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FORM 10-K

(Mark One)

Commission File Number 0-15782

CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (972) 258-8507

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.10 each
(Title of Class)

Class A Preferred Stock, par value $60.00 each
(Title of Class)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

      At March 12, 2001, an aggregate of 27,806,688 shares of the registrant’s Common Stock, par value of $.10 each (being the registrant’s only class of common stock), were outstanding, and the aggregate market value thereof (based upon the last reported sale price on March 12, 2000) held by non-affiliates of the registrant was $1,142,042,983.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement, to be filed pursuant to Section 14(a) of the Act in connection with the registrant’s 2000 annual meeting of shareholders, have been incorporated by reference in Part III of this report.

PART I

Item 1. Business

General

      CEC Entertainment, Inc. (the “Company”), was incorporated in the State of Kansas in 1980 and is engaged in the family restaurant/entertainment center business. The Company considers this to be its sole industry segment.

      The Company operated, as of March 12, 2001, 328 Chuck E. Cheese’s Pizza ® (“Chuck E. Cheese’s”) restaurants. In addition, as of March 12, 2001, franchisees of the Company operated 54 Chuck E. Cheese’s restaurants.

Chuck E. Cheese’s Restaurants

Business Development

      Chuck E. Cheese’s restaurants offer a variety of pizza, a salad bar, sandwiches and desserts and feature musical and comic entertainment by life-size, computer-controlled robotic characters, family oriented games, rides and arcade-style activities. The restaurants are intended to appeal to families with children between the ages of 2 and 12. The Company opened its first restaurant in March 1980.

      The Company and its franchisees operate in a total of 45 states. The Company owns and operates Chuck E. Cheese’s restaurants in 37 states and Canada. See “Item 2. Properties.”

      The following table sets forth certain information with respect to the Chuck E. Cheese’s restaurants owned by the Company (excludes franchised restaurants):

      The revenues from Chuck E. Cheese’s restaurants are seasonal in nature. The restaurants tend to generate more revenues during the first and third fiscal quarters as compared to the second and fourth fiscal quarters.

      Each Chuck E. Cheese’s restaurant generally employs a general manager, one or two managers, an electronic specialist who is responsible for repair and maintenance of the robotic characters and games, and 45 to 75 food preparation and service employees, most of whom work only part-time.

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      To maintain a unique and exciting environment in the restaurants, the Company believes it is essential to reinvest capital through the evolution of its games, rides and entertainment packages and continuing enhancement of the facilities. In 2000, the Company initiated a Phase III upgrade program which generally includes a new toddler play area, skill games and rides, kiddie games and rides, sky-tube enhancements, and prize area enhancements with ticket counting machines. The Company completed Phase III upgrades in 27 restaurants in 2000 and plans to complete Phase III upgrades in approximately 100 restaurants in 2001.

      The Company has expanded the customer areas of 79 existing stores since 1995, including stores with increased seating capacity due to an enhanced showroom package. In 2000, the Company expanded a total of 23 stores. The Company plans to continue its strategy of expanding the customer areas and seating capacity of selected existing restaurants in 2001. The customer area of expanded stores, other than stores with increased seating capacity due to an enhanced showroom package, is typically increased by an average of 1,000 to 4,000 square feet per store.

      The Company has added 31, 24 and 22 Company-operated Chuck E. Cheese’s restaurants in 2000, 1999 and 1998, respectively, including restaurants acquired from franchisees. The Company anticipates adding approximately 30 to 34 new restaurants in 2001 through a combination of new restaurants and the acquisition of existing franchise restaurants. The Company periodically reevaluates the site characteristics of its restaurants. In the event certain site characteristics considered essential for the success of a restaurant deteriorate, the Company will consider relocating the restaurant to a more desirable site.

      The Company believes its ownership of trademarks to the names and character likenesses featured in the robotic animation stage show (and other in-store entertainment) in its restaurants to be an important competitive advantage.

Restaurant Design and Entertainment

      Chuck E. Cheese’s restaurants are typically located in shopping centers or in free-standing buildings near shopping centers and generally occupy 8,000 to 14,000 square feet in area. Chuck E. Cheese’s restaurants are typically divided into three areas: a kitchen and related area (cashier and prize area, salad bar, manager’s office, technician’s office, restrooms, etc.) occupies approximately 35% of the space, a dining area occupies approximately 25% of the space and a playroom area occupies approximately 40% of the space.

      The dining area of each Chuck E. Cheese’s restaurant features a variety of comic and musical entertainment by computer-controlled robotic characters, together with video monitors and animated props, located on various stage type settings. The dining area typically provides table and chair seating for 250 to 375 customers.

      Each Chuck E. Cheese’s restaurant typically contains a family oriented playroom area offering approximately 40 coin- and token-operated attractions, including arcade-style games, kiddie rides, video games, skill oriented games and other similar entertainment. Most games dispense tickets that can be redeemed by guests for prize merchandise such as toys and dolls. Also included in the playroom area are tubes and tunnels suspended from or reaching to the ceiling (“SkyTubes”) or other free attractions for young children, with booth and table seating for the entire family. The playroom area normally occupies approximately 60% of the restaurant’s customer area and contributes significantly to its revenues. A limited number of free tokens are furnished with food orders. Additional tokens may be purchased. These tokens are used to play the games and rides in the playroom.

Food and Beverage Products

      Each Chuck E. Cheese’s restaurant offers varieties of pizza, a salad bar, sandwiches and desserts. Soft drinks, coffee and tea are also served, along with beer and wine where permitted by local laws. The Company believes that the quality of its food compares favorably with that of its competitors.

      The majority of food, beverages and other supplies used in the Company-operated restaurants is currently distributed under a system-wide agreement with a major food distributor. The Company believes that this distribution system creates certain cost and operational efficiencies for the Company.

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Marketing

      The primary customer base for the Company’s restaurants consists of families having children between 2 and 12 years old. The Company conducts advertising campaigns targeted at families with young children that feature the family entertainment experiences available at Chuck E. Cheese’s restaurants and are primarily aimed at increasing the frequency of customer visits. The primary advertising medium continues to be television, due to its broad access to family audiences and its ability to communicate the Chuck E. Cheese’s experience. The television advertising campaigns are supplemented by promotional offers in newspapers.

Franchising

      The Company began franchising its restaurants in October 1981 and the first franchised restaurant opened in June 1982. At March 12, 2001, 54 Chuck E. Cheese’s restaurants were operated by a total of 35 different franchisees, as compared to 55 of such restaurants at March 13, 2000. In 1998, the Company sold franchise rights to open international franchise restaurants in the Middle East. Opportunities for further international franchise development are being reviewed by the Company.

      The Chuck E. Cheese’s standard franchise agreements grant to the franchisee the right to develop and operate a restaurant and use the associated trademarks within the standards and guidelines established by the Company. The franchise agreement presently offered by the Company has an initial term of 15 years and includes a 10-year renewal option. The standard agreement provides the Company with a right of first refusal should a franchisee decide to sell a restaurant. The earliest expiration dates of outstanding Chuck E. Cheese’s franchises are in 2001.

      The franchise agreements governing existing franchised Chuck E. Cheese’s restaurants currently require each franchisee to pay: (i) to the Company, in addition to an initial franchise fee of $50,000, a continuing monthly royalty fee equal to 3.8% of gross sales; (ii) to the Advertising Fund [an independent fund established and managed by an association of the Company and its franchisees to pay costs of system-wide advertising (the “Association”)] an amount equal to 2.65% of gross sales; and (iii) to the Entertainment Fund (an independent fund established and managed by such Association to further develop and improve entertainment attractions) an amount equal to 0.2% of gross sales. The Chuck E. Cheese’s franchise agreements also require franchisees to expend at least 1% of gross sales for local advertising. Under the Chuck E. Cheese’s franchise agreements, the Company is required, with respect to Company-operated restaurants, to spend for local advertising and to contribute to the Advertising Fund and the Entertainment Fund at the same rates as franchisees.

Competition

      The restaurant and entertainment industries are highly competitive, with a number of major national and regional chains operating in the restaurant or family entertainment business. Although other restaurant chains presently utilize the combined family restaurant / entertainment concept, these competitors primarily operate on a regional, market-by-market basis.

      The Company believes that it will continue to encounter competition in the future. Major national and regional chains, some of which may have capital resources as great or greater than the Company, are competitors of the Company. The Company believes that the principal competitive factors affecting Chuck E. Cheese’s restaurants are the relative quality of food and service, quality and variety of offered entertainment, and location and attractiveness of the restaurants as compared to its competitors in the restaurant or entertainment industries.

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Trademarks

      The Company, through a wholly owned subsidiary, owns various trademarks, including “Chuck E. Cheese” and “ShowBiz” that are used in connection with the restaurants and have been registered with the United States Patent and Trademark Office. The duration of such trademarks is unlimited, subject to continued use. The Company believes that it holds the necessary rights for protection of the marks considered essential to conduct its present restaurant operations.

Government Regulation

      The development and operation of Chuck E. Cheese’s restaurants are subject to various federal, state and local laws and regulations, including but not limited to those that impose restrictions, levy a fee or tax, or require a permit or license on the service of alcoholic beverages and the operation of games and rides. The Company is subject to the Fair Labor Standards Act, the Americans With Disabilities Act, and Family Medical Leave Act mandates. A significant portion of the Company’s restaurant personnel are paid at rates related to the minimum wage established by federal and state law. Increases in such minimum wage result in higher labor costs to the Company, which may be partially offset by price increases and operational efficiencies.

Working Capital Practices

      The Company attempts to maintain only sufficient inventory of supplies in the restaurants which it operates to satisfy current operational needs. The Company’s accounts receivable consist primarily of credit card receivables and franchise royalties.

Employees

      The Company’s employment varies seasonally, with the greatest number being employed during the summer months. On March 12, 2001, the Company employed approximately 17,802 employees, including 17,463 in the operation of Chuck E. Cheese’s restaurants and 339 employed by the Company in the Company’s executive offices. None of the Company’s employees are members of any union or collective bargaining group. The Company considers its employee relations to be good.

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Item 2. Properties

      The following table sets forth certain information regarding the Chuck E. Cheese’s restaurants operated by the Company as of March 12, 2001.

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Of the 328 Chuck E. Cheese’s restaurants owned by the Company as of March 12, 2001, 297 occupy leased premises and 31 occupy owned premises. The leases of these restaurants will expire at various times from 2001 to 2028, as described in the table below.

      The leases of Chuck E. Cheese’s restaurants contain terms which vary from lease to lease, although a typical lease provides for a primary term of 10 years, with two additional five-year options to renew, and provides for annual minimum rent payments of approximately $6.00 to $25.00 per square foot, subject to periodic adjustment. The restaurant leases require the Company to pay the cost of repairs, insurance and real estate taxes and, in many instances, provide for additional rent equal to the amount by which a percentage (typically 6%) of gross revenues exceeds the minimum rent.

Item 3. Legal Proceedings.

      On June 2, 2000, a purported class action lawsuit against the Company, entitled Freddy Gavarrete, et al. v. CEC Entertainment, Inc., dba Chuck E. Cheese's, et. al., Cause No. 00-08132 FMC (RZx)("Gavarrete"), was filed in the Superior Court of the State of California in the County of Los Angeles. On July 27, 2000, the lawsuit was removed to the United States District Court for the Central District of California. The lawsuit was filed by one former restaurant manager purporting to represent restaurant managers of the Company in California from 1996 to the present. No class of plaintiffs has been certified in this lawsuit. The lawsuit alleges violations of the state wage and hour laws involving unpaid overtime wages and seeks an unspecified amount in damages. The Company believes the lawsuit is without merit and intends to vigorously defend it.

Item 4. Submission of Matters to a Vote of Security Holders.

      No matters were submitted to a vote of security holders during the fourth quarter of 2000.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

      As of March 12, 2001, there were an aggregate of 27,806,688 shares of the Company’s Common Stock outstanding and approximately 2,451 stockholders of record.

      The Company’s Common Stock is listed on the New York Stock Exchange under the symbol “CEC”. The following table sets forth the highest and lowest prices per share of the Common Stock during each quarterly period within the two most recent years, as reported on the New York Stock Exchange:

      The Company may not pay any dividends to holders of its Common Stock (except in shares of Common Stock) unless an amount equal to all dividends then accrued on its Class A Preferred Stock par value $60.00 per share (“the Preferred Stock”) has been paid or set aside to be paid. A dividend to holders of record of Preferred Stock as of December 31, 2000 in the amount of $1.20 per share will be paid on April 2, 2001.

      The Company has not paid any cash dividends on its Common Stock and has no present intention of paying cash dividends thereon in the future. The Company plans to retain any earnings to finance anticipated capital expenditures, repurchase the Company's common stock and reduce its long-term debt. Future dividend policy with respect to the Common Stock will be determined by the Board of Directors of the Company, taking into consideration factors such as future earnings, capital requirements, potential loan agreement restrictions and the financial condition of the Company.

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Item 6. Selected Financial Data.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results Of Operations.

      Results of Operations

      A summary of the results of operations of the Company as a percentage of revenues for the last three fiscal years is shown below.

      2000 Compared to 1999

      Revenues

      Revenues increased 14.8% to $506.1 million in 2000 from $440.9 million in 1999 primarily due to new restaurants and an increase of 2.3% in sales of the Company’s Chuck E. Cheese’s restaurants which were open during all of 2000 and 1999 (“comparable store sales”). The Company opened 31 new restaurants and closed one restaurant in 2000. Average annual revenues per restaurant increased to approximately $1,576,000 in 2000 from approximately $1,531,000 in 1999. Menu prices increased 1.9% between the two years.

      Revenues from franchise fees and royalties were $3.3 million in 2000 compared to $3.2 million in 1999 primarily due to a 4.4% increase in comparable franchise store sales. During 2000, one new franchise restaurants opened and one franchise restaurant was closed.

      Costs and Expenses

      Costs and expenses as a percentage of revenues decreased to 82.1% in 2000 from 83.6% in 1999.

      Cost of sales as a percentage of revenues decreased to 44.6% in 2000 from 45.1% in 1999. Cost of food, beverage, prize and merchandise items as a percentage of revenues decreased to 14.5% in 2000 from 15.1% in 1999 primarily due to a decrease in cheese costs, adjusted prize ticket categories and an increase in menu prices. Restaurant labor expenses as a percentage of revenues increased slightly to 27.0% in 2000 from 26.8% in 1999 primarily due to wage increases and new store staffing.

      Selling, general and administrative expenses as a percentage of revenues declined to 14.2% in 2000 from 14.9% in 1999 primarily due to a reduction in advertising and overhead expenses as a percentage of revenues.

      Depreciation and amortization expense as a percentage of revenues declined to 6.6% in 2000 from 7.0% in 1999 primarily due to the increase in comparable store sales and new restaurants with higher sales volumes.

      Interest expense as a percentage of revenues was .7% in 2000 compared to .5% in 1999. During the twelve months ended July 2000, interest expense on incremental debt incurred to finance assets held for resale was allocated to the basis of such assets.

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      Other operating expenses decreased as a percentage of revenues to 16.0% in 2000 from 16.1% in 1999 primarily due to the increase in comparable store sales and leveraging of fixed costs with higher revenues.

      The Company’s effective income tax rate was 39.0% in 2000 compared to 38.7% in 1999 primarily due to higher estimated state tax rates.

      Net Income

      The Company had net income of $55.4 million in 2000 compared to $44.4 million in 1999 due to the changes in revenues and expenses discussed above. The Company’s diluted earnings per share increased to $1.98 per share in 2000 compared $1.58 per share in 1999.

      1999 Compared to 1998

      Revenues

      Revenues increased 16.2% to $440.9 million in 1999 from $379.4 million in 1998 primarily due to an increase of 5.7% in sales of the Company’s Chuck E. Cheese’s restaurants which were open during all of 1999 and 1998 (“comparable store sales”). In addition, the Company opened 23 new restaurants and purchased one restaurant from a franchisee in 1999. Average annual revenues per restaurant increased to approximately $1,531,000 in 1999 from approximately $1,452,000 in 1998. Management believes that several factors contributed to the comparable store sales increase with the primary factor being sales increases at Phase II upgraded restaurants. Menu prices increased .4% between the two years.

      Revenues from franchise fees and royalties were $3.2 million in 1999 compared to $3.3 million in 1998 primarily due to a reduction in the number of franchise stores. Average annual revenue per franchised restaurant increased due to a 3.7% increase in comparable franchise store sales and higher sales volumes in new franchise restaurants. During 1999, two new franchise restaurants opened.

      Costs and Expenses

      Costs and expenses as a percentage of revenues decreased to 83.6% in 1999 from 85.5% in 1998.

      Cost of sales as a percentage of revenues decreased to 45.1% in 1999 from 45.9% in 1998. Cost of food, beverage, prize and merchandise items as a percentage of revenues decreased to 15.1% in 1999 from 15.8% in 1998 primarily due to an increase in game sales and reduced costs of certain food and beverage products, including cheese costs, and an increase in menu prices. Restaurant labor expenses as a percentage of revenues remained constant at 26.8% in both 1999 and 1998.

      Selling, general and administrative expenses as a percentage of revenues was 14.9% in both 1999 and 1998. Preopening expenses and recruiting and training costs were higher in 1999 compared to 1998 due to the greater number of new stores opened in 1999.

      Depreciation and amortization expense as a percentage of revenues declined to 7.0% in 1999 from 7.3% in 1998 primarily due to the increase in comparable store sales.

      Interest expense as a percentage of revenues decreased to .5% in 1999 from .7% in 1998 due to the increase in revenues and lower interest rates. Interest expense on the increase in debt incurred to finance assets held for resale was allocated to the cost basis of such assets.

      Other operating expenses decreased as a percentage of revenues to 16.1% in 1999 from 16.7% in 1998 primarily due to the increase in comparable store sales and the fact that a significant portion of operating costs are fixed.

      The Company’s effective income tax rate was 38.7% in both 1999 and 1998.

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      Net Income

      The Company had net income of $44.4 million in 1999 compared to $33.7 million in 1998 due to the changes in revenues and expenses discussed above. The Company’s diluted earnings per share increased to $1.58 per share in 1999 compared $1.20 per share in 1998.

      Inflation

      The Company’s cost of operations, including but not limited to labor, supplies, utilities, financing and rental costs, are significantly affected by inflationary factors. The Company pays most of its part-time employees rates that are related to federal and state mandated minimum wage requirements. Management anticipates that any increases in federally mandated minimum wage would result in higher costs to the Company, which the Company expects would be partially offset by menu price increases and increased efficiencies in operations.

      Financial Condition, Liquidity and Capital Resources

      Cash provided by operations increased to $94.1 million in 2000 from $78.5 million in 1999. Cash outflow from investing activities for 2000 was $85.9 million primarily related to capital expenditures. Cash outflow from financing activities in 2000 was $3.6 million. The Company’s primary requirements for cash relate to planned capital expenditures, the repurchase of the Company’s common stock and debt service. The Company expects that it will satisfy such requirements from cash provided by operations and, if necessary, funds available under its line of credit.

      In 2001, the Company plans to add 30 to 34 stores including new stores and acquisition of existing stores from franchisees. The Company currently anticipates its cost of opening new stores to average approximately $1.8 million per store which will vary depending upon many factors including the size of the store and whether the store is an in-line or free-standing building. In addition to such new store openings, the Company plans to expand the seating capacity of 10 to 15 high sales volume stores in 2001 including stores which will receive an enhanced showroom package. The Company also plans to complete Phase III upgrades in approximately 100 stores this year at an average cost of approximately $210,000 to $225,000 per store. A Phase III upgrade generally includes a new toddler play area, skill games and rides, kiddie games and rides, sky-tube enhancements, and prize area enhancement with ticket counting machines. During 2000, the Company opened 31 new restaurants, expanded the customer area of 23 restaurants and completed Phase III upgrades in 27 restaurants. The Company currently estimates that capital expenditures in 2001, including expenditures for new store openings, existing store expansions and equipment investments, will be approximately $104 million. The Company plans to finance these expenditures through cash flow from operations and, if necessary, borrowings under the Company’s line of credit.

      Since 1993, the Company has repurchased shares of the Company’s common stock on the open market at an aggregate purchase price of $65 million. In September 1999, the Company announced a plan to purchase additional shares of the Company’s common stock at an aggregate purchase price of up to $25 million. As of March 12, 2001, the Company has purchased shares of its common stock under the $25 million plan at an aggregate purchase price of approximately $10.9 million.

      In 2000, the Company entered into a bank agreement that increases its revolving credit facility to $75 million from $55 million and extends the maturity date to 2003 from 2001. The Company’s total credit facilities of $81 million consist of $6 million in term notes and a $75 million line of credit. Term notes totaling $6 million with annual principal payments of $6 million and annual interest of 10.02% mature in 2001. Interest under the $75 million line of credit is dependent on earnings and debt levels of the Company and ranges from prime or, at the Company’s option, LIBOR plus 1% to 1.75%. Currently, any borrowings under this line of credit would be at the prime rate or LIBOR plus 1%. As of March 12, 2001, there was $29.5 million in borrowings under this line of credit. The Company is required to comply with certain financial ratio tests during the terms of the loan agreements.

      Certain statements in this report, other than historical information, may be considered forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and is subject to various risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or

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should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company’s operating results, performance or financial condition are its ability to implement its growth strategies, national, regional and local economic conditions affecting the restaurant/entertainment industry, competition within each of the restaurant and entertainment industries, success of its franchise operations, negative publicity, fluctuations in quarterly results of operations, including seasonality and government regulations.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

      The Company is subject to market risk in the form of interest rate risk and foreign currency risk. Both interest rate risk and foreign currency risk are immaterial to the Company.

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Item 8. Financial Statements and Supplementary Data

CEC ENTERTAINMENT, INC.
YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000
AND JANUARY 3, 1999

CONTENTS

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INDEPENDENT AUDITORS’ REPORT

Board of Directors and Shareholders
CEC Entertainment, Inc.
Irving, Texas

We have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. and subsidiaries as of December 31, 2000 and January 2, 2000, and the related consolidated statements of earnings and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CEC Entertainment, Inc. and subsidiaries as of December 31, 2000 and January 2, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
February 16, 2001

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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See notes to consolidated financial statements.

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1. Summary of significant accounting policies:

	Operations: CEC Entertainment, Inc. (the “Company”) operates and franchises family restaurant/entertainment centers as Chuck E. Cheese’s restaurants.
	Fiscal year: The Company’s fiscal year is 52 or 53 weeks and ends on the Sunday nearest December 31. References to 2000, 1999 and 1998 are for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999, respectively. Fiscal years 2000, 1999 and 1998 each consisted of 52 weeks.
	Basis of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
	Foreign currency translation: The consolidated financial statements are presented in U.S. dollars. The assets and liabilities of the Company’s Canadian subsidiary are translated to U.S. dollars at year-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments that result from translating amounts are reported as a component of other comprehensive income.
	Cash and cash equivalents: Cash and cash equivalents of the Company are composed of demand deposits with banks and short-term cash investments with remaining maturities of three months or less from the date of purchase by the Company.
	Inventories: Inventories of food, paper products and supplies are stated at the lower of cost or market on a first-in, first-out basis.
	Property and equipment, depreciation and amortization: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided by charges to operations over the estimated useful lives of the assets by the straight-line method, generally ranging from four to fifteen years for furniture, fixtures and equipment and 40 years for buildings. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally ranging from ten to 20 years. All preopening costs are expensed as incurred.
	Deferred charges and related amortization: Deferred charges are amortized over various periods of up to 16 years. All amortization is provided by the straight-line method, which approximates the interest method.
	Franchise fees and royalties: The Company recognizes initial franchise fees upon fulfillment of all significant obligations to the franchisee. Royalties from franchisees are accrued as earned.
	Advertising costs: The Company expenses advertising costs as incurred. The total amounts charged to advertising expense were approximately $22.0 million, $20.3 million and $18.2 million in 2000, 1999 and 1998, respectively.
	Use of estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	Stock-based compensation: As permitted by Statement of Financial Accounting Standards No. 123 (“SFAS 123”) “Accounting for Stock-Based Compensation,” the Company applies the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and has disclosed the proforma effects of SFAS 123 (Note 16).

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Summary of significant accounting policies (continued):

Recent Accounting Pronouncements: Statement of Financial Accounting Standards No. 133 (“SFAS 133”) “Accounting for Derivative Instruments and Hedging Activities” and Statement of Financial Accounting Standards No. 138 (“SFAS 138”) which amends certain provisions of SFAS 133 became effective for years beginning after June 15, 2000. The Company currently does not utilize derivatives or engage in hedging activities that require separate disclosure under SFAS 133 or SFAS 138.

2. Accounts receivable:

3. Notes receivable:

The Company and its franchisees contribute a percentage of revenues to the International Association of CEC Entertainment, Inc. (the “Association”), a related party, to develop entertainment attractions and produce system wide advertising. The Company has granted three separate operating lines of credit to the Association. In December 2000, the lines were renewed to provide the Association with available borrowings of $3.2 million at 10.5% interest and are due December 31, 2001. Five officers of the Association are also officers of the Company. At December 31, 2000 and January 2, 2000, approximately $1,526,000 and $491,000, respectively, was outstanding under these lines of credit.

	In addition, the Company has notes receivable from franchisees which have various terms, but most are payable in monthly installments of principal and interest through 2001, with interest rates of 7.5%. Notes receivable from franchisees have been fully reserved with allowances for doubtful collection of $57,647 and $73,000 at December 31, 2000 and January 2, 2000, respectively.

4. Assets held for resale:

In July 1999, the Company acquired for approximately $19 million in cash, 13 owned properties, the rights to seven leased properties, two parcels of undeveloped real estate, and all furniture, fixtures, equipment and intellectual properties owned by Discovery Zone, Inc. The Company has converted 10 of the acquired properties to Chuck E. Cheese’s restaurants and plans to sell substantially all of the remaining properties, furniture, fixtures and equipment. The final allocation of the purchase price was approximately $7.9 million to property and equipment and $11.1 million to assets held for resale. At December 31, 2000, the remaining assets held for resale total $4.2 million which relate to seven properties recorded at the lower of cost or fair value less estimated selling costs.

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CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Property and equipment:

6. Accounts payable and accrued liabilities:

7. Long-term debt: