A n n u Al R e p oR t
focused on the
road ahead
cec entertainment, inc.
nothing beats the smiles and laughter of a child. multiply that times one hundred thousand and, well, you get
the picture. at chuck e. cheese’s, our business is always rewarding, and fun is plentiful every day.
it starts the moment you walk in the door. the music plays, the lights go up, and almost magically you’re
greeted by the “big guy” himself, chuck e. cheese. From our roots 31 years ago as a pizza and playland arcade,
we’ve evolved into a national brand of 542 family-friendly dining and entertainment centers strategically
located in major markets across the country. today, the company and its franchisees operate chuck e. cheese’s
stores in 48 states and six foreign countries.
rOaDmaP tO SUcceSS
By many measures 2008 was an excellent year for our
company; however, it was not a year without challenges.
From a top-line perspective, unprecedented changes in
the economy and capital markets affected every consumer
and business across the nation, adding significant pressure
to consumer disposable income. In the Fall, we lost 265
store operating days from store closures during hurricanes
Gustav and Ike.
During 2008 we developed and executed strategies that
positioned the company for success despite an increas-
ingly difficult operating and economic environment. Our
ability to execute these strategies while maintaining a
sharp focus on customer service and cost controls at the
store level, and our significant share repurchase program,
resulted in an increase in comparable store sales of 2.3%
and diluted earnings per share increased 35%.
To generate these results we implemented a number of
sales initiatives:
• We developed a strong capital plan for existing stores,
which involved new games, and in some cases a new look
and additional square footage;
• We created multiple strategies to improve birthday party
sales, which included improved operational execution
at the store level, the promotion of birthday parties on
TV and the web, and a reconfiguration of the birthday
party package aimed at increasing average guest check;
• We implemented an internal suggestive selling program
and introduced new products to grow average guest
check;
• We focused on increasing school fundraising events to
drive sales during the off-peak period; and
• We initiated a multi-media marketing plan aimed at
capturing the attention of moms, as well as promoting
to kids the fun and excitement of the Chuck E. Cheese’s
experience. This multi-media marketing plan included
a significant online component.
cOnStrUctiOn aHeaD
This year we invested approximately $50 million on existing
store capital expenditures, which positively impacted 160
stores or 35 percent of our comparable store base. The plan
included 15 major remodels, 20 store expansions and 125
store game enhancements. The improvements consisted of
reconfiguring existing space – enlarging some stores to add
an expansive game room and making stores brighter with
more open areas for play. Game and ride enhancements
like the introduction of the new Deal or No Deal game, pat-
terned after the popular television show, and the Need for
Speed racing game are two big hits with our guests. What’s
more, our game and ride tokens are still 25 cents – the same
price they were 31 years ago, a testament to stores provid-
ing fun at an excellent value to our guests.
focused on fun
focused on family
Our capital initiatives continue to show strong results.
Our capital plan is enhanced by increasing the number
of store expansions because they produce the best
financial results. The incremental sales increase attribut-
able to these expansions remains strong and we believe
expansions and remodels not only protect our strong
cash flow, but also are instrumental in increasing it over
the long term.
least 10 percent. In teacher’s terms, we got an “A+”. Our
core stores fundraising sales increased 28% for the year.
We achieved this through an aggressive advertising cam-
paign to build awareness, and through increased training
by our own operators to book fundraising events. We
see this initiative gaining momentum next year, as
our operators’ mentality of booking week-day school
fundraisers continues to accelerate.
This year we opened five new stores and four franchise
operations. Our company development plan going for-
ward is to open primarily larger high volume stores in
densely populated markets.
BirtHDaY BOULeVarD Or PartY Lane
Birthdays are a big opportunity for growth. This year we
implemented a new system-wide birthday package in
the second quarter. This new birthday package includes
an expanded assortment of goodies including a limited
edition medallion, balloon bouquet, mini lunch box, 100
tickets, tokens, pizza and drinks, plus the chance to star
in the live birthday show.
Birthday sales rose approximately 10% during the year
and we anticipate continued increases next year as a
result of our concentrated focus and executional efforts
at the stores.
ramP UP
We embrace the creativity and dedication of all our
employees – they are, after all, at the epicenter of our oper-
ations. We also realize they are the experts when it comes
to finding ways to improve our business. This year we
implemented national programs to encourage suggestive
selling with the objective of increasing value meals, token
deals, birthday sales and food platters. Our team came
through with flying colors. We saw meaningful improve-
ment in sales trends in each of the targeted categories.
Based on these successes, we will continue to promote
similar programs next year and empower everyone
within the organization to take initiative, improve our
business and drive sales.
ScHOOL ZOne
In 2007 our fundraising sales totaled approximately $5.2
million, representing 0.7% of total sales. In 2008, we
established a goal of increasing this revenue source by at
BUiLDinG traFFic
A key initiative that we believe continues to positively
impact sales is our enhanced marketing plan directed
to moms and kids. Our 2008 plan incorporated the key
components of prior years, including a strong national
television campaign and distribution of free-standing
inserts supported with cross promotions. In addition, we
reintroduced our popular “Where A Kid Can Be A Kid”
campaign that has high brand recognition. We also
enhanced our advertising toward moms to reduce their
resistance for a visit with key messages in our TV
commercials. 2008 also debuted our first major effort to
promote our brand, our birthdays, and our value messages
via online advertising to moms.
LOOKinG aHeaD
In today’s market, Chuck E. Cheese’s can perform well
by executing our strategic plan, improving our business
model and aggressively pursuing our growth initiatives.
Our employees and franchisees have the passion and
drive to be better at what we do every day in meeting
our obligations to our guests, our suppliers and ulti-
mately you, our shareholders. We look forward to the
road ahead!
Sincerely,
Richard M. Frank
executive chaiRMan
Michael h. Magusiak
PResident & ce O
focused on safety
focused on value
B O a rD O F Di r e c t OrS
c OrP Or a t e i nF Or m a t iOn
Richard M. Frank
Executive Chairman
CEC Entertainment, Inc.
Richard t. huston
Executive Vice President
Marketing and Entertainment
CEC Entertainment, Inc.
Michael h. Magusiak
President and
Chief Executive Officer
CEC Entertainment, Inc.
Gen. tommy Franks (retired)
President
Franks & Associates, LLC
Larry t. Mcdowell
Retired Partner
Arthur Andersen, LLP
O F Fi c e rS
Richard M. Frank
Executive Chairman
Michael h. Magusiak
President and
Chief Executive Officer
John R. cardinale
Executive Vice President
Development and Purchasing
Gene F. cramm, Jr.
Executive Vice President
Games and Concept Evolution
Randy G. Forsythe
Executive Vice President
Director of Operations
Richard t. huston
Executive Vice President
Marketing and Entertainment
christopher d. Morris
Executive Vice President
Chief Financial Officer and Treasurer
Michael Beacham
Senior Vice President
Chief Operating Officer of
International Development
catherine R. Olivieri
Senior Vice President
Human Resources,
Risk Management and Benefits
Jay a. Young
Senior Vice President
General Counsel
Michael R. Boyko
Vice President
Operations, Western Region
tim t. Morris
President
Morris Capital Management, LLC
Louis P. neeb
President
Neeb Enterprises, Inc
cynthia Pharr Lee
President
C. Pharr & Company
Walter tyree
Regional Restaurant Vice President
CBRL Group, Inc
Raymond e. Wooldridge
Retired Vice Chairman
Southwest Securities Group, Inc
executive Offices
4441 West Airport Freeway
Irving, Texas 75062
972-258-8507
annual stockholder Meeting
April 28, 2009
8:00 A.M., central time
Chuck E. Cheese’s
3903 West Airport Freeway
Irving, Texas 75062
stock transfer agent and Registrar
Mailing Address:
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
www.computershare.com
stockholder services:
Telephone: 1-781-575-2879
Internet: www.computershare.com
daniel a. dickson
Vice President
Operations, Central Region
Joe W. elliott
Vice President
Research and Development
darin e. harper
Vice President
Controller
christie M. hill
Vice President
Operations Accounting
Michael h. Johnson
Vice President
Purchasing
don L. McKechnie
Vice President
Development
donald R. May
Vice President
Operations, Northern Region
ahmet M. Oner
Vice President
Management Information
Systems
Lois F. Perry
Vice President
Advertising
Mark P. Wallace
Vice President
Operations, Southeast Region
Meredith W. Bjorck
Secretary
stock Listing
The Company’s common stock is traded on the
New York Stock Exchange under the symbol “CEC.”
independent Registered Public
accounting Firm
Deloitte & Touche, LLP
2200 Ross Avenue
Suite 1600
Dallas, Texas 75201
10-K availability
The Company will furnish any stockholder, without
charge, a copy of the Company’s annual report filed
with the Securities and Exchange Commission on Form
10-K for the 2008 fiscal year (including the financial
statements and schedules thereto) upon written
request from the stockholder addressed to:
secretary
CEC Entertainment, Inc.
4441 West Airport Freeway
Irving, Texas 75062
ceO/cFO certifications
On June 23, 2008 the Company submitted its annual
Section 303A CEO Certification to the New York Stock
Exchange. The Company also filed the CEO and CFO
certifications required under Section 302 of the Sarbanes-
Oxley Act of 2002 with the Securities and Exchange
Commission as exhibits to its Annual Report on Form
10-K for the year ended December 28, 2008.
annual Report design
Squires & Company
www.squirescompany.com
The officers identified above are employed by
CEC Entertainment, Inc. and its subsidiaries.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2008
OR
(cid:2)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 001-13687
CEC ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Kansas
(State or other jurisdiction of incorporation or organization)
48-0905805
(IRS Employer Identification No.)
4441 West Airport Freeway
Irving, Texas
(Address of principal executive offices)
75062
(Zip Code)
(972) 258-8507
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.10 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:2) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:2) No ⌧
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 for 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 ⌧ No (cid:2)
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. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ⌧ Accelerated filer (cid:2) Non-accelerated filer (cid:2) (Do not check if a smaller reporting company)
Smaller reporting company (cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:2) No ⌧
As of June 27, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the
common stock beneficially held by non-affiliates of the registrant was $547,532,606. (For purposes hereof, directors, executive officers and 10% or
greater stockholders have been assumed to be affiliates).
As of February 9, 2009, an aggregate of 22,728,078 shares of the registrant’s common stock, par value $0.10 per share were outstanding.
Portions of the registrant's Definitive Proxy Statement, to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934 in
connection with the registrant's 2009 annual meeting of stockholders, are incorporated by reference in Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
CEC ENTERTAINMENT, INC.
TABLE OF CONTENTS
Forward-Looking Statements. ...........................................................................................
3
Page
PART I
ITEM 1. Business. ...........................................................................................................................
ITEM 1A. Risk Factors ......................................................................................................................
ITEM 1B. Unresolved Staff Comments .............................................................................................
ITEM 2. Properties ..........................................................................................................................
ITEM 3. Legal Proceedings .............................................................................................................
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities ......................................................................
ITEM 6. Selected Financial Data.....................................................................................................
ITEM 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations ..............................................................................................
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ..........................................
ITEM 8. Financial Statements and Supplementary Data .................................................................
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................................................................
ITEM 9A. Controls and Procedures ...................................................................................................
ITEM 9B. Other Information .............................................................................................................
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance ................................................
ITEM 11. Executive Compensation...................................................................................................
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters....................................................................................
ITEM 13. Certain Relationships and Related Transactions, and
Director Independence.............................................................................................
ITEM 14. Principal Accountant Fees and Services ...........................................................................
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.....................................................................
Signatures ..........................................................................................................................................
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9
13
14
15
16
17
19
20
35
36
59
59
59
60
60
60
60
60
60
61
2
Within this report, unless otherwise indicated, any use of the terms “CEC Entertainment,” the “Company,” “we,” “us” and “our”
refer to CEC Entertainment, Inc and its consolidated subsidiaries.
Forward-Looking Statements
Certain statements in this report, other than historical information, may be considered “forward-looking statements” within the
meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and are subject to various risks,
uncertainties and assumptions. Statements that are not historical in nature, and which may be identified by the use of words such as “may,”
“should,” “could,” “believe,” “predict,” “potential,” “continue,” “plan,” “intend,” “expect,” “anticipate,” “future,” “project,” “estimate” and
similar expressions (or the negative of such expressions) are forward-looking statements. Forward-looking statements are made based on
management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and
uncertainties, including the risk factors described in Item 1A “Risk Factors” of this Annual Report on Form 10-K. 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. Factors that could cause actual results to differ materially from those contemplated by forward-looking statements
include, but are not limited to:
• Changes in consumer discretionary spending and general economic conditions;
• Disruptions in the financial markets affecting the availability and cost of credit and our ability to maintain adequate insurance
coverage;
• Our ability to successfully implement our business development strategies;
• Costs incurred in connection with our business development strategies;
• Competition in both the restaurant and entertainment industries;
• Loss of certain key personnel;
•
Increases in food, labor and other operating costs;
• Changes in consumers’ health, nutrition and dietary preferences;
• Negative publicity concerning food quality, health, safety and other issues;
• Disruption of our commodity distribution system;
• Our dependence on a few global providers for the procurement of games and rides;
• Adverse affects of local conditions, events and natural disasters;
•
Fluctuations in our quarterly results of operations due to seasonality;
• Conditions in foreign markets;
• Risks in connection with owning and leasing real estate;
• Our ability to adequately protect our trademarks or other proprietary rights;
• Government regulations, litigation, product liability claims and product recalls;
• Disruptions of our information technology systems;
• Changes in financial accounting standards or our interpretations of existing standards; and
•
Failure to establish, maintain and apply adequate internal control over financial reporting.
The forward-looking statements made in this report relate only to events as of the date on which the statements were made. Except as
may be required by law, we undertake no obligation to update our forward-looking statements to reflect events and circumstances after the
date on which the statements were made or to reflect the occurrence of unanticipated events.
3
PART I
ITEM 1. Business
General
Chuck E. Cheese’s® is a nationally recognized leader in family dining and entertainment. CEC Entertainment, Inc. was incorporated
in the state of Kansas in 1980 and is engaged in the family dining and entertainment center business. We consider this to be our sole
operating segment.
Company Overview
We develop, operate and franchise family dining and entertainment centers under the name “Chuck E. Cheese’s” in 48 states and six
foreign countries or territories. Chuck E. Cheese's stores feature musical and comic entertainment by robotic and animated characters,
arcade-style and skill oriented games, video games, rides and other activities intended to appeal to our primary customer base of families
with children between two and 12 years of age. All of our stores offer dining selections consisting of a variety of beverages, pizzas,
sandwiches, appetizers, a salad bar, and desserts.
A portion of our revenue comes from sales of value-priced combination packages primarily consisting of food, beverage and game
tokens (“package deals”) which we promote through in-store menu pricing or coupon offerings. Package deals represent a significant value
to our customers because they are priced at an amount lower than our guests would pay if they were to purchase the packaged items
individually.
We believe that the dining and entertainment components of our business are interdependent, and therefore we primarily manage and
promote them as an integrated product. Our typical guest experience involves a combination of wholesome family dining and
entertainment, comprised of token-operated games and rides, and attractions provided free-of-charge. This integrated product drives our
business development strategies as we endeavor to drive guest traffic into our stores, benefiting both dining and entertainment revenue.
We opened our first location in March 1980. Currently, we and our franchisees operate a total of 541 Chuck E. Cheese's stores located
in 48 states and six foreign countries or territories. As of December 28, 2008, we operated 495 Company-owned Chuck E. Cheese’s stores
located in 44 states and Canada and our franchisees operated a total of 46 stores located in the United States, Puerto Rico, Guatemala,
Chile, Saudi Arabia, and the United Arab Emirates. See Item 2. “Properties” for more information regarding the number and location of
Chuck E. Cheese’s stores.
Financial information regarding our sole operating segment is presented in our consolidated financial statements included in Item 8.
“Financial Statements and Supplementary Data” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.”
Business Development Strategy
Our business development strategy is focused on maintaining and evolving our existing stores, developing high sales volume
Company-owned stores in primarily densely populated areas, and selling development rights to franchisees in markets we do not currently
intend to develop.
Existing Stores. We believe that in order to maintain consumer demand for and the appeal of our concept, we must continually
reinvest in our existing stores. For our existing stores, we currently utilize the following capital initiatives: (a) major remodels; (b) store
expansions; and (c) game enhancements. We believe these capital initiatives are essential to preserving our existing sales and cash flows
and provide a solid foundation for long term revenue growth.
We undertake periodic major remodels when there is a need to improve the overall appearance of a store or when we introduce
concept changes or enhancements to our stores. The major remodel initiative typically includes increasing the space allocated to the
playroom area of the store, increasing the number of games and rides and developing a new exterior and interior identity. We completed 15
major remodel initiatives in 2008. We currently expect to complete eight major remodels during 2009 at an average cost of approximately
$0.6 million to $0.7 million per store.
Store expansions improve the quality of the guests’ experience because it allows us to increase the variety of games, rides and other
entertainment offerings in our stores. In addition to expanding the square footage of a store, store expansions typically include all
components of a major remodel including an increase in the number of games and rides. A store expansion typically results in both an
increase in the store’s seat count and the space available for our various entertainment offerings. We completed 20 store expansions in
2008. We currently expect to complete approximately 25 store expansions during 2009 at an average cost of approximately $1.0 million per
store.
4
The primary components of the game enhancement initiative are to provide new games and rides. Game enhancements incorporate
improvements in game technology and counteract general wear and tear on the equipment. We completed 125 game enhancements in 2008.
We currently expect to enhance the games and rides at approximately 105 stores during 2009 at an average cost of approximately $100
thousand to $150 thousand per store.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information
regarding our capital initiatives and related capital expenditures.
New Company Store Development. Our plan for the development of new Company-owned stores focuses on opening high sales
volume stores in densely populated areas. During 2008, we added five new Company-owned stores, including one relocation, and we also
purchased two stores from a franchisee. The average square footage of the five new stores we opened in 2008 was approximately 14,000
square feet, representing approximately a 12% increase over the average square footage of new Company-owned stores we opened in 2007.
We currently project these stores will generate on average annual sales in excess of approximately $2.1 million per store representing
approximately a 30% increase over the comparable company store average of $1.6 million per store in 2008. We currently expect to open
approximately five new, including one relocated, Company-owned stores in 2009.
We periodically reevaluate the site characteristics of our stores and will consider relocating a store to a more desirable location in the
event certain site characteristics considered essential for the success of a store deteriorate or we are unable to negotiate acceptable lease
terms with the existing landlord.
New Domestic Franchise Store Development. We added four new franchise stores in 2008, and we currently expect to open two new
franchise stores in 2009.
During 2008, we sold the development rights for seven domestic franchise stores that have not opened yet. We are currently offering
the development rights for approximately 25 domestic franchise locations.
International Growth. We believe that we have an opportunity to further expand the Chuck E. Cheese’s concept globally. We are
currently in the early stages of developing a plan for international growth.
Store Design
Chuck E. Cheese's are typically located in shopping centers or in free-standing buildings near shopping centers and generally occupy
9,000 to 14,000 square feet in area, averaging approximately 11,500 square feet per store. Chuck E. Cheese’s stores are typically divided
into three areas: (1) a kitchen and related areas (cashier and prize area, salad bar, manager’s office, technician’s office, restrooms, etc.)
occupying approximately 35% of the space, (2) a showroom area occupying approximately 25% of the space, and (3) a playroom area
occupying approximately 40% of the space. Total table and chair seating in both the showroom and playroom areas is on average 325 to
425 guests per store. The showroom area of each Chuck E. Cheese's typically 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.
Food and Beverages
Each Chuck E. Cheese's offers a variety of pizzas, sandwiches, appetizers, a salad bar and desserts. Soft drinks, coffee and tea are also
served, along with beer and wine where permitted by local laws. We believe that the quality of our food compares favorably with that of
our competitors. The majority of the food, beverages and other supplies used in Company-owned stores are currently distributed under a
system-wide agreement with a major food distributor. We believe that this distribution system creates certain cost and operational
efficiencies for us.
Approximately 50.3%, 51.7% and 53.2% of our total revenues were derived from food and beverage sales during 2008, 2007 and
2006, respectively.
Entertainment
Each Chuck E. Cheese’s store generally includes a showroom area featuring musical entertainment presented by robotic and animated
characters and a family oriented playroom area offering arcade-style and skill oriented games, rides, video games and other forms of
entertainment. Tokens are used to activate the games and rides in the playroom area. The maximum price our customers may pay for a
game token is $0.25; however, we offer game tokens at reduced prices when purchased in large quantities or as part of a package deal
comprised of food, beverage and game tokens. On a limited basis, we may also provide game tokens to our customers free of charge with
the purchase of certain food and beverage items. A number of games dispense tickets that can be redeemed by guests for prize merchandise
such as toys and dolls. Also included in the playroom area of our stores are tubes and tunnels suspended from or reaching to the ceiling
known as SkyTubes® or other free attractions for young children. We place a limited amount of table and chair seating in the playroom
areas of our Company-owned store so that parents can observe their children as they play the games and ride the rides.
5
Approximately 49.2%, 47.9% and 46.4% of our total revenues were derived from entertainment and merchandise sales during 2008,
2007 and 2006, respectively.
Marketing
The primary customer base for our stores consists of families with children between two and 12 years of age. We conduct advertising
campaigns focused towards families with young children that feature the family entertainment experiences available at Chuck E. Cheese's
and are primarily aimed at increasing the frequency of customer visits. The primary advertising medium we use continues to be television,
due to its broad access to family audiences and our belief in its ability to effectively communicate the Chuck E. Cheese's experience. The
television advertising campaigns are supplemented by promotional offers in newspapers, cross promotions with companies that target a
similar customer base, our Web site, Internet advertising campaigns and direct e-mail.
Franchising
As of December 28, 2008, 46 Chuck E. Cheese's were operated by a total of 24 different franchisees. Currently, domestic franchisees
have expansion rights to open an additional 27 franchise stores.
The Chuck E. Cheese's standard franchise agreement grants to the franchisee the right to construct and operate a store and use the
associated trade names, trademarks and service marks within the standards and guidelines established by us. Our current franchise
agreement has an initial term of 15 years and includes a 10-year renewal option. The standard agreement provides us with a right of first
refusal should a franchisee decide to sell a store. The earliest expiration dates of outstanding Chuck E. Cheese's franchises are in 2009.
We and our franchisees created the International Association of CEC Entertainment, Inc. (the “Association”) to discuss and consider
matters of common interest relating to the operation of Company-owned and franchised Chuck E. Cheese’s. Routine business matters of
the Association are conducted by a board of directors of the Association, composed of five members appointed by us and five members
elected by the franchisees. The Association serves as an advisory council, which among other responsibilities, oversees expenditures from
the funds established and managed by the Association. These funds include (1) the Advertising Fund, a fund that pays the costs of
development, purchasing and placement of system-wide advertising programs, including Internet Web sites, (2) the Entertainment Fund, a
fund established to develop and improve audio-visual and animated entertainment attractions, as well as the development and
implementation of new entertainment concepts and (3) the Media Fund, a fund primarily designated for the purchase of national network
television advertising. The Association is included in our consolidated financial statements.
The franchise agreements governing existing franchised Chuck E. Cheese's in the United States currently require each franchisee to
pay to (i) us, in addition to an initial franchise fee of $50,000, a continuing monthly royalty fee equal to 3.8% of gross sales, (ii) the
Advertising Fund an amount equal to 0.4% of gross sales, (iii) the Entertainment Fund an amount equal to 0.2% of gross sales, and (iv) the
Media Fund an amount equal to 2.5% of gross sales. Under the Chuck E. Cheese's franchise agreement, we are required, with respect to
Company-owned stores, to spend for local advertising and to contribute to the Advertising Fund and the Entertainment Fund at the same
rates as franchisees. We and our franchisees could be required to make additional contributions to fund any deficits that may be incurred by
the Association.
Approximately 0.5%, 0.5% and 0.4% of our total revenues were derived from franchise fees and royalties during 2008, 2007 and
2006, respectively
Foreign Operations
As of December 28, 2008, we operated a total of 14 Company-owned stores in Canada. During 2008, 2007 and 2006, our Canada
stores generated total revenues of approximately $22.8 million, $21.4 million and $20.3 million, respectively, representing approximately
2.8%, 2.7% and 2.6% of our total revenues in 2008, 2007 and 2006, respectively. As of December 28, 2008, we had approximately $19.3
million, or approximately 3%, of our long-lived assets located in Canada. Additionally, our franchisees operate a total of eight stores
located in Puerto Rico, Guatemala, Chile, Saudi Arabia, and the United Arab Emirates.
These foreign activities are subject to various risks of conducting business in a foreign country, including changes in laws and
regulations and economic and political stability. See Item 1A. “Risk Factors” for more information regarding the risks associated with our
operations located in foreign markets. As of December 28, 2008, we do not believe that we have a material dependence on these foreign
operations.
Competition
The family dining industry and the entertainment industry are highly competitive, with a number of major national and regional chains
operating in each of these spaces. In this regard, we compete for customers on the basis of (1) our name recognition; (2) the price, quality,
variety, and perceived value of our food offerings; (3) the quality of our customer service, and (4) the convenience and attractiveness of our
facilities. Although there are other concepts that presently utilize the combined family dining and entertainment format, these competitors
6
primarily operate on a regional or market-by-market basis. To a lesser extent, we may also compete directly and indirectly with other dining
and entertainment formats including the quick service pizza segment, movie theaters, and themed amusement attractions catering to our
target market of families with young children.
We believe that our principal competitive strengths consist of our established recognized brand, the relative quality of the food and
service we provide our customer, the quality and variety of our entertainment offerings, and the location and attractiveness of our stores.
We also believe that our competitive strengths include our tenured management team’s knowledge of the family dining and entertainment
industries relative to our target market of families with young children.
Intellectual Property
We own various trademarks, including "Chuck E. Cheese’s" and the Chuck E. Cheese character image used in connection with our
business, which have been registered with the appropriate patent and trademark offices. The duration of such trademarks is unlimited,
subject to continued use. We believe that we hold the necessary rights for protection of the trademarks considered essential to conduct our
business. We believe our trade name and our ownership of trademarks in the names and character likenesses featured in the operation of
our stores provides us with an important competitive advantage and we actively seek to protect our interest in such property.
Seasonality
Our sales volumes fluctuate seasonally and are generally higher during the first and third quarters of each fiscal year. Holidays, school
operating schedules and weather conditions may affect sales volumes seasonally in some operating regions. Because of the seasonality of
our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Government Regulation
We and our franchisees are subject to various federal, state and local laws and regulations affecting the development and operation of
Chuck E. Cheese’s, including, but not limited to, those that impose restrictions, levy a fee or tax, or require a permit or license, or other
regulatory approval, and those that relate to the operation of video and arcade games and rides, the preparation and sale of food and
beverages, the sale and service of alcoholic beverages, and building and zoning requirements. We and our franchisees are also subject to
laws governing relationships with employees, including minimum wage requirements, overtime, working and safety conditions,
immigration status requirements and child labor laws. A significant portion of our store personnel are paid at rates related to the minimum
wage established by federal, state and municipal law and, accordingly, increases in such minimum wage result in higher labor costs to us.
We are also subject to the Fair Labor Standards Act, the Americans with Disabilities Act, and Family Medical Leave Act mandates. In
addition, we are subject to regulation by the Federal Trade Commission, Federal Communications Commission and must comply with
certain state laws which govern the offer, sale and termination of franchises and the refusal to renew franchises.
Working Capital Practices
Our requirement for working capital is not significant since our customers pay for their purchases in cash or credit cards at the time of
the sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Since our accounts
payable are generally due in five to 30 days, we are able to carry current liabilities in excess of current assets (commonly referred to as a
“net working capital deficit”). We attempt to maintain only sufficient inventory of supplies in our stores to satisfy current operational
needs. Our accounts receivable typically consists of credit card receivables, tax receivables, vendor rebates and leasehold improvement
incentives. Our current liabilities typically consist of accounts payable, accrued operating expenses (including salaries and wages, certain
self-insurance claims and taxes), deferred revenues and interest obligations.
Employees
As of December 28, 2008, we employed approximately 16,800 employees, including approximately 16,400 in the operation of our
stores and approximately 400 employed in our corporate office. None of our employees are members of any union or collective bargaining
group. We believe that our employee relations are satisfactory, and we have not experienced any work stoppages at any of our stores.
Each Chuck E. Cheese's store typically employs a general manager, one or two managers, an electronic specialist who is responsible
for repair and maintenance of the robotic characters, games and rides, and 20 to 45 food preparation and service employees, many of whom
work part-time. Our employment varies seasonally, with the greatest number of people being employed during the summer months.
Available Information
Our principal executive offices are located at 4441 W. Airport Freeway, Irving, Texas 75062, and our telephone number is (972) 258-
8507. We maintain a Web site at www.chuckecheese.com.
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange
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Commission (the “SEC”). You may read and copy any reports, statements and other information filed by us at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549-0102. Please call (800) SEC-0330 for further information on the Public Reference
Room. The SEC maintains an Internet Web site that contains reports, proxy and information statements and other information regarding
issuers, including us, that we file electronically with the SEC. The address for the SEC’s Web site is www.sec.gov.
We make available, free of charge, on or through the investor information section of our Web site our annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of changes in beneficial ownership of securities, and
amendments to those reports and statements as soon as reasonably practicable after electronic filing or furnishing of such material with the
SEC. The address for our Web site is www.chuckecheese.com.
Documents available on our Web site include our (i) Corporate Governance Guidelines, (ii) Code of Business Conduct and Ethics, (iii)
Code of Ethics for the Chief Executive Officer, President and Senior Financial Officers (the “Code of Ethics”), (iv) Complaint and
Reporting Procedures for Accounting and Auditing Matters, and (v) Charters for the Audit, Compensation, and Nominating/Corporate
Governance Committees of the Board of Directors. These documents are also available in print, free of charge, to any stockholder who
requests a copy from the Secretary, Meredith W. Bjorck, at 4441 W. Airport Freeway, Irving, Texas 75062. We intend to disclose future
amendments to, or waivers from, certain provisions of the Code of Ethics on our Web site.
8
ITEM 1A. Risk Factors
Our business operations and the implementation of our business strategy are subject to significant risks inherent in our business,
including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties
described below and elsewhere in this Annual Report on Form 10-K could have a material adverse effect on our financial condition, results
of operations and cash flows. While we believe we have identified and discussed below the key risk factors that affect our business, there
may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely
affect our business, operations, industry, financial position and financial performance in the future. Since these forward-looking statements
are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are
beyond our control or are subject to change, actual results could be materially different.
Risks Related to Our Business
Changes in consumer discretionary spending and general economic conditions could reduce sales at our stores and have an adverse
effect on our financial results.
Purchases at our stores are discretionary for consumers and, therefore, our results of operations are susceptible to economic
slowdowns and recessions. We are dependent in particular upon discretionary spending by consumers living in the communities in which
our stores are located. A significant portion of our stores are clustered in certain geographic areas. A significant weakening in the local
economies of these geographic areas, or any of the areas in which our stores are located, may cause consumers to curtail discretionary
spending, which in turn could reduce our Company store sales and have an adverse effect on our financial results.
The future performance of the U.S. and global economies are uncertain and are directly affected by numerous national and global
financial and other factors that are beyond our control. Increases in credit card, home mortgage and other borrowing costs and declines in
housing values have weakened the U.S. economy leading to a decrease in consumer spending. It is difficult to predict the severity and the
duration of such a decrease. We believe that consumers generally are more willing to make discretionary purchases, including at our stores,
during periods in which favorable economic conditions prevail. Further, recent fluctuations in the retail price of gasoline and the potential
for future increases in gasoline and other energy costs may affect consumers’ disposable incomes available for entertainment and dining.
Changes in consumer spending habits as a result of a recession or a reduction in consumer confidence are likely to reduce our sales
performance, which could have a material adverse affect on our business, results of operations or financial condition. In addition, these
economic factors may affect our level of spending on planned capital initiatives at our stores, and thereby impact our future sales.
The recent disruptions in the financial markets may adversely affect the availability and cost of credit and compromise our ability
to maintain adequate insurance coverage.
Disruptions in the financial markets may adversely affect the availability of credit already arranged and the availability and cost of
credit in the future. Failures of significant financial institutions could adversely affect our access to and reduce the alternative sources of
liquidity needed to operate our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or
until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring or
curtailing our capital expenditures and other discretionary uses of cash.
We rely on insurance to mitigate our exposure to catastrophic losses we may sustain to our property, claims by our employees,
customers or other third parties. Although we have historically obtained adequate levels of insurance coverage through well rated and
capitalized firms, the ongoing financial crisis may affect our ability to obtain coverage under existing policies or purchase insurance under
new policies at reasonable rates in the future. Additionally, we are potentially at risk if our insurance carriers become insolvent. As a result,
we could potentially be exposed to financial losses which could adversely affect our results of operations.
We may not be successful in the implementation of our business development strategies.
Our continued growth depends, to a significant degree, on our ability to successfully implement our long-term growth strategies. As
part of our long-term growth strategy, we plan to open additional new stores in selected markets, remodel and expand our existing stores
and upgrade the games, rides and entertainment at our existing stores. The opening and success of new Chuck E. Cheese’s stores is
dependant on various factors, including but not limited to the availability of suitable sites, the negotiation of acceptable lease terms for such
locations, our ability to meet construction schedules, our ability to manage such expansion and hire and train personnel to manage the new
stores, the potential cannibalization of sales at our adjacent stores located in the market, as well as general economic and business
conditions. Our ability to successfully open new stores or remodel, expand or upgrade the entertainment at existing stores will also depend
upon the availability of sufficient capital for such purposes, including operating cash flow, our existing credit facility, future debt
financings, future equity offerings or a combination thereof. There can be no assurance that we will be successful in opening and operating
the number of anticipated new stores on a timely or profitable basis. There can be no assurance that we can continue to successfully
remodel or expand our existing facilities or upgrade the games and entertainment. Our growth is also dependent on our ability to
continually evolve and update our business model to anticipate and respond to changing customer needs and competitive conditions. There
can be no assurance that we will be able to successfully anticipate changes in competitive conditions or customer needs or that the market
9
will accept our business model.
Part of our growth strategy depends on our ability to attract new franchisees to recently opened markets and the ability of these
franchisees to open and operate new stores on a profitable basis. Delays or failures in opening new franchised stores could adversely affect
our planned growth. Our new franchisees depend on the availability of financing to construct and open new stores. If these franchisees
experience difficulty in obtaining adequate financing for these purposes, our growth strategy and franchise revenues may be adversely
affected.
We may incur significant costs in connection with our business development strategies.
Our long-term growth is dependent on the success of strategic initiatives to increase the number of our stores and enhance the facilities
of existing stores. We incur significant costs each time we open a new store and other expenses when we relocate or remodel existing
stores. The expenses of opening, relocating or remodeling any of our stores may be higher than anticipated. If we are unable to open or are
delayed in opening new stores, we may incur significant costs which may adversely affect our financial results. If we are unable to remodel
or are delayed in remodeling stores, we may incur significant costs which may adversely affect our financial results.
We are subject to competition in both the restaurant and entertainment industries.
We believe that our combined restaurant and entertainment center concept puts us in a niche which combines elements of both the
restaurant and entertainment industries. As a result, to some degree, we compete with entities in both industries. Although other restaurant
chains presently utilize the concept of combined family entertainment-dining operations, we believe these competitors operate primarily on
a local, regional or market-by-market basis. Within the traditional restaurant sector, we compete with other casual dining restaurants on a
nationwide basis with respect to price, quality and speed of service, type and quality of food, personnel, the number and location of
restaurants, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product development. Such
competitive market conditions, including the effectiveness of our advertising and promotion and the emergence of significant new
competition, could adversely affect our operating results.
We are dependent on the service of certain key personnel.
The success of our business is highly dependent upon the continued employment of Richard M. Frank, our Executive Chairman,
Michael H. Magusiak, our President and Chief Executive Officer, and other members of our senior management team. Although the
Company has entered into employment agreements with each of Mr. Frank and Mr. Magusiak, the loss of the services of either of such
individuals could have a material adverse effect upon our business and development. Our success will also depend upon our ability to
retain and attract additional skilled management personnel to our senior management team and at our operational level. There can be no
assurances that we will be able to retain the services of Messrs. Frank or Magusiak, senior members of our management team or the
required operational support at the store level in the future.
We may experience an increase in food, labor and other operating costs.
An increase in food, labor, utilities, insurance and/or other operating costs may adversely affect our financial results. Such an increase
may adversely affect us directly or indirectly through our vendors, franchisees and others whose performance have a significant impact on
our financial results.
Specifically, any increase in the prices for food commodities, including cheese and wheat, could adversely affect our financial results.
The performance of our stores is also adversely affected by increases in the price of utilities on which the stores depend, such as natural
gas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. Our business also incurs significant costs for and
including among other things, insurance, marketing, taxes, real estate, borrowing and litigation, all of which could increase due to inflation,
rising interest rates, changes in laws, competition, or other events beyond our control.
In addition, a number of our employees are subject to various minimum wage requirements. Several states and cities in which we
operate stores have established a minimum wage higher than the federally mandated minimum wage. There may be similar increases
implemented in other jurisdictions in which we operate or seek to operate. These minimum wage increases may have an adverse effect on
our results of operations.
Changes in consumers’ health, nutrition and dietary preferences could adversely affect our financial results.
Our industry is affected by consumer preferences and perceptions. Changes in prevailing health or dietary preferences and perceptions
may cause consumers to avoid certain products we offer in favor of alternative or healthier foods. If consumer eating habits change
significantly and we are unable to respond with appropriate menu offerings, it could adversely affect our financial results.
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Negative publicity concerning food quality, health, safety or other issues could adversely affect our financial results.
Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups or government
authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one store or a limited
number of stores. Publicity concerning food-borne illnesses, injuries caused by food tampering and safety issues may negatively affect our
operations, reputation and brand. Such publicity may have a significant adverse impact on our financial results.
Our target market of children between the ages of two and 12 and families with young children may be highly sensitive to adverse
publicity that may arise from an actual or perceived negative event within one or more of our stores. There can be no assurance that we will
not experience negative publicity regarding one or more of our stores, and the existence of negative publicity could materially and
adversely affect our image with our customers and our results of operations.
We are subject to risks from disruption of our commodity distribution system.
Any disruption in our commodity distribution system could adversely affect our financial results. We use a single vendor to distribute
most of the products and supplies used in our stores. Any failure by this vendor to adequately distribute products or supplies to our stores
could increase our costs and have a material adverse affect on our financial results and our operations.
Our procurement of games and rides is dependant upon a few global providers.
Our ability to continue to procure new games, rides and other entertainment-related equipment is important to our business strategy.
The number of suppliers from which we can purchase games, rides and other entertainment-related equipment is limited due to industry
consolidation over the past several years coupled with a lower overall global demand. To the extent that the number of suppliers continues
to decline, we could be subject to the risk of distribution delays, pricing pressure, lack of innovation and other associated risks.
Our stores may be adversely affected by local conditions, events and natural disasters.
Certain regions in which our stores are located may be subject to adverse local conditions, events or natural disasters. A natural
disaster may damage our stores or other operations which may adversely affect the financial results of the Company. In addition, if severe
weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our
stores, our sales could be adversely affected. If severe weather occurs during the first and third quarters of the year, the adverse impact to
our sales and profitability could be even greater than at other times during the year because we generate a significant portion of our sales
and profits during these periods. Additionally, demographic shifts in the areas where our stores are located could adversely impact our sales
and results of operations.
Our business is highly seasonal and quarterly results may fluctuate significantly as a result of this seasonality.
We have experienced, and in the future could experience, quarterly variations in revenues and profitability as a result of a variety of
factors, many of which are outside our control, including the timing and number of new store openings, the timing of capital investments in
existing stores, the timing of school vacations and holidays, weather conditions and natural disasters. We typically experience lower
revenues and profitability in the second and fourth quarters than in the first and third quarters. If revenues are below expectations in any
given quarter, our operating results will likely be adversely affected for that quarter.
Unanticipated conditions in foreign markets may adversely affect our ability to operate effectively in those markets.
In addition to our stores in the United States, we currently own or franchise stores in Canada, Puerto Rico, Guatemala, Chile, Saudi
Arabia and the United Arab Emirates. We intend to expand into additional foreign markets in the future. We and our franchisees are subject
to the regulatory and economic and political conditions of any foreign market in which we and our franchisees operate stores. Any change
in the laws and regulations and economic and political stability of these foreign markets may adversely affect our financial results. Changes
in foreign markets that may affect our financial results include, but are not limited to, taxation, inflation, currency fluctuations, political
instability, war, increased regulations and quotas, tariffs and other protectionist measures.
We are subject to risks in connection with owning and leasing real estate.
As an owner and lessee of the land and/or building for our Company-owned stores, we are subject to all of the risks generally
associated with owning and leasing real estate, including changes in the supply and demand for real estate in general and the supply and
demand for the use of the stores. Any obligation to continue making rental payments with respect to leases for closed stores could adversely
affect our financial results.
We may not be able to adequately protect our trademarks or other proprietary rights.
We own certain common law trademark rights and a number of federal and international trademark and service mark registrations and
11
proprietary rights relating to our operations. We believe that our trademarks and other proprietary rights are important to our success and
our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The
protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which could harm our
image, brand or competitive position and, if we commence litigation to enforce our rights, we may incur significant legal fees.
We cannot be assured that third parties will not claim that our trademarks or menu offerings infringe upon their proprietary rights. Any
such claim, whether or not it has merit, may result in costly litigation, cause delays in introducing new menu items in the future or require
us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of
operations, and financial position.
We are subject to various government regulations which may adversely affect our operations and financial performance.
The development and operation of our stores are subject to various federal, state and local laws and regulations in many areas of our
business, including, but not limited to, those that impose restrictions, levy a fee or tax, or require a permit or license, or other regulatory
approval. Difficulties or failure in obtaining required permits, licenses or other regulatory approvals could delay or prevent the opening of a
new store, and the suspension of, or inability to renew, a license or permit could interrupt operations at an existing store. We are also
subject to laws governing our relationship with employees, including minimum wage requirements, overtime, health insurance mandates,
working and safety conditions, immigration status requirements, and child labor laws. Additionally, potential changes in federal labor laws,
including “card check” regulations, could result in portions of our workforce being subjected to greater organized labor influence. This
could result in an increase to our labor costs. A significant portion of our store personnel are paid at rates related to the minimum wage
established by federal, state and municipal law. Increases in such minimum wage result in higher labor costs, which may be partially offset
by price increases and operational efficiencies. Additionally, we are subject to certain laws and regulations that govern our handling of
customers’ personal information. A failure to protect the integrity and security of our customers’ personal information could expose us to
litigation, as well as materially damage our reputation with our customers. While we endeavor to comply with all applicable laws and
regulations, governmental and regulatory bodies may change such laws and regulations in the future, which may require us to incur
substantial cost increases. If we fail to comply with applicable laws and regulations, we may be subject to various sanctions, and/or
penalties and fines or may be required to cease operations until we achieve compliance, which could have a material adverse effect on our
financial results and operations.
We face litigation risks from customers, employees, franchisees and other third parties in the ordinary course of business.
Our business is subject to the risk of litigation by customers, current and former employees, suppliers, stockholders or others through
private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class
action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large
or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of
time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could
decrease customer acceptance of our food or entertainment offerings, regardless of whether the allegations are valid or whether we are
ultimately found liable.
We are continually subject to risks from litigation and regulatory action regarding advertising to our market of children between the
ages of two and 12 years old. In addition, since certain of our stores serve alcoholic beverages, we are subject to “dram shop” statutes.
These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. Although we believe we are adequately covered by insurance, a judgment against us under a
“dram shop” statute in excess of the liability covered could have a material adverse effect on our business, financial condition and results
of operations.
Under certain circumstances plaintiffs may file certain types of claims which may not be covered by insurance. In some cases,
plaintiffs may seek punitive damages which may also not be covered by insurance. Any litigation we face could have a material adverse
effect on our business, financial condition and results of operations.
We face risks with respect to product liability claims and product recalls.
We purchase merchandise from third-parties and offer this merchandise to customers in exchange for prize tickets or for sale. This
merchandise could be subject to recalls and other actions by regulatory authorities. Changes in laws and regulations could also impact the
type of merchandise we offer to our customers. We have experienced, and may in the future experience, issues that result in recalls of
merchandise. In addition, individuals have asserted claims, and may in the future assert claims, that they have sustained injuries from third-
party merchandise offered by us, and we may be subject to future lawsuits relating to these claims. There is a risk that these claims or
liabilities may exceed, or fall outside of the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to
our reputation, diversion of development and management resources, or reduced sales and increased costs, any of which could harm our
business.
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We are dependent on certain information technology systems and technologies which may be compromised.
The operation of our business is dependent upon the integrity, security and successful functioning of our computer networks and
information systems, including the point-of-sales systems in our stores, data centers that process transactions and various software
applications used in our operations. Damage to, or interruption or failure of these systems could result in losses due to disruption of our
business operations. These adverse situations could lead to loss of sales or profits or cause us to incur additional development costs. In
addition, despite our efforts to secure our computer networks and information systems, security could be compromised or confidential
information could be misappropriated resulting in a loss of customers’ personal information, negative publicity, harm to our business and
reputation or cause us to incur costs to reimburse third parties for damages.
Our application of and changes in financial accounting standards or interpretations of existing standards could affect our reported
results of operations.
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles which require us to
make estimates and assumptions. The use of estimates is pervasive throughout our financial statements and is affected by management’s
judgment. To the extent management’s judgment is incorrect, it could result in an adverse impact on our financial statements and reported
results of operations. Generally accepted accounting principles, interpretations and other promulgated accounting pronouncements related
to the development of estimates for insurance, tax and legal contingencies, valuation of long-lived assets, stock-based compensation, and
accounting for leases and hedge accounting are highly complex and may be subject to multiple sources of authoritative guidance. Changes
in these accounting standards, new accounting pronouncements and interpretations may occur that could adversely affect our reported
financial position, results of operations and/or cash flows.
Risks Related to Our Common Stock
A failure to establish, maintain and apply adequate internal control over financial reporting could have a material adverse affect
on our business and/or market valuation of our common stock.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).
These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process
to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting
principles generally accepted in the United States of America. As of December 28, 2008, we have concluded that our internal
controls over financial reporting are effective; however there can be no assurance that we will be able to maintain all of the controls
necessary to remain in compliance with Sarbanes-Oxley in the future. Should we identify any material weaknesses in internal control
over financial reporting in the future, there can be no assurance that we will be able to remediate such material weaknesses in a
timely manner. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report
financial results accurately and timely or to detect and/or prevent fraud. A failure to maintain an effective system of internal control
may also result in a negative market reaction in regards to the valuation of our common stock.
ITEM 1B. Unresolved Staff Comments.
We had no unresolved Securities and Exchange Commission staff comments as of December 28, 2008.
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ITEM 2. Properties.
The following table summarizes information regarding the number and location of stores we and our franchisees operated as of
December 28, 2008:
Domestic
Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arkansas. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Connecticut . . . . . . . . . . . . . . . . . . . . . . . . . .
Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iowa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Montana . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nebraska . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Hampshire . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Carolina . . . . . . . . . . . . . . . . . . . . . . . .
North Dakota . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oklahoma. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . .
Rhode Island . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . . . . .
South Dakota . . . . . . . . . . . . . . . . . . . . . . . . .
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total domestic . . . . . . . . . . . . . . . . . .
International
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . .
Saudi Arabia . . . . . . . . . . . . . . . . . . . . . . . . .
United Arab Emirates . . . . . . . . . . . . . . . . . . .
Total international . . . . . . . . . . . . . . .
Total system . . . . . . . . . . . . . . . . . . . .
Company -
Owned
Stores
Franchised
Stores
Total
1
-
7
-
5
-
-
-
-
-
2
-
-
-
-
-
1
1
-
-
-
-
-
2
-
1
-
-
-
-
-
-
2
1
-
-
3
1
-
-
-
-
-
3
4
4
-
-
38
-
1
2
3
1
1
8
46
8
1
9
6
79
10
6
2
25
16
2
1
22
14
5
4
5
10
1
14
11
18
5
5
8
1
2
5
2
15
3
21
15
1
19
3
4
23
1
7
2
12
57
3
15
11
1
9
519
14
1
2
3
1
1
22
541
7
1
2
6
74
10
6
2
25
16
-
1
22
14
5
4
4
9
1
14
11
18
5
3
8
-
2
5
2
15
3
21
13
-
19
3
1
22
1
7
2
12
57
-
11
7
1
9
481
14
-
-
-
-
-
14
495
14
Company Store Leases
Of the 495 Chuck E. Cheese's owned by us as of December 28, 2008, 436 occupy leased premises and 59 occupy owned premises. The
current lease terms of these stores will expire at various times from 2009 to 2028 and available lease terms, including options to renew,
expire at various times from 2012 to 2043, as described in the table below.
Year of
Expiration
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 through 2028 . . . . . . . . . . . . . . . . .
Number
of Stores
32
33
33
41
54
243
Range of Renewal
Options (Years)
None to 20
None to 20
None to 20
None to 20
None to 20
None to 20
The leases of these stores 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. It is common for us to take possession of leased premises prior to the commencement of
rent payments for the purpose of constructing leasehold improvements. The leases generally require us to pay the cost of repairs, insurance
and real estate taxes and, in some instances, may provide for additional rent equal to the amount by which a percentage of gross revenues
exceed the minimum rent.
Corporate Office and Warehouse Facilities
We lease a 76,556 square foot office building in Irving, Texas which serves as our corporate office and support services center. This
lease expires in May 2015, with options to renew through May 2025.
We also lease a total of 146,142 square feet at two warehouses in Topeka, Kansas which primarily serve as storage and refurbishing
facilities for our store fixtures and game equipment. These leases expire in August and September 2013, respectively.
ITEM 3. Legal Proceedings.
On January 23, 2007, a purported class action lawsuit against us, entitled Blanco v. CEC Entertainment, Inc., et. al., Cause No. CV-07-
0559 (“Blanco Litigation”), was filed in the United States District Court for the Central District of California. The Blanco Litigation was
filed by an alleged customer of one of our Chuck E. Cheese’s stores purporting to represent all individuals in the United States who, on or
after December 4, 2006, were knowingly and intentionally provided at the point of sale or transaction with an electronically-printed receipt
by us that was in violation of U.S.C. Section 1681c(g) of the Fair and Accurate Credit Transactions Act (“FACTA”). The Blanco plaintiffs
did not seek actual damages, but only sought statutory damages for each willful violation under FACTA. On January 10, 2008, the Court
denied class certification without prejudice and stayed the case pending the appellate outcome of the Soualian v. Int’l Coffee & Tea LLC
case before the Ninth Circuit. On June 3, 2008, President George W. Bush signed into law the Credit and Debit Card Receipt Clarification
Act of 2007, which amends FACTA to clarify that any person who printed an expiration date on any consumer receipt between December
4, 2004 and June 3, 2008, and otherwise complied with FACTA, shall not be in willful noncompliance with FACTA. Following the
enactment, the plaintiffs agreed to dismiss the case against us. Accordingly, on June 23, 2008, the court entered an order dismissing the
case with prejudice and requiring each party to bear its own attorneys’ fees and costs. Thus, this case has been dismissed without payment
of any compensation to the plaintiffs.
On November 19, 2007, a purported class action lawsuit against us, entitled Ana Chavez v. CEC Entertainment, Inc., et al., Cause No.
BC380996 (“Chavez Litigation”), was filed in the Central District Superior Court of California in Los Angeles County. We received
service of process on December 21, 2007. On January 9, 2008, a second purported class action lawsuit against us, entitled Cynthia Perez et
al. v. CEC Entertainment, Inc., et al., Cause No. BC3853527 (“Perez Litigation”), was filed in the Central District Superior Court of
California in Los Angeles County. We were served with the second complaint on January 30, 2008. We removed both cases to Federal
court on January 18, 2008 and February 29, 2008, respectively. On March 21, 2008, the Chavez Litigation was remanded back to state
court and on April 30, 2008, the Perez Litigation was remanded back to state court. These two cases were then consolidated by the court for
procedural purposes in the Superior Court of the State of California in Los Angeles County on June 18, 2008. The Chavez Litigation was
filed by a former store employee purporting to represent other similarly situated current and former employees of us in the State of
California from November 19, 2003 to the present. The lawsuit alleges violations of the state wage and hour laws involving unpaid
vacation wages, meal periods, wages due upon termination, waiting time penalties, and unfair competition and seeks an unspecified amount
in damages. The Perez Litigation was filed by former store employees purporting to represent other similarly situated current and former
employees of us in Los Angeles County from January 8, 2004 to the present. The lawsuit alleges violations of the state wage and hour laws
involving unpaid overtime wages, meal and rest periods, itemized wage statements, waiting time penalties, retaliation, unfair competition,
and constructive trust and seeks an unspecified amount in damages. We attended formal mediation with representatives of the plaintiffs in
both suits and reached a tentative settlement for all of the claims alleged on November 17, 2008. On December 3, 2008, following the
tentative settlement, the plaintiffs filed a Consolidated Complaint combining the allegations of the two actions in accordance with the
15
tentative settlement agreement. We then filed an Answer to the Consolidated Complaint on December 16, 2008. The tentative settlement
is subject to both preliminary and final approval by the court. Although no hearing dates have been set yet, we expect the court to hear
argument on the parties’ joint motion for preliminary approval of class action settlement in February or March 2009. If the court grants
preliminary approval of the tentative settlement, we will commence efforts to administer the settlement to approximately 17,000 current
and former employees in the class. The terms of the tentative settlement are not expected to have a material adverse effect on our financial
condition or results of operations.
On July 25, 2008, a purported class action lawsuit against us, entitled Liendo, et al., v. CEC Entertainment, Inc., Cause No. BC395195
(“Liendo Litigation”), was filed in the Superior Court of California, Los Angeles County. We received service of process on July 28, 2008.
The Liendo Litigation was filed by two alleged customers of our Chuck E. Cheese’s stores in California purporting to represent all mobility
impaired/wheelchair bound individuals in the State of California who were allegedly denied the full and equal enjoyment of goods,
services, programs, facilities, privileges, advantages, or accommodations in violation of the Americans With Disabilities Act, 42 U.S.C.
Section 12181 and California state laws. We removed the case to the United States District Court for the Central District of California on
August 25, 2008. The Liendo plaintiffs seek injunctive relief, statutory damages and attorneys’ fees and costs. Throughout the months of
November and December 2008, we engaged in informal settlement negotiations with the named plaintiffs in the lawsuit and finalized a
settlement with these individuals on December 31, 2008. The settlement’s terms did not have a material adverse effect on our financial
condition or results of operations.
On June 19, 2006, a lawsuit was filed by a personal representative of the estates of Robert Bullock, II and Alysa Bullock, against CEC
Entertainment, Inc., Manley Toy Direct, LLC (“Manley Toy”), et. al. in the Circuit Court for the Fourth Judicial Circuit, Duval County,
Florida, Case No. 2006 CA 004378 (“Bullock Litigation”). In the complaint, the Bullock Litigation’s plaintiff alleged that the May 8, 2006
mobile home fire which resulted in the deaths of his two children, Robert Bullock, II and Alysa Bullock, was caused by a defective disco
light product that was purchased at a Chuck E. Cheese’s. The Bullock Litigation’s plaintiff sought an unspecified amount of damages. We
tendered our defense of this matter to Manley Toy, from which we had purchased certain disco light products. Manley Toy accepted our
tender and indicated it would indemnify us in the event of any judgment or settlement that exceeded coverage afforded under Manley Toy’s
insurance policies. On September 22, 2008, we settled the case with the plaintiff. The terms of the settlement did not have a material
adverse effect on our financial condition or results of operations.
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 2008.
16
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the New York Stock Exchange under the symbol "CEC." The following table sets forth the highest
and lowest sale price for our common stock during each quarterly period within the two most recent fiscal years, as reported on the New
York Stock Exchange:
Fiscal 2008
Fiscal 2007
High
Low
High
Low
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30.65 $ 19.81
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39.47 $ 27.87
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39.59 $ 25.59
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34.21 $ 12.96
$ 43.83 $ 38.94
$ 43.19 $ 34.50
$ 37.11 $ 26.17
$ 30.69 $ 24.37
As of February 9, 2009, there were an aggregate of 22,728,078 shares of our common stock outstanding and approximately 2,043
stockholders of record.
We have not paid any cash dividends on our common stock and have no present intention of paying cash dividends thereon in the
future; however, our intent in regards to paying cash dividends is subject to continual review. In addition, pursuant to our revolving credit
facility agreement, there are restrictions on the amount of our repurchases of our common stock and cash dividends that we may pay on our
common stock based on certain financial covenants and criteria. We currently plan to utilize our earnings to finance anticipated capital
expenditures, reduce our long-term debt and potentially repurchase our common stock.
Issuer Purchases of Equity Securities
We repurchase shares of our common stock under a plan authorized by our Board of Directors (the “Board”). In July 2005, the Board
approved a stock repurchase program which authorized us to repurchase from time to time up to $400 million of our common stock. In
October 2007, the Board authorized a $200 million increase to the share repurchase authorization bringing the total authorization to $600
million. The share repurchase program, which does not have a stated expiration date, authorizes us to make repurchases in the open market
or in private transactions.
The following table presents information related to repurchases of our common stock during the fourth quarter of 2008 and the
maximum dollar value of shares that may yet be purchased pursuant to our share repurchase program:
Issuer Purchases of Equity Securities
Total
Number of
Shares
Purchased
As Part of
Publicly
Announced
Plans or
Programs
Maximum Dollar
Value of Shares
that May Yet Be
Purchased
Under the Plans
or Programs(2)
Total
Number
of Shares
Purchased(1)
Average
Price Paid
Per Share(1)
Period
Sept. 29 – Oct. 26, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oct. 27 – Nov. 23, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nov. 24 – Dec. 28, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-
182
-
182
-
$ 22.13
-
$ 22.13
-
-
-
-
$ 71,376,456
$ 71,376,456
$ 71,376,456
$ 71,376,456
(1) For the period ended November 23, 2008, the total number of shares purchased included 182 shares tendered by employees at an average price
per share of $22.13 to satisfy tax withholding requirements on the vesting of restricted stock awards, which are not deducted from shares
available to be purchased under our share repurchase program. Unless otherwise indicated, shares tendered by employees to satisfy tax
withholding requirements were purchased at the closing price of our common stock on the date of vesting.
(2) There is no expiration date associated with the plan.
17
Stock Performance Graph
The graph below compares the annual change in the cumulative total stockholder return on our common stock over the last five fiscal
years ended December 28, 2008, with the cumulative total return on the NYSE Market Index and the S&P SmallCap 600 Restaurants
Index. The comparison assumes an investment of $100 on December 28, 2003 in our common stock and in each of the foregoing indices
and assumes the reinvestment of dividends. Our stock price performance shown in the graph below may not be indicative of future stock
price performance.
Dec. 28
2003
Jan. 2
2005
Jan. 1
2006
Dec. 31
2006
Dec. 30
2007
Dec. 28
2008
$ 74.02
$ 82.92
CEC Entertainment . . . . . . . . . . . . . . . . . . . .
NYSE Stock Market (US Companies) . . . . . . $ 100.00 $ 112.92 $ 122.25 $ 143.23 $ 150.88
$ 94.76
S&P SmallCap 600 Restaurants . . . . . . . . . . . $ 100.00 $ 142.44 $ 151.54 $ 192.67 $ 212.61 $ 201.16
$ 100.00 $ 126.16 $ 107.44 $ 127.04
18
ITEM 6. Selected Financial Data.
The following selected financial data presented below should be read in conjunction with Item 7. “Management's Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements under Item 8. “Financial Statements
and Supplementary Data.”
2008
Fiscal Year(1)
2006
(in thousands, except per share and store number amounts)
2007
2005
2004
Statement of Earnings Data:
Company store sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company store operating costs:
Cost of food, beverage, entertainment and merchandise
(exclusive of labor expenses, depreciation and
amortization shown separately below). . . . . . . . . . . . . . . .
Labor expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total company store operating costs . . . . . . . . . . . . . . . .
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses. . . . . . . . . . . . . . . . . . . . .
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
810,693
3,816
814,509
781,665
3,657
785,322
769,241
3,312
772,553
722,873
3,296
726,169
723,637
3,647
727,284
131,416
223,331
74,805
65,959
119,990
615,501
34,736
55,970
282
706,489
108,020
17,389
90,631
34,137
126,413
214,147
70,701
63,734
113,789
588,784
30,651
51,705
9,638
680,778
104,544
13,170
91,374
35,453
121,808
210,010
64,292
60,333
106,025
562,468
32,253
53,037
3,910
651,668
120,885
9,508
111,377
43,120
115,930
202,780
59,849
57,022
98,094
533,675
29,294
45,527
360
608,856
117,313
4,532
112,781
43,110
118,747
200,447
54,574
54,723
96,746
525,237
27,589
47,283
-
600,109
127,175
2,514
124,661
47,683
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
56,494 $
55,921 $
68,257 $
69,671 $
76,978
Per Share Data: (2) (3)
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.43
$ 2.37
$ 1.81
$ 1.76
$ 2.09
$ 2.04
$ 1.99
$ 1.93
$ 2.07
$ 2.00
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,270
23,793
30,922
31,694
32,587
33,465
35,091
36,188
37,251
38,472
Balance Sheet Data (end of year):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving credit facility borrowings . . . . . . . . . . . . . . . . . . . . .
Total long-term debt (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17,769 $
747,440
401,850
414,058
128,586
Number of Stores (end of year):
Company-owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
495
46
541
18,373 $
18,308 $
12,184 $
737,893
316,800
329,875
217,993
490
44
534
704,185
168,200
181,781
359,206
484
45
529
651,920
137,100
149,568
343,183
475
44
519
11,798
612,129
77,800
89,952
365,978
449
46
495
(1) We operate on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. Fiscal year 2004 was 53 weeks in length and all other fiscal years
presented were 52 weeks.
(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.
(4) Long-term debt includes revolving credit facility borrowings and capital lease obligations.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of financial
reporting changes reflected in our Consolidated Statements of Earnings.
19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the
readers of our financial statements with a narrative from the perspective of our management on our financial condition, results of
operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
• Executive Overview
• Overview of Operations
• Results of Operations
•
• Off-Balance Sheet Arrangements and Contractual Obligations
• Critical Accounting Policies and Estimates
• Recent Accounting Pronouncements
Financial Condition, Liquidity and Capital Resources
Our MD&A should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8
“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13 weeks,
except for a 53 week year when the fourth quarter has 14 weeks. References to 2008, 2007 and 2006 are for the fiscal years ended
December 28, 2008, December 30, 2007, and December 31, 2006, respectively. Our 2008, 2007 and 2006 fiscal years each consisted
of 52 weeks and our 2009 fiscal year will consist of 53 weeks.
Financial Reporting Changes
As described in Note 1 “Summary of Significant Accounting Policies – Revisions to Financial Statement Presentation” to our
consolidated financial statements, we revised the presentation in our Consolidated Statements of Earnings to disaggregate Company
store sales into separate amounts for “Food and beverage sales” and “Entertainment and merchandise sales” and to also present
separate corresponding amounts for the cost related to each of these revenue captions. This revision had no impact on previously
reported total revenues, total cost of food and beverage and entertainment and merchandise, operating income, net income,
stockholders’ equity, comprehensive income, or cash flows from operating activities.
Executive Overview
Fiscal 2008 Summary
• Revenues increased 3.7% during 2008 compared to 2007.
- Comparable Company store sales increased 2.3%.
- Weighted average Company-owned store count increased by approximately five stores.
- We lost approximately 265 store operating days resulting from temporary store closures related to hurricanes Gustav and Ike
during the third quarter of 2008. As a result of these lost operating days, we estimate that comparable Company store sales
were negatively impacted by approximately 0.2%.
- Menu prices increased on average 1.7%.
• Company store operating costs as a percentage of Company store sales increased 0.6% during 2008 compared to 2007.
- Increases in the average price per pound of cheese and dough, an increase in our buffalo wing usage resulting from an
increase in food platter sales and an adjustment to vendor rebates represented a combined increase in food costs as a
percentage of Company store sales of approximately 0.6% (or 1.2% as a percentage of food and beverage sales).
- Various company initiatives implemented during the year provided for a combined reduction in total pizza costs of
approximately 0.4% as a percentage of Company store sales (or 0.8% as a percentage of food and beverage sales).
- A 3.6% increase in average hourly wage rates was partially offset by a 3.1% increase in revenue per hourly labor hour at our
stores.
- An increase in group medical expenses (included in store labor expenses) and general insurance costs (included in other
store operating expenses) represented a combined increase in costs as a percentage of Company store sales of 0.7% primarily
due to favorable adjustments recorded in 2007 that did not recur in 2008.
- Depreciation and amortization and rent expenses increased a combined 0.2% as a percentage of Company store sales.
- Asset disposal costs declined approximately $3.1 million, or 0.4% as a percentage of Company store sales, during 2008
primarily attributable to a reduction in the number of major remodel initiatives during 2008 compared to 2007.
• Advertising expenses in 2008 increased to $34.7 million compared to $30.7 million in 2007 due to our recently enhanced
marketing plan that incorporates both television and online media directed towards kids and moms and is further supported by
our traditional newspaper insert coupon program.
• General and administrative expenses increased to $56.0 million in 2008 compared to $51.7 million in 2007 primarily due to
higher performance based compensation costs associated with our financial performance in 2008 relative to 2007 and a 0.3%
20
increase as a percentage of total revenues in litigation related costs.
•
Interest expense increased to $17.4 million in 2008 compared to $13.2 million in 2007 primarily due to an increase in the average
debt balance outstanding under our revolving credit facility in 2008. The additional borrowings were used by us to repurchase
shares of our common stock during the first two quarters of 2008 and conduct certain capital initiatives.
- $401.9 million was outstanding under our $550 million revolving credit facility at the end of 2008.
- Average interest rates incurred on the outstanding balances of our revolving credit facility during 2008 decreased by
approximately 240 basis points compared to last year.
• Net income in 2008 increased 1.0% to $56.5 million from $55.9 million in 2007 and diluted earnings per share increased 34.7%
to $2.37 compared to $1.76 in 2007. Earnings per share growth benefited from our cumulative share repurchases of $408.9
million during the 2007 and 2008 fiscal years.
Impact of Share Repurchases
During 2008 and 2007, we repurchased 4,911,041 shares and 7,887,337 shares of our common stock under the repurchase plan
authorized by our Board of Directors (the “Board”). These share repurchases reduced our weighted average diluted shares outstanding by
3,498,151 shares in 2008 and 2,393,932 shares in 2007. We estimate that the decrease in the number of weighted average diluted shares
outstanding attributable solely to our 2008 share repurchases benefited our diluted earnings per share by approximately $0.26 in 2008.
Additionally, we estimate that the decrease in the number of weighted average diluted shares outstanding attributed solely to our 2007
share repurchases benefited our diluted earnings per share by approximately $0.08 in 2007. Our estimate is based on the weighted average
number of shares repurchased during the period and includes an adjustment for the estimated additional interest expense attributable to
increased borrowings under our revolving credit facility to finance the repurchases. Our computation does not include the effect of prior
year share repurchases.
Capital Initiatives
Our future capital expenditures will primarily be for the development of new stores and reinvestment into our existing store base
through various capital initiatives. Our plan for new store development is primarily focused on opening high sales volume stores in densely
populated areas. The cost of opening such new stores varies depending upon many factors including the size of the store, whether we
acquire land and whether the store is an in-line or freestanding building.
We believe that in order to maintain consumer demand for and the appeal of our concept, we must continually reinvest in our existing
stores. For our existing stores, we currently utilize the following capital initiatives: (a) major remodels, (b) store expansions, and (c) game
enhancements. We believe these capital initiatives are essential to preserving our existing sales and cash flows and provide a solid
foundation for long term revenue growth.
The following table summarizes information regarding the number of capital initiatives we completed during each of the periods
presented:
2008
Fiscal Year
2007
2006
Major remodels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Store expansions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Game enhancements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
20
125
160
52
19
94
165
55
15
82
152
Major remodels. We undertake periodic major remodels when there is a need to improve the overall appearance of a store or when we
introduce concept changes or enhancements to our stores. The major remodel initiative typically includes increasing the space allocated to
the playroom area, increasing the number of games and rides and developing a new exterior and interior identity. During 2008, our major
remodels cost on average approximately $0.7 million per store.
Store expansions. Store expansions improve the quality of the guests’ experience because it allows us to increase the variety of games,
rides and other entertainment offerings in our stores. In addition to expanding the square footage of a store, store expansions typically
include all components of a major remodel including an increase in the number of games and rides. A store expansion typically results in
both an increase in the store’s seat count and the space available for our various entertainment offerings. We consider our investments in
store expansions to generally be discretionary in nature. In undertaking store expansions, our objective is to improve the appeal of our
stores and to respond to sales growth opportunities as they arise. During 2008, our store expansions cost on average approximately $1.0
million per store.
Game enhancements. The primary components of the game enhancement initiative are to provide new games and rides. Game
enhancements incorporate improvements in game technology and counteract general wear and tear on the equipment. During 2008, our
21
game enhancements cost on average approximately $100 thousand to $150 thousand per store.
Since the lifecycles of our store format and our games are largely driven by changes in consumer behaviors and preferences, we
believe that our capital initiatives involving major remodels and game enhancements are required in order to keep pace with consumer
entertainment expectations. As a result, we view our major remodel and game enhancement initiatives as a means to maintaining and
protecting our existing sales and cash flows. While we are hopeful that our major remodels and game enhancements will contribute to
incremental sales growth, we believe that our capital spending with respect to expansions of existing stores will more directly lead to
growth in our comparable store sales and cash flow. We typically invest in expansions when we believe there is potential for sales growth
and, in some instances, in order to maintain sales in stores that compete with other large-box competitors. We believe that expanding the
square footage and entertainment space of a store increases our guest traffic and enhances the overall customer experience, which we
believe will contribute to the growth of our long-term comparable store sales. The objective of an expansion or remodel that increases
space available for entertainment is not intended to exclusively improve our entertainment sales, but rather is focused on impacting total
Company store sales through increased guest traffic and satisfaction.
Overview of Operations
We develop, operate and franchise family dining and entertainment centers under the name “Chuck E. Cheese’s” in 48 states and six
foreign countries or territories. Chuck E. Cheese’s stores feature musical and comic entertainment by robotic and animated characters,
arcade-style and skill oriented games, video games, rides and other activities intended to appeal to our primary customer base of families
with children between two and 12 years of age. All of our stores offer dining selections consisting of a variety of beverages, pizzas,
sandwiches, appetizers, a salad bar, and desserts.
The following table summarizes information regarding the number of Company-owned and franchised stores for the periods
presented:
Number of Company-owned stores:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired from franchisees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of franchise stores:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
Fiscal Year
2007
2006
490
5
2
(2)
495
44
4
(2)
-
46
484
10
1
(5)
490
45
1
(1)
(1)
44
475
14
-
(5)
484
44
1
-
-
45
Comparable store sales. Comparable store sales (sales of domestic stores that were open for a period greater than 18 months at the
beginning of each respective fiscal year or 12 months for acquired stores) is a key performance indicator used within our industry and is a
critical factor when evaluating our performance as it is indicative of acceptance of our strategic initiatives and local economic and
consumer trends.
The following table summarizes information regarding our average annual comparable store sales and comparable store base:
Fiscal Year
2007
(in thousands, except store number amounts)
2008
2006
Average annual sales per comparable store (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of stores included in comparable store base . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,633 $
453
1,602 $
436
1,647
416
______________
(1) Average annual sales per comparable store have been calculated based on the average weekly sales of our comparable store base. The amount of average
annual sales per comparable store cannot be used to compute year-over-year comparable store sales increases or decreases due to the change in comparable
store base.
Revenues. Our primary source of revenues is from sales at our Company-owned stores (“Company store sales”) and consists of the
sale of food, beverages, game-play tokens and merchandise. Food and beverage sales include all revenue recognized with respect to stand-
alone food and beverage sales as well as the portion of revenue that is allocated from package deals. Entertainment and merchandise sales
22
include all revenue recognized with respect to stand-alone game sales as well as the portion of revenue that is allocated from package deals.
This revenue caption also includes sales of merchandise at our stores.
A portion of Company store sales comes from sales of value-priced combination packages generally consisting of food, beverage and
game tokens (“package deals”) which we promote through in-store menu pricing or coupon offerings. Package deals represent a significant
value to our customers because they are priced at an amount lower than what our guests would pay if they were to purchase the packaged
items individually. We allocate the revenue recognized from the sale of our package deals between “Food and beverage sales” and
“Entertainment and merchandise sales” based upon our best estimate of each component’s fair value, which we typically determine as the
price charged for each component when it is sold separately. The maximum price our customers may pay for a game token is $0.25;
however, we offer game tokens at reduced prices when purchased in large quantities or as part of a package deal. On a limited basis, we
may also provide game tokens to our customers free of charge with the purchase of certain food and beverage items.
Franchise fees and royalties include area development and initial franchise fees received from franchisees to establish new stores and
royalties charged to franchisees based on a percentage of a franchised store’s sales.
Company store operating costs. Certain costs and expenses relate only to the operation of our Company-owned stores and are as
follows:
• Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates
from suppliers.
• Cost of entertainment and merchandise includes all direct costs of prizes provided and merchandise sold to our customers, as well as
the cost of tickets dispensed to customers and redeemed for prize items.
• Labor expenses consist of salaries and wages, related payroll taxes and benefits for store personnel.
• Depreciation and amortization expense pertain directly to our store assets.
• Rent expense includes lease costs for Company stores, excluding common occupancy costs (e.g. common area maintenance (“CAM”)
charges, property taxes, etc.).
• Other store operating expenses which include utilities, repair costs, liability and property insurance, CAM, property taxes, preopening
expenses, store asset disposal gains and losses, and all other costs directly related to the operation of a store.
Our “Cost of food and beverage” and “Cost of entertainment and merchandise” mentioned above do not include an allocation of (i)
store employee payroll, related taxes and benefit costs and (ii) depreciation and amortization expense associated with Company-store
assets. We believe that presenting store-level labor costs and depreciation and amortization expense in the aggregate provides the most
informative financial reporting presentation. Our rationale for excluding such costs is as follows:
(cid:3) Based on the fact that our store employees are trained to sell and attend to both our dining and entertainment operations, we
believe it would be difficult and potentially misleading to assign labor costs between food and beverage sales and entertainment
and merchandise sales.
(cid:3) While certain assets are individually dedicated to either our food service operations or game activities, we also have significant
capital investments in shared depreciating assets, such as leasehold improvements, point-of-sale systems, animatronics, and
showroom fixtures. Therefore, we believe it would be difficult and potentially misleading to assign depreciation and amortization
expense between food and beverage sales and entertainment and merchandise sales.
Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet
advertising, coupons and media expenses for national and local advertising, with offsetting contributions from the Advertising Fund and
Media Fund made by the Association pursuant to franchise agreements.
General and administrative expenses. General and administrative expenses represent all costs associated with our corporate office
operations, including regional and district management and corporate personnel payroll and benefits, depreciation and amortization of
corporate assets and other administrative costs not directly related to the operation of a store location.
Asset impairments. Asset impairments represent non-cash charges we record to write down the carrying amount of long-lived assets
within stores that are not expected to generate sufficient projected cash flows in order to recover their net book value.
23
Results of Operations
Historical Results
The following table summarizes our principal sources of revenues expressed in dollars and as a percentage of total revenues for the
periods presented:
2008
Fiscal Year
2007
(in thousands, except percentages)
2006
Food and beverage sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entertainment and merchandise sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 409,895
400,798
Company store sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchising activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
810,693
3,816
50.3%
49.2%
99.5%
0.5%
$ 405,740
375,925
781,665
3,657
51.7%
47.9%
99.5%
0.5%
$ 411,080
358,161
769,241
3,312
53.2%
46.4%
99.6%
0.4%
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 814,509
100.0%
$ 785,322
100.0%
$ 772,553
100.0%
______________
Due to rounding, percentages presented in the table above may not add.
The following table summarizes our costs and expenses expressed in dollars and as a percentage of Company store sales (except as
otherwise noted) for the periods presented:
2008
Fiscal Year
2007
(in thousands, except percentages)
2006
Company store operating costs:
Cost of food and beverage (as a percentage of food and
beverage sales) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 96,891
23.6%
$ 93,693
23.1%
$ 89,650
21.8%
Cost of entertainment and merchandise (as a percentage of
entertainment and merchandise sales). . . . . . . . . . . . . . . . . . . . . . . . .
34,525
8.6%
32,720
8.7%
32,158
9.0%
Labor expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other store operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Company store operating costs . . . . . . . . . . . . . . . . . . . . . . . . .
Other costs and expenses (as a percentage of total revenues):
Advertising expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (as a percentage of total revenues). . . . . . . . . . . . . . .
Interest expense, net (as a percentage of total revenues). . . . . . . . . . . . . .
131,416
223,331
74,805
65,959
119,990
615,501
34,736
55,970
282
706,489
108,020
17,389
16.2%
27.5%
9.2%
8.1%
14.8%
75.9%
4.3%
6.9%
0.0%
86.7%
13.3%
2.1%
126,413
214,147
70,701
63,734
113,789
588,784
30,651
51,705
9,638
680,778
104,544
13,170
16.2%
27.4%
9.0%
8.2%
14.6%
75.3%
3.9%
6.6%
1.2%
86.7%
13.3%
1.7%
121,808
210,010
64,292
60,333
106,025
562,468
32,253
53,037
3,910
651,668
120,885
9,508
15.8%
27.3%
8.4%
7.8%
13.8%
73.1%
4.2%
6.9%
0.5%
84.4%
15.6%
1.2%
Income before income taxes (as a percentage of total revenues). . . . . . $ 90,631
11.1%
$ 91,374
11.6%
$ 111,377
14.4%
______________
Due to rounding, percentages presented in the table above may not add.
Fiscal Year 2008 Compared to Fiscal Year 2007
Revenues
Company store sales increased 3.7% to $810.7 million during 2008 compared to $781.7 million in 2007 primarily due to a 2.3%
increase in comparable store sales during 2008, a net increase in the number of our Company-owned stores and an average increase in
menu prices of 1.7% in 2008 compared to 2007. The weighted average number of Company-owned stores open during 2008 increased by
approximately five stores as compared to 2007. We believe that our comparable store sales in 2008 reflect the impact of the various
strategies we have implemented during the year, including the ongoing capital initiatives at our existing stores, an enhanced marketing plan
implemented at the beginning of 2008, implementation of a suggestive sales program and our recent efforts to increase the number of
birthday parties and fund raising events at our stores. During 2008, our birthday party sales as a percentage of total Company store sales
increased from 12.0% to 12.9%, and fund raising sales as a percentage of total Company store sales increased from 0.7% to 0.9%. Even
with the success of these strategies and the increase in Company store sales, we believe that our sales in 2008 were negatively impacted by
a restraint in consumer spending attributable to the weakening economy particularly in the last two quarters of 2008. The increase in our
comparable store sales growth was also partially offset by the impact of temporary closures of 39 stores (representing approximately 265
store operating days) in the third quarter of 2008 as a result of hurricanes Gustav and Ike. We estimate that these temporary closures
decreased our 2008 comparable store sales by approximately 0.2%.
24
Our Company store sales mix was 50.6% food and beverage and 49.4% entertainment and merchandise for fiscal 2008 compared to
51.9% and 48.1%, respectively, for 2007.
Revenue from franchise fees and royalties increased 4.3% to $3.8 million during 2008 compared to $3.7 million in 2007 primarily due
to our recognition of additional franchise fees attributable to the increase in the number of new franchise stores that opened during 2008.
During 2008, four new franchise stores opened and we acquired two franchise stores. Domestic franchise comparable store sales decreased
2.4% in 2008 as compared to 2007.
Company Store Operating Costs
Cost of food and beverage as a percentage of food and beverage sales increased 0.5% to 23.6% during 2008 from 23.1% in 2007
primarily due to higher commodity prices and beverage costs. During 2008, the average price per pound of cheese increased approximately
$0.13, or 8%, and the average price per pound of dough increased approximately $0.12, or 29%, compared to prices paid in 2007. Increases
attributable to the average prices per pound of cheese and dough and our increased buffalo wing usage represented approximately a 1.0%
combined increase in food costs as a percentage of food and beverage sales. These increases were partially offset by a reduction of
approximately 0.9% as a percentage of food and beverage sales in total pizza costs attributable to our implementation of an enhanced
cheese product and a resizing of our medium and large pizzas during the first two quarters of 2008. Beverage costs increased due to a non-
cash charge of approximately $0.9 million, or approximately 0.2% as a percentage of food and beverage sales, that we recorded in the third
quarter to adjust our vendor rebate allowance. Additionally, costs associated with an enhanced birthday party package we introduced during
2008 increased approximately 0.2% as a percentage of food and beverage sales.
Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales decreased 0.1% to 8.6% during 2008
from 8.7% in 2007.
Labor expense as a percentage of Company store sales increased 0.1% to 27.5% during 2008 compared to 27.4% in 2007 primarily
due to a 3.6% increase in average hourly wage rates at our stores, higher group medical expenses and performance based compensation
costs related to field operations personnel. These increases were partially offset by a 3.1% increase in revenue per hourly labor hour.
Depreciation and amortization expense related to our stores increased $4.1 million to $74.8 million during 2008 compared to $70.7
million in 2007 primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development.
Store rent expense increased $2.2 million to $66.0 million during 2008 compared to $63.7 million in 2007 primarily due to an increase
in the number of store properties we lease resulting from our new store development and to a lesser extent expansions of existing stores.
Other store operating expenses as a percentage of Company store sales increased 0.2% to 14.8% during 2008 compared to 14.6% in
2007 primarily due to increases in insurance related costs and, to a lesser extent, increases in other store operating expense and were
partially offset by the leverage from our sales increase. Insurance related costs were approximately $2.7 million higher during 2008
compared to 2007 due to a favorable prior year adjustment to workers compensation and general liability reserves recorded in 2007 and
losses we incurred from hurricanes Gustav and Ike during the third quarter of 2008 which were not covered by our insurance. Property
taxes increased approximately $2.0 million, or 0.2% as a percentage of Company store sales, during 2008 primarily due to a favorable
adjustment to our accrued property taxes in the prior year. This increase was offset by a $2.4 million, or 0.3% as a percentage of Company
store sales, reduction in asset disposal costs primarily attributable to charges for our store remodeling initiatives during 2008 which did not
recur to the same extent as had been incurred in 2007. Other store operating costs in 2008 also benefited from a $0.8 million gain that we
recognized in the second quarter of 2008 from the sale of property related to our TJ Hartford’s Grill and Bar (“TJ Hartford’s”).
Advertising Expense
Advertising expense as a percentage of total revenues increased 0.4% to 4.3% during 2008 from 3.9% in 2007 primarily due to
increased television advertising, newspaper inserts and online media costs associated with our enhanced marketing programs in 2008.
General and Administrative Expenses
General and administrative expenses as a percentage of total revenues increased 0.3% to 6.9% during 2008 from 6.6% in 2007
primarily due to higher corporate office compensation expense and litigation related costs. Total corporate office compensation expense
increased $4.6 million, or 0.4% as a percentage of total revenues, during 2008 compared to 2007 primarily due to higher performance
based compensation costs associated with our financial performance in 2008. Litigation related costs increased approximately $2.5 million,
or 0.3% as a percentage of total revenues, primarily due to the accrual of $1.3 million in aggregate loss contingencies and a $1.3 million
increase in legal fees related to ongoing legal matters. These increases were partially offset by reductions in other corporate office
expenses, including the non-recurrence of approximately $0.5 million of professional service fees associated with the review of our stock
option granting practices that concluded in the first quarter of 2007 and the benefit from approximately $2.4 million, or 0.3% as a
percentage of total revenues, of 2007 tax related charges which did not recur in 2008.
25
Asset Impairments
Impairments related to our store assets were $0.3 million during 2008 compared to $9.6 million in 2007. The $0.3 million asset
impairment charge during 2008 related to two stores, one of which had been previously impaired and the other which we decided to close
prior to the end of its expected lease term. In 2007, we recorded impairment charges of $9.6 million related to six stores, one of which we
closed in the first quarter of 2008. We recognized these asset impairment charges due to the decline in the stores’ estimated fair values
which had been adversely affected by economic and competitive factors in the markets in which the stores are located. Due to the negative
impact of these factors, we determined that the forecasted cash flows for these stores were insufficient to recover the carrying amount of
their assets and, as a result, an impairment charge was necessary because the estimated fair value of the stores’ long-lived assets had
declined below their carrying amount.
Interest Expense, Net
Interest expense increased to $17.4 million during 2008 compared to $13.2 million in 2007 primarily due to an increase in the average
debt balance outstanding under our revolving credit facility during 2008 as compared to the prior year. During 2008, the average debt
balance under our revolving credit facility increased to approximately $358.6 million compared to $178.8 million in 2007 primarily due to
our repurchases of our common stock during the first two quarters of 2008. The effect of the debt increase was partially offset by lower
average interest rates in 2008, which declined by approximately 240 basis points compared to average interest rates in 2007.
Income Taxes
Our effective income tax rate was 37.7% and 38.8% during 2008 and 2007, respectively. The decrease in our effective income tax rate
was primarily due to reductions in certain unfavorable permanent tax differences, other discrete tax adjustments made during 2008 and an
increase in available federal tax credits.
Net Income and Earnings Per Share
We reported increased net income of $56.5 million during 2008 compared to $55.9 in 2007. Diluted earnings per share increased
34.7% to $2.37 per share during 2008 from $1.76 per share in 2007 due to a 24.9% decrease in the number of weighted average diluted
shares outstanding combined with the1.0% increase in net income. During 2008, we repurchased 4,911,041 shares of our common stock
under the plan authorized by our Board, which reduced our weighted average diluted shares outstanding by 3,498,151 shares. We estimate
that the decrease in the number of weighted average diluted shares outstanding attributable solely to our 2008 share repurchases benefited
our diluted earnings per share by approximately $0.26 during 2008. Our estimate is based on the weighted average number of shares
repurchased during the period and includes an adjustment for the estimated additional interest expense attributable to increased borrowings
under our revolving credit facility to finance the repurchases. Our computation does not include the effect of prior year share repurchases.
Fiscal Year 2007 Compared to Fiscal Year 2006
Revenues
Company store sales increased 1.6% to $781.7 million in 2007 compared to $769.2 million in 2006 primarily due to the net increase in
the number of Company-owned stores in 2007, partially offset by a 1.4% decrease in 2007 comparable store sales. In 2007, the weighted
average number of Company-owned stores open during the year increased by 11 stores as compared to 2006. We believe that comparable
store sales in 2007 were negatively affected by a weak consumer environment and a significant increase in competition including family
movies. Menu prices increased 2.2% in 2007 as compared to 2006.
Our Company store sales mix was 51.9% food and beverage and 48.1% entertainment and merchandise for fiscal 2007 compared to
53.4% and 46.6%, respectively, for 2006.
Revenue from franchise fees and royalties were $3.7 million in 2007 compared to $3.3 million in 2006. During 2007, one new
franchise store opened, we acquired one franchise store and one franchise store closed. Domestic franchise comparable store sales
decreased 0.7% in 2007 as compared to 2006.
Company Store Operating Costs
Cost of food and beverage as a percentage of food and beverage sales increased 1.3% to 23.1% in 2007 from 21.8% in 2006 primarily
due to higher cheese prices and a larger beverage rebate received in 2006 as compared to 2007. These increases were partially offset by
higher menu prices. The average price per pound of cheese in 2007 increased approximately $0.50 compared to prices paid in 2006.
Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales decreased 0.3% to 8.7% in 2007 from
9.0% in 2006.
26
Labor expense as a percentage of Company store sales increased 0.1% to 27.4% in 2007 compared to 27.3% in 2006 primarily due to a
5.7% increase in hourly wage rates which was offset by improvement in labor productivity and an increase in menu prices.
Depreciation and amortization expense related to our stores increased $6.4 million to $70.7 million in 2007 compared to $64.3 million
in 2006. The increase was due to ongoing capital investment initiatives occurring at our existing stores and new store development.
Store rent expense increased $3.4 million to $63.7 million in 2007 compared to $60.3 million in 2006 primarily due to new store
development.
Other store operating expenses as a percentage of Company store sales increased 0.8% to 14.6% in 2007 compared to 13.8% for the
same period in 2006. The increase was primarily due to negative comparable store sales and a 0.6% increase in insurance expense as
percentage of store sales in 2007 attributable to the favorable impact of prior year claims reserves adjustments, resulting from improved
trends of general liability and workers compensation claims recognized in 2006, which did not recur to the same extent in 2007.
Advertising Expense
Advertising expense as a percentage of total revenues decreased 0.3% to 3.9% in 2007 from 4.2% in 2006 primarily due to lower
advertisement production costs in 2007 compared to 2006.
General and Administrative Expenses
General and administrative expenses associated with our corporate office operations as a percentage of total revenues decreased 0.3%
to 6.6% in 2007 from 6.9% in 2006. The decrease was primarily due to reductions in corporate office compensation and non-recurring
professional service fees. During 2007, corporate compensation expense decreased $2.5 million, or 0.3% as a percent of total revenues,
primarily due to a reduction in performance based compensation costs. We also benefited in 2007 from a decrease in professional service
fees primarily associated with the conclusion of the 2006 review of our stock option granting practices. These reductions were partially
offset by certain tax related charges and increases in other corporate office expenses.
Asset Impairments
Impairments related to our store assets increased to $9.6 million in 2007 compared to $3.9 million in 2006. In 2007, we recorded
impairment charges of $9.6 million related to six stores, one of which we closed in the first quarter of 2008. In 2006, we recognized asset
impairment charges of approximately $3.9 million related to five different stores. We recognized these asset impairments due to the decline
in the stores’ estimated fair values which had been adversely affected by economic and competitive factors in the markets in which the
stores are located. Due to the negative impact of these factors, we determined that the forecasted cash flows for these stores were
insufficient to recover the carrying amount of their assets and, as a result, an impairment charge was necessary because the estimated fair
value of the stores’ long-lived assets had declined below their carrying amount.
Interest Expense, Net
Interest expense increased to $13.2 million in 2007 compared to $9.5 million in 2006 primarily due to a greater amount of debt
outstanding under our credit facility and higher average interest rates incurred in 2007. During 2007, the average debt balance under our
revolving credit facility was $178.8 million compared to $142.8 million in 2006 primarily due to our repurchases of our common stock in
2007. Also in 2007, average interest rates increased by approximately 70 basis points compared to average interest rates in 2006.
Income Taxes
Our effective income tax rate was 38.8% and 38.7% in 2007 and 2006, respectively.
Net Income and Earnings Per Share
We reported net income of $55.9 million in 2007 compared to $68.3 million in 2006. Diluted earnings per share decreased to $1.76
per share in 2007 from $2.04 per share in 2006 due to the 18.1% decrease in net income which was partially offset by a 5.3% decrease in
the number of weighted average shares outstanding. During 2007, we repurchased 7,887,337 shares of our common stock under the plan
authorized by our Board, which reduced our weighted average diluted shares outstanding by 2,393,932 shares. We estimate that the
decrease in the number of weighted average diluted shares outstanding attributable solely to our 2007 share repurchases benefited our
diluted earnings per share by approximately $0.08 during 2007. Our estimate is based on the weighted average number of shares
repurchased during the period and includes an adjustment for the estimated additional interest expense attributable to increased borrowings
under our revolving credit facility to finance the repurchases. Our computation does not include the effect of prior year share repurchases.
Financial Condition, Liquidity and Capital Resources
27
Overview of Liquidity
Funds generated by our operating activities, available cash and cash equivalents, and our revolving credit facility continue to be our
most significant sources of liquidity. We believe funds generated from the expected results of operations and available cash and cash
equivalents will be sufficient to finance our business development strategies and capital initiatives for the next year. In addition, our
revolving credit facility is available for additional working capital needs and investment opportunities. However, in light of the current
weakened economic environment and volatility in the financial markets, there can be no assurance that we will generate cash flows at or
above our current levels or that we will have adequate access to credit. Further restraint in consumer spending or disruptions in financial
markets could require us to take measures to conserve cash until the economic climate stabilizes or, if needed, until we can secure
alternative credit arrangements or other funding for our business needs. Such measures could include deferring or curtailing our capital
expenditures and other discretionary uses of cash.
Our primary requirements for cash provided by operating activities relate to planned capital expenditures, servicing our debt and may
include repurchases of our common stock.
We do not enter into any material development or contractual purchase obligations in connection with our business development
strategy. As a result, with respect to our planned capital expenditures, including spending that pertains to our new store development and
capital initiatives, we believe that we have the flexibility necessary to manage our liquidity by promptly deferring or curtailing our capital
spending.
The following tables present summarized financial information that we believe is helpful in evaluating our liquidity and capital
resources:
2008
Fiscal Year
2007
(in thousands)
2006
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,182 $
(85,478)
(58,034)
(1,274)
162,742 $
(108,647)
(54,030)
-
149,602
(115,516)
(27,962)
-
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(604) $
65 $
6,124
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,542 $
46,696 $
10,721 $
27,016 $
9,168
45,106
At Year End
2008
2007
(in thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Revolving credit facility borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unused commitments under revolving credit facility (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,769 $
401,850 $
148,150 $
18,373
316,800
233,200
(1) Based on our debt covenant calculations as of December 28, 2008, $138.7 million of the unused revolving credit facility commitments was
available for future borrowing.
Cash Flows – Operating Activities
Net cash provided by operating activities decreased $18.6 million to $144.2 million during 2008 from $162.7 million in 2007
primarily attributable to a $15.8 million federal income tax refund received in 2007 in connection with the implementation of certain tax
strategies.
Our cash interest payments increased $5.8 million to $16.5 million during 2008 from $10.7 million in 2007 primarily due to an
increase in the average debt balance outstanding under our credit facility as compared to the prior year, partially offset by a reduction in the
prevailing rates of interest incurred on our borrowings in 2008 as compared to 2007.
Our cash payments for income taxes, net of refunds we received, increased $19.7 million to $46.7 million during 2008 compared to
payments of $27.0 million in 2007. The increase was primarily due to the refund of $15.8 million received in 2007, a $6.3 million payment
made to the Internal Revenue Service in the third quarter of 2008 for the settlement of certain federal income tax examination issues, and
an increase in estimated federal and state income tax payments made during 2008.
Net cash provided by operating activities increased to $162.7 million in 2007 from $149.6 million in 2006. The increase was primarily
28
attributable to a $15.8 million federal income tax refund received in 2007 in connection with the implementation of certain tax strategies
partially offset by the timing of payments for accrued expenses and changes in operating assets and liabilities between the two years.
Cash Flows – Investing Activities
Net cash used in investing activities decreased $23.2 million to $85.5 million during 2008 from $108.6 million in 2007, primarily
due to a $21.3 million decrease in capital expenditures in 2008 attributable to a decrease in the number of our new store openings and
a change in the mix of capital initiatives impacting our existing stores. During 2008, we opened or acquired from franchisees, four
fewer stores than we had in 2007, which contributed to a $7.7 million reduction in our capital expenditures. Also during 2008, the
number of major remodels decreased by 37 units, the number of store expansions increased by only one unit and the number of game
enhancements increased by 31 units as compared to the prior year, providing for a $24.7 million reduction in our capital expenditures
from the prior year. These decreases were partially offset by an increase in expenditures for general store maintenance. Investing
activities cash flows during 2008 also included the receipt of cash proceeds of approximately $2.1 million from our sale of property
related to TJ Hartford’s.
Net cash used in investing activities decreased to $108.6 million in 2007 from $115.5 million in 2006, due to a decrease in capital
expenditures during 2007. Capital expenditures were $109.1 million in 2007 compared to $115.8 million in 2006. The decrease in capital
expenditures was attributable to our opening four fewer new stores in 2007 than we had opened in 2006 and a lower average cost incurred
per store for capital initiatives in 2007 compared to 2006. In 2007, capital initiatives affected 165 existing stores compared to 152 stores in
2006.
Cash Flows – Financing Activities
Net cash used in financing activities increased $4.0 million to $58.0 million during 2008 from $54.0 million in 2007, primarily due to
a decrease in proceeds obtained through the exercise of employee stock options in 2008 compared to 2007. The amount of proceeds we
obtained from the exercise of stock options decreased $26.1 million to $19.2 million in 2008 from $45.3 million in 2007 due to a 67%
decline in the number of option shares exercised during 2008. Also during 2008, we increased the outstanding borrowings under our
revolving line of credit by $85.1 million, compared to 2007 when we increased our revolving line of credit borrowings by $148.6 million.
The $63.6 million decrease in the amount of borrowings we drew under our revolving line of credit during 2008 compared to 2007 was
primarily attributable to the reduction in our repurchases of our common stock. During 2008, our repurchases of our common stock
decreased $87.2 million to $160.8 million, compared to $248.1 million in 2007.
Net cash used in financing activities increased to $54.0 million in 2007 from $28.0 million in 2006, primarily due to a $181.3 million
increase in the cost of repurchases of the Company’s common stock, partially offset by a $117.4 million increase in net borrowings
obtained under the our revolving credit facility which we amended in 2007 to increase the amount of available borrowings by $350 million.
Additionally, during 2007, proceeds obtained from the exercise of employee stock options increased by $37.3 million compared to 2006.
Sources of Liquidity
We currently finance our business activities through cash flows provided by our operations and, if necessary, from borrowings under
our revolving credit facility.
Our requirement for working capital is not significant since our customers pay for their purchases in cash or credit cards at the time of
the sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Since our accounts
payable are generally due in five to 30 days, we are able to operate with a net working capital deficit (current liabilities in excess of current
assets). Our net working capital deficit decreased to $7.7 million at December 28, 2008 from $11.9 million at December 30, 2007 primarily
due to an increase in refundable income taxes, partially offset by increases in accounts payable and accrued expenses.
Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of the credit facility
agreement, including our maintenance of certain prescribed financial ratio covenants, as more fully described below.
Debt Financing
Our revolving credit facility agreement provides for total borrowings of up to $550 million for a term of five years. The credit facility,
which matures in October 2012, also includes an accordion feature which allows us, subject to lender approval, to request an additional
$50 million in borrowings at any time. As of December 28, 2008, there were $401.9 million of borrowings and $9.4 million of letters of
credit outstanding but undrawn under our credit facility. The credit facility bears interest at LIBOR plus an applicable margin of 0.625% to
1.25% determined based on our financial performance and debt levels, or alternatively, the higher of (a) the prime rate or (b) the Federal
Funds rate plus 0.50%. As of December 28, 2008, borrowings under the credit facility incurred interest at LIBOR (0.46% - 2.17%) plus
1.00% or prime (3.25%). The total weighted average interest rate applied to outstanding borrowings under the credit facility was 2.56% at
December 28, 2008 and 4.70% at December 30, 2007. A commitment fee of 0.1% to 0.3%, depending on our financial performance and
debt levels, is payable on a quarterly basis on any unused credit line. All borrowings are unsecured, but we have agreed not to pledge any of
29
our existing assets to secure future indebtedness.
During 2008, we increased the outstanding debt balance under our revolving credit facility by $85.1 million to $401.9 million from
$316.8 million as of December 30, 2007. The increase in debt balance was primarily attributable to our repurchases of our common stock
during the first two quarters of 2008.
The weighted average interest rate incurred on borrowings under our revolving credit facility was 3.9%, 6.3% and 5.6% in 2008, 2007
and 2006, respectively.
Our revolving credit facility agreement contains a number of covenants, including covenants requiring maintenance of the following
financial ratios as of the end of any fiscal quarter:
•
•
a consolidated fixed charge coverage ratio of not less than 1.5 to 1.0, based upon the ratio of (a) consolidated EBITR (as defined in
the revolving credit facility agreement) for the last four fiscal quarters to (b) the sum of consolidated interest charges plus
consolidated rent expense during such period.
a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded
indebtedness (as defined in the revolving credit facility agreement) to (b) consolidated EBITDA (as defined in the revolving credit
facility agreement) for the last four fiscal quarters.
Our revolving credit facility is the primary source of committed funding from which we finance our planned capital expenditures,
strategic initiatives, such as repurchases of our common stock, and certain working capital needs. Non-compliance with the financial
covenant ratios could prevent us from being able to access further borrowings under our revolving credit facility, require us to immediately
repay all amounts outstanding under the revolving credit facility, and increase our cost of borrowing. As of December 28, 2008, we were in
compliance with these covenant ratios, with a consolidated fixed charge coverage ratio of 2.2 to 1 and a consolidated leverage ratio of 2.2
to 1.
Interest Rate Swap
On May 27, 2008, we entered into a $150.0 million notional amount interest rate swap contract as a hedge against adverse changes in
interest rates and to reduce the variability of the interest payment cash flows associated with our variable rate revolving credit facility debt.
The contract, which matures in May 2011, requires us to pay a fixed rate of 3.62% while receiving variable payments from the counterparty
at the three-month LIBOR rate. The differential amounts receivable or payable under the swap contract are recorded over the life of the
contract as adjustments to interest expense. We have designated the swap as a cash flow hedge for accounting purposes. Accordingly, the
swap is recorded at its estimated fair value on the consolidated balance sheet and changes in the fair value that are considered to be
effective are reported on the consolidated balance sheet as a component of accumulated other comprehensive income. Throughout the term
of the swap contract, the unrealized gains and losses reported in accumulated other comprehensive income will be recognized in earnings
consistent with when the variable interest rate of the debt affects earnings. Any changes in fair value of the swap that are considered to be
ineffective will be recorded in earnings as they arise. There were no ineffective gains or losses recognized in 2008.
As of December 28, 2008, the estimated fair value of the swap contract was a liability of approximately $6.9 million. Refer to Note 7
“Derivative Instrument” of our consolidated financial statements for a more complete discussion of our interest rate swap contract.
Capital Expenditures
Our future capital expenditures are expected to be primarily for the development of new stores and reinvestment into our existing store
base through various capital initiatives. We estimate capital expenditures in 2009 will total approximately $70.0 to $75.0 million, including
approximately $44.0 million related to capital initiatives for our existing stores, approximately $16.0 million related to new store
development and the acquisition of franchise stores, and the remainder for general store requirements and corporate capital expenditures.
We plan to fund these capital expenditures through cash flow from operations and, if necessary, borrowings under our revolving credit
facility. While we believe that we must continually make capital investments in our existing store base, a weakened economy could require
us to take measures to conserve cash until the economic climate stabilizes. Such measures could include deferring or curtailing our capital
expenditures.
During 2008, we opened five new Company-owned stores and purchased two stores from a franchisee. The cost of opening such new
stores varies depending upon many factors including the size of the store, whether we acquire land and whether the store is an in-line or
freestanding building. The average capital cost of all new stores we opened during 2008 was approximately $2.5 million to $2.7 million per
store. We currently expect to open approximately five new, including one relocated, Company-owned stores in 2009 at an average cost of
approximately $3.1 million to $3.3 million per store.
We believe that in order to maintain consumer demand for and the appeal of our concept, we must continually reinvest in our existing
stores. For our existing stores, we currently utilize the following capital initiatives: (a) major remodels, (b) store expansions, and (c) game
30
enhancements.
The major remodel initiative typically includes increasing the space allocated to the playroom area of the store, increasing the number
of games and rides and developing a new exterior and interior identity. We completed 15 major remodels during 2008, at an average cost of
approximately $0.7 million per store. We currently expect to complete approximately eight major remodels in 2009 at an average cost of
approximately $0.6 million to $0.7 million per store.
In addition to expanding the square footage of a store, store expansions typically include all components of a major remodel including
an increase in the number of games and rides. A store expansion typically results in both an increase in the store’s seat count and the space
available for our various entertainment offerings. We completed 20 store expansions in 2008, at an average cost of approximately $1.0
million per store. We currently expect to complete approximately 25 store expansions in 2009 at an average cost of approximately $1.0
million per store.
The primary components of the game enhancement initiative are to provide new games and rides. Game enhancements incorporate
improvements in game technology and counteract general wear and tear on the equipment. We completed 125 game enhancement
initiatives in 2008, at an average cost of approximately $0.1 million to $0.2 million per store. We currently expect to complete
approximately 105 game enhancements in 2009 at an average cost of approximately $100 thousand to $150 thousand per store.
Share Repurchases
We repurchase shares of our common stock under a plan authorized by our Board. The plan authorizes us to make repurchases in the
open market or in private transactions. As amended, the share repurchase plan authorizes a total of $600 million of share repurchases and
does not have a stated expiration date. During 2008, we repurchased 4,911,041 shares through the open market at an aggregate purchase
price of approximately $160.8 million. At December 28, 2008, approximately $71.4 million remained available for share repurchases under
the $600 million repurchase authorization. We continually assess the optimal means by which to repurchase our common stock, including
but not limited to open market repurchases, private transactions or other structured transactions which may be entered into with a banking
partner.
Off-Balance Sheet Arrangements and Contractual Obligations
At December 28, 2008, we had no off-balance sheet financing arrangements as described in Regulation S-K Item 303(a)(4)(ii).
The following table summarizes our contractual cash obligations as of December 28, 2008:
Total
Less than
1 Year
Payments Due by Period
1 – 3
Years
(in thousands)
3 – 5
Years
More than
5 Years
Operating leases (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving credit facility (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Interest obligations (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase commitments (4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions (5) . . . . . . . . . . . . . . . . . . . . . . . . . .
803,907 $
18,205
401,850
43,605
524
469
$ 1,268,560 $
66,849 $
1,683
-
12,234
524
469
81,759 $
132,954 $
3,366
-
23,036
-
-
129,350 $
3,186
401,850
8,335
-
-
159,356 $
542,721 $
474,754
9,970
-
-
-
-
484,724
(1) Includes the initial non-cancellable term plus renewal option periods provided for in the lease that can be reasonably assured and excludes
obligations to pay property taxes, insurance and maintenance on the leased assets.
(2) The amount for the revolving credit facility excludes interest payments related to this variable rate debt.
(3) Interest obligations represent an estimate of future interest payments under our revolving credit facility. We calculated the estimate based on (i)
terms of the credit facility agreement, (ii) using a 2.56% weighted average interest rate incurred on outstanding borrowings that were not
subject to an interest rate swap agreement as of December 28, 2008, (iii) and $150.0 million notional amount of debt converted to a fixed rate
of 3.62% through an interest rate swap contract which matures in May 2011. Our estimate assumes that we will maintain the same levels
indebtedness and financial performance through the credit facility’s maturity in October 2012.
(4) We are required to purchase certain store furniture totaling $0.5 million that has been or will be manufactured to our specifications.
(5) Due to the uncertainty related to the timing and reversal of uncertain tax positions, only the short-term uncertain tax benefits have been
provided in the table above. The long-term amounts excluded from the table above were approximately $4.5 million.
In addition to the above, we estimate that the accrued liabilities for group medical, general liability and workers’ compensation claims
of approximately $19.5 million as of December 28, 2008 will be paid as follows: approximately $8.3 million to be paid in 2009 and the
remainder paid over the six year period from 2010 to 2015.
31
As of December 28, 2008, capital expenditures totaling $5.4 million were outstanding and included in accounts payable. These
amounts are expected to be paid in less than one year.
Inflation
Our cost of operations, including but not limited to labor, food products, supplies, utilities, financing and rental costs, are significantly
affected by inflationary factors. We pay most of our part-time employees rates that are related to federal, state and municipal mandated
minimum wage requirements. Our management anticipates that any increases in federal or state mandated minimum wage would result in
higher costs to us, which we expect may be partially offset by menu price increases.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States
(“GAAP”). The application of GAAP requires us to make estimates and assumptions that affect the reported values of assets and liabilities
at the date of the financial statements, the reported amount of revenues and expenses during the reporting period, and the related
disclosures of contingent assets and liabilities. The use of estimates is pervasive throughout our financial statements and is affected by
management judgment and uncertainties. Our estimates, assumptions and judgments are based on historical experience, current market
trends and other factors that we believe to be relevant and reasonable at the time the consolidated financial statements are prepared. We
continually evaluate the information used to make these estimates as the business and the economic environment change. Actual results
may differ materially from these estimates under different assumptions or conditions.
The significant accounting policies used in the preparation of our consolidated financial statements are described in Note 1 “Summary
of Significant Accounting Policies” under Item 8. “Financial Statements and Supplementary Data.” We consider an accounting policy or
estimate to be critical if it requires difficult, subjective or complex judgments, and is material to the portrayal of financial condition,
changes in financial condition or results of operations. The accounting policies and estimates that our management considers most critical
are: estimation of reserves specifically related to insurance, tax and legal contingencies; valuation of long-lived assets; stock-based
compensation; accounting for leases and hedge accounting. The selection, application and disclosure of the critical accounting policies and
estimates have been reviewed by the Audit Committee of the Board of Directors.
Estimation of Reserves
The amount of liability we record for claims related to insurance, tax and legal contingencies requires us to make judgments about the
amount of expenses that will ultimately be incurred. We use history and experience, as well as other specific circumstances surrounding
these contingencies, in evaluating the amount of liability that should be recorded. As additional information becomes available, we assess
the potential liability related to various claims and revise our estimates as appropriate. These revisions could materially impact our results
of operations and financial position or liquidity.
We are self-insured for certain losses related to workers’ compensation claims, property losses and general liability matters. We also
have a self-insured health program administered by a third party covering the majority of the employees that participate in our health
insurance programs. We estimate the amount of reserves for all the insurance programs discussed above at the end of each reporting period.
This estimate is primarily based on information provided by independent third-party actuaries. The information includes historical claims
experience, demographic factors, severity factors, and other factors we deem relevant. A 10% change in the insurance reserves at December
28, 2008, would have affected our net income by approximately $1.0 million for the fiscal year ended December 28, 2008. We are insured
through third-party insurance carriers for certain losses related to workers' compensation, general liability, property and other liability
claims, with deductibles of up to approximately $0.1 million to $0.4 million per occurrence. For claims that exceed the deductible amount,
we record a gross liability and a corresponding receivable representing expected recoveries, since we are not legally relieved of our
obligation to the claimant.
We are subject to periodic audits from multiple domestic and foreign tax authorities related to income tax, sales and use tax, personal
property tax, and other forms of taxation. These audits examine our tax positions, timing of income and deductions, and allocation
procedures across multiple jurisdictions. As part of our evaluation of these tax issues, we establish reserves in the consolidated financial
statements based on the estimate of current probable tax exposures. We recognize uncertain income tax positions based on the assessment
of whether the tax position was more likely than not to be sustained on audit, using the guidance provided in Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109.” Depending on the nature of the tax issue, we could be subject to audit over several years; therefore, the estimated reserve balances
might exist for multiple years before an issue is resolved by the taxing authority.
Additionally, from time to time we are involved with governmental inquiries, legal proceedings and other claims that are incidental to
the conduct of our business which are brought about by customers, employees and others involved in operational issues common to the
entertainment and food industries. When a contingency involving uncertainty as to a possible loss occurs (“contingent liability”), reserves
are established based on our best estimates of the potential liability in these matters. Our estimates of contingent liability are developed in
consultation with in-house and outside legal counsel and are based upon a combination of litigation and settlement strategies in light of
32
specific events and circumstances including settlement discussions with respect to ongoing legal matters and court rulings in relevant, but
unrelated, proceedings. Our management reviews the contingent liability reserves periodically, and loss reserves may be increased or
decreased in the future to reflect further developments.
Although we believe that our assessments of tax and contingent liability reserves are based on reasonable judgments and estimates,
actual results could differ, which may expose us to material gains or losses in future periods. These actual results could materially affect
our effective tax rate, earnings, deferred tax balances and cash flows in the period of resolution.
Valuation of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable, such as historical negative cash flows or plans to dispose of or sell long-lived assets before the
end of their previously estimated useful lives. We assess the recoverability of property and equipment by comparing the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the asset to their respective carrying amounts. If factors
indicate that the carrying amount may not be recoverable, we may recognize an impairment loss equal to the amount by which the carrying
amount exceeds its estimated fair value. Fair value is determined by discounting expected future cash flows using a weighted average cost
of capital commensurate with the risk or the availability of other market information.
Impairment losses, if any, are recorded in the period in which we determine that impairment occurred. The carrying value of the asset
is adjusted to the new carrying value, and any subsequent increases in fair value are not recorded. Additionally, if it is determined that the
estimated remaining useful life of the asset should be decreased, the periodic depreciation expense is adjusted based on the new carrying
value of the asset unless written down to salvage value, at which time depreciation ceases.
The impairment calculation requires us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives,
salvage values and discount rates. If actual results are not consistent with our estimates and assumptions, we may be exposed to additional
impairment charges, which could be material to our results of operations.
Stock-Based Compensation
We have historically granted certain stock-based compensation awards to employees and directors in the form of stock options and
restricted stock. In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”), at the date that an award is granted, we determine the fair value of the award and recognize the compensation expense over the
period that services are required to be provided in exchange for the award (“requisite service period”), which typically is the period over
which the award vests.
We determine the fair value of all stock-based compensation awards as of the measurement date (i.e. grant date), which is the first date
on which we know with finality both (1) the number of shares an individual employee is entitled to receive and (2) the award price. We use
all available evidence to determine the measurement date. For awards granted after 2005, this is the date that the Board of Directors or the
Compensation Committee of the Board of Directors meets and approves the granting of a stock-based award.
Restricted stock is valued at the closing market price of our common stock on the date of grant. The fair value of stock options were
estimated using the Black-Scholes option-pricing model, which requires management to apply judgment and use highly subjective
assumptions of factors required to be input into the model, including estimating the length of time that individuals will retain their vested
stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term, and
dividend yield and risk-free interest rates. We used historical data and judgment to estimate the expected term and the stock price volatility.
Effective during the 2006 fiscal year, we discontinued granting stock options; however we continue to recognize compensation expense for
option awards previously granted to employees and non-employee directors based on the fair values used for the pro forma disclosures
previously required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.”
SFAS 123(R) requires the recognition of stock-based compensation only for awards that vest and the accrual of period compensation
cost be based on an estimated number of awards that are expected to vest. Therefore, we estimate at the date of grant a rate representing the
number of non-vested awards expected to be forfeited by individuals that may not complete the requisite service period and apply an
estimated forfeiture rate assumption to adjust compensation cost. The forfeiture rate assumption is based on our historical experience of
award forfeitures, and as necessary, is adjusted for certain events that are not expected to recur during the expected term of the award.
While the assumptions that have been developed are based on our best expectations, they involve inherent uncertainties based on
market conditions and employee behavior that are outside of our control. If actual results are not consistent with the assumptions used, the
stock-based compensation expense reported in our consolidated financial statements may not be representative of the actual economic cost
of the stock-based compensation. Additionally, if actual employee forfeitures significantly differ from our estimated rate of forfeiture, we
may record an adjustment to the financial statements in future periods.
Accounting for Leases
33
We estimate the expected term of a lease by assuming the exercise of renewal options, in addition to the initial non-cancelable lease
term, if the renewal is in our sole discretion and can be reasonably assured due to the existence of an economic penalty that would preclude
the abandonment of the lease at the end of the initial non-cancelable lease term. The expected term is used in the determination of whether
a lease is a capital or operating lease and in the calculation of straight-line rent expense. Additionally, the useful life of leasehold
improvements is limited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are
made for leasehold improvements late in the expected term of a lease and renewal is reasonably assured, the useful life of the leasehold
improvement is limited to the end of the renewal period or economic life of the asset.
The determination of the expected term of a lease requires us to apply judgment and estimates concerning the number of renewal
periods that are reasonably assured. If a lease is terminated prior to reaching the end of the expected term, this may result in the
acceleration of depreciation or impairment of long-lived assets, and it may result in the reversal of deferred rent balances that assumed
higher rent payments in renewal periods that were never ultimately exercised by us.
Hedge Accounting
We account for derivative instruments utilizing the guidance set forth in Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) and its amendments and interpretations, which requires the
recognition of all derivative instruments as either an asset or a liability on the balance sheet at fair value. The accounting for changes in the
fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship, and
further, on the type of hedging relationship (fair value or cash flow hedge). To qualify for designation in a hedging relationship, specific
criteria provided in SFAS 133 must be met and appropriate documentation maintained. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk),
the effective portions of the changes in fair value of the derivative instrument are reported on the Consolidated Balance Sheets as a
component of “Accumulated other comprehensive income” and are recognized in the Consolidated Statements of Earnings in the same
period or periods during which the hedged item affects earnings. If the total cumulative change in fair value of the derivative instrument
exceeds the cumulative change in the present value of expected future cash flows of the hedged item, the excess representing the
ineffective portion of the change in fair value of derivative instrument, will be recorded immediately in earnings.
We formally document at the inception of the hedge, all relationships between hedging instruments and hedged items, as well as the
risk management objectives and strategies for undertaking the hedge transaction. We formally assess, both at inception and at least
quarterly thereafter, whether derivative instruments used in a cash flow hedge transaction are highly effective in offsetting changes in cash
flows of the hedged item. If we determine that it is no longer probable that a hedge transaction will occur, or the derivative instrument
ceases to be a highly effective hedge, we would discontinue hedge accounting and any unrealized gains or losses included in accumulated
other comprehensive income would be recognized immediately in earnings.
Recent Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures About Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 enhances the current disclosure
requirements in Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) about an entity’s derivative instruments and hedging activities. Entities with instruments subject to this statement will be
required to provide qualitative disclosures including (a) how and why derivative instruments are used, (b) how derivative instruments and
related hedge items are accounted for under SFAS 133, and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and cash flows. Additionally, under SFAS 161, entities must
disclose the fair values of derivative instruments and their gains and losses in a tabular format that identifies the location of derivative
positions and the effect of their use in an entity’s financial statements. The new disclosure requirements of SFAS 161 are effective for us in
the first quarter of 2009 and we are currently evaluating the impact with respect to our interest rate swap contract.
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2 which deferred the effective date of Statement of
Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”), as it applies to nonfinancial assets and liabilities that
are measured at fair value on a non-recurring basis, until fiscal years and interim periods beginning after November 15, 2008. The deferral
provided by FSP 157-2 applies to our measurement of property and equipment at fair value made in connection with periodic impairment
assessments. Our adoption of SFAS 157 in the first quarter of fiscal year 2009, as it relates to our impaired long-lived assets, has not had a
material impact on our consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”
(“SFAS 141(R)”) which establishes new guidance for how business combinations are accounted for in the acquirer’s financial statements.
SFAS 141(R) is effective for business combinations occurring in fiscal years beginning on or after December 15, 2008, which is our 2009
fiscal year that began December 29, 2008. We will apply SFAS 141(R) in the event of a future business combination.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated
34
Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the
noncontrolling ownership interest in a subsidiary (minority interest). SFAS 160 clarifies that a minority interest in a subsidiary should be
reported as a separate component of equity in the parent’s financial statements. This statement also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the minority interest. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, which is our 2009 fiscal year that began December 29, 2008. Our adoption of this statement did
not have a material impact on our consolidated financial statements.
ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk.
We are subject to interest rate, commodity price and foreign currency market risks.
Interest Rate Risk
We are exposed to market risk from changes in the variable interest rates (primarily LIBOR) incurred on our revolving line of credit,
which at December 28, 2008 had borrowings outstanding of $401.9 million. We have entered into an interest rate swap contract which
effectively fixes the LIBOR component of our interest rate to a fixed rate of 3.62% on $150.0 million of our borrowings, leaving us with
$251.9 million of variable rate debt as of December 28, 2008. After giving effect to the swap, a 100 basis point increase in the variable
interest rates on our revolving line of credit at December 28, 2008, would increase our annual interest expense by approximately $2.5
million.
Commodity Price Risk
Commodity prices of certain food products that we purchase, primarily cheese and dough, vary throughout the year due to changes in
demand, supply and other factors. We currently have not entered into any hedging arrangements to reduce the volatility of the commodity
prices from period to period. The estimated increase in our food costs from a hypothetical $0.10 increase in the average cheese block price
per pound (approximately 6% of the unit cheese price as of December 28, 2008) would have been approximately $0.8 million for fiscal
2008. The estimated increase in our food costs from a hypothetical $0.10 increase in the average dough price per pound (approximately
20% of the unit dough price as of December 28, 2008) would have been approximately $1.5 million for fiscal 2008.
Foreign Currency Risk
As of December 28, 2008 we operated a total of 14 Company-owned stores in Canada. As a result, we have market risk associated
with changes in the value of the Canadian dollar. These changes result in cumulative translation adjustments, which are included in
“Accumulated other comprehensive income”, and potentially result in transaction gains or losses, which are included in our earnings.
During 2008, our Canada stores represented approximately 2.6% of our operating income. A hypothetical 10% devaluation in the average
quoted U.S. dollar-equivalent of the Canadian dollar exchange rate during 2008 would have reduced our reported operating income by
approximately $0.2 million.
35
ITEM 8. Financial Statements and Supplementary Data
CEC ENTERTAINMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of independent registered public accounting firm ................................................................................
37
Consolidated financial statements:
Consolidated balance sheets at December 28, 2008 and December 30, 2007..........................................
38
Consolidated statements of earnings
for years ended December 28, 2008, December 30, 2007 and December 31, 2006 .........................
39
Consolidated statements of changes in stockholders' equity
for years ended December 28, 2008, December 30, 2007 and December 31, 2006 .........................
40
Consolidated statements of cash flows for years ended December 28, 2008,
December 30, 2007, 2006 and December 31, 2006..........................................................................
Notes to consolidated financial statements ..............................................................................................
41
42
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
CEC Entertainment, Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. and subsidiaries (the "Company") as of
December 28, 2008 and December 30, 2007, and the related consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 28, 2008. We also have audited the Company's internal control over
financial reporting as of December 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial
reporting 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 and whether effective internal control over financial reporting was maintained in all material respects. Our audits of
the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CEC
Entertainment, Inc. and subsidiaries as of December 28, 2008 and December 30, 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 28, 2008, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 28, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 20, 2009
37
CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
December 28,
2008
December 30,
2007
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,769 $
31,734
14,184
11,192
3,878
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,757
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
666,443
2,240
18,373
18,176
15,533
11,352
3,585
67,019
668,390
2,484
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
747,440 $
737,893
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instrument liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instrument liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
806 $
37,116
33,716
7,575
3,457
3,830
86,500
413,252
76,617
23,396
11,190
3,097
4,802
618,854
756
40,209
27,625
6,437
3,878
-
78,905
329,119
73,995
24,760
8,435
-
4,686
519,900
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.10 par value; authorized 100,000,000 shares; 59,860,722 and 58,874,737
shares issued, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less treasury stock, at cost; 37,169,265 and 32,258,224 shares, respectively . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,986
398,124
641,220
(1,892)
(914,852)
128,586
5,887
374,376
584,726
7,011
(754,007)
217,993
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
747,440 $
737,893
The accompanying notes are an integral part of these consolidated financial statements.
38
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
2008
Fiscal Year
2007
2006
REVENUES
Food and beverage sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Entertainment and merchandise sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company store sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
409,895 $
400,798
405,740 $
375,925
810,693
3,816
814,509
781,665
3,657
785,322
411,080
358,161
769,241
3,312
772,553
OPERATING COSTS AND EXPENSES
Company store operating costs:
Cost of food and beverage (exclusive of labor expenses,
depreciation and amortization shown separately below). . . . . . . . . . . . . . . . . . . . .
96,891
93,693
89,650
Cost of entertainment and merchandise (exclusive of labor expenses,
depreciation, and amortization shown separately below). . . . . . . . . . . . . . . . . . . . .
Labor expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other store operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total company store operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,525
131,416
223,331
74,805
65,959
119,990
615,501
34,736
55,970
282
706,489
108,020
17,389
90,631
34,137
32,720
126,413
214,147
70,701
63,734
113,789
588,784
30,651
51,705
9,638
680,778
104,544
13,170
91,374
35,453
32,158
121,808
210,010
64,292
60,333
106,025
562,468
32,253
53,037
3,910
651,668
120,885
9,508
111,377
43,120
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share:
56,494 $
55,921 $
68,257
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.43
$ 2.37
$ 1.81
$ 1.76
$ 2.09
$ 2.04
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,270
23,793
30,922
31,694
32,587
33,465
The accompanying notes are an integral part of these consolidated financial statements.
39
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Fiscal Years 2006, 2007 and 2008
(in thousands, except share information)
Balance at January 1, 2006. . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments, net of
income taxes of $22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation costs . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock issued, net of forfeitures . . . . . . . . . . . . . . .
Tax benefit from stock options exercised . . . . . . . . . . . . . . .
Treasury stock reserved for 401(k) plan . . . . . . . . . . . . . . . .
Common stock issued under 401(k) plan . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2006. . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments, net of
income taxes of $707 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
56,619,300
-
-
Cumulative effect adjustment of
adopting FIN 48 (see Note 1). . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation costs . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock issued, net of forfeitures . . . . . . . . . . . . . . .
Tax shortfall from stock options exercised and
restricted stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock returned for taxes . . . . . . . . . . . . . . . . . . . .
Common stock issued under 401(k) plan . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 30, 2007. . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of cash flow hedge, net of
income taxes of $2,968 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedging loss realized in earnings, net of
income taxes of $335 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments, net of
income taxes of $646 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation costs . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock issued, net of forfeitures . . . . . . . . . . . . . . .
Tax shortfall from stock options exercised and
restricted stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock returned for taxes . . . . . . . . . . . . . . . . . . . .
Common stock issued under 401(k) plan . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock
Shares
Amount
Capital In
Excess of
Par
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury Stock
Shares
Amount
Total
56,115,658
-
$
5,612
-
$
314,439
-
$
463,178
68,257
$
2,446
-
22,499,815
-
$
(442,492) $ 343,183
68,257
-
-
-
349,323
240,877
-
(100,000)
13,442
-
-
-
2,049,686
194,227
-
(308)
11,832
-
-
-
35
24
-
(10)
1
-
5,662
-
-
-
-
205
19
-
-
1
-
-
5,801
7,954
(24)
373
(3,786)
455
-
-
-
-
-
-
-
-
-
(78)
-
-
-
-
-
-
-
-
-
-
-
-
-
(100,000)
-
1,959,635
-
-
-
-
3,796
-
(66,775)
325,212
-
531,435
55,921
2,368
-
24,359,450
-
(505,471)
-
-
-
4,643
-
4,509
45,052
(19)
(845)
(8)
475
-
(2,630)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,437
-
7,887,337
58,874,737
-
5,887
-
374,376
-
584,726
56,494
7,011
-
32,258,224
-
(78)
68,179
5,801
7,989
-
373
-
456
(66,775)
359,206
55,921
4,643
60,564
(2,630)
4,509
45,257
-
(845)
(487)
476
(248,057)
217,993
56,494
(4,842)
547
(4,608)
47,591
6,173
19,169
-
-
-
-
-
-
-
(479)
-
(248,057)
(754,007)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,911,041
-
-
-
(160,845)
(1,008)
(1,031)
544
(160,845)
-
-
-
-
671,311
324,967
-
(31,243)
20,950
-
-
-
-
-
67
33
-
(3)
2
-
-
-
-
6,173
19,102
(33)
(1,008)
(1,028)
542
-
-
-
-
-
-
-
-
-
-
-
(4,842)
547
(4,608)
-
-
-
-
-
-
-
Balance at December 28, 2008 . . . . . . . . . . . . . . . . . . . . .
59,860,722
$
5,986
$
398,124
$
641,220
$
(1,892)
37,169,265
$
(914,852) $ 128,586
The accompanying notes are an integral part of these consolidated financial statements.
40
CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred lease rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on asset disposals, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions received from landlords . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
Fiscal Year
2007
2006
$
56,494 $
55,921 $
68,257
75,445
580
5,980
479
281
2,527
(132)
3,068
(14,327)
1,275
1,417
2,415
7,298
1,134
(421)
669
71,919
15,079
4,384
2,826
130
14,465
-
2,720
(620)
2,763
(3,142)
4,264
(1,466)
1,231
1,355
(9,087)
65,392
(8,085)
5,601
1,972
-
10,254
-
4,600
(666)
(4,637)
(328)
(558)
907
810
364
5,719
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,182
162,742
149,602
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(87,790)
2,362
(50)
(109,066)
-
419
(115,810)
66
228
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(85,478)
(108,647)
(115,516)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term debt and line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares returned for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,550
(48,254)
-
19,170
389
(1,031)
(160,845)
(13)
205,800
(57,885)
(1,184)
45,257
2,016
(487)
(248,057)
510
71,000
(40,522)
-
7,989
373
-
(66,775)
(27)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(58,034)
(54,030)
(27,962)
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,274)
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(604)
18,373
-
65
18,308
-
6,124
12,184
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,769 $
18,373 $
18,308
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes paid, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,542 $
46,696 $
10,721 $
27,016 $
9,168
45,106
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued construction costs in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment in capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted stock issued, net of estimated forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . $
Common stock issued under 401(k) plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Treasury stock retired and reserved for 401(k) plan . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,393 $
- $
8,240 $
544 $
- $
10,335 $
- $
7,036 $
476 $
- $
7,344
1,735
7,114
456
3,796
The accompanying notes are an integral part of these consolidated financial statements.
41
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Description of Business: CEC Entertainment, Inc. and its subsidiaries (the “Company”) operate and franchise Chuck E. Cheese's®
family dining and entertainment centers (also referred as “stores”) in a total of 48 states and six foreign countries or territories. As of
December 28, 2008, the Company operated 495 Chuck E. Cheese’s located in 44 states and Canada and its franchisees operated a total of
46 stores located in the United States, Puerto Rico, Guatemala, Chile, Saudi Arabia, and the United Arab Emirates. The use of the terms
“CEC Entertainment,” “we,” “us” and “our” throughout these Notes to Consolidated Financial Statements refer to the Company.
Basis of Presentation: The consolidated financial statements include the accounts of the Company and also include the accounts of
the International Association of CEC Entertainment, Inc. (the “Association”), an entity in which we have variable interests and we are
considered the primary beneficiary.
The Association primarily represents an advisory council consisting of a board of directors composed of an equal number of members
appointed by us and elected by our franchisees, respectively, which among other responsibilities, oversees expenditures from advertising,
entertainment, and media funds of the Association. We and our franchisees are required to contribute a percentage of gross sales to these
funds and could be required to make additional contributions to fund any deficits that may be incurred by the Association. We include the
Association in our consolidated financial statements because we are considered the primary beneficiary of its variable interests as a result
of our ownership of more than 90% of the store locations that benefit from the Association’s advertising and media expenditures. The
assets, liabilities and operating results of the Association were not material to our consolidated financial statements.
All intercompany accounts and transactions have been eliminated in consolidation. We have only one reportable segment.
Revisions to Financial Statement Presentation: We revised the presentation in our Consolidated Statements of Earnings to
disaggregate Company store sales into separate amounts for “Food and beverage sales” and “Entertainment and merchandise sales”
and to also present separate corresponding amounts for the cost related to each of these revenue captions. This revision had no impact
on previously reported total revenues, total cost of food and beverage and entertainment and merchandise, operating income, net
income, stockholders’ equity, comprehensive income, or cash flows from operating activities.
Fiscal Year: We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13
weeks, except for a 53 week year when the fourth quarter has 14 weeks. References to 2008, 2007 and 2006 are for the fiscal years ended
December 28, 2008, December 30, 2007, and December 31, 2006, respectively. Fiscal year 2008, 2007 and 2006 each consisted of 52
weeks.
Use of Estimates and Assumptions: The preparation of financial statements in conformity with accounting principles generally
accepted in the United States 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.
Cash and Cash Equivalents: Cash and cash equivalents are comprised of demand deposits with banks and short-term cash
investments with remaining maturities of three months or less from the date of purchase by us.
Inventories: Inventories of food, beverages, merchandise, paper products, and other supplies needed for our food service and
entertainment operations are stated at the lower of cost on a first-in, first-out basis or market.
Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation
and amortization are charged to operations using the straight-line method over the assets’ estimated useful lives, which generally range
from four to 12 years for game and ride equipment, with the exception of non-technical play equipment which have estimated useful lives
ranging from 15 to 20 years; four to 20 years for furniture, fixtures and other equipment and 40 years for buildings. Leasehold
improvements are amortized by the straight-line method over the lesser of the lease term, including lease renewal option periods provided
for in the lease that are reasonably assured, or the estimated useful lives of the related assets. We use a consistent lease period (generally,
the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonably assured of being
exercised) when estimating the depreciable lives of leasehold improvements, in determining straight-line rent expense and classification of
our leases as either operating or capital. Interest costs incurred during the construction period are capitalized and depreciated based on the
estimated useful life of the underlying asset.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
1. Summary of Significant Accounting Policies (continued):
We evaluate property and equipment held and used in the business for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. We assess the recoverability of property and equipment by comparing the sum of
the undiscounted cash flows expected to result from the use and eventual disposition of the asset to their respective carrying amounts. If
factors indicate that the carrying amount may not be recoverable, we may recognize an impairment loss equal to the amount by which the
carrying amount exceeds the estimated discounted future operating cash flows of the asset, which approximates its fair value. We report
such non-cash impairment charges in “Asset impairments” on the Consolidated Statements of Earnings.
Self-Insurance Accruals: We are self-insured for certain losses related to workers’ compensation claims, property losses, general
liability matters and our company sponsored employee health insurance programs. We estimate the accrued liabilities for our self-insurance
programs using historical claims experience and loss reserves provided by independent third-party actuaries. To limit our exposure to
losses, we obtain third-party insurance coverage with deductibles of up to approximately $0.1 million to $0.4 million per occurrence. For
claims that exceed the deductible amount, we record a gross liability and a corresponding receivable representing expected recoveries, since
we are not legally relieved of our obligation to the claimant.
Comprehensive Income: We report comprehensive income, consisting of net income and certain changes in stockholders’ equity
which are excluded from net income (referred to as “Other comprehensive income”) on the Consolidated Statements of Changes in
Stockholders’ Equity. The components of other comprehensive income in 2008 included the change in fair value of our interest rate swap
contract and foreign currency translation adjustments. The components of other comprehensive income in 2007 and 2006 included foreign
currency translation adjustments. Other comprehensive income is recorded directly to accumulated other comprehensive income, a separate
component of shareholders’ equity.
Foreign Currency Translation: The consolidated financial statements are presented in U.S. dollars. The assets and liabilities of our
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. The effect of foreign currency exchange rate changes on cash is reported on the Consolidated Statements of Cash Flows as a
separate component of the reconciliation of the change in cash and cash equivalents during the period.
Derivative Instruments and Hedging Activities: We account for derivative instruments utilizing the guidance set forth in Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) and its
amendments and interpretations, which requires the recognition of all derivative instruments as either an asset or a liability on the balance
sheet at fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portions of the changes in
fair value of the derivative instrument are reported on the Consolidated Balance Sheets as a component of “Accumulated other
comprehensive income” and are recognized in the Consolidated Statements of Earnings in the same financial statement line item associated
with the forecasted transaction when the hedged item affects earnings. Ineffective portions of the changes in the fair value of cash flow
hedges are recognized in earnings. We assess, both at inception and at least quarterly thereafter, whether derivative instruments used in a
cash flow hedge transaction are highly effective in offsetting changes in cash flows of the hedged item. If we determine that it is no longer
probable that a hedge transaction will occur, or the derivative instrument ceases to be a highly effective hedge, we would discontinue hedge
accounting and any unrealized gains or losses included in accumulated other comprehensive income are recognized immediately in
earnings.
Fair Value Measurements: We perform fair value assessments of certain assets and liabilities, including an interest rate swap contract
and our impaired long-lived assets. Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”), as
amended, clarifies how fair value measurements should be determined for financial reporting purposes and provides for expanded
disclosure about assets and liabilities measured at fair value in a company’s financial statements. SFAS 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS 157 prescribes a three-level
fair value hierarchy that prioritizes the source of inputs used in measuring fair value, as follows:
Level 1 – Unadjusted quoted prices available in active markets for identical assets or liabilities.
Level 2 – Pricing inputs, other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable
or can be corroborated by observable market data. These inputs are frequently utilized in pricing models, discounted cash
flow techniques and other widely accepted valuation methodologies.
43
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued):
Level 3 – Pricing inputs that are not observable for the asset or liability, are supported by little or no market activity and reflect the
use of significant judgment, often used in an internally developed valuation model intended to result in management’s
best estimate of current fair value.
In the first quarter of 2008, we adopted SFAS 157 as it relates to financial assets and liabilities measured on a recurring basis. Our
adoption of this Statement did not have an impact on our consolidated financial statements. In October 2008, the Financial Accounting
Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FSP 157-3 which clarifies the application of SFAS 157 to a financial asset
when the market for that asset is not active and illustrates how an entity determines fair value when the market for a financial asset is
inactive. FSP 157-3, which was effective upon issuance, did not have an impact on our consolidated financial statements.
As of December 28, 2008, the fair value of our interest rate swap contract was a liability of approximately $6.9 million (Level 2).
Additional disclosure required by SFAS 157, as it relates to our interest rate swap contract, is included in Note 7 “Derivative Instrument.”
We do not have any material Level 1 or Level 3 fair value measurements as of December 28, 2008.
In February 2008, the FASB issued FSP No. 157-2 which deferred the effective date of SFAS 157, as it applies to nonfinancial assets
and liabilities that are measured at fair value on a non-recurring basis, until fiscal years and interim periods beginning after November 15,
2008. The deferral provided by FSP 157-2 applies to our measurement of property and equipment at fair value made in connection with
periodic impairment assessments. Our adoption of SFAS 157 in the first quarter of fiscal year 2009, as it relates to our impaired long-lived
assets, has not had a material impact on our consolidated financial statements.
Financial Instruments: The carrying amount of our long-term debt approximates its fair value based upon the interest rates charged
on instruments with similar terms and risks.
Stock-Based Compensation: We recognize stock-based compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) and expense the fair value of all stock-based awards to
employees, including grants of employee stock options, in the financial statements over the period that services are required to be provided
in exchange for the award (“requisite service period” or “vesting period”). Stock-based compensation is recognized only for awards that
vest and our accrual of compensation cost is based on the estimated number of awards expected to vest. Therefore, we estimate at the date
of grant a rate representing the number of non-vested awards expected to be forfeited by individuals that may not complete the requisite
service period and apply an estimated forfeiture rate assumption to adjust compensation cost. As awards vest, we adjust compensation cost
to reflect actual forfeitures. We measure the fair value of compensation cost related to restricted stock awards based on the closing market
price of our common stock on the grant date. In 2006, we discontinued the granting of stock options, however we measured the fair value
of compensation cost related to previously issued stock options using the Black-Scholes option-pricing model which requires the input of
subjective assumptions including estimating the length of time that employees will retain their stock options before exercising them
(“expected term”), the estimated volatility of our common stock price over the expected term, and dividend yield and risk-free interest
rates.
The benefits of tax deductions in excess of the compensation cost recognized from exercised stock options is classified as cash inflows
from financing activities in the Consolidated Statements of Cash Flows.
Revenue recognition – Company Store Activities: Food, beverage and merchandise revenues are recognized when sold. Game
revenues are recognized as game-play tokens are purchased by customers and we accrue a liability for the estimated amount of unused
tokens which may be redeemed in the future. We allocate the revenue recognized from the sale of value-priced combination packages
consisting of food, beverage and game tokens (and in some instances, merchandise) between “Food and beverage sales” and
“Entertainment and merchandise sales” based upon our best estimate of each component’s fair value, which we typically determine as the
price charged for each component when it is sold separately. We sell gift cards to our customers in our stores, through our Web site and
through selected third parties. Gift card sales are recorded as an unearned gift card revenue liability when sold and are recognized as
revenue when: (i) the gift card is redeemed by the customer, or (ii) the likelihood of the gift card being redeemed by the customer is remote
(“gift card breakage”), and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the relevant
jurisdictions. Gift card breakage is determined based upon historical redemption patterns of our gift cards; however, because we do not
have sufficient historical information regarding such redemption patterns, we have not recognized any material revenue from gift card
breakage in our Consolidated Statements of Earnings.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
1. Summary of Significant Accounting Policies (continued):
Revenue Recognition – Franchise Activities: Revenues from franchised activities include area development and initial franchise fees
(collectively referred to as “Franchise fees”) received from franchisees to establish new stores and royalties charged to franchisees based on
a percentage of a franchised store’s sales. Franchise fees are accrued as an unearned franchise revenue liability when received and are
recognized as revenue when the franchised stores covered by the fees open, which is generally when we have fulfilled all significant
obligations to the franchisee. Continuing fees and royalties are recognized in the period earned. Franchise fees included in revenues were
approximately $0.4 million, $0.2 million, and $0.1 million in 2008, 2007 and 2006, respectively.
Cost of Food, Beverage, Entertainment and Merchandise: Cost of food and beverage includes the direct cost of food and beverage
sold to our customers and related paper products used in our food service operations, less “vendor rebates” described below. Cost of
entertainment and merchandise includes the direct cost of prizes provided and merchandise sold to our customers, as well as the cost of
tickets dispensed to customers and redeemed for prize items, during the period. These amounts exclude any allocation of other operating
costs including labor and related costs for store personnel and depreciation and amortization expense.
Vendor Rebates: We receive rebate payments primarily from a single third-party vendor. Pursuant to the terms of a volume purchasing
and promotional agreement entered into with the vendor, rebates are provided based on the quantity of the vendor’s products we purchase
over the term of the agreement. We record these allowances in the period they are earned as a reduction in the cost of the vendor's products,
and in accordance with Emerging Issues Task Force 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor,” the allowances are recognized in “Cost of food and beverage” in the Consolidated Statements of Earnings when
the related inventory is sold.
Rent Expense: We recognize rent expense on a straight-line basis over the lease term, including the construction period and lease
renewal option periods provided for in the lease that can be reasonably assured at the inception of the lease. The lease term commences on
the date when we take possession and have the right to control use of the leased premises. The difference between actual rent payments
and rent expense in any period is recorded as a deferred rent liability in the Consolidated Balance Sheets. Construction allowances received
from the lessor as a lease incentive intended to reimburse us for the cost of leasehold improvements (“Landlord contributions”) are accrued
as a deferred rent credit in the period construction is completed and the store opens. Landlord contributions are amortized on a straight-line
basis over the lease term as a reduction to rent expense.
Advertising Costs: Production costs for commercials and coupons are expensed in the period in which the commercials are initially
aired and the coupons are distributed. All other advertising costs are expensed as incurred. As of December 28, 2008 and December 30,
2007, capitalized production costs of approximately $1.0 million and $0.8 million, respectively, were included in “Prepaid expenses” on
the Consolidated Balance Sheets.
We utilize an Advertising Fund to administer all the national advertising programs that benefit both us and our franchisees. We and
our franchisees are required to contribute a percentage of gross sales to the fund. As the contributions to this fund are designated and
segregated for advertising, we act as an agent for the franchisees with regard to these contributions. We consolidate the Advertising Fund
into our financial statements on a net basis, whereby contributions from franchisees, when received, are recorded as offsets to reported
advertising expenses. Contributions to the Advertising Fund from our franchisees were approximately $2.1 million, $2.1 million, and $2.2
million in 2008, 2007 and 2006, respectively.
Debt Financing Costs: We capitalize direct costs incurred to obtain long-term financing or establishment of credit facilities. These
costs are included in “Other noncurrent assets” on the consolidated balance sheets and are amortized as an adjustment to interest expense
over the term of the related debt. In the case of debt refinancing or amending of a credit agreement, previously capitalized debt financing
costs are expensed if we determine there has been a substantial modification of the related borrowing arrangement. As of December 28,
2008 and December 30, 2007, debt financing costs of approximately $1.1 million and $1.3 million, respectively, were included in “Other
noncurrent assets.”
Income Taxes: We account for income taxes under the asset and liability method which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax basis. A valuation allowance is applied against net deferred tax assets, if based on
the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred income
taxes are not provided on undistributed income from our Canadian subsidiary, as such, earnings are considered to be permanently invested.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
1. Summary of Significant Accounting Policies (continued):
On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109” (“FIN 48”) which addresses how the benefit of tax positions taken or expected to be taken on a
tax return should be recorded in the financial statements. Under FIN 48, we recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on examination by a taxing authority, based on the technical merits of the
position. The amount recognized in the financial statements from an uncertain tax position is measured based on the largest amount of
benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. To the extent a tax return position has not been
reflected in income tax expense for financial reporting purposes, a liability (“unrecognized tax benefit”) is recorded. Refer to Note 9
“Income Taxes” for further discussion of our adoption of FIN 48.
Recent Accounting Pronouncements: In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS
161 enhances the current disclosure requirements in Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”) about an entity’s derivative instruments and hedging activities. Entities with
instruments subject to this statement will be required to provide qualitative disclosures including (a) how and why derivative instruments
are used, (b) how derivative instruments and related hedge items are accounted for under SFAS 133, and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.
Additionally, under SFAS 161, entities must disclose the fair values of derivative instruments and their gains and losses in a tabular format
that identifies the location of derivative positions and the effect of their use in an entity’s financial statements. The new disclosure
requirements of SFAS 161 are effective for us in the first quarter of 2009 and we are currently evaluating the impact with respect to our
interest rate swap contract.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”
(“SFAS 141(R)”) which establishes new guidance for how business combinations are accounted for in the acquirer’s financial statements.
SFAS 141(R) is effective for business combinations occurring in fiscal years beginning on or after December 15, 2008, which is our 2009
fiscal year that began December 29, 2008. We will apply SFAS 141(R) in the event of a future business combination.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the
noncontrolling ownership interest in a subsidiary (minority interest). SFAS 160 clarifies that a minority interest in a subsidiary should be
reported as a separate component of equity in the parent’s financial statements. This statement also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the minority interest. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, which is our 2009 fiscal year that began December 29, 2008. Our adoption of this statement did
not have a material impact on our consolidated financial statements.
2. Accounts Receivable:
Accounts receivable consisted of the following:
At Year End
2008
2007
(in thousands)
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Vendor rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,323 $
7,626
1,687
3,499
12,658
1,941
6,858
6,740
1,917
1,314
-
1,347
$
31,734 $
18,176
Trade receivables consist primarily of debit and credit card receivables due from third-party financial institutions. Other accounts
receivable consist primarily of amounts due from our franchisees.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
3. Inventories:
Inventories consisted of the following:
At Year End
2008
2007
(in thousands)
Food and beverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Entertainment and merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,400 $
9,784
5,019
10,514
$
14,184 $
15,533
Food and beverage inventories include paper products needed for our food service operations. Entertainment and merchandise
inventories consist primarily of novelty toy items used as redemption prizes for skill oriented games that may also be sold to our
customers, and include supplies needed for our entertainment operations.
4. Property and Equipment:
Property and equipment consisted of the following:
At Year End
2008
2007
(in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Game and ride equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property leased under capital leases (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,831 $
98,243
481,646
237,400
211,050
15,862
45,255
93,222
454,869
219,376
196,548
16,031
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,088,032
(429,491)
1,025,301
(369,725)
Net property and equipment in service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
658,541
7,902
655,576
12,814
$
666,443 $
668,390
Property leased under capital leases as of December 28, 2008 and December 30, 2007 primarily consisted of buildings for our store
locations.
Total depreciation and amortization expense was approximately $75.4 million, $71.9 million and $65.4 million in 2008, 2007 and
2006, respectively (approximately $0.6 million, $1.2 million and $1.1 million in 2008, 2007 and 2006, respectively, was recorded in
“General and administrative expenses”). Interest costs capitalized in connection with the construction of new stores were not material in
2008 and were approximately $0.1 million in 2007 and 2006, respectively.
Sale of TJ Hartford’s
In April 2008, we sold substantially all of the property and equipment related to our former TJ Hartford’s Grill and Bar (“TJ
Hartford’s”) casual dining restaurant. Assets consisting primarily of land, a building and fixtures and equipment with a net carrying amount
of approximately $1.3 million were sold for cash proceeds of approximately $2.1 million. In connection with this sale, we recognized a
$0.8 million gain included in “Other operating expenses” in the Consolidated Statements of Earnings.
Asset Impairments
In 2008, we recorded total asset impairment charges of $0.3 million consisting of a $0.1 million charge related to a previously
impaired store and a $0.2 million charge pertaining to a store we decided to close prior to the end of its expected lease term.
In 2007, we recorded total asset impairment charges of $9.6 million of which approximately $2.3 million related to our decision to
close one store. We also recognized asset impairment charges of approximately $7.3 million related to five other stores we continue to
operate.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
4. Property and Equipment (continued):
In 2006, we recorded asset impairment charges of approximately $3.9 million related to five stores we continue to operate.
Asset impairments represent adjustments we record to write down the carrying amount of the property and equipment at our stores to
their estimated fair value. During 2008, 2007 and 2006, we determined that the affected stores had been adversely impacted by economic
and competitive factors in the markets in which the stores are located. Due to the negative impact of these factors, we determined that the
forecasted cash flows for the stores were insufficient to recover the carrying amount of their assets and, as a result, an impairment charge
was necessary because the estimated fair value of the stores’ long-lived assets had declined below their carrying amounts.
5. Accrued Expenses:
Accrued expenses consisted of the following:
At Year End
2008
2007
(in thousands)
Current:
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,040 $
8,096
8,133
3,447
10,004
7,800
6,606
3,215
$
33,716 $
27,625
Non-current:
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
11,190 $
8,435
Accrued insurance liabilities represent estimated claims incurred but unpaid under our self-insured retention programs for general
liability, workers’ compensation, health benefits and certain other insured risks.
6. Long-Term Debt:
Long-term debt consisted of the following:
At Year End
2008
2007
(in thousands)
Revolving credit facility borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Obligations under capital leases (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
401,850 $
12,208
316,800
13,075
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
414,058
(806)
329,875
(756)
$
413,252 $
329,119
We have a revolving credit facility providing for total borrowings of up to $550 million for a term of five years. The credit facility,
which matures in October 2012, also includes an accordion feature allowing us, subject to lender approval, to request an additional $50
million in borrowings at any time. As of December 28, 2008, there were $401.9 million of borrowings and $9.4 million of letters of credit
outstanding but undrawn under the credit facility. The credit facility bears interest at LIBOR plus an applicable margin of 0.625% to 1.25%
determined based on our financial performance and debt levels, or alternatively, the higher of (a) the prime rate or (b) the Federal Funds
rate plus 0.50%. As of December 28, 2008, borrowings under the credit facility incurred interest at LIBOR (0.46% - 2.17%) plus 1.00% or
prime (3.25%). The total weighted average interest rate applied to outstanding borrowings under the credit facility was 2.56% at December
28, 2008 and 4.70% at December 30, 2007. A commitment fee of 0.1% to 0.3%, depending on our financial performance and debt levels,
is payable on a quarterly basis on any unused credit line. All borrowings are unsecured, but we have agreed not to pledge any of our
existing assets to secure future indebtedness.
The weighted average interest rate incurred on borrowings under our revolving credit facility was 3.9%, 6.3% and 5.6% in 2008, 2007
and 2006, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
6. Long-Term Debt (continued):
The revolving credit facility agreement contains certain restrictions and conditions that, among other things, require us to maintain
financial covenant ratios, including a minimum fixed charge coverage ratio of 1.5 to 1.0 and a maximum leverage ratio of 3.0 to 1.0.
Additionally, the terms of the revolving credit facility agreement limit the amount of our repurchases of our common stock and cash
dividends we may pay on our common stock based on certain financial covenants and criteria. As of December 28, 2008, we were in
compliance with these covenants.
7. Derivative Instrument:
Interest Rate Swap
On May 27, 2008, we entered into a $150.0 million notional amount interest rate swap contract to effectively convert a portion of our
variable rate debt to a fixed interest rate. The principal objective of the swap contract is to mitigate the variability of the interest payment
cash flows associated with our variable rate revolving credit facility debt and to reduce our exposure to adverse interest rate changes. The
contract, which matures in May 2011, requires us to pay a fixed rate of 3.62% while receiving variable payments from the counterparty at
the three-month LIBOR rate. The differential amounts receivable or payable under the swap contract are recorded over the life of the
contract as adjustments to interest expense.
We have designated the swap contract as a cash flow hedge in accordance with SFAS 133. Accordingly, changes in its fair value that
are considered to be effective are reported on the Consolidated Balance Sheets as a component of “Accumulated other comprehensive
income.” Throughout the term of the swap contract, the unrealized gains or losses we have reported in accumulated other comprehensive
income will be recognized in earnings consistent with when the variable interest rate of the debt affects earnings. We assess whether the
swap contract is highly effective in offsetting the changes in cash flows on the hedged debt based on a comparison of cumulative changes
in fair value of the swap to the total change in future cash flows on the notional amount of debt. If the total cumulative change in fair value
of the swap contract more than offsets the cumulative change in the present value of expected future cash flows of the hedged debt, the
difference is considered hedge ineffectiveness and will be recorded immediately in earnings.
As of December 28, 2008, the estimated fair value of the swap contract was a liability of approximately $6.9 million, composed of a
$3.8 million current and a $3.1 million noncurrent derivative instrument liability. We expect that approximately $2.4 million, net of taxes,
of the change in fair value of the swap contract included in “Accumulated other comprehensive income” as of December 28, 2008 will be
realized in earnings as additional interest expense within the next 12 months. There were no ineffective gains or losses recognized in 2008.
Fair Value Measurement
Our interest rate swap contract is not traded on a public exchange, therefore its fair value is determined using the present value of
expected future cash flows arising from the contract which approximates an amount to be received from or paid to a market participant in
settlement of this instrument. This valuation methodology utilizes forward interest rate yield curves obtained from an independent pricing
service’s quotes of three-month forward LIBOR rates through the swap contract’s maturity. Accordingly, the inputs to our fair value
measurement of the interest rate swap are classified within Level 2 of the fair value hierarchy.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
8. Commitments and Contingencies:
Leases
We lease certain store locations and related property and equipment under operating and capital leases. All leases require us 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 December 28, 2008 are as follows:
Fiscal Years
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum future lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amounts representing interest (interest rates from 6.00% to 16.63%) . . . . . . . . . . . . . . . . . . . .
Present value of future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital
Operating
(in thousands)
66,849
66,396
66,558
65,478
63,872
474,754
803,907
1,683 $
1,683
1,683
1,600
1,586
9,970
18,205 $
(5,997)
12,208
(806)
Long-term capital lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
11,402
Rent expense, including contingent rent based on a percentage of sales when applicable, was comprised of the following:
2008
Fiscal Year
2007
(in thousands)
2006
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,599 $
321
64,476 $
280
61,312
373
$
66,920 $
64,756 $
61,685
Rent expense of approximately $1.0 million in 2008, 2007 and 2006 related primarily to our corporate office and warehouse facilities
and was recorded among “General and administrative expenses” in the Consolidated Statements of Earnings.
Legal Proceedings
On January 23, 2007, a purported class action lawsuit against us, entitled Blanco v. CEC Entertainment, Inc., et. al., Cause No. CV-07-
0559 (“Blanco Litigation”), was filed in the United States District Court for the Central District of California. The Blanco Litigation was
filed by an alleged customer of one of our Chuck E. Cheese’s stores purporting to represent all individuals in the United States who, on or
after December 4, 2006, were knowingly and intentionally provided at the point of sale or transaction with an electronically-printed receipt
by us that was in violation of U.S.C. Section 1681c(g) of the Fair and Accurate Credit Transactions Act (“FACTA”). The Blanco plaintiffs
did not seek actual damages, but only sought statutory damages for each willful violation under FACTA. On January 10, 2008, the Court
denied class certification without prejudice and stayed the case pending the appellate outcome of the Soualian v. Int’l Coffee & Tea LLC
case before the Ninth Circuit. On June 3, 2008, President George W. Bush signed into law the Credit and Debit Card Receipt Clarification
Act of 2007, which amends FACTA to clarify that any person who printed an expiration date on any consumer receipt between December
4, 2004 and June 3, 2008, and otherwise complied with FACTA, shall not be in willful noncompliance with FACTA. Following the
enactment, the plaintiffs agreed to dismiss the case against us. Accordingly, on June 23, 2008, the court entered an order dismissing the
case with prejudice and requiring each party to bear its own attorneys’ fees and costs. Thus, this case has been dismissed without payment
of any compensation to the plaintiffs.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
8. Commitments and Contingencies (continued):
On November 19, 2007, a purported class action lawsuit against us, entitled Ana Chavez v. CEC Entertainment, Inc., et al., Cause No.
BC380996 (“Chavez Litigation”), was filed in the Central District Superior Court of California in Los Angeles County. We received
service of process on December 21, 2007. On January 9, 2008, a second purported class action lawsuit against us, entitled Cynthia Perez et
al. v. CEC Entertainment, Inc., et al., Cause No. BC3853527 (“Perez Litigation”), was filed in the Central District Superior Court of
California in Los Angeles County. We were served with the second complaint on January 30, 2008. We removed both cases to Federal
court on January 18, 2008 and February 29, 2008, respectively. On March 21, 2008, the Chavez Litigation was remanded back to state
court and on April 30, 2008, the Perez Litigation was remanded back to state court. These two cases were then consolidated by the court for
procedural purposes in the Superior Court of the State of California in Los Angeles County on June 18, 2008. The Chavez Litigation was
filed by a former store employee purporting to represent other similarly situated current and former employees of us in the State of
California from November 19, 2003 to the present. The lawsuit alleges violations of the state wage and hour laws involving unpaid
vacation wages, meal periods, wages due upon termination, waiting time penalties, and unfair competition and seeks an unspecified amount
in damages. The Perez Litigation was filed by former store employees purporting to represent other similarly situated current and former
employees of us in Los Angeles County from January 8, 2004 to the present. The lawsuit alleges violations of the state wage and hour laws
involving unpaid overtime wages, meal and rest periods, itemized wage statements, waiting time penalties, retaliation, unfair competition,
and constructive trust and seeks an unspecified amount in damages. We attended formal mediation with representatives of the plaintiffs in
both suits and reached a tentative settlement for all of the claims alleged on November 17, 2008. On December 3, 2008, following the
tentative settlement, the plaintiffs filed a Consolidated Complaint combining the allegations of the two actions in accordance with the
tentative settlement agreement. We then filed an Answer to the Consolidated Complaint on December 16, 2008. The tentative settlement
is subject to both preliminary and final approval by the court. Although no hearing dates have been set yet, we expect the court to hear
argument on the parties’ joint motion for preliminary approval of class action settlement in February or March 2009. If the court grants
preliminary approval of the tentative settlement, we will commence efforts to administer the settlement to approximately 17,000 current
and former employees in the class. The terms of the tentative settlement are not expected to have a material adverse effect on our financial
condition or results of operations.
On July 25, 2008, a purported class action lawsuit against us, entitled Liendo, et al., v. CEC Entertainment, Inc., Cause No. BC395195
(“Liendo Litigation”), was filed in the Superior Court of California, Los Angeles County. We received service of process on July 28, 2008.
The Liendo Litigation was filed by two alleged customers of our Chuck E. Cheese’s stores in California purporting to represent all mobility
impaired/wheelchair bound individuals in the State of California who were allegedly denied the full and equal enjoyment of goods,
services, programs, facilities, privileges, advantages, or accommodations in violation of the Americans With Disabilities Act, 42 U.S.C.
Section 12181 and California state laws. We removed the case to the United States District Court for the Central District of California on
August 25, 2008. The Liendo plaintiffs seek injunctive relief, statutory damages and attorneys’ fees and costs. Throughout the months of
November and December 2008, we engaged in informal settlement negotiations with the named plaintiffs in the lawsuit and finalized a
settlement with these individuals on December 31, 2008. The settlement’s terms did not have a material adverse effect on our financial
condition or results of operations.
On June 19, 2006, a lawsuit was filed by a personal representative of the estates of Robert Bullock, II and Alysa Bullock, against CEC
Entertainment, Inc., Manley Toy Direct, LLC (“Manley Toy”), et. al. in the Circuit Court for the Fourth Judicial Circuit, Duval County,
Florida, Case No. 2006 CA 004378 (“Bullock Litigation”). In the complaint, the Bullock Litigation’s plaintiff alleged that the May 8, 2006
mobile home fire which resulted in the deaths of his two children, Robert Bullock, II and Alysa Bullock, was caused by a defective disco
light product that was purchased at a Chuck E. Cheese’s. The Bullock Litigation’s plaintiff sought an unspecified amount of damages. We
tendered our defense of this matter to Manley Toy, from which we had purchased certain disco light products. Manley Toy accepted our
tender and indicated it would indemnify us in the event of any judgment or settlement that exceeded coverage afforded under Manley Toy’s
insurance policies. On September 22, 2008, we settled the case with the plaintiff. The terms of the settlement did not have a material
adverse effect on our financial condition or results of operations.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
8. Commitments and Contingencies (continued):
Contingent Liabilities
From time to time we are involved with governmental inquiries, legal proceedings and other claims that are incidental to the conduct
of our business. These matters typically involve claims from customers, employees and others involved in operational issues common to
the entertainment and food industries. A number of such claims may exist at any given time. In the opinion of our management, none of the
claims or proceedings to which we are currently a party to is expected to have a material adverse affect on our financial condition, results of
operations or cash flows. When a contingency involving uncertainty as to a possible loss occurs (“contingent liability”), an estimate of
such loss contingency may be accrued as a charge to income and a reserve established on the balance sheet. As of December 28, 2008, we
accrued $1.3 million in aggregate loss contingencies, based on management’s assessment of the appropriate contingent liability as of that
date. In light of all information known, we believe that amounts accrued for such contingencies are adequate and that the ultimate
resolution of these matters will not have a material adverse effect on our financial position. However, there can be no assurance that there
will not be a loss different from the amounts accrued. Any such loss, if realized, could have a material effect on our results of operations in
the period during which the underlying matters are resolved. Management reviews reserves periodically, and the contingent loss reserve
may be increased or decreased in the future to reflect further developments.
9. Income Taxes:
The components of income tax expense are as follows:
Current tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax expense from exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
Fiscal Year
2007
(in thousands)
2006
25,969 $
13,325 $
5,577
(260)
2,271
1,192
515
5,342
33,557
20,374
402
(431)
609
580
12,144
2,725
210
15,079
44,086
4,597
1,124
1,398
51,205
(6,671)
(829)
(585)
(8,085)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
34,137 $
35,453 $
43,120
A reconciliation of the 35% federal statutory income tax rate to the effective tax rates is as follows:
Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0%
3.7
(1.3)
0.3
35.0%
3.2
(1.2)
1.8
35.0%
3.5
(0.6)
0.8
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.7%
38.8%
38.7%
2008
Fiscal Year
2007
2006
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
9. Income Taxes (continued):
Deferred income tax assets and liabilities consisted for the following:
At Year End
2008
2007
(in thousands)
Deferred tax assets:
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unearned gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned franchise fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,489 $
2,484
24,000
6,121
332
7,121
8,556
4,535
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,638
1,427
2,085
20,707
7,542
383
6,015
7,851
308
46,318
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(73,150)
(1,006)
(67,375)
(118)
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(74,156)
(67,493)
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(19,518) $
(21,175)
Amounts reported on consolidated balance sheets:
Current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-current deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,878 $
(23,396)
3,585
(24,760)
$
(19,518) $
(21,175)
On January 1, 2007, we adopted the provisions of FIN 48 (see Note 1 “Summary of Significant Accounting Policies - Income Taxes”)
and recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by a taxing authority, based on the technical merits of the position. The amount recognized in the financial statements from an
uncertain tax position is measured based on the largest amount of benefit that has a greater than 50% likelihood of being realized upon
ultimate resolution. To the extent a tax return position has not been reflected in income tax expense for financial reporting purposes, a
liability is recorded.
As a result of the implementation of FIN 48, we recognized a $2.6 million increase in our liability for uncertain tax positions, which
was accounted for as an adjustment to the beginning balance of retained earnings. As of the date of the adoption, including the increase in
liability noted above, we had approximately $13.7 million of unrecognized tax benefits.
As of December 28, 2008 and December 30, 2007, we had approximately $5.0 million and $10.9 million, respectively of unrecognized
tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Fiscal Year
2008
2007
(in thousands)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions for tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,893 $
520
426
(132)
(6,329)
(369)
13,742
827
549
(3,892)
(190)
(143)
Balance at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,009 $
10,893
53
CEC ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (continued):
Included in the balance as of December 28, 2008, are approximately $2.0 million of unrecognized tax benefits that, if recognized,
would decrease our provision for income taxes. Other than in connection with federal income tax examinations discussed below, we do not
expect our existing unrecognized tax benefits to change significantly within the next twelve months.
In July 2008, the Internal Revenue Service concluded its examination of our 2003 through 2005 tax years. As a result, we agreed to a
$6.3 million settlement of certain issues identified in the audit. This amount was fully reserved at December 30, 2007, and payment was
made during the third quarter of 2008. The remaining pending issues that arose during the examination total $2.6 million, and we filed an
appeal during the third quarter of 2008 with respect to the unresolved matters. We expect to reach a resolution on these matters within the
next twelve months, and until such time that these matters are ultimately resolved, these tax years will remain open.
We are subject to the U.S. federal income tax, and file income tax returns in multiple state jurisdictions and in Canada. The U.S.
federal tax years 2003 through 2007 are open to audit, with 2003 through 2007 currently under examination. In general, the state tax years
open to audit range from 2005 through 2007 and the Canadian tax years open to audit include 2004 through 2007. Within the next twelve
months, we expect to resolve the federal income tax examination discussed above, as well as settle or otherwise conclude certain ongoing
state income tax audits. As such, it is possible that the unrecognized tax benefits would decrease up to approximately $0.5 million through
audit settlement.
We recognize interest related to uncertain tax positions in “Interest expense” and related penalties are included in “General and
administrative expenses” on the Consolidated Statements of Earnings. Interest expense related to uncertain tax positions was $1.0 million
and $0.7 million in 2008 and 2007, respectively. During 2008, we recognized a net benefit of approximately $0.5 million from a reduction
in our estimated penalties related to uncertain tax positions. Penalties expense was $1.9 million in 2007. The total amount of interest and
penalties accrued related to uncertain tax positions as of December 28, 2008 and December 30, 2007 was $3.8 million and $5.1 million,
respectively.
10. Earnings Per Share:
Basic earnings per share (“EPS”) is computed by dividing earnings applicable to common shares by the weighted average number of
common shares outstanding. Diluted EPS is computed using the weighted average number of common shares and dilutive potential
common shares outstanding during the period using the treasury stock method. Potential common shares consist of dilutive stock options
and non-vested shares of restricted stock.
The following table sets forth the computation of EPS, basic and diluted:
Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic EPS:
Fiscal Year
2006
2007
2008
(in thousands, except per share data)
56,494 $
55,921 $
68,257
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
23,270
30,922
2.43 $
1.81 $
Diluted EPS:
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potential common shares for stock options and restricted stock . . . . . . . . . . . . . . .
Weighted average common and potential common shares outstanding . . . . . . . . . .
Earnings per common and potential common shares . . . . . . . . . . . . . . . . . . . . . . . . $
23,270
523
23,793
30,922
772
31,694
2.37 $
1.76 $
32,587
2.09
32,587
878
33,465
2.04
Stock options to purchase 998,254 common shares, 813,650 common shares, and 863,851common shares were not included in the
diluted EPS computations in 2008, 2007 and 2006, respectively, because the exercise prices of these options were greater than the average
market price of the common shares and, therefore, their effect would be antidilutive.
11. Stockholders’ Equity:
We have one class of common capital stock, our common stock, as disclosed on the Consolidated Balance Sheets. Holders of our
common stock are entitled to one vote per share held on all matters submitted to a vote of the stockholders.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
11. Stockholders’ Equity (continued):
Our articles of incorporation authorize our Board of Directors (the “Board”), at its discretion, to issue up to 500,000 shares of Class B
Preferred Stock (“Preferred B Stock”), par value $100.00. Preferred B Stock may be issued in one or more series and are entitled to
dividends, voting powers, liquidation preferences, conversion and redemption rights, and certain other rights and preferences as determined
by the Board. As of December 28, 2008 and December 30, 2007, there were no shares of Preferred B Stock issued or outstanding.
Stock Repurchase Program
We repurchase shares of our common stock under a plan authorized by the Board. In July 2005, the Board approved a stock repurchase
program which authorized us to repurchase from time to time up to $400 million of our common stock. In October 2007, the Board
authorized a $200 million increase to the share repurchase authorization; bringing the total authorization to $600 million. The share
repurchase program, which does not have a stated expiration date, authorizes us to make repurchases in the open market or in private
transactions. We repurchased 4,911,041 shares in 2008, 7,887,337 shares in 2007 and 1,959,635 shares in 2006 at an aggregate purchase
price of approximately $160.8 million, $248.1 million and $66.8 million in 2008, 2007 and 2006, respectively. At December 28, 2008,
approximately $71.4 million remained available for share repurchases under the $600 million repurchase authorization.
Accumulated Other Comprehensive Income
The following table summarizes changes in the components of accumulated other comprehensive income, net of taxes:
Cash Flow
Hedge
Accumulated
Other
Comprehensive
Income
Foreign
Currency
(in thousands)
Balance at January 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- $
-
2,446 $
(78)
Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on cash flow hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-
-
-
(4,295)
-
2,368
4,643
7,011
-
(4,608)
Balance at December 28, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(4,295) $
2,403 $
2,446
(78)
2,368
4,643
7,011
(4,295)
(4,608)
(1,892)
12. Stock-Based Compensation Plans:
We have stock-based compensation plans that include non-statutory stock option plans and restricted stock plans for our employees
and non-employee directors. In conjunction with stockholder approval of the restricted stock plans in fiscal year 2006, we discontinued
issuing stock options to our employees and non-employee directors.
The fair value of all stock-based awards, less estimated forfeitures, has been recognized in the financial statements over the vesting
period. The Consolidated Statements of Earnings for 2008, 2007 and 2006 reflect pretax stock-based compensation expense of $6.0
million, $4.4 million and $5.6 million, respectively, which is included in “General and administrative expenses” on the Consolidated
Statements of Earnings. The income tax benefit related to stock-based compensation expense was $2.3 million, $1.7 million and $2.1
million for 2008, 2007 and 2006, respectively. Stock-based compensation cost of approximately $0.2 million, $0.1 million, and $0.2
million was capitalized as property and equipment in 2008, 2007 and 2006, respectively.
Stock Option Plans
We have adopted stock option plans under which 10,781,250 shares may be granted to employees and 437,500 shares may be granted
to non-employee directors. Under the terms of our stock option plans, employees and non-employee directors were granted options to
purchase our common stock at a price equal to the fair market value of the underlying shares on the date of grant. Options may not be
exercised until the employee has been continuously employed at least one year, or the non-employee director has served on the Board of
Directors for at least two years, after the date of grant. Stock options granted under the plans vest over periods of one to four years and
expire from five to seven years from the date of grant. Options which expire or terminate may be re-granted under the plan. We issue new
shares of our common stock when options are exercised. In 2006, we discontinued granting stock options.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
12. Stock-Based Compensation Plans (continued):
The following table summarizes 2008 stock option activity and related information for all plans (except as otherwise noted, not
presented in thousands):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Option
Shares
Aggregate
Intrinsic
Value(1)
(in thousands)
Options outstanding, December 30, 2007 . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/cancelled . . . . . . . . . . . . . . . . . . . . . .
2,779,680
-
(671,311)
(127,075)
$ 28.15
-
$ 28.56
$ 33.39
Options outstanding, December 28, 2008 . . . . . . .
1,981,294
$ 27.68
Options exercisable, December 28, 2008 . . . . . . . .
1,819,556
$ 26.88
1.4
1.4
$
3,393
$
3,393
(1) Aggregate intrinsic value represents the difference between the closing market price of our common stock on the last day of the fiscal year,
which was $23.45 on December 28, 2008, and the exercise price multiplied by the number of options outstanding.
Pursuant to a plan approved by the Board, our executive officers elected in December 2006 to modify the terms of certain outstanding
stock options held by them totaling 998,950 shares in order to mitigate certain tax costs associated with Section 409A of the Internal
Revenue Code of 1986, as amended, by setting a pre-determined fixed period in which such stock options would be exercised. As of
December 28, 2008, outstanding stock options totaling 340,750 shares remained subject to this arrangement, of which unexercised stock
options totaling 198,300 shares were cancelled on December 31, 2008 and stock options totaling 142,450 shares will be forfeited if not
otherwise exercised by the executive officers prior to December 31, 2009.
Cash proceeds from the exercise of stock options totaled $19.2 million, $45.3 million and $8.0 million in 2008, 2007 and 2006,
respectively. Stock options exercised during 2008, 2007 and 2006 had an aggregate intrinsic value (the amount by which the closing
market price of our common stock on the date of exercise exceeded the exercise price multiplied by the number of shares) of $5.6 million,
$31.8 million and $3.7 million, respectively. As of December 28, 2008, unrecognized pretax stock-based compensation cost related to
stock options was $0.2 million which will be recognized over a weighted average remaining vesting period of 0.2 year.
Restricted Stock Plans
We have adopted a restricted stock plan for our employees under which 1,100,000 shares are authorized to be granted before
December 31, 2014. Shares awarded under the employee restricted stock plan provide for a vesting period of at least one year and no more
than five years, and the full award may not vest in less than three years, subject to the terms of the employee restricted stock plan. We have
also adopted a restricted stock plan for our non-employee directors under which 75,000 shares are authorized to be granted before May 1,
2020. Shares awarded under the non-employee directors restricted stock plan provide for a vesting period of four years. Shares issued under
a restricted stock award are nontransferable and subject to the forfeiture restrictions. Unvested shares which are forfeited or cancelled may
be re-granted under the plan.
The following table summarizes 2008 restricted stock activity for all plans (not presented in thousands):
Weighted
Average
Grant Date
Fair Value
Restricted
Shares
Restricted stock outstanding, December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
375,794
345,542
(113,595)
(20,575)
$ 35.66
$ 26.74
$ 35.01
$ 31.35
Restricted stock outstanding, December 28, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .
587,166
$ 30.69
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
12. Stock-Based Compensation Plans (continued):
In 2007 and 2006, we granted 220,826 and 258,364 shares of restricted stock, respectively, at a weighted average grant date fair value
of $38.57 and $32.19 per share, respectively. The total fair value of shares that vested during 2008 and 2007 was $3.6 million and $2.5
million, respectively. There were no shares that vested in 2006. On January 8, 2009, we granted an additional 27,692 shares at a weighted
average grant date fair value of $24.78 per share under the non-employee directors restricted stock plan. As of December 28, 2008,
unrecognized pretax stock-based compensation cost related to restricted stock awards was $13.7 million which will be recognized over a
weighted average remaining vesting period of 1.7 years.
13. Employee Benefit Plan:
We have adopted the CEC 401(k) Retirement and Savings Plan (the “401(k) Plan”), a defined contribution profit sharing plan that
allows participants to defer a portion of their annual compensation on a pretax basis. Only non-highly compensated employees, as
determined by the Internal Revenue Service, who are at least 18 years of age and who have completed minimum service requirements are
eligible to participate in the 401(k) Plan. Each year, at our discretion, we may make an annual contribution to the 401(k) Plan out of our
current or accumulated earnings. We made contributions in the form of our common stock of approximately $0.5 million for each of the
2007, 2006 and 2005 plan years. At December 28, 2008, we accrued approximately $0.6 million for our contributions for the 2008 plan
year, which will be paid in our common stock during fiscal 2009. At December 28, 2008, 79,507 shares of our common stock remained
available for future contributions to the 401(k) Plan.
14. Quarterly Results of Operations (Unaudited):
The following tables summarize our unaudited quarterly results of operations in 2008 and 2007:
Quarters in Fiscal Year 2008
March 30,
2008
June 29,
2008
Sept. 28,
2008
Dec. 28,
2008
(in thousands, except per share data)
Food and beverage sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Entertainment and merchandise sales . . . . . . . . . . . . . . . . . . . . . . . .
124,205 $
120,014
96,783 $
94,571
100,309 $
100,569
Company store sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
244,219
957
245,176
55,838
52,005
32,911
191,354
1,140
192,494
22,541
18,478
11,308
200,878
1,000
201,878
20,746
15,694
9,901
88,598
85,644
174,242
719
174,961
8,895
4,454
2,374
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.28
1.26
$ 0.49
0.48
$ 0.45
0.44
$ 0.11
0.11
Quarters in Fiscal Year 2007
April 1,
2007
July 1,
2007
Sept. 30,
2007
Dec. 30,
2007
(in thousands, except per share data)
Food and beverage sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Entertainment and merchandise sales . . . . . . . . . . . . . . . . . . . . . . . .
121,339 $
110,520
92,687 $
86,404
100,412 $
96,207
91,302
82,794
Company store sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231,859
1,000
232,859
54,269
51,478
32,020
179,091
774
179,865
16,563
13,698
8,548
196,619
862
197,481
28,197
25,115
15,917
174,096
1,021
175,117
5,515
1,083
(564)
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.00
0.95
$ 0.27
0.26
$ 0.51
0.50
$ (0.02)
(0.02)
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CEC ENTERTAINMENT, INC.
14. Quarterly Results of Operations (Unaudited) (continued):
Quarterly operating results are not necessarily representative of operations for a full year. EPS amounts in each quarter are computed
using the weighted average number of shares outstanding during the quarter and may not sum to EPS for the full year, which is computed
using the weighted average number of shares outstanding during the full year. This is due to changes in basic and diluted weighted average
shares outstanding throughout the year.
Fourth Quarter Adjustments
During the fourth quarter of 2008, we recorded a net $1.7 million reduction in our contingent loss reserves as a result of specific
events and circumstances occurring in the fourth quarter of 2008, including settlement discussions with respect to ongoing legal matters.
During the fourth quarter of 2007, we recorded asset impairment charges of approximately $8.4 million of which approximately $2.3
million related to our decision to close one store and the remainder related to our decision to write down the carrying amount of the
property and equipment at four other Company-owned stores we continue to operate.
58
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end
of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, has concluded that our disclosure controls and procedures were effective as of December 28, 2008 to ensure that information
required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, was (1) recorded,
processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and
(2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized that any control and procedures, no matter
how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in
Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer and effected by our 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 and includes those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and
our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our 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.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control
over financial reporting as of December 28, 2008 based on the criteria established in “Internal Control — Integrated Framework” issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on our management’s assessment, we have concluded
that, as of December 28, 2008, our internal control over financial reporting was effective based on those criteria.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our financial statements included in this
Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting as of December 28, 2008,
which is included in Item 8 under the caption “Report of Independent Registered Public Accounting Firm. ”
Changes in Internal Control over Financial Reporting
During the quarterly period ended December 28, 2008, there has been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
59
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this Item regarding our directors and executive officers is incorporated by reference from and will be
included in our definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with our 2009 Annual Meeting under the
captions “Proposal 1: Election of Directors”, “Corporate Governance”, “Additional Information Regarding the Executive Officers”,
“Section 16(a) Beneficial Ownership Reporting Compliance”, and “Audit Committee Disclosure”.
We have adopted a Code of Ethics for the Chief Executive Officer, President and Senior Financial Officers (the "Code of Ethics") that
applies to the Chief Executive Officer, President, Chief 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 our Web site at www.chuckecheese.com.
ITEM 11. Executive Compensation
The information required by this Item regarding our directors and executive officers is incorporated by reference from and will be
included in our definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with our 2009 Annual Meeting under the
captions “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Executive Compensation” and “Director
Compensation”.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference from and will be included in our definitive Proxy Statement to be
filed pursuant to Regulation 14A in connection with our 2009 Annual Meeting under the captions “Securities Authorized for Issuance
under Equity Compensation Plans” and “Security Ownership”.
ITEM 13. Certain Relationships and Related Transactions, and Directors Independence
The information required by this Item is incorporated by reference from and will be included in our definitive Proxy Statement to be
filed pursuant to Regulation 14A in connection with our 2009 Annual Meeting under the captions “Certain Relationships and Related
Transactions” and “Meetings and Committees of the Board of Directors.”
ITEM 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference from and will be included in our definitive Proxy Statement to be
filed pursuant to Regulation 14A in connection with our 2009 Annual Meeting under the caption “Service Fees Billed in 2007 and 2008 by
the Independent Registered Public Accounting Firm.”
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as a part of this report:
(1) Financial Statements.
The financial statements included in Item 8. “Financial Statements and Supplementary Data” are filed as a part of this
Annual Report on Form 10-K. See “Index to Consolidated Financial Statements.”
(2) Financial Statement Schedules.
There are no financial statement schedules filed as a part of this Annual Report on Form 10-K, since the circumstances
requiring inclusion of such schedules are not present.
(3) Exhibits.
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which Exhibit Index is incorporated in
this Annual Report on Form 10-K by reference.
60
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.
SIGNATURES
Dated: February 20, 2009
CEC Entertainment, Inc.
/s/ Michael H. Magusiak
Michael H. Magusiak
President 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/ Michael H. Magusiak
Michael H. Magusiak
President, Chief Executive Officer
and Director (Principal Executive
Officer)
February 20, 2009
/s/ Christopher D. Morris
Christopher D. Morris
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
February 20, 2009
/s/ Darin E. Harper
Darin E. Harper
Vice President, Controller
(Principal Accounting Officer)
February 20, 2009
/s/ Richard M. Frank
Richard M. Frank
Executive Chairman of the Board
February 20, 2009
of Directors
/s/ Tommy R. Franks
Tommy R. Franks
Director
/s/ Richard T. Huston
Richard T. Huston
Director
/s/ Larry T. McDowell
Larry T. McDowell
Director
/s/ Tim T. Morris
Tim T. Morris
Director
/s/ Louis P. Neeb
Louis P. Neeb
Director
/s/ Cynthia I. Pharr Lee
Cynthia I. Pharr Lee
Director
/s/ Walter Tyree
Walter Tyree
Director
/s/ Raymond E. Wooldridge
Raymond E. Wooldridge
Director
61
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2.1§
10.2.2§
10.3.1§
10.3.2§
10.4 §
EXHIBIT INDEX
Description
Restated Articles of Incorporation of CEC Entertainment, Inc. (the “Company”) dated October 14, 2008 (incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the
Securities and Exchange Commission (the “Commission”) on October 14, 2008)
Amended and Restated Bylaws of the Company dated December 10, 2008 (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commission on December 10,
2008)
Restated Articles of Incorporation of the Company dated October 14, 2008 (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commission on October 14, 2008)
Amended and Restated Bylaws of the Company dated December 10, 2008 (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commission on December 10,
2008)
Specimen form of Certificate representing $.10 par value Common Stock (incorporated by reference to Exhibit 4.4 to
the Company’s Registration Statement on Form S-8 (File No. 333-152992) as filed with the Commission on August 13,
2008)
Second Amended and Restated Credit Agreement dated October 19, 2007 by and among CEC Entertainment Concepts,
L.P., as the Borrower, the Company, as a Guarantor, Bank of America, N.A., as Administrative Agent, Swing Line
Lender and L/C Issuer, J.P. Morgan Chase Bank, N.A., as Syndication Agent, Wachovia Bank, N.A. and SunTrust
Bank, as Co-Documentation Agents, Banc of America Securities LLC and J.P. Morgan Securities, Inc., as Co-Lead
Arrangers and Co-Book Managers and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K (File No. 001-13687) as filed with the Commission on October 23, 2007)
Richard M. Frank 2005 Employment Agreement dated March 29, 2005 by and between Richard M. Frank and the
Company (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K (File No. 001-
13687) as filed with the Commission on February 28, 2008)
Amendment No. 1 to the Richard M. Frank 2005 Employment Agreement dated December 17, 2007 by and between
Richard M. Frank and the Company (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on
Form 10-K (File No. 001-13687) as filed with the Commission on February 28, 2008)
Michael H. Magusiak 2005 Employment Agreement dated March 29, 2005,by and between Michael H. Magusiak and
the Company (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K (File No. 001-
13687) as filed with the Commission on February 28, 2008)
Amendment No. 1 to the Michael H. Magusiak 2005 Employment Agreement dated December 17, 2007 by and
between Michael H. Magusiak and the Company (incorporated by reference to Exhibit 10.30 to the Company’s Annual
Report on Form 10-K (File No. 001-13687) as filed with the Commission on February 28, 2008)
1997 Non-Statutory Stock Option Plan (incorporated by referenced to Exhibit 4.1 to the Company’s Registration
Statement on Form S-8 (File No. 333-119218) as filed with the Commission on September 23, 2004)
10.5 *§
Form of Stock Option Agreement under the Company’s 1997 Non-Statutory Stock Option Plan
10.6 §
Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form S-8 (File No. 333-119225) as filed with the Commission on September 23, 2004)
10.7 *§
Form of Stock Option Agreement under the Company’s Non-Employee Directors Stock Option Plan
10.8 §
2004 Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
(File No. 001-13687) as filed with the Commission on June 3, 2008)
10.9 *§
Form of Restricted Stock Agreement under the Company’s 2004 Restricted Stock Plan
Exhibit
Number
10.10 §
Description
Non Employee Directors Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to the Company Quarterly
Report on Form 10-Q (File No. 001-13687) as filed with the Commission on August 7, 2008)
10.11 *§
Form of Restricted Stock Agreement under the Company’s Non Employee Directors Restricted Stock Plan
10.12 §
10.13 §
21.1*
23.1*
31.1*
31.2*
32.1*
32.2*
Summary of Director Compensation (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q (File No. 001-13687) as filed with the Commission on May 8, 2008)
Summary of Incentive Bonus Plan (incorporated by reference to the Company’s Definitive Proxy Statement (File No.
001-13687) as filed with the Commission on April 16, 2008 under the section entitled “Compensation Discussion and
Analysis—How We Determine the Amount and Material Terms of Each Element of Compensation—Cash Bonus—
Incentive Bonus Plan” on page 21)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
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
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
______________
* Filed herewith.
§ Management contract or compensatory plan, contract or arrangement.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-103572, 333-111175, 333-119218, 333-119225,
333-119232, 333-130142, 333-145612, 333-152992, 333-72878, 333-13077, 333-44434, 333-83691 and 333-41039 on Form S-8 of our
report dated February 20, 2009, relating to the consolidated financial statements of CEC Entertainment, Inc., and the effectiveness of CEC
Entertainment, Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of CEC Entertainment, Inc.
for the year ended December 28, 2008.
EXHIBIT 23.1
/s/ Deloitte & Touche LLP
Dallas, Texas
February 20, 2009
CERTIFICATION PURSUANT TO RULE 13a – 14(a)/15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(Chief Executive Officer)
EXHIBIT 31.1
I, Michael H. Magusiak, 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 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 report;
4. The registrant’s other certifying officer(s) 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 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 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) 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 the registrant’s board of directors (or persons
performing the equivalent functions):
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.
February 20, 2009
/s/ Michael H. Magusiak
Michael H. Magusiak
President and Chief Executive Officer
CERTIFICATION PURSUANT TO RULE 13a – 14(a)/15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(Chief Financial Officer)
EXHIBIT 31.2
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 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 report;
4. The registrant’s other certifying officer(s) 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 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 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) 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 the registrant’s board of directors (or persons
performing the equivalent functions):
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.
February 20, 2009
/s/ Christopher D. Morris
Christopher D. Morris
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(Chief Executive Officer)
EXHIBIT 32.1
In connection with the Annual Report of CEC Entertainment, Inc. (the “Company”) on Form 10-K for the year ended December 28,
2008 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 as of, and for, the periods presented in this Report.
February 20, 2009
/s/ Michael H. Magusiak
Michael H. Magusiak
President and Chief Executive Officer
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.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(Chief Financial Officer)
EXHIBIT 32.2
In connection with the Annual Report of CEC Entertainment, Inc. (the “Company”) on Form 10-K for the year ended December 28,
2008 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 as of, and for, the periods presented in this Report.
February 20, 2009
/s/ Christopher D. Morris
Christopher D. Morris
Chief Financial Officer
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.