UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended AprilJuly 3, 2005.
--------------
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_______________.
Commission File Number 001-13587
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0905805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 West Airport Freeway
Irving, Texas 75062
(Address of principal executive offices,
including zip code)
(972) 258-8507
(Registrant's telephone number,
including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [_]
At May 6,August 8, 2005, an aggregate of 35,132,60735,060,822 shares of the registrant's
Common Stock, par value of $.10 each (being the registrant's only class of
common stock), were outstanding.
CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
----
Part I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets...................................Sheets............................... 3
Condensed Consolidated Statements of Earnings and Comprehensive
Income..Income........................................................... 4
Condensed Consolidated Statement of Shareholders' Equity................ 5Equity............ 6
Condensed Consolidated Statements of Cash Flows ........................ 6.................... 7
Notes to Condensed Consolidated Financial Statements.................... 7Statements................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 9Operations........................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 13.... 16
Item 4. Controls and Procedures.......................................... 13Procedures....................................... 16
Part II - Other Information:
Item 1. Legal Proceedings................................................ 14Proceedings............................................. 17
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.................................................... 14Securities................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 14Holders........... 17
Item 6. Exhibits and Reports on Form 8-K................................. 14
Signatures................................................................... 15
Certifications............................................................... 168-K.............................. 18
Signatures................................................................ 19
Certifications............................................................ 20
PART I - FINANCIAL INFORMATION
Item 1.1: Financial Statements
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands, except share data)
ASSETS
AprilJuly 3, January 2,
2005 2005
----------- ---------------------
(unaudited)
Current assets:
Cash and cash equivalents.................................................... $ 11,7639,611 $ 11,798
Accounts receivable.......................................................... 14,20415,141 13,482
Inventories.................................................................. 11,40711,919 12,171
Prepaid expenses............................................................. 9,1339,144 7,444
Deferred tax asset........................................................... 1,763 1,763
--------- ---------
Total current assets...................................................... 48,27047,578 46,658
--------- ---------
Property and equipment, net..................................................... 564,602567,231 563,081
--------- ---------
Other assets.................................................................... 1,9501,122 2,278
--------- ---------
$ 614,822615,931 $ 612,017
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 53,563534 $ 78,279
Accounts payable............................................................. 20,91822,927 24,294
Accrued liabilities.......................................................... 53,48632,957 36,329
--------- ---------
Total current liabilities................................................. 127,96756,418 138,902
--------- ---------
Long-term debt, less current portion............................................ 11,782100,669 11,673
--------- ---------
Deferred rent................................................................... 55,99658,545 53,427
--------- ---------
Deferred tax liability.......................................................... 35,01934,386 36,429
--------- ---------
Accrued insurance............................................................... 10,750 10,856
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 55,711,87455,973,127
and 55,556,857 shares issued, respectively ............................... 5,5715,597 5,556
Capital in excess of par value............................................... 250,029257,823 245,991
Retained earnings ........................................................... 465,521479,957 433,267
Accumulated other comprehensive income ...................................... 1,3411,333 1,476
Less treasury shares of 19,847,86820,921,268 and 19,210,568, respectively, at cost..... (349,154)(389,547) (325,560)
--------- ---------
373,308355,163 360,730
--------- ---------
$ 614,822615,931 $ 612,017
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Three Months Ended
-------------------------------
April--------------------------------
July 3, 2005 March 28,June 27, 2004
------------ ------------- --------------
Food and beverage revenues...................................revenues.............................. $ 139,044109,455 $ 136,339108,739
Games and merchandise revenues............................... 74,242 69,741revenues.......................... 58,253 55,826
Franchise fees and royalties................................. 795 861royalties............................ 685 852
Interest income ............................................. 5........................................ 8 7
--------- ---------
214,086 206,948168,401 165,424
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies..................... 25,568 24,478supplies................ 19,837 21,307
Games and merchandise................................... 8,324 8,643
Labor................................................... 53,825 53,238merchandise.............................. 6,707 7,218
Labor.............................................. 48,622 47,688
--------- ---------
87,717 86,35975,166 76,213
Selling, general and administrative expenses.............. 25,417 23,832expenses......... 21,416 20,047
Depreciation and amortization............................. 14,397 13,378amortization........................ 15,780 13,880
Interest expense.......................................... 723 483expense..................................... 984 485
Other operating expenses.................................. 33,555 31,951expenses............................. 31,659 31,436
--------- ---------
161,809 156,003145,005 142,061
--------- ---------
Income before income taxes................................... 52,277 50,945taxes.............................. 23,396 23,363
Income taxes................................................. 20,023 19,512taxes............................................ 8,960 8,947
--------- ---------
Net income .................................................. 32,254 31,433............................................. 14,436 14,416
Other comprehensive loss, net of tax:
Foreign currency translation.............................. (135) (14)translation......................... (8) (124)
--------- ---------
Comprehensive income.........................................income.................................... $ 32,11914,428 $ 31,41914,292
========= =========
Earnings per share:
Basic:
Net income ..................................................................................... $ .89.41 $ .82.38
========= =========
Weighted average shares outstanding..................... 36,205 38,310outstanding................ 35,255 37,507
========= =========
Diluted:
Net income ................................................................................... $ .86.40 $ .79.37
========= =========
Weighted average shares outstanding..................... 37,451 39,607outstanding................ 36,473 38,604
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(Thousands, except per share data)
Six Months Ended
--------------------------------
July 3, 2005 June 27, 2004
------------ -------------
Food and beverage revenues.............................. $ 248,499 $ 245,078
Games and merchandise revenues.......................... 132,495 125,567
Franchise fees and royalties............................ 1,480 1,713
Interest income ........................................ 13 14
--------- ---------
382,487 372,372
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies................ 45,405 45,785
Games and merchandise.............................. 15,031 15,860
Labor.............................................. 102,447 100,927
--------- ---------
162,883 162,572
Selling, general and administrative expenses......... 46,833 43,879
Depreciation and amortization........................ 30,177 27,258
Interest expense..................................... 1,707 968
Other operating expenses............................. 65,214 63,387
--------- ---------
306,814 298,064
--------- ---------
Income before income taxes.............................. 75,673 74,308
Income taxes............................................ 28,983 28,459
--------- ---------
Net income ............................................. 46,690 45,849
Other comprehensive loss, net of tax:
Foreign currency translation......................... (143) (138)
--------- ---------
Comprehensive income.................................... $ 46,547 $ 45,711
========= =========
Earnings per share:
Basic:
Net income ........................................ $ 1.31 $ 1.21
========= =========
Weighted average shares outstanding................ 35,736 37,910
========= =========
Diluted:
Net income ....................................... $ 1.26 $ 1.17
========= =========
Weighted average shares outstanding................ 36,963 39,107
========= =========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands)
Amounts Shares
--------- --------
Common stock and capital in excess of par value:
Balance, beginning of year...................................year............................. $ 251,547 55,557
Stock options exercised...................................... 3,100 144exercised................................ 8,901 405
Tax benefit from exercise of options .......................... 497.................... 2,515
Stock issued under 401(k) plan................................. 456plan........................... 457 11
--------- -------
Balance, AprilJuly 3, 2005......................................... 255,600 55,7122005.................................... 263,420 55,973
--------- =======
Retained earnings:
Balance, beginning of year...................................year............................. 433,267
Net income................................................... 32,254income............................................. 46,690
---------
Balance, AprilJuly 3, 2005....................................... 465,5212005.................................. 479,957
---------
Accumulated other comprehensive income (loss):
Balance, beginning of year...................................year............................. 1,476
Foreign currency translation................................. (135)translation........................... (143)
---------
Balance, AprilJuly 3, 2005....................................... 1,3412005.................................. 1,333
---------
Treasury shares:
Balance, beginning of year...................................year............................. (325,560) 19,211
Treasury stock acquired...................................... (23,594) 637acquired................................ (63,987) 1,710
--------- -------
Balance, AprilJuly 3, 2005....................................... (349,154) 19,8482005.................................. (389,547) 20,921
--------- =======
Total shareholders' equity......................................equity................................ $ 373,308355,163
=========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
ThreeSix Months Ended
--------------------------------
AprilJuly 3, 2005 March 28,June 27, 2004
------------ ------------- --------------
Operating activities:
Net income ............................................................... $ 32,25446,690 $ 31,43345,849
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization........................................... 14,397 13,37830,177 27,258
Deferred income taxes................................................... (1,410) 4,414tax expense............................................. (2,043) 6,206
Tax benefit from exercise of stock options.............................. 497 1,2352,515 1,844
Other................................................................... 2,862 3,1112,207 2,313
Net change in receivables, inventory,inventories, prepaids, payables and
accrued liabilities................................................... 12,134 20,310(7,846) 4,638
Leasehold reimbursements from lessors................................... 3,394 3,650
-------- --------
Cash provided by operations......................................... 60,734 73,881operations............................................. 75,094 91,758
-------- --------
Investing activities:
Purchases of property and equipment....................................... (15,709) (16,434)
Decrease(34,336) (39,787)
(Increase) decrease in other assets.................................................. 280 60assets....................................... 993 (87)
-------- --------
Cash used in investing activities....................................... (15,429) (16,374)(33,343) (39,874)
-------- --------
Financing activities:
Proceeds on line of credit ............................................... 39,000 27,000
Payments on debt and line of credit ...................................... (25,134) (27,552)(28,276) (28,705)
Exercise of stock options ................................................ 3,100 3,9828,901 8,677
Repurchase of common stock ............................................... (23,594) (29,834)(63,987) (56,338)
Other ................................................................... 288 294.................................................................... 424 484
-------- --------
Cash used in financing activities....................................... (45,340) (53,110)(43,938) (48,882)
-------- --------
Increase (decrease) in cash and cash equivalents ............................ (35) 4,397(2,187) 3,002
Cash and cash equivalents, beginning of period............................... 11,798 8,067
-------- --------
Cash and cash equivalents, end of period..................................... $ 11,7639,611 $ 12,46411,069
======== ========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim financial statements:
In the opinion of management, the accompanying condensed financial
statements for the periods ended AprilJuly 3, 2005 and March 28,June 27, 2004 reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's financial condition, results of operations and cash
flows in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The unaudited condensed consolidated
financial statements referred to above should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K filed
with the Securities and Exchange Commission for the year ended January 2, 2005.
Results of operations for the periods ended AprilJuly 3, 2005 and March 28,June 27, 2004 are
not necessarily indicative of the results for the full year.
2. Earnings per common share:
Basic earnings per common share ("EPS") is computed by dividing net income
by the weighted average number of common shares outstanding. Diluted EPS adjusts
for the effect of potential common shares from dilutive stock options using the
treasury stock method. Earnings per common and potential common share were
computed as follows (thousands, except per share data):
Three Months Ended
----------------------
April 3, March 28,
2005 2004
-------- --------
Net income ............................................ $ 32,254 $ 31,433
Three Months Ended Six Months Ended
----------------------- -----------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
-------- -------- -------- --------
Net income ........................................... $ 14,436 $ 14,416 $ 46,690 $ 45,849
======== ======== ======== ========
Basic:
Weighted average common shares outstanding......... 35,255 37,507 35,736 37,910
======== ======== ======== ========
Earnings per common share.......................... $ .41 $ .38 $ 1.31 $ 1.21
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding......... 35,255 37,507 35,736 37,910
Potential common shares for stock options.......... 1,218 1,097 1,227 1,197
-------- -------- -------- --------
Weighted average shares outstanding................ 36,473 38,604 36,963 39,107
======== ======== ======== ========
Earnings per common and potential
common share.................................... $ .40 $ .37 $ 1.26 $ 1.17
========= ======== ======== ========
Basic:
Weighted average common shares outstanding.......... 36,205 38,310
======== ========
Earnings per common share........................... $ .89 $ .82
======== ========
Diluted:
Weighted average common shares outstanding.......... 36,205 38,310
Potential common shares for stock options........... 1,246 1,297
-------- --------
Weighted average shares outstanding................. 37,451 39,607
======== ========
Earnings per common and potential
common share..................................... $ .86 $ .79
======== ========
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock based compensation:
The Company accounts for its stock based compensation under the intrinsic
value method of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations ("APB 25"), and has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). Under
APB 25, no stock based compensation cost is reflected in net income for grants
of stock options to employees because the Company grants stock options with an
exercise price equal to the market value of the stock on the date of grant. Had
compensation cost for the Company's stock option plans been determined based on
the fair value method at the grant date for awards under those plans consistent
with the method prescribed by SFAS 123, the Company's pro-forma net income and
earnings per share would have been as follows (thousands, except per share
data):
Three Months Ended
---------------------
April 3, March 28,
2005 2004
-------- ---------
Net income, as reported................................ $ 32,254 $ 31,433
Fair value based compensation expense, net of taxes.... (1,671) (1,436)
-------- --------
Pro-forma net income .................................. $ 30,583 $ 29,997
======== ========
Earnings per Share:
Basic:
As reported......................................... $ .89 $ .82
Pro-forma........................................... $ .84 $ .78
Diluted:
As reported......................................... $ .86 $ .79
Pro-forma........................................... $ .82 $ .76
Three Months Ended Six Months Ended
--------------------- ---------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
-------- -------- -------- --------
Net income, as reported ............................... $ 14,436 $ 14,416 $ 46,690 $ 45,849
Fair value based compensation expense, net of taxes.... (1,351) (1,451) (2,262) (2,886)
-------- -------- -------- --------
Pro-forma net income applicable to common shares....... $ 13,085 $ 12,965 $ 44,428 $ 42,963
======== ======== ======== ========
Earnings per Share:
Basic:
As reported......................................... $ .41 $ .38 $ 1.31 $ 1.21
Pro-forma........................................... $ .37 $ .35 $ 1.24 $ 1.13
Diluted:
As reported......................................... $ .40 $ .37 $ 1.26 $ 1.17
Pro-forma........................................... $ .36 $ .34 $ 1.20 $ 1.10
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
First Quarter 2005 Compared to First Quarter 2004
A summary of the results of operations of the Company as a percentage of
revenues for the first quarters of 2005 and 2004 is shown below.
Three Months Ended
-------------------------------
April
Three Months Ended Six Months Ended
---------------------------- ----------------------------
Jul. 3, 2005 Jun. 27, 2004 Jul. 3, 2005 Jun. 27, 2004
------------ ------------- ------------ -------------
Revenues.................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of sales:
Food, beverage and related supplies.... 11.8 12.9 11.9 12.3
Games and merchandise.................. 4.0 4.4 3.9 4.3
Labor.................................. 28.9 28.8 26.8 27.1
----- ----- ----- -----
44.7 46.1 42.6 43.7
Selling, general and administrative...... 12.7 12.1 12.2 11.8
Depreciation and amortization............ 9.4 8.4 7.9 7.3
Interest expense......................... .5 .3 .4 .3
Other operating expenses................. 18.8 19.1 17.1 17.0
----- ----- ----- -----
86.1 86.0 80.2 80.1
----- ----- ----- -----
Income before income taxes.................. 13.9 14.0 19.8 19.9
Income tax expense ......................... 5.3 5.4 7.6 7.7
----- ----- ----- -----
Net income ................................. 8.6% 8.6% 12.2% 12.2%
===== ===== ===== =====
Number of Company-operated stores:
Beginning of period...................... 453 420 449 418
New...................................... 1 10 5 12
Company purchased franchise stores....... 1 1
Closed...................................
---- ---- ---- ----
End of period............................ 455 430 455 430
==== ==== ==== ====
Number of franchise stores:
Beginning of period...................... 45 48 46 48
New...................................... 1 1 1 1
Company purchased franchise stores....... (1) (1)
Closed................................... (1)
---- ---- ---- ----
End of period............................ 45 49 45 49
==== ==== ==== ====
Second Quarter 2005 March 28,Compared to Second Quarter 2004
------------- --------------
Revenue...................................... 100.0% 100.0%
------ ------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies.... 11.9 11.8
Games and merchandise.................. 3.9 4.2
Labor.................................. 25.1 25.7
------ ------
40.9 41.7
Selling, general and administrative....... 11.9 11.5
Depreciation and amortization............. 6.7 6.5
Interest expense.......................... .4 .2
Other operating expenses.................. 15.7 15.4
------ ------
75.6 75.3
------ ------
Income before income taxes................... 24.4 24.7
Income tax expense .......................... 9.3 9.4
------ ------
Net income .................................. 15.1% 15.3%
====== ======
Revenues
Revenues increased 3.4%1.8% to $214.1$168.4 million in the firstsecond quarter of 2005
from $206.9$165.4 million in the firstsecond quarter of 2004 due to an increase in the
number of Company-operated restaurants. Comparable store sales decreased 1.8%2.1%
between the periods. The Company believes comparable store sales in the second
quarter of 2005 were negatively impacted by ineffective sales promotions and the
effect of high gasoline prices on consumer buying decisions. Comparable store
sales were also negatively impacted by the shift of a large percentage of spring
breaks into the first quarter of 2005 compared to the prior period. The weighted
average number of Company-operated restaurants increased by 27 restaurants
between the second quarter of 2004 and the second quarter of 2005. Menu prices
increased approximately 3.4% between the second quarter of 2005 and the second
quarter of 2004.
Costs and Expenses
Costs and expenses as a percentage of revenues increased slightly to 86.1%
in the second quarter of 2005 from 86.0% in the second quarter of 2004.
Cost of sales decreased as a percentage of revenues to 44.7% in the second
quarter of 2005 from 46.1% in the comparable period of 2004. Cost of food,
beverage, and related supplies as a percentage of revenues decreased to 11.8% in
the second quarter of 2005 from 12.9% in the second quarter of 2004, due to a
24% reduction in average cheese prices paid during the second quarter of 2005
compared to the same period of the prior year, a beverage rebate from our
supplier and a benefit from price increases. These improvements were partially
offset by an increase in the prices of dough and pepperoni. Games and
merchandise costs as a percentage of revenues decreased to 4.0% in the second
quarter of 2005 from 4.4% in the second quarter of 2004 due primarily to an
increase in pricing. Labor expense as a percentage of revenues increased to
28.9% in the second quarter of 2005 from 28.8% in the second quarter of 2004
primarily due to the decline in comparable store sales during the quarter.
Selling, general and administrative expenses as a percentage of revenues
increased to 12.7% in the second quarter of 2005 from 12.1% in the second
quarter of 2004. The increase was primarily due to an increase in group medical
expenses and an increase in advertising expense in Canadian markets.
Depreciation and amortization expenses as a percentage of revenues
increased to 9.4% in the second quarter of 2005 from 8.4% in the second quarter
of 2004 due to capital invested in new and existing restaurants and the decline
in comparable store sales.
Interest expense as a percentage of revenues increased to 0.5% in the
second quarter of 2005 from 0.3% in the second quarter of 2004 primarily due to
an increase in interest rates and outstanding debt.
Other operating expenses decreased as a percentage of revenues to 18.8% in
the second quarter of 2005 from 19.1% in the second quarter of 2004 primarily
due to a 0.9% decrease in insurance expense as a percentage of revenues
reflecting improved trends in workers compensation and general liability claims
and a reduction in insurance premiums. This decrease was partially offset by the
impact of the decline in comparable store sales.
The Company's effective income tax rate was 38.3% in the second quarters of
both 2005 and 2004.
Net Income
The Company's net income was $14.4 million in both the second quarter of
2005 and the second quarter of 2004 . The Company's diluted earnings per share
increased 8.1% to $.40 per share in the second quarter of 2005 from $.37 per
share in the second quarter of 2004 due to a 5.5% decrease in the number of
weighted average diluted shares outstanding.
First quarter comparableSix Months of 2005 Compared to First Six Months of 2004
Revenues
Revenues increased 2.7% to $382.5 million in the first six months of 2005
from $372.4 million in the first six months of 2004 due to an increase in the
number of Company-operated restaurants. Comparable store sales decreased 1.9%
between the periods. Comparable store sales were negatively impacted by the
shift of the seasonally strong first week of the year into the fourth quarter of
2004. On a same week basis, calculated by comparing the 13first 26 weeks included in the
first quarter of 2005 to the same 1326
weeks in fiscal year 2004 comparable store sales growth was 0.2%declined .4%. The shift ofCompany believes
comparable store sales in the Easter holiday into the firstsecond quarter of 2005 were also negatively
impacted sales. However, this negative impact was offset by ineffective sales promotions and the benefiteffect of a large percentagehigh gasoline prices
on consumer buying decisions. The weighted average number of spring breaks falling in March 2005 versus
April 2004. DuringCompany-operated
restaurants increased by 29 restaurants between the full yearfirst six months of 2004 the Company opened 29 new restaurants,
acquired three restaurants from franchisees and closed one restaurant. During
the first threesix months of 2005, the Company opened four new restaurants and has
453 Company-operated restaurants at April 3, 2005. Menu prices increased approximately 3.6%3.5% between
the first quartersix months of 20042005 and the first quartersix months of 2005.2004.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 75.6%80.2% in the
first quartersix months of 2005 from 75.3%80.1% in the first quartersix months of 2004.
Cost of sales decreased as a percentage of revenues to 40.9%42.6% in the first
quartersix months of 2005 from 41.7%43.7% in the comparable period of 2004. Cost of food,
beverage, and related supplies as a percentage of revenues increaseddecreased to 11.9% in
the first quartersix months of 2005 from 11.8%12.3% in the first quartersix months of 2004, due to
higher
commodity costs which were partially offset byan 11.8% reduction in average cheese prices paid during the first six months of
2005 compared to the first six months of 2004, a beverage rebate from our
supplier and a menu price increase. Cost of games and merchandise as a
percentage of revenues decreased to 3.9% in the first quartersix months of 2005 from
4.2%4.3% in the first quartersix months of 2004 due primarily to the menu price increase.
Labor expense as a percentage of revenues decreased to 25.1%26.8% in the first quartersix
months of 2005 from 25.7%27.1% in the first quartercomparable period of 2004 primarily due to
improved operational efficiency.
efficiency partially offset by the decline in comparable
store sales.
Selling, general and administrative expenses as a percentage of revenues
increased to 11.9%12.2% in the first threesix months of 2005 from 11.5%11.8% in the first threesix
months of 2004. The increase was primarily due to a recognition and reward
conference for restaurant general managers held in the first quarter of 2005.
Depreciation and amortization expenses as a percentage of revenues
increased to 6.7%7.9% in the first quartersix months of 2005 from 6.5%7.3% in the first quartersix
months of 2004 due to capital invested in new and existing restaurants.restaurants and the
decline in comparable store sales.
Interest expense as a percentage of revenues increased to 0.4% in the first
threesix months of 2005 from 0.2%0.3% in the first threesix months of 2004 primarily due to an
increase in interest rates and outstanding debt.
Other operating expenses increased as a percentage of revenuesslightly to 15.7%17.1% in the first quartersix
months of 2005 from 15.4%compared to 17.0% in the first quartersix months of 2004 primarily due
to the decrease in comparable store sales.sales which was partially offset by an
improvement in insurance expense as a percentage of revenues. Insurance expense
decreased as a percentage of revenues due to improved trends in workers
compensation and general liability claims and a reduction in insurance premiums.
The Company's effective income tax rate was 38.3% in the first quarterssix months
of both 2005 and 2004.
Net Income
The Company had net income of $32.3$46.7 million in the first quartersix months of 2005
compared to $31.4$45.8 million in the first quartersix months of 2004 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 8.9%7.7% to $.86$1.26 per share in the first quartersix months of 2005 from $.79$1.17 per
share in the first quartersix months of 2004 due to the 2.6%1.8% increase in net income
discussed above and a 5.4%5.5% decrease in the number of weighted average diluted
shares outstanding.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations was $60.7$75.1 million in the first quartersix months of
2005 compared to $73.9$91.8 million in the first quartersix months of 2004. Net cash
outflows from investing activities for the first quartersix months of 2005 were $15.4$33.3
million, primarily related to capital expenditures. Net cash outflows from
financing activities for the first quartersix months of 2005 were $45.3$43.9 million,
primarily related to payments to
reduce outstanding debt and the repurchase of the Company's common stock.stock offset by
borrowings on the Company's line of credit and proceeds from the exercise of
employee stock options. 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.
Cash provided by operations is a significant source of liquidity for the
Company. Since substantially all of the Company's sales are for cash and credit
cards, and accounts payable are generally due in five to 30 days, the Company is
able to carry current liabilities in excess of current assets. The net working
capital deficit decreased from $92.2 million at January 2, 2005 to $79.7$8.8 million
at AprilJuly 3, 2005 due primarily to the timingan amendment of payments for various accrued
expenses and payments made on the Company's line of credit. Included in working
capital are borrowings on the Company's line of credit
that is scheduled to
mature in December 2005. The Company intends to extendagreement which extended the maturity date on its
linefive years and resulted in the
reclassification of credit agreement.amounts outstanding under the agreement to long-term.
The Company has initiated several strategies to increase revenues and
earnings over the long-term that require capital expenditures. These strategies
include: (a) new restaurant development and acquisitions of existing restaurants
from franchisees, (b) a game enhancement initiative that includes new games and
a game rotation plan, (c) major remodels, and (d) expansions of the square
footage of existing restaurants.
In 2005, the Company plans to add 3027 to 3531 restaurants, which includes
opening new restaurants and acquiring existing restaurants from franchisees. The
Company currently anticipates its cost of opening such new restaurants will vary
depending upon many factors including the size of the restaurants and whether
the Company acquires land or the restaurant is an in-line or freestanding
building. The average capital cost of all new restaurants expected to open in
2005 is approximately $1.8 million per restaurant. At the beginning of 2005, the
Company identified potential development opportunities for approximately 250
restaurants including those restaurants expected to open in 2005. The Company
currently expects to open approximately 100 restaurants from 2006 through 2008.
The game enhancement initiative began in 2003 and has an average capital
cost of approximately $50,000 to $60,000 per restaurant. The primary components
of this plan are to provide new and transferred games and rides and, in certain
stores, enhancements to the Toddler Zone (r)Zone(R). The major remodel initiative
includes expansion of the space allocated to the game room, an increase in the
number of games and in some cases may include a new exterior and interior
identity. A new exterior identity includes a revised Chuck E. Cheese's logo and
signage, updating the exterior design of the buildings and, in some restaurants,
colorful new awnings. The interior component includes painting, updating decor,
a new menu board and enhanced lighting. The Company intends to complete
approximately 60 to 70 major remodels in 2005 with an average capital cost of
$250,000 toapproximately $300,000 per restaurant. Approximately one quarterthree quarters of the major
remodels will also include the new exterior and interior identity depending on
the age and condition of the building exterior, signage and awnings. In
addition, the Company intends on expanding the square footage in approximately
five to seven restaurants during 2005. Expanding the square footage of existing
restaurants can range in cost from $200,000 to $900,000 per restaurant, but
generally have an average capital cost of approximately $500,000.
The Company expects the aggregate capital costs in 2005 of completing the
game enhancement initiative, major remodels, expanding the square footage of
existing restaurants and the exterior and interior remodels to total
approximately $30 million and impact approximately 160 restaurants.
During the first quartersix months of 2005, the Company opened fourfive new restaurants,
acquired one restaurant from a franchisee, completed six17 major remodels,
including four15 remodels with a new exterior and interior identity, expanded the
square footage of two restaurants and 1948 game rotation upgrades. The Company
currently estimates that capital expenditures in 2005 will be $100$95 to $105$100
million, including the $30 million the Company is expecting to invest to remodel
existing stores. The Company plans to finance its capital expenditures through
cash flow from operations and, if necessary, borrowings under the Company's line
of credit.
From time to time, the Company repurchases shares of its common stock under
a plan authorized by its Board of Directors. The plan authorizes repurchases in
the open market or in private transactions. Beginning in 1993, the Company has
repurchased approximately 19.020.1 million shares of the Company's common stock,
retroactively adjusted for all stock splits, at an aggregate purchase price of
approximately $344.4$384.8 million. During the first quartersix months of 2005, the Company
repurchased 637,3001,710,700 shares at an aggregate purchase price of approximately
$23.6$64.0 million. AtIn July 2005, the endCompany announced completion of the first quarter of 2005, approximately $40.5 million
remained available fora previously
approved plan to repurchase under aup to $100 million repurchase authorization
approvedof common stock and approval by
the Company'sits Board of Directors in August 2004.
Theof a new plan authorizing the repurchase of up to $400
million of common stock.
In July 2005, the Company has available borrowings underamended its line of credit agreement to provide
for borrowings up to $200 million for a term of five years. The credit facility
replaces the Company's previous $132.5 million credit facility that iswas
scheduled to mature in December 2005. Interest under the line of credit
agreement is dependent on earnings and debt levels of the Company and ranges
from prime or, at the Company's option, LIBOR plus 0.75%0.50% to 1.50%1.25%. Currently,
any borrowings under this line of credit would be at the prime rate or LIBOR
plus 0.75%0.50%. As of April 3, 2005, there were $53.0 million in borrowings
under this line of credit and outstanding letters of credit of $7.5 million. The line of credit agreement contains certain restrictions and
conditions as defined in the agreement that require the Company to maintain net worth of $326 million
as of April 3, 2005, a
fixed charge coverage ratio at a minimum of 1.5 to 1.0 and a maximum total debt
to earnings before interest, taxes, depreciation, amortization and rent ratio of 3.253.0 to
1.0. Borrowings under the line of credit agreement are unsecured but the Company
has agreed not to pledge any of its existing assets to secure future
indebtedness. At AprilJuly 3, 2005, the Company had borrowings outstanding under the
previous line of credit agreement of $89.0 million and outstanding letters of
credit of $10.9 million. At July 3, 2005, the Company was in compliance with all
of the aboveits debt covenants. The Company intends to
extend the maturity date of its line of credit agreement.
Critical Accounting Policies and Estimates
The following discussion addresses the Company's most critical accounting
policies, which are those that require significant judgment.
Self Insurance
The Company estimates its liability for incurred but unsettled general
liability and workers compensation related claims under its self-insured
retention programs, including reported losses in the process of settlement and
losses incurred but not reported. The estimate is based on loss development
factors determined through actuarial methods using the actual claim loss
experience of the Company subject to adjustment for current trends. Revisions to
the estimated liability resulting from ongoing periodic reviews are recognized
in the period in which the differences are identified. Significant increases in
general liability and workers compensation claims could have a material adverse
impact on future operating results.
Impairment of Long-Lived Assets
The Company periodically reviews the estimated useful lives and
recoverability of its depreciable assets based on factors including historical
experience, the expected beneficial service period of the asset, the quality and
durability of the asset and the Company's maintenance policy including periodic
upgrades. Changes in useful lives are made on a prospective basis, unless
factors indicate the carrying amounts of the assets may not be recoverable from
estimated future cash flows and an impairment write-down is necessary.
Lease Accounting
The Company uses a consistent lease period (generally, the initial
non-cancelable lease term plus renewal option periods provided for in the lease
that can be reasonably assured) when calculating depreciation of leasehold
improvements and in determining straight-line rent expense and classification of
its leases as either an operating lease or a capital lease. The lease term and
straight-line rent expense commences on the date when the Company takes
possession and has the right to control use of the leased premises. Funds
received from the lessor intended to reimburse the Company for the costs of
leasehold improvements is recorded as a deferred credit resulting from a lease
incentive and amortized over the lease term as a reduction to rent expense.
New Accounting Standards
In May 2005, the FASB issued Statement of Financial Accounting Standards
No., 154, "Accounting changes and Error Corrections - A Replacement of APB
Opinion No. 20 and FASB Statement No. 3". SFAS No.154 requires retrospective
application, or the latest practical date, as the preferred method to report a
change in accounting principle or correction of an error. SFAS No.154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected
to have a material impact on the Company's consolidated results of operations
and financial condition.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment." SFAS 123(R) is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all
share-based payments to employees including grants of employee stock options, to
be recognized in the financial statements based on their fair values. SFAS 123
(R) is effective at the beginning of the first annual period beginning after
June 15, 2005. Under APB Opinion No. 25, no stock-based compensation cost has
been reflected in the net income of the Company for grants of stock options to
employees. Beginning in the first quarter of 2006, the Company will recognize
compensation expense in its financial statements based on the fair value of all
share-based payments to employees.
Website Access to Company Reports
OurThe Company's website address is www.chuckecheese.com. Our annualAnnual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3,
4 and 5 filed by ourthe Company's officers, directors and stockholders holding 10%
or more of
our common stock and all amendments to those reports are available free
of charge through ourthe website, as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and
Exchange Commission.
Forward Looking Statements
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 are
subject to various risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or 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 and entertainment industries, competition
within each of the restaurant and entertainment industries, store sales
cannibalization, success of its franchise operations, negative publicity,
fluctuations in quarterly results of operations, including seasonality,
government regulations, weather, school holidays, commodity, insurance and labor
costs.
Item 3.3: Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to market risk in the form of interest risk and
foreign currency risk. Both interest risk and foreign currency risk are
immaterial to the Company.
Item 4. Controls and Procedures.
Disclosure4: Controls and Procedures
In connection with the preparation of the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 2005, theThe Company performed an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. In performing this evaluation, the Company's management
considered the Company's lease accounting practices discussed below and the
Company's decision to restate certain of its previously issued financial
statements to reflect the correction in its lease accounting. Based on that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
not effective as of January 2, 2005. The Company subsequently
remediated this deficiency in its disclosure controls and procedures by
instituting additional review procedures over the selection and monitoring of
appropriate assumptions and factors affecting its lease accounting practices.
After these remedial measures and a re-evaluation of the effectiveness and
design of its disclosure controls and procedures, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, have
concluded that the Company's disclosure controls were effective as of AprilJuly 3, 2005, in ensuring that material information relating to
the Company, including its consolidated subsidiaries, required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Changes in Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act). During the assessment of internal control over financial
reporting performed in connection with the preparation of management's annual
report on internal control over financial reporting contained in the Company's
Annual Report on Form 10-K for the fiscal year ended January 2, 2005, management
determined that the Company's controls over the selection and monitoring of
appropriate assumptions and factors affecting lease accounting were
insufficient, and, as a result, the Company's computation of depreciation, lease
classification, straight-line rent expense and the related deferred rent
liability had been incorrect. Accordingly, the Company restated certain of its
previously issued financial statements to reflect the correction in its lease
accounting practices. Management further concluded that this control deficiency
represented a material weakness in the Company's internal control over financial
reporting as of January 2, 2005. To remediate the material weakness in internal
control over financial reporting, the Company instituted additional review
procedures over the selection and monitoring of appropriate assumptions and
factors affecting lease accounting practices during the first quarter of 2005.
Other than as described above, thereThere have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls during the fiscal quarter to which
this report relates.
PART II - OTHER INFORMATION
Item 1.1: Legal Proceedings.Proceedings
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation in which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations, financial condition or cash flows.
Item 2.2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.Securities
The following table presents information related to repurchases of common
stock the Company made during the firstsecond quarter of 2005 pursuant to a
repurchase program authorized by the Company's Board of Directors in August 2004
to purchase up to $100 million in the Company's common stock:
CummulativeCumulative Maximum Dollar
Number of Shares Amount that May
Total Number of Average Price Purchased Under Yet be Purchased
Shares Purchased Paid per Share the Program Under the Program
---------------- -------------- ---------------- -----------------
Jan. 3
Apr. 4 - Jan.May 1, 2005 573,700 $ 37.29 2,216,600 $ 19,074,562
May 2 - May 29, 2005 499,700 $ 38.01 2,716,300 $ 78,893
May 30 2005 - - 1,005,600 $ 64,065,347
Jan. 31 - Feb. 27, 2005 - - 1,005,600 $ 64,065,347
Feb. 28 - Apr.Jul. 3, 2005
637,300----------
Total 1,073,400 $ 37.02 1,642,900 $ 40,471,193
--------
Total 637,300 $ 37.02
========37.63
==========
In July 2005, the Company announced completion of a previously approved
plan to repurchase up to $100 million of common stock and approval by its Board
of Directors of a new plan authorizing the repurchase of up to $400 million of
common stock.
Item 4.4: Submission of Matters to a Vote of Security Holders.Holders
On May 19, 2005, at the Company's annual meeting of shareholders, the
Company's shareholders re-elected Richard T. Huston, Cynthia I. Pharr Lee and
Raymond E. Wooldridge to serve the Company as directors. The following votes
were cast with respect to the election of these directors:
For Withheld
Richard T. Huston 31,414,298 2,636,791
Cynthia I. Pharr Lee 31,057,426 2,993,663
Raymond E. Wooldridge 32,706,789 1,344,300
Richard M. Frank, Michael H. Magusiak, Tim T. Morris, Louis P. Neeb, and
Walter Tyree's terms of office as directors of the Company continued after the
meeting.
Next, the shareholders ratified the appointment of Deloitte & Touche LLP as
the Company's independent registered public accounting firm. The Audit Committee
had selected the firm of Deloitte & Touche LLP, an independent registered public
accounting firm, to be the Company's auditors, which selection had been approved
by the Board of Directors. Deloitte & Touche LLP had served in this capacity for
the year 2004. The following votes were cast with respect to the appointment of
Deloitte & Touche LLP as the Company's independent registered public accounting
firm:
For Against Abstain
33,336,308 704,521 10,260
Finally, the shareholders approved the adoption of a Non-Employee Directors
Restricted Stock Plan. The Restricted Stock Plan provides for the granting of
Common Stock to non-employee Directors for such consideration, if any, and
subject to such restrictions on transfer, rights of first refusal, repurchase
provisions, forfeiture provisions and other terms and conditions as are
established by the Compensation Committee of the Board of Directors. Subject to
any adjustments made as a result of various changes in the capitalization of the
Company, the aggregate number of shares of Common Stock which may be granted
under the Restricted Stock Plan shall not exceed 50,000 shares, plus any shares
of Common Stock previously awarded which are forfeited or terminated. The
following votes were cast with respect to the adoption of the Non-Employee
Directors Restricted Stock Plan:
For Against Abstain No matters were submitted to a vote of security holders during the first
quarter of 2005.Vote
24,893,190 6,387,737 730,315 2,039,847
Item 6.6: Exhibits and Reports on Form 8-K.8-K
a) Exhibits
10(a) 2005 Employment10(c) Credit Agreement, in the stated amount of $200,000,000, dated
March 29,July 18, 2005, between CEC Entertainment Concepts, L.P. and Bank
of America, N.A., JP Morgan Chase Bank, N.A., SunTrust Bank, and
the Company and Richard M. Frankother Lenders (filed as Exhibitexhibit 10(a)(1) to the Company's
Form 8-K filed on April 1,July 21, 2005, and incorporated
herein by reference).
10(b) 2005 Employment Agreement dated March 29, 2005, between the
Company and Michael H. Magusiak (filed as Exhibit 10(b) to the
Company's Form 8-K filed on April 1, 2005, and incorporated herein by
reference).
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
During the firstsecond quarter and to present, we filed or furnished the
following reports on Form 8-K:
A current report on Form 8-K, dated February 1, 2005, announcing
nonreliance on previously issued financial statements.
A current report on Form 8-K, dated March 2, 2005, announcing fourth
quarter 2004 financial results.
A current report on Form 8-K, dated April 1, 2005, furnishing
employment agreements between the Company and Richard M. Frank and
Michael H. Magusiak.
A current report on Form 8-K, dated April 9, 2005, announcing the
expansion of its Board of Directors by the additionsaddition of a new
member.
A current report on Form 8-K, dated April 20, 2005, announcing
first quarter 2005 financial results.
A current report on Form 8-K, dated July 21, 2005, furnishing a
new Credit Agreement between CEC Entertainment Concepts, L.P. and
Bank of America, N.A., JP Morgan Chase Bank, N.A., SunTrust Bank,
and the other Lenders.
A current report on Form 8-K, dated July 26, 2005, announcing
second quarter 2005 financial results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEC ENTERTAINMENT, INC.
Dated: May 12,August 11, 2005 By: /s/ Richard M. Frank
---------------------------------------------------------------------------
Richard M. Frank
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Christopher D. Morris
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Christopher D. Morris
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
/s/ James Mabry
---------------------------------------------------------------------------
James Mabry
Vice President, Controller and Treasurer
(Principal Accounting Officer)