Item 1. Business
General
ShowBiz Pizza Time, Inc. (the "Company"), was incorporated in the State of Kansas in 1980 and is engaged in the family restaurant/entertainment center business. The Company considers this to be its sole industry segment.
The Company operated, as of March 17, 1995, 227 Chuck E. Cheese's Pizza ("Chuck E. Cheese's") restaurants (including six restaurants managed by the Company for others). In addition, as of March 17, 1995, franchisees of the Company operated 101 Chuck E. Cheese's restaurants. Effective May 5, 1994, BHC Acquisition Corporation ("BAC"), a wholly owned subsidiary of the Company, sold its Monterey's Tex-Mex Cafe restaurants.
Chuck E. Cheese's Restaurants
Business Development
Chuck E. Cheese's restaurants offer a variety of pizza, a salad bar, and selected sandwiches and desserts and feature musical and comic entertainment by life-size, computer-controlled robotic characters, family oriented games, rides and arcade-style activities. The restaurants are intended to appeal to families with children between the ages of 2 and 12. The Company opened its first restaurant in March 1980.
The Company and its franchisees operate in a total of 44 states and the Company has concentrated its ownership and operation of Chuck E. Cheese's restaurants within a 28-state area. See "Item 2.
Item 2. Properties
The following table sets forth certain information regarding the Chuck E. Cheese's restaurants operated by the Company (excluding six restaurants managed by the Company for others) as of March 17, 1995.
Chuck E. State Cheese's ----- -------
Alabama 5 Arkansas 2 California 47 Colorado 4 Connecticut 5 Florida 15 Georgia 7 Illinois 14 Indiana 7 Kansas 1 Kentucky 1 Louisiana 4 Maryland 10 Massachusetts 10 Michigan 11 Missouri 7 Nevada 1 Nebraska 2 New Hampshire 2 New Jersey 9 New York 5 North Carolina 2 Ohio 11 Pennsylvania 7 Tennessee 2 Texas 24 Virginia 3 Wisconsin 3 --- ===
Of the 227 Chuck E. Cheese's restaurants operated by the Company as of March 17, 1995, 212 were leased by the Company and 15 were owned by the Company. The leases of these restaurants will expire at various times from 1995 to 2009, as described in the table below.
Year of Number of Range of Renewal Expiration Restaurants Options (Years) ---------- --------- ---------------- 1995 10 None to 10 1996 14 None to 20 1997 27 None to 20 1998 23 None to 20 1999 and thereafter 138 None to 20
The leases of Chuck E. Cheese's restaurants contain terms which vary from lease to lease, although a typical lease provides for a primary term of 10 years, with two additional five-year options to renew, and provides for annual minimum rent payments of approximately $6.00 to $22.00 per square foot, subject to periodic adjustment. Most of the restaurant leases require the Company to pay the cost of repairs, insurance and real estate taxes and, in most instances, provide for additional rent equal to the amount by which a percentage (typically 6%) of gross revenues exceeds the minimum rent.
Item 3.
Item 3. Legal Proceedings.
In December 1991, the Company, The Hallwood Group Incorporated, ("Hallwood"), Integra-A Hotel and Restaurant Company ("Integra"), and their individual directors were named defendants in two separate but related lawsuits brought in the 14th and 134th District Courts of Dallas County, Texas. In April 1993, the Company and its two directors who are also employees of the Company, were dismissed as defendants in the lawsuit brought in the 134th District Court by an Integra common stockholder. Integra owned approximately 90% of the outstanding Common Stock of the Company prior to Integra's distribution of such Common Stock in December 1988 (the "1988 Distribution") to its shareholders of record. The plaintiffs in the remaining lawsuit constitute certain holders of warrants, options and preferred stock of Integra who seek to serve as representatives of proposed classes of other holders of such securities. The plaintiffs allege that the Company has (i) violated Texas statutes related to securities fraud and the fraudulent transfer of assets, (ii) committed common law fraud, and (iii) breached fiduciary and other duties to the plaintiffs. As amended, this suit seeks recision of the 1988 distribution actual damages in excess of $184 million, and punitive damages in excess of $500 million. To date, no class has been certified as against the Company. The case is set for trial on May 1, 1995. The Company believes that the claims made against it in this suit are without merit and intends to vigorously defend this lawsuit. However, the Company is actively pursuing negotiations for settlement of the lawsuit.
In May 1994, Hermitage Hotel, Ltd., L. P., filed a lawsuit against the Company, Hallwood and certain directors of the Company in the 101st District Court of Dallas County, Texas. The lawsuit seeks recovery on behalf of plaintiff under theories of successor liability, tortious interference with contract, fraud, negligent representation and breach of contract. The plaintiff is seeking approximately $10.2 million in actual damages, $30 million in exemplary damages, attorneys' fees and court costs. The Company believes that the claims made against it in this suit are without merit and intends to vigorously defend this lawsuit. However, the Company is actively pursuing negotiations for settlement of the lawsuit.
In June 1993, the Company was named as a nominal defendant in a shareholders' derivative action in the 68th Judicial District Court in Dallas County, Texas in which three of the Company's executive officers, four of the Company's outside directors and Hallwood were named defendants. The plaintiffs in this lawsuit have alleged the individual defendants (i) breached their fiduciary duties to stockholders, (ii) committed constructive fraud and (iii) unjustly enriched themselves as a result of alleged violations of federal securities laws and illegal insider trading between July 13, 1992 and June 11, 1993. The Company does not believe that this action will result in any significant damages to the Company.
In July 1993, the Company was named a defendant in a lawsuit brought in the Circuit Court for Davidson County, Nashville, Tennessee by Third National Bank in Nashville, as Trustee pursuant to a municipal bond issuance of $6.4 million made in 1980, for which Integra executed a guaranty. The plaintiff has alleged that Integra's guaranty of the municipal bond issuance was binding on successors of Integra and that the Company is the legal successor to Integra. The plaintiff is seeking to recover a judgement against the Company in the full amount of its claim against Integra, which is unspecified, as well as attorneys' fees and costs. In April 1994, the court dismissed the plaintiff's complaint for failure to state a claim upon which relief can be granted. Plaintiff has appealed the dismissal to the 6th Circuit Court of Appeals. The Company believes the allegations made in this suit to be without merit and will offer a vigorous defense in this lawsuit.
In January 1994, the Company was named a defendant in a lawsuit brought in the Supreme Court of the State of New York, County of Queens, by Big Six Towers, Inc., in its purported capacity as a landlord to the Company with regard to a restaurant/entertainment center location in Queens County, New York which the Company had contracted to lease from the plaintiff. The plaintiff has alleged that the Company has breached the lease and is seeking total damages in excess of $4.0 million against the Company. The Company believes it validly terminated the lease in question pursuant to an agreement with the plaintiff and believes the allegations made in this suit to be without merit and therefore intends to vigorously defend this lawsuit.
Certain other pending legal proceedings exist against the Company which the Company believes are not material in amount or have arisen in the ordinary course of its business.
Item 4.
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 1994.
PART I I
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of March 17, 1995, there were an aggregate of 12,275,177 shares of the Company's Common Stock outstanding and approximately 5,489 stockholders of record.
The Company's Common Stock is listed on the National Market System of the National Association of Securities Dealers Automated Quotation ("NASDAQ") system under the symbol "SHBZ". The following table sets forth the highest and lowest prices per share of the Common Stock during each quarterly period within the two most recent years, as reported on the National Market System of NASDAQ:
High Low -------- -------
1994 - 1st quarter $15 1/4 $ 11 3/4 ---- - 2nd quarter 14 9 1/4 - 3rd quarter 11 1/4 7 1/4 - 4th quarter 9 1/8 7 1/4
1993 - 1st quarter 35 1/2 25 1/2 ---- - 2nd quarter 34 1/2 16 - 3rd quarter 17 1/2 12 1/4 - 4th quarter 15 12 1/2
The Company may not pay any dividends to holders of its Common Stock (except in shares of Common Stock) unless an amount equal to all dividends then accrued on its Class A Preferred Stock par value $60.00 per share ("the Preferred Stock") has been paid or set aside to be paid. A dividend to holders of record of Preferred Stock as of December 28, 1994 in the amount of $1.20 per share will be paid on March 28, 1995. The Company also may not pay any dividend or make any other distribution on its Common Stock (except in shares of Common Stock or rights to acquire capital stock of the Company) so long as any amount is outstanding under the terms of its revolving loan agreement.
The Company has not paid any dividends on its Common Stock, has no present intention of paying cash dividends thereon in the future and is currently restricted from paying cash dividends under the terms of its current revolving loan agreement. The Company plans to retain any earnings to finance anticipated capital expenditures and reduce its long-term debt. Future dividend policy with respect to the Common Stock will be determined by the Board of Directors of the Company, taking into consideration factors such as future earnings, capital requirements, potential loan agreement restrictions and the financial condition of the Company.
Item 6.
Item 6. Selected Financial Data.
----------------------
(1) Fiscal year 1992 was 53 weeks in length while fiscal years 1994, 1993, 1991, and 1990 were 52 weeks in length. (2) No cash dividends on common stock were paid in any of the years presented.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations.
Results of Operations
1994 Compared to 1993
Revenues declined 1.5% to $267.8 million in 1994 from $272.0 million in 1993 due to the sale of the Company's Monterey's Tex-Mex Cafe restaurants effective May 5, 1994. Revenue generated by the Company's Chuck E. Cheese's restaurants increased by 3.4% to $261.6 million in 1994 from $253.0 million in 1993 due to the net addition of 11 Company restaurants in 1994 and 33 Company restaurants in 1993. Sales from the Company's Chuck E. Cheese's restaurants which were open during all of 1994 and 1993 ("comparable store sales") declined 5.8% between the years. Revenues from the Company's Monterey's Tex-Mex Cafe restaurants declined to $6.2 million in 1994 from $19.0 million in 1993 due to the sale of the Monterey's restaurants mentioned above.
Operating income decreased to $4.3 million in 1994 from $18.7 million in 1993. Included in operating income for 1994 is a gain of $5.5 million related to the sale of the Company's Monterey's Tex-Mex Cafe restaurants and a $2.3 million loss associated with the impairment in fair value of certain Chuck E. Cheese's restaurants. Operating income in 1994 was also reduced by approximately $900,000 due to a write-off of all unamortized preopening expenses resulting from a change in the estimated future benefit of such expenses. The decline in operating income is primarily due to the decline in comparable store sales and operating margins in the Company's Chuck E. Cheese's restaurants. A material portion of operating costs are fixed resulting in an erosion of operating margins at lower sales levels.
A summary of the results of operations of the Company as a percentage of revenues for the last three fiscal years is shown below.
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased by 3.4% to $261.6 million in 1994 from $253.0 million in 1993 due to sales from new restaurants opened throughout 1994 and 1993. Comparable store sales of Chuck E. Cheese's restaurants which were open during all of both 1994 and 1993 declined by 5.8% between the years. Average annual sales per restaurant decreased to approximately $1,206,000 in 1994. Menu prices were comparable between the two years.
Management believes that several factors may have contributed to the comparable store sales decline, including increased competition and to a lesser extent, a decrease in the number of restaurants remodeled since 1992 and the impact of newly opened restaurants on comparable store sales of existing restaurants in certain markets. Some of the factors impacting comparable store sales are believed to be negatively impacting sales volumes of newer restaurants opened since 1990. During 1994, the average sales volume of the 70 new Chuck E. Cheese's restaurants opened in 1991 through 1993 was 3.0% lower than the average sales volume of existing restaurants during the same period.
Revenues from franchise fees and royalties decreased by 5.6% from 1993 to 1994 primarily due to a 6.4% decline in comparable franchise store sales for restaurants open all of 1994 and 1993, and a decline in the number of restaurants operated each year. During 1994, two new franchise restaurants opened and six franchise restaurants closed.
Revenues from Monterey's Tex-Mex Cafe restaurants were $6.2 million in 1994 compared to $19.0 million in 1993 due to the sale of the Company's Monterey's Tex-Mex Cafe restaurants effective May 5, 1994.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 98.4% in 1994 from 93.1% in 1993.
Cost of sales increased as a percentage of revenues to 51.4% in 1994 from 50.5% in 1993. Cost of food, beverage, prize and merchandise items for Chuck E. Cheese's restaurants as a percentage of restaurant sales increased to 18.2% in 1994 from 18.0% in 1993 primarily due to increases in cheese costs and in costs relating to the enhancement of certain prize and merchandise items. Labor expenses for Chuck E. Cheese's restaurants as a percentage of restaurant sales increased to 30.0% in 1994 from 29.0% in 1993 primarily due to the decline in comparable store sales and enhancements in services provided to guests, including child security.
Selling, general and administrative expenses as a percentage of revenues increased to 17.7% in 1994 from 15.5% in 1993 due primarily to increased advertising expense as a percentage of revenues. Corporate overhead costs were impacted by an increase of approximately $1.2 million primarily during the first three quarters of 1994 as a result of increasing the number of operational regional and district managers. Overhead costs were also impacted in 1994 by an allowance for potential legal settlements.
Depreciation and amortization expense as a percentage of revenues increased to 9.7% in 1994 from 8.5% in 1993 primarily due to a write- off of all unamortized preopening expenses of approximately $900,000 resulting from a change in the estimated future benefit of such expenses, the higher depreciation and amortization expense of new restaurants relative to older restaurants and the decline in comparable store sales.
The Company had a net gain on property transactions of $2.6 million in 1994 compared to a loss on property transactions of $675,000 in 1993. The Company recognized a gain of $5.5 million from the sale of its Monterey's Tex-Mex Cafe restaurants effective May 5, 1994. The gain was partially offset by a loss of approximately $2.3 million in 1994. The loss was 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 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. The Company will consider possible relocation of some of the restaurants. The Company provided for an additional loss on property transactions of approximately $597,000 in 1994 compared to $675,000 in 1993 due to the replacement of certain assets in conjunction with the enhancement of facilities and entertainment packages of restaurants.
Other operating expenses increased as a percentage of revenues to 20.6% in 1994 from 18.4% in 1993 primarily due to increased rent, utility and property tax expenses as a percentage of revenues and the decline in comparable store sales.
Operating Income
As a result of the changes in revenues and expenses discussed above, operating income declined to $4.3 million in 1994 from $18.7 million in 1993. Included in operating income are the operations of Monterey's Tex-Mex Cafe restaurants through May 5, 1994. Operating income in 1994 for Monterey's Tex-Mex Cafe restaurants was $6.0 million, including a gain on property transactions of $5.5 million, compared to operating income of $652,000 in 1993.
Net Income
Interest expense increased to $1.9 million in 1994 from $797,000 in 1993 due primarily to an increase in long-term debt of $18.5 million since the third quarter of 1993 primarily to fund the Company's repurchase of its common stock and an increase in interest rates. In the fourth quarter of 1994, the Company established an allowance of approximately $1.1 million related to deferred tax credit carryforwards which are estimated to expire in 1997. Income tax expense was increased by approximately $1.1 million as a result of this allowance. In the third quarter of 1993, income tax expense was reduced approximately $971,000 primarily due to a non-recurring tax gain resulting from the increased valuation of the Company's deferred tax asset due to an increase in federal corporate income tax rates enacted in 1993. The Company's net income decreased to $676,000 in 1994 from $11.9 million in 1993 due to the changes in revenues and expenses as discussed above. The Company's primary and fully diluted earnings per share decreased to $.03 per share in 1994 from $.86 per share in 1993.
1993 Compared to 1992
Revenues increased 7.5% to $272.0 million in 1993 from $253.1 million in 1992. Revenue generated by the Company's Chuck E. Cheese's restaurants increased by 8.1% to $253.0 million in 1993 from $234.0 million in 1992 due to the net addition of 33 Company restaurants in 1993 and 23 Company restaurants in 1992. Sales from the Company's Chuck E. Cheese's restaurants which were open during all of 1993 and 1992 declined 5.3% between the years. Revenues from the Company's Monterey's Tex-Mex Cafe restaurants declined slightly to $19.0 million in 1993 from $19.1 million in 1992 primarily due to a decline in comparable store sales of .6% between the years. Fiscal years 1993 and 1992 consisted of 52 and 53 weeks, respectively.
Operating income decreased to $18.7 million in 1993 from $26.4 million in 1992 due primarily to declines in comparable store sales and operating margins in both restaurant concepts. A material portion of operating costs are fixed resulting in an erosion of operating margins at lower sales levels.
Chuck E. Cheese's Restaurants
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased by 8.1% to $253.0 million in 1993 from $234.0 million in 1992 due to sales from new restaurants opened throughout 1993 and 1992. Comparable store sales of Chuck E. Cheese's restaurants which were open during all of both 1993 and 1992 declined by 5.3% between the years. Average annual sales per restaurant decreased to approximately $1,259,000 in 1993. Menu prices were increased approximately 1.1% between the two years.
Management believes that several factors may have contributed to the comparable store sales decline, including generally severe winter weather and a March snowstorm which caused the brief closing of numerous restaurants, ineffective advertising and the decrease in number and apparent effectiveness of restaurants remodeled during 1992 and 1993. Other factors that management believes contributed to the decline in comparable store sales include increased competition and the impact of newly opened restaurants on comparable store sales of existing restaurants in certain markets. Some of the factors impacting comparable store sales are believed to be negatively impacting sales volumes of newer restaurants opened since 1988. New restaurants opened from 1988 through 1992 averaged approximately $1,341,000 in sales during 1993, which is slightly in excess of the sales volume of the average Company restaurant. This compares to the prior year in which new restaurants had sales volumes significantly higher than the average Company restaurant.
Revenues from franchise fees and royalties decreased by 11.1% from 1992 to 1993 primarily due to 52 weeks of revenue in 1993 compared to 53 weeks of revenue in 1992, a 1.0% decline in comparable franchise store sales for restaurants open all of 1993 and 1992, and a decline in the number of franchise restaurants operated each year. During 1993, the Company purchased two franchise restaurants, one new franchise restaurant opened and two franchise restaurants closed.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 92.9% in 1993 from 89.1% in 1992.
Cost of sales increased as a percentage of revenues to 49.7% in 1993 from 48.5% in 1992. Cost of food, beverage, prize and merchandise items as a percentage of restaurant sales remained constant at 18.0% in both 1993 and 1992. Labor expenses as a percentage of restaurant sales increased slightly to 29.0% in 1993 from 28.0% in 1992 primarily due to the decline in comparable store sales.
Selling, general and administrative expenses as a percentage of revenues declined to 15.6% in 1993 from 15.9% in 1992 due primarily to a decrease in management bonus expense and other corporate overhead expenses as a percentage of revenues which was partially offset by an increase in advertising expense as a percentage of revenues.
Depreciation and amortization expense as a percentage of revenues increased to 8.5% in 1993 from 7.6% in 1992 primarily due to the higher depreciation and amortization expense of new restaurants relative to older restaurants and the decline in comparable store sales.
Other operating expenses increased as a percentage of revenues to 18.9% in 1993 from 16.9% in 1992 primarily due to increased rent, utility and insurance expenses as a percentage of revenues and the decline in comparable store sales.
The Company provided for a loss on property transactions of $585,000 in 1993 compared to $654,000 in 1992 primarily due to closing three restaurants in 1993 and to the replacement of certain assets in conjunction with the remodeling of restaurants.
Operating Income
As a result of the changes in revenues and expenses discussed above, operating income decreased to $18.0 million in 1993 from $25.4 million in 1992.
Monterey's Tex-Mex Cafe Restaurants
Revenues
Revenues decreased to $19.0 million in 1993 from $19.1 million in 1992 due primarily to a .6% decline in comparable store sales between the two years. One restaurant was opened in the third quarter of 1992 and was subsequently sold in the fourth quarter of 1993. Menu prices were increased approximately 2.0% between the periods.
Costs and Expenses
Costs and expenses increased as a percentage of revenues to 96.6% in 1993 from 94.5% in 1992.
Cost of sales declined slightly to 61.3% in 1993 from 61.8% in 1992. The cost of food and beverage items as a percentage of restaurant sales decreased slightly to 27.4% in 1993 compared to 27.7% in 1992 due primarily to lower food prices on certain items resulting from a change in food distributors in the third quarter of 1992 and the increase in menu prices implemented in the second quarter of 1993. These factors were slightly offset by a change in product ingredients which was implemented in the third quarter of 1992. Labor expenses as a percentage of restaurant sales increased slightly to 31.7% in 1993 from 31.6% in 1992 primarily as a result of the decline in comparable store sales.
Selling, general and administrative expenses as a percentage of revenues increased to 14.1% in 1993 from 13.6% in 1992 primarily due to an increase in advertising expense and in corporate overhead expenses including an increase in research and development costs.
Other operating expenses increased as a percentage of revenues to 12.5% in 1993 from 11.3% in 1992 primarily due to an increase in rent and utility expenses as a percentage of revenues and the decline in comparable store sales. The Company provided for a loss on property transactions of $90,000 from the sale of one restaurant in the fourth quarter of 1993.
Operating Income
Operating income declined to $652,000 in 1993 from $1,049,000 in 1992 as a result of the changes in revenues and expenses discussed above.
Consolidated Income
Interest expense declined to $797,000 in 1993 from $1.5 million in 1992 due primarily to reductions in long-term debt of $1.8 million in the first three quarters of 1993 and $4.6 million in 1992 and reduced interest rates between the years. Income taxes were decreased approximately $971,000 in the third quarter of 1993 due to a non- recurring tax gain resulting from the increased valuation of the Company's deferred tax asset due to an increase in federal corporate income tax rates enacted in 1993. The Company's net income decreased to $11.9 million in 1993 from $15.5 million in 1992 due to the changes in revenues and expenses as discussed above. The Company's primary and fully diluted earnings per share decreased to $.86 per share in 1993 from $1.11 per share in 1992.
Inflation
The Company's costs of operations, including but not limited to, labor, supplies, utilities, financing and rental costs, are significantly affected by inflationary factors. The Company pays most of its part-time employees rates that are related to federal and state mandated minimum wage requirements. Increases in any such costs would result in higher costs to the Company, which the Company expects would be partially offset by menu price increases and increased efficiencies in operations.
Financial Condition, Liquidity and Capital Resources
Cash provided by operations declined to $30.8 million in 1994 from $44.9 million in 1993. The Company's primary requirements for cash relate to planned capital expenditures and debt service. During 1994, the Company made approximately $29.4 million in capital expenditures primarily related to the opening of 12 new Chuck E. Cheese's restaurants and the enhancement of facilities and entertainment packages at 27 restaurants, including 22 restaurants completed under the "repositioning" program described below.
The Company previously announced that it planned to repurchase shares of the Company's common stock at an aggregate purchase price of up to $30 million. As of December 30, 1994, the Company had repurchased shares of its common stock in the open market for an aggregate purchase price of approximately $24.9 million. The Company has purchased treasury shares up to the limit permitted under its revolving loan agreement and intends to use its future cash flow for the enhancement of existing facility and entertainment packages and new store development. The ability of the Company to satisfy its capital expenditure and debt service requirements depends on the availability of sufficient funds for such purpose. The Company expects that it will satisfy such requirements from cash provided by operations and funds available under its revolving loan agreement or from refinancing.
In 1994, the Company's revolving loan agreement was amended to provide a credit facility of up to $30.8 million due on January 31, 1996. Beginning July 1, 1995, available borrowings under the credit line reduce each month to $18.3 million by January 1, 1996. Available borrowings are reduced by outstanding letters of credit which totaled $1.5 million at December 30, 1994. The Company is required to comply with certain financial ratio tests during the term of the revolving loan agreement. The Company is currently considering refinancing alternatives and believes it will complete such refinancing prior to the maturity of its current credit facility. If the Company is unable to complete such refinancing, it would impair the Company's ability to fully execute its capital expenditure enhancement plans.
The Company believes that the success of its facility and enhancement program in addition to new restaurant development will continue to be significant factors in its ability to generate increased revenues over the foreseeable future. The Company continues to evolve and expand its efforts to significantly enhance its Chuck E. Cheese's locations. This "repositioning" program is being carried out on a market by market basis and involves: an improved exterior identity, a facility upgrade, an expanded free ball-crawl with tubes and tunnels suspended from or reaching to the ceiling, and an enhancement of the variety and number of games and rides offered to its guests. The Company has completed 22 restaurants under this program in 1994. Although the Company has had limited time to evaluate the results of these 22 repositioned restaurants, average sales of these restaurants for the periods following their repositioning have increased over 12% compared to the same periods of the previous year. Sales in these restaurants during the three months immediately prior to their repositioning averaged 6% less than the sales during the comparable three month periods of the prior year resulting in an improvement in sales trends of approximately 18%. Based on the early sales results of these repositioned restaurants, the Company currently intends to reposition approximately 140 additional Chuck E. Cheese's restaurants by the end of 1996. The Company anticipates that the repositioning of the remaining restaurants will cost on the average approximately $300,000 per restaurant. However, this amount can vary significantly at a particular restaurant depending on several factors, including the restaurant's square footage, date of most recent remodel and the existing assets of the restaurant. The Company plans to open two to three new Chuck E. Cheese's restaurants in 1995. In the event certain site characteristics considered essential for the success of a restaurant deteriorate, the Company will consider closing the restaurant or relocating the restaurant to a more desirable site.
The Company is implementing several strategies designed to strengthen the sales vitality of its existing restaurant base in what management believes is a competitive market. The Company appointed a new advertising agency during the fourth quarter of 1993; the Company has accelerated its commitment of capital to existing stores; and the Company is limiting its 1995 new restaurant development to ensure that the sales vitality of the Company's existing restaurant base and new restaurant growth are both given appropriate priority. The Company believes that certain operating costs will increase as a result of implementing these strategies designed to strengthen existing restaurant sales. If the declines in comparable store sales of the Company's Chuck E. Cheese's restaurants experienced in 1994 and 1993 continue to be experienced over a longer term, an adverse impact on the Company's operating margins and results of operations could continue.
The Company is involved in a number of lawsuits. The Company presently believes that it will continue to incur expense to defend against and resolve such litigation, and anticipates that it will satisfy such expense with cash flow from operations.
The Company believes it will realize substantial benefit from utilization of approximately $74 million in net operating loss carryforwards to reduce federal income tax liability. Such net operating loss carryforwards expire from years 1999 through 2002. Although the use of such carryforwards could, under certain circumstances, be limited, the Company is presently unaware of the occurrence of any event which would result in the imposition of such limitation. The Company has adopted an amendment to its Restated Articles of Incorporation which is intended to prevent changes in ownership of its common stock that would cause such limitation. In addition, the Company has investment tax credit, job tax credit and alternative minimum tax credit carryforwards of approximately $7 million. The investment tax credit and the job tax credit carryforwards expire in years 1997 through 2002. Tax credit carryforwards can be utilized by the Company only after all net operating loss carryforwards have been realized. At December 30, 1994, the deferred tax asset was reduced approximately $1.1 million due to an allowance for the estimated expiration of tax credit carryforwards in 1997. If the Company's results of operations continue to decline or fail to timely achieve levels necessary to utilize the net operating loss carryforwards, the investment tax credit and job credit carryforwards and net operating loss carryforwards could expire prior to utilization, resulting in a charge against income.
Item 8.
Item 8. Financial Statements and Supplementary Data
SHOWBIZ PIZZA TIME, INC. YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
CONTENTS
Page ------ Independent auditors' report. . . . . . . . . . . . . . . . . . . . 18 Consolidated financial statements: Consolidated balance sheets . . . . . . . . . . . . . . . . . . 19 Consolidated statements of earnings . . . . . . . . . . . . . . 20 Consolidated statements of shareholders' equity . . . . . . . . 21 Consolidated statements of cash flows . . . . . . . . . . . . . 22 Notes to consolidated financial statements. . . . . . . . . . . 23
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 30, 1994 and December 31, 1993 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years (52 or 53 weeks) in the period ended December 30, 1994. 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 30, 1994 and December 31, 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 30, 1994, 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 March 3, 1995
SHOWBIZ PIZZA TIME, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 30, 1994 AND DECEMBER 31, 1993 (Thousands, except share data) ASSETS
See notes to consolidated financial statements.
SHOWBIZ PIZZA TIME, INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993 (Thousands, except per share data)
See notes to consolidated financial statements.
SHOWBIZ PIZZA TIME, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993 (Thousands, except per share data)
See notes to consolidated financial statements.
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
(Thousands)
See notes to consolidated financial statements.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
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 1994, 1993 and 1992 are for the fiscal years ended December 30, 1994, December 31, 1993 and January 1, 1993, respectively. Fiscal year 1992 was 53 weeks in length, while 1994 and 1993 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 less than three months 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.
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 will now expense 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.
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.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
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 $6.2 million in 1994. Operating income was $6.0 million in 1994. Operating income includes 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.
3. Accounts receivable:
4. Notes receivable:
The Company's notes receivable at December 30, 1994 and December 31, 1993 arose principally as a result of the sale of restaurants, advances to franchisees, joint ventures and managed properties and lines of credit established with the International Association of ShowBiz Pizza Time Restaurants, Inc., a related party (Note 19). The notes have various terms, but most are payable in monthly installments of principal and interest through 2000, with interest rates ranging from 8.5% to 13.5%. Substantially all notes are collateralized by the related property and equipment. Balances of notes receivable are net of an allowance for doubtful collection of $139,000 at December 30, 1994. There was no allowance at December 31, 1993.
5. Property and equipment:
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
6. Deferred charges:
7. Accounts payable and accrued liabilities:
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:
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
8. Leases (continued):
Scheduled annual maturities of the obligations for capital and operating leases as of December 30, 1994, are:
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.
The Company's rent expense is comprised of the following:
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994 DECEMBER 31, 1993 AND JANUARY 1, 1993
9. Long-term debt:
The Company's revolving loan agreement was amended to provide the Company with a credit line of up to $30.8 million due on January 31, 1996. Beginning July 1, 1995, available borrowings under the credit line reduce each month to $18.3 million by January 1, 1996. Available borrowings are further reduced by outstanding letters of credit which totaled $1.5 million at December 30, 1994. Interest is provided at a rate equal to prime, 8.5% at December 30, 1994, plus 1%, increasing to 2.75% by January 1996. A 1/5% annual commitment fee is payable on any unused credit line.
Under the terms of the revolving loan agreement, the Company is prohibited from paying dividends on its common stock and must achieve certain profitability levels.
The Company has a substantial portion of its assets pledged as collateral for the bank loan, including $7,234,000 in notes receivable and property and equipment with a net book value of $70,862,000.
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 30, 1994, such guarantees aggregated approximately $ 1,126,000.
11. Litigation:
The Company has been named a defendant in litigation brought by plaintiffs as individuals and as representatives of a purported class who are holders of securities issued by Integra - A Hotel and Restaurant Company ("Integra") which has sought protection from creditors under Chapter 11 of the Federal Bankruptcy Code. This suit has alleged that the Company, Integra and The Hallwood Group, Incorporated ("Hallwood") violated state securities laws, committed common law fraud and breached fiduciary duties to the plaintiffs in connection with the Integra securities acquired by the plaintiffs from 1986 through 1988 and that the 1988 Integra distribution of 90% of the common stock of the Company to holders of Integra common stock constituted a fraudulent transfer under Texas law. The plaintiffs have sought actual damages in an amount equal to the alleged loss of value of their Integra securities, recission of the Company's 1988 spin-off and punitive damages.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
11. Litigation (continued):
The Company has been named a defendant in litigation brought by the trustee of a municipal bond issuance made in 1980 upon which Integra executed a guaranty. The plaintiff in this suit has alleged that Integra's guaranty of the municipal bond issuance was binding on successors of Integra and that the Company is a legal successor to Integra. The plaintiff in this action seeks to recover judgement in the full amount of its claim against Integra.
The Company is a nominal defendant in a shareholders' derivative action in which three of the Company's executive officers, four of the Company's outside directors and Hallwood were named defendants. The plaintiffs in this lawsuit have alleged the individual defendants breached fiduciary duties to shareholders and unjustly enriched themselves as a result of alleged violations of federal securities laws. The plaintiffs in this action have sought unspecified damages.
The Company has been named a defendant in litigation brought by a partnership alleging that the Company tortiously interfered with a contract between the partnership and Integra and that the Company has successor liability on the contract. The plaintiff in this action has sought damages.
The Company has also been named a defendant in a suit alleging that the Company breached a restaurant lease, which the Company contends it has rightfully terminated.
The Company presently believes that the ultimate resolution of these lawsuits will not have a material adverse impact on the Company. Certain other suits are pending against the Company which involve claims for damages which are not material and which have arisen in the ordinary course of business.
12. Redeemable preferred stock:
As of December 30, 1994, 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 December 30, 1994, 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.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
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):
14. Franchise fees and royalties:
At December 30, 1994, 106 Chuck E. Cheese's restaurants were operated by a total of 58 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 $315,000, $82,500 and $197,000 in 1994, 1993 and 1992, respectively.
15. Cost of sales:
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
16. Income taxes: The significant components of income tax expense are as follows:
The Company's deferred tax asset of approximately $33.0 million at December 30, 1994 is primarly due to a $26.4 million tax effect of $74.0 million unused net operating loss carryforwards ("NOL's"), $7.1 million in tax credit carryforwards and tax effected net taxable deductions of $575,000. In 1994, the Company recorded a valuation allowance of $1.1 million for deferred tax credit carryforwards which are estimated to expire in 1997.
In August 1993, new federal tax legislation was enacted that increased the Company's federal tax rate to 35% effective January 1, 1993. As a result, the Company's deferred tax asset and net income were increased by approximately $971,000 and deferred tax expense decreased in the same amount.
As of December 30, 1994, the Company has NOL's of approximately $74.0 million for federal income tax purposes. While the Company believes that it is likely that it will realize these carryforwards, there can be no assurance that they will be available to such extent and be fully realized. In addition, as of December 30, 1994, the Company has investment tax credit and jobs tax credit carryforwards totaling $5,258,000 and $495,000, respectively, and alternative minimum tax credits of $1,369,000.
A schedule of expiring NOL's and tax credits by fiscal year are as follows:
The Company's alternative minimum tax credits have no expiration date.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
16. Income taxes (continued):
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 30, 1994, no limitation of such carryforwards has occurred.
A reconciliation of the statutory rate to taxes provided is as follows:
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. The carrying values of all other financial instruments approximate the fair values.
18. Supplemental cash flow information:
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
19. Related party transactions:
Hallwood is the beneficial owner of approximately 14.5% of the outstanding common stock of the Company. The directors of Hallwood serve as a majority of the directors of the Company and Integra.
In December 1993, the Company fully repaid approximately $1.7 million in a term loan payable to a third party assigned by Integra. In February 1992, the Company prepaid $1,583,000 in a term loan payable to Hallwood which had been assigned to them by Integra. In November 1992, the Company redeemed $4,768,300 in floating rate subordinated bonds held by Hallwood.
The Company made annual payments to Hallwood of $125,000 for consulting services in 1994, 1993, and 1992. In addition, the Company made interest payments to Hallwood of $261,000 in 1992. 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.
The Company paid $99,000 and $115,000 in interest to Integra for 1993 and 1992, respectively.
In 1993 and 1992, Hallwood and its affiliate exercised warrants to purchase 835,873 and 73,263 shares of common stock, respectively. The exercise price of the warrants was $1.78 per share.
During 1993 and 1992, the Company advanced $30,000 and $437,000, respectively, 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 the joint ventures of approximately $393,000 and $279,000 at December 30, 1994 and December 31, 1993, 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, which allowed the Association to accelerate the conversion of all robotic characters into Chuck E. Cheese's characters and to begin improvements to existing Chuck E. Cheese's characters. 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%. 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 30, 1994, $1,372,000 was outstanding under these lines of credit. The Company also had a miscellaneous account receivable from the Association of $22,000 and $30,000 at December 30, 1994 and December 31, 1993, respectively.
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) a non-statutory stock option plan and c) a stock grant plan.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECMBBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
20. Employee benefit plans (continued):
The number of shares of the Company's common stock which may be issued under the stock option plan is 1,348,025 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 regranted under the plan.
The options granted in 1994 are at exercise prices ranging from $8.13 to $13.75 per share. In January and March 1995, the Stock Option Committee of the Board of Directors granted 191,540 additional options at an exercise price of $8.50 per share, subject to the surrender of certain options granted in 1994.
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 1,145,758 shares. An aggregate of 414,508 shares were awarded pursuant to the plan in 1993. None were awarded in 1994 and 1992. Compensation expense recognized by the Company pursuant to this plan was $2,734,000, $2,756,000 and $418,000, in 1994, 1993, and 1992, 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. The deferred compensation is amortized over the compensated periods of service through 1997.
In January 1992, the Board of Directors accelerated the vesting provisions of 350,955 shares of common stock granted in 1989 to the Company's Chairman of the Board and Chief Executive Officer. Concurrently, 112,053 shares were surrendered to the Company to satisfy federal income tax withholding obligations. Shares were held in an irrevocable trust to secure his continuing obligations to the Company under his employment and consulting agreements.
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 of up to the lesser of 50% of employee contributions or $750 per employee. 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 plan year and it is anticipated that approximately $30,000 will be made for 1994.
SHOWBIZ PIZZA TIME, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
21. Quarterly results of operations (unaudited):
The following summarizes the unaudited quarterly results of operations for the years ended December 30, 1994 and December 31, 1993 (thousands, except per share data).
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 preopening 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.
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 30, 1994 and December 31, 1993, and for each of the three years (52 or 53 weeks) in the period ended December 30, 1994 and have issued our report thereon dated March 3, 1995; 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.
DELOITTE & TOUCHE LLP Dallas, Texas March 3, 1995
SCHEDULE II
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY 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 of period expenses Deductions period =============================================================================== (Thousands)
Allowance for doubtful accounts: Years ended:
Dec. 30, 1994 . $ 266 $ 209 $ 475 ======== ======= ======= Dec. 31, 1993 . . $ 150 $ 116 $ 266 ======== ======= ======= Jan. 1, 1993. . . $ 234 $ 84 (A) $ 150 ======== ========== =======
Accumulated amortization -- deferred charges: Years ended:
Dec. 30, 1994 . . $ 6,307 $ 2,854 $ 5,252 (B) $ 3,909 ======== ======== ============ ======== Dec. 31, 1993 . . $ 7,789 $ 2,110 $ 3,592 (B) $ 6,307 ======== ======== ============ ======== Jan. 1, 1993. . . $ 6,424 $ 1,784 $ 419 (B) $ 7,789 ======== ======== ============ ========
Reserve for uncollectible notes receivable: Years ended:
Dec. 30, 1994 . . $ 139 $ 139 ======= ======= Dec. 31, 1993 . . $ 320 $ 320(C) ======= =========== Jan. 1, 1993 . . $ 320 $ 320 ======= =======
________________
(A) Settlement of previously reserved accounts. (B) Write-off of deferred charges. (C) Adjustment to notes receivable reserve.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART I I I
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item regarding the directors and executive officers of the Company shall be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 1995 annual meeting of stockholders and is incorporated herein by reference thereto.
Item 11.
Item 11. Executive Compensation.
The information required by this Item regarding the directors and executive officers of the Company shall be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 1995 annual meeting of stockholders and is incorporated herein by reference thereto.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item shall be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with Company's 1995 annual meeting of stockholders and is incorporated herein by reference thereto.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item shall be included in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A in connection with the Company's 1995 annual meeting of stockholders and is incorporated herein by reference thereto.
PART I V
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements and Supplementary Data:
Independent auditors' report. ShowBiz Pizza Time, Inc. and Subsidiary consolidated financial statements: Consolidated balance sheets as of December 30, 1994 and December 31, 1993. Consolidated statements of earnings for the years ended December 30, 1994, December 31, 1993, and December 27, 1991. Consolidated statements of shareholders' equity for the years ended December 30, 1994, December 31, 1993, and January 1, 1993. Consolidated statements of cash flows for the years ended December 30, 1994, December 31, 1993, and January 1, 1993. Notes to consolidated financial statements.
(2) Financial Statement Schedules:
ShowBiz Pizza Time, Inc. and Subsidiary
II --- Valuation and qualifying accounts and reserves.
(3) Exhibits:
Number Description ------- ------------ 3(a)--- Restated Articles of Incorporation of the Company, as amended to date (Filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated herein by reference).
3(b)--- Bylaws of the Company, as amended to date (filed as Exhibit 3 to the Company's Quarterly Report on Form 10- Q for the quarter ended September 30, 1994 and incorporated herein by reference).
4(a)--- Specimen form of certificate representing $.10 par value Common Stock (filed as Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended December 28, 1990 and incorporated herein by reference).
4(b)--- Specimen form of certificate representing $60 par value Class A Preferred Stock (filed as Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended December 28, 1990 and incorporated herein by reference).
4(c)--- Fourth Amended and Restated Revolving Credit Note in the stated amount of $50,000,000 dated December 15, 1993 from the Company to The First National Bank of Boston (filed as Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). 10(a)(1)--- Amended and Restated Employment Agreement dated April 14, 1993 between the Company and Richard M. Frank (filed as Exhibit 10(a)(8) to the Company's Quarterly Report on Form 10- Q for the quarter ended April 2, 1993 and incorporated herein by reference). 10(a)(2)--- Consulting Agreement dated January 5, 1989 between the Company and Richard M. Frank (filed as Exhibit 10(a)(5) to the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and incorporated herein by reference). 10(a)(3)--- Amendment to Consulting Agreement dated January 29, 1992, amending the Consulting Agreement dated January 5, 1989 between the Company and Richard M. Frank (filed as Exhibit 10(a)(6) to the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and incorporated herein by reference). 10(a)(4)--- Stock Grant Trust Agreement dated January 29, 1992 among the Company, Richard M. Frank, Ronald F. Saupe and Kevin J. Shepherd (filed as Exhibit 10(a)(7) to the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and incorporated herein by reference). 10(b)--- Employment Agreement dated January 4, 1994 between the Company and Michael H. Magusiak. (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference).
10(c)(1)--- Non-Statutory Stock Option Plan of the Company, as amended to date (filed as Exhibit 10(a)(1) to Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference). 10(c)(2)--- Specimen form of Contract under the Non-Statutory Stock Option Plan of the Company, as amended to date (filed as Exhibit 10(a)(2) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference). 10(d)(1)--- Stock Grant Plan of the Company, as amended to date (filed as Exhibit 10(d)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). 10(d)(2)--- Specimen form of Certificate of Participation to certain participants under the Stock Grant Plan of the Company (filed as Exhibit 10(e)(3) to Company's Annual Report on Form 10-K for the year ended December 29, 1989 and incorporated herein by reference). 10(e)(1)--- Specimen current form of the Company's Franchise Agreement (filed as Exhibit 10(d)(1) to the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and herein by reference). 10(e)(2)--- Specimen current form of the Company's Development Agreement (filed as Exhibit 10(d)(2) to the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and herein by reference). 10(f)(1)--- Second Amended and Restated Revolving Credit Agreement dated as of November 19, 1992 between The First National Bank of Boston and the Company (filed as Exhibit 10(e)(1) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated herein by reference). 10(f)(2)--- First Amendment to Second Amended and Restated Revolving Credit Agreement dated as of December 15, 1993 between The First National Bank of Boston, the Company and BHC Acquisition Corporation ("BAC") (filed as Exhibit 10(f)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein for all purposes). 10(f)(3)--- Second Amendment to Second Amended and Restated Revolving Credit Agreement dated as of July 1, 1994 between the Company, BAC and The First National Bank of Boston, (filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 1, 1994 and incorporated herein by reference). 10(f)(4)--- Third Amendment Agreement dated as of December 29, 1994 between the Company, BAC and The First National Bank of Boston.
10(f)(5)--- Letter agreement dated as of July 1, 1994 between the Company, BAC and the First National Bank of Boston (filed as Exhibit 10(b)(1) to the Company's quarterly report on Form 10-Q and incorporated herein by reference).
10(f)(6)--- Second Amended and Restated ShowBiz Security Agreement dated as of November 19, 1992 between the Company and The First National Bank of Boston (filed as Exhibit 10(e)(2) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated herein by reference).
10(f)(7)--- Second Amended and Restated Monterey Security Agreement dated as of November 19, 1992 between BAC and The First National Bank of Boston (filed as Exhibit 10(e)(3) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated herein by reference).
10(f)(8)--- Second Amended and Restated Guaranty Agreement dated November 19, 1992 between BAC and The First National Bank of Boston (filed as Exhibit 10(e)(4) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated herein by reference).
10(f)(9)--- Second Amended and Restated Stock Pledge Agreement dated as of November 19, 1992 between the Company and The First National Bank of Boston (filed as Exhibit 10(e)(5) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated herein by reference).
10(g)--- Financial and Management Consulting Services Agreement between the Company and The Hallwood Group Incorporated (filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 30, 1988 and incorporated herein by reference).
10(h)--- Stock Purchase and Registration Agreement dated as of May 5, 1992 among the Company, The Hallwood Group Incorporated and certain shareholders of the Company (filed as Exhibit 28 to the Company's Registration Statement on Form S-3 (No. 33-48307) and incorporated herein by reference).
10(i)(1)--- Entertainment Operating Fund Line of Credit dated as of November 17, 1994 between the Company and the International Association of ShowBiz Pizza Time Restaurants, Inc. (the "Association").
10(i)(2)--- Entertainment Operating Fund Promissory Note dated as of November 17, 1994 in the original principal amount of $750,000 executed by the Association payable to the order of the Company.
10(i)(3)--- National Advertising Production Line of Credit dated as of November 17, 1994 between the Company and the Association.
10(i)(4)--- National Advertising Production Promissory Note dated as of November 17, 1994 in the original principal amount of $750,000 executed by the Association payable to the order of the Company.
10(i)(5)--- Concept Unification Fund Line of Credit dated as of November 17, 1994 between the Company and the Association.
10(i)(6)--- Concept Unification Fund Promissory Note dated as of November 17, 1994 in the original principal amount of $500,000 executed by the Association payable to the order of the Company.
10(i)(7)--- National Media Fund Line of Credit as of November 17, 1994 between the Company and the Association.
10(i)(8)--- National Media Fund Promissory Note dated as of November 17, 1994 in the original principal amount of $400,000 executed by the Association payable to the order of the Company.
18--- Letter of Deloitte & Touche LLP.
21--- List of subsidiaries.
23--- Independent Auditors' Consent.
27--- Financial Data Schedule.
----------------
(b) Reports on Form 8-K: No reports on Form 8-K were filed in the fourth quarter of 1994.
(c) Exhibits pursuant to Item 601 of Regulation S-K: Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded from the exhibits filed pursuant to this report instruments defining the rights of holders of long-term debt of the Company where the total amount of the securities authorized under each such instrument does not exceed 10% of the total assets of the Company. The Company hereby agrees to furnish a copy of any such instruments to the Commission upon request.
(d) Financial Statements excluded from the annual report to shareholders by Rule 14a-3(b): No financial statements are excluded from the annual report to the Company's shareholders by Rule 14a-3(b).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 1995 SHOWBIZ PIZZA TIME, INC.
By: Richard M. Frank Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date ---------- ------ -----
Richard M. Frank Chairman of the Board, March 29, 1995 Chief Executive Officer, and Director (Principal Executive Officer)
Michael H. Magusiak President and Director
Larry G. Page March 29, 1995 Executive Vice President, Treasurer, (Principal Financial Officer and Principal Accounting Officer)
Charles A. Crocco, Jr. Director March 29, 1995
Anthony J. Gumbiner Director March 29, 1995
Robert L. Lynch Director March 29, 1995
J. Thomas Talbot Director March 29, 1995
Brian M. Troup Director March 29, 1995
Louis P. Neeb Director March 29, 1995
Cynthia I. Pharr Director March 29, 1995
EXHIBIT INDEX
Exhibit No. Description ------------ ----------- Page No. ------------
10(f)(4)--- Third Amendment Agreement between the Company, BAC and The First National Bank of Boston. 45
10(i)(1)--- Entertainment Fund Line of Credit dated November 17, 1994 between the Company and the International Association of ShowBiz Pizza Time Restaurants, Inc. (the "Association"). 54
10(i)(2)--- Entertainment Operating Fund Promissory Note dated November 17, 1994 between the Company and the Association. 58
10(i)(3)--- National Advertising Production Line of Credit dated November 17, 1994 between the Company and the Association. 63
10(i)(4)--- National Advertising Production Promissory Note dated November 17, 1994 between the Company the Association. 67
10(i)(5)--- Concept Unification Fund Line of Credit dated November 17, 1994 between the Company and the Association. 72
10(i)(6)--- Concept Unification Fund Promissory Note dated November 17, 1994 between the Company and the Association. 76
10(i)(7)--- National Media Fund Line of Credit dated November 17, 1994 between the Company and the Association. 81
10(i)(8)--- National Media Fund Promissory Note dated November 17, 1994 between the Company and the Association. 85
18 --- Letter of Deloitte & Touche LLP 90
21 --- List of Subsidiaries 91
23--- Independent Auditor's Consent 92