-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QuKU1elI/q96yQfXbGpGHdlZRxKfekUOmAAhV/0Flu1iP5H4kYGO8+JtrcX2MIl0 Uz07Fn6+58S/kX2/PpVtsw== 0000813920-03-000045.txt : 20030825 0000813920-03-000045.hdr.sgml : 20030825 20030825162539 ACCESSION NUMBER: 0000813920-03-000045 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030330 ITEM INFORMATION: FILED AS OF DATE: 20030825 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEC ENTERTAINMENT INC CENTRAL INDEX KEY: 0000813920 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 480905805 STATE OF INCORPORATION: KS FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13687 FILM NUMBER: 03864593 BUSINESS ADDRESS: STREET 1: PO BOX 152077 CITY: IRVING STATE: TX ZIP: 75015 BUSINESS PHONE: 9722585403 MAIL ADDRESS: STREET 1: PO BOX 152077 CITY: IRVING STATE: TX ZIP: 75015 FORMER COMPANY: FORMER CONFORMED NAME: SHOWBIZ PIZZA TIME INC DATE OF NAME CHANGE: 19920703 8-K 1 k81st2003earn.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): April 15, 2003 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) Item 7: Financial Statements and Exhibits. (c) Exhibits 99.1 Transcript of Conference Call conducted by CEC Entertainment, Inc. (the "Company") on April 15, 2003. Item 12: Results of Operations and Financial Condition The information furnished in this Current Report on Form 8-K and the Exhibit attached hereto shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of such section. On April 15, 2003, the Company issued a press release announcing financial results for the fiscal first quarter ended March 30, 2003. A copy of the press release is being furnished as an Exhibit to a separate report on Form 8-K, dated August 25, 2003. Following the issuance of the press release, the Company held a conference call ("Conference Call") on April 15, 2003, to discuss the Company's results set forth in the press release. A transcript of the Conference Call is attached as Exhibit 99.1 to this Current Report on Form 8-K. 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: August 25, 2003 By: /s/ Richard M. Frank -------------------- Richard M. Frank Chairman of the Board and Chief Executive Officer EXHIBIT INDEX Exhibit Number Description - ------- ----------- 99.1 Transcript of Conference Call conducted by CEC Entertainment, Inc. on April 15, 2003. EX-99 3 ex9911st2003earn.txt CEC ENTERTAINMENT, INC. Host: Mike Magusiak April 15, 2003/3:30 p.m. CDT CEC ENTERTAINMENT, INC. April 15, 2003 3:30 p.m. CDT Moderator Ladies and gentlemen, thank you for standing by and welcome to the CEC Entertainment earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chief Financial Officer of CEC Entertainment, Mr. Rodney Carter. Please go ahead. R. Carter Good afternoon, everyone, and welcome to our conference call. Today I'm joined by Dick Frank, our Chairman and CEO, and Mike Magusiak, our President. This call is also being broadcast simultaneously over the Internet. Before we begin today's discussion, I would like to make you aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements. Information on the company's risk factors was included in our press release, and is also included in the company's filings with the SEC. Our primary objectives for the call today include: first, to discuss sales and earnings results for the first quarter of 2003; secondly, to discuss our strategies to continue growing long-term earnings; and third, to comment on our outlook for the business going forward. Revenue for the quarter increased 6.6% to $184.1 million. This increase was primarily attributable to the addition of 35 company-owned stores last year. First quarter comparable store sales declined 2.9% due to the difficult economic environment and heavy winter storms, particularly the weather around the Presidents' Day holiday, which had a negative impact of approximately $0.03 per share, as discussed on our last conference call. The first quarter was favorably impacted by the shift of the Easter holiday to the second quarter. Net income increased to $27.4 million during the first quarter of 2003. Diluted earnings per share for the quarter increased 6.4% to $1.00, up from $0.94 in 2002 and slightly above consensus expectations of $0.99. I would now like to provide you with some details on several key margin items that impacted results during the first quarter. Cost of sales as a percent of revenues for the first quarter decreased 0.5%, from 42.6% in 2002 to 42.1% in 2003. As anticipated in our previous guidance, lower cheese costs throughout the quarter were the primary factor. As a result of these lower costs, food and beverage expenses decreased from 12.5% of revenues in 2002 to 11.9% in 2003. Labor expenses remained flat at 26% in the first quarter of 2003 due to excellent operational performance at the store level. SG&A expenses for the first quarter were 11.5% of revenues, flat with the first quarter of the prior year. Depreciation and amortization expenses increased 0.6% as a percent of revenues in the first quarter of 2003 at 5.9% versus 5.3% the prior year, reflecting primarily the impact of soft sales and to a lesser degree the capital invested in new stores and remodels. As a percent of revenues, other operating expenses increased from 15% during the first quarter of 2002 to 16% in 2003. This increase was due to increased property taxes, rent, repair and maintenance, gas prices, insurance costs, and the asset write off of approximately $420,000 associated with a store location where we lost our lease. We continue our commitment to maintaining a strong balance sheet, providing our company the strategic financial flexibility to meet challenges and to capitalize on opportunities. During the first quarter of 2003, internally generated cash flow funded $19 million in new stores and the reinvestment in existing stores with game rotations and remodels. With operating cash flow of over $60 million, we were able to make these key investments in the business, repurchase $6 million of company stock, increase cash reserves from $12 million to almost $16 million, as well as reduce debt by $31 million since year-end 2002. Thus, our company has the financial flexibility to continue our strategic focus on driving long-term shareholder value. Mike Magusiak, the President of the company, will now update you on our strategies to drive shareholder value. M. Magusiak Thanks, Rodney. Our strategies to increase revenues and earnings are segmented into three categories: sales initiatives supported with capital expenditures; second, sales initiatives requiring minimal or no capital; and third, new store development. The primary sales initiatives that are supported with capital include Phase III remodels, games rotation initiative and, third, expansions and reconfigurations. We intend to complete our Phase III remodels in all company stores by the third quarter of this year. We completed 20 Phase III remodels in the first quarter, and anticipate completing the remaining 32 company stores in the second and third quarters of this year. We believe that our enhanced entertainment package will increase long-term revenues, profits, and cash flow. We completed 20 stores located in Massachusetts, New Hampshire, Rhode Island, and Connecticut with our games rotation plan during February of this year. This sales initiative has a capital cost of approximately $50,000 per location. The primary components of this sales initiative are new and transferred games and rides. On average, stores are receiving 15 to 20 new or transferred games from other stores, which represents 25% to 33% of the average store's game package. We believe that this is a significant initiative because guests receive an upgraded entertainment package for a very minimal capital expenditure. We anticipate completing our game rotation initiative in all St. Louis, San Diego, and Tampa stores during the second quarter of this year. The physical assets of our company stores are in excellent condition as a result of our Phase III remodel plan. We believe that we have an opportunity to significantly increase sales by either expanding or reconfiguring a select number of stores. This year we intend on completing a total of approximately 10 stores with either an expansion or reconfiguration. Historically, expansions have resulted in significant sales increases, as there is proven demand in locations that are constrained from significant revenue growth due to size limitations. Given the level of fixed and semi-fixed costs at these locations, high sales have resulted in a high return on investment. The major components of our reconfiguration are as follows: relocate the showroom to the front of the store with the Studio C show to provide a significant visual impact to our guests as they enter our stores; second, to relocate the skill area of our game room to the showroom, which will increase the number of total games by approximately 20% to 25%. These reconfigurations provide the guests with a more open, comfortable environment by reallocating space to provide the guests with what they want, a significant increase in premium booth seating and more square footage in our game room, which is the highest traffic area of our store. We completed our first location in the Dallas/Fort Worth area in the first quarter, and are under construction in our second reconfiguration in the San Diego market. In summary, the combination of Phase III remodels, games rotation initiative, reconfigurations and expansions impacts approximately 100 stores this year or 30% of core locations. Our strong cash flow generated from operations provides us the funding to execute our strategic plan, including the reinvestment into existing locations and the growth of new stores by approximately 10%. We estimate that cash flow from operations in 2003 will exceed our $90 million capital expenditure plan by approximately $40 million to $45 million this year. This excess cash flow provides us the opportunity to repurchase shares, reduce debt, or build cash reserves. Sales initiatives with minimal or no capital requirements. Our first initiative is our More Fun initiative. Our More Fun sales initiative is currently being tested in all stores located in Houston, Los Angeles, Minneapolis, and Boston. This initiative combines the following components: a value component in which all games and rides require one token; an increase in the overall number of tickets that guests win; and third, a 35% increase in the variety of prizes our guests can select from our lower ticket categories. Based on early sales results and encouraging guest feedback, we are implementing this More Fun sales initiative in all company stores during June of this year. We anticipate supporting this initiative with national media with no significant increase in cost. We believe that this sales initiative will enhance long-term value and the guest experience without a significant increase in costs. The next sales initiative that requires minimal capital is a conversion of all company stores to an enhanced menu. We completed the implementation of our enhanced menu in all company stores during the last week of the first quarter. Our objectives are to better communicate value, food quality, and variety to our guests. Increasing the number of both value meals and token value deals from two to three provides more value to our guests. In the testing of approximately 150 company stores, the combination of token value deals and value meals has increased from approximately 30% of sales to approximately 38% to 40%. This new menu has been very well received by our guests as determined by their purchases. Secondarily, we believe that the perception of the quality and variety of our food offerings has been enhanced because of the more attractive, appealing photographs of our pizza, salad bar, sandwiches, and appetizers. We believe that our value proposition has improved by the every day offering of more value meals and token value deals. Our average guest check and operating margins have remained essentially unchanged. New store development remains a critical component of our strategy to grow long-term revenues and earnings. New stores provide a good return on investment, and enable us to realize operating margin efficiencies with our national advertising plan and overhead economies of scale. During 2002, we increased the number of company stores by 35, including 32 new stores and three franchise acquisitions, which represented a 10% growth rate. During each of the past five years we've increased company stores with an annual growth rate ranging from 9% to 11%. Our development plan for 2003 is to increase the number of company stores by approximately 10% or 35 to 38 stores. As part of our long-term development plan, we have identified approximately 350 specific market areas for potential Chuck E. Cheese sites. This development plan is significant since we believe it enables us to almost double the number of Chuck E. Cheeses' in the United States and Canada from 384 stores at year-end 2002. The mix of large market and smaller market stores to be opened in 2003 is approximately 60% and 40%, respectively. We anticipate opening 20 to 25 large market stores with the remainder of 2003 new store developments being smaller market stores. Performance of new large market stores remains strong and we continue to be encouraged by the performance of the smaller market locations. During the first quarter we opened four new company stores and currently have eight new stores under construction. I'll now turn the call over to Rodney to discuss our earnings outlook. R. Carter Thanks, Mike. I would now like to share our thoughts on the second quarter of 2003. The economic environment has shown no visible signs of recovery, nor do we have any means of forecasting a strengthening in the current consumer environment. The negative impact from the Easter shift, the weak overall economic and consumer environments, as well as the strong second quarter last year in which we had 3.9% increase in comps and a 25% plus increase in EPS, factor into our second quarter 2003 earnings guidance of $0.53 to $0.55 per diluted share. Current analyst estimates for 2003 reflect a consensus diluted EPS of $2.60. We are on track to achieve that earnings performance, which is consistent with our previous guidance of $2.58 to $2.66 per share. The pace of earnings is expected to accelerate throughout the second half of the year based primarily on the impact of key strategies, including new stores, remodels, game rotations, the national rollout of the More Fun initiative, as well as easier comparisons later in the year. Current analyst estimates for the overall second half of 2003 reflect a reasonable 8% growth rate in diluted EPS. I would now like to turn the call over to Dick Frank, our CEO, for a few closing comments before we open the call to Q&A. D. Frank Thanks, Rodney. Our first quarter results are best reflected in the strength of our operating cash flow. With cash flow of approximately $60 million, we were able to reinvest $19 million back into our business, increase our cash reserves by $4 million, repurchase $6 million of our company's stock, as well as reduce debt by over $30 million since year-end 2002. On the earnings side, earnings per share increased 6.4% to $1.00, up from $0.94 in the first quarter of the prior year. As we look to the remainder of the year, our greatest challenge may well come in the second quarter as we anticipate gaining momentum as we move through the last half of the year. Our earlier guidance for the second quarter reflects the negative impact we expect from the shift of Easter into the second quarter of this year, and strong comp sales performance of a year ago of approximately 4%. As we move to the second half of 2003, we believe our key strategies discussed with you previously, including our reinvestment plans for our business and the implementation of our More Fun initiative supported with national TV, are on target and should accelerate our performance. We continue to believe that the Chuck E. brand is well positioned and that our strategies are sound. At this time, Mike, Rodney, and I will be glad to answer any questions that you may have. Moderator Thank you. Our first question comes from Robert Derrington with Morgan Keegan. Please go ahead. R. Derrington Gentlemen, I'm curious. What kind of experience are you seeing with some of the programs that you have rolled out? You've got a lot of things you're testing right now and some of them appear to be generating some pretty good returns. For example, the reconfiguration, what kind of benefit to sales are you seeing from that program? D. Frank Bob, on the reconfigurations, it's way too early. We've completed one store and it wasn't completed until March so that's just way too early to be able to give any data. We've got a second store under construction out in San Diego, but again, it's going to be some time before we're able to quantify exactly what that means in terms of performance. R. Derrington Okay. What are the drivers that you see that you're having good experience with in individual unit sales growth? Can you put your finger on what's really working right now? D. Frank I think that, as you can tell, Bob, from Mike's comments, we continue to obviously believe in Phase III, and we're moving to complete the 50 some odd units that we had remaining here in the early part of 2003. We also are encouraged by the early results of the More Fun initiative. As Mike mentioned, we are now in process of implementing that nationwide here by the middle of June of this year and intend to support that with national TV. So obviously we feel very good about that particular initiative. R. Derrington I apologize for one more question. As you look into your crystal ball, Dick, and as you continue to evolve the brand, what do you see coming after? Are you going to finish Phase III? You're looking at reconfigurations. Where do you put your cash flow to work in the business? D. Frank Our crystal ball is not quite as good today as it was maybe some time ago, but I think, Bob, that we continue to believe in the long-term prospects for the business. We are excited about some of the value initiatives that we're currently involved in, and we continue to believe that our stores, our locations today, are in the best, probably, physical condition and offer the best product offering that we've had out in the marketplace perhaps ever, but certainly in the last number of years. So we think we're really well positioned as we go to the future. As we said in our last conference call, we do project free cash flow after all capital expenditures this year of about $40 million to $45 million. So certainly we'll have an opportunity to look at what we believe is the best use of that capital as we go forward. We will look at that just as we have in the past in terms of balancing it with the reinvestment into our business, looking at our overall debt levels, and just where we think is the best opportunity to put that cash to use. Always looking at the repurchasing of our stock is one of those potential opportunities. R. Derrington Great. Thank you very much. Moderator Our next question comes from Jeff Omohundro with Wachovia Securities. Please go ahead. J. Omohundro I've got two questions. First is a marketing-related question. I've been encouraged with your increased focus on value, but I guess one question I have relates to how you communicate that message. Certainly your history has shown strength in areas like Cartoon Network and really children-oriented marketing, but I'm wondering with an increased value proposition in the message, who is the right audience for that and how does that weigh into your marketing strategy? M. Magusiak That's a real good question. One of the things that we see is a big positive to our More Value initiative, as we roll that out in June of this year, is our marketing of that initiative. Because of our national presence we have already produced a More Fun commercial and we will air that on national TV broadcasts on Nickelodeon and Cartoon Network. We also see a spillover, not only from a kid's perspective, but from an adult's perspective, a spillover into the moms to watch that commercial. So what we have seen so far off of the testing of that initiative in Minneapolis, Los Angeles, Boston, and the Houston markets is we're encouraged by going into the stores to see the way that the parents are reacting to the More Fun initiative, and then we think the marketing of that, the advertising on TV is a huge part of that initiative. J. Omohundro So you don't see a need to go to more traditional or other channels to get that value message out? M. Magusiak We have an in-store marketing campaign that we have put into our stores. We're refining that, and actually the head of our marketing, Executive Vice President Dick Houston, and I are heading to Houston tomorrow to look at a refined in-store marketing. Then in addition to that, we are also on our free standing inserts, advertising the More Value, which is a direct communication with the parents. J. Omohundro Okay, I understand. The second question relates to the small prototype stores and the progress you're making there. I'm just wondering if you could give us an update on the cost side of that equation, how the costs are trending there. Maybe just now that you've got a little bit of legs under it, what kind of feedback internally from your regional managers and others in terms of their enthusiasm to operate small stores versus standard prototype? D. Frank First, on the first part of that, Jeff, or I guess the second part of your question in terms of feedback from the field, I think the feedback from the field, whether it be our regional managers or general managers, I think we're getting nothing but positive comments. We obviously did learn a lot, and we shared that in the past that that relates to our very first opening in Waco. We have evolved slightly from the Waco location in that we've brought in the blue screen, which we have in most of our stores in the showrooms, to try to enhance the entertainment value in the smaller town prototype. But we feel very good about the small towns, both here at the office as well as the feedback we're getting from the field, and we continue to be real encouraged by the revenues that we're experiencing out in all three of the locations, and continue to think that that's going to be a great vehicle for us and should allow us to essentially almost double the size of our system. J. Omohundro Thank you very much. Moderator We have a question from Eric Wold with RTX Securities. Please go ahead. E. Wold Just one question, a follow-up on Jeff's question on the small town units. I know you've made a lot of changes there from what you've learned, but can you talk a little bit about what, if anything, you've learned from the small town that you've now incorporated into the larger units that you'll do going forward? M. Magusiak Naturally, one of the benefits that whenever you really work on capital costs from a small town, which we've worked in large towns, but as we continue to watch our capital and get an excellent return on investment of our new stores, we intend to take some of those ideas, whether it be to a show or lighting, potentially an open kitchen that is working very well in the small towns that may factor into the development of our large towns. But what I would tell you from a Chuck E. Cheese, from a guest standpoint, we believe that the guest experience in the small town is an excellent experience just like it is in a large town. So the main benefit that we could potentially get is potential cost savings driving our large town investment cost down. D. Frank Having said that though too, Eric, I think the flip of that is, you've followed us for a number of years now, and when you look at the performance of our new stores, although as Mike said, we want to take into account and pick up any potential cost savings that we can that we think make sense based on what we are learning in the smaller markets. We also want to make sure that we don't go off and take our larger markets in the new stores within them in a direction that may or may not make sense. We've got excellent, excellent returns and an excellent history with our larger stores in the larger markets. You can be assured that we're going to protect that at all costs. We've still got a lot of opportunity to grow our larger prototype and we want to make sure we continue to do that in a quality way. E. Wold Thanks. One more quick question. Has the weather or anything pushed back any development of stores this year? If so or if not, can you give a short-term outlook by quarter as to how many you expect to open? M. Magusiak Right now the weather won't impact, at least what we're seeing now this early, any of the openings in 2003. As we said earlier, we have four stores that we opened in the first quarter. We have eight stores that are currently under construction. Out of those eight, the majority of those will open in the second quarter. Then from there we have a number of sites that are approved that are in permitting that we're looking at getting approvals from cities. It's more difficult when you get into the third and fourth quarter, but somewhat evenly we'll be busy the rest of this year opening new stores. E. Wold I apologize. One quick clarification. That 35 to 38 that you gave, that also includes any acquired stores from franchises as well; that's not all just new stores. M. Magusiak That is correct. E. Wold Okay, perfect. Thanks a lot. Moderator We have a question from Alan Mitrani with Copper Beech Capital. Please go ahead. A. Mitrani Can you quantify a bit the same store sales, how much you think was hurt due to weather, and maybe give us your forecast for the second quarter, what you think same store sales will look like? R. Carter It's fairly difficult to isolate the impact of weather. When we went back into the weeks in and around Presidents' Day, basically there were two weeks that were hit, two series of snow. You really combine that, and then the other side of that is the Easter impact. We had comps of about 2.9% negative in the quarter as a whole. If you net out the effect of those two, I think it would have been somewhere closer to about a point higher than that, somewhere in the 2% range. A. Mitrani For the second quarter or the rest of the year, what kind of same store sales are you thinking about? R. Carter We're seeing difficult trends that we had talked about continuing in the second quarter, as we referenced particularly with the shift of Easter back into what is seasonally a low period of time, and some steady but modest increases thereafter. We've anticipated some modest improvements based on both the contribution of the initiatives without getting into some specific numbers, but also the growing contribution of that, as well as the softer comps that we're up against in the second half particularly. A. Mitrani Okay. Also, when you're defining free cash flow, if I use $2.60 as my number, roughly about $72 million in net income, D&A maybe of $43, you said cap ex of about $90 gets me to $25. What's the extra $20 million? Is that a working capital you expect to realize? R. Carter That and deferred taxes. A. Mitrani Deferred taxes, okay. R. Carter And you've got a little bit of option exercises. There are a couple of categories. A. Mitrani Got it. How much did you pay for the shares? What price did you buy back the shares at? R. Carter The shares that we've repurchased this year have been the mid-twenties, mid to upper twenties. A. Mitrani You're almost done with your buy back, right? You have ten million left at the beginning of the quarter. R. Carter That's right. A. Mitrani You didn't reauthorize a new one. R. Carter We did not. We have a modest amount left, and I would continue to anticipate that as we utilize that, after we continue, we've always had one outstanding and continue to utilize that. We're in the sixth program that we have utilized since 1994, and have repurchased just under about eight million shares over that time period. A. Mitrani Okay. One last question. What sales base are you? I mean, you're giving us an EPS number, but you're not giving us any sales levels for the year at all or for the quarter. What sales base for the year, let's say, if you don't want to come down to a quarter, are you looking at to get to your $2.60 or range of estimates for sales? R. Carter It's just going to be very modest. The growth that we've talked about, we've talked about some level of contribution from new stores. Without getting into specific numbers that we have for the year, going into it without getting into specific numbers, there's a variety of moving parts on the expense side, moving parts on the comp side. I wish that we could really crystal ball that and realize that we have to, but it's fairly difficult to get a real precise number on it. M. Magusiak I think the one thing that we've learned over the past 14 or 15 years is that it's difficult to project comp store sales. In the first quarter our sales, our revenues, increased 6.6%. That's the first quarter, and off of a revenue increase of 7% our earnings per share increased about 6%. Again, that's going to vary by quarter depending on the seasonality of our business. A. Mitrani Okay. Thank you. Moderator We have a question from Craig Schroeder with Fulcrum. Please go ahead. C. Schroeder A couple of questions, but let me first ask this. The acceleration in free cash flow this year, I know you can authorize a new buy back, but is your stance on acquiring a growth vehicle different today than it may have been a couple of year ago or anything new there? D. Frank No, nothing new in that arena, Craig. C. Schroeder Okay. Rodney, I think you mentioned there was a $420,000 asset write-off for a lease this quarter. Is that correct? R. Carter That is correct. C. Schroeder Okay, and that was in other operating expense? R. Carter That's correct. C. Schroeder Okay. There were no asset write-downs last year in Q1? R. Carter There is always a small amount as we go through the remodels that are marginal, but there's nothing that's non-comparable. This is the one item that really impacted that category, as we were negotiating that lease and did not reach satisfactory conclusion on what we were trying to achieve. C. Schroeder That store is still open or do you know when it's going to close? M. Magusiak It's closing at the end of this month. C. Schroeder Then I guess the final question. I guess someone will ask it, but can you give us a sense on comp trends here in the first couple of weeks of Q2? I know you have the Easter shift. D. Frank Yes. We're not seeing anything that I guess you would say is unforeseen. There is an awful lot of volatility at this time of the year given the way Easter falls, spring breaks around the country. So sales, which is typical of this time of the year, are always difficult for us to read, but we have certainly incorporated that into the guidance that we gave in the first part of the conference call. The fact is we've only got two weeks of results in. C. Schroeder Okay, great. Thank you. Moderator We have a follow-up question from Robert Derrington with Morgan Keegan. Please go ahead. R. Derrington Dick, I'll try and skin that cat another way. I'm curious how the weekly trend has changed. When you look at the slowdown or the improvement in the situation with the war with Iraq, has there been any general change in the trend as we've seen that look more favorable? D. Frank Bob, again, just given the time of the year and even the slowdown of Iraq, which has been the last ten days to two weeks, there's just no way for us, at least from my perspective, to be able to know whether or not that's having a positive effect or not. It just would be impossible to read. R. Derrington Okay, that's fair. On the smaller market stores, how many are actually open at this point? R. Carter We have three open. We have the Dover, Delaware, which opened fourth quarter. We had Lake Jackson, which was early third quarter. Then we had a second quarter opening with Waco. R. Derrington Okay. What kind of average unit sales are you seeing in those restaurants? R. Carter All those are still trending well above the budgeted level that we had had, very solid levels. To get into real specifics, it's hard without having a full year of what those annualized at, but the results are certainly encouraging. R. Derrington What we're trying to do is gain some insight. As we blend the mix of stores coming into the pool, obviously if you open a larger number of those smaller stores in any given quarter, we could see some impact on the average unit sales that we wouldn't want to draw the wrong conclusion from. Can you give us any guidance on roughly a million to a million and a half, a million two? D. Frank Robert, I didn't mean to cut you off. If you go back to our previous calls, we gave out roughly what we were doing from a capital expenditure standpoint, and also that our target was to hit a 30% cash on cash return. We've previously stated that to hit those returns we'd need to do probably a million to a million fifty to hit those returns. We're saying that we're on track to do that at this point in time. R. Derrington What have you learned from operating that buffet format? Is that something that you would consider possibly testing in the larger box, Dick? D. Frank You know, we are testing it in the larger box. We actually converted one of the stores here in Texas, our Midland, Texas location. So we are testing that. Today, of the three small stores, we have two of those operating as buffets, so we have three buffets out there. Our third small town store in Dover, Delaware, we opened the small town format, but we did it with more of our traditional menu in just serving the pizza without the buffet format, but at significantly reduced pricing to create, we think, a similar type of value within that market. So on the buffet side we're going to continue to monitor that, to test that. Whether or not that has broader applications to our larger stores, only the future would tell us that. R. Derrington Okay. So the smaller stores that you plan going forward, do you anticipate those would also be buffets? D. Frank Probably at this time I think that it's probably safe to say that we will open more of those with the reduced menu pricing as we did in Dover, Delaware. R. Derrington Okay, one last question or actually kind of a statement. I've got a couple of kids, and unfortunately I wind up with cartoons on in the morning on weekends. I thought for sure that I saw a Chuck E. Cheese commercial on an ABC affiliate. Is that real or is that imagined? D. Frank We do national broadcasting, and ABC has been one of the channels that we've talked about in the past. R. Derrington Okay. So you're not just locked into cable; you're also using that major network. R. Carter We've used ABC. We've used Warner Brothers. Obviously, one big network one is PBS. R. Derrington Got you. Okay, super. Thank you guys. Moderator We have a question from Scott Schumann with BB&T. Please go ahead. S. Schumann Sorry if you've said this already, what was the cap ex for the first quarter? R. Carter Just under $20 million. S. Schumann All right. Then at full year you're expecting $90 million? R. Carter That's correct. S. Schumann Okay. What was the change in average check for the quarter? R. Carter It was essentially flat to slightly up. It's just a matter of cents. S. Shuman Okay. Last question, any color on wage rates, the direction? R. Carter Obviously, I think we've done a good focal point. There is always a bit of pressure, particularly when you have softer comps, but we're pleased with the management of the hours and the efforts that the field put in place to hold labor expenses flat quarter to quarter despite the sales decline. So we're not experiencing any significant pressure that we're not trying to address operationally. S. Shuman Great. Thank you. Moderator We have a question from Adam Weiss with Chilton Investments. Please go ahead. A. Weiss Rodney, what was the cost of the debt that you paid down in the first quarter, the interest you were paying on that? R. Carter It would have been between 240 and 270 probably. It's a LIBOR-based floating rate. A. Weiss So last year when your stock was in the $45.00 range, you guys bought back a lot. I think it was like $15 million during the second quarter, $6 million in the third. You were buying stock in well above $40.00 a share. So in the first quarter this year your stock gets down to a level it hasn't seen since 2000, you have all this cash flow, you pay off $30 million of 2.5% debt, and you buy back $6 million worth of stock? R. Carter I think you raise a fair question, Adam. The practical aspect, we clearly have the cash flow to increase those buy backs and some that we discussed a great deal, and we'll continue to evaluate it and utilize. The other backdrop is, with a very unpredictable economy, to make sure that we've got the liquidity and the flexibility to continue to operate over time to really focus on some of the initiatives and try to temper the balance of what we really try to do. So the mathematical exercise, I think, was very compelling relative to stock repurchases, but I think we were trying to focus as well on the balance of what those demands of cash would be, etc. So it wasn't just a purely financial calculation for the first quarter, but I understand your question. A. Weiss There weren't any issues with your credit agreement that mandated you pay off any of those outstanding balance, right? R. Carter That is correct. A. Weiss Okay. Thank you. Moderator We have a question from Mike Carney with Stephens. Please go ahead. M. Carney My question has been answered. Thank you. Moderator Our next question comes from Eric Fell with Tazza Capital. Please go ahead. E. Fell I just wanted to know if you didn't do any expansions this year, maintenance capital expenditures, would they roughly equal depreciation or would it be something different? R. Carter If we didn't do any expansions, we're talking about something that's a handful of stores, three, four, or five stores so you would not have a material change. You could drop the capital expenditure number by potentially a couple million or less. E. Fell From the 90 number? R. Carter Yes. E. Fell So you could look at that as a maintenance cap ex number? R. Carter I'm sorry. I thought you were talking about the expansions. E. Fell No, I'm sorry. I'm trying to get to a maintenance cap ex. R. Carter Okay. The easiest number is to utilize something in the neighborhood of $20,000 a store, roughly 400 stores. That's going to get you essentially to that $8 million number, and there might be a little bit more as far as MIS or anything like that, but that's essentially going to be there. The bulk of the capital expenditures, the great bulk of it goes into new stores. The next piece goes into the remodel initiatives and reinvestment back into the business. E. Fell Okay. Then over what life do you depreciate the stores? R. Carter It depends on the type of asset category. Leasehold improvements is probably the single biggest category and an operating lease is 20 years. You can go down to some categories that are just a few years. So it depends on each asset category as we go through. E. Fell Okay. Thank you. Moderator We have a question from Alan Mitrani with Copper Beech Capital. Please go ahead. A. Mitrani Two follow-ups. One, have you anticipated or thought about how the movie schedule this coming quarter is going to impact? I know Pixar has made a big splash regarding Finding Nemo coming out and the Pokemon Movie. Is that incorporated in your guidance or how does it look versus last year's movie schedule? R. Carter It's incorporated into the guidance to the degree we can expect it. That's the problem. The thing is, the big movies that are coming out this quarter, we're up against, you know Spiderman came out in the middle of the second quarter last year. We're not expecting any huge change plus or minus. For example, in the first quarter movies were up year over year, in January, were up in February, but were negative in March so they're roughly offset. So this year it's very hard for us to predict. There has obviously been a fair amount of hype about Finding Nemo, but there are also a couple of significant movies that occurred middle of the second quarter last year. A. Mitrani Okay. Also, food and beverage cost weren't our biggest cost. I guess they we're down because cheese costs were down in the quarter. Are you expecting cheese costs, in your expectations, typically over time those things tend to straighten out, as well as the labor. Are you expecting in your planning for the $2.60 for the year those costs to come back at all in the second half? R. Carter Yes. We're expecting, particularly in the third quarter, that cheese prices were quite low, very favorable last year, particularly in the summer months, which are typically the peak pricing months in the cheese market, to go up a little bit simply because they were very, very favorable, historically favorable last year, that we expect a little bit of increase in cost. However, there is no known immediate supply/demand issues that should spike it or create a big spike, just purely kind of the seasonal demand. A. Mitrani Okay. In response to the question regarding the buying back stock and relative to the debt, I agree. Is there something we should read into your expectations? I mean, what's the priority? Maybe ask it this way, what's the corporate priority, given that you want to put money into the stores and you want to try to get the same store sales up? It seems like that should be the priority. Is that where the cash is going to go to try to do new concepts or enhance the concepts you have to figure out how to get the same store sales up, as opposed to putting money back in the stock? R. Carter Let me answer that in two pieces. Certainly, a key priority is to be able to reinvest back into the business. I would not read into it, and forgive me if I'm putting words in your mouth, to try to create a war chest to go out and have some alternate means. There's not something that's going to be read into that. It was just purely a timing of when we're working through a variety of plans, reinvestment alternatives and what we should do, as well as with the war and everything else, just significant uncertainty into the economy being read to keep a significant amount of flexibility. A. Mitrani Okay. What's the level of off balance sheet debt or off balance sheet leases you have? R. Carter On a present value basis we have a couple of hundred million dollars worth of operating leases. A. Mitrani Okay. Thank you. Moderator We have a question from Craig Schroeder with Fulcrum. Please go ahead. C. Schroeder If I look at other operating expense and I pull out the asset write down, it looks like we're up about 70 basis points year over year. If I remember right from last year's first quarter, you said that you typically renegotiate insurance premiums in January/February time frame. Given the little bit softer sales this year you lost a lot in that line item. So I was just wondering if you could talk a little bit about insurance and what the impact was this quarter? R. Carter Sure. Insurance in that category was up about one-tenth of a percent, Craig. We had seen the increases and losses. Many of the other restaurant stocks are starting to reflect that a little bit later. We had seen those trends increase and reflected, not only the losses that were indentified, but in kind of the trending or the methods to accrue insurance expenses. So that has actually stabilized a bit, albeit at a level that we'd love to see drop, but it's a higher level. So what we saw this quarter in other operating expenses was a bit of an impact in a variety of categories because of the softer sales repair costs were up a tenth or two. We had property taxes up a tenth or two. We had rent up a tenth or two. So it really was not any one big category like it was last year, which was really driven by insurance, which you had just a few categories on a more modest impact individually. C. Schroeder Okay. Thank you. Moderator Mr. Carter, there are no further questions at this time. R. Carter Very well. We appreciate everyone participating in the phone call and, as always, if you have any questions feel free to follow up with us directly. Thank you. Moderator Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect. -----END PRIVACY-ENHANCED MESSAGE-----