-----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, JjIV/s336pIQcTDfnwY9ALo/g3HQUkAfeepBjm+OaG07LxTKJCb0JALaEpbyY+jO uy3IdVyvhLVmtTgCUEGLCw== 0000813920-05-000051.txt : 20050321 0000813920-05-000051.hdr.sgml : 20050321 20050318181919 ACCESSION NUMBER: 0000813920-05-000051 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050102 FILED AS OF DATE: 20050321 DATE AS OF CHANGE: 20050318 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13687 FILM NUMBER: 05692719 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 10-K 1 k2004.txt 2004 FORM 10-K |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 2, 2005. |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____. Commission File Number 0-15782 CEC ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) Kansas 48-0905805 (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4441 West Airport Freeway Irving, Texas 75062 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 258-8507 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock, par value $.10 each (Title of Class) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes |X| No |_| At March 7, 2005, an aggregate of 36,398,870 shares of the registrant's common stock, par value of $.10 each (being the registrant's only class of common stock), were outstanding. At June 30, 2004, the aggregate market value of our common stock held by non-affiliates of the registrant was $1,092,110,507. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement, to be filed pursuant to Section 14(a) of the Act in connection with the registrant's 2005 annual meeting of shareholders, have been incorporated by reference in Part III of this report. P A R T I Item 1. Business General CEC Entertainment, Inc. (the "Company") was incorporated in the state of Kansas in 1980 and is engaged in the family restaurant/entertainment center business. The Company considers this to be its sole industry segment. Our principal executive offices are located at 4441 W. Airport Freeway, Irving, Texas 75062. The Company maintains a website at www.chuckecheese.com. Documents available on our website include the Company's (i) Code of Business Conduct and Ethics, (ii) Code of Ethics for the Chief Executive Officer and Senior Financial Officers (iii) Corporate Governance Guidelines, and (iv) charters for the Audit, Compensation, and Nominating/Corporate Governance Committees of the Board. These documents are also available in print to any stockholder who requests a copy. In addition, we make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronic filing or furnishing of such material with the Securities and Exchange Commission. The Company operated, as of January 2, 2005, 449 Chuck E. Cheese's (R) restaurants. In addition, as of January 2, 2005, franchisees of the Company operated 46 Chuck E. Cheese's restaurants. Chuck E. Cheese's Restaurants Business Development Chuck E. Cheese's restaurants offer a variety of pizzas, a salad bar, sandwiches, appetizers and desserts and feature musical and comic entertainment by robotic and animated characters, family oriented games, rides and arcade-style activities. The restaurants are intended to appeal to families with children between the ages of two and 12. The Company opened its first restaurant in March 1980. The Company and its franchisees operate in a total of 48 states and five international countries. The Company owns and operates Chuck E. Cheese's restaurants in 44 states and Canada. See "Item 2. Properties." The following table sets forth certain information with respect to the Chuck E. Cheese's restaurants owned by the Company (excludes franchised restaurants and one TJ Hartford's Grill and Bar). 2004 2003 2002 ---- ---- ---- Average annual revenues per restaurant (1) $ 1,695,000 $ 1,628,000 $ 1,641,000 Number of restaurants open at end of period 449 418 384 Percent of total restaurant revenues: Food and beverage sales 66.1% 66.5% 66.7% Game sales 31.4% 31.0% 30.8% Merchandise sales 2.5% 2.5% 2.5% - ------- (1) In computing these averages, only restaurants that were open for a period greater than eighteen months at the beginning of each respective year were included (360, 331 and 300 restaurants in 2004, 2003 and 2002, respectively). Fiscal year 2004 consisted of 53 weeks while each of fiscal years 2003 and 2002 consisted of 52 weeks. The Company's sales volumes fluctuate seasonally and are generally higher during the first and third quarters of each fiscal year. Holidays, school operating schedules and severe weather may affect sales volumes seasonally in some operating regions. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Each Chuck E. Cheese's restaurant typically employs a general manager, one or two managers, an electronic specialist who is responsible for repair and maintenance of the robotic characters and games, and 45 to 75 food preparation and service employees, most of whom work part-time. To maintain a unique and exciting environment in the restaurants, the Company believes it is essential to reinvest capital through the evolution of its games, rides and entertainment packages and continuing enhancement of the facilities. In 2000, the Company initiated a Phase III upgrade program that generally includes a new Toddler Zone, skill games and rides, kiddie games and rides, SkyTubes(R) enhancements, and prize area enhancements with ticket counting machines. The Company completed Phase III upgrades in 28, 105, 123 and 50 restaurants in 2000, 2001, 2002 and 2003, respectively, and completed this upgrade program in 2003. In 2003, the Company also initiated a game enhancement plan. The primary components of this plan are to provide new and transferred games and rides and, in certain stores, enhancements to the Toddler Zone. The Company completed the game enhancement initiative in 33 and 81 restaurants in 2003 and 2004, respectively, and plans to complete game enhancements in approximately 60 additional restaurants in 2005. The Company also began a program of exterior and interior remodels that include a new exterior identity including a revised Chuck E. Cheese logo and signage, updating the exterior design of the buildings and, in some restaurants, colorful new awnings. 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. In 2004, the Company completed 15 interior and exterior remodels. The Company also will complete major remodels in a select number of restaurants that are believed to have the greatest opportunity to significantly increase sales and provide an adequate return on investment. A major remodel includes expansion of the space allocated to the game room and an increase in the number of games. The Company completed three major remodels in 2003 and 19 in 2004. The Company plans to complete 60 to 70 major remodels in 2005, of which approximately one quarter will include the new exterior and interior identity depending on the age and condition of the building exterior, signage and awnings. The Company has expanded the customer areas of 93 restaurants since 1995, including restaurants with increased seating capacity due to an enhanced showroom package. The Company plans to continue its strategy of expanding the customer areas and seating capacity of five to seven selected restaurants in 2005. The customer area of expanded restaurants, other than restaurants with increased seating capacity due to an enhanced showroom package, is typically increased by an average of 1,000 to 4,000 square feet per store. The Company has added 35, 35 and 32 Company-operated Chuck E. Cheese's restaurants in 2002, 2003 and 2004, respectively, including restaurants acquired from franchisees. The Company anticipates adding approximately 30 to 35 new restaurants in 2005 through a combination of opening new restaurants and acquiring existing franchise restaurants. At the beginning of 2005, the Company had identified development opportunities for approximately 250 restaurants including those restaurants expected to open in 2005. The Company periodically reevaluates the site characteristics of its restaurants. The Company will consider relocating the restaurant to a more desirable site in the event certain site characteristics considered essential for the success of a restaurant deteriorate. The Company believes its ownership of trademarks in the names and character likenesses featured in the operation of its restaurants are an important competitive advantage. Restaurant Design and Entertainment Chuck E. Cheese's restaurants are typically located in shopping centers or in free-standing buildings near shopping centers and generally occupy 7,000 to 14,000 square feet in area. Chuck E. Cheese's restaurants are typically divided into three areas: a kitchen and related areas (cashier and prize area, salad bar, manager's office, technician's office, restrooms, etc.) occupies approximately 35% of the space, a dining area occupies approximately 25% of the space and a playroom area occupies approximately 40% of the space. The dining area of each Chuck E. Cheese's restaurant features a variety of comic and musical entertainment by computer-controlled robotic characters, together with video monitors and animated props, located on various stage type settings. The dining area typically provides table and chair seating for 250 to 375 customers. Each Chuck E. Cheese's restaurant typically contains a family oriented playroom area offering approximately 45 coin and token-operated attractions, including arcade-style games, kiddie rides, a Toddler Zone(R), video games, skill oriented games and other similar entertainment. Most games dispense tickets that can be redeemed by guests for prize merchandise such as toys and dolls. Also included in the playroom area are tubes and tunnels suspended from or reaching to the ceiling known as SkyTubes(R) or other free attractions for young children, with booth and table seating for the entire family. The playroom area normally occupies approximately 60% of the restaurant's customer area. A limited number of free tokens are furnished with food orders. Additional tokens may be purchased. Tokens are used to play the games and rides in the playroom. Food and Beverage Products Each Chuck E. Cheese's restaurant offers a variety of pizzas, a salad bar, sandwiches, appetizers and desserts. Soft drinks, coffee and tea are also served, along with beer and wine where permitted by local laws. The Company believes that the quality of its food compares favorably with that of its competitors. The majority of food, beverages and other supplies used in the Company-operated restaurants is currently distributed under a system-wide agreement with a major food distributor. The Company believes that this distribution system creates certain cost and operational efficiencies for the Company. Marketing The primary customer base for the Company's restaurants consists of families having children between the ages of two and 12. The Company conducts advertising campaigns which are targeted at families with young children that feature the family entertainment experiences available at Chuck E. Cheese's restaurants and are primarily aimed at increasing the frequency of customer visits. The primary advertising medium continues to be television, due to its broad access to family audiences and its ability to communicate the Chuck E. Cheese's experience. The television advertising campaigns are supplemented by promotional offers in newspapers, the Company's website and direct e-mail. Franchising The Company began franchising its restaurants in October 1981 and the first franchised restaurant opened in June 1982. At January 2, 2005, 46 Chuck E. Cheese's restaurants were operated by a total of 26 different franchisees, as compared to 48 of such restaurants at December 28, 2003. Currently, franchisees have expansion rights to open an additional five franchise restaurants. The Company is not granting additional United States franchises. The Chuck E. Cheese's standard franchise agreements grant to the franchisee the right to construct and operate a restaurant and use the associated trade names, trademarks and service marks within the standards and guidelines established by the Company. The franchise agreement presently offered by the Company has an initial term of 15 years and includes a 10-year renewal option. The standard agreement provides the Company with a right of first refusal should a franchisee decide to sell a restaurant. The earliest expiration dates of outstanding Chuck E. Cheese's franchises are in 2005. The Company and its franchisees created The International Association of CEC Entertainment, Inc., (the "Association"), to discuss and consider matters of common interest relating to the operation of corporate and franchised Chuck E. Cheese's restaurants, to serve as an advisory council to the Company and to plan and approve contributions to and expenditures from the Advertising Fund, a fund established and managed by the Association that pays the costs of system-wide advertising, and the Entertainment Fund, a fund established and managed by the Association to further develop and improve entertainment attractions. Routine business matters of the Association are conducted by a Board of Directors of the Association, composed of five members appointed by the Company and five members elected by the franchisees. The franchise agreements governing existing franchised Chuck E. Cheese's restaurants in the United States currently require each franchisee to pay: (i) to the Company, in addition to an initial franchise fee of $50,000, a continuing monthly royalty fee equal to 3.8% of gross sales; (ii) to the Advertising Fund an amount equal to 2.7% of gross sales; and (iii) to the Entertainment Fund an amount equal to 0.2% of gross sales. Under the Chuck E. Cheese's franchise agreements, the Company is required, with respect to Company-operated restaurants, to spend for local advertising and to contribute to the Advertising Fund and the Entertainment Fund at the same rates as franchisees. The Company and its franchisees could be required to make additional contributions to the Association to fund any cash deficits that may be incurred by the Association. Competition The restaurant and entertainment industries are highly competitive, with a number of major national and regional chains operating in the restaurant or family entertainment business. Although other restaurant chains presently utilize the combined family restaurant / entertainment concept, these competitors primarily operate on a regional, market-by-market basis. The Company believes that it will continue to encounter competition in the future. Major national and regional chains, some of which may have capital resources as great or greater than the Company, are competitors of the Company. The Company believes that the principal competitive factors affecting Chuck E. Cheese's restaurants are established brand recognition, the relative quality of food and service, quality and variety of offered entertainment, and location and attractiveness of the restaurants as compared to its competitors in the restaurant or entertainment industries. TJ Hartford's Grill and Bar In 2001, the Company opened a full service casual dining restaurant with a game room area named TJ Hartford's Grill and Bar aimed at a broad demographic target offering medium priced, high quality food, including alcoholic beverages in a relaxed entertaining atmosphere. Trademarks The Company, through a wholly owned subsidiary, owns various trademarks, including "Chuck E. Cheese's" and "TJ Hartford's Grill and Bar" that are used in connection with the restaurants and have been registered with the appropriate patent and trademark offices. The duration of such trademarks is unlimited, subject to continued use. The Company believes that it holds the necessary rights for protection of the marks considered essential to conduct its present restaurant operations. Government Regulation The development and operation of Chuck E. Cheese's restaurants are subject to various federal, state and local laws and regulations, including but not limited to those that impose restrictions, levy a fee or tax, or require a permit or license on the service of alcoholic beverages and the operation of games and rides. The Company is subject to the Fair Labor Standards Act, the Americans With Disabilities Act, and Family Medical Leave Act mandates. A significant portion of the Company's restaurant personnel are paid at rates related to the minimum wage established by federal and state law. Increases in such minimum wage result in higher labor costs to the Company, which may be partially offset by price increases and operational efficiencies. Working Capital Practices The Company attempts to maintain only sufficient inventory of supplies in its restaurants to satisfy current operational needs. The Company's accounts receivable consist primarily of credit card receivables, tax receivables, vendor rebates and construction advances. Employees The Company's employment varies seasonally, with the greatest number of people being employed during the summer months. On January 2, 2005, the Company employed approximately 16,500 employees, including 16,111 in the operation of Chuck E. Cheese's and TJ Hartford's Grill and Bar restaurants and 389 employed by the Company in its executive offices. None of the Company's employees are members of any union or collective bargaining group. The Company considers its employee relations to be good. Item 2. Properties The following table sets forth certain information regarding the Chuck E. Cheese's restaurants operated by the Company as of January 2, 2005. Chuck E. Domestic Cheese's -------- -------- Alabama 7 Alaska 1 Arizona 1 Arkansas 4 California 64 Colorado 8 Connecticut 6 Delaware 2 Florida 21 Georgia 16 Idaho 1 Illinois 22 Indiana 12 Iowa 5 Kansas 4 Kentucky 3 Louisiana 8 Maryland 14 Maine 1 Massachusetts 10 Michigan 18 Minnesota 5 Mississippi 3 Missouri 8 Nevada 5 Nebraska 2 New Hampshire 2 New Jersey 15 New Mexico 3 New York 19 North Carolina 11 North Dakota 1 Ohio 17 Oklahoma 3 Pennsylvania 21 Rhode Island 1 South Carolina 6 South Dakota 2 Tennessee 11 Texas 54 Virginia 10 Washington 6 West Virginia 1 Wisconsin 9 ---- 443 International Canada 6 ---- 449 ==== Of the 449 Chuck E. Cheese's restaurants owned by the Company as of January 2, 2005, 391 occupy leased premises and 58 occupy owned premises. The leases of these restaurants will expire at various times from 2005 to 2028, as described in the table below. Year of Number of Range of Renewal Expiration Restaurants Options (Years) 2005 34 None to 20 2006 37 None to 20 2007 48 None to 20 2008 53 None to 20 2009 and thereafter 219 None to 25 The leases of Chuck E. Cheese's restaurants contain terms that vary from lease to lease, although a typical lease provides for a primary term of 10 years, with two additional five-year options to renew, and provides for annual minimum rent payments of approximately $4.00 to $31.00 per square foot, subject to periodic adjustment. It is common for the Company to take possession of leased premises prior to the commencement of rents for the purpose of constructing leasehold improvements. The restaurant leases require the Company to pay the cost of repairs, insurance and real estate taxes and, in many instances, provide for additional rent equal to the amount by which a percentage (typically 6%) of gross revenues exceeds the minimum rent. Item 3. Legal Proceedings. From time to time the Company is involved in litigation, most of which is incidental to its business. In the Company's opinion, no litigation in which the Company currently is a party is likely to have a material adverse effect on the Company's results of operations, financial condition or cash flows. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of 2004. P A R T I I Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities. As of March 7, 2005, there were an aggregate of 36,398,870 shares of the Company's common stock outstanding and approximately 2,132 stockholders of record. The Company's common stock is listed on the New York Stock Exchange under the symbol "CEC." The following table sets forth the highest and lowest price per share of the common stock during each quarterly period within the two most recent years, as reported on the New York Stock Exchange (adjusted for a three for two stock split effective on March 15, 2004): High Low ------ ----- 2004 - 1st quarter $ 38.67 $ 30.94 - 2nd quarter 36.55 30.18 - 3rd quarter 36.99 28.93 - 4th quarter 42.25 34.44 2003 - 1st quarter $ 21.11 $ 16.03 - 2nd quarter 24.97 17.40 - 3rd quarter 27.17 22.83 - 4th quarter 34.67 25.99 The Company has not paid any cash dividends on its common stock and has no present intention of paying cash dividends thereon in the future. The Company plans to retain any earnings to finance anticipated capital expenditures, repurchase the Company's common stock and reduce its long-term debt. The future dividend policy with respect to the common stock will be determined by the Board of Directors of the Company, taking into consideration factors such as future earnings, capital requirements, potential loan agreement restrictions and the financial condition of the Company. From time to time, the Company repurchases shares of its common stock under a plan authorized by its Board of Directors. See the section titled Financial Condition, Liquidity and Capital Resources under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table presents information related to repurchases of common stock the Company made during the fourth quarter of 2004:
Cummulative 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 Program Under the Program ------------- ---------------- -------------- ---------------- ----------------- Sept 27 - Oct. 24, 2004 - - 754,200 $ 74,080,836 Oct. 25 - Nov. 21, 2004 - - 754,200 $ 74,080,836 Nov. 22 - Jan. 2, 2005 251,400 $ 39.84 1,005,600 $ 64,065,347 -------- Total 251,400 $ 39.84 ========
Item 6. Selected Financial Data.
2004 2003 2002 2001 2000 ------ ------ ------ ------ ------ (Thousands, except per share and store data) Operating results (1): Revenues ................................................. $ 728,079 $ 654,598 $ 602,201 $ 562,227 $ 506,111 Costs and expenses........................................ 594,314 544,500 494,629 462,940 421,355 --------- --------- --------- --------- --------- Income before income taxes................................ 133,765 110,098 107,572 99,287 84,756 Income taxes.............................................. 51,233 42,717 41,772 38,721 33,048 --------- --------- --------- --------- --------- Net income................................................ $ 82,532 $ 67,381 $ 65,800 $ 60,566 $ 51,708 ========= ========= ========= ========= ========= Per share (2)(3): Basic: Net income ........................................... $ 2.22 $ 1.70 $ 1.58 $ 1.44 $ 1.27 Weighted average shares outstanding.................... 37,251 39,654 41,511 41,724 40,499 Diluted: Net income .......................................... $ 2.15 $ 1.66 $ 1.55 $ 1.41 $ 1.23 Weighted average shares outstanding.................. 38,472 40,389 42,263 42,771 41,759 Cash flow data: Cash provided by operations............................ $ 165,835 $ 158,730 $ 136,395 $ 121,889 $ 97,623 Cash used in investing activities...................... (80,370) (94,226) (112,686) (111,058) (89,363) Cash used in financing activities...................... (81,734) (68,651) (15,177) (14,449) (3,691) Balance sheet data: Total assets........................................... $ 612,017 $ 582,983 $ 537,251 $ 457,430 $ 386,724 Long-term obligations (including current portion and redeemable preferred stock)...................... 100,808 84,259 77,211 65,445 60,670 Shareholders' equity................................... 360,730 364,323 359,907 316,201 264,846 Number of restaurants at year end: Company operated..................................... 449 418 384 350 324 Franchise............................................ 46 48 50 52 55 --------- --------- --------- --------- --------- 495 466 434 402 379 ========= ========= ========= ========= ========= - ---------------------- (1) Fiscal year 2004 was 53 weeks in length and all other fiscal years presented were 52 weeks in length. (2) No cash dividends on common stock were paid in any of the years presented. (3) Share and per share information reflect the effects of a 3 for 2 stock split effected in the form of a special stock dividend that was effective on March 15, 2004.
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations. Results of Operations A summary of the results of operations of the Company as a percentage of revenues for the last three fiscal years is shown below. 2004 2003 2002 ------- ------- ------- Revenues ...................................... 100.0% 100.0% 100.0% ------ ------ ------ Costs and expenses: Cost of sales Food, beverage and related supplies....... 12.3% 12.2% 12.2% Games and merchandise..................... 4.2% 4.3% 4.2% Labor..................................... 27.5% 27.8% 27.8% Selling, general and administrative......... 11.9% 12.7% 12.3% Depreciation and amortization............... 7.7% 7.6% 7.3% Interest expense............................ .3% .3% .3% Other operating expenses.................... 17.8% 18.3% 18.0% ------ ------ ------ 81.7% 83.2% 82.1% ------ ------ ------ Income before income taxes..................... 18.3% 16.8% 17.9% ====== ====== ====== Number of Company-owned stores: Beginning of period......................... 418 384 350 New......................................... 29 32 32 Company purchased franchise stores.......... 3 3 3 Closed...................................... (1) (1) (1) ------ ------ ------ End of period............................... 449 418 384 ====== ====== ====== Number of franchise stores: Beginning of period......................... 48 50 52 New......................................... 1 2 1 Company purchased franchise store........... (3) (3) (3) Closed...................................... (1) ------ ------ ------ End of period............................... 46 48 50 ====== ====== ====== 2004 Compared to 2003 Revenues Revenues increased 11.2% to $728.1 million in 2004 from $654.6 million in 2003 primarily due to an increase in the number of Company-operated restaurants, an additional week of operation in 2004 and a 2% increase in comparable store sales. The Company opened 29 new restaurants, acquired three restaurants from franchisees and closed one restaurant in 2004. Average annual revenues per restaurant increased to approximately $1,695,000 in 2004 from approximately $1,628,000 in 2003. Fiscal year 2004 consisted of 53 weeks while fiscal year 2003 consisted of 52 weeks. Menu prices increased approximately 1.8% between the two years. Revenues from franchise fees and royalties were $3.2 million in 2004 compared to $3.3 million in 2003. During 2004, one new franchise restaurant opened and three franchise restaurants were acquired by the Company. Franchise comparable store sales increased 1.8% in 2004. Costs and Expenses Costs and expenses as a percentage of revenues decreased to 81.7% in 2004 from 83.2% in 2003. Cost of sales as a percentage of revenues decreased to 44.0% in 2004 from 44.3% in 2003. Costs of food, beverage, and related supplies as a percentage of revenues increased to 12.3% in 2004 from 12.2% in 2003. Food costs were negatively impacted approximately $3.4 million due to an increase of approximately 25% in average cheese prices paid in 2004 compared to 2003. This increase was partially offset by the impact of a 3% increase in menu prices implemented in June of 2004. Costs of games and merchandise decreased to 4.2% in 2004 from 4.3% in 2003 primarily due to the menu price increase. Restaurant labor expenses as a percentage of revenues decreased to 27.5% in 2004 from 27.8% in 2003 primarily due to the increase in comparable store sales. Selling, general and administrative expenses as a percentage of revenues decreased to 11.9% in 2004 from 12.7% in 2003 primarily due to a $4.25 million legal settlement recorded in 2003 and higher revenues in 2004. Depreciation and amortization expense as a percentage of revenues increased to 7.7% in 2004 from 7.6% in 2003 primarily due to capital invested in new restaurants and remodels. Interest expense as a percentage of revenues remained constant at 0.3% in both 2004 and 2003. Other operating expenses decreased as a percentage of revenues to 17.8% in 2004 from 18.3% in 2003 primarily due to the increase in total revenues. The Company's effective income tax rate decreased to 38.3% in 2004 from 38.8% in 2003 due to lower estimated state tax rates. Net Income The Company had net income of $82.5 million in 2004 compared to $67.4 million in 2003 due to the changes in revenues and expenses discussed above. The Company's diluted earnings per share increased 29.5% to $2.15 per share in 2004 compared to $1.66 per share in 2003 due to the 22.5% increase in net income over the prior year and a 4.7% decrease in the Company's number of weighted average shares outstanding. In addition, the Company estimates that the additional week of operations in 2004 increased diluted earnings per share by approximately $.11. Weighted average diluted shares outstanding decreased to 38.5 million in 2004 from 40.4 million in 2003 primarily due to the Company's share repurchase program. 2003 Compared to 2002 Revenues Revenues increased 8.7% to $654.6 million in 2003 from $602.2 million in 2002 primarily due to an increase in the number of Company-operated restaurants. The Company opened 32 new restaurants, acquired three restaurants from franchisees and closed one restaurant in 2003. Comparable store sales decreased 0.3%. Average annual revenues per restaurant declined to approximately $1,628,000 in 2003 from approximately $1,641,000 in 2002. Menu prices increased 0.8% between the two years. Revenues from franchise fees and royalties were $3.3 million in 2003 compared to $3.2 million in 2002. During 2003, two new franchise restaurants opened, three franchise restaurants were acquired by the Company and one franchise restaurant closed. Franchise comparable store sales increased 1.4% in 2003. Costs and Expenses Costs and expenses as a percentage of revenues increased to 83.2% in 2003 from 82.1% in 2002. Cost of sales as a percentage of revenues increased to 44.3% in 2003 from 44.2% in 2002. Costs of food, beverage, and related supplies as a percentage of revenues were 12.2% in both 2003 and 2002. Costs of games and merchandise increased to 4.3% in 2003 from 4.2% in 2002 primarily due to higher prize costs resulting from a guest value program implemented in the second quarter of 2003. Restaurant labor expenses as a percentage of revenues remained constant at 27.8% in both 2003 and 2002. Selling, general and administrative expenses as a percentage of revenues increased to 12.7% in 2003 from 12.3% in 2002 primarily due to a $4.25 million charge in 2003 relating to the settlement of a class action wage and hour lawsuit filed in the State of California. Depreciation and amortization expense as a percentage of revenues increased to 7.6% in 2003 from 7.3% in 2002 primarily due to capital invested in new restaurants and remodels. Interest expense as a percentage of revenues was 0.3% in both 2003 and 2002. Other operating expenses increased as a percentage of revenues to 18.3% in 2003 from 18.0% in 2002 primarily due to losses on the disposal of assets, repairs and property taxes. The Company's effective income tax rate was 38.8% in both 2003 and 2002. Net Income The Company had net income of $67.4 million in 2003 compared to $65.8 million in 2002 due to the changes in revenues and expenses discussed above. The Company's diluted earnings per share increased 7.1% to $1.66 per share in 2003 compared to $1.55 per share in 2002 due to the 2.4% increase in net income discussed above and a 4.4% decrease in the Company's number of weighted average shares outstanding. Weighted average diluted shares outstanding decreased to 40.4 million in 2003 from 42.32 million in 2002 primarily due to the Company's share repurchase program. Critical Accounting Policies and Estimates The Company's significant accounting policies are disclosed in Note 1 to the consolidated financial statements. The following discussion addresses the Company's most critical accounting policies, which are those that require significant judgment. Self Insurance The Company estimates its liability for incurred but unsettled general liability and workers compensation related claims under its self-insured retention programs, including reported losses in the process of settlement and losses incurred but not reported. The estimate is based on loss development factors determined through actuarial methods using the actual claim loss experience of the Company subject to adjustment for current trends. Revisions to the estimated liability resulting from ongoing periodic reviews are recognized in the period in which the differences are identified. Significant increases in general liability and workers compensation claims could have a material adverse impact on future operating results. Impairment of Long-Lived Assets The Company periodically reviews the estimated useful lives and recoverability of its depreciable assets based on factors including historical experience, the expected beneficial service period of the asset, the quality and durability of the asset and the Company's maintenance policy including periodic upgrades. Changes in useful lives are made on a prospective basis, unless factors indicate the carrying amounts of the assets may not be recoverable from estimated future cash flows and an impairment write-down is necessary. Lease Accounting The Company uses a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonably assured) when calculating depreciation of leasehold improvements and in determining straight-line rent expense and classification of its leases as either an operating lease or a capital lease. The lease term and straight-line rent expense commences on the date when the Company takes possession and has the right to control use of the leased premises. Funds received from the lessor intended to reimburse the Company for the costs of leasehold improvements is recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. New Accounting Standards In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), "Share-Based Payment." SFAS 123(R) is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all share-based payments to employees including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123 (R) is effective at the beginning of the first interim or annual period beginning after June 15, 2005. Under APB Opinion No. 25, no stock-based compensation cost has been reflected in the net income of the Company for grants of stock options to employees. Beginning in the third quarter of 2005, the Company will recognize compensation expense in its financial statements based on the fair value of all share-based payments to employees. Inflation The Company's cost of operations, including but not limited to labor, supplies, utilities, financing and rental costs, are significantly affected by inflationary factors. The Company pays most of its part-time employees rates that are related to federal and state mandated minimum wage requirements. Management anticipates that any increases in federally mandated minimum wage would result in higher costs to the Company, which the Company expects would be partially offset by menu price increases and increased efficiencies in operations. Financial Condition, Liquidity and Capital Resources Cash provided by operations increased to $165.8 million in 2004 from $158.7 million in 2003. Cash outflows from investing activities for 2004 were $80.4 million, primarily related to capital expenditures. Net cash outflows from financing activities for 2004 were $81.7 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 $92.2 million at January 2, 2005 due primarily to the reclassification of the Company's borrowings on its line of credit to current. The Company intends to extend the maturity date on its line of credit. The Company has initiated several strategies to increase revenues and earnings over the long-term that require capital expenditures. These strategies include: (a) new restaurant development and acquisitions of existing restaurants from franchisees, (b) a game enhancement initiative that includes new games and a game rotation plan (c) major remodels, and (d) expansions of the square footage of existing restaurants. In 2005, the Company plans to add 30 to 35 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 2005 is approximately $1.8 million per restaurant. At the beginning of 2005, the Company identified development opportunities for approximately 250 restaurants including those restaurants expected to open in 2005. The game enhancement initiative began in 2003 and has an average capital cost of approximately $50,000 to $60,000 per restaurant. The primary components of this plan are to provide new and transferred games and rides and, in certain stores, enhancements to the Toddler Zone(R). The major remodel initiative includes expansion of the space allocated to the game room, an increase in the number of games and in some cases may include a new exterior and interior identity. A new exterior identity includes a revised Chuck E. Cheese logo and signage, updating the exterior design of the buildings and, in some restaurants, colorful new awnings. The interior component includes painting, updating decor, a new menu board and enhanced lighting. The typical capital cost of the major remodel initiative will range from $250,000 to $300,000 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 Company expects the aggregate capital costs in 2005 of completing the game enhancement initiative, major remodels, expanding the square footage of existing restaurants and the exterior and interior remodels to total approximately $30 million and impact approximately 160 restaurants. During 2004, the Company opened 29 new restaurants, acquired three restaurants from franchisees and impacted a total of 120 existing restaurants with capital expenditures. The Company currently estimates that capital expenditures in 2005 will be approximately $100 million, includes the $30 million the Company is expecting to invest to remodel existing stores. The Company plans to finance its capital expenditures through cash flow from operations and, if necessary, borrowings under the Company's line of credit. From time to time, the Company repurchases shares of its common stock under a plan authorized by its Board of Directors. The plan authorizes repurchases in the open market or in private transactions. Beginning in 1993 through 2004, the Company has repurchased approximately 18.4 million shares of the Company's common stock, retroactively adjusted for all stock splits, at an aggregate purchase price of approximately $321 million. During 2004, the Company repurchased 3,168,150 shares at an aggregate purchase price of approximately $113.9 million. At the end of 2004, approximately $64 million remained available for share repurchases under a $100 million share 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 January 2, 2005, there were $77.8 million in borrowings under this line of credit and outstanding letters of credit of $7.5 million. The line of credit agreement contains certain restrictions and conditions as defined in the agreement that require the Company to maintain net worth of $314 million as of January 2, 2005, a fixed charge coverage ratio at a minimum of 1.5 to 1.0 and a maximum total debt to earnings before interest, taxes, depreciation, amortization and rent ratio of 3.25 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 January 2, 2005, 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. The following are contractual cash obligations of the Company as of January 2, 2004 (thousands):
Cash Obligations Due by Year ---------------------------------------------------------------------------- Total 2005 2006 2007 2008 Thereafter ----- ---- ---- ---- ---- ---------- Operating leases (1)............... $ 753,336 $ 56,026 $ 55,473 $ 53,733 $ 51,999 $ 536,105 Revolving line of credit........... 77,800 77,800 Purchase commitments............... 32,124 4,966 5,116 5,272 5,431 11,339 Capital lease obligations.......... 19,881 1,401 1,401 1,401 1,401 14,277 --------- --------- -------- -------- -------- --------- $ 883,141 $ 140,193 $ 61,990 $ 60,406 $ 58,831 $ 561,721 ========= ========= ======== ======== ======== ========= (1) Includes the initial non-cancelable term plus renewal option periods provided for in the lease that can be reasonably assured.
In addition to the above, the Company estimates that the accrued liabilities for group medical, general liability and workers compensation claims of approximately $20.6 million as of January 2, 2005 will be paid as follows: approximately $9.8 million to be paid in 2005 and the remainder paid over the six year period from 2006 to 2011. 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 7A: Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk in the form of interest rate risk and foreign currency risk. Both interest rate risk and foreign currency risk are immaterial to the Company. Item 8. Financial Statements and Supplementary Data CEC ENTERTAINMENT, INC. YEARS ENDED JANUARY 2, 2005, DECEMBER 28, 2003 AND DECEMBER 29, 2002 CONTENTS Page ---- Report of independent registered public accounting firm................... 18 Consolidated financial statements: Consolidated balance sheets............................................ 19 Consolidated statements of earnings and comprehensive income........... 20 Consolidated statements of shareholders' equity........................ 21 Consolidated statements of cash flows.................................. 22 Notes to consolidated financial statements............................. 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders CEC Entertainment, Inc. Irving, Texas We have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. and subsidiaries (the "Company") as of January 2, 2005 and December 28, 2003, and the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended January 2, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of CEC Entertainment, Inc. and subsidiaries as of January 2, 2005 and December 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2005, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of January 2, 2005, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2005, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of a material weakness. Deloitte & Touche LLP Dallas, Texas March 18, 2005
CEC ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEETS (Thousands, except share data) January 2, December 28, 2005 2003 ---------- ------------ ASSETS Current assets: Cash and cash equivalents.................................................... $ 11,798 $ 8,067 Accounts receivable, net..................................................... 13,482 13,103 Inventories.................................................................. 12,171 12,491 Prepaid expenses............................................................. 7,444 7,608 Deferred tax asset........................................................... 1,763 1,487 --------- --------- Total current assets...................................................... 46,658 42,756 --------- --------- Property and equipment, net..................................................... 563,081 538,756 --------- --------- Other assets ................................................................... 2,278 1,471 --------- --------- $ 612,017 $ 582,983 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................ $ 78,279 $ 554 Accounts payable............................................................. 24,294 30,126 Accrued liabilities.......................................................... 36,329 28,610 --------- --------- Total current liabilities................................................. 138,902 59,290 --------- --------- Long-term debt, less current portion............................................ 11,673 75,205 --------- --------- Deferred rent................................................................... 53,427 42,816 --------- --------- Deferred tax liability.......................................................... 36,429 32,849 --------- --------- Accrued insurance .............................................................. 10,856 8,500 --------- --------- Commitments and contingencies (Note 6) Shareholders' equity: Common stock, $.10 par value; authorized 100,000,000 shares; 55,556,857 and 54,481,913 shares issued, respectively ..................... 5,556 5,448 Capital in excess of par value............................................... 245,991 219,071 Retained earnings ........................................................... 433,267 350,735 Accumulated other comprehensive income....................................... 1,476 695 Less treasury shares of 19,210,568 and 16,042,418, respectively, at cost..... (325,560) (211,626) --------- --------- 360,730 364,323 --------- --------- $ 612,017 $ 582,983 ========= ========= See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (Thousands, except per share data) Fiscal Year ------------------------------------- 2004 2003 2002 ------ ------ ------ Food and beverage revenues.................................. $ 479,741 $ 433,952 $ 400,119 Games and merchandise revenues.............................. 245,088 217,261 198,466 Franchise fees and royalties................................ 3,220 3,335 3,188 Interest income, including related party income of $404 in 2002.......................................... 30 50 428 --------- --------- --------- 728,079 654,598 602,201 --------- --------- --------- Costs and expenses: Cost of sales: Food, beverage and related supplies................... 89,228 79,982 73,690 Games and merchandise ................................ 30,395 28,234 25,490 Labor................................................. 200,554 181,789 167,177 --------- --------- --------- 320,177 290,005 266,357 Selling, general and administrative expenses............. 86,471 83,024 74,143 Depreciation and amortization............................ 55,771 49,502 43,951 Interest expense......................................... 2,486 2,194 1,680 Other operating expenses................................. 129,409 119,775 108,498 --------- --------- --------- 594,314 544,500 494,629 --------- --------- --------- Income before income taxes.................................. 133,765 110,098 107,572 Income taxes................................................ 51,233 42,717 41,772 --------- --------- --------- Net income.................................................. 82,532 67,381 65,800 Other comprehensive income, net of tax: Foreign currency translation............................. 781 786 87 --------- --------- --------- Comprehensive income........................................ $ 83,313 $ 68,167 $ 65,887 ========= ========= ========= Earnings per share: Basic: Net income ............................................. $ 2.22 $ 1.70 $ 1.58 ========= ========= ========= Weighted average shares outstanding...................... 37,251 39,654 41,511 ========= ========= ========= Diluted: Net income ............................................. $ 2.15 $ 1.66 $ 1.55 ========= ========= ========= Weighted average shares outstanding...................... 38,472 40,389 42,263 ========= ========= ========= See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Thousands, except per share data) Fiscal Year - Amounts Fiscal Year - Shares ------------------------------------- --------------------------------- 2004 2003 2002 2004 2003 2002 ------ ------ ------ ------ ------ ------ Common stock and capital in excess of par value: Balance, beginning of year............... $ 224,519 $ 205,503 $ 195,574 54,482 53,505 52,988 Stock options exercised.................. 18,853 14,588 6,367 1,063 960 506 Tax benefit from exercise of stock options ...................... 7,801 4,072 3,265 Stock issued under 401(k) plan........... 401 356 297 13 17 11 Payment for fractional shares............ (27) (1) --------- --------- --------- ------- ------- ------- Balance, end of year..................... 251,547 224,519 205,503 55,557 54,482 53,505 --------- --------- --------- ======= ======= ======= Retained earnings: Balance, beginning of year............... 350,735 283,516 218,035 Net income............................... 82,532 67,381 65,800 Redeemable preferred stock accretion..... (49) (95) Redeemable preferred stock dividend...... (113) (224) --------- --------- --------- Balance, end of year..................... 433,267 350,735 283,516 --------- --------- --------- Accumulated other comprehensive income (loss): Balance, beginning of year............... 695 (91) (178) Foreign currency translation............. 781 786 87 --------- --------- --------- Balance, end of year..................... 1,476 695 (91) --------- --------- --------- Treasury shares: Balance, beginning of year............... (211,626) (129,021) (97,230) 16,042 12,614 11,379 Treasury stock acquired.................. (113,934) (82,605) (31,791) 3,169 3,428 1,235 --------- --------- --------- ------- ------- ------- Balance, end of year..................... (325,560) (211,626) (129,021) 19,211 16,042 12,614 --------- --------- --------- ======= ======= ======= Total shareholders' equity.................. $ 360,730 $ 364,323 $ 359,907 ========= ========= ========= See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) Fiscal Year ------------------------------------- 2004 2003 2002 --------- --------- --------- Operating activities: Net income..................................................................... $ 82,532 $ 67,381 $ 65,800 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization .............................................. 55,771 49,502 43,951 Deferred income tax expense ................................................ 3,304 10,225 15,884 Tax benefit from exercise of stock options ................................. 7,801 4,072 3,265 Other....................................................................... 4,618 4,247 2,948 Net change in receivables, inventories, prepaids, payables and accrued liabilities......................................................... 4,242 17,790 1,731 Leasehold reimbursements from lessors.......................................... 7,567 5,513 2,816 --------- --------- --------- Cash provided by operations................................................. 165,835 158,730 136,395 --------- --------- --------- Investing activities: Purchases of property and equipment............................................ (80,131) (93,899) (110,952) Proceeds from dispositions of property and equipment........................... 791 Payments received on notes receivable.......................................... 2,201 Additions to notes receivable.................................................. (3,971) Change in other assets......................................................... (1,030) (327) (426) Sale of assets held for resale................................................. 462 --------- --------- --------- Cash used in investing activities........................................... (80,370) (94,226) (112,686) --------- --------- --------- Financing activities: Proceeds from debt and line of credit.......................................... 47,000 48,700 52,375 Payments on debt and line of credit............................................ (34,227) (46,818) (42,171) Redeemable preferred stock dividends........................................... (113) (224) Acquisition of treasury stock................................................. (113,934) (82,605) (31,791) Exercise of stock options...................................................... 18,853 14,588 6,367 Redemption of preferred stock.................................................. (2,795) Other.......................................................................... 574 392 267 --------- --------- --------- Cash used in financing activities........................................... (81,734) (68,651) (15,177) --------- --------- --------- Increase (decrease) in cash and cash equivalents.................................. 3,731 (4,147) 8,532 Cash and cash equivalents, beginning of year...................................... 8,067 12,214 3,682 --------- --------- --------- Cash and cash equivalents, end of year............................................ $ 11,798 $ 8,067 $ 12,214 ========= ========= ========= See notes to consolidated financial statements.
CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies: Operations: CEC Entertainment, Inc. and its subsidiaries (the "Company") operates and franchises family restaurant/entertainment centers as Chuck E. Cheese's restaurants. Fiscal year: The Company's fiscal year is 52 or 53 weeks and ends on the Sunday nearest December 31. References to 2004, 2003 and 2002 are for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002, respectively. Fiscal year 2004 consisted of 53 weeks, and 2003 and 2002 each consisted of 52 weeks. Basis of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated financial statements also include the accounts of the International Association of CEC Entertainment, Inc. (the "Association"), an entity in which the Company has variable interests and the Company is considered the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. Foreign currency translation: The consolidated financial statements are presented in U.S. dollars. The assets and liabilities of the Company's Canadian subsidiary are translated to U.S. dollars at year-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments that result from translating amounts are reported as a component of other comprehensive income. Cash and cash equivalents: Cash and cash equivalents of the Company are composed of demand deposits with banks and short-term cash investments with remaining maturities of three months or less from the date of purchase by the Company. Inventories: Inventories of food, paper products, merchandise and supplies are stated at the lower of cost on a first-in, first-out basis or market. Property and equipment, depreciation and amortization: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided by charges to operations over the estimated useful lives of the assets by the straight-line method, generally ranging from four to 20 years for furniture, fixtures and equipment and 40 years for buildings. Leasehold improvements are amortized by the straight-line method over the lesser of the lease term, including renewal option periods provided for in the lease that are reasonably assured, or the estimated useful lives of the related assets. The Company uses a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonably assured ) when calculating depreciation of leasehold improvements and in determining straight-line rent expense and classification of its leases as either an operating lease or a capital lease. All pre-opening costs are expensed as incurred. The Company evaluates long-lived assets held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The carrying amount of long-lived assets is not recoverable if it exceeds the sum of associated undiscounted future cash flows. The amount of any impairment is measured as the excess of the carrying amount over associated discounted future operating cash flows. Assets held for sale are reported at the lower of carrying amount or the fair value less estimated costs to sell. Deferred Rent: The Company recognizes rent expense by the straight-line method over the lease term, including lease renewal option periods that can be reasonably assured at the inception of the lease. The lease term commences on the date when the Company takes possession and has the right to control use of the leased premises. Also, funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction of rent expense. Fair Value of Financial Instruments: The Company has certain financial instruments consisting primarily of cash equivalents, notes receivable and notes payable. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The carrying amount of the Company's notes receivable and long-term debt approximates fair value based on the interest rates charged on instruments with similar terms and risks. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Summary of significant accounting policies (continued): Stock-Based Compensation: The Company accounts for its stock-based compensation under the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations ("APB 25"), and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). Under APB 25, no stock-based compensation cost is reflected in net income for grants of stock options to employees because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant. Had compensation cost for the Company's stock option plans been determined based on the fair value method at the grant date for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's pro forma net income and earnings per share would have been as follows (thousands, except per share data):
2004 2003 2002 -------- -------- -------- Net income, as reported .................................... $ 82,532 $ 67,381 $ 65,800 Fair value based compensation expense, net of taxes......... (5,776) (6,507) (6,439) -------- -------- -------- Pro forma net income........................................ $ 76,756 $ 60,874 $ 59,361 ======== ======== ======== Earnings per Share: Basic: As reported.............................................. $ 2.22 $ 1.70 $ 1.58 Pro forma................................................ $ 2.06 $ 1.53 $ 1.42 Diluted: As reported.............................................. $ 2.15 $ 1.66 $ 1.55 Pro forma................................................ $ 2.00 $ 1.50 $ 1.40
For the pro forma calculations above, the estimated fair value of options granted was $9.93, $6.32 and $9.79 per share in 2004, 2003 and 2002, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: risk free interest rate of 3.00%, 3.10% and 4.34% in 2004, 2003 and 2002, respectively; no dividend yield; expected lives of five years; and expected volatility of 30%. Franchise fees and royalties: Franchise fees are recognized upon fulfillment of all significant obligations to the franchisee. At January 2, 2005, 46 Chuck E. Cheese's restaurants were operated by a total of 26 different franchisees. The standard franchise agreements grant to the franchisee the right to construct and operate a restaurant and use the associated trade names, trademarks and service marks within the standards and guidelines established by the Company. Royalties from franchisees are accrued as earned. Franchise fees included in revenues were $160,000, $281,000, and $240,000 in 2004, 2003 and 2002, respectively. Advertising costs: Production costs for commercials are expensed in the year in which the commercials are initially aired. All other advertising costs are expensed as incurred. The total amounts charged to advertising expense were approximately $26.1 million, $24.6 million and $24.4 million in 2004, 2003 and 2002, respectively. Self-Insurance Accruals: The Company self-insures a significant portion of expected losses under its workers' compensation, employee medical and general liability programs. Accrued liabilities have been recorded based on the Company's estimates of the ultimate costs to settle incurred claims, both reported and unreported. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Summary of significant accounting policies (continued): Use of estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), "Share-Based Payment." SFAS 123(R) is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all share-based payments to employees including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123 (R) is effective at the beginning of the first interim or annual period beginning after June 15, 2005. Under APB Opinion No. 25, no stock-based compensation cost has been reflected in the net income of the Company for grants of stock options to employees. Beginning in the third quarter of 2005, the Company is required to recognize compensation expense in its financial statements based on the fair value of all share-based payments to employees. Reclassifications: Certain reclassifications of 2003 and 2002 amounts have been made to conform to the 2004 presentation. 2. Accounts receivable: 2004 2003 -------- -------- (thousands) Trade...................................... $ 4,645 $ 2,414 Tax receivables............................ 1,873 Vendor rebates............................. 3,096 3,638 Leasehold reimbursements from lessors...... 4,139 3,481 Other...................................... 1,602 1,697 -------- -------- $ 13,482 $ 13,103 ======== ======== 3. Property and equipment:
2004 2003 --------- --------- (thousands) Land............................................................. $ 42,661 $ 40,357 Leasehold improvements........................................... 355,230 317,578 Buildings ....................................................... 52,590 49,305 Game, restaurant and other equipment............................. 357,185 328,369 Property leased under capital leases (Note 6).................... 13,512 12,562 --------- --------- 821,178 748,171 Less accumulated depreciation and amortization................... (276,724) (230,816) --------- --------- Net property and equipment in service........................ 544,454 517,355 Construction in progress......................................... 7,992 7,547 Game and restaurant equipment held for future service............ 10,635 13,854 --------- --------- $ 563,081 $ 538,756 ========= =========
CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Accrued liabilities and accrued insurance: 2004 2003 -------- -------- (thousands) Current: Salaries and wages.......................... $ 12,680 $ 8,665 Insurance................................... 9,879 7,888 Taxes, other than income.................... 6,453 5,668 Income taxes................................ 2,926 2,804 Other....................................... 4,391 3,585 -------- -------- $ 36,329 $ 28,610 ======== ======== Long-term: Insurance .................................. $ 10,856 $ 8,500 ======== ======== Accrued insurance liabilities represent estimated claims incurred but unpaid under the Company's self-insured retention programs for general liability, workers compensation, health benefits and certain other insured risks. 5. Long-term debt: 2004 2003 -------- -------- (thousands) Revolving bank loan, prime or LIBOR plus 0.75% to 1.5%, due December 2005 ........... $ 77,800 $ 64,400 Obligations under capital leases (Note 6)............ 12,152 11,359 -------- -------- 89,952 75,759 Less current portion................................. (78,279) (554) -------- -------- $ 11,673 $ 75,205 ======== ======== The Company has available borrowings under the line of credit of $132.5 million. Interest under the line of credit is payable at rates which are dependent on earnings and debt levels of the Company. Currently, any borrowings under this line of credit would be at prime (5.00% at January 2, 2005) or, at the Company's option, LIBOR (2.42% at January 2, 2005) plus 0.75%. A 0.2% commitment fee is payable on any unused credit line. The Company is required to comply with certain financial ratio tests during the terms of the loan agreement. The weighted average interest rate on the revolving bank loan was 2.3% and 2.0% in 2004 and 2003, respectively. The Company capitalized interest costs of $56,000, $77,000 and $176,000 in 2004, 2003 and 2002, respectively related to the construction of new restaurants. The Company intends to extend the maturity date of its revolving bank loan. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Commitments and contingencies: The Company leases certain restaurants and related property and equipment under operating and capital leases. All leases require the Company to pay property taxes, insurance and maintenance of the leased assets. The leases generally have initial terms of 10 to 20 years with various renewal options. Scheduled annual maturities of the obligations for capital and operating leases as of January 2, 2005, are as follows: Years Capital Operating - ----- -------- --------- (thousands) 2005................................................. $ 1,401 $ 56,026 2006................................................. 1,401 55,473 2007................................................. 1,401 53,733 2008................................................. 1,401 51,999 2009................................................. 1,401 50,611 2010-2028 (aggregate payments)....................... 12,876 485,496 -------- --------- Minimum future lease payments ....................... 19,881 $ 753,338 ========= Less amounts representing interest................... (7,729) -------- Present value of future minimum lease payments....... 12,152 Less current portion................................. (479) -------- Long-term capital lease obligation................... $ 11,673 ======== The Company's rent expense, including contingent rent based on a percentage of sales when applicable, is comprised of the following: 2004 2003 2002 -------- -------- -------- (thousands) Minimum................................ $ 62,191 $ 56,791 $ 52,096 Contingent............................. 430 291 330 -------- -------- -------- $ 62,621 $ 57,082 $ 52,426 ======== ======== ======== From time to time the Company is involved in litigation, most of which is incidental to its business. In the Company's opinion, no litigation to which the Company currently is a party is likely to have a material adverse effect on the Company's results of operations, financial condition or cash flows. In September 2003, the Company recorded a charge to selling, general and administrative expense of $4.25 million related to the settlement agreed to on September 29, 2003, which was subject to court approval, in a class action wage and hour lawsuit filed in the State of California. The settlement amount has been paid in full by the Company. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Income taxes: The significant components of income tax expense are as follows:
2004 2003 2002 -------- -------- -------- (thousands) Current expense: Federal............................................ $ 33,761 $ 23,430 $ 18,571 State.............................................. 6,167 4,810 3,854 Foreign............................................ 200 180 198 Tax benefit from exercise of stock options ........... 7,801 4,072 3,265 -------- -------- -------- Total current expense.............................. 47,929 32,492 25,888 Deferred expense: Federal............................................ 3,192 9,497 14,068 State.............................................. 112 728 1,816 -------- -------- -------- Total temporary differences .................... 3,304 10,225 15,884 -------- -------- -------- $ 51,233 $ 42,717 $ 41,772 ======== ======== ========
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The income tax effects of temporary differences which give rise to deferred income tax assets and liabilities are as follows: 2004 2003 -------- -------- (thousands) Current deferred tax asset: Accrued vacation................................ $ 973 $ 894 Unearned gift certificates ..................... 695 498 Other........................................... 95 95 -------- -------- $ 1,763 $ 1,487 Non-current deferred tax asset (liability): Deferred rent................................. $ 20,462 $ 16,607 Unearned franchise fees......................... 153 91 Depreciation.................................... (60,364) (50,120) Foreign......................................... (760) (479) Insurance....................................... 3,263 Other........................................... 817 1,052 -------- -------- $(36,429) $(32,849) ======== ======== A reconciliation of the statutory rate to taxes provided is as follows: 2004 2003 2002 ------ ------ ------ Federal statutory rate........................ 35.0% 35.0% 35.0% State income taxes, net of federal benefit.... 3.3% 3.3% 3.9% Other......................................... .5% (.1)% ----- ----- ----- Effective tax rate............................ 38.3% 38.8% 38.8% ===== ===== ===== CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. 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. The redeemable preferred stock was fully redeemed in 2003. Earnings per common and potential common shares (retroactively adjusted for a three-for-two stock split effective March 15, 2004) were computed as follows (thousands, except per share data):
2004 2003 2002 -------- -------- -------- Net income................................................ $ 82,532 $ 67,381 $ 65,800 Accretion of redeemable preferred stock................... (49) (95) Redeemable preferred stock dividends...................... (113) (224) -------- -------- -------- Net income applicable to common shares.................... $ 82,532 $ 67,219 $ 65,481 ======== ======== ======== Basic: Weighted average common shares outstanding............. 37,251 39,654 41,511 ======== ======== ======== Earnings per common share.............................. $ 2.22 $ 1.70 $ 1.58 ======== ======== ======== Diluted: Weighted average common shares outstanding............. 37,251 39,654 41,511 Potential common shares for stock options.............. 1,221 735 752 -------- -------- -------- Weighted average shares outstanding.................... 38,472 40,389 42,263 ======== ======== ======== Earnings per common and potential common shares........ $ 2.15 $ 1.66 $ 1.55 ======== ======== ========
Antidilutive stock options to purchase 5,175; 1,143,144; and 1,181,851 common shares were not included in the EPS computations in 2004, 2003 and 2002, respectively, because the exercise prices of these options were greater than the average market price of the common shares. 9. Employee benefit plans: The Company has employee benefit plans that include: a) incentive bonus compensation plans based on the performance of the Company; b) non-statutory stock option plans for its employees and non-employee directors, c) restricted stock plan for employees; and d) a retirement and savings plan. In 1997, the Company adopted an employee stock option plan under which 10,781,250 shares, as amended in 2004, may be granted before July 31, 2007. The exercise price for options granted under the plan may not be less than the fair market value of the Company's common stock at date of grant. Options may not be exercised until the employee has been continuously employed at least one year after the date of grant. Options which expire or terminate may be re-granted under the plan. Options which have been granted under the plan cannot be re-priced with shareholder approval. In 1995, the company adopted a stock option plan for its non-employee directors. Per an amendment to the plan in 2004, the number of shares of the Company's common stock that may be issued under this plan can not exceed 437,500. The exercise price for options granted under this plan may not be less than the fair market value of the Company's common stock at the date of grant. Options which expire or terminate may be regranted under the plan. Each non-employee director is entitled to an option to purchase 7,500 shares of common stock in January of each year, and a non-employee director is granted an option to purchase 15,000 shares of common stock upon becoming a board member. Options may not be exercised until the non-employee director has served on the Board of Directors for at least two years after the date of grant. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. Employee benefit plans (continued): In May 2004, the Company adopted an employee restricted stock plan under which 500,000 shares may be granted before December 31, 2014. The price of the shares awarded under the plan shall be equal to the fair market value of such shares on the date of grant. All shares awarded shall provide for a vesting period of at least one year and no more than five years. Shares issued under a restricted stock award are nontransferable and subject to the forfeiture restrictions. Shares which expire or terminate may be re-granted under the plan. At January 2, 2005, there were 2,952,683 shares available for future grants under the employee and non-employee directors stock option plans. Stock option transactions are summarized as follows for all plans:
Weighted Average Number of Shares Exercise Price Per Share ---------------------------------------- ------------------------------- 2004 2003 2002 2004 2003 2002 ---------- ---------- ---------- ------- ------- ------- Options outstanding, beginning of year 5,598,311 4,538,213 3,975,917 $ 21.09 $ 20.42 $ 16.84 Granted ....................... 641,671 2,264,756 1,188,449 31.90 19.98 28.97 Exercised...................... (1,063,029) (959,861) (506,484) 17.74 15.20 12.57 Terminated..................... (89,900) (244,797) (119,669) 25.29 21.53 19.61 ---------- ---------- ---------- Options outstanding, end of year 5,087,053 5,598,311 4,538,213 23.08 21.09 20.42 ========== ========== ==========
Options outstanding at January 2, 2005:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------- ------------------------------- Shares Weighted Avg. Weighted Shares Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices as of 1/2/05 Life (Years) Exercise Price as of 1/2/05 Exercise Price - ----------------- ------------ ------------- -------------- ------------ -------------- $ 9.70 - $ 17.38 633,266 2.0 $ 15.19 558,266 $15.15 $ 18.21 - $ 19.99 1,900,200 5.1 19.98 377,711 19.96 $ 20.83 - $ 24.39 958,049 3.1 22.67 685,714 22.67 $ 25.10 - $ 29.79 972,182 4.1 29.00 445,196 29.01 $ 30.41 - $ 37.07 623,356 6.2 31.92 4,857 33.65 ---------- ---------- $ 9.70 - $ 37.07 5,087,053 4.3 23.08 2,071,744 21.53 ========== ==========
Stock options expire from five to seven years from the grant date. Stock options vest over various periods ranging from one to four years. Through March 7, 2005, the Company has granted 896,269 additional options to employees at an exercise price of $36.66 per share and 52,500 options to its non-employee directors at exercise prices of $36.66 to $38.86 per share. The Company has adopted the CEC 401(k) Retirement and Savings Plan, to which it may at its discretion make an annual contribution out of its current or accumulated earnings. Contributions by the Company may be made in the form of its common stock or in cash. At January 2, 2005, 20,662 shares remained available for grant under the plan. The Company made contributions of approximately $400,766 and $356,000 in common stock for the 2003 and 2002 plan years, respectively. The Company accrued $455,000 for contributions for the 2004 plan year which will be paid in common stock in 2005. CEC ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Supplemental cash flow information: 2004 2003 2002 ------ ------ ------ (thousands) Cash paid during the year for: Interest................................. $ 2,458 $ 2,226 $ 1,695 Income taxes ............................ 40,248 25,773 26,936 11. Quarterly results of operations (unaudited): The following summarizes the unaudited quarterly results of operations in 2004 and 2003 (thousands, except per share data).
Fiscal year ended January 2, 2005 --------------------------------------------------- March 28 June 27 Sept. 26 Jan. 2 --------- --------- --------- --------- Revenues....................................... $ 206,948 $ 165,424 $ 183,622 $ 172,085 Income before income taxes..................... 50,945 23,363 34,222 25,235 Net income..................................... 31,433 14,416 21,114 15,569 Earnings Per Share: Basic ...................................... $ .82 $ .38 $ .57 $ .43 Diluted .................................... .79 .37 .56 .41
Fiscal year ended December 28, 2003 --------------------------------------------------- March 30 June 29 Sept. 28 Dec. 28 --------- --------- --------- --------- Revenues....................................... $ 184,126 $ 152,885 $ 170,138 $ 147,449 Income before income taxes..................... 43,385 22,726 26,122 17,865 Net income..................................... 26,552 13,908 15,987 10,934 Earnings Per Share: Basic ...................................... $ .65 $ .34 $ .41 $ .28 Diluted .................................... .64 .34 .40 .28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None Item 9A. Controls and Procedures MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND MANAGEMENT'S 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. Such restatements were completed and amended reports were filed with the SEC on March 18, 2005. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: - pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; - provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and - provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of January 2, 2005. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the Public Company Accounting Oversight Board's Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, restatement of financial statements in prior filings with the Securities and Exchange Commission is a strong indicator of the existence of a "material weakness" in the design or operation of internal control over financial reporting. As of January 2, 2005, the Company has concluded that, because its historical financial statements required restatement as a result of the lease accounting error described above, a material weakness existed in the Company's internal control over financial reporting as of the date of this report and, to this extent, its internal control over financial reporting was not effective. The Company's independent registered accounting firm has issued an attestation report on the Company's assessment of the Company's internal control over financial reporting. This report appears below. The Company also 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 January 2, 2005 in ensuring that material information relating to the Company, including its consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with correcting its lease accounting methodology, the Company has instituted the following procedures to remediate this material weakness: - use of a consistent lease period (generally, the initial non-cancelable lease term plus 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. During the evaluation the Company has identified no change in its internal control over financial reporting that occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. INDEPENDENT AUDITORS' ASSESSSMENT OF MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors and Shareholders CEC Entertainment, Inc. Irving, Texas We have audited management's assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that CEC Entertainment, Inc. and subsidiaries (the "Company") did not maintain effective internal control over financial reporting as of January 2, 2005, because of the effect of the Company's insufficient controls over the selection and monitoring of appropriate assumptions and factors affecting lease accounting based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO control criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more that a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management's assessment: In its assessment as of January 2, 2005, management identified as a material weakness the Company's insufficient controls over the selection and monitoring of appropriate assumptions and factors affecting lease accounting. As a result of this material weakness in internal control, the Company concluded that its previously reported annual depreciation expense and rent expense had been understated and that previously issued financial statements should be restated. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 financial statement, and this report does not affect our report on such financial statements. In our opinion, management's assessment that the Company did not maintain effective internal control over financial reporting as of January 2, 2005, is fairly stated, in all material respects, based on the COSO control criteria. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objective of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 2, 2005, based on the COSO control criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 2, 2005 of the Company and our report dated March 18, 2005 expressed an unqualified opinion on those financial statements. DELOITTE & TOUCHE LLP Dallas, Texas March 18, 2005 Item 9B. Other Information None. P A R T I I I Item 10. Directors and Executive Officers of the Registrant The information required by this item regarding the directors and executive officers of the Company is incorporated by reference to and will be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 2005 annual meeting of stockholders. The Company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers (the "Code of Ethics") that applies to the principal executive officer, principal financial officer and principal accounting officer. Changes to and waivers granted with respect to the Code of Ethics related to the above named officers required to be disclosed pursuant to applicable rules and regulations will also be posted on the Company's website at www.chuckecheese.com. Item 11. Executive Compensation The information required by this item regarding the directors and executive officers of the Company is incorporated by reference to and will be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 2005 annual meeting of stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference to and will be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with Company's 2005 annual meeting of stockholders. Item 13. Certain Relationships and Related Transactions The information required by this Item regarding the directors and executive officers of the Company is incorporated by reference to and will be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 2005 annual meeting of stockholders. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated by reference to and will be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 2004 annual meeting of stockholders. P A R T I V Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as a part of this report: (1) Financial Statements and Supplementary Data: Report of independent registered public accounting firm. CEC Entertainment, Inc. consolidated financial statements: Consolidated balance sheets as of January 2, 2005 and December 28, 2003. Consolidated statements of earnings and comprehensive income for the years ended January 2, 2005, December 28, 2003 and December 29, 2002. Consolidated statements of shareholders' equity for the years ended January 2, 2005, December 28, 2003 and December 29, 2002. Consolidated statements of cash flows for the years ended January 2, 2005, December 28, 2003 and December 29, 2002. Notes to consolidated financial statements. (2) Exhibits: Number Description - ------ ----------- 3(a)(1) Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1999, and incorporated herein by reference). 3(b)(1) Restated Bylaws of the Company, dated August 16, 1994 (filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and incorporated herein by reference). 3(b)(2) Amendment to the Bylaws, dated May 5, 1995 (filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). 4(a) Specimen form of certificate representing $.10 par value Common Stock (filed as Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended December 28, 1990, and incorporated herein by reference). 10(a) 2001 Employment Agreement dated November 13, 2000, between the Company and Richard M. Frank (filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 30, 2000, and incorporated herein by reference). 10(b) Employment Agreement, dated May 8, 2001, between Michael H. Magusiak and the Company (filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended April 1, 2001, and incorporated herein by reference). 10(c)(1) Credit Agreement, in the stated amount of $100,000,000, dated December 3, 2002, between Showbiz Merchandising, L.P., Company, Bank of America, Bank One, U.S. Bank National Association, Fleet National Bank, and the other Lenders (filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 29, 2002, and incorporated herein by reference). 10(c)(2) First Amendment to Credit Agreement, in the stated amount of $100,000,000, dated February 28, 2003, between Showbiz Merchandising, L.P., Company, Bank of America, Bank One, U.S. Bank National Association, Fleet National Bank, and the other Lenders (filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, and incorporated herein by reference). 10(c)(3) Second Amendment to Credit Agreement, in the stated amount of $100,000,000, dated July 16, 2003, between Showbiz Merchandising, L.P., Company, Bank of America, Bank One, U.S. Bank National Association, Fleet National Bank, and the other Lenders (filed as Exhibit 10(_) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, and incorporated herein by reference). 10(c)(4) Third Amendment to Credit Agreement, in the stated amount of $132,500,000, dated August 27, 2003, between CEC Entertainment Concepts, L.P. (f/k/a Showbiz Merchandising, L.P.), Company, Bank of America, Bank One, U.S. Bank National Association, Fleet National Bank, and the other Lenders. 10(c0(5) Fourth Amendment to Credit Agreement in the stated amount of $135,000,000, dated August 10, 2004, between Bank of America, N.A. and the Company (filed as Exhibit 10(a) to the Company's Quarterly Report of Form 10-Q for the Quarter ended on September 26, 2004, and incorporated herein by reference). 10(d)(1) 1997 Non-Statutory Stock Option Plan (filed as Exhibit 4.1 to the Company's Form S-8 (No. 333-41039), and incorporated herein by reference). 10(d)(2) Specimen form of Contract under the 1997 Non-Statutory Stock Option Plan of the Company, as amended to date (filed as Exhibit 10(o)(2) to the Company's Annual Report on Form 10-K for the year ended January 2, 1998, and incorporated herein by reference). 10(e)(1) Non-Employee Directors Stock Option Plan (filed as Exhibit B to the Company's Proxy Statement for Annual Meeting of Stockholders to be held on June 8, 1995, and incorporated herein by reference). 10(e)(2) Specimen form of Contract under the Non-Employee Directors Stock Option Plan of the Company, as amended to date (filed as Exhibit 10(s)(2) to the Company's Annual Report on Form 10-K for the year ended December 27, 1996, and incorporated herein by reference). 10(f)(1) Specimen form of the Company's current Franchise Agreement (filed as Exhibit 10(a)(1) to the Company's Form 8-K (No. 0000813920-04-000021), and incorporated herein by reference). 10(f)(2) Specimen form of the Company's current Development Agreement (filed as Exhibit 10(a)(2) to the Company's Form 8-K (No. 0000813920-04-000021), and incorporated herein by reference). 10(g) Rights Agreement, dated as on November 19, 1997, by and between the Company and the Rights Agent (filed as Exhibit A to Exhibit 1 of the Company's Registration Statement on Form 8-A (No. 001-13687) and incorporated herein by reference). 10(h) 2004 Restricted Stock Plan (filed as Exhibit 4.1 to the Company's Form S-8 (No. 333-119232), and incorporated herein by reference). 23 Consent of Independent Registered Public Accounting Firm. 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 fourth quarter and to present, we filed or furnished the following reports on Form 8-K: A current report on Form 8-K, dated October 14, 2004, containing a press release on October 14, 2004. A current report on Form 8-K, dated February 2, 2005, containing a press release on February 1, 2005. A current report on Form 8-K, dated March 2, 2005, containing a press release on March 2, 2005. A current report on Form 8-K, dated March 9, 2005, containing a press release on March 9, 2005. (c) Exhibits pursuant to Item 601 of Regulation S-K: Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded from the exhibits filed pursuant to this report instruments defining the right of holders of long-term debt of the Company where the total amount of the securities authorized under each such instrument does not exceed 10% of the total assets of the Company. The Company hereby agrees to furnish a copy of any such instruments to the Commission upon request. (d) Financial Statements excluded from the annual report to shareholders by Rule 14A - 3(b): No financial statements are excluded from the annual report to the Company's shareholders by Rule 14a - 3(b). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 18, 2005 CEC Entertainment, Inc. By: /s/ Richard M. Frank --------------------------- Richard M. Frank Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Richard M. Frank Chairman of the Board, March 18, 2005 - -------------------------- Chief Executive Officer, Richard M. Frank and Director (Principal Executive Officer) /s/ Christopher D. Morris Senior Vice President, March 18, 2005 - -------------------------- Chief Financial Officer Christopher D. Morris (Principal Financial Officer) /s/ James Mabry Vice President, Controller March 18, 2005 - -------------------------- and Treasurer James Mabry (Principal Accounting Officer) /s/ Michael H. Magusiak President and Director March 18, 2005 - -------------------------- Michael H. Magusiak /s/ Richard T. Huston Director March 18, 2005 - -------------------------- Richard T. Huston /s/ Larry T. McDowell Director March 18, 2005 - -------------------------- Larry T. McDowell /s/ Tim T. Morris Director March 18, 2005 - -------------------------- Tim T. Morris /s/ Louis P. Neeb Director March 18, 2005 - -------------------------- Louis P. Neeb /s/ Cynthia I. Pharr Lee Director March 18, 2005 - -------------------------- Cynthia I. Pharr Lee /s/ Walter Tyree Director March 18, 2005 - -------------------------- Walter Tyree /s/ Raymond E. Wooldridge Director March 18, 2005 - -------------------------- Raymond E. Wooldridge EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23 Independent Registered Public Accounting Firm, Deloitte & Touche LLP 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 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-23 2 ex23k2004.txt AUDITOR'S CONSENT CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-103572 of ShowBiz Pizza Time, Inc. on Form S-8 of our reports dated March 18, 2005, relating to the financial statements of CEC Entertainment, Inc. and management's report on the effectiveness of internal control over financial reporting appearing in this Annual Report on Form 10-K of CEC Entertainment, Inc. for the year ended January 2, 2005. /s/ Deloitte & Touche, LLP Dallas, Texas March 18, 2005 EX-31 3 ex311k2004.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a - 14(a)/15d-14(a) (CHIEF EXECUTIVE OFFICER) I, Richard M. Frank, certify that: 1. I have reviewed this annual report on Form 10-K of CEC Entertainment, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation ; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting;and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 18, 2005 /s/ Richard M. Frank --------------------------- Richard M. Frank Chief Executive Officer EX-31 4 ex312k2004.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13a - 14(a)/15d-14(a) (CHIEF FINANCIAL OFFICER) I, Christopher D. Morris, certify that: 1. I have reviewed this annual report on Form 10-K of CEC Entertainment, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation ; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 18, 2005 /s/ Christopher D. Morris ------------------------------ Christopher D. Morris Chief Financial Officer EX-32 5 ex321k2004.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of CEC Entertainment, Inc. (the "Company") on Form 10-K for the year ended January 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard M. Frank --------------------------- Richard M. Frank Chief Executive Officer March 18, 2005 A signed original of this written statement required by Section 906 has been provided to CEC Entertainment, Inc. and will be retained by CEC Entertainment, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 6 ex322k2004.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of CEC Entertainment, Inc. (the "Company") on Form 10-K for the year ended January 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Christopher D. Morris Christopher D. Morris Chief Financial Officer March 18, 2005 A signed original of this written statement required by Section 906 has been provided to CEC Entertainment, Inc. and will be retained by CEC Entertainment, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----