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 April 2, 2006.
-------------
|_| 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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Securities Exchange Act of 1934. Large accelerated
filer [X] Accelerated filer [_] Non-accelerated filer [_].
Indicated by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act) . Yes [ ] No [X]
At May 8, 2006, an aggregate of 33,289,098 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................................ 3
Condensed Consolidated Statements of Earnings and Comprehensive
Income............................................................ 4
Condensed Consolidated Statement of Shareholders' Equity............. 5
Condensed Consolidated Statements of Cash Flows ..................... 6
Notes to Condensed Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 16
Item 4. Controls and Procedures........................................ 16
Part II - Other Information:
Item 1. Legal Proceedings............................................. 17
Item 1A. Risk Factors................................................... 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 6. Exhibits and Reports on Form 8-K............................. 17
Signatures................................................................. 18
Certifications............................................................. 19
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands, except share data)
ASSETS
April 2, January 1,
2006 2006
--------- ----------
(as adjusted-
see Note 3)
Current assets:
Cash and cash equivalents.................................................... $ 15,689 $ 12,184
Accounts receivable.......................................................... 19,652 20,323
Inventories.................................................................. 12,799 13,659
Prepaid expenses............................................................. 9,746 7,882
Deferred tax asset........................................................... 1,824 1,824
--------- ---------
Total current assets...................................................... 59,710 55,872
--------- ---------
Property and equipment, net..................................................... 594,550 592,255
--------- ---------
Other assets.................................................................... 1,762 2,201
--------- ---------
$ 656,022 $ 650,328
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 599 $ 594
Accounts payable............................................................. 21,117 30,264
Accrued liabilities.......................................................... 46,346 27,791
--------- ---------
Total current liabilities................................................. 68,062 58,649
--------- ---------
Long-term debt, less current portion............................................ 116,729 148,974
--------- ---------
Deferred rent................................................................... 63,974 61,877
--------- ---------
Deferred tax liability.......................................................... 16,131 15,388
--------- ---------
Accrued insurance............................................................... 17,000 17,000
--------- ---------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; 56,591,613
and 56,115,658 shares issued, respectively ............................... 5,659 5,612
Capital in excess of par value............................................... 328,231 314,476
Retained earnings ........................................................... 497,618 468,398
Accumulated other comprehensive income ...................................... 2,467 2,446
Deferred compensation........................................................ (6,915)
Less treasury shares of 22,821,415 and 22,499,815, respectively, at cost..... (452,934) (442,492)
--------- ---------
374,126 348,440
--------- ---------
$ 656,022 $ 650,328
========= =========
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 2, 2006 April 3, 2005
------------- -------------
(as adjusted-
see Note 3)
Food and beverage revenues................................... $ 148,600 $ 139,044
Games and merchandise revenues............................... 77,506 74,242
Franchise fees and royalties................................. 884 795
Interest income ............................................. 2 5
--------- ---------
226,992 214,086
--------- ---------
Costs and expenses:
Cost of sales:
Food, beverage and related supplies.................... 27,422 25,568
Games and merchandise.................................. 10,062 8,324
Labor.................................................. 59,626 53,825
--------- ---------
97,110 87,717
Selling, general and administrative expenses.............. 28,672 26,894
Depreciation and amortization............................. 15,919 14,397
Interest expense.......................................... 1,703 723
Other operating expenses.................................. 36,610 33,555
--------- ---------
180,014 163,286
--------- ---------
Income before income taxes................................... 46,978 50,800
Income taxes................................................. 17,758 19,457
--------- ---------
Net income .................................................. 29,220 31,343
Other comprehensive income (loss), net of tax:
Foreign currency translation.............................. 21 (135)
--------- ---------
Comprehensive income......................................... $ 29,241 $ 31,208
========= =========
Earnings per share:
Basic:
Net income ............................................ $ .87 $ .87
========= =========
Weighted average shares outstanding.................... 33,719 36,205
========= =========
Diluted:
Net income ........................................... $ .85 $ .84
========= =========
Weighted average shares outstanding.................... 34,517 37,451
========= =========
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 (as adjusted - see Note 3)..................... $ 320,088 56,116
Stock options exercised................................................... 4,842 220
Excess tax benefit from stock-based compensation.......................... 303
Stock issued under 401(k) plan............................................ 457 13
Stock compensation expense................................................ 1,084
Issuance of restricted stock, net of forfeiture adjustments............... 7,116 243
--------- -------
Balance, April 2, 2006.................................................... 333,890 56,592
--------- =======
Retained earnings:
Balance, beginning of year (as adjusted - see Note 3)..................... 468,398
Net income................................................................ 29,220
---------
Balance, April 2, 2006.................................................... 497,618
---------
Accumulated other comprehensive income:
Balance, beginning of year................................................ 2,446
Foreign currency translation.............................................. 21
---------
Balance, April 2, 2006.................................................... 2,467
---------
Deferred compensation:
Balance, beginning of year................................................ 0
Stock compensation expense................................................ 201
Issuance of restricted stock, net of forfeiture estimates................. (7,116)
---------
Balance, April 2, 2006.................................................... (6,915)
---------
Treasury shares:
Balance, beginning of year................................................ (442,492) 22,500
Treasury stock acquired................................................... (10,442) 321
--------- -------
Balance, April 2, 2006.................................................... (452,934) 22,821
--------- =======
Total shareholders' equity................................................... $ 374,126
=========
See notes to condensed consolidated financial statements.
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Three Months Ended
--------------------------------
April 2, 2006 April 3, 2005
------------- -------------
(as adjusted-
see Note 3)
Operating activities:
Net income ..................................................... $ 29,220 $ 31,343
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization................................ 15,919 14,397
Deferred income taxes........................................ 749 (1,746)
Stock compensation expense................................... 1,285 1,477
Excess tax benefit from stock-based compensation............. (303) (267)
Contributions from landlords................................. 1,788 1,596
Deferred lease rentals....................................... 309 973
Provision for asset write-offs............................... 367 293
Changes in assets and liabilities:
Accounts receivable....................................... 671 (722)
Inventories............................................... 860 764
Prepaid expenses.......................................... (1,864) (1,689)
Accounts payable.......................................... (8,679) (3,318)
Accrued liabilities....................................... 19,043 17,424
-------- --------
Cash provided by operations............................ 59,365 60,525
-------- --------
Investing activities:
Purchases of property and equipment............................. (18,688) (15,767)
Decrease in other assets........................................ 412 280
-------- --------
Cash used in investing activities...................... (18,276) (15,487)
-------- --------
Financing activities:
Proceeds on long-term debt...................................... 3,000
Payments on long-term debt...................................... (32,240) (28,134)
Exercise of stock options ...................................... 4,842 3,100
Excess tax benefit from stock-based compensation................ 303 267
Treasury stock acquired ........................................ (10,442) (23,594)
Other .......................................................... (47) 288
-------- --------
Cash used in financing activities...................... (37,584) (45,073)
-------- --------
Increase (decrease) in cash and cash equivalents .................. 3,505 (35)
Cash and cash equivalents, beginning of period..................... 12,184 11,798
-------- --------
Cash and cash equivalents, end of period........................... $ 15,689 $ 11,763
======== ========
Supplemental cash flow information:
Interest paid................................................... $ 630 $ 763
Income taxes paid............................................... 1,226 3,806
Non-cash investing and financing activities:
Change in accrued construction accounts payable................. (196) (58)
Stock issued under 401(k) plan.................................. 457 456
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 consolidated
financial statements for the periods ended April 2, 2006 and April 3, 2005
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 1, 2006.
Results of operations for the periods ended April 2, 2006 and April 3, 2005 are
not necessarily indicative of the results for the 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 and
restricted shares 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 2, April 3,
2006 2005
-------- --------
(as adjusted-
See Note 3)
Net income ..................................................................... $ 29,220 $ 31,343
======== ========
Basic:
Weighted average common shares outstanding................................... 33,719 36,205
======== ========
Earnings per common share.................................................... $ .87 $ .87
======== ========
Diluted:
Weighted average common shares outstanding................................... 33,719 36,205
Potential common shares for stock options and restricted shares.............. 798 1,246
-------- --------
Weighted average shares outstanding.......................................... 34,517 37,451
======== ========
Earnings per common and potential
common share.............................................................. $ .85 $ .84
======== ========
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock based compensation:
The Company adopted Financial Accounting Standards Board Statement No.
123(R), "Share-Based Payment" ("FAS 123R") and has elected to apply the modified
retrospective method of adoption and as a result, retroactively adjusted the
results from prior periods.
Under the terms of the Company's stock option plans, employees and
non-employee directors may be granted options to purchase the Company's common
stock at a price equal to the market price on the date of grant. Options may not
be exercised until the employee has been continuously employed for at least one
year after the date of grant. Options which expire or terminate may be
re-granted under the plan. At April 2, 2006, there were 2,047,639 shares
available for future awards under the stock option plans.
Stock option transactions are summarized as follows:
Weighted
Options Average
Outstanding Exercise Price
----------- --------------
Options outstanding, Jan. 1, 2006............ 5,452,774 $ 25.69
Granted...................................
Exercised................................. (219,988) 22.01
Terminated................................ (64,987) 33.23
----------
Options outstanding, April 2, 2006.......... 5,167,799 25.75
==========
Options outstanding at April 2, 2006:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- -----------------------------
Options Weighted Avg. Weighted Options Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices as of 4/2/06 Life (Years) Exercise Price as of 4/2/06 Exercise
--------------- ------------ ------------ -------------- ------------ ----------
$ 11.67 - $ 19.99 2,026,571 3.1 $ 18.90 1,935,650 $ 18.83
$ 20.83 - $ 27.43 801,826 1.8 22.68 849,546 22.67
$ 29.00 - $ 31.49 936,256 3.0 29.22 896,266 29.12
$ 31.64 - $ 34.09 481,284 4.8 31.90 266,803 31.88
$ 35.04 - $ 42.17 921,862 3.9 36.77 230,314 36.65
---------- ----------
$ 11.67 - $ 42.17 5,167,799 3.2 25.75 4,178,579 23.64
========== ==========
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock based compensation (continued):
Prior to 2006, the Company accounted for stock compensation in accordance
with Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," ("FAS 123") and elected to recognize no expense
related to stock compensation, since options were always granted with an
exercise price equal to the market price of the Company's stock on the date of
grant. In December 2004, the Financial Accounting Standards Board issued a
revised and renamed standard regarding stock compensation - FAS 123R. The
revised standard, which was adopted by the Company in the first quarter of 2006,
eliminates the disclosure-only election under FAS 123 and requires the
recognition of compensation expense of stock options and all other forms of
equity compensation generally based on the fair value of the instruments on the
date of grant. In order to enhance comparability among all years presented and
to provide the fullest understanding of the impact that stock compensation
expense has on the Company, the Company has retrospectively applied the new
standard to prior period results.
The fair value of stock compensation is recognized in selling, general and
administrative expense over the vesting period, and is determined on the date of
grant using the Black-Scholes option pricing model to determine the fair value
of options granted. The estimated fair value of options granted was $9.72, $9.93
and $6.32 per share in 2005, 2004 and 2003, respectively. The following weighted
average assumptions were used for grants: risk free interest rate of 4.1%, 3.00%
and 3.10% in 2005, 2004 and 2003, respectively; no dividend yield; expected
lives of three years in 2005 and five years in 2004 and 2003; and expected
volatility of 30%.
The unaudited condensed consolidated statement of income for the three
months ended April 2, 2006 and April 3, 2005 reflects pre-tax share based
compensation cost of $1.3 million and $1.5 million, respectively. The impact on
net income for the three months ended April 2, 2006 and April 3, 2005 was
$791,000 and $911,000, respectively. The amount expensed in 2006 includes the
expense of restricted shares granted in the first quarter of 2006. Unrecognized
pretax stock compensation cost as of April 2, 2006 was $5.8 million related to
stock options granted and $6.9 million related to restricted shares issued.
Cash proceeds from the exercise of stock options totaled $4.8 million and
$3.1 million in the first three months of 2006 and the first three months of
2005, respectively. Stock options exercised in the first quarters of 2006 and
2005 had an aggregate intrinsic value (amount by which the market price exceeded
the exercise price on the date of exercise) of $2.4 million and $1.3 million,
respectively. The income tax benefit related to the expense of employee stock
options was $303,000 and $267,000 for the first quarters of 2006 and 2005,
respectively.
Following are figures pertinent to the balance sheet as of January 1, 2006
and the first quarter of 2005 consolidated statement of earnings as they were
previously reported and as restated for the retrospective adoption of FAS123R.
January 1, 2006
--------------------------------------------
As Previously
Reported Adjustment Adjusted
------------- ---------- ---------
Condensed Consolidated Balance Sheet:
Deferred tax liability........................... $ 29,272 $(13,884) $ 15,388
Capital in excess of par value................... 262,846 51,630 314,476
Retained earnings................................ 506,144 (37,746) 468,398
Total shareholders' equity....................... 334,556 13,884 348,440
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Stock based compensation (continued):
Three Months ended April 3, 2005
--------------------------------------------
As Previously
Reported Adjustment Adjusted
------------- ---------- ---------
Condensed Consolidated Statement of Earnings:
Selling, general and administrative expenses..... $ 25,417 $ 1,477 $ 26,894
Total costs and expenses......................... 161,809 1,477 163,286
Income before income taxes....................... 52,277 (1,477) 50,800
Income taxes..................................... 20,023 (566) 19,457
Net income....................................... 32,254 (911) 31,343
Comprehensive income............................. 32,119 (911) 31,208
Basic earnings per share......................... .89 (.02) .87
Diluted earnings per share....................... .86 (.02) .84
Three Months ended April 3, 2005
--------------------------------------------
As Previously
Reported Adjustment Adjusted
------------- ---------- ---------
Condensed Consolidated Statement of Cash Flows:
Net income....................................... $ 32,254 $ (911) $ 31,343
Stock compensation expense....................... 0 1,477 1,477
Excess tax benefit from stock-based compensation. 497 (764) (267)
Deferred income taxes............................ (1,410) (336) (1,746)
Accrued liabilities.............................. 17,157 267 17,424
Cash provided by operating activities............ 60,792 (267) 60,525
Excess tax benefit from stock-based compensation. 0 267 267
Cash used in financing activities................ (45,340) 267 (45,073)
In May 2004, the Company adopted an employee restricted stock plan under
which 500,000 shares may be granted before December 31, 2014. The value of the
shares awarded under the plan shall be equal to the fair market value of such
shares on the date of grant. All shares awarded shall provide for a vesting
period of at least one year and no more than five years, and the full award may
not vest in less than three years. Shares issued under a restricted stock award
are nontransferable and subject to the forfeiture restrictions. Shares which
expire or terminate may be re-granted under the plan. In 2006, 242,525 shares
were issued under the plan, net of 8,464 shares forfeited, at a weighted average
price of $33.19. As a result, the Company recognized deferred compensation cost
of $7.1 million.
4. Commitments and contingencies:
From time to time, the Company is involved in litigation, which is
incidental to its business. In the Company's opinion, no litigation to 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.
CEC ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. New accounting pronouncement:
In March 2006, the Emerging Issues Task Force ("EITF") issued EITF Issue
06-3, "How Sales Taxes collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement." A consensus was
reached that entities may adopt a policy of presenting sales taxes in the income
statement on either a gross or net basis. If taxes are significant, an entity
should disclose its policy of presenting taxes and the amounts of taxes. The
guidance is effective for periods beginning after December 15, 2006. The Company
presents sales net of sales taxes. This issue will not impact the method for
recording sales taxes in the Company's consolidated financial statements.
There are no other recently issued accounting standards effective after
April 2, 2006 that are expected to materially impact the Company.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
First Quarter 2006 Compared to First Quarter 2005
A summary of the results of operations of the Company as a percentage of
revenues for the first quarters of 2006 and 2005 is shown below.
Three Months Ended
------------------------------
April 2, 2006 April 3, 2005
------------- -------------
(adjusted)
Revenue....................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of sales:
Food, beverage and related supplies..... 12.1 11.9
Games and merchandise................... 4.4 3.9
Labor................................... 26.3 25.1
----- -----
42.8 40.9
Selling, general and administrative........ 12.6 12.6
Depreciation and amortization.............. 7.0 6.7
Interest expense........................... .8 .4
Other operating expenses................... 16.1 15.7
----- -----
79.3 76.3
----- -----
Income before income taxes.................... 20.7 23.7
Income tax expense ........................... 7.8 9.1
----- -----
Net income ................................... 12.9% 14.6%
===== =====
Revenues
Revenues increased 6.0% to $227.0 million in the first quarter of 2006 from
$214.1 million in the first quarter of 2005 due to a weighted average increase
of 25 Company-operated restaurants and an increase of 1.2% in comparable store
sales between the periods. There was a negative impact associated with a number
of school spring breaks shifting from the first quarter of the prior year to the
second quarter of this year. In the first quarter of 2006, the number of guests
per comparable store increased an estimated 4% to 5% compared to the same period
of the prior year due primarily to a marketing promotion and enhanced coupon
initiative. Additionally, the average guest check declined an estimated 3% to 4%
in the first quarter of 2006 compared to the first quarter of 2005. There was no
material net change in menu prices between the first quarter of 2005 and the
first quarter of 2006.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 79.3% in the
first quarter of 2006 from 76.3% in the first quarter of 2005.
Cost of sales increased as a percentage of revenues to 42.8% in the first
quarter of 2006 from 40.9% in the comparable period of 2005. Cost of food,
beverage, and related supplies as a percentage of revenues increased to 12.1% in
the first quarter of 2006 from 11.9% in the first quarter of 2005, due to higher
produce and paper costs which were partially offset by a reduction in cheese
prices and a reduction in the cost of various pizza toppings. In addition,
margin pressure associated with the decline in average guest check increased
costs as a percentage of revenues. Cost of games and merchandise as a percentage
of revenues increased to 4.4% in the first quarter of 2006 from 3.9% in the
first quarter of 2005 due primarily to the distribution of free tokens related
to a marketing promotion in the first quarter of 2006. Labor expense as a
percentage of revenues increased to 26.3% in the first quarter of 2006 from
25.1% in the first quarter of 2005 primarily due to higher wage rates and a
decline in the average guest check.
Selling, general and administrative expenses as a percentage of revenues
were 12.6% in the first three months of 2006 and the first three months of 2005.
Increased advertising costs associated with a marketing promotion in the first
quarter of 2006 was offset by the benefit of not holding a restaurant general
manager conference in 2006 compared to the first quarter of 2005.
Depreciation and amortization expenses as a percentage of revenues
increased to 7.0% in the first quarter of 2006 from 6.7% in the first quarter of
2005 due to capital invested in new and existing restaurants.
Interest expense as a percentage of revenues increased to 0.8% in the first
three months of 2006 from 0.4% in the first three months of 2005 primarily due
to an increase in the average debt balance and an increase in interest rates.
Other operating expenses increased as a percentage of revenues to 16.1% in
the first quarter of 2006 from 15.7% in the first quarter of 2005 primarily due
to increased utility costs.
The Company's effective income tax rate was 37.8% in the first quarter of
2006 compared to 38.3% in the first quarter of 2005.
Net Income
The Company had net income of $29.2 million in the first quarter of 2006
compared to $31.3 million in the first quarter of 2005 due to the changes in
revenues and expenses discussed above. The Company's diluted earnings per share
increased 1.2% to $.85 per share in the first quarter of 2006 from $.84 per
share in the first quarter of 2005 due to a 7.8% decrease in the number of
weighted average shares outstanding offset by a 6.8% decrease in net income
discussed above.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations was $59.4 million in the first quarter of 2006
compared to $60.5 million in the first quarter of 2005. Net cash outflows from
investing activities for the first quarter of 2006 were $18.3 million, primarily
related to capital expenditures. Net cash outflows from financing activities for
the first quarter of 2006 were $37.6 million, primarily related to payments to
reduce outstanding debt and the repurchase of the Company's common stock. 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 increased from $2.8 million at January 1, 2006 to $8.4 million
at April 2, 2006 due primarily to the timing of payments for various accrued
expenses.
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
rides (c) major remodels, and (d) expansions of the square footage of existing
restaurants.
In 2006, the Company plans to add 24 to 28 restaurants, which includes
opening new restaurants, acquiring existing restaurants from franchisees and
relocating certain restaurants. 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 Company intends on opening or
acquiring from franchisees a total of 80 to 90 company restaurants over the next
three years, including approximately two to four relocated restaurants per year.
The average capital cost of all new restaurants expected to open in 2006 is
approximately $2.0 million per restaurant.
The primary components of the game enhancement initiatives are new games
and rides with an average capital cost in 2006 of $90,000 to $110,000 per
restaurant. The major remodel initiative includes expansion of the space
allocated to the game room, an increase in the number of games and rides, a new
ceiling with enhanced lighting, salad bar enhancements, restroom remodels and
may include a new exterior and interior identity. A new exterior identity
includes a revised Chuck E. Cheese(R) logo and signage, updating the exterior
design of the buildings and, in some restaurants, adding colorful new awnings.
The interior component includes painting, updating decor and a new menu board.
The typical capital cost of the major remodel is estimated to be $500,000 per
restaurant in 2006. Expanding the square footage of existing restaurants can
typically range in cost from $300,000 to $900,000 per restaurant, but generally
have an average capital cost of approximately $700,000.
The Company expects the aggregate capital costs in 2006 of completing game
enhancements, major remodels and expanding the square footage of existing
restaurants to total approximately $40 million and impact approximately 150
restaurants.
During the first quarter of 2006, the Company opened three new restaurants,
completed 18 game rotation upgrades, nine major remodels and expanded the square
footage of one restaurant. The Company currently estimates that capital
expenditures in 2006 will be $95 to $100 million, including the $40 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 22.0 million shares of the Company's common stock,
retroactively adjusted for all stock splits, at an aggregate purchase price of
approximately $448.2 million. During the first quarter of 2006, the Company
repurchased 321,600 shares at an aggregate purchase price of approximately $10.4
million. At the end of the first quarter of 2006, approximately $336.6 million
remained available for repurchase under a $400 million repurchase authorization
approved by the Company's Board of Directors in July 2005.
The Company has available borrowings under its line of credit agreement of
up to $200 million that is scheduled to mature in December 2010. Interest under
the 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 0.50% to 1.25%.
Currently, any borrowings under this line of credit would be at the prime rate
or LIBOR plus 0.75%. As of April 2, 2006, there were $105.0 million in
borrowings under this line of credit and outstanding letters of credit of $12.1
million. The line of credit agreement contains certain restrictions and
conditions as defined in the agreement that require the Company to maintain 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 other
non-cash items ratio of 3.0 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 April 2, 2006, the Company was
in compliance with all of the above debt covenants.
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 Pronouncement
In March 2006, the Emerging Issues Task Force ("EITF") issued EITF Issue
06-3, "How Sales Taxes collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement." A consensus was
reached that entities may adopt a policy of presenting sales taxes in the income
statement on either a gross or net basis. If taxes are significant, an entity
should disclose its policy of presenting taxes and the amounts of taxes. The
guidance is effective for periods beginning after December 15, 2006. The Company
presents sales net of sales taxes. This issue will not impact the method for
recording sales taxes in the Company's consolidated financial statements.
There are no other recently issued accounting standards effective after
April 2, 2006 that are expected to materially impact the Company.
Website Access to Company Reports
Our website address is www.chuckecheese.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4
and 5 filed by our officers, directors and stockholders holding 10% or more of
our common stock and all amendments to those reports are available free of
charge through our 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, utility
and labor costs.
Item 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
The 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. 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
effective as of April 2, 2006, 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. There 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. Legal 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 1A. Risk Factors.
There have been no material changes in the Company's risk factors from
those disclosed in the Company's 2005 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents information related to repurchases of common
stock the Company made during the first quarter of 2006 pursuant to a repurchase
program authorized by the Company's Board of Directors in July 2005 to purchase
up to $400 million in the Company's common stock:
Cumulative 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. 2 - Jan. 29, 2006 - - 1,578,547 $ 347,055,138
Jan. 30 - Feb. 26, 2006 - - 1,578,547 $ 347,055,138
Feb. 27 - Apr. 2, 2006 321,600 $ 32.47 1,900,147 $ 336,612,503
--------
Total 321,600 $ 32.47
========
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the first
quarter of 2006.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
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 first quarter and to present, we filed or furnished the
following reports on Form 8-K:
A current report on Form 8-K, dated February 21, 2006, announcing
fourth quarter 2005 financial results.
A current report on Form 8-K, dated March 3, 2006, furnishing
information on entry into a material definitive agreement.
A current report on Form 8-K, dated April 25, 2006, announcing first
quarter 2006 financial results.
A current report on Form 8-K, dated May 9, 2006, announcing intentions
regarding equity plans for employees and non-employee directors.
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, 2006 By: /s/ Richard M. Frank
-------------------------------
Richard M. Frank
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Christopher D. Morris
-------------------------------
Christopher D. Morris
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
/s/ James Mabry
-------------------------------
James Mabry
Vice President, Controller and Treasurer
(Principal Accounting Officer)