UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 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 other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification No.)
P.O. Box 152077
4441 West Airport Freeway
Irving, Texas 75015
(Address of principal executive offices,
including zip code)
(214) 258-8507
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No _
At September 29, 1995, an aggregate of 12,215,177 shares of
the registrant's Common Stock, par value of $.10 each (being the
registrant's only class of common stock), were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ShowBiz Pizza Time, Inc.:
Page
----
Consolidated balance sheets as of September 29, 1995 (unaudited)
and December 30, 1994 . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of earnings for the three months ended
September 29, 1995 and September 30, 1994 (unaudited). . . . . . . 3
Consolidated statements of earnings for the nine months ended
September 29, 1995 and September 30, 1994 (unaudited). . . . . . . 4
Consolidated statement of shareholders' equity for the nine months
ended September 29, 1995 (unaudited) . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the nine months ended
September 29, 1995 and September 30, 1994 (unaudited). . . . . . . . 6
Notes to consolidated financial statements . . . . . . . . . . . . . 7
<PAGE> 1
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 1995 AND DECEMBER 30, 1994
(Thousands, except share data)
ASSETS
<TABLE>
September 29, December 30,
1995 1994
---------------- -------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . $ 3,366 $ 2,381
Accounts receivable, including
receivables from related parties
of $326 and $416, respectively. . . . . . 2,311 3,361
Current portion of notes receivable,
including receivables from related
parties of $370 and
$300, respectively. . . . . . . . . . . . 678 529
Inventories . . . . . . . . . . . . . . . . 4,107 3,107
Prepaid expenses. . . . . . . . . . . . . . 2,575 2,900
Current portion of deferred tax asset . . . 916 3,583
------- -------
Total current assets. . . . . . . . . . . . 13,953 15,861
------- -------
Investments in related parties . . . . . . . . 761 699
------- -------
Property and equipment . . . . . . . . . . . . 133,827 130,190
------- -------
Deferred tax asset . . . . . . . . . . . . . . 31,216 29,414
------- -------
Other assets:
Notes receivable, less current portion,
including receivables from related
parties of $1,998 and
$1,708, respectively . . . . . . . . . . 6,899 6,705
Deferred charges, less amortization . . . . 2,980 2,083
Other . . . . . . . . . . . . . . . . . . . 2,494 3,356
-------- --------
12,373 12,144
-------- --------
$192,130 $188,308
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . $ 69 $ 10,060
Accounts payable and accrued liabilities. . 26,666 26,545
------- -------
Total current liabilities . . . . . . . . . 26,735 36,605
-------- -------
Long-term debt, less current portion . . . . . 31,046 19,947
-------- -------
Deferred credits . . . . . . . . . . . . . . . 3,435 3,025
-------- -------
Other liabilities. . . . . . . . . . . . . . . 1,399 1,314
-------- -------
Redeemable preferred stock, $60 par value,
redeemable for $2,974 in 2005. . . . . . . . 1,979 1,902
------- ------
Shareholders' equity:
Common stock, $.10 par value; authorized
30,000,000 shares; 14,287,961 and 14,337,235
shares issued, respectively . . . . . . . 1,429 1,434
Capital in excess of par value. . . . . . . 154,265 156,532
Retained earnings . . . . . . . . . . . . . 6,202 5,012
Deferred compensation . . . . . . . . . . . (4,097) (7,200)
Less 2,072,784 treasury shares, at cost,
at both dates . . . . . . . . . . . . . . (30,263) (30,263)
------- -------
127,536 125,515
------- -------
$192,130 $188,308
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 2
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share data)
<TABLE>
Three Months Three Months
Ended Ended
Sept. 29, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Food and beverage revenues . . . . . . . . . $46,175 $ 47,198
Games and merchandise revenues . . . . . . . 19,805 19,980
Franchise fees and royalties . . . . . . . . 751 1,068
Joint venture income . . . . . . . . . . . . 27 39
------- -------
66,758 68,285
------- -------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . 34,124 34,496
Selling, general and administrative
expenses, including related party
expenses of $31 in both periods . . . . 11,515 11,570
Depreciation and amortization . . . . . . 5,684 6,186
Loss on property transactions . . . . . . 63 279
Other operating expenses. . . . . . . . . 14,517 13,772
------- -------
65,903 66,303
------- -------
Operating income . . . . . . . . . . . . . . 855 1,982
------- -------
Other income (expenses):
Interest income, including related party
income of $74 and $172, respectively . . 218 217
Interest expense . . . . . . . . . . . . . (786) (503)
------- -------
(568) (286)
------- -------
Income before income taxes . . . . . . . . . . 287 1,696
------- -------
Income taxes:
Current expense. . . . . . . . . . . . . . . 355 152
Deferred (benefit) expense . . . . . . . . . (129) 520
------- -------
226 672
------- -------
Net income . . . . . . . . . . . . . . . . . . $ 61 $ 1,024
======= =======
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . $ .00 $ .08
======= =======
Weighted average shares outstanding . . . . 12,109 11,976
======= =======
Fully diluted:
Net income . . . . . . . . . . . . . . . . $ .00 $ .08
======= =======
Weighted average shares outstanding . . . . 12,115 11,977
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share data)
<TABLE>
Nine Months Nine Months
Ended Ended
Sept. 29, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Food and beverage revenues . . . . . . . . . $ 138,903 $ 147,765
Games and merchandise revenues . . . . . . . 60,128 57,371
Franchise fees and royalties . . . . . . . . 2,604 3,388
Joint venture income . . . . . . . . . . . . 81 150
------- -------
201,716 208,674
------- -------
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . 105,078 105,650
Selling, general and administrative expenses,
including related party expenses of $94
in both periods . . . . . . . . . . . . 33,975 35,885
Depreciation and amortization. . . . . . . 16,535 18,618
(Gain) loss on property transactions . . . 102 (3,215)
Other operating expenses . . . . . . . . . 41,851 41,481
------- -------
197,541 198,419
------- -------
Operating income . . . . . . . . . . . . . . . 4,175 10,255
------- -------
Other income (expenses):
Interest income, including related party
income of $172 and $350, respectively . . 654 472
Interest expense . . . . . . . . . . . . . . (2,239) (1,295)
------- -------
(1,585) (823)
------- -------
Income before income taxes . . . . . . . . . . 2,590 9,432
------- -------
Income taxes:
Current expense. . . . . . . . . . . . . . . 880 848
Deferred expense . . . . . . . . . . . . . . 264 2,887
------- -------
1,144 3,735
------- -------
Net income . . . . . . . . . . . . . . . . . .$ 1,446 $ 5,697
======= =======
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . . $ .10 $ .45
======= ========
Weighted average shares outstanding. . . . . 12,097 12,174
======= =======
Fully diluted:
Net income . . . . . . . . . . . . . . . . . $ .10 $ .45
======== =======
Weighted average shares outstanding. . . . . 12,118 12,174
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands, except per share data)
<TABLE>
Common
Stock Capital in Deferred Treasury
------------------ Excess of Retained Compen- Stock
Shares Par Value Par Value Earnings sation Shares Cost
------- --------- ---------- --------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, Dec. 30, 1994. . . . . .
14,337 $ 1,434 $ 156,532 $ 5,012 $(7,200) 2,073 $(30,263)
Net income . . . . . . . . . . . 1,446
Redeemable preferred stock accretion (78)
Redeemable preferred stock dividends,
$3.60 per share. . . . . . . . . (178)
Stock options exercised. . . . . .
11 1 68
Tax expense from the exercise of stock
options and stock grants . . . . . .
(598)
Stock grants forfeited . . . . . . . .
(60) (6) (1,737) 1,737
Amortization of deferred compensation .
1,366
------- ------- -------- -------- ------- ------ ------
Balances, Sept. 29, 1995 . . . . . . . . .
14,288 $ 1,429 $154,265 $ 6,202 $ (4,097) 2,073 $(30,263)
====== ======= ========= ======= ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
<TABLE>
Nine Months Nine Months
Ended Ended
Sept. 29, 1995 Sept.30, 1994
-------------- -------------
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . $ 1,446 $ 5,697
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization. . . . . . . 16,535 18,618
Deferred tax expense . . . . . . . . . . . 264 2,887
(Gain) loss on property transactions. . . . 102 (3,215)
Compensation expense under stock grant plan. 1,366 2,050
Other. . . . . . . . . . . . . . . . . . . . 411 494
Net change in receivables, inventories,
prepaids, payables and
accrued liabilities. . . . . . . . . . 113 139
------- -------
Cash provided by operations. . . . . 20,237 26,670
------- -------
Investing activities:
Purchases of property and equipment. . . . (19,273) (22,860)
Proceeds from disposition of
property and equipment . . . . . . . . 6,725
Additions to notes receivable. . . . . . . (2,293) (1,197)
Payments received on notes receivable. . . 1,851 1,713
Change in investments, deferred charges
and other assets . . . . . . . . . . . . (633) (1,468)
------- -------
Cash used in investing activities . . . (20,348) (17,087)
------- -------
Financing activities:
Payments on line of credit . . . . . . . . (30,495) (5,160)
Proceeds from debt and line of credit. . . 31,645 7,910
Reduction of capital lease obligations . . (42) (33)
Exercise of stock options and warrants . . 69 238
Treasury stock acquired. . . . . . . . . . (13,513)
Redeemable preferred stock dividends . . . (178) (178)
Other. . . . . . . . . . . . . . . . . . . 97 (129)
------- -------
Cash used in financing activities. . . 1,096 (10,865)
------- -------
Increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . 985 (1,282)
Cash and cash equivalents,
beginning of period. . . . . . . . . . . . 2,381 4,511
------- -------
Cash and cash equivalents, end of period . $ 3,366 $ 3,229
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
(Unaudited)
1. Interim financial statements:
In the opinion of management, the accompanying financial
statements for the periods ended September 29, 1995 and September
30, 1994 reflect all adjustments (consisting only of normal
recurring adjustments except as previously disclosed or referred
to in Note 5) necessary to present fairly the Company's financial
condition, results of operations and cash flows.
Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted.
The unaudited consolidated financial statements referred to above
should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission for the year ended December 30,
1994. Results of operations for the periods ended September 29,
1995 and September 30, 1994 are not necessarily indicative of the
results for the year.
2. Earnings per common and common equivalent 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 below, and earnings per common and common equivalent
share were computed as follows (thousands, except per share data):
<TABLE>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
1995 1994 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . $ 61 $ 1,024 $ 1,446 $ 5,697
Accretion of redeemable
preferred stock . . . . . (26) (27) (78) (78)
Redeemable preferred
stock dividends . . . . . (59) (59) (178) (178)
------- ------- ------- -------
Adjusted income applicable
to common and common
equivalent shares . . . . $ (24) $ 938 $ 1,190 $ 5,441
======= ====== ======= =======
Primary:
Weighted average number
of common shares
outstanding . . . . . 12,026 11,974 12,046 12,104
Common stock equivalents:
Stock purchase options . 83 2 51 70
------- ------- ------- -------
Weighted average number of
shares outstanding. . . 12,109 11,976 12,097 12,174
======= ======= ======= =======
Earnings per common and
common equivalent share $ .00 $ .08 $ .10 $ .45
====== ====== ======= =======
Fully diluted:
Weighted average number of common
shares outstanding. . . . 12,026 11,974 12,046 12,104
Common stock equivalents:
Stock purchase options . 89 3 72 70
------- ------- ------- -------
Weighted average number of
shares outstanding . . 12,115 11,977 12,118 12,174
======= ======= ======= =======
Earnings per common and common
equivalent share . . . $ .00 $ .08 $ .10 $ .45
======= ======= ======= =======
</TABLE>
<PAGE> 7
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
(Unaudited)
3. Income taxes:
Income taxes have been provided at the expected annual federal
tax rate during the year (34% for 1995) plus an estimated provision
for state income taxes and state franchise taxes.
4. Supplemental cash flow information:
<TABLE>
Nine Months Nine Months
Ended Ended
Sept. 29, 1995 Sept. 30, 1994
-------------- -------------
<S> <C> <C>
Cash paid during the year for:
Interest . . . . . . . . . . . . . . $ 2,195 $ 1,226
Income taxes . . . . . . . . . . . . 677 1,285
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
</TABLE>
5. Significant transactions:
During 1995, the Company refinanced its previous credit facility
of $30.8 million expiring January 1996 with an increased facility
of $38 million. The new credit facility consists of term
notes totalling $18 million with annual interest of 10.02% maturing
in 2001, term notes totalling $10 million with annual interest
equal to the London Interbank Offered Rate ("LIBOR") plus 3.5%
maturing in 2000 and term notes of $5.0 million, obtained
subsequent to September 29, 1995, with annual interest equal to
LIBOR plus 3.5% maturing in October 1997. The Company also has a
$5 million line of credit with annual interest provided at prime
plus 1/2 %, or at the Company's option, LIBOR plus 3% maturing June
1997. Approximately $2.0 million is outstanding under the line of
credit at September 29, 1995. The Company is required to comply
with certain ratio tests during the terms of the loan agreements.
During the first quarter of 1995, the Company changed its
estimate of the useful lives of certain fixed assets as follows:
<TABLE>
Previous New
Lives Lives
------- -------
<S> <C> <C>
Land and improvements. . . . . . . . . . . . 0-10 0-20
Leasehold improvements . . . . . . . . . . . 4-15 4-20
Buildings and improvements . . . . . . . . . 4-25 4-25
Furniture, fixtures and improvements . . . . 2-10 2-15
Property based under capital leases . . . . 10-15 10-15
</TABLE>
<PAGE> 8
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
(Unaudited)
5. Significant transactions (cont.):
As a result of this change, income before income taxes increased
approximately $576,000, net income was increased $276,000 and
earnings per share increased $.03 in the third quarter of 1995. In
the first nine months of 1995, income before income taxes increased
approximately $1.7 million, net income increased $961,000 and
earnings per share increased $.08.
During the first quarter of 1995, the Company's Chairman of the
Board and Chief Executive Officer forfeited 60,000 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. Amortization of
the remaining deferred compensation is provided by the straight-
line method over the remaining term of the employment agreement.
<PAGE> 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Third Quarter 1995 Compared to Third Quarter 1994
- -------------------------------------------------
Revenues for the third quarter of 1995 decreased 2.2% to $66.8
million from $68.3 million in the third quarter of 1994 primarily
due to a decline in comparable store sales of the Company's Chuck
E. Cheese's restaurants of 1.9% between the periods.
The Company had operating income of $855,000 in the third
quarter of 1995 compared to $2.0 million in the third quarter of
1994. The decline in comparable store sales and operating margins
in the Company's Chuck E. Cheese's restaurants primarily
contributed to the decline in operating income. 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 two quarters is shown below.
<TABLE>
Three Months Ended
Sept. 29, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . . . . 100.0% 100.0%
------- -------
Costs and expenses:
Cost of sales. . . . . . . . . . . . 51.1 50.5
Selling, general
and administrative . . . . . . . . . 17.2 16.9
Depreciation and amortization. . . . . 8.5 9.1
Loss on property
transactions . . . . . . . . . . . . .1 .4
Other operating expenses . . . . . . . 21.8 20.2
------- --------
98.7 97.1
------- -------
Operating income . . . . . . . . . . . . 1.3% 2.9%
======= =======
</TABLE>
Revenues
--------
Revenues from the Company's Chuck E. Cheese's restaurants
declined to $66.8 million in the third quarter of 1995 from $68.3
million in the third quarter of 1994 primarily due to a decline of
1.9% in comparable store sales of such restaurants which were
opened during all of the third quarters of both 1995 and 1994. The
Company opened one new restaurant in the first quarter of 1995 and
12 new restaurants throughout 1994. Management believes that
several factors may have contributed to the comparable store sales
decline including increased competition. Menu prices were
comparable between the two periods.
Costs and Expenses
------------------
Costs and expenses as a percentage of revenues increased to
98.7% in the third quarter of 1995 from 97.1% in the third quarter
of 1994.
Cost of sales increased as a percentage of revenues to 51.1% in
the third quarter of 1995 from 50.5% in the comparable period of
1994. Cost of food, beverage, prize and merchandise items for
Chuck E. Cheese's restaurants as a percentage of restaurant sales
decreased to 17.7% in the third quarter of 1995 from 18.0% in the
third quarter of 1994 primarily due to an increase in game sales as
a percentage of total restaurant sales. Labor expenses for Chuck E.
Cheese's restaurants as a percentage of restaurant sales increased
to 30.2% during the third quarter of 1995 from 29.6% in the third
quarter of 1994 primarily due to increased labor rates and the
decline in the comparable store sales.
<PAGE> 10
Selling, general and administrative expenses as a percentage of
revenues increased to 17.2% in the third quarter of 1995 from 16.9%
in the comparable period of 1994 primarily due to increased
advertising costs.
Depreciation and amortization expenses as a percentage of
revenues decreased to 8.5% in the third quarter of 1995 from 9.1%
in the third quarter of 1994. Preopening expense declined due to
the write-off of all unamortized preopening expense in the fourth
quarter of 1994 resulting from a change in the estimated future
benefit of such expenses. Depreciation expense declined due to a
change effected in the first quarter of 1995 in the estimated
useful lives of certain fixed assets based on a review of
historical asset utilization. As a result of this change,
depreciation expense decreased approximately $576,000 in the third
quarter of 1995.
Other operating expenses increased as a percentage of revenues
to 21.8% in the third quarter of 1995 from 20.2% in the third
quarter of 1994 primarily due to increased rent and utility costs
as a percentage of revenues and the decline in comparable store
sales.
The Company provided for a loss on property transactions of
approximately $63,000 in the third quarter of 1995 compared to a
loss of $279,000 in the third quarter of 1994 due to the
replacement of certain assets in conjunction with the enhancement
of facilities and entertainment packages of restaurants.
Operating Income
----------------
As a result of the changes in revenues and expenses discussed
above, the Company had operating income of $855,000 in the third
quarter of 1995 compared to $2.0 million in the third quarter of
1994.
Net Income
----------
Interest expense increased to $786,000 in the third quarter of
1995 from $503,000 in the third quarter of 1994 due primarily to an
increase in interest rates since the third quarter of 1994. The
Company had net income of $61,000 in the third quarter of 1995
compared to $1.0 million in the third quarter of 1994 due to the
changes in revenues and expenses discussed above. The Company's
primary and fully diluted earnings per share was $.00 per share in
the third quarter of 1995 compared to $.08 per share in the third
quarter of 1994.
First Nine Months of 1995 Compared to First Nine Months of 1994
- ----------------------------------------------------------------
Revenues decreased 3.3% to $201.7 million in the first nine
months of 1995 from $208.7 million in the comparable period of 1994
primarily due to the sale of the Company's Monterey's Tex-Mex Cafe
restaurants effective May 5, 1994. Revenues generated by the
Company's Chuck E. Cheese's restaurants decreased to $201.7 million
in the first nine months of 1995 from $202.5 million in the first
nine months of 1994 primarily due to a decline in comparable store
sales of 2.5% between the periods. Revenues from the Company's
Monterey's Tex-Mex Cafe restaurants were $6.2 million in the first
nine months of 1994.
Operating income decreased to $4.2 million in the first nine
months of 1995 from $10.3 million in the first nine months of 1994.
Included in operating income in 1994 is a gain of $5.5 million
related to the sale of the Company's Monterey's Tex-Mex Cafe
restaurants and a $1.9 million loss associated with the valuation
of fixed assets used in certain Chuck E. Cheese's restaurants. The
decline in comparable store sales and operating margins in the
Company's Chuck E. Cheese's restaurants also contributed to the
decline in operating income. A material portion of operating costs
are fixed resulting in an erosion of operating margins at lower
sales levels.
<PAGE> 11
A summary of the results of operations of the Company as a
percentage of revenues for the nine month periods is shown below.
<TABLE>
Nine Months Ended
----------------------------------
Sept. 29, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . 100.0% 100.0%
------- -------
Costs and expenses:
Cost of sales. . . . . . . . . 52.1 50.6
Selling, general
and administrative . . . . . 16.8 17.2
Depreciation and
amortization . . . . . . . . 8.2 8.9
(Gain) loss on property
transactions . . . . . . . . .1 (1.5)
Other operating expenses 20.7 19.9
------- -------
97.9 95.1
------- --------
Operating income . . . . . . . . . 2.1% 4.9%
======= =======
</TABLE>
Revenues
--------
Revenues from the Company's Chuck E. Cheese's restaurants
decreased to $201.7 million in the first nine months of 1995 from
$202.5 million in the first nine months of 1994 primarily due to a
decline of 2.5% in comparable store sales of such restaurants which
were open during all of the first nine months of both 1995 and
1994. This was partially offset by new restaurant development
which occurred throughout 1994 and January 1995. Management
believes that several factors may have contributed to the
comparable store sales decline including increased competition and
to a lesser extent, the impact of newly opened restaurants on
comparable store sales of existing restaurants in certain markets.
Menu prices were comparable between the two periods.
Costs and Expenses
------------------
Costs and expenses as a percentage of revenues increased to
97.9% in the first nine months of 1995 from 95.1% in the first nine
months of 1994.
Cost of sales increased as a percentage of revenues to 52.1% in
the first nine months of 1995 from 50.6% in the comparable period
of 1994. Cost of food, beverage, prize and merchandise items for
Chuck E. Cheese's restaurants as a percentage of restaurant sales
decreased to 18.0% in the first nine months of 1995 from 18.2% in
the first nine months of 1994 primarily due to an increase in game
sales as a percentage of total restaurant sales. Labor expenses
for Chuck E. Cheese's restaurants as a percentage of restaurant
sales increased to 30.8% during the first nine months of 1995 from
29.3% in the first nine months of 1994 primarily due to increased
labor rates, reduced management turnover and the decline in the
comparable store sales.
Selling, general and administrative expenses as a percentage of
revenues decreased to 16.8% in the first nine months of 1995 from
17.2% in the comparable period of 1994 primarily due to a reduction
in corporate overhead expenses.
Depreciation and amortization expenses as a percentage of
revenues decreased to 8.2% in the first nine months of 1995 from
8.9% in the comparable period of 1994. Preopening expense declined
due to the write-off of all unamortized preopening expense in the
fourth quarter of 1994 resulting from a change in the estimated
future benefit of such expenses. Depreciation expense declined due
to the sale of Monterey's Tex-Mex Cafe restaurants in May 1994 and
a change effected in the first quarter of 1995 in the estimated
useful lives of certain fixed assets based on a review of
historical asset utilization. As a result of this change,
depreciation expense decreased approximately $1.7 million in the
first nine months of 1995.
<PAGE> 12
Other operating expenses increased as a percentage of revenues
to 20.7% in the first nine months of 1995 from 19.9% in the first
nine months of 1994 primarily due to increased rent expense as a
percentage of revenues and the decline in comparable store sales.
The Company had a net loss on property transactions of $102,000
in the first nine months of 1995 compared to a net gain on property
transactions of $3.2 million in the first nine months of 1994. In
the first nine months of 1994, the Company recognized a gain of
$5.5 million from the sale of substantially all of the assets of
its Monterey's Tex-Mex Cafe restaurants on May 5, 1994. The gain
was partially offset by a loss of approximately $1.9 million in
the first nine months of 1994. The loss was a result of the
Company's decision to close one Chuck E. Cheese's restaurant and
the decline in fair value of the fixed assets of eight 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.
The Company will consider possible relocation of some of the
restaurants.
Operating Income
----------------
As a result of the changes in revenues and expenses discussed
above, operating income declined to $4.2 million in the first nine
months of 1995 from $10.3 million in the first nine months of 1994.
Included in operating income are the operations of Monterey's Tex-
Mex Cafe restaurants through May 5, 1994. Operating income in the
first nine months of 1994 for Monterey's Tex-Mex Cafe restaurants
was $5.9 million, including a gain on property transactions of $5.5
million.
Net Income
----------
Interest expense increased to $2.2 million in the first nine
months of 1995 from $1.3 million in the first nine months of 1994
due primarily to an increase in interest rates and the Company's
average outstanding debt between the periods. The Company's net
income decreased to $1.4 million in the first nine months of 1995
from $5.7 million in the first nine months of 1994 due to the
changes in revenues and expenses discussed above. The Company's
primary and fully diluted earnings per share decreased to $.10 per
share in the first nine months of 1995 from $.45 per share in the
first nine months of 1994.
<PAGE> 13
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
Cash provided by operations decreased to $20.2 million in the
first nine months of 1995 from $26.7 million in the comparable
period of 1994. Cash outflow from investing activities for the
first nine months of 1995 was $20.3 million. Cash inflow from
financing activities for the first nine months of 1995 was $1.1
million. The Company's primary requirements for cash relate to
planned capital expenditures and debt service. The Company expects
that it will satisfy such requirements from cash provided by
operations and funds available under its line of credit or
additional borrowings.
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 term
notes totalling $18 million with annual interest of 10.02% maturing
in 2001, term notes totalling $10 million with annual interest
equal to the London Interbank Offered Rate ("LIBOR") plus 3.5%
maturing in 2000 and term notes of $5.0 million with annual
interest equal to LIBOR plus 3.5% maturing in 1997. In addition,
the Company has obtained a $5 million line of credit due June 1997
with interest provided at prime plus 1/2%, or at the Company's
option, LIBOR plus 3%. The Company is required to comply with
certain financial ratio tests during the terms of the loan
agreements.
The Company believes that the success of its facility and
entertainment 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
completed 21 restaurants under this program in 1994 and has
currently completed an additional 44 restaurants during 1995. The
average sales growth in these restaurants during the periods
following their repositioning compared to the same periods of the
prior year have increased more than 20% after giving effect to
average sales trends experienced during the three month periods
prior to their repositioning. The Company currently intends to have
repositioned approximately 97 restaurants by the end of 1995 which is
approximately 43% of all Company operated restaurants, and
substantially all of the remaining Company 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 the several
factors, including the restaurant's square footage, date of the
most recent remodel and the existing assets at the restaurant. In
the event certain site characteristics considered essential to 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 unit base in what
management believes is a competitive market. The Company is
refining its marketing plan; the Company has accelerated its
commitment of capital to existing stores; and the Company is
currently limiting its 1995 new restaurant development to ensure
that the sales vitality of the Company's existing restaurant base
is given immediate priority. The Company believes that certain
operating costs could increase as a result of implementing its
strategies designed to strengthen existing unit sales. If the
declines in comparable store sales of the Company's Chuck E.
Cheese's restaurants experienced since 1992 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. (Refer to
Item 1. Legal Proceedings).
<PAGE> 14
The Company believes it will realize substantial benefit from
utilization of approximately $73 million in net operating loss
carryforwards to reduce its 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 expiring from years 1997 through 2008.
Tax credit carryforwards can be utilized by the Company only after
all net operating loss carryforwards have been realized. If the
Company's results of operations continue to decline, a portion of
the net operating loss and tax credit carryforwards could expire
prior to utilization resulting in a charge against income. Taxable
income for the five years ending December 30, 1994 was $53 million.
Based on the early results of the repositioned restaurants and the
Company's current plans to reposition substantially all of its
Company owned restaurants by the end of 1996, the Company currently
projects future taxable income levels sufficient to realize its net
operating loss and tax credit carryforwards prior to their
expiration after considering an allowance of $1.1 million for the
estimated expiration of tax credit carryforwards in 1997.
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 has agreed in principle to
the settlement of this lawsuit subject to final documentation and
court approval.
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 2. Changes in Securities.
None to report during quarter for which this report is filed.
Item 3. Defaults Upon Senior Securities.
None to report during quarter for which this report is filed.
Item 4. Submission of Matters to a Vote of Security Holders.
None to report during quarter for which this report is filed.
Item 5. Other Information.
None to report during quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the quarter for which
this report is filed.
<PAGE> 16
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: November 10, 1995 By:____________________________
Larry G. Page
Chief Financial Officer
(Principal Financial Officer)
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