UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q/A (Amendment No. 1) (Mark One) |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 26, 2004. |_| 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 0-15782 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 November 1, 2004, an aggregate of 36,338,978 shares of the registrant's Common Stock, par value of $.10 each (being the registrant's only class of common stock), were outstanding. EXPLANATORY NOTE As previously disclosed in a Form 8-K filed on March 2, 2005, following a review of its lease-related accounting policies, CEC Entertainment, Inc. (the "Company") determined that it was appropriate to adjust its prior financial statements (the "Restatement") to correct certain errors contained in those financial statements relating to the computation of depreciation, lease classification, straight-line rent expense and the related deferred liability. Historically, when accounting for leases, the Company has depreciated its leasehold improvements over a period equal to the lesser of the initial non-cancelable lease term plus periods of expected renewal, or the useful life of the assets. The periods of expected renewal included option periods provided for in the lease and any additional periods that the Company considered reasonably assured of exercising or acquiring. When determining whether each of its leases was an operating lease or a capital lease and when calculating straight-line rent expense, the Company used the initial non-cancelable lease term commencing when the obligation to make current rent payments began. Funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements were netted against the amount recorded for the leasehold improvement. Following an extensive analysis of its lease and related accounting policies, the Company has now determined to use 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 will commence 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 cost of leasehold improvements will be recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. As a result, the accompanying condensed consolidated financial statements have been restated from the amounts previously reported to incorporate the effects of these policies. See Note 2 to the consolidated financial statements. This amendment No. 1 on Form 10-Q/A to the Company's quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2004 ("Original Filing"), initially filed with the Securities and Exchange Commission ("SEC") on November 4, 2004, is being filed to reflect restatements of the Company's consolidated balance sheet at September 26, 2004 and the Company's consolidated statements of earnings, changes in stockholders' equity and consolidated cash flows for the nine months ended September 26, 2004 and September 28, 2003 and the notes related thereto. For a more detailed description of these restatements, see Note 2, "Restatement of Financial Statements" to the accompanying condensed consolidated financial statements and the section entitled "Restatement" in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-Q/A. For the convenience of the reader, this Form 10-Q/A includes the Original Filing in its entirety. However, this Form 10-Q/A only amends and restates Items 1, 2 and 4, of Part I of the Original Filing and no other material information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer , as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2, respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and does not update disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been or will be addressed any reports filed with the SEC subsequent to this filing. Concurrently with the filing of this Form 10-Q/A, we are filing an amendment on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year ended December 28, 2003 ("2003 10-K") to provide restatements of the financial statements or financial data as of and for the periods included in the 2003 10-K and amended quarterly reports on Form 10-Q/A for the quarters ended March 28, 2004, June 27, 2004 and September 26, 2004. We have not amended and do not intend to amend our previously filed Annual Reports on Form 10-K other than the 2003 10-K or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to December 28, 2003. For this reason, the consolidated financial statements, auditors' reports and related financial information for all affected periods contained in any other prior reports should no longer be relied upon. CEC ENTERTAINMENT, INC. TABLE OF CONTENTS Page ---- Part I - Financial Information: Item 1. Financial Statements: Condensed Consolidated Balance Sheets............................... 5 Condensed Consolidated Statements of Earnings and Comprehensive Income............................................................ 6 Condensed Consolidated Statement of Shareholders' Equity............ 8 Condensed Consolidated Statements of Cash Flows .................... 9 Notes to Condensed Consolidated Financial Statements................ 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 21 Item 4. Controls and Procedures....................................... 21 Part II - Other Information: Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities................................................. 24 Item 6. Exhibits and Reports on Form 8-K.............................. 24 Signatures................................................................ 25 Exhibits.................................................................. 26 PART I - FINANCIAL INFORMATION Item 1. Financial Statements CEC ENTERTAINMENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands, except share data) Sept. 26, December 28, 2004 2003 ------------- ------------- (as restated) (unaudited) ASSETS Current assets: Cash and cash equivalents.................................................... $ 13,311 $ 8,067 Accounts receivable.......................................................... 10,398 13,103 Inventories.................................................................. 11,611 12,491 Prepaid expenses............................................................. 7,763 7,608 Deferred tax asset........................................................... 1,487 1,487 --------- --------- Total current assets...................................................... 44,570 42,756 --------- --------- Property and equipment, net..................................................... 555,258 538,756 --------- --------- Other assets.................................................................... 1,319 1,471 --------- --------- $ 601,147 $ 582,983 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................ $ 742 $ 554 Accounts payable............................................................. 22,701 30,126 Accrued liabilities.......................................................... 41,336 28,610 --------- --------- Total current liabilities................................................. 64,779 59,290 --------- --------- Long-term debt, less current portion............................................ 92,942 75,205 --------- --------- Deferred rent................................................................... 50,793 42,816 --------- --------- Deferred tax liability.......................................................... 41,881 32,849 --------- --------- Accrued insurance............................................................... 8,518 8,500 --------- --------- Shareholders' equity: Common stock, $.10 par value; authorized 100,000,000 shares; 55,168,260 and 54,481,913 shares issued, respectively ............................... 5,517 5,448 Capital in excess of par value............................................... 233,582 219,071 Retained earnings ........................................................... 417,698 350,735 Accumulated other comprehensive income ...................................... 982 695 Less treasury shares of 18,959,168 and 16,042,418, respectively, at cost..... (315,545) (211,626) --------- --------- 342,234 364,323 --------- --------- $ 601,147 $ 582,983 ========= ========= 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 -------------------------------- Sept. 26, 2004 Sept. 28, 2003 -------------- -------------- (as restated) (as restated) Food and beverage revenues................................. $ 120,416 $ 112,286 Games and merchandise revenues............................. 62,394 56,886 Franchise fees and royalties............................... 807 962 Interest income ........................................... 5 4 --------- --------- 183,622 170,138 --------- --------- Costs and expenses: Cost of sales: Food, beverage and related supplies................... 22,152 21,222 Games and merchandise................................. 7,922 7,483 Labor................................................. 49,928 46,322 --------- --------- 80,002 75,027 Selling, general and administrative expenses............ 21,410 24,726 Depreciation and amortization........................... 14,220 12,479 Interest expense........................................ 599 689 Other operating expenses................................ 33,169 31,095 --------- --------- 149,400 144,016 --------- --------- Income before income taxes................................. 34,222 26,122 Income taxes............................................... 13,108 10,135 --------- --------- Net income ................................................ 21,114 15,987 Other comprehensive income (loss), net of tax: Foreign currency translation............................ 425 (275) --------- --------- Comprehensive income....................................... $ 21,539 $ 15,712 ========= ========= Earnings per share: Basic: Net income ........................................... $ .57 $ .41 ========= ========= Weighted average shares outstanding................... 36,834 38,831 ========= ========= Diluted: Net income .......................................... $ .56 $ .40 ========= ========= Weighted average shares outstanding................... 37,970 39,749 ========= ========= See notes to condensed consolidated financial statements. CEC ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (Unaudited) (Thousands, except per share data) Nine Months Ended -------------------------------- Sept. 26, 2004 Sept. 28, 2003 -------------- -------------- (as restated) (as restated) Food and beverage revenues................................. $ 365,494 $ 334,363 Games and merchandise revenues............................. 187,961 170,150 Franchise fees and royalties............................... 2,520 2,620 Interest income............................................ 19 16 --------- --------- 555,994 507,149 --------- --------- Costs and expenses: Cost of sales: Food, beverage and related supplies................... 67,937 61,437 Games and merchandise................................. 23,782 21,972 Labor................................................. 150,855 138,010 --------- --------- 242,574 221,419 Selling, general and administrative expenses............ 65,289 64,864 Depreciation and amortization........................... 41,478 36,633 Interest expense........................................ 1,567 1,526 Other operating expenses................................ 96,556 90,474 --------- --------- 447,464 414,916 --------- --------- Income before income taxes................................. 108,530 92,233 Income taxes............................................... 41,567 35,786 --------- --------- Net income ................................................ 66,963 56,447 Other comprehensive income, net of tax: Foreign currency translation............................ 287 668 --------- --------- Comprehensive income....................................... $ 67,250 $ 57,115 ========= ========= Earnings per share: Basic: Net income ........................................... $ 1.78 $ 1.41 ========= ========= Weighted average shares outstanding................... 37,551 40,061 ========= ========= Diluted: Net income .......................................... $ 1.73 $ 1.39 ========= ========= Weighted average shares outstanding................... 38,726 40,584 ========= ========= 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.................................. $ 224,519 54,482 Stock options exercised..................................... 11,920 674 Net tax benefit from exercise of options.................... 2,290 Stock issued under 401(k) plan.............................. 397 13 Payment for fractional shares............................... (27) (1) --------- ------- Balance, September 26, 2004................................. 239,099 55,168 --------- ======= Retained earnings: Balance, beginning of year (as restated).................... 350,735 Net income.................................................. 66,963 --------- Balance, September 26, 2004 (as restated)................... 417,698 --------- Accumulated other comprehensive income: Balance, beginning of year.................................. 695 Foreign currency translation................................ 287 --------- Balance, September 26, 2004................................. 982 --------- Treasury shares: Balance, beginning of year.................................. (211,626) 16,042 Treasury stock acquired..................................... (103,919) 2,917 --------- ------ Balance, September 26, 2004................................. (315,545) 18,959 --------- ====== Total shareholders' equity..................................... $ 342,234 ========= See notes to condensed consolidated financial statements. CEC ENTERTAINMENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands) Nine Months Ended --------------------------------- Sept. 26, 2004 Sept. 28, 2003 -------------- -------------- (as restated) (as restated) Operating activities: Net income ............................................................... $ 66,963 $ 56,447 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization............................................. 41,478 36,633 Deferred income tax expense............................................... 9,032 6,861 Tax benefit from exercise of stock options................................ 2,290 344 Other ................................................................... 8,924 7,339 Net change in receivables, inventories, prepaids, payables and accrued liabilities..................................................... 8,731 21,978 -------- -------- Cash provided by operations............................................ 137,418 129,602 -------- -------- Investing activities: Purchases of property and equipment....................................... (58,545) (64,337) Disposition of property and equipment..................................... 791 Increase in other assets.................................................. (21) (753) -------- -------- Cash used in investing activities...................................... (57,775) (65,090) -------- -------- Financing activities: Proceeds from debt and line of credit..................................... 17,139 4,313 Exercise of stock options ................................................ 11,920 2,435 Redeemable preferred stock dividends...................................... (113) Purchase of treasury stock ............................................... (103,919) (71,634) Deposit for redeemable preferred stock redemption......................... (2,795) Other .................................................................... 461 368 -------- -------- Cash used in financing activities...................................... (74,399) (67,426) -------- -------- Increase (decrease) in cash and cash equivalents ............................ 5,244 (2,914) Cash and cash equivalents, beginning of period............................... 8,067 12,214 -------- -------- Cash and cash equivalents, end of period..................................... $ 13,311 $ 9,300 ======== ======== 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 September 26, 2004 and September 28, 2003 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/A filed with the Securities and Exchange Commission for the year ended December 28, 2003. Results of operations for the periods ended September 26, 2004 and September 28, 2003 are not necessarily indicative of the results for the year. 2. Restatement of Financial Statements: Subsequent to the issuance of the Company's interim condensed consolidated financial statements for the period ended September 26, 2004, and following a review of its lease-related accounting policies, the Company's management has determined that it was appropriate to adjust its prior financial statements to correct certain errors contained in those financial statements relating to the computation of depreciation, lease classification, straight-line rent expense and the related deferred rent liability. Historically, when accounting for leases, the Company has depreciated its leasehold improvements over a period equal to the lesser of the initial non-cancelable lease term plus periods of expected renewal, or the useful life of the assets. The periods of expected renewal included option periods provided for in the lease and any additional periods that the Company considered reasonably assured of exercising or acquiring. When determining whether each of its leases was an operating lease or a capital lease and when calculating straight-line rent expense, the Company used the initial non-cancelable lease term commencing when the obligation to make current rent payments began. Funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements were netted against the amount recorded for the leasehold improvement. The Company has now determined to use 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 will commence 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 cost of leasehold improvements will be recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. As a result, the accompanying condensed consolidated financial statements have been restated from the amounts previously reported to incorporate the effects of these policies. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Restatement of Financial Statements (continued): The following is a summary of the impact of the Restatement on the consolidated balance sheets at December 28, 2003 and September 26, 2004, the consolidated statements of earnings for the three month and nine month periods ended September 26, 2004 and September 28, 2003, and the consolidated statements of cash flows for the nine month periods ended September 26, 2004 and September 28, 2003. September 26, 2004 ------------------------------------------- As Previously Reported Adjustment Restated ------------- ---------- --------- Consolidated Balance Sheet: Property and equipment, net.................... $ 549,613 $ 5,645 $ 555,258 Total assets................................... 595,502 5,645 601,147 Current portion of long-term debt.............. 190 552 742 Long-term debt, less current portion........... 82,035 10,907 92,942 Deferred rent.................................. 6,125 44,668 50,793 Deferred tax liability......................... 61,447 (19,566) 41,881 Retained earnings.............................. 448,614 (30,916) 417,698 Total shareholders' equity..................... 373,150 (30,916) 342,234 Three Months ended September 26, 2004 ------------------------------------------- As Previously Reported Adjustment Restated ------------- ---------- --------- Consolidated Statement of Earnings: Depreciation and amortization.................. $ 13,070 $ 1,150 $ 14,220 Interest expense............................... 401 198 599 Other operating expense........................ 33,036 133 33,169 Total costs and expenses....................... 147,919 1,481 149,400 Income before income taxes..................... 35,703 (1,481) 34,222 Income taxes................................... 13,675 (567) 13,108 Net income..................................... 22,028 (914) 21,114 Basic earnings per share....................... .60 (.03) .57 Diluted earnings per share..................... .58 (.02) .56 CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Restatement of Financial Statements (continued): Three Months ended September 28, 2003 ------------------------------------------- As Previously Reported Adjustment Restated ------------- ---------- --------- Consolidated Statement of Earnings: Depreciation and amortization.................. $ 11,381 $ 1,098 $ 12,479 Interest expense............................... 503 186 689 Other operating expense........................ 30,985 110 31,095 Total costs and expenses....................... 142,622 1,394 144,016 Income before income taxes..................... 27,516 (1,394) 26,122 Income taxes................................... 10,676 (541) 10,135 Net income..................................... 16,840 (853) 15,987 Basic earnings per share....................... .43 (.02) .41 Diluted earnings per share..................... .42 (.02) .40 Nine Months ended September 26, 2004 ------------------------------------------- As Previously Reported Adjustment Restated ------------- ---------- --------- Consolidated Statement of Earnings: Depreciation and amortization.................. $ 38,029 $ 3,449 $ 41,478 Interest expense............................... 975 592 1,567 Other operating expense........................ 96,156 400 96,556 Total costs and expenses....................... 443,023 4,441 447,464 Income before income taxes..................... 112,971 (4,441) 108,530 Income taxes................................... 43,268 (1,701) 41,567 Net income..................................... 69,703 (2,740) 66,963 Basic earnings per share....................... 1.86 (.08) 1.78 Diluted earnings per share...................... 1.80 (.07) 1.73 Consolidated Statement of Cash Flows: Cash provided by operations.................... $ 131,406 $ 6,012 $ 137,418 Cash used in investing activities.............. (52,100) (5,675) (57,775) Cash used in financing activities.............. (74,062) (337) (74,399) CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Restatement of Financial Statements (continued): Nine Months ended September 28, 2003 ------------------------------------------- As Previously Reported Adjustment Restated ------------- ---------- --------- Consolidated Statement of Earnings: Depreciation and amortization.................. $ 33,338 $ 3,295 $ 36,633 Interest expense............................... 967 559 1,526 Other operating expense........................ 90,143 331 90,474 Total costs and expenses....................... 410,731 4,185 414,916 Income before income taxes..................... 96,418 (4,185) 92,233 Income taxes................................... 37,410 (1,624) 35,786 Net income..................................... 59,008 (2,561) 56,447 Basic earnings per share....................... 1.47 (.06) 1.41 Diluted earnings per share...................... 1.45 (.06) 1.39 Consolidated Statement of Cash Flows: Cash provided by operations.................... $ 125,185 $ 4,417 $ 129,602 Cash used in investing activities.............. (60,955) (4,135) (65,090) Cash used in financing activities.............. (67,144) (282) (67,426) CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Earnings per common share: Basic earnings per common share ("EPS") is computed by dividing earnings applicable to common shares 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. Net income applicable to common shares has been adjusted for redeemable preferred stock accretion and dividends for the applicable periods. Earnings per common and potential common shares were computed as follows (thousands, except per share data): Three Months Ended Nine Months Ended --------------------- --------------------- Sept 26, Sept 28, Sept 26, Sept 28, 2004 2003 2004 2003 -------- -------- -------- -------- Net income ............................................ $ 21,114 $ 15,987 $ 66,963 $ 56,447 Accretion of redeemable preferred stock................ (49) Redeemable preferred stock dividends................... (113) -------- -------- -------- -------- Adjusted income applicable to common shares............ $ 21,114 $ 15,987 $ 66,963 $ 56,285 ======== ======== ======== ======== Basic: Weighted average common shares outstanding.......... 36,834 38,831 37,551 40,061 ======== ======== ======== ======== Earnings per common share........................... $ .57 $ .41 $ 1.78 $ 1.41 ======== ======== ======== ======== Diluted: Weighted average common shares outstanding.......... 36,834 38,831 37,551 40,061 Potential common shares for stock options........... 1,136 918 1,175 523 -------- -------- -------- -------- Weighted average shares outstanding................. 37,970 39,749 38,726 40,584 ======== ======== ======== ======== Earnings per common and potential common share...................................... $ .56 $ .40 $ 1.73 $ 1.39 ======== ======== ======== ======== CEC ENTERTAINMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. 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 costs are 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 No. 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 Nine Months Ended ----------------------- ----------------------- Sept. 26, Sept. 28, Sept. 26, Sept. 28, 2004 2003 2004 2003 --------- --------- --------- --------- Net income,as reported ................................ $ 21,114 $ 15,987 $ 66,963 $ 56,447 Fair value based compensation expense, net of taxes.... (1,444) (1,626) (4,330) (4,879) -------- -------- -------- -------- Pro-forma net income................................... 19,670 14,361 62,633 51,568 Accretion and dividends of redeemable preferred stock, as reported........................ (162) -------- -------- -------- -------- Pro-forma adjusted income applicable to common shares............................................... $ 19,670 $ 14,361 $ 62,633 $ 51,406 ======== ======== ======== ======== Earnings per Share: Basic: As reported......................................... $ .57 $ .41 $ 1.78 $ 1.41 Pro forma........................................... $ .53 $ .37 $ 1.67 $ 1.28 Diluted: As reported......................................... $ .56 $ .40 $ 1.73 $ 1.39 Pro forma........................................... $ .52 $ .36 $ 1.62 $ 1.27 5. Stock split: All share and per share information have been retroactively adjusted for the effects of a three for two stock split in the form of a special stock dividend effected and distributed on March 15, 2004. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Restatement Following a review of its lease-related accounting policies, the Company determined that it was appropriate to adjust its prior financial statements to correct certain errors contained in those financial statements relating to the computation of depreciation, lease classification, straight-line rent expense and the related deferred rent liability. Historically, when accounting for leases, the Company has depreciated its leasehold improvements over a period equal to the lesser of the initial non-cancelable lease term plus periods of expected renewal, or the useful life of the assets. The periods of expected renewal included option periods provided for in the lease and any additional periods that the Company considered reasonably assured of exercising or acquiring. When determining whether each of its leases was an operating lease or a capital lease and when calculating straight-line rent expense, the Company used the initial non-cancelable lease term commencing when the obligation to make current rent payments began. Funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements were netted against the amount recorded for the leasehold improvement. The Company has now determined to use 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 will commence 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 cost of leasehold improvements will be recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. As a result, the accompanying condensed consolidated financial statements have been restated from the amounts previously reported to incorporate the effects of these policies. The effects of the restatement adjustments are discussed in Note 2 in the notes to the condensed consolidated financial statements. The following has been updated to give effect to the Restatement. Results of Operations A summary of the results of operations of the Company as a percentage of revenues is shown below. Three Months Ended Nine Months Ended ------------------------------- ------------------------------- Sept. 26, 2004 Sept. 28, 2003 Sept. 26, 2004 Sept. 28, 2003 -------------- -------------- -------------- -------------- Revenues.................................... 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Costs and expenses: Cost of sales: Food, beverage and related supplies.... 12.1 12.5 12.2 12.1 Games and merchandise.................. 4.3 4.4 4.3 4.3 Labor.................................. 27.2 27.2 27.1 27.2 ----- ----- ----- ----- 43.6 44.1 43.6 43.6 Selling, general and administrative...... 11.7 14.5 12.0 13.0 Depreciation and amortization............ 7.7 7.3 7.5 7.2 Interest expense......................... .3 .4 .3 .3 Other operating expenses................. 18.1 18.3 17.1 17.7 ----- ----- ----- ----- 81.4 84.6 80.5 81.8 ----- ----- ----- ----- Income before income taxes.................. 18.6 15.4 19.5 18.2 Income taxes ............................... 7.1 6.0 7.5 7.1 ----- ----- ----- ----- Net income ................................. 11.5% 9.4% 12.0% 11.1% ===== ===== ===== ===== Number of Company-owned stores: Beginning of period...................... 430 391 418 384 New...................................... 8 10 20 18 Company purchased franchise stores....... 2 2 Closed................................... (1) ----- ----- ----- ----- End of period............................ 440 401 440 401 ===== ===== ===== ===== Number of franchise stores: Beginning of period...................... 49 51 48 50 New...................... 1 1 Company purchased franchise store (2) (2) ----- ----- ----- ----- End of period............................ 47 51 47 51 ===== ===== ===== ===== Third Quarter 2004 Compared to Third Quarter 2003 Revenues Revenues increased 7.9% to $183.6 million in the third quarter of 2004 from $170.1 million in the third quarter of 2003 due primarily to an increase in the number of Company-operated restaurants. During the full year of 2003, the Company opened 32 new restaurants, acquired three restaurants from its franchisees and closed one restaurant. During the first nine months of 2004, the Company opened 20 new restaurants and acquired two restaurants from a franchisee and has 440 Company-operated restaurants at September 26, 2004. Comparable store sales increased 0.4% in the third quarter of 2004 despite a negative impact of approximately 0.5% to 0.6% or $800,000 to $900,000 in lost sales due to the numerous hurricanes in the Southeast. Menu prices increased approximately 3.0% between the quarters. Costs and Expenses Costs and expenses as a percentage of revenues decreased to 81.4% in the third quarter of 2004 from 84.6% in the third quarter of 2003. Cost of sales decreased as a percentage of revenues to 43.6% in the third quarter of 2004 from 44.1% in the comparable period of 2003. Cost of food, beverage and related supplies as a percentage of revenues decreased to 12.1% in the third quarter of 2004 from 12.5% in the third quarter of 2003 primarily due to a 3% increase in menu prices implemented in June 2004. Cost of games and merchandise as a percentage of revenues decreased to 4.3% in the third quarter of 2004 from 4.4% in the third quarter of 2003 due primarily to the menu price increase. Store labor expenses as a percentage of revenues were 27.2% in both the third quarter of 2004 and the third quarter of 2003. Selling, general and administrative expenses as a percentage of revenues decreased to 11.7% in the third quarter of 2004 from 14.5% in the third quarter of 2003. This decrease was primarily due to a $4.25 million legal settlement charge recorded in the third quarter of 2003 and an increase in total revenues. Depreciation and amortization expense as a percentage of revenues increased to 7.7% in the third quarter of 2004 from 7.3% in the third quarter of 2003 primarily due to capital invested in new stores and remodels. Interest expense as a percentage of revenues decreased to 0.3% in the third quarter of 2004 from 0.4% in the third quarter of 2003 due to higher interest expense in the third quarter of 2003 related to the Company's commitment to reacquire its outstanding preferred stock. Other operating expenses decreased as a percentage of revenues to 18.1% in the third quarter of 2004 from 18.3% in the third quarter of 2003 primarily due to a decrease in insurance expense as a percentage of revenues. The Company's effective income tax rate was 38.3% in the third quarter of 2004 compared to 38.8% in the third quarter of 2003 due to lower estimated state tax rates. Net Income The Company's net income increased 32.1% to $21.1 million in the third quarter of 2004 compared to $16.0 million in the third quarter of 2003 due to the changes in revenues and expenses discussed above. The Company's diluted earnings per share increased 40.0% to $.56 per share in the third quarter of 2004 from $.40 in the third quarter of 2003 due to the 32.1% increase in net income discussed above and a 4.5% decrease in the number of weighted average shares outstanding. First Nine Months of 2004 Compared to First Nine Months of 2003 Revenues Revenues increased 9.6% to $556.0 million in the first nine months of 2004 from $507.1 million in the first nine months of 2003 primarily due to an increase in the number of Company-operated stores and an increase of 2.0% in comparable store sales. During the full year of 2003, the Company opened 32 new restaurants, acquired three restaurants from franchisees and closed one restaurant. During the first nine months of 2004, the Company opened 20 new restaurants and acquired two restaurants from a franchisee and has 440 Company-operated restaurants at September 26, 2004. Menu prices increased on average approximately 1.5% between the two periods. Costs and Expenses Costs and expenses as a percentage of revenues decreased to 80.5% in the first nine months of 2004 from 81.8% in the first nine months of 2003. Cost of sales as a percentage of revenues remained constant at 43.6% in the first nine months of 2004 and 2003. Cost of food, beverage and related supplies as a percentage of revenues increased to 12.2% in the first nine months of 2004 from 12.1% in the first nine months of 2003. Food costs were negatively impacted approximately $3.1 million due to an increase of approximately 32% in average cheese prices paid in the first nine months of 2004 compared to the first nine months of 2003. This increase was partially offset by the impact of a 3% increase in menu prices implemented in June of 2004. Cost of games and merchandise as a percentage of revenues remained constant at 4.3% in both the first nine months of 2004 and the first nine months of 2003. Store labor expenses as a percentage of revenues decreased slightly to 27.1% in the first nine months of 2004 from 27.2% in the first nine months of 2003 primarily due to the increase in comparable store sales. Selling, general and administrative expenses as a percentage of revenues decreased to 12.0% in the first nine months of 2004 from 13.0% in the first nine months of 2003 primarily due to a $4.25 million legal settlement recorded in the third quarter of 2003 and the increase in total revenues. Depreciation and amortization expense as a percentage of revenues increased to 7.5% in the first nine months of 2004 from 7.2% in the first nine months of 2003 primarily due to capital invested in new stores and remodels. Interest expense as a percentage of revenues remained constant at 0.3% in the first nine months of 2004 and the first nine months of 2003. Other operating expenses decreased as a percentage of revenues to 17.1% in the first nine months of 2004 from 17.7% in the first nine months of 2003 primarily due to the increase in comparable store sales and a decrease in insurance expense as a percentage of revenues. The Company's effective income tax rate was 38.3% in the first nine months of 2004 compared to 38.8% in the first nine months of 2003 due to lower estimated state tax rates. Net Income The Company's net income increased 18.6% to $67.0 million in the first nine months of 2004 from $56.4 million in the first nine months of 2003 primarily due to the changes in revenues and expenses discussed above. The Company's diluted earnings per share increased 24.5% to $1.73 per share in the first nine months of 2004 compared to $1.39 per share in the first nine months of 2003 due to the 18.6% increase in net income discussed above and a 4.6% decrease in the number of weighted average shares outstanding. Financial Condition, Liquidity and Capital Resources Cash provided by operations increased to $137.4 million in the first nine months of 2004 from $129.6 million in the comparable period of 2003. Cash outflows from investing activities for the first nine months of 2004 were $57.8 million, primarily related to capital expenditures. Net cash outflows from financing activities for the first nine months of 2004 were $74.4 million, primarily related to 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 $16.5 million at December 28, 2003 to $20.2 million at September 26, 2004 due primarily to the timing of payments for various accrued expenses and an increase in the number of restaurants. 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 or reconfigurations, and (d) expansions of the square footage of existing restaurants. In addition, the Company is currently testing revisions to the building exterior along with interior enhancements in conjunction with the game enhancement initiative. In 2004, the Company plans to add 33 to 34 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, the amount of any landlord contribution 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 2004 is approximately $1.2 million per restaurant. At the beginning of 2004, the Company identified development opportunities for approximately 300 restaurants including those restaurants expected to open in 2004. The game enhancement initiative began in 2003 and has an average capital cost of approximately $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 area. The major remodel or reconfiguration initiative includes a reallocation of the space between the dining and game room areas, expansion of the space allocated to the game room and an increase in the number of games. The typical capital cost of this initiative will range from $225,000 to $400,000 per restaurant. 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 exterior and interior remodel includes a new exterior identity including a revised Chuck E. Cheese logo and signage, colorful new awnings, and updating the exterior design of the buildings. The interior component of this remodel includes painting, updating decor, a new menu board and enhanced lighting. This remodel also includes new games and rides in conjunction with the transfer of games and rides between stores. The typical capital cost of this initiative is expected to range from $160,000 to $170,000 per restaurant. The Company expects the aggregate capital costs in 2004 of completing the game enhancement initiative, major remodels or reconfigurations, expanding the square footage of existing restaurants and the exterior and interior remodels to total approximately $17 to $18 million and impact approximately 125 restaurants. During the first nine months of 2004, the Company opened 20 new restaurants, acquired two restaurants from a franchisee and impacted a total of 95 existing restaurants with capital expenditures. The Company currently estimates that capital expenditures in 2004 will be approximately $75 million. The Company plans to finance its capital expenditures through cash flow from operations and, if necessary, borrowings under the Company's line of credit. The Company has developed a preliminary capital plan for 2005 totaling $95 to $105 million including a budget for existing stores of $30 to $35 million, a new store budget of approximately $55 to $60 million and a store maintenance and corporate budget of approximately $10 million. This capital plan assumes the continued success of exterior and interior remodels. 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 through the first nine months of 2004, the Company has repurchased approximately 18.1 million shares of the Company's common stock, retroactively adjusted for all stock splits, at an aggregate purchase price of approximately $311 million. During the first nine months of 2004, the Company repurchased 2,916,750 shares at an aggregate purchase price of approximately $103.9 million. At the end of the first nine months of 2004, approximately $74.1 million remained available for repurchase under a current $100 million repurchase authorization approved by the Company's Board of Directors in August 2004. The Company has available borrowings under its line of credit agreement of $132.5 million that is scheduled to mature in December 2005. 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 0.75% to 1.50%. Currently, any borrowings under this line of credit would be at the prime rate or LIBOR plus 0.75%. As of September 26, 2004, there were $82.0 million in borrowings under this line of credit and outstanding letters of credit of $7.6 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 $303.8 million as of September 26, 2004, 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 3.25 to 1.0. Borrowings under the line of credit agreement are unsecured but the Company has agreed to not pledge any of its existing assets to secure future indebtedness. At September 26, 2004, the Company was in compliance with all of the above debt covenants. The Company intends to extend the maturity date of its line of credit agreement. 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/entertainment industry, 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. 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. Evaluation of Disclosure Controls and Procedures The Company's Audit Committee of the Board of Directors (the "Audit Committee) held a telephonic meeting with management on January 31, 2005. Management reached the conclusion, and the Audit Committee concurred, 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, management determined, and the Audit Committee concurred, that the Company should report on Form 8-K that its historical financial statements should no longer be relied upon. The Audit Committee also concurred with management's action plan to complete an extensive analysis of these matters and quantify the impact of the correction of the lease accounting errors on the Company's financial statements for each of the prior periods affected. Historically, the Company had depreciated its leasehold improvements over a period equal to the lesser of the initial non-cancelable lease term plus periods of expected renewal, or the useful life of the assets. The periods of expected renewal included option periods provided for in the lease and any additional periods that the Company considered reasonably assured of exercising or acquiring. When determining whether each of its leases was an operating lease or a capital lease and when calculating straight-line rent expense, the Company used the initial non-cancelable lease term commencing when the obligation to make current rent payments began. Funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements were netted against the amount recorded for the leasehold improvement. On March 1, 2005, the Audit Committee held a telephonic meeting with management and the Company's independent registered public accounting firm. Management presented the results of its completed analysis of its lease accounting practices, including the quantification of the impact of the correction of the lease accounting errors on the Company's financial statements for each of the prior periods affected. Management affirmed its prior determination, and the Audit Committee concurred, to restate the Company's financial statements for the three year periods ended December 28, 2003 and for the first three quarters of fiscal 2004 to reflect the correction in its lease accounting practices. 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 as of the end of the period covered by this report. Based on that evaluation, which included the matters discussed above, 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 September 26, 2004 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. In connection with correcting its lease accounting methodology, the Company has instituted the following procedures: - use of 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; - commence the lease term and straight-line rent expense on the date when the Company takes possession and the right to control use of the leased premises; and - record funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. The Company has not identified any change in its internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. PART II - OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. The following table presents information related to repurchases of common stock the Company made during the third quarter of 2004: Cumulative Maximum Dollar Number of Shares Amount that May Total Number of Average Price Purchased Under Yet be Purchased Fiscal Period Shares Purchased Paid per Share the Programs Under the Programs ------------- ---------------- -------------- ---------------- ------------------ Program approved in February 2004: June 28 - July 25, 2004 279,500 $ 35.74 1,752,250 $ 11,680,912 July 26 - Aug. 22, 2004 (1) 323,600 36.07 2,075,850 - Aug. 23 - Sept. 26, 2004 - - - - -------- Total 603,100 $ 35.92 ======== Program approved in August 2004: June 28 - July 25, 2004 - - - - July 26 - Aug. 22, 2004 (1) 267,600 $ 33.62 267,600 $ 91,002,327 Aug. 23 - Sept. 26, 2004 486,600 34.77 754,200 $ 74,080,836 -------- Total 754,200 $ 34.37 ======== (1) In February 2004, the Company's Board of Directors approved a program to repurchase up to $75,000,000 of the Company's common stock. In August 2004, this program was completed and the Company's Board of Directors approved a new program to repurchase up to $100,000,000 of the Company's common stock. Item 6. Exhibits and Reports on Form 8-K. a) Exhibits Exhibit Number Description ------- ----------- 10(a) Fourth Amendment to Credit Agreement in the stated amount of $132,500,000, dated August 10, 2004, between Bank of America, N.A. and the Company. 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 third quarter and through the original filing of this report, we filed or furnished the following reports on Form 8-K: A current report on Form 8-K, dated July 14, 2004, announcing second quarter 2004 financial results. A current report on Form 8-K, dated October 13, 2004, announcing third quarter 2004 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: March 18, 2005 By: /s/ Richard M. Frank --------------------------------- Richard M. Frank Chief Executive Officer (Principal Executive Officer) /s/ Christopher D. Morris --------------------------------- 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)