1 - ------------------------------------------------------------------------------- FORM 10-K/A (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 1995. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ____. Commission File Number 0-15782 SHOWBIZ PIZZA TIME, INC. (Exact name of registrant as specified in its charter) KANSAS 48-0905805 (State or jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 4441 West Airport Freeway P.O. Box 150277 Irving, Texas 75015 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 258-8507 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.10 each (Title of Class) Class A Preferred Stock, par value $60.00 each (Title of Class) - ------------------------------------------------------------------------------- 2 This Form 10-K/A amends and restates in its entirety Item 8 of the registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1995. Item 8. Financial Statements and Supplementary Data SHOWBIZ PIZZA TIME, INC. YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993 CONTENTS Page ---- Independent auditors' report . . . . . . . . . . . . . . . . . . 3 Consolidated financial statements: Consolidated balance sheets . . . . . . . . . . . . . . . . . 4 Consolidated statements of earnings . . . . . . . . . . . . . 5 Consolidated statements of shareholders' equity . . . . . . . 6 Consolidated statements of cash flows . . . . . . . . . . . . 7 Notes to consolidated financial statements . . . . . . . . . 8 3 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders ShowBiz Pizza Time, Inc. Irving, Texas We have audited the accompanying consolidated balance sheets of ShowBiz Pizza Time, Inc. and subsidiary as of December 29, 1995 and December 30, 1994 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ShowBiz Pizza Time, Inc. and subsidiary as of December 29, 1995 and December 30, 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 29, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for preopening costs in 1994. DELOITTE & TOUCHE LLP Dallas, Texas February 23, 1996 (May 22, 1996 as to the last paragraph in Note 1) 3 4 SHOWBIZ PIZZA TIME, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 30, 1994 AND DECEMBER 29, 1995 (THOUSANDS, EXCEPT SHARE DATA) ASSETS DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ Current assets: Cash and cash equivalents................................. $ 2,381 $ 5,589 Accounts receivable, including receivables from related parties of $416 and $415, respectively................. 3,361 3,327 Current portion of notes receivable, including receivables from related parties of $300 and $327, respectively.... 529 608 Inventories............................................... 3,107 3,589 Prepaid expenses.......................................... 2,900 2,781 Current portion of deferred tax asset..................... 3,583 4,147 -------- -------- Total current assets.............................. 15,861 20,041 -------- -------- Investments in related parties.............................. 699 761 -------- -------- Property and equipment...................................... 130,190 137,181 -------- -------- Deferred tax asset.......................................... 29,414 28,582 -------- -------- Other assets: Notes receivable, less current portion, including receivables from related parties of $1,708 and $1,983, respectively........................................... 6,705 7,072 Deferred charges, less amortization....................... 2,083 2,599 Other..................................................... 3,356 2,774 -------- -------- 12,144 12,445 -------- -------- $188,308 $199,010 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 10,060 $ 95 Accounts payable and accrued liabilities.................. 26,545 29,836 -------- -------- Total current liabilities.............................. 36,605 29,931 -------- -------- Long-term debt, less current portion........................ 19,947 35,753 -------- -------- Deferred credits............................................ 3,025 3,443 -------- -------- Other liabilities........................................... 1,314 1,391 -------- -------- Commitments and contingencies Redeemable preferred stock, $60 par value, redeemable for $2,974 in 2005............................................ 1,902 2,005 -------- -------- Shareholders' equity: Common stock, $.10 par value; authorized 30,000,000 shares; 21,505,853 and 21,435,092 shares issued, respectively........................................... 2,151 2,144 Capital in excess of par value............................ 155,815 153,515 Retained earnings......................................... 5,012 4,733 Deferred compensation..................................... (7,200) (3,642) Less treasury shares of 3,109,176 at both dates, at cost................................................... (30,263) (30,263) -------- -------- 125,515 126,487 -------- -------- $188,308 $199,010 ======== ======== See notes to consolidated financial statements. 4 5 SHOWBIZ PIZZA TIME, INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994 AND DECEMBER 29, 1995 (THOUSANDS, EXCEPT PER SHARE DATA) 1993 1994 1995 -------- -------- -------- Food and beverage revenues.................................. $197,090 $189,257 $182,376 Games and merchandise revenues.............................. 70,242 74,331 76,969 Franchise fees and royalties................................ 4,321 4,078 3,464 Interest income, including related party income of $177, $209, and $222, respectively.............................. 346 688 872 Joint venture income........................................ 345 161 102 -------- -------- -------- 272,344 268,515 263,783 -------- -------- -------- Costs and expenses: Cost of sales............................................. 137,343 137,729 136,700 Selling, general and administrative expenses, including related party expenses of $125 in each year............ 42,129 47,263 44,794 Depreciation and amortization............................. 23,058 26,032 23,184 Interest expense, including related party expense of $99 in 1993................................................ 797 1,861 3,118 (Gain) loss on property transactions...................... 675 (2,597) 136 Other operating expenses.................................. 50,095 55,114 55,476 -------- -------- -------- 254,097 265,402 263,408 -------- -------- -------- Income before income taxes.................................. 18,247 3,113 375 Income taxes: Current expense........................................... 1,751 869 701 Deferred (benefit) expense................................ 4,605 1,568 (389) -------- -------- -------- 6,356 2,437 312 -------- -------- -------- Net income.................................................. $ 11,891 $ 676 $ 63 ======== ======== ======== Earnings per common and common equivalent share: Primary: Net income (loss)...................................... $ .57 $ .02 $ (.02) ======== ======== ======== Weighted average shares outstanding.................... 20,183 18,191 18,098 ======== ======== ======== Fully diluted: Net income (loss)...................................... $ .57 $ .02 $ (.02) ======== ======== ======== Weighted average shares outstanding.................... 20,196 18,191 18,098 ======== ======== ======== See notes to consolidated financial statements. 5 6 SHOWBIZ PIZZA TIME, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994 AND DECEMBER 29, 1995 (THOUSANDS, EXCEPT PER SHARE DATA) COMMON TREASURY STOCK CAPITAL IN RETAINED DEFERRED STOCK ------------------- EXCESS OF EARNINGS COMPEN- ------------------ SHARES PAR VALUE PAR VALUE (DEFICIT) SATION SHARES COST ------ --------- ---------- --------- -------- ------ -------- Balances, January 1, 1993...................... 19,448 $1,946 $142,570 $(6,872) $ (666) 318 $ (4,811) Net income................................... 11,891 Redeemable preferred stock accretion......... (104) Redeemable preferred stock dividends, $4.80 per share.................................. (238) Stock options exercised...................... 72 8 570 Warrants exercised........................... 1,282 127 1,393 Stock grant plan............................. 621 62 11,979 (12,000) Tax expense from exercise of stock options and stock grants........................... (37) Treasury stock acquired...................... 1,251 (11,939) Amortization of deferred compensation........ 2,732 Stock issued under 401(k) plan............... 2 36 ------ ------ -------- ------- -------- ----- -------- Balances, December 31, 1993.................... 21,425 2,143 156,511 4,677 (9,934) 1,569 (16,750) Net income................................... 676 Redeemable preferred stock accretion......... (103) Redeemable preferred stock dividends, $4.80 per share.................................. (238) Stock options exercised...................... 81 8 232 Tax expense from exercise of stock options and stock grants........................... (928) Treasury stock acquired...................... 1,540 (13,513) Amortization of deferred compensation........ 2,734 ------ ------ -------- ------- -------- ----- -------- Balances, December 30, 1994.................... 21,506 2,151 155,815 5,012 (7,200) 3,109 (30,263) Net income................................... 63 Redeemable preferred stock accretion......... (104) Redeemable preferred stock dividends, $4.80 per share.................................. (238) Stock options exercised...................... 19 2 88 Stock grant shares forfeited................. (90) (9) (1,734) 1,737 Tax expense from exercise of stock options and stock grants........................... (654) Amortization of deferred compensation........ 1,821 ------ ------ -------- ------- -------- ----- -------- Balances, December 29, 1995.................... 21,435 $2,144 $153,515 $ 4,733 $(3,642) 3,109 $(30,263) ====== ====== ======== ======= ======== ===== ======== See notes to consolidated financial statements. 6 7 SHOWBIZ PIZZA TIME, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994 AND DECEMBER 29, 1995 (THOUSANDS) 1993 1994 1995 -------- -------- -------- Operating activities: Net income................................................ $ 11,891 $ 676 $ 63 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization.......................... 23,058 26,032 23,184 Deferred income tax expense (benefit).................. 4,605 1,568 (389) (Gain) loss on property transactions................... 675 (2,597) 136 Compensation expense under stock grant plan............ 2,756 2,734 1,821 Other.................................................. 399 619 418 Net change in receivables, inventories, prepaids, payables and accrued liabilities..................... 1,521 1,787 2,577 -------- -------- -------- Cash provided by operations.......................... 44,905 30,819 27,810 -------- -------- -------- Investing activities: Purchases of property and equipment....................... (44,600) (29,421) (28,277) Proceeds from disposition of property and equipment....... 250 6,725 20 Payments received on notes receivable..................... 978 2,992 2,503 Additions to notes receivable............................. (724) (2,169) (3,047) Change in deferred charges, investments and other assets................................................. (1,813) (703) (1,747) -------- -------- -------- Cash used in investing activities...................... (45,909) (22,576) (30,548) -------- -------- -------- Financing activities: Proceeds from line of credit.............................. 24,050 8,535 38,895 Payments on line of credit................................ (10,550) (5,235) (32,995) Reduction of debt and capital lease obligations, including payments to related parties of $1,658 in 1993.......... (1,692) (47) (59) Redeemable preferred stock dividends...................... (238) (238) (238) Acquisition of treasury stock............................. (11,939) (13,513) Exercise of stock options and warrants, including exercise by a related party of $1,488 in 1993................... 2,098 240 90 Other..................................................... 324 (115) 253 -------- -------- -------- Cash provided by (used in) financing activities........ 2,053 (10,373) 5,946 -------- -------- -------- Increase (decrease) in cash and cash equivalents............ 1,049 (2,130) 3,208 Cash and cash equivalents, beginning of year................ 3,462 4,511 2,381 -------- -------- -------- Cash and cash equivalents, end of year...................... $ 4,511 $ 2,381 $ 5,589 ======== ======== ======== See notes to consolidated financial statements. 7 8 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994 AND DECEMBER 29, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Operations: ShowBiz Pizza Time, Inc. (the "Company") operates and franchises family restaurant entertainment centers as Chuck E. Cheese's restaurants, and through BHC Acquisition Corporation ("BAC"), its wholly owned subsidiary, also operated Monterey's Tex-Mex Cafe restaurants. The Monterey's Tex-Mex Cafe restaurants were sold effective May 5, 1994. Fiscal year: The Company's fiscal year is 52 or 53 weeks and ends on the Friday nearest December 31. References to 1993, 1994 and 1995 are for the fiscal years ended December 31, 1993, December 30, 1994 and December 29, 1995, respectively. Fiscal years 1993, 1994 and 1995 were each 52 weeks in length. Basis of consolidation: The consolidated financial statements include the accounts of the Company and BAC. All significant intercompany accounts and transactions have been eliminated. Cash and cash equivalents: Cash and cash equivalents of the Company are composed of demand deposits with banks and short-term cash investments with remaining maturities of three months or less from the date of purchase by the Company. Inventories: Inventories of food, paper products and supplies are stated at the lower of cost or market on a first-in, first-out basis. Property and equipment, depreciation and amortization: Property and equipment are stated at cost. Depreciation and amortization are provided by charges to operations over the estimated useful lives of the assets, or the lease term if less, by the straight-line method. During the first quarter of 1995, the Company changed its estimate of the useful lives of certain fixed assets (Note 5). As a result of this change, income before income taxes increased approximately $2.3 million, net income increased approximately $1.4 million and earnings per share increased approximately $.08 in 1995. Deferred charges and related amortization: Loan costs are deferred and amortized over the term of the respective agreements. Franchise rights are amortized over the remaining life of the franchise agreements. In the fourth quarter of 1994, the Company revised its estimate of the future benefit for preopening expenses. As a result, the Company expensed all unamortized preopening expenses of approximately $900,000. The Company now expenses all preopening expenses as incurred. Previously, preopening expenses were amortized over a two year period. Other deferred charges are amortized over various periods of up to five years. All amortization is provided by the straight-line method. 8 9 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Franchise fees and royalties: The Company recognizes initial franchise fees upon fulfillment of all significant obligations to the franchisee. Royalties from franchisees are accrued as earned. Impairment of intangibles and long-lived assets: Impairment losses are recognized if the future cash flows expected to be generated by intangibles and long-lived assets are less than the carrying value of the assets. The impairment loss is equal to the amount by which the carrying value of the assets exceeds the fair value of the assets. Reclassifications: In 1995, the Company adopted the single step format for presenting its Consolidated Statements of Earnings. Certain reclassifications of 1993 and 1994 amounts have been made to conform to the 1995 presentation. Use of estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are used in determining the realization of the deferred tax asset, the liability for self-insured reserves and the collectibility of receivables. Actual results could differ from those estimates. Accounting for stock-based compensation: The Company has elected to not apply the accounting provisions of the Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" issued by the Financial Accounting Standards Board. Stock Split: All share and per share amounts have been adjusted to reflect a three-for-two stock split in the form of a 50% stock dividend of the Company's Common Stock effected on May 22, 1996. 2. SIGNIFICANT TRANSACTIONS: Effective May 5, 1994, the Company sold its Monterey's Tex-Mex Cafe restaurants for an aggregate purchase price consisting of approximately $6.7 million in cash, $4.7 million in subordinated promissory notes and the retention of a 12 1/2% equity interest in the acquiring company. Due to the Company's substantial equity interest, the acquiring company is a related party subsequent to the transaction. Revenues from the Company's Monterey's Tex-Mex Cafe restaurants were $6.5 million in 1994. Income before income taxes was $6.3 million in 1994 including a gain of $5.5 million from the sale. The Company provided for a loss of approximately $2.3 million in 1994 as a result of the Company's decision to close one Chuck E. Cheese's restaurant and the impairment in fair value of the fixed assets of ten Chuck E. Cheese's restaurants. The impairment in fair value of the ten restaurants is due to the Company's decision not to renew the leases as a result of the deterioration of site characteristics or the inability to renew the leases at acceptable rental terms. 9 10 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS RECEIVABLE: 1994 1995 ------ ------ (THOUSANDS) Trade....................................................... $ 382 $ 516 Other....................................................... 3,454 2,886 ------ ------ 3,836 3,402 Less allowance for doubtful collection...................... (475) (75) ------ ------ $3,361 $3,327 ====== ====== 4. NOTES RECEIVABLE: The Company's notes receivable at December 30, 1994 and December 29, 1995 arose principally as a result of the sale of restaurants, lines of credit established with the International Association of ShowBiz Pizza Time Restaurants, Inc., a related party (Note 19), and advances to franchisees, joint ventures and managed properties. All obligors under the notes receivable are principally engaged in the restaurant industry. The notes have various terms, but most are payable in monthly installments of principal and interest through 2000, with interest rates ranging from 7.5% to 12.0%. The notes are generally collateralized by the related property and equipment. Balances of notes receivable are net of an allowance for doubtful collection of $139,000 and $354,000 at December 30, 1994 and December 29, 1995, respectively. 5. PROPERTY AND EQUIPMENT: In 1995, the Company changed its estimate of the useful lives of certain fixed assets. PREVIOUS NEW LIVES LIVES 1994 1995 -------- ------- -------- -------- (IN YEARS) (THOUSANDS) Land and improvements........................ 0-10 0-20 $ 4,650 $ 4,630 Leasehold improvements....................... 4-15 4-20 107,928 118,041 Buildings and improvements................... 4-15 4-25 8,789 8,789 Furniture, fixtures and equipment............ 2-10 2-15 87,756 97,703 Property leased under capital leases (Note 8)......................................... 10-15 10-15 1,328 1,328 -------- -------- 210,451 230,491 Less accumulated depreciation and amortization............................... (81,805) (94,781) -------- -------- 128,646 135,710 Construction in progress..................... 1,544 1,471 -------- -------- $130,190 $137,181 ======== ======== 6. DEFERRED CHARGES: 1994 1995 ------- ------- (THOUSANDS) Franchise rights............................................ $ 5,000 $ 5,000 Loan costs.................................................. 434 1,223 Other....................................................... 557 579 ------- ------- 5,991 6,802 Less accumulated amortization............................... (3,908) (4,203) ------- ------- $ 2,083 $ 2,599 ======= ======= 10 11 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: 1994 1995 ------- ------- (THOUSANDS) Accounts payable............................................ $10,819 $12,851 Salaries and wages.......................................... 3,990 4,215 Insurance................................................... 7,670 8,805 Taxes, other than income.................................... 2,528 2,561 Other....................................................... 1,538 1,404 ------- ------- $26,545 $29,836 ======= ======= 8. LEASES: The Company leases certain restaurants and related property and equipment under operating and capital leases. All leases require the Company to pay property taxes, insurance and maintenance of the leased assets. The leases generally have initial terms of seven to 30 years with various renewal options. Following is a summary of property leased under capital leases: 1995 and 1994 1994 1995 ------ ------ (THOUSANDS) Buildings and improvements.................................. $1,328 $1,328 Less accumulated depreciation............................... (771) (877) ------ ------ $ 557 $ 451 ====== ====== Scheduled annual maturities of the obligations for capital and operating leases as of December 29, 1995, are: YEARS CAPITAL OPERATING ----- ------- --------- (THOUSANDS) 1996........................................................ $ 292 $ 26,755 1997........................................................ 292 24,182 1998........................................................ 256 21,271 1999........................................................ 184 19,087 2000........................................................ 184 17,223 2001-2009 (aggregate payments).............................. 1,055 39,317 ------ -------- Minimum future lease payments............................... 2,263 $147,835 ======== Less amounts representing interest.......................... (1,115) ------ Present value of future minimum lease payments.............. 1,148 Less current portion........................................ (95) ------ $1,053 ====== Certain of the Company's real estate leases, both capital and operating, require payment of contingent rent in the event defined revenues exceed specified levels. 11 12 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's rent expense is comprised of the following: 1993 1994 1995 ------- ------- ------- (THOUSANDS) Minimum............................................... $25,305 $28,003 $28,730 Contingent.......................................... 185 216 146 ------- ------- ------- $25,490 $28,219 $28,876 ======= ======= ======= 9. LONG-TERM DEBT: 1994 1995 -------- ------- (THOUSANDS) Term loan, 10.02%, due June 2001............................ $18,000 Term loan, LIBOR plus 3.5%, due June 2000................... 10,000 Term loans, LIBOR plus 3.5%, due October 1997............... 5,000 Revolving bank loan, prime plus 1/2% or LIBOR plus 3%, due June 1997............................................. 1,700 Revolving bank loan, prime plus 1% to 2.75%, due January 1996...................................................... $ 28,800 Obligations under capital leases (Note 8)................... 1,207 1,148 -------- ------- 30,007 35,848 Less current portion........................................ (10,060) (95) -------- ------- $ 19,947 $35,753 ======== ======= In 1995, the Company refinanced its previous credit facility of $30.8 million expiring in January 1996 with an increased facility of $38 million. The new credit facility consists of certain term notes totalling $33 million and a $5 million revolving loan agreement. A 3/8% annual commitment fee is payable on any unused credit line. The Company is required to comply with certain financial ratio tests during the terms of the loan agreements. As of December 29, 1995, scheduled annual maturities of all long-term debt (exclusive of obligations under capital leases) are $6.7 million in 1997, $10 million in 2000 and $18 million in 2001. 10. COMMITMENTS AND CONTINGENCIES: The Company has guaranteed certain obligations related to restaurant building and equipment leases. The underlying assets are collateral for the leases and the makers or assignees of all of the obligations are required to perform thereunder before the Company is required to fulfill its guarantee. In the event of default by the maker or assignee, the Company, in almost all cases, may make payment under the guarantees in accordance with the original payment schedule and has the right to locate potential buyers or subtenants for the assets. As of December 29, 1995, such guarantees aggregated approximately $586,000. 11. LITIGATION: The Company is involved in litigation arising in the normal course of its business. Based on information presently available, the Company believes there will be no material effects on the Company's financial position, results of operations or cash flows as a result of such litigation. 12. REDEEMABLE PREFERRED STOCK: As of December 29, 1995, the Company had 49,570 shares of its redeemable preferred stock authorized and outstanding. The stock pays dividends at $4.80 per year, subject to a minimum cash flow test. As of 12 13 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 29, 1995, one quarterly dividend, totaling $59,484 or $1.20 per share, was accrued but not yet paid. The redeemable preferred stock has been recorded at the net present value and is being accreted on the straight-line basis. The Company's restated articles of incorporation provide for the redemption of such shares at $60 per share in 2005. During the continuation of any event of default by the Company, the preferred shareholders shall be able to elect a majority of the directors of the Company. 13. EARNINGS PER COMMON SHARE: Earnings per common and common equivalent share were computed based on the weighted average number of common and common equivalent shares outstanding during the period. Net income available per common share has been adjusted for the items indicated. Earnings per common and common equivalent share were computed as follows (thousands, except per share data): 1993 1994 1995 ------- ------- ------- Net income.............................................. $11,891 $ 676 $ 63 Accretion of redeemable preferred stock................. (104) (103) (104) Redeemable preferred stock dividends.................... (238) (238) (238) ------- ------- ------- Adjusted income (loss) applicable to common shares...... $11,549 $ 335 $ (279) ======= ======= ======= Primary: Weighted average common shares outstanding............ 19,224 18,117 18,098 Common stock equivalents: Stock purchase warrants............................... 639 Other................................................. 320 74 ------- ------- ------- Weighted average shares outstanding................... 20,183 18,191 18,098 ======= ======= ======= Earnings (loss) per common and common equivalent share.............................................. $ .57 $ .02 $ (.02) ======= ======= ======= Fully Diluted: Weighted average common shares outstanding............ 19,224 18,117 18,098 Common stock equivalents: Stock purchase warrants............................... 639 Other................................................. 333 74 ------- ------- ------- Weighted average shares outstanding................... 20,196 18,191 18,098 ======= ======= ======= Earnings (loss) per common and common equivalent share.............................................. $ .57 $ .02 $ (.02) ======= ======= ======= 14. FRANCHISE FEES AND ROYALTIES: At December 29, 1995, 93 Chuck E. Cheese's restaurants were operated by a total of 57 different franchisees. The standard franchise agreements grant to the franchisee the right to develop and operate a restaurant and use the associated trade names, trademarks and service marks within the standards and guidelines established by the Company. Initial franchise fees included in revenues were $82,500, $315,000 and $98,000 in 1993, 1994 and 1995, respectively. 13 14 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. COST OF SALES: 1993 1994 1995 -------- -------- -------- (THOUSANDS) Food, beverage and related supplies................ $ 48,435 $ 46,328 $ 43,412 Games and merchandise.............................. 11,375 12,369 13,285 Labor.............................................. 77,533 79,032 80,003 -------- -------- -------- $137,343 $137,729 $136,700 ======== ======== ======== 16. INCOME TAXES: The significant components of income tax expense are as follows: 1993 1994 1995 ------ ------ ------ (THOUSANDS) Current expense.......................................... $1,751 $ 869 $ 701 Deferred expense: Utilization of operating loss carryforwards............ 6,078 2,204 1,138 Net tax benefits from exercise of stock options and stock grants.............................................. (37) (928) (654) Increase in valuation of deferred tax asset............ (971) Allowance for tax credit carryforwards expiring in 1997................................................ 1,104 Tax credits............................................ (465) (237) (127) Other (primarily temporary differences related to depreciation)....................................... (575) (746) ------ ------ ------ $6,356 $2,437 $ 312 ====== ====== ====== At December 29, 1995, the Company has recorded a deferred tax asset of approximately $33.0 million reflecting the $24.7 million tax effect of $67.0 million in net operating loss carryforwards, $7.3 million in tax credit carryforwards and tax effected net taxable deductions of $796,000. Realization of the deferred tax asset is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Tax credit carryforwards can be utilized only after all net operating loss carryforwards have been realized. In 1994, the Company recorded a valuation allowance of $1.1 million for tax credit carryforwards which are estimated to expire in 1997. Although realization is not assured, the Company believes it is more likely than not that the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced. As of December 29, 1995, the Company has investment tax credit and jobs tax credit carryforwards totaling $5,258,000 and $548,000, respectively, and alternative minimum tax credits of $1,513,000. In August 1993, new federal tax legislation was enacted that increased the Company's federal tax rate to 35% effective December 31, 1993. As a result, the Company's deferred tax asset and net income were increased by approximately $971,000 and deferred tax expense decreased by the same amount. 14 15 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A schedule of expiring NOL's and tax credits by fiscal year are as follows: TAX NOL'S CREDITS ------- ----------- (THOUSANDS) 1997........................................................ $1,104 1998........................................................ 4,007 1999........................................................ $34,000 395 2000........................................................ 19,000 149 2001........................................................ 14,000 19 2002 -- 2010................................................ 132 ------- ------ $67,000 $5,806 ======= ====== The Company's alternative minimum tax credits have no expiration date. Current tax laws and regulations relating to substantial changes in control may limit the utilization of net operating loss and tax credit carryforwards in any one year. As of December 29, 1995, no limitation of such carryforwards has occurred. A reconciliation of the statutory rate to taxes provided is as follows: 1993 1994 1995 ----- ----- ------ Statutory rate........................................... 35.0% 34.0% 34.0% State income taxes....................................... 5.1% 14.8% 106.1% Increase in valuation of deferred tax asset.............. (5.3%) Allowance for tax credit carryforwards................... 35.5% Tax credits earned....................................... (2.6%) (6.9%) (33.9%) Other.................................................... 2.6% .9% (23.0%) ----- ----- ------ Income taxes provided.................................... 34.8% 78.3% 83.2% ===== ===== ====== 17. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company has certain financial instruments consisting primarily of cash, cash equivalents, notes receivable, notes payable and redeemable preferred stock. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The carrying amount of the Company's notes receivable, notes payable and redeemable preferred stock approximates fair value based on the interest rates charged on instruments with similar terms and risks. The estimated fair value of the Company's redeemable preferred stock is $3.0 million. 15 16 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. SUPPLEMENTAL CASH FLOW INFORMATION: 1993 1994 1995 ------ ------ ------ (THOUSANDS) Cash paid during the year for: Interest............................................... $ 912 $1,781 $3,055 Income taxes........................................... 1,769 1,389 801 Supplemental schedule of noncash investing and financing activities: Notes received in connection with the disposition of property and equipment.............................. 4,650 Investment received in connection with the disposition of property and equipment........................... 438 Notes and accounts receivable canceled in connection with the acquisition of property and equipment...... 483 19. RELATED PARTY TRANSACTIONS: The Hallwood Group, Incorporated ("Hallwood") is the beneficial owner of approximately 14.6% of the outstanding common stock of the Company. The directors of Hallwood serve as a majority of the directors of the Company and Integra -- A Hotel and Restaurant Company ("Integra"). In December 1993, the Company fully repaid approximately $1.7 million in a term loan payable to a third party assigned by Integra. The Company made annual payments to Hallwood of $125,000 for consulting services in 1993, 1994, and 1995. In consideration for rent reductions resulting from Hallwood's negotiation of the Company's home office lease agreement in December 1990, the Company assigned to Hallwood its sublease interest in the home office building subleased to Integra with a fair value of approximately $120,000 per year. Integra vacated this space in 1995. The Company paid $99,000 in interest to Integra for 1993. In 1993, Hallwood and its affiliate exercised warrants to purchase 835,873 shares of common stock. The exercise price of the warrants was $1.19 per share. During 1993, the Company advanced $30,000 to joint ventures in which the Company has a 50% interest or less. Principal and interest are payable in monthly installments, with interest at various rates from prime to 12%. The Company also has miscellaneous accounts receivable from joint ventures of approximately $393,000 and $410,000 at December 30, 1994 and December 29, 1995, respectively. In September 1990, the Company entered into an agreement to grant the International Association of ShowBiz Pizza Time Restaurants, Inc. (the "Association") a $2.0 million line of credit, at prime. In December 1993, the Company granted the Association a $1.0 million line of credit, at prime, for advertising production. In November 1994, available borrowings under the lines of credit were reduced to a total of $2.4 million at an annual interest rate of prime plus 1/2%. In December 1995, the lines were renegotiated to provide the Association with available borrowings of $3,750,000 at 10.5% which expire December 31, 1996. The Association was established to develop and improve entertainment attractions and produce system wide advertising. Two officers of the Association are also officers of the Company. At December 29, 1995, approximately $1,869,000 was outstanding under these lines of credit. The Company also had a miscellaneous account receivable from the Association of $22,000 and $5,000 at December 30, 1994 and December 29, 1995, respectively. 16 17 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 20. EMPLOYEE BENEFIT PLANS: The Company has employee benefit plans that include: a) executive bonus compensation plans based on the performance of the Company; b) non-statutory stock option plans for its employees and non-employee directors and c) a stock grant plan. In 1995, the Company increased the number of shares of the Company's common stock which may be issued under its employee stock option plan by 750,000 shares to an aggregate of 2,772,038 shares. All shares must be granted before December 31, 1998. The exercise price for options granted under the plan may not be less than the fair market value of the Company's common stock at date of grant. Options may not be exercised until the employee has been continuously employed at least one year after the date of grant. Options which expire or terminate may be re-granted under the plan. In 1995, the Company adopted a stock option plan for its non-employee directors. The number of shares of the Company's common stock that may be issued under this plan cannot exceed 150,000 shares. Options are granted at the fair market value of the Company's common stock at the date of grant. 1993 1994 1995 ------- -------- --------- Options outstanding, beginning of year................ 414,446 558,993 759,953 Granted............................................. 238,200 512,250 391,860 Exercised........................................... (71,828) (77,570) (19,239) Terminated.......................................... (21,825) (233,720) (283,632) ------- -------- --------- Options outstanding, end of year ($1.63-$22.33 per share).............................................. 558,993 759,953 848,942 ======= ======== ========= Options: Exercisable......................................... 392,235 262,976 203,024 Available for grant................................. 536,337 257,807 1,049,579 The options granted in 1995 are at exercise prices ranging from $5.67 to $7.92 per share. In January 1996, the Company granted 270,992 additional options at an exercise price of $8.29 per share. The number of shares of the Company's common stock which may be awarded to senior executives of the Company under the Stock Grant Plan is 1,718,637 shares. An aggregate of 621,762 shares were awarded pursuant to the plan in 1993. None were awarded in 1995 and 1994. Compensation expense recognized by the Company pursuant to this plan was $2,756,000, $2,734,000 and $1,821,000 in 1993, 1994 and 1995, respectively. All shares are subject to forfeiture upon termination of the participant's employment by the Company over vesting periods ranging from 2 years to 6 years. The shares are nontransferable during the vesting periods. As a result of shares awarded to the Company's Chairman of the Board and Chief Executive Officer, the Company recognized deferred compensation of $12.0 million in 1993. In 1995, the Company's Chairman of the Board and Chief Executive Officer forfeited 90,000 shares of unvested common stock of the Company previously awarded to him under the Company's stock grant plan. As a result of this forfeiture, deferred compensation and capital in excess of par value were reduced by approximately $1.7 million. The deferred compensation is amortized over the compensated periods of service through 1997. The Company has adopted the ShowBiz 401(k) Retirement and Savings Plan, to which it may at its discretion make an annual contribution out of its current or accumulated earnings. Contributions by the Company may be made in the form of its common stock or in cash. In 1993, the Company made a contribution of approximately $36,000 in common stock for the 1992 plan year. No contributions were made for the 1993 and 1994 plan years. The Company plans to contribute $23,000 in common stock for the 1995 plan year. 17 18 SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following summarizes the unaudited quarterly results of operations for the years ended December 30, 1994 and December 29, 1995 (thousands, except per share data). FISCAL YEAR ENDED DECEMBER 30, 1994 --------------------------------------- APRIL 1 JULY 1 SEPT. 30 DEC. 30 -------- ------- -------- ------- Revenues...................................... $76,469 $64,175 $68,502 $59,369 Income (loss) before income taxes............. 5,481 2,255 1,696 (6,319) Net income (loss)............................. 3,425 1,248 1,024 (5,021) Per Share: Primary and fully diluted: Net income (loss)........................ $ .18 $ .07 $ .05 $ (.28) FISCAL YEAR ENDED DECEMBER 29, 1995 --------------------------------------- MARCH 31 JUNE 30 SEPT. 29 DEC. 29 -------- ------- -------- ------- Revenues..................................... $72,751 $62,643 $66,976 $61,413 Income (loss) before income taxes............ 4,266 (1,963) 287 (2,215) Net income (loss)............................ 2,565 (1,180) 61 (1,383) Per Share: Primary and fully diluted: Net income (loss)....................... $ .14 $ (.07) $ .00 $ (.08) In the second quarter of 1994, the Company recognized a gain of $5.5 million from the sale of its Monterey's Tex-Mex Cafe restaurants. This was partially offset by a $2.0 million loss associated with the impairment in fair value of certain Chuck E. Cheese's restaurants. The fourth quarter of 1994 includes a $1.1 million increase in income tax expense due to a reduction in deferred tax credit carryforwards which are estimated to expire in 1997, a write-off of approximately $900,000 for pre-opening expenses due to a change in the estimated future benefit of such expenses and a reserve of approximately $400,000 for the impairment in fair value of certain Chuck E. Cheese's restaurants. 18 19 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders ShowBiz Pizza Time, Inc. Irving, Texas We have audited the consolidated financial statements of ShowBiz Pizza Time, Inc. and subsidiary as of December 29, 1995, and December 30, 1994, and for each of the three years in the period ended December 29, 1995, and have issued our report thereon dated February 23, 1996 (May 22, 1996 as to the last paragraph of Note 1); such report, which discloses a change in the method of accounting for preopening expenses in 1994, is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of ShowBiz Pizza Time, Inc. and subsidiary, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Dallas, Texas February 23, 1996 (May 22, 1996 as to the last paragraph of Note 1) 19 20 SCHEDULE II SHOWBIZ PIZZA TIME, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - -------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - -------------------------------------------------------------------------------------------- Additions charged Balance at to costs Balance at beginning of and end of Description period expenses Deductions period ============================================================================================ (Thousands) Allowance for doubtful accounts: Years ended: December 29, 1995........... $ 475 $ 400(A) $ 75 ====== ====== ====== December 30, 1994........... $ 266 $ 209 $ 475 ====== ====== ====== December 31, 1993........... $ 150 $ 116 $ 266 ====== ====== ====== Accumulated amortization -- deferred charges: Years ended: December 29, 1995........... $3,909 $1,781 $1,487(B) $4,203 ====== ====== ====== ====== December 30, 1994........... $6,307 $2,854 $5,252(B) $3,909 ====== ====== ====== ====== December 31, 1993........... $7,789 $2,110 $3,592(B) $6,307 ====== ====== ====== ====== Reserve for uncollectible notes receivable: December 29, 1995........... $ 139 $ 215 $ 354 ====== ====== ====== December 30, 1994........... $ 139 $ 139 ====== ====== December 31, 1993........... $ 320 $ 320(C) ====== ====== - ---------- (A) Settlement of previously reserved accounts. (B) Write-off of deferred charges. (C) Adjustment to notes receivable reserve. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHOWBIZ PIZZA TIME, INC. Dated: February 21, 1997 By: /s/ LARRY G. PAGE ----------------------------------- Larry G. Page Executive Vice President and Chief Financial Officer 22 INDEX TO EXHIBITS ----------------- EXHIBIT NO. DESCRIPTION - ----------- ----------- 23.1 Consent of Deloitte & Touche LLP