SHOWBIZ PIZZA TIME INC, 424B1, 1997-03-21

SHOWBIZ PIZZA TIME INC
424B1, 1997-03-21
EATING PLACES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-2229

[SHOWBIZ PIZZA TIME LOGO]

3,200,000 Shares
Common Stock
($.10 par value)
------------------

All of the 3,200,000 shares of common stock, par value $.10 per share ("Common
Stock"), of ShowBiz Pizza Time, Inc. ("ShowBiz" or the "Company") being
offered hereby (the "Shares") are being sold by The Hallwood Group
Incorporated and its affiliates (collectively, the "Selling
Stockholders"). See "Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Shares. The
Common Stock is traded on The Nasdaq Stock Market's National
Market ("NNM") under the symbol "SHBZ." On March 19, 1997,
the last reported sale price of the Common Stock on
the NNM was $17.875 per share. See "Price Range of Common Stock
and Dividend Policy."

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 6.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.

ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Selling
Public Commissions Stockholders(1)
-------- ------------- ---------------
<S> <C> <C> <C>
Per Share............................................ $16.50 $.82 $15.68
Total (2)............................................ $52,800,000 $2,624,000 $50,176,000
</TABLE>

(1) Before deduction of expenses payable by the Company and the Selling
Stockholders, estimated at $500,000.

(2) The Selling Stockholders have granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase a
maximum of 454,746 additional shares of Common Stock from the Selling
Stockholders to cover over-allotments of shares. If the option is exercised
in full, the total Price to Public will be $60,303,309, Underwriting
Discounts and Commissions will be $2,996,892, and Proceeds to Selling
Stockholders will be $57,306,417.

The Shares are offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the Shares will be ready
for delivery on or about March 26, 1997 against payment in immediately available
funds.

CREDIT SUISSE FIRST BOSTON PRINCIPAL FINANCIAL SECURITIES, INC.

Prospectus dated March 20, 1997
<PAGE> 2

[Picture of costumed characters in front of a typical Chuck E. Cheese's
restaurant.]

------------------------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS, PENALTY BIDS AND PASSIVE MARKET MAKING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus (i) assumes that
there will be no exercise of the over-allotment option and (ii) reflects a
three-for-two stock split with respect to the Common Stock effected on May 22,
1996. Unless otherwise indicated, all references herein to "ShowBiz" and the
"Company" mean ShowBiz Pizza Time, Inc. and its wholly-owned subsidiaries. All
references herein to the Company's "restaurant/entertainment centers,"
"restaurants," "stores" and "locations" shall have the same meanings. References
herein to "comparable store sales" shall mean sales for Company-owned
restaurants that were open during all of the relevant comparable prior period.

THE COMPANY

The Company is engaged in developing, operating and franchising a system of
family-oriented restaurant/entertainment centers under the name Chuck E.
Cheese's Pizza ("Chuck E. Cheese's"). Management believes that the Company is
one of the leading operators of family-oriented restaurant/entertainment centers
in the United States. According to independent national research, Chuck E.
Cheese's restaurants and the Company's namesake character, Chuck E. Cheese, are
widely known by families with young children. In two recent national surveys of
children between the ages of six and eight, the Chuck E. Cheese character placed
in the top 10% of approximately 400 characters and the top 7.5% of approximately
640 characters included in the surveys in terms of image recognition and
popularity. As of December 27, 1996, the Company and its franchisees operated
314 locations in 44 states in the United States, Canada, Chile and Guatemala,
including 244 Company-operated locations in the United States. The Company
estimates that in 1996 Company-operated and franchised stores had over 50
million customer visits, including 30 million by children.

Chuck E. Cheese's restaurants typically occupy 8,000 to 14,000 square feet
and are divided into three areas: a kitchen and related areas occupying
approximately 35% of the premises, a dining area and showroom occupying
approximately 25% of the premises, and an activity area occupying approximately
40% of the premises. All food is prepared fresh daily in the kitchen. The menu
includes a variety of pizzas, a salad bar, sandwiches, desserts and other items.
Customers order from a central cashier and food is delivered to them at their
table. The dining area, which typically seats 250 to 375 customers, is also the
setting for a robotic musical stage show featuring Chuck E. Cheese and other
life-sized characters. The activity area offers games and rides which can be
used with tokens purchased in the restaurant, as well as ceiling-suspended tubes
and tunnels (SkyTubes) and other free activities. Most games dispense tickets
which may be redeemed for prize merchandise such as toys and dolls.

Following a period of steady growth from 1987 to 1992, the Company began
experiencing declining comparable store sales in 1993. In response to this
decline, the Company began implementing a number of strategic initiatives in
1994 designed to increase the Company's competitive position in the industry and
improve the financial performance of its restaurants. The key element of these
strategic initiatives has been the remodeling and repositioning of the Company's
existing store locations. From March 1994 to December 1996, the Company
remodeled 223 of its 244 Company-operated stores at an average cost of $315,000
per store. The remodeling program has resulted in significant sales growth in
the remodeled stores, with these stores experiencing average sales growth of
approximately 18% during the first year after the remodeling and approximately
3% sales growth the following year. Based upon the sales growth experienced to
date in its remodeled stores, management believes that the remodeled stores,
including the 68 stores completed in the last six months of 1996, will have a
positive impact on the Company's revenues in 1997.
3
<PAGE> 4

THE OFFERING

Common Stock Offered by the
Selling Stockholders.......... 3,200,000 shares

Common Stock Outstanding
before and after the
Offering.................... 18,518,867 shares(1)

Use of Proceeds............... The Company will not receive any proceeds from
the sale of Shares by the Selling Stockholders.

Nasdaq National Market
Symbol........................ SHBZ

Risk Factors.................. Prospective investors should carefully consider
all the information set forth in this
Prospectus and, in particular, should evaluate
the specific factors set forth under "Risk
Factors" before purchasing any of the Shares.
- - ---------------

(1) Excludes 1,010,511 shares of Common Stock issuable upon exercise of options
outstanding at December 27, 1996.

SUMMARY FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27,
1994 1995 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $268,515 $263,783 $293,990
Costs and expenses........................................ 265,402 263,408 271,769
Income before income taxes................................ 3,113 375 22,221
Income taxes.............................................. 2,437 312 9,000
Net income................................................ 676 63 13,221
Net income (loss) per share(1)............................ .02 (.02) .70
OTHER DATA:
EBITDA(2)................................................. $ 27,721 $ 25,941 $ 49,966
Capital expenditures...................................... 29,421 28,277 51,719
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................................. $188,308 $199,010 $216,580
Long-term obligations(3).................................. 33,223 39,244 39,571
Stockholders' equity...................................... 125,515 126,487 141,476
STORE DATA:
Stores open at period end:
Company-operated(4)..................................... 226 226 244
Franchised.............................................. 106 93 70
-------- -------- --------
Total.............................................. 332 319 314
Comparable store sales increase (decrease)(5)............. (5.8)% (1.4)% 9.8%
</TABLE>

- - ---------------

(1) Per share information is calculated after the payment of dividends on shares
of redeemable preferred stock and reflects a three-for-two stock split in
the form of a 50% stock dividend of shares of Common Stock effected on May
22, 1996.

(2) Earnings before interest income, interest expense, (gain) loss on property
transactions, depreciation, amortization and income taxes.

(3) Includes current and long-term portions of long-term debt, redeemable
preferred stock and other long-term liabilities.

(4) Does not include 27 Monterey's Tex-Mex Cafe restaurants that were sold by
the Company effective May 4, 1994.

(5) Comparable store sales are calculated using sales of Company-owned stores
which were open for the full prior period.
4
<PAGE> 5

RECENT DEVELOPMENTS

OPERATING RESULTS FOR THE FOURTH QUARTER AND FISCAL YEAR ENDED DECEMBER 27, 1996

Revenues increased by 15.5% to $70.9 million for the fourth quarter ended
December 27, 1996 from $61.4 million for the fourth quarter ended December 29,
1995 due to a 9.9% increase in comparable store sales for the fourth quarter of
1996. Management believes that several factors contributed to the comparable
store sales increase with the primary factor being sales increases at
repositioned restaurants. Net income increased to $2.2 million for the fourth
quarter of 1996 from a loss of $1.4 million for the fourth quarter of 1995. The
Company's primary and fully-diluted earnings per share was $.12 per share in the
fourth quarter of 1996 compared to a loss of $.08 per share in the fourth
quarter of 1995.

Revenues increased by 11.5% to $294.0 million for the fiscal year ended
December 27, 1996 from $263.8 million for the fiscal year ended December 29,
1995 primarily due to a 9.8% increase in comparable store sales for 1996. In
addition, the Company purchased 19 restaurants from its largest franchisee in
September 1996. Net income increased to $13.2 million in 1996 compared to
$63,000 in 1995. The Company's primary and fully diluted earnings per share
increased to $.70 per share in 1996 compared to a loss of $.02 per share in
1995.

BOARD COMPOSITION UPON CLOSING OF THE OFFERING

In connection with the sale of the Shares being offered hereby by The
Hallwood Group Incorporated ("Hallwood"), one of the Selling Stockholders, it is
anticipated that Charles A. Crocco, Jr., Anthony J. Gumbiner, Robert L. Lynch,
J. Thomas Talbot and Brian M. Troup, each of whom is affiliated with Hallwood,
will resign from the Company's Board of Directors upon the closing of the
offering. It is anticipated that after the closing of the offering, the number
of directors constituting the entire Board of Directors of the Company will be
reduced to seven from nine, and that the four directors remaining after these
resignations will elect three new directors to fill the vacancies created by
these resignations.

5
<PAGE> 6

RISK FACTORS

Prospective investors should consider carefully the following factors in
addition to other information included in this Prospectus before purchasing any
of the Shares.

IMPLEMENTATION OF GROWTH STRATEGIES

The Company's continued growth depends, to a significant degree, on its
ability to successfully implement its growth strategies. Among such strategies,
the Company plans to continue to open new stores in selected markets. The
opening and success of such new Chuck E. Cheese's restaurant/entertainment
centers will depend on various factors, including the availability of suitable
sites, the negotiation of acceptable lease terms for such locations, the ability
to meet construction schedules, the ability of the Company to manage such
expansion and hire and train personnel, as well as general economic and business
conditions. The ability of the Company to successfully open new stores will also
depend upon the availability of sufficient funds for such purpose, including
funds from operations, the Company's existing credit facility, future debt
financings, future equity offerings or a combination thereof. There can be no
assurance that the Company will be successful in opening and operating the
number of anticipated new stores on a timely or profitable basis. The Company's
growth is also dependent on management's ability to continually evolve and
update the Company's concept to anticipate and respond to changing customer
needs and competitive conditions. There can be no assurance that management will
be able to successfully anticipate changes in competitive conditions or customer
needs or that the market will accept the Company's concepts.

RESTAURANT/ENTERTAINMENT INDUSTRY

The restaurant/entertainment industry is affected by national, regional and
local economic conditions, demographic trends and consumer tastes. The
performance of individual restaurants may be affected by factors such as traffic
patterns and the type, number and location of competing restaurants. Dependence
on frequent deliveries of fresh food products also subjects food service
businesses, such as the Company, to the risk that shortages or interruptions in
supply caused by adverse weather or other conditions could adversely affect the
availability, quality and cost of ingredients. In addition, factors such as
inflation, increased food, labor and employee benefit costs and the availability
of experienced management and hourly employees may also adversely affect the
restaurant industry in general and the Company's restaurant/entertainment
centers in particular. The entertainment industry is affected by many factors,
including changes in customer preferences and increases in the type and number
of entertainment offerings. Operating costs may also be affected by further
increases in the minimum hourly wage, unemployment tax rates, sales taxes and
similar matters over which the Company has no control.

COMPETITION

The Company believes that its combined restaurant/entertainment center
concept puts it in a niche which combines elements of both the restaurant and
entertainment industries. As a result, the Company, to some degree, competes
with entities in both industries. Although other restaurant chains presently
utilize the concept of combined family restaurant/entertainment operations, the
Company believes these competitors operate primarily on a local or regional,
market-by-market basis. Within the traditional restaurant sector, the Company
competes with other casual restaurants on a nationwide basis. In addition to
such national restaurant chains and regional and local restaurant/family
entertainment competitors, the Company competes with other concepts that target
the same consumer, including "fun centers," such as those operated by Discovery
Zone, Inc. These fun centers have experienced rapid expansion which has affected
the Company's historical performance. The Company's high operating leverage may
make it particularly susceptible to competition. Such competitive market
conditions, including the emergence of significant new competition, could
adversely affect the Company's ability to successfully increase its results of
operations.

6
<PAGE> 7

DEPENDENCE ON KEY PERSONNEL

The success of the Company's business will continue to be highly dependent
upon Richard M. Frank, the Chairman of the Board and Chief Executive Officer of
the Company, Michael H. Magusiak, the President of the Company, and other
members of the Company's senior management. Although the Company has entered
into employment agreements with each of Mr. Frank and Mr. Magusiak, the loss of
the services of either of such individuals could have a material adverse effect
upon the Company's business and development. The Company's success will also
depend upon its ability to retain and attract additional skilled management
personnel to its senior management team and at its operational level. There can
be no assurances that the Company will be able to retain the services of Messrs.
Frank or Magusiak, senior members of its management team or the required
operational support at the store level in the future.

FRANCHISE OPERATIONS

The Company's success is also dependent, to some degree, upon its franchise
operations and the manner in which its franchisees operate and develop their
restaurant/entertainment centers to promote and develop the Company's concept
and its reputation for quality and value. Currently, 22% of the Company's
restaurant/entertainment centers are owned and operated by its franchisees.
Although the Company has established criteria to evaluate prospective
franchisees, there can be no assurance that current or prospective franchisees
will have the business abilities or access to financial resources necessary to
successfully develop or operate restaurant/entertainment centers in their
franchise areas in a manner consistent with the Company's concepts and
standards.

SENSITIVITY TO NEGATIVE PUBLICITY

The Company's target market of 2 to 12 year old children and families with
small children is potentially highly sensitive to adverse publicity. There can
be no assurance that the Company will not experience negative publicity
regarding one or more of its restaurant/entertainment centers. The occurrence of
negative publicity regarding one or more of the Company's locations could
materially and adversely affect the Company's image with its customers and its
results of operations.

POSSIBLE LIMITATIONS ON USE OF NET OPERATING LOSS AND TAX CREDIT CARRYFORWARDS

Federal income tax laws may limit the amount of net operating losses and
certain tax credits that might otherwise be used by the Company to offset future
income and tax liabilities. There can be no assurance as to the availability of
such losses and credits for such offset.

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS; SEASONALITY

The Company has experienced, and in the future could experience, quarterly
variations in revenues as a result of a variety of factors, many of which are
outside the Company's control, including the timing and number of new store
openings, the timing of capital investments in existing stores, unfavorable
weather conditions and natural disasters. The Company typically experiences
lower net sales in the second and fourth quarters than in the first and third
quarters. If revenues are below expectations in any given quarter, the Company's
operating results would likely be materially adversely affected for that
quarter.

GOVERNMENT REGULATION

The Company and its franchisees are subject to various federal, state and
local laws and regulations affecting operations, including those relating to the
use of video and arcade games and rides, the preparation and sale of food, and
those relating to building and zoning requirements. The Company and its
franchisees are also subject to laws governing their relationship with
employees, including minimum wage requirements, overtime, working and safety
conditions, and citizenship requirements. In addition, the Company is subject to
regulation by the Federal Trade Commission and must comply with certain state
laws which govern the offer, sale and termination of franchises and the refusal
to renew franchises. Difficulties or failures in obtaining required licenses or
other regulatory approvals could delay or prevent the opening of a new
restaurant/entertainment center, and the suspension of, or inability to renew, a
license or permit could interrupt operations at an existing restaurant.

7
<PAGE> 8

USE OF PROCEEDS

All of the Shares offered hereby are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
Shares by the Selling Stockholders.

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at December 27, 1996. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes.

<TABLE>
<CAPTION>
DECEMBER 27,
1996
------------
(IN THOUSANDS)
<S> <C>
Current portion of long-term debt........................... $ 1,785
Long-term debt and other obligations, noncurrent............ 35,678
--------
Total debt................................................ 37,463
--------
Class A redeemable preferred stock, par value $60.00 per
share; authorized -- 49,570 shares; issued -- 49,570
shares.................................................... 2,108
--------
Stockholders' equity:
Common stock, par value $.10 per share;
authorized -- 50,000,000 shares; issued -- 21,519,075
shares(1).............................................. 2,152
Additional paid-in capital................................ 153,795
Retained earnings......................................... 17,613
Deferred compensation..................................... (1,821)
Less 3,109,176 common shares in treasury.................. (30,263)
--------
Total stockholders' equity............................. 141,476
--------
Total capitalization................................. $181,047
========
</TABLE>

- - ---------------

(1) Excludes 1,010,511 shares of Common Stock issuable upon exercise of options
outstanding as of December 27, 1996.

8
<PAGE> 9

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is traded on the Nasdaq National Market under the symbol
"SHBZ." The following table sets forth on a per share basis the high and low
sale prices for the Common Stock as reported on the Nasdaq National Market for
the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................................. $ 7 3/16 $ 4 7/8
Second Quarter............................................ 8 3/16 5 13/16
Third Quarter............................................. 9 1/16 7 5/16
Fourth Quarter............................................ 8 15/16 7 1/4
1996
First Quarter............................................. $12 13/16 $ 8
Second Quarter............................................ 17 5/8 12 1/2
Third Quarter............................................. 19 1/4 12
Fourth Quarter............................................ 20 14
1997
First Quarter (through March 19, 1997).................... $25 $16 3/4
</TABLE>

On March 14, 1997, there were 4,171 holders of record of outstanding shares
of Common Stock.

The Company has not paid any cash dividends on its Common Stock and does
not expect to pay cash dividends on its Common Stock in 1997 or in the
foreseeable future. The Board of Directors anticipates that all cash flow
generated from operations in the foreseeable future will be retained and used to
develop and expand the Company's business and reduce outstanding indebtedness.
Any future payment of cash dividends will depend upon the Company's results of
operations, financial condition, cash requirements and other factors deemed
relevant by the Board of Directors.

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 "Class A
Preferred Stock"), has been paid or set aside to be paid. A dividend to holders
of record of Class A Preferred Stock as of December 27, 1996 in the amount of
$1.20 per share will be paid on March 27, 1997.

9
<PAGE> 10

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The information presented below, except store data, for, and at the end of,
each of the years in the five year period ended December 27, 1996 is derived
from the consolidated financial statements, which have been audited by Deloitte
& Touche LLP, independent auditors.

The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements at December 29, 1995 and
December 27, 1996 and for each of the years in the three year period ended
December 27, 1996 and the related notes and Independent Auditors' Report (which
notes a 1994 change in accounting for pre-opening costs), which are included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, DECEMBER 29, DECEMBER 27,
1993 1993 1994 1995 1996
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT STORE DATA AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $253,444 $272,344 $268,515 $263,783 $293,990
Costs and expenses:
Cost of sales.................. 125,279 137,343 137,729 136,700 143,381
Selling, general and
administrative expenses...... 39,733 42,129 47,263 44,794 43,534
Depreciation and
amortization................. 19,249 23,058 26,032 23,184 25,057
Interest expense............... 1,508 797 1,861 3,118 3,476
(Gain) loss on property
transactions................. 654 675 (2,597) 136 263
Other operating expenses(1).... 41,771 50,095 55,114 55,476 56,058
-------- -------- -------- -------- --------
Total costs and
expenses................ 228,194 254,097 265,402 263,408 271,769
-------- -------- -------- -------- --------
Income before income taxes....... 25,250 18,247 3,113 375 22,221
Income taxes..................... 9,747 6,356 2,437 312 9,000
-------- -------- -------- -------- --------
Net income....................... 15,503 11,891 676 63 13,221
======== ======== ======== ======== ========
Earnings (loss) per common and
common equivalent share(2)..... $ .74 $ .57 $ .02 $ (.02) $ .70
Weighted average shares
outstanding.................... 20,570 20,196 18,191 18,098 18,532
OTHER DATA:
Cash flow from operations........ $ 44,246 $ 44,905 $ 30,819 $ 27,810 $ 48,362
Cash flow from investing......... (35,872) (45,909) (22,576) (30,548) (51,868)
Cash flow from financing......... (7,631) 2,053 (10,373) 5,946 1,319
EBITDA(3)........................ 46,341 42,431 27,721 25,941 49,966
Capital expenditures............. 33,903 44,600 29,421 28,277 51,719
BALANCE SHEET DATA (AT PERIOD END):
Total assets..................... $173,217 $193,649 $188,308 $199,010 $216,580
Long-term obligations(4)......... 17,743 29,816 33,223 39,244 39,571
Stockholders' equity............. 132,167 136,647 125,515 126,487 141,476
STORE DATA:
Stores open at period end:
Company-operated(5)............ 182 215 226 226 244
Franchised..................... 113 110 106 93 70
-------- -------- -------- -------- --------
Total..................... 295 325 332 319 314
Comparable store sales increase
(decrease)(6).................. 3.2% (5.3)% (5.8)% (1.4)% 9.8%
Company-operated stores remodeled
during period.................. 26 25 10 87 126
</TABLE>

- - ---------------

(1) Consists primarily of expenses for rent, utilities and repairs.

(2) Per share information is calculated after the payment of dividends on shares
of redeemable preferred stock and reflects a three-for-two stock split in
the form of a 50% stock dividend of shares of Common Stock effected on May
22, 1996.

(3) Earnings before interest income, interest expense, (gain) loss on property
transactions, depreciation, amortization and income taxes.

(4) Includes current and long-term portions of long-term debt, redeemable
preferred stock and other long-term liabilities.

(5) Does not include 27 Monterey's Tex-Mex Cafe restaurants that were sold by
the Company effective May 4, 1994.

(6) Comparable store sales are calculated using sales of Company-owned stores
which were open for the full prior period.

10
<PAGE> 11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

From 1987 to 1992, the Company experienced steady growth in revenues,
profitability and restaurant locations, as revenues increased at a 15% compound
annual rate and the number of Company-operated stores increased from 118 at the
start of 1987 to 182 at the end of 1992. During early 1993, the Company began to
experience increasing competitive pressure in the form of national fun centers
such as Discovery Zone, Inc., which offered a different type of entertainment
targeted at the same market as Chuck E. Cheese's. The first quarter of 1993
marked the first time in 20 consecutive quarters that the Company did not report
comparable store sales growth. In response to the changing competitive
environment, management began an extensive review of each aspect of the
business. Following this review, the Company began a repositioning program that
focused on critical areas of the business, including the remodeling and
repositioning of its restaurants. See "Business -- Recent Strategic
Initiatives."

Under this program, the Company remodeled 10 stores in 1994. Based on the
positive operating results of these remodeled stores, the Company decided to
remodel substantially all of its Company-operated stores by the end of 1996.
Accordingly, the Company remodeled 87 stores in 1995 and another 126 stores in
1996. During the first half of 1997, the Company plans to complete the
remodeling program as it remodels the remaining 21 stores, bringing to 244 the
number of store locations remodeled since 1994.

As a result of the remodeling and repositioning program, comparable store
sales have improved significantly since the fourth quarter of 1995. The
following charts show the change in comparable store sales for each quarter and
the percentage of Company-operated restaurants that were remodeled by the end of
each quarter.

CHANGE IN COMPARABLE STORE SALES

[COMPARABLE STORE SALES CHART]

REMODELED RESTAURANTS AS A PERCENTAGE
OF TOTAL COMPANY-OPERATED RESTAURANTS

[REMODELED RESTAURANTS AS A PERCENTAGE]

11
<PAGE> 12

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of revenues that certain items in the statement of earnings represent and should
be read in conjunction with the discussion below and with the Company's
Consolidated Financial Statements, including the notes thereto, for the periods
indicated.

<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue.................................................. 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales.......................................... 51.3 51.8 48.7
Selling, general and administrative.................... 17.6 17.0 14.8
Depreciation and amortization.......................... 9.7 8.8 8.5
Interest expense....................................... .7 1.2 1.2
(Gain) loss on property
transactions........................................ (1.0) .1 .1
Other operating expenses(1)............................ 20.5 21.0 19.1
----- ----- -----
Income before income taxes............................... 1.2 .1 7.6
Income tax expense....................................... .9 .1 3.1
----- ----- -----
Net income............................................... .3% 0.0% 4.5%
===== ===== =====
</TABLE>

- - ---------------

(1) Consists primarily of expenses for rent, utilities and repairs.

1996 COMPARED TO 1995

Revenues increased by 11.5% to $294.0 million in 1996 from $263.8 million
in 1995 primarily due to an increase of 9.8% in comparable store sales from 1995
to 1996. In addition, the Company purchased 19 restaurants from its largest
franchisee in September 1996. Average annual sales per restaurant increased to
approximately $1,286,000 in 1996 from approximately $1,178,000 in 1995.
Management believes that several factors contributed to the comparable store
sales increase with the primary factor being sales increases at repositioned
stores. Menu prices increased 3.2% between the two years. Revenues from
franchise fees and royalties were $3.7 million in 1996, an increase of 6.1% from
1995, primarily due to an increase in franchise fee income in 1996 and an
increase of 3.6% in comparable franchise store sales for 1996. The increase in
comparable franchise store sales was partially offset by a decline in the number
of franchise restaurants operated each year. During 1996, four new franchise
restaurants opened, eight franchise restaurants closed and 19 franchise
restaurants were purchased by the Company.

Cost of sales as a percentage of revenues decreased to 48.7% in 1996 from
51.8% in 1995. Cost of food, beverage, prize and merchandise items for Chuck E.
Cheese's restaurants as a percentage of restaurant sales decreased to 17.4% in
1996 from 17.9% in 1995 primarily due to a 3.2% increase in menu prices. Labor
expenses for Chuck E. Cheese's restaurants as a percentage of restaurant sales
declined to 28.7% in 1996 from 30.9% in 1995 primarily due to an increase in
comparable store sales and more effective utilization of hourly employees.

Selling, general and administrative expenses as a percentage of revenues
decreased to 14.8% in 1996 from 17.0% in 1995 primarily due to comparable store
sales increases and a reduction of advertising costs between the two periods.

12
<PAGE> 13

Depreciation and amortization expense as a percentage of revenues decreased
to 8.5% in 1996 from 8.8% in 1995 primarily due to the full amortization of
certain deferred charges.

Interest expense increased to $3.5 million in 1996 from $3.1 million in
1995 primarily due to an increase in the Company's average outstanding debt
between the two periods. Debt increased as a result of capital expenditures in
connection with the repositioning of 126 and 87 restaurants in 1996 and 1995,
respectively.

The Company had a net loss on property transactions of $263,000 in 1996 and
$136,000 in 1995 due to the replacement of assets arising from the enhancement
of facilities and entertainment packages of restaurants. The loss in 1995 was
net of a gain of $100,000 from the sale of certain assets which had been held
for resale.

Other operating expenses decreased as a percentage of revenues to 19.1% in
1996 from 21.0% in 1995 primarily due to a decrease in insurance costs, the
increase in comparable store sales and the fact that a significant portion of
operating costs are fixed.

The Company had net income of $13.2 million in 1996 compared to $63,000 in
1995 due to the changes in revenues and expenses discussed above. The Company's
primary and fully diluted earnings per share increased to $.70 per share in 1996
compared to a loss of $.02 per share in 1995.

1995 COMPARED TO 1994

Revenues declined 1.8% to $263.8 million in 1995 from $268.5 million in
1994 primarily due to the sale of the Company's Monterey's Tex-Mex Cafe
restaurants in May 1994. Revenue generated by the Company's Chuck E. Cheese's
restaurants increased to $263.3 million in 1995 from $262.0 million in 1994
primarily due to the net addition of 11 Company restaurants in 1994 and two
Company restaurants in 1995. Comparable store sales declined 1.4% from 1994 to
1995. Revenues from the Company's Monterey's Tex-Mex Cafe restaurants were $6.5
million in 1994.

Cost of sales as a percentage of revenues increased to 51.8% in 1995 from
51.3% in 1994. Cost of food, beverage, prize and merchandise items for Chuck E.
Cheese's restaurants as a percentage of restaurant sales decreased to 17.9% in
1995 from 18.2% in 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 30.9% in 1995 from
30.0% in 1994 primarily due to increased labor rates, reduced management
turnover and the decline in comparable store sales.

Selling, general and administrative expenses as a percentage of revenues
decreased to 17.0% in 1995 from 17.6% in 1994 primarily due to a reduction in
corporate overhead expenses.

Depreciation and amortization expense as a percentage of revenues decreased
to 8.8% in 1995 from 9.7% in 1994. Pre-opening expense declined due to the
write-off of all unamortized pre-opening expense in the fourth quarter of 1994
resulting from a change in the estimated useful future benefit of such expenses.
Depreciation and amortization expense decreased by $2.8 million in 1995 due to
the sale of the Company's 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 that resulted in approximately $2.3 million of such
decrease.

Interest expense increased to $3.1 million in 1995 from $1.9 million in
1994 primarily due to an increase in interest rates and the Company's average
outstanding debt for 1995.

The Company had a net loss on property transactions of $136,000 in 1995
compared to a net gain on property transactions of $2.6 million in 1994. In
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 4, 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

13
<PAGE> 14

to close one Chuck E. Cheese's restaurant and the impairment in fair value of
the fixed assets of 10 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.

Other operating expenses as a percentage of revenues increased to 21.0% in
1995 from 20.5% in 1994 primarily due to increased rent expense and the decline
in comparable store sales.

The Company's net income decreased to $63,000 in 1995 from $676,000 in 1994
due to the changes in revenues and expenses discussed above.

INFLATION AND SEASONALITY

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.
Management anticipates that recent increases in the federally mandated minimum
wage will result in increased labor costs for the Company. Any other 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. The Company typically experiences lower net sales in
the second and fourth quarters than in the first and third quarters.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations increased to $48.4 million in 1996 compared to
$27.8 million in 1995. Cash outflow from investing activities for 1996 was $51.9
million. Cash inflow from financing activities in 1996 was $1.3 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.

The Company repositioned 10, 87 and 126 restaurants in 1994, 1995 and 1996,
respectively. Company expenditures relating to the remodeling program averaged
approximately $330,000 per restaurant during 1996, representing total
expenditures of approximately $41.6 million. The Company anticipates remodeling
the remaining 21 restaurants in the first half of 1997 at an average cost of
approximately $350,000 per restaurant for a total of approximately $7.4 million.
However, this amount can vary significantly at a particular restaurant depending
on several factors, including the restaurant's square footage, the date of the
most recent remodel and the existing assets at the restaurant. Expenditures
relating to the repositioning program have been financed primarily by cash flow
from operations and borrowings under the Company's line of credit.

The Company plans to open approximately six to eight new stores in 1997 and
10 to 12 new stores in 1998. The Company currently anticipates the cost of
opening such new stores to average approximately $1.3 million per store. In
addition to such new store openings, the Company plans to expand 10 to 15
existing stores in 1997 by an average of 1,000 to 4,000 square feet per store.
The Company also anticipates adding new game packages to as many as 100 stores
in 1997 at an average cost of approximately $150,000 per store. The Company
currently estimates that capital expenditures in 1997, including expenditures
for the remodeling of existing stores, new store openings, existing store
expansions and equipment investments, will be approximately $40 to $50 million.
The Company plans to finance these expenditures through cash flow from
operations and borrowings, if necessary, under the Company's line of credit.

In August 1996, the Company increased its line of credit to $15.0 million
from $5.0 million and extended the maturity date from June 1997 to June 1998.
Currently, any borrowings under this line of credit would be at prime or at the
London Interbank Offered Rate ("LIBOR") plus 2%. As of January 31, 1997,
$500,000 was outstanding under the line of credit.

14
<PAGE> 15

The Company believes it will realize substantial benefit in the future from
the utilization of approximately $47 million in net operating loss carryforwards
to reduce its federal income tax liability. Such net operating loss
carryforwards expire from 1999 through 2001. 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's Restated Articles of Incorporation
contain a provision 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 of which $5.8 million expires from
1997 through 2010. Tax credit carryforwards can be utilized by the Company only
after all net operating loss carryforwards have been utilized (if no event
occurs that would limit the use of net operating carryforwards). If the
improvement in the Company's results of operations does not continue, 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 ended December 27, 1996 was approximately $66 million. Based on the
results of the repositioned restaurants, the Company currently anticipates
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. However, there can be no assurance that the levels of
taxable income will be sufficient to realize these benefits.

15
<PAGE> 16

BUSINESS

GENERAL

The first Chuck E. Cheese's restaurant was opened in 1977. In 1980, the
Company opened the first ShowBiz Pizza Place restaurant and in 1985 the Company
acquired the Chuck E. Cheese's chain. During 1993, the Company completed the
conversion of its Company-operated ShowBiz Pizza Place restaurants to Chuck E.
Cheese's restaurants. From 1985 to 1996, the Company expanded to its current 244
Company-operated locations.

RECENT STRATEGIC INITIATIVES

Following is a discussion of each of the recent strategic initiatives
recently implemented by the Company.

Remodeling of Existing Stores. In 1994, the Company began a remodeling
program designed to improve the appearance and competitive position of the
Company's restaurants and to meet key customer needs identified through an
extensive research process. The key elements of the remodeling program include
the following:

- Enhanced exterior, containing signage projecting a friendlier, more
upbeat image of the Chuck E. Cheese character, block letters and back-lit
awnings;

- Brighter, airier locations typically provided by increasing the number of
exterior windows;

16
<PAGE> 17

- The addition of SkyTubes, attractive tubes and tunnels suspended from the
ceiling, that compete directly with pay-for-play fun centers;

- The installation of new games; and

- The addition of other interior improvements.

Enhancing Value Perception to Customers. The Company's extensive research
process identified value as a key need of the Company's customers. In response
to this identified need, the Company is attempting to enhance the value
perception of its restaurant/entertainment centers to its customers through the
following:

- Free Access to SkyTubes -- As a free attraction, the SkyTubes represent a
significant value to customers who typically pay for such activity at
pay-for-play fun centers.

- Token Value Deals -- This program allow customers to purchase tokens in
volume at a discount at the same time that food is ordered rather than
requiring continual purchases by parents. This has increased the
perception of value among consumers because customers are not continually
buying additional tokens.

- Improved Prize Program -- The Company has revamped the prize program by
increasing the number of prize tickets dispensed from games and updating
the prize offerings to include more popular new toys.

- Improved Game Packages -- The Company has added kiddie skill games and
redemption type games for the older customer base to its game offerings.

- "Kid Check" Child Security Program -- To improve security and reassure
parents, the Company has implemented the "Kid Check" program at all
locations. Kid Check is monitored by a Chuck E. Cheese's employee, who
greets guests and stamps the hand of each person in the party with a
unique number in invisible ink. A child can leave only with an adult
whose stamped number matches the child's when viewed under an ultraviolet
light.

- Improved Food Quality -- The Company's food and beverage improvements
have focused on better pizza and enhanced menu items to increase the
perception of healthiness to parents. The pizza quality has been improved
through the use of a better pizza tray which keeps the crust crispy
longer and through various ingredient enhancements. Recent blind tests by
independent experienced taste evaluators show that Chuck E. Cheese's
pizza is superior to or at parity with national competitors.

Expansion of Existing Stores. The Company is expanding the size of selected
stores by an average of 1,000 to 4,000 square feet based on highest sales per
square foot. In 1995 and 1996, the Company expanded four and six stores,
respectively, and management anticipates expanding an additional 10 to 15 stores
in 1997.

Addition of New Game Packages. In addition to the remodeling described
above, the Company is testing new expanded game packages to enhance customer
appeal in 17 repositioned stores. If the test results continue to exceed the
Company's requirements for returns on invested capital, management anticipates
adding these new expanded game packages to as many as 100 selected stores in
1997. The cost of these enhanced game packages is expected to average
approximately $150,000 per store. The Company anticipates increased sales in
stores with enhanced game packages.

Implementation of Birthday Hotline. The Company has implemented a Birthday
Hotline, a toll-free reservation number available for parents to book birthday
parties at Chuck E. Cheese's restaurants, in approximately 129 restaurants.
Management believes that the Birthday Hotline will provide faster and more
professional service to parents, thereby facilitating the booking of more
birthday parties at Chuck E. Cheese's restaurants. Management also believes that
this will improve operating efficiencies at the Company's restaurants and result
in incremental revenues due to increased sales of birthday party favor bags.
Management is currently evaluating whether the benefits derived from the
Birthday Hotline justify its further implementation. The Company derives
approximately 15% of its revenues from birthday parties.

Integration of McBiz Stores. In September 1996, the Company purchased all
of the 19 Chuck E. Cheese's restaurants owned by its largest franchisee, McBiz
Corporation ("McBiz"), plus the 49% minority interest of one restaurant
previously operated as a joint venture by the two companies for approximately
$2.6 million in cash and

17
<PAGE> 18

reimbursement for remodeling costs for three restaurants which had been
remodeled prior to the purchase. The addition of these restaurants represents an
increase of over 8% in the number of Company-operated stores. The Company is
integrating these stores into the Chuck E. Cheese's system on an expedited
basis, including remodeling all of these stores by the end of the first quarter
of 1997. Based upon the sales growth experienced to date in the Company's
remodeled stores and historical performance of the acquired McBiz stores,
management anticipates that these new locations will contribute to the Company's
overall revenues, profitability and earnings per share in 1997. However, there
can be no assurance that the anticipated level of revenues, profitability and
earnings per share will be achieved.

FUTURE GROWTH OPPORTUNITIES

Management has identified the following areas as future growth
opportunities for the Company:

Opening of New Stores. Since 1994, the Company has focused primarily on
remodeling and repositioning existing stores. Beginning in 1997, management
plans to focus more attention on new store development. Management has
specifically targeted approximately 100 potential sites in the United States for
future new store openings. Management anticipates opening approximately six to
eight new stores in 1997 and approximately 10 to 12 new stores in 1998. In
addition, management believes that there are a number of other attractive sites
in the United States that have not yet been specifically identified but that
could be attractive locations for future new stores. The Company's rate of
opening new stores is highly variable depending on obtaining sites at reasonable
costs that meet the Company's site requirements.

Development of Smaller Market Store. Currently, the Company seeks to locate
its restaurants, which generally range from 8,000 to 14,000 square feet in size,
in larger metropolitan areas with high populations of children. However,
management is in the process of developing a redesigned prototype Chuck E.
Cheese's restaurant which could be used in smaller markets. The Company
anticipates completing the prototype, which is expected to be a 7,500 to 8,000
square foot unit, by the end of 1997 and developing the first restaurant in
1998.

Development of Enhanced Customer Entertainment Features. The Company is
continually seeking ways to enhance the entertainment experience and perceived
value provided by Chuck E. Cheese's restaurant/entertainment centers through the
evolution of the Company's concept, including enhancing the existing robotic
hardware and software of the animated stage show. The Company is currently
testing a new show, Chuck E.'s Awesome Adventure Machine, in one location in
Dallas. The new show has only one robotic character (Chuck E. Cheese) at a
control center in the center of the stage. Two large projection televisions on
each side of Chuck E. Cheese allow Chuck E. Cheese to take the audience on
adventures around the globe and universe. The show has interaction between Chuck
E. Cheese and the characters on screen, and the video segments are very upbeat
with lots of music.

Franchising. As of December 27, 1996, the Company had 63 franchise units in
the United States, four in Canada, two in Chile and one in Guatemala. The
Company intends to continue its franchise program in the United States,
primarily with existing franchisees, and on a case by case basis in selected
international markets. Management is approached regularly by interested
international developers because of the appeal of the concept and the success of
existing operations.

Merchandising. Merchandise sales were approximately 3% of revenues in 1996
(total merchandise sales were $9.6 million in 1996). Based on the number of
children aged 2 to 12 years old visiting Chuck E. Cheese's restaurants,
management believes that an opportunity exists for enhanced merchandise sales
and increased revenues from expanding the prizes and merchandise available for
redemption or purchase.

Licensing of the Chuck E. Cheese Character. The Company believes that the
Chuck E. Cheese character is among the most familiar and best-liked characters
among children aged 2 to 12 years old. Management is currently exploring
opportunities to license the Chuck E. Cheese character. In July 1996, the
Company entered into an agreement to use ACA, The Licensing Group ("ACA") to
represent it in pursuing opportunities in character licensing. The agreement
provides that ShowBiz will pay to ACA one-third of the net royalties received by
the Company. The agreement is automatically renewed each year unless either
party gives thirty days notice to

18
<PAGE> 19

the contrary. The Company believes that product licensing at the retail level
can help further promote the Chuck E. Cheese character and the Company's
restaurants.

INDUSTRY OVERVIEW

Management believes that the Company is one of the leading operators of
family-oriented restaurant/entertainment centers in the United States. By
combining these two often separate activities, the Company is able to capitalize
on the consumer's demand for fun, value and convenience and create an
entertaining family experience.

The family entertainment industry is a broad and growing industry. The
spectrum of entertainment opportunities for families with young children is
extremely broad, ranging from low-cost, short-lived activities to more lengthy
and expensive activities. Low cost, low commitment activities include events
such as stopping for treats, ice cream, etc. while high cost, high time
commitment activities would be events such as amusement park visits, field
trips, etc. ShowBiz and its entertainment industry peer group are more medium
cost, medium time commitment activities, typically offering value-oriented,
activity-based entertainment costing approximately $7.25 per person per visit
and lasting approximately one and one-half hours per visit.

The family restaurant industry is also very broad. Young children, however,
greatly limit the range of opportunities for family restaurant-goers. As a
result, convenience and value are significant decision factors for families
dining out with young children; the ultimate objective is to minimize the adult
"hassle factor" and provide value.

MARKETING STRATEGY

The primary customer base for Chuck E. Cheese's restaurants is families
with children between 2 and 12 years old. The Company estimates that the typical
customer visits a Chuck E. Cheese's location two to six times a year and spends
an average of $7.25 per person and approximately one and one-half hours per
visit. Approximately 90% of ShowBiz customers have children under the age of 12.
The average child's age is 5.4 years. The typical Chuck E. Cheese's customer has
young children and seeks a fun, entertaining restaurant experience which
includes quality food and good value.

The Company conducts advertising campaigns which target families with young
children and feature the family entertainment experiences available at Chuck E.
Cheese's restaurants. Since the concept has high awareness and appeal, the
advertising is primarily aimed at increasing the frequency of customer visits.

Television is the key advertising medium directed to children. Ads placed
on both local and national levels show the fun that kids and their families and
friends can have at Chuck E. Cheese's restaurants. In addition, the Company is a
sponsoring underwriter of Barney and Friends, one of the highest-rated programs
among two to six year olds, and has recently begun an advertising campaign on
Nickelodeon.

Parents are periodically targeted by full color free-standing inserts in
local newspapers. These inserts feature package deals available at Chuck E.
Cheese's which include pizza, drinks, and game tokens for $16 to $20. In each
restaurant the Company promotes additional value meal packages priced from $25
to $35. These package deals provide tokens with meal purchases rather than
requiring continual purchases by parents.

OPERATIONS

Chuck E. Cheese's restaurants are typically located in shopping centers or
in free-standing buildings near shopping centers and generally occupy 8,000 to
14,000 square feet. Chuck E. Cheese's are typically divided into three areas: a
kitchen and related area (cashier and prize area, salad bar, manager's office,
technician's office, restrooms, etc.) occupies approximately 35% of the space, a
dining area occupies approximately 25% of the space, and an activity area
occupies approximately 40% of the space.

The kitchen area includes a walk-in refrigerator, sinks, an automated pizza
oven, a dough mixer, storage space, and food preparation counters. The kitchen
has space for several employees to work simultaneously, and the automated pizza
oven has the capacity to bake approximately 100 pizzas per hour.

19
<PAGE> 20

The dining area of each Chuck E. Cheese's restaurant features a variety of
comic and musical entertainment by computer-controlled robotic characters,
together with video monitors and animated props, located on various stage type
settings. The dining area typically provides table and chair seating for 250 to
375 customers. Each Chuck E. Cheese's restaurant offers a variety of pizzas, a
salad bar, sandwiches, desserts and an assortment of other menu items. Soft
drinks, coffee, and tea are also served, along with beer and wine where
permitted by local laws. All food is prepared fresh daily in the kitchen.
Customers order from a central cashier and food is delivered to them at their
table.

Each Chuck E. Cheese's contains a family-oriented playroom area offering
approximately 40 coin and token-operated attractions, including arcade-style
games, kiddie rides, video games, skill oriented games and other similar
entertainment. Most games dispense tickets which can be redeemed by guests for
prize merchandise such as toys and dolls. Also included in the playroom area are
ceiling-suspended tubes and tunnels (SkyTubes) and other free attractions for
young children, with booth or table seating available for the entire family. The
playroom area normally occupies approximately 60% of the restaurant's public
area and contributes significantly to its revenues. A limited number of free
tokens are furnished with food orders and additional tokens may be purchased.
These tokens are used to play the games in the playroom area.

Most food is prepared in the restaurant using mixes produced in accordance
with Company standards. Each day prior to the opening of the restaurant,
employees prepare fresh pizza dough according to Company specifications.
Employees also clean and prepare fresh vegetables daily (no canned or frozen
vegetables are used). Meat and cheese items are delivered pre-cut. The following
chart shows sales of various food items at Company stores in the last year.

FOOD AND BEVERAGE SALES
TWELVE MONTHS ENDED DECEMBER 27, 1996
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
DOLLAR AMOUNT PERCENT OF TOTAL
------------- ----------------
<S> <C> <C>
Pizza.................................................... $153.4 75.7%
Salad Bar................................................ 10.2 5.1
Sandwiches............................................... 7.5 3.7
Non-Alcoholic Beverages.................................. 24.0 11.8
Alcoholic Beverages...................................... 6.4 3.2
Other.................................................... 1.1 .5
------ ------
Total.......................................... $202.6 100.0%
</TABLE>

Pizzas are made to order using the dough and other items prepared earlier
in the day. Visual aids showing the volume or weight of each ingredient for each
type of pizza are displayed near the pizza preparation counter, so employees are
able to quickly determine the appropriate items for each type of pizza. Portions
are controlled through standard-sized ladles for sauce and by weight for solids.
After the raw pizza is assembled, it is placed on a motor-driven shelf in the
automated pizza oven, which automatically controls the cooking period for the
pizza. The Company strives to serve a pizza 10 to 12 minutes after the order is
placed. Fresh, prepared-to-order sandwiches are also placed through the
automated oven.

The salad bar typically consists of 21 items, including fresh produce,
pasta salads, fruits and cheeses. Employees prepare fresh vegetables daily for
the salad bar and cut them according to Company specifications for size and
thickness. Certain items, including pasta salad, are delivered pre-prepared by
McLane Company, Inc. ("McLane's"), a national food distributor. Employees
maintain the freshness of the salad bar and dispose of items before their shelf
lives expire.

Birthday cakes are ordered through McLane's and delivered to the stores
pre-decorated with the Chuck E. Cheese character.

Beverage dispensers are located near the cashier. When customers purchase
beverages they are given a cup and may dispense their own selection of soda or
other soft drinks -- refills of soda and similar drinks are free.

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<PAGE> 21

Chuck E. Cheese's restaurants also sell juice in bottles and milk in cartons
with no free refills. Where permitted by law, Chuck E. Cheese's restaurants sell
beer and wine by the glass.

Each Chuck E. Cheese's restaurant generally employs a general manager, one
or two assistant managers, an electronics specialist who is responsible for
repair and maintenance of the robotic characters and games, and 45 to 75 food
preparation and service employees, most of whom work only part time. In general,
a minimum of five staffers is required at any time the restaurant is open.
Management maintains direct and frequent contact with unit level managers
through a network of 27 district managers, most of whom supervise six to 12
stores each, and four regional managers, each of whom supervises five to nine
district managers.

COMPETITION

The restaurant and entertainment industries are highly competitive, with a
number of major national and regional chains operating in the restaurant or
family entertainment business. Although other restaurant chains presently
utilize the combined family entertainment/restaurant concept, these competitors
primarily operate on a regional, market-by-market basis. ShowBiz believes that
it is the leader in the family restaurant/entertainment niche and has no true
direct national competition in this area.

Although ShowBiz has competition on a local and regional basis in most
areas, ShowBiz believes that its family entertainment concept is a meaningful
differentiation from other restaurants. With food prices that are competitive
with other pizza restaurants, ShowBiz offers an entertainment package which
significantly enhances the customer's price/value experience and promotes family
entertainment and interaction.

In the early 1990s, fun centers emerged as a new competitor catering
directly to ShowBiz's target market -- the 12 and under age group. These fun
centers typically charge an initial admission fee and offer a variety of tubes,
slides, trampolines, ball bins and other climbing apparatus that allow children
to be active in a large indoor environment. These stores grew in popularity by
emphasizing a new aspect of child entertainment that focuses on recreation,
fitness and education, while providing a safe and controlled environment that
parents appreciate. A number of fun centers opened across the country in
response to the popularity of active child entertainment.

Discovery Zone, Inc. ("DZ"), which is now reorganizing under Chapter 11 of
the United States Bankruptcy Code, expanded rapidly and increased its store base
from approximately 35 locations at the end of 1991 to over 300 (including
acquired Leaps and Bounds locations) prior to recent closures. DZs are typically
located in a shopping center and offer a variety of "ball crawls," slides and
other soft-playground equipment, a game room with arcade-style and
skill-oriented games, a dining area that serves food and beverages, party rooms
for group events, and a merchandise counter with DZ apparel, toys and other
items.

The rapid expansion of fun centers negatively impacted ShowBiz's financial
performance in 1993 through 1995, yet at the same time expanded the overall
market for and market awareness of children's entertainment/dining. In response
to the changing competitive environment, ShowBiz management began an extensive
review of each aspect of the business. Following the review, the Company began
its remodeling and repositioning program. See " -- Recent Strategic
Initiatives."

FRANCHISING PROGRAM

As of December 27, 1996, the Company had 63 franchise units in the United
States, four in Canada, two in Chile and one in Guatemala. ShowBiz has 44
franchisees, the two largest being Family Entertainment Center with seven stores
and Mid-South Food Management, Inc. with six stores. In 1996, ShowBiz acquired
19 stores from its then-largest franchisee, McBiz Corporation. The Company began
franchising its restaurants in October 1981 and the first franchised restaurant
opened in June 1982.

The Chuck E. Cheese's standard franchise agreement grants to the franchisee
the right to develop and operate a restaurant and use the associated trademarks
within the standards and guidelines established by the Company. The franchise
agreement presently offered by the Company has an initial term of 15 years and
includes a 10-year renewal option. New franchise agreements generally provide
protection to the franchisee prohibiting the Company from opening a store or
allowing another franchisee to open a store within a five-mile radius of an

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<PAGE> 22

existing franchised location. The agreements provide the Company with a right of
first refusal should any franchisee decide to sell a store.

The franchise agreements governing existing franchised Chuck E. Cheese's
restaurants currently require each franchisee to pay the Company an initial
franchise fee of $50,000, a continuing monthly royalty fee equal to 3.8% of
gross sales and a fee equal to 1.3% of gross sales to cover costs of system-wide
advertising and for further development and improvement of entertainment
attractions. Franchisees are also required to expend at least 3% of gross sales
for local advertising.

PROPERTIES

As of December 27, 1996, the Company operated 244 restaurants and had 67
franchised units in the United States and Canada, two franchised units in Chile
and one unit in Guatemala. The Company-owned stores include 19 Chuck E. Cheese's
locations acquired from McBiz in 1996.

Of the 244 Chuck E. Cheese's restaurants operated by the Company as of
December 27, 1996, 229 occupy leased premises and 15 occupy owned premises. 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 five-year renewal options, 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 many instances, provide for additional
rent equal to the amount by which a percentage (generally no higher than 7%) of
gross revenues exceeds the minimum rent. The leases will expire at various times
from 1997 to 2009.

SUPPLIERS

The Company has developed rigorous standards for the supplies used in its
restaurants and by its franchisees. All food items and other supplies except
produce and fresh dairy products are purchased on behalf of the Company by
McLane's from approved suppliers. The Company has developed exclusive
specifications for key food components (e.g., cheese, pizza dough mix, toppings,
and sauces), and for each major food product the Company has at least two
independent vendors selected on the basis of reputation, quality assurance
systems, pricing, location, and financial strength. Produce is sourced locally
but again must meet specific standards set by the Company. The Company also
maintains a non-contractual relationship with a vendor to supply and deliver toy
prizes and merchandise to individual restaurants.

EMPLOYEES

The Company's employment varies seasonally, with the greatest number of
people employed during the summer. As of December 27, 1996, the Company employed
approximately 11,000 people: 10,200 hourly field employees (approximately 650 of
these are full time) and 600 salaried field employees as well as 125 salaried
headquarters employees and 60 hourly headquarters employees. None of the
Company's employees is a member of any union or collective bargaining group. The
Company considers its employee relations to be good.

LEGAL PROCEEDINGS

From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations, financial condition or cash flows.

TRADEMARKS

The Company owns various trademarks, including "Chuck E. Cheese" and
"ShowBiz Pizza Place," that are used in connection with the restaurants and have
been registered with the United States Patent and Trademark Office. The duration
of such trademarks is unlimited, subject to continued use. The Company believes
that it holds the necessary rights for protection of the marks essential to the
conduct of its present restaurant operations.

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<PAGE> 23

GOVERNMENT REGULATION

The development and operation of Chuck E. Cheese's restaurants are subject
to various federal, state and local laws and regulations, including but not
limited to those that impose restrictions, levy a fee or tax, or require a
permit or license on the service of alcoholic beverages and the operation of
games and rides. The Company is subject to the Fair Labor Standards Act, the
Americans With Disabilities Act and family leave mandates. A significant portion
of the Company's restaurant personnel are paid at rates related to the minimum
wage established by federal and state law. Increases in such minimum wage result
in higher labor costs to the Company, which may be partially offset by price
increases and operational efficiencies.

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<PAGE> 24

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
current executive officers and directors of the Company. It is anticipated that
Messrs. Crocco, Gumbiner, Lynch, Talbot and Troup, each of whom is affiliated
with Hallwood, will resign from the Company's Board of Directors upon the
closing of the offering.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard M. Frank...................... 49 Chairman of the Board and Chief
Executive Officer
Michael H. Magusiak................... 40 President and Director
Richard T. Huston..................... 50 Executive Vice President -- Marketing
and Entertainment
Larry G. Page......................... 52 Executive Vice President, Chief
Financial Officer and Treasurer
Charles A. Crocco, Jr................. 58 Director
Anthony J. Gumbiner................... 52 Director
Robert L. Lynch....................... 79 Director
Louis P. Neeb......................... 58 Director
Cynthia I. Pharr...................... 48 Director
J. Thomas Talbot...................... 61 Director
Brian M. Troup........................ 50 Director
</TABLE>

The business experience of each of the executive officers and directors who
are anticipated to continue in office after the closing of the offering is set
forth below.

Richard M. Frank has been Chairman of the Board and Chief Executive Officer
of the Company since March 1986 and has been a director of the Company since
June 1985. He served as President and Chief Operating Officer from June 1985
until October 1988. He joined the Company in 1985. He has served as a director
for Monterey Acquisition Corp. since May 1994.

Michael H. Magusiak was elected President of the Company in June 1994. He
had previously served as Executive Vice President, Chief Financial Officer and
Treasurer since June 1988. He has also served as a director of the Company since
1988. He was Vice President of the Company from October 1987 to June 1988 and
Controller of the Company from October 1987 to January 1989. He joined the
Company in July 1987. He has served as a director for Monterey Acquisition Corp.
since May 1994.

Richard T. Huston has served as Executive Vice President of the Company
since July 1986 and as Director of Marketing and Strategic Development since
January 1993. His responsibilities were expanded in June 1994 to include
entertainment as well as marketing. He served as Director of Marketing and
Development from October 1988 to January 1993. He served as Vice President from
October 1985 to July 1986, as Director of Marketing from October 1985 to October
1988, and as a director from July 1986 to September 1988. He joined the Company
in 1985.

Larry G. Page has served as Executive Vice President, Chief Financial
Officer and Treasurer of the Company since October 1994. Prior to joining the
Company, Mr. Page served as Vice President and Regional General Manager in the
retail services division of Comdata Holdings Corporation, a publicly-held
financial services company, from July 1985 to October 1994. Mr. Page is a
Certified Public Accountant and was a partner in various national and regional
public accounting firms, including Arthur Andersen LLP, from August 1978 through
July 1985.

Louis P. Neeb was elected as a director in August 1994. Mr. Neeb has served
as Chairman of the Board and CEO of Casa Ole' Restaurants, Inc. from October
1995 to the present. From August 1982 to the present, Mr. Neeb has been
President of Neeb Enterprises, Inc., a management consulting firm specializing
in restaurants. From October 1993 through January 1994, he was Chairman of the
Board of Spaghetti Warehouse, Inc., a

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<PAGE> 25

publicly-traded restaurant company. From July 1991 through January 1994, Mr.
Neeb was President and Chief Executive Officer of Spaghetti Warehouse, Inc. Mr.
Neeb has also had other extensive experience in the restaurant industry,
including serving as Chairman of the Board of Burger King Corporation. Mr. Neeb
is a member of the Board of Directors of the Franchise Finance Corporation of
America, a publicly-traded real estate trust which provides real estate for
restaurants.

Cynthia I. Pharr was elected as a director of the Company in August 1994.
She is currently President and owner of C. Pharr & Company, a communications
management consulting firm. She has served in that position since March 1993.
From May 1989 through February 1993, Ms. Pharr was President and Chief Executive
Officer of Tracy -- Locke/Pharr P R, a public relations firm. From August 1986
through April 1989, she was President and owner of C. Pharr & Company, Inc. a
public relations agency. Ms. Pharr has served as a member of the Board of
Directors of Spaghetti Warehouse, Inc. since August 1991, as well as Chairman of
the Board of GuestCare, Inc., a privately held technology company, from February
1994 to the present.

Except as set forth above, none of the continuing directors of the Company
hold directorships in any company with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or
subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.

It is anticipated that after the closing of the offering, the number of
directors constituting the entire Board of Directors will be reduced to seven
from nine, and that the four directors remaining after the anticipated
resignations of Messrs. Crocco, Gumbiner, Lynch, Talbot and Troup will elect
three new directors to fill the vacancies created by these resignations, which
are anticipated to be effective upon the closing of the offering.

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<PAGE> 26

SELLING STOCKHOLDERS

The following table sets forth the number and percentage of outstanding
shares of Common Stock beneficially owned by the Selling Stockholders and the
number of Shares to be sold by each Selling Stockholder in the offering.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING COMMON
STOCK
-----------------------
NUMBER OF SHARES SHARES TO BEFORE AFTER
NAME AND ADDRESS OF SELLING STOCKHOLDER BEFORE OFFERING(1) BE SOLD(2) OFFERING OFFERING(3)
--------------------------------------- ------------------ ---------- -------- -----------
<S> <C> <C> <C> <C>
The Hallwood Group Incorporated(4).......... 2,632,983 2,305,371 14.2% 1.8%
3710 Rawlins, Suite 1500
Dallas, TX 75219
Alpha Trust(5).............................. 613,058 536,778 3.3 *
c/o Radcliffes Trustee Company SA
9 Rue Charles Humbert
1205 Geneva, Switzerland
Epsilon Trust(5)............................ 408,705 357,851 2.2 *
c/o Radcliffes Trustee Company SA
9 Rue Charles Humbert
1205 Geneva, Switzerland
</TABLE>

- - ---------------

* Less than one percent.

(1) Hallwood has agreed to purchase, prior to the closing of the offering,
219,194 total shares of Common Stock from Alpha Trust and Epsilon Trust. The
Number of Shares Before Offering reflects the consummation of such
purchases.

(2) Excludes 327,612 shares owned by Hallwood, 76,280 shares owned by Alpha
Trust and 50,854 owned by Epsilon Trust subject to the Underwriters'
over-allotment option.

(3) Assumes no exercise of the Underwriters' over-allotment option, which, if
exercised in full, would result in no share ownership after the Offering by
the Selling Stockholders.

(4) The directors of Hallwood are Anthony J. Gumbiner, Brian M. Troup, Charles
A. Crocco, Jr., Robert L. Lynch and J. Thomas Talbot. Mr. Gumbiner is
Chairman of the Board and Chief Executive Officer of Hallwood. Mr. Troup is
President and Chief Operating Officer of Hallwood. The Company has been
informed that a portion of such Shares are pledged as collateral to secure
certain obligations of Hallwood. Arrangements have been made for the release
of such liens contemporaneously with the closing of the offering.

(5) Mr. Gumbiner has the power to designate and replace the trustees of Alpha
Trust. Mr. Troup has the power to designate and replace the trustees of
Epsilon Trust. The Company has been informed that a portion of such Shares
are pledged as collateral to secure certain obligations of Alpha Trust and
Epsilon Trust. Arrangements have been made for the release of such liens
contemporaneously with the closing of the offering. The record holder of the
Shares of Alpha Trust and Epsilon Trust is RTC Nominees AG.

The Company and Hallwood entered into a Financial and Management Consulting
Services Agreement (the "Consulting Agreement"), dated as of December 1, 1988,
pursuant to which Hallwood provides a variety of non-exclusive financial and
managerial consulting services to the Company. Such services include corporate
finance and acquisition analysis on an "as requested" basis. Pursuant to the
terms of the Consulting Agreement, the Company pays Hallwood $125,000 per year.
The Consulting Agreement will be terminated upon the closing of this offering.

In connection with this offering, the Company entered into an agreement
with the Selling Stockholders providing for the registration of the Common Stock
owned by the Selling Stockholders. Such agreement obligates the Selling
Stockholders to pay, or hold the Company harmless from, all expenses of the
offering other than legal and accounting fees incurred by the Company and the
Company's out-of-pocket expenses.

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<PAGE> 27

Hallwood has advised the Company that it has determined to sell the Shares
offered hereby at this time to repay debt, utilize expiring federal income tax
net operating loss carryforwards and focus on core investments actively managed
by Hallwood.

DESCRIPTION OF CAPITAL STOCK

The description set forth below does not purport to be complete and is
qualified in its entirety by reference to the Restated Articles of Incorporation
(the "Articles of Incorporation") and the Restated Bylaws (the "Bylaws") of the
Company.

GENERAL

The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, 49,570 shares of Class A Preferred Stock, par value $60.00 per
share (the "Class A Preferred Stock"), and 500,000 shares of Class B Preferred
Stock, par value $100.00 per share (the "Class B Preferred Stock"). As of
December 27, 1996, there were 18,409,899 shares of Common Stock outstanding,
49,570 shares of Class A Preferred Stock outstanding, no shares of Class B
Preferred Stock outstanding and 1,821,026 shares of Common Stock reserved and
available for issuance under the 1988 Non-Statutory Stock Option Plan,
Non-Employee Directors Stock Option Plan and Stock Grant Plan.

COMMON STOCK

The rights of the holders of the Common Stock discussed below are subject
to such rights as the Board of Directors may hereafter confer on the holders of
preferred stock; accordingly, rights conferred on holders of preferred stock
issued under the Articles of Incorporation may adversely affect the rights of
holders of the Common Stock.

Subject to the right of holders of preferred stock, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor, at such times and in such amounts as the
Board of Directors may from time to time determine. See "Price Range of Common
Stock and Dividend Policy." The shares of Common Stock are neither redeemable
nor convertible and the holders thereof have no preemptive or subscription
rights to purchase any securities of the Company. Upon liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to
receive, pro rata, the assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of preferred stock then outstanding. Each
outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders. The Articles of Incorporation provide that
prior to December 31, 2002, no transfer of shares of Common Stock to any person
holding greater than 4.75% of the outstanding Common Stock or who, after any
transfer, would own in excess of 4.75% of the outstanding Common Stock is
permitted without the written consent of the Board of Directors.

PREFERRED STOCK

Dividends. Holders of Class A Preferred Stock are currently entitled to
receive when, as and if declared by the Board of Directors of the Company, cash
dividends equal to $1.20 per share per quarter. At December 27, 1996, dividends
of $1.20 per share, aggregating $59,484, have been declared but not yet paid.
Unpaid dividends on the Class A Preferred Stock cumulate and must be paid before
any distribution (other than in Common Stock or Class B Preferred Stock) is made
to holders of Common Stock or Class B Preferred Stock.

Liquidation. In the event of the liquidation, dissolution or winding up of
the Company, the holders of the Class A Preferred Stock are entitled to be paid
$60.00 per share plus all cumulated unpaid dividends thereon before any
distribution or payment is made to the holders of Common Stock or Class B
Preferred Stock.

Redemption of Class A Preferred Stock. The Company may, at any time or from
time to time, voluntarily redeem all or a part of the outstanding Class A
Preferred Stock at a redemption price of $60.00 per share plus the amount of all
cumulated unpaid dividends thereon. Because more than 90% of the shares of Class
A Preferred Stock has previously been reacquired by the Company, the Company
believes that it has satisfied all mandatory

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<PAGE> 28

redemption requirements until the year 2005. The Company must redeem, or
repurchase in the open market, all outstanding shares of the Class A Preferred
Stock no later than December 31, 2005. There is no restriction on the repurchase
or redemption of shares by the Company while there is an arrearage in payment of
dividends.

Voting. Except as described below or as required by law, the holders of
shares of the Class A Preferred Stock and Common Stock each have one vote for
each share so held and vote together and not as separate classes on matters
submitted to a vote of the stockholders of the Company. With respect only to the
election of directors, under applicable Kansas law, a holder of Common Stock or
Class A Preferred Stock is entitled to cumulate his votes for any candidate and
to spread his votes, so cumulated, among as many candidates per election and in
such manner as he may see fit.

The vote of the holders of two-thirds of the outstanding shares of the
Class A Preferred Stock is required: (a) to amend the liquidation and dividend
preferences of the Class A Preferred Stock or otherwise to amend the Articles of
Incorporation in a manner that would materially adversely affect the holders of
the Class A Preferred Stock; (b) to increase the authorized number of shares of
the Class A Preferred Stock; (c) to create any new class of stock having any
preferences over or being on a par with the Class A Preferred Stock as to
dividends, redemption or liquidation; (d) to create classes of preferred stock
junior to the Class A Preferred Stock unless certain dividend, redemption and
conversion price restrictions are met; (e) to merge or consolidate with any
other corporation; or (f) to sell, convey or otherwise dispose of all or
substantially all of the property or business of the Company.

Miscellaneous. The following provisions of the Articles of Incorporation
and Bylaws may have the effect of delaying or inhibiting any attempts to take
control of the Company: (i) the classification of directors of the Company and
provisions in the Articles of Incorporation and Bylaws that protect the
classification provisions from amendment, (ii) the authorized Class B Preferred
Stock with respect to which the Board of Directors retains the power to issue
and to determine voting rights, (iii) the restriction contained in the Articles
of Incorporation on the transfer of shares of Common Stock to any person holding
greater than 4.75% of the outstanding Common Stock or who, after any transfer,
would own in excess of 4.75% of the outstanding Common Stock, and (iv) the
requirement of a favorable class vote of the holders of two-thirds of the
outstanding shares of Class A Preferred Stock to approve any merger,
consolidation or sale, conveyance or other disposition of all or substantially
all of the Company's property or business.

Upon the occurrence and during the continuance of any event of default (as
defined in the Articles of Incorporation), the number of directors constituting
the board of directors of the Company shall, at a meeting of stockholders
requested by the holders of 5% or more of the Class A Preferred Stock, be
reduced or increased, as the circumstances shall require, to five, and the
holders of the Class A Preferred Stock, voting together as a class, shall be
entitled to elect three of such directors, and the holders of the Common Stock
and Class B Preferred Stock, voting together as a class, shall be entitled to
elect the remaining two.

Shares of the Class A Preferred Stock are not convertible into shares of
Common Stock. All of the outstanding shares of Common Stock and the Class A
Preferred Stock have been validly issued and are fully paid, and nonassessable.
The holders of the Class A Preferred Stock, Common Stock and Class B Preferred
Stock have no preemptive rights. The Articles of Incorporation further provide
that the Company shall not authorize or issue any class or series of nonvoting
equity securities.

INDEMNIFICATION FOR CERTAIN LIABILITIES

The Bylaws of the Company provide for each director and officer of the
Company to be indemnified by the Company, as of right, to the full extent
permitted or authorized by the laws of the State of Kansas against any
liability, judgment, fine, amount paid in settlement, cost and expense asserted
or threatened against and incurred by such person in his capacity as or arising
out of his status as a director or officer.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling the Company, pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission (the "Commis-

28
<PAGE> 29

sion") such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.

CERTAIN EFFECTS OF AUTHORIZED AND UNISSUED STOCK

The unissued and unreserved shares of capital stock may be issued for a
variety of proper corporate purposes, including future private or public
offerings to raise additional capital or facilitate acquisitions. The Company's
Board of Directors currently does not have any plans to issue additional shares
of Common Stock or Preferred Stock (other than in connection with the 1988
Non-Statutory Stock Option Plan, Non-Employee Directors Stock Option Plan and
the Stock Grant Plan).

One of the effects of the existence of such unissued and unreserved shares
may be to enable the Company's Board of Directors to discourage an attempt to
change control of the Company and thereby to protect the continuity of the
Company's management. The issuance of shares of Class A Preferred Stock, whether
or not related to any attempt to effect change in control, may adversely affect
the rights of the holders of shares of Common Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Boston Equiserve
Limited Partnership.

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<PAGE> 30

CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

A general discussion of certain United States federal income and estate tax
consequences of the ownership and disposition of Common Stock applicable to
Non-U.S. Holders (as defined) of Common Stock is set forth below. In general, a
"Non-U.S. Holder" is a person other than: (i) a citizen or resident (as defined
for United Stated federal income or estate tax purposes of the United States;
(ii) a corporation or partnership created or organized in the United States or
under the laws of the United States or of any state thereof; or (iii) an estate
or trust the income of which is subject to United States federal income taxation
regardless of its source. The discussion is based on current law and is provided
for general information only. The discussion does not address all aspects of
United States federal income and estate taxation. The discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder and does not address all aspects of United States federal income
or estate tax law that may be relevant to Non-U.S. Holders that may be subject
to special treatment under such law (for example, insurance companies,
tax-exempt organizations, financial institutions or broker-dealers).
ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. CURRENT AND
POSSIBLE FUTURE INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING OF
COMMON STOCK.

DIVIDENDS

In general, the gross amount of dividends paid to a Non-U.S. Holder will be
subject to United States withholding tax at a 30% rate (or any lower rate
prescribed by an applicable tax treaty) unless the dividends are effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States. In determining the applicability of a tax treaty that provides
for a lower rate of withholding, dividends paid to an address in a foreign
country are presumed under current regulations of the Treasury Department to be
paid to a resident of that country unless the payor has knowledge to the
contrary. Under proposed Treasury regulations, however, a Non-U.S. Holder would
be required to file certain forms in order to claim the benefit of an applicable
treaty rate. Withholding will not apply to dividends effectively connected with
a trade or business carried on in the United States by a Non-U.S. Holder who
properly files Internal Revenue Service Form 4224 with the payor of the
dividends. Such dividends will generally be subject to United States federal
income tax at ordinary federal income tax rates. However, effectively connected
dividends may be taxed at ordinary federal income tax rates under an applicable
tax treaty only if such dividends are attributable to a permanent establishment
of the Non-U.S. holder in the United States. In the case of a Non-U.S. Holder
which is a corporation, effectively connected income may be subject to the
branch profits tax (which is generally imposed on a foreign corporation at a
rate of 30% of the "effectively connected earnings and profits") except to the
extent that an applicable tax treaty provides otherwise. A Non-U.S. Holder
eligible for a reduced rate of United States withholding tax pursuant to an
income tax treaty may obtain a refund of any excess amounts withheld by filing
an appropriate claim for refund with the Internal Revenue Service. If a Non-U.S.
Holder is a partnership, a withholding rate in excess of 30% may apply. Although
no withholding would apply to effectively connected dividends paid to a foreign
partnership engaged in a United States trade or business, the foreign
partnership generally will be required to withhold tax on any effectively
connected dividend includible in the distributive share of partnership income of
a partner who is a Non-U.S. Holder, whether or not distributed, at the highest
applicable rate of United States taxation. Different withholding requirements
may apply to partnerships, the interests of which are publicly traded, and those
partnerships are advised to consult their tax advisors. The proposed Treasury
regulations, if adopted in their present form, would require withholding at the
rate of 31% on dividends unless the foreign partnership furnished an
"intermediary withholding certificate" containing the appropriate withholding
certificate for each partner, or the foreign partnership furnished other
appropriate forms claiming exemption from or reduction in 31% withholding.
Non-U.S. Holders that are foreign partnerships are advised to consult their tax
advisors regarding the special withholding rules in the proposed Treasury
regulations.

SALE OF COMMON STOCK

Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of his Common Stock unless:
(i) the Company has been, is, or becomes a "U.S. real property

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<PAGE> 31

holding corporation" for federal income tax purposes and certain other
requirements are met; (ii) the gain is effectively connected with a trade or
business carried on by the Non-U.S. Holder (or by a partnership, trust or estate
in which the Non-U.S. Holder is a partner or beneficiary) within the United
States; or (iii) the Common Stock is disposed of by an individual Non-U.S.
Holder, who holds the Common Stock as a capital asset and is present in the
United States for a period or periods aggregating 183 days or more in the
taxable year of the disposition, and the gains are considered derived from
sources within the United States. The Company believes that it has not been, is
not currently and, based upon its current business plans, is not likely to
become a U.S. real property holding corporation. A Non-U.S. Holder also may be
subject to tax pursuant to the provisions of United States tax law applicable to
certain United States expatriates. Non-U.S. Holders should consult applicable
treaties, which may exempt from United States taxation gains realized upon the
disposition of Common Stock in certain cases.

ESTATE TAX

Common Stock owned or treated as owned (other than through a foreign
corporation) by an individual Non-U.S. Holder at the time of death (or
previously transferred subject to certain retained rights or powers) will be
includible in the individual's gross estate for United States federal estate tax
purposes, unless an applicable treaty provides otherwise, and may be subject to
United States federal estate tax.

BACKUP WITHHOLDING AND INFORMATION REPORTING

The Company may be required to report annually to the Internal Revenue
Service and to Non-U.S. Holders the amount of dividends paid to, and the tax
withheld with respect to, each Non-U.S. Holder. These information reporting
requirements apply regardless of whether withholding was reduced by an
applicable tax treaty. Copies of these information returns also may be made
available under the provisions of a specific treaty or agreement to the tax
authorities in the country in which the Non-U.S. Holder resides or is
established. United States backup withholding tax (which generally is a
withholding tax imposed at the rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting and backup withholding rules) generally will not apply to dividends
paid on Common Stock to a Non-U.S. Holder at an address outside the United
States, absent actual knowledge by the payor that the payee is not a Non-U.S.
Holder. Backup withholding and information reporting generally will apply to
dividends paid on Common Stock to a Non-U.S. Holder at an address inside the
United States unless such Non-U.S. Holder is an "exempt recipient" and provides
information required under such information reporting and backup withholding
rules.

The payment of the proceeds from the disposition of Common Stock to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Holder or otherwise
establishes an exemption. The payment of the proceeds from the disposition of
Common Stock to or through a foreign office of a non-United States broker will
not be subject to backup withholding and generally will not be subject to
information reporting. Unless the broker has documentary evidence in its files
that the owner is a Non-U.S. Holder and certain other conditions are met, or the
owner otherwise establishes an exemption, information reporting generally will
apply to dispositions through (a) a non-United States office of a United States
broker and (b) a non-United States office of a non-United States broker that is
either a "controlled foreign corporation" for United States federal income tax
purposes or a person 50% or more of whose gross income from all sources for a
three year testing period was effectively connected with a United States trade
or business.

The backup withholding and information reporting rules are currently under
review by the Treasury Department and their application to the Common Stock is
subject to change.

Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder may be allowed as a credit against such Non-U.S. Holder's United
States federal income tax and any amounts withheld in excess of such Non-U.S.
Holder's United States federal income tax liability may be refunded, provided
that required information is furnished to the Internal Revenue Service.

31
<PAGE> 32

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated March 20, 1997 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation and Principal Financial Securities, Inc. are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Selling Stockholders the following respective numbers of
Shares:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,652,000
Principal Financial Securities, Inc. ....................... 708,000
Alex. Brown & Sons Incorporated............................. 80,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 80,000
Equitable Securities Corporation............................ 80,000
Everen Securities, Inc...................................... 40,000
Fahnestock & Co. Inc........................................ 40,000
Hanifen, Imhoff Inc......................................... 40,000
Invemed Associates, Inc..................................... 80,000
Johnson Rice & Company L.L.C................................ 40,000
Montgomery Securities....................................... 80,000
Morgan Keegan & Company, Inc................................ 40,000
Robertson, Stephens & Company LLC........................... 80,000
Sanders Morris Mundy........................................ 40,000
Schroder Wertheim & Co. Incorporated........................ 80,000
Wheat, First Securities, Inc................................ 40,000
---------
Total............................................. 3,200,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Shares offered hereby
(other than those Shares covered by the over-allotment option described below)
if any are purchased. The Underwriting Agreement provides that, in the event of
a default by an Underwriter in certain circumstances, the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.

The Selling Stockholders have granted to the Underwriters an option
expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 454,746 additional shares of Common Stock (the
"Option Shares") at the initial public offering price, less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. Such option may be exercised only to cover over-allotments, if any,
in the sale of the Shares. To the extent that this option to purchase is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of Option Shares as
the number of Shares set forth next to such Underwriter's name in the preceding
table bears to the sum of the total number of Shares in such table it was
obligated to purchase pursuant to the Underwriting Agreement.

The Selling Stockholders have been advised by the Representatives that the
Underwriters propose to offer the Shares to the public initially at the public
offering price set forth on the cover page of this Prospectus and, through the
Representatives, to certain dealers at such price less a concession of $.50 per
Share, and the Underwriters and such dealers may allow a discount of $.10 per
Share on sales to other dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
Representatives.

The Company, certain of its executive officers and directors and the
Selling Stockholders have agreed that none of them will, directly or indirectly,
offer, sell, announce its intention to sell, contract to sell, pledge,
hypothecate, grant any option to purchase or otherwise dispose of, or file with
the Commission a registration

32
<PAGE> 33

statement under the Securities Act relating to, any shares of Common Stock or
securities convertible or exchangeable into or exercisable for any shares of
Common Stock without the prior written consent of Credit Suisse First Boston
Corporation, for a period of 90 days after the date of this Prospectus, subject
to certain limited exceptions.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters, may be
required to make in respect thereof.

The Selling Stockholders have agreed to pay certain expenses of the
offering. See "Selling Stockholders."

Credit Suisse First Boston Corporation has provided certain financial
advisory and investment banking services to the Company and Hallwood in the past
for which it has received usual and customary fees.

Principal Financial Securities, Inc. has provided certain financial
advisory and investment banking services to Hallwood in the past for which it
has received usual and customary fees.

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Shares in the open market after the
distribution has been completed in order to cover syndicate short positions. In
"passive" market making, market makers in the Shares who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for
purchases of the Shares until the time, if any, at which a stabilizing bid is
made. Penalty bids permit the Representatives to reclaim a selling concession
from a syndicate member when the Shares originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Shares to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Shares in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Shares are effected. Accordingly, any resale of the Shares in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Shares.

REPRESENTATIONS OF PURCHASERS

Each purchaser of Shares in Canada who receives a purchase confirmation
will be deemed to represent to the Company, the Selling Stockholders and the
dealer from whom such purchase confirmation is received that (i) such purchaser
is entitled under applicable provincial securities laws to purchase such Shares
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".

33
<PAGE> 34

RIGHTS OF ACTION AND ENFORCEMENT

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Shares to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Shares
acquired by such purchaser pursuant to this offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of Shares acquired on the same date and under the same
prospectus exemption.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Shares will be
passed upon for the Company by Winstead Sechrest & Minick P.C., Dallas, Texas.
The Underwriters have been represented by Fulbright & Jaworski L.L.P., Dallas,
Texas.

EXPERTS

The Consolidated Financial Statements of the Company as of December 29,
1995 and December 27, 1996 and for each of the three years in the period ended
December 27, 1996, included in this Prospectus and incorporated by reference
herein, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a change in the method of accounting for
preopening expenses in 1994) which is included and incorporated by reference
herein, and has been included and incorporated herein in reliance upon the
report of such firm as given upon its authority as experts in accounting and
auditing.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, filed by the Company with the Commission under the
Exchange Act, are incorporated in this Prospectus by reference:

(a) The Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 27, 1996;

(b) The Company's Current Report on Form 8-K filed with the Commission
on March 11, 1997, as amended; and

(c) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed with the Commission on
November 19, 1993.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the shares offered hereby

34
<PAGE> 35

shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the date of filing of such documents. Any statement contained
in this Prospectus or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus. The Company will provide without charge
to each person to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written request for
such copies should be directed to Mr. Larry Page, Executive Vice President and
Chief Financial Officer, ShowBiz Pizza Time, Inc., 4441 West Airport Freeway,
Irving, Texas 75062, telephone number (972) 258-8507.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Shares. This Prospectus, which forms a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the Shares, reference is
made to the Registration Statement. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete
and, where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions in
such exhibit, to which reference is hereby made. Copies of the Registration
Statement may be examined without charge at the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the
Commission's Regional Offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any portion of the Registration
Statement can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees
prescribed by the Commission, or from the Commission's Web site
(http://www.sec.gov), which contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files periodic reports, proxy
statements and other information with the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of the reports, proxy statements and information
so filed can be obtained from the Public Reference Section of the Commission,
upon payment of certain fees prescribed by the Commission or from the
Commission's Web site. The Company's Common Stock is traded on the Nasdaq
National Market. The foregoing material is available for inspection at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.

35
<PAGE> 36

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 29, 1995 and
December 27, 1996......................................... F-3
Consolidated Statements of Earnings for the years ended
December 30, 1994, December 29, 1995 and December 27,
1996...................................................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 30, 1994, December 29, 1995 and
December 27, 1996......................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 30, 1994, December 29, 1995 and December 27,
1996...................................................... F-6
Notes to Consolidated Financial Statements for the years
ended December 30, 1994, December 29, 1995 and December
27, 1996.................................................. F-7
</TABLE>

F-1
<PAGE> 37

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 27, 1996 and December 29, 1995
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three years in the period ended December 27, 1996.
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 27, 1996 and December 29, 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1996, in conformity with generally accepted accounting
principles.

As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for preopening costs in 1994.

DELOITTE & TOUCHE LLP

Dallas, Texas
February 21, 1997

F-2
<PAGE> 38

SHOWBIZ PIZZA TIME, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1995 AND DECEMBER 27, 1996
(THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 27,
1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,589 $ 3,402
Accounts receivable, including receivables from related
parties of $415 and $675, respectively................. 3,327 3,543
Current portion of notes receivable, including receivables
from related parties of $327 and $221, respectively.... 608 457
Inventories............................................... 3,589 3,368
Prepaid expenses.......................................... 2,781 3,185
Current portion of deferred tax asset..................... 4,147 13,633
-------- --------
Total current assets.............................. 20,041 27,588
-------- --------
Investments in related parties.............................. 761 1,315
-------- --------
Property and equipment...................................... 137,181 163,998
-------- --------
Deferred tax asset.......................................... 28,582 12,296
-------- --------
Other assets:
Notes receivable, less current portion, including
receivables from related parties of $1,983 and $2,323,
respectively........................................... 7,072 7,257
Other..................................................... 5,373 4,126
-------- --------
12,445 11,383
-------- --------
$199,010 $216,580
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt......................... $ 95 $ 1,785
Accounts payable and accrued liabilities.................. 29,836 31,738
-------- --------
Total current liabilities.............................. 29,931 33,523
-------- --------
Long-term debt, less current portion........................ 35,753 34,668
-------- --------
Deferred credits............................................ 3,443 3,795
-------- --------
Other liabilities........................................... 1,391 1,010
-------- --------

Commitments and contingencies

Redeemable preferred stock, $60 par value, redeemable for
$2,974 in 2005............................................ 2,005 2,108
-------- --------
Shareholders' equity:
Common stock, $.10 par value; authorized 50,000,000
shares; 21,435,092 and 21,519,075 shares issued,
respectively........................................... 2,144 2,152
Capital in excess of par value............................ 153,515 153,795
Retained earnings......................................... 4,733 17,613
Deferred compensation..................................... (3,642) (1,821)
Less treasury shares of 3,109,176 at both dates, at
cost................................................... (30,263) (30,263)
-------- --------
126,487 141,476
-------- --------
$199,010 $216,580
======== ========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 39

SHOWBIZ PIZZA TIME, INC.

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 29, 1995 AND DECEMBER 27, 1996
(THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Food and beverage revenues.................................. $189,257 $182,376 $202,624
Games and merchandise revenues.............................. 74,331 76,969 86,444
Franchise fees and royalties................................ 4,078 3,464 3,675
Interest income, including related party income of $209,
$222 and $246, respectively............................... 688 872 1,051
Joint venture income........................................ 161 102 196
-------- -------- --------
268,515 263,783 293,990
-------- -------- --------
Costs and expenses:
Cost of sales............................................. 137,729 136,700 143,381
Selling, general and administrative expenses, including
related party expenses of $125 in each year............ 47,263 44,794 43,534
Depreciation and amortization............................. 26,032 23,184 25,057
Interest expense.......................................... 1,861 3,118 3,476
(Gain) loss on property transactions...................... (2,597) 136 263
Other operating expenses.................................. 55,114 55,476 56,058
-------- -------- --------
265,402 263,408 271,769
-------- -------- --------
Income before income taxes.................................. 3,113 375 22,221
Income taxes:
Current expense........................................... 869 701 2,855
Deferred (benefit) expense................................ 1,568 (389) 6,145
-------- -------- --------
2,437 312 9,000
-------- -------- --------
Net income.................................................. $ 676 $ 63 $ 13,221
======== ======== ========
Earnings per common and common equivalent share:
Primary:
Net income (loss)...................................... $ .02 $ (.02) $ .70
======== ======== ========
Weighted average shares outstanding.................... 18,191 18,098 18,477
======== ======== ========
Fully diluted:
Net income (loss)...................................... $ .02 $ (.02) $ .70
======== ======== ========
Weighted average shares outstanding.................... 18,191 18,098 18,532
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 40

SHOWBIZ PIZZA TIME, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 29, 1995 AND DECEMBER 27, 1996
(THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
COMMON TREASURY
STOCK CAPITAL IN DEFERRED STOCK
------------------- EXCESS OF RETAINED COMPEN- ------------------
SHARES PAR VALUE PAR VALUE EARNINGS SATION SHARES COST
------ --------- ---------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993..................... 21,425 $2,143 $156,511 $ 4,677 $(9,934) 1,569 $(16,750)
Net income.................................... 676
Redeemable preferred stock accretion.......... (103)
Redeemable preferred stock dividends, $4.80
per share................................... (238)
Stock options exercised....................... 81 8 232
Tax expense from exercise of stock options and
stock grants................................ (928)
Treasury stock acquired....................... 1,540 (13,513)
Amortization of deferred compensation......... 2,734
------ ------ -------- ------- ------- ----- --------
Balances, December 30, 1994..................... 21,506 2,151 155,815 5,012 (7,200) 3,109 (30,263)
Net income.................................... 63
Redeemable preferred stock accretion.......... (104)
Redeemable preferred stock dividends, $4.80
per share................................... (238)
Stock options exercised....................... 19 2 88
Stock grant shares forfeited.................. (90) (9) (1,734) 1,737
Tax expense from exercise of stock options and
stock grants................................ (654)
Amortization of deferred compensation......... 1,821
------ ------ -------- ------- ------- ----- --------
Balances, December 29, 1995..................... 21,435 2,144 153,515 4,733 (3,642) 3,109 (30,263)
Net income.................................... 13,221
Redeemable preferred stock accretion.......... (103)
Redeemable preferred stock dividends, $4.80
per share................................... (238)
Stock options exercised....................... 77 7 930
Tax benefit from exercise of stock options and
stock grants................................ (655)
Amortization of deferred compensation......... 1,821
Stock issued under 401(k) plan................ 8 1 51
Stock split costs............................. (30)
Cancellation of fractional shares............. (1) (16)
------ ------ -------- ------- ------- ----- --------
Balances, December 27, 1996..................... 21,519 $2,152 $153,795 $17,613 $(1,821) 3,109 $(30,263)
====== ====== ======== ======= ======= ===== ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 41

SHOWBIZ PIZZA TIME, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 29, 1995 AND DECEMBER 27, 1996
(THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 676 $ 63 $ 13,221
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization.......................... 26,032 23,184 $ 25,057
Deferred income tax expense (benefit).................. 1,568 (389) 6,145
(Gain) loss on property transactions................... (2,597) 136 263
Compensation expense under stock grant plan............ 2,734 1,821 1,821
Other.................................................. 619 418 352
Net change in receivables, inventories, prepaids,
payables and accrued liabilities..................... 1,787 2,577 1,503
-------- -------- --------
Cash provided by operations.......................... 30,819 27,810 48,362
-------- -------- --------
Investing activities:
Purchases of property and equipment....................... (29,421) (28,277) (51,719)
Proceeds from disposition of property and equipment....... 6,725 20
Payments received on notes receivable..................... 2,992 2,503 3,534
Additions to notes receivable............................. (2,169) (3,047) (3,568)
Change in investments and other assets.................... (703) (1,747) (115)
-------- -------- --------
Cash used in investing activities...................... (22,576) (30,548) (51,868)
-------- -------- --------
Financing activities:
Proceeds from line of credit.............................. 8,535 38,895 7,600
Payments on line of credit................................ (5,235) (32,995) (6,900)
Reduction of debt and capital lease obligations........... (47) (59) 95
Redeemable preferred stock dividends...................... (238) (238) (238)
Acquisition of treasury stock............................. (13,513)
Exercise of stock options................................. 240 90 937
Other..................................................... (115) 253 15
-------- -------- --------
Cash provided by (used in) financing activities........ (10,373) 5,946 1,319
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ (2,130) 3,208 (2,187)
Cash and cash equivalents, beginning of year................ 4,511 2,381 5,589
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 2,381 $ 5,589 $ 3,402
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 42

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 29, 1995 AND DECEMBER 27, 1996

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, 1995 and 1996 are for the fiscal years ended
December 30, 1994, December 29, 1995 and December 27, 1996, respectively. Fiscal
years 1994, 1995 and 1996 were each 52 weeks in length.

Basis of consolidation:

The consolidated financial statements include the accounts of the Company
and BAC. All significant intercompany accounts and transactions have been
eliminated.

Cash and cash equivalents:

Cash and cash equivalents of the Company are composed of demand deposits
with banks and short-term cash investments with remaining maturities of three
months or less from the date of purchase by the Company.

Inventories:

Inventories of food, paper products and supplies are stated at the lower of
cost or market on a first-in, first-out basis.

Property and equipment, depreciation and amortization:

Property and equipment are stated at cost. Depreciation and amortization
are provided by charges to operations over the estimated useful lives of the
assets, or the lease term if less, by the straight-line method. During the first
quarter of 1995, the Company changed its estimate of the useful lives of certain
fixed assets. As a result of this change, income before income taxes increased
approximately $2.3 million, net income increased approximately $1.4 million and
earnings per share increased approximately $.12 in 1995.

Deferred charges and related amortization:

In the fourth quarter of 1994, the Company revised its estimate of the
future benefit for preopening expenses. As a result, the Company expensed all
unamortized preopening expenses of approximately $900,000. The Company now
expenses all preopening expenses as incurred. Previously, preopening expenses
were amortized over a two year period. Other deferred charges are amortized over
various periods of up to five years. All amortization is provided by the
straight-line method, which approximates the interest 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.

F-7
<PAGE> 43

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Impairment of intangibles and long-lived assets:

Impairment losses are recognized if the future cash flows expected to be
generated by intangibles and long-lived assets are less than the carrying value
of the assets. The impairment loss is equal to the amount by which the carrying
value of the assets exceeds the fair value of the assets.

Use of estimates and assumptions:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Accounting for stock-based compensation:

The Company has elected to not apply the accounting provisions of the
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" issued by the Financial Accounting Standards Board ("SFAS 123") .
In 1996, the Company implemented the disclosure provisions of SFAS 123 (Note
19).

Earnings per share:

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" effective for years ending
after December 15, 1997. The Company does not believe that adoption will have a
material impact on historical earnings per share.

2. SIGNIFICANT TRANSACTIONS:

In September 1996, the Company purchased from its largest franchisee 19
restaurants plus the 49% minority interest of one restaurant previously operated
as a joint venture by the Company and seller. In addition to the cash purchase
price of $2.6 million, the Company reimbursed the seller for remodeling costs
for three restaurants which had been recently remodeled. The Company assumed no
liabilities under the asset purchase. Results of operations for the assets
purchased are included in the Company's results from the date of this
acquisition.

Effective May 5, 1994, the Company sold its Monterey's Tex-Mex Cafe
restaurants for an aggregate purchase price consisting of approximately $6.7
million in cash, $4.7 million in subordinated promissory notes and the retention
of a 12 1/2% equity interest in the acquiring company. Due to the Company's
substantial equity interest, the acquiring company is a related party subsequent
to the transaction. Revenues from the Company's Monterey's Tex-Mex Cafe
restaurants were $6.5 million in 1994. Income before income taxes was $6.3
million in 1994 including a gain of $5.5 million from the sale.

The Company provided for a loss of approximately $2.3 million in 1994 as a
result of the Company's decision to close one Chuck E. Cheese's restaurant and
the impairment in fair value of the fixed assets of 10 Chuck E. Cheese's
restaurants. The impairment in fair value of the 10 restaurants was 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.

F-8
<PAGE> 44

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACCOUNTS RECEIVABLE:

<TABLE>
<CAPTION>
1995 1996
------ ------
(THOUSANDS)
<S> <C> <C>
Trade....................................................... $ 516 $ 538
Other....................................................... 2,886 3,025
------ ------
3,402 3,563
Less allowance for doubtful collection...................... (75) (20)
------ ------
$3,327 $3,543
====== ======
</TABLE>

4. NOTES RECEIVABLE:

The Company's notes receivable at December 29, 1995 and December 27, 1996
arose principally as a result of the sale of restaurants, lines of credit
established with the International Association of ShowBiz Pizza Time
Restaurants, Inc., a related party (Note 18), and advances to franchisees, joint
ventures and managed properties. All obligors under the notes receivable are
principally engaged in the restaurant industry. The notes have various terms,
but most are payable in monthly installments of principal and interest through
2001, with interest rates ranging from 7.5% to 12.0%. The notes are generally
collateralized by the related property and equipment. Balances of notes
receivable are net of an allowance for doubtful collection of $354,000 and
$174,000 at December 29, 1995 and December 27, 1996, respectively.

5. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
ESTIMATED
LIVES 1995 1996
---------- -------- ---------
(IN YEARS) (THOUSANDS)
<S> <C> <C> <C>
Land and improvements.............................. 0-20 $ 4,630 $ 5,208
Leasehold improvements............................. 4-20 118,041 135,201
Buildings and improvements......................... 4-25 8,789 9,161
Furniture, fixtures and equipment.................. 2-15 97,703 120,688
Property leased under capital leases (Note 7)...... 10-15 1,328 1,328
-------- ---------
230,491 271,586
Less accumulated depreciation and amortization..... (94,781) (108,345)
-------- ---------
135,710 163,241
Construction in progress........................... 1,471 757
-------- ---------
$137,181 $ 163,998
======== =========
</TABLE>

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

<TABLE>
<CAPTION>
1995 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $12,851 $13,240
Salaries and wages.......................................... 4,215 4,292
Insurance................................................... 8,805 8,714
Taxes, other than income.................................... 2,561 3,037
Other....................................................... 1,404 2,455
------- -------
$29,836 $31,738
======= =======
</TABLE>

F-9
<PAGE> 45

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. 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 7 to 30 years with various renewal options.

Following is a summary of property leased under capital leases:

<TABLE>
<CAPTION>
1995 1996
------ ------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements.................................. $1,328 $1,328
Less accumulated depreciation............................... (877) (982)
------ ------
$ 451 $ 346
====== ======
</TABLE>

Scheduled annual maturities of the obligations for capital and operating
leases as of December 27, 1996, are as follows:

<TABLE>
<CAPTION>
YEARS CAPITAL OPERATING
- - ----- ------- ---------
(THOUSANDS)
<S> <C> <C> <C>
1997.............................................................. $ 292 $ 28,270
1998.............................................................. 256 26,419
1999.............................................................. 184 24,731
2000.............................................................. 187 23,073
2001.............................................................. 214 20,348
2002-2009 (aggregate payments).................................... 838 27,076
------ --------
Minimum future lease payments..................................... 1,971 $149,917
========
Less amounts representing interest................................ (918)
------
Present value of future minimum lease payments.................... 1,053
Less current portion.............................................. (117)
------
$ 936
======
</TABLE>

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:

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Minimum............................................... $28,003 $28,730 $30,484
Contingent............................................ 216 146 195
------- ------- -------
$28,219 $28,876 $30,679
======= ======= =======
</TABLE>

F-10
<PAGE> 46

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT:

<TABLE>
<CAPTION>
1995 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Term loans, 10.02%, due June 2001........................... $18,000 $18,000
Term loans, LIBOR plus 3.5%, due June 2000.................. 10,000 10,000
Term loans, LIBOR plus 3.5%, due October 1997............... 5,000
Revolving bank loan, prime plus 0% to .5% or LIBOR plus 2%
to 3%, due June 1998...................................... 1,700 7,400
Obligations under capital leases (Note 7)................... 1,148 1,053
------- -------
35,848 36,453
Less current portion........................................ (95) (1,785)
------- -------
$35,753 $34,668
======= =======
</TABLE>

In August 1996, the Company's line of credit agreement was amended to
provide the Company with available borrowings of up to $15 million expiring in
June 1998. In September 1996, the Company prepaid $5 million in term notes. The
Company's credit facility totals $43 million, which consists of $28 million in
term notes and the $15 million line of credit. Interest under the line of credit
is dependent on earnings and debt levels of the Company. Currently, any
borrowings under this line of credit would be at prime (8.25% at December 27,
1996) plus 0% or, at LIBOR (5.5% at December 27, 1996) plus 2%. At December 27,
1996, $7.4 million was outstanding under the line of credit. A 3/8% commitment
fee is payable on any unused credit line. The Company is required to comply with
certain financial ratio tests during the terms of the loan agreements.

As of December 27, 1996, scheduled annual maturities of all long-term debt
(exclusive of obligations under capital leases) are as follows (thousands):

<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1997........................................................ $ 1,668
1998........................................................ 10,732
1999........................................................ 9,333
2000........................................................ 7,667
2001........................................................ 6,000
-------
$35,400
=======
</TABLE>

9. 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 27, 1996, such guarantees aggregated approximately
$142,000.

10. LITIGATION:

F-11
<PAGE> 47

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. REDEEMABLE PREFERRED STOCK:

As of December 27, 1996, 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 27, 1996, 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.

12. EARNINGS PER COMMON SHARE:

Earnings per common and common equivalent share were computed based on the
weighted average number of common and dilutive 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 (adjusted for a
three-for-two stock split effected May 22, 1996) were computed as follows
(thousands, except per share data):

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net income............................................ $ 676 $ 63 $13,221
Accretion of redeemable preferred stock............... (103) (104) (103)
Redeemable preferred stock dividends.................. (238) (238) (238)
------- ------- -------
Adjusted income (loss) applicable to common shares.... $ 335 $ (279) $12,880
======= ======= =======
Primary:
Weighted average common shares outstanding.......... 18,117 18,098 18,207
Common equivalent shares for stock options.......... 74 270
------- ------- -------
Weighted average shares outstanding................. 18,191 18,098 18,477
======= ======= =======
Earnings (loss) per common and common equivalent
share............................................ $ .02 $ (.02) $ .70
======= ======= =======
Fully Diluted:
Weighted average common shares outstanding.......... 18,117 18,098 18,207
Common equivalent shares for stock options.......... 74 325
------- ------- -------
Weighted average shares outstanding................. 18,191 18,098 18,532
======= ======= =======
Earnings (loss) per common and common equivalent
share............................................ $ .02 $ (.02) $ .70
======= ======= =======
</TABLE>

13. FRANCHISE FEES AND ROYALTIES:

At December 27, 1996, 70 Chuck E. Cheese's restaurants were operated by a
total of 44 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, $98,000 and
$274,000 in 1994, 1995 and 1996, respectively.

F-12
<PAGE> 48

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. COST OF SALES:

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Food, beverage and related supplies................ $ 46,328 $ 43,412 $ 45,681
Games and merchandise.............................. 12,369 13,285 14,816
Labor.............................................. 79,032 80,003 82,884
-------- -------- --------
$137,729 $136,700 $143,381
======== ======== ========
</TABLE>

15. INCOME TAXES:

The significant components of income tax expense are as follows:

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
(THOUSANDS)
<S> <C> <C> <C>
Current expense............................................ $ 869 $ 701 $ 2,855
Deferred expense:
Utilization of operating loss carryforwards.............. 2,204 1,138 8,664
Net tax benefits from exercise of stock options and stock
grants................................................ (928) (654) (655)
Allowance for tax credit carryforwards expiring in
1997................................................... 1,104
Tax credits.............................................. (237) (127) (475)
Other (primarily temporary differences related to
depreciation)......................................... (575) (746) (1,389)
------ ------ -------
$2,437 $ 312 $ 9,000
====== ====== =======
</TABLE>

At December 27, 1996, the Company has recorded a deferred tax asset of
approximately $26.0 million reflecting the $17.5 million tax effect of $47.0
million in net operating loss carryforwards, $7.7 million in tax credit
carryforwards and tax effected net taxable deductions of $800,000. Realization
of the deferred tax asset is dependent on generating sufficient taxable income
prior to expiration of these carryforwards. Tax credit carryforwards can be
utilized only after all net operating loss carryforwards have been realized. In
1994, the Company recorded a valuation allowance of $1.1 million for tax credit
carryforwards which are estimated to expire in 1997. Although realization is not
assured, the Company believes it is more likely than not that the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced.

As of December 27, 1996, the Company has investment tax credit and jobs tax
credit carryforwards totaling $5,258,000 and $548,000, respectively, and
alternative minimum tax credits of $1,928,000.

A schedule of expiring NOL's and tax credits by fiscal year are as follows:

<TABLE>
<CAPTION>
AMOUNTS
---------------------
TAX
YEARS NOL'S CREDITS
- - ------------------------------------------------------------ ------- -----------
(THOUSANDS)
<S> <C> <C>
1997........................................................ $1,104
1998........................................................ 4,007
1999........................................................ $14,000 395
2000........................................................ 19,000 149
2001........................................................ 14,000 19
2002 -- 2010................................................ 132
------- -----------
$47,000 $5,806
======= ===========
</TABLE>

F-13
<PAGE> 49

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's alternative minimum tax credits have no expiration date.

Current tax laws and regulations relating to substantial changes in control
may limit the utilization of net operating loss and tax credit carryforwards in
any one year. As of December 27, 1996, no limitation of such carryforwards has
occurred.

A reconciliation of the statutory rate to taxes provided is as follows:

<TABLE>
<CAPTION>
1994 1995 1996
----- ------ -----
(THOUSANDS)
<S> <C> <C> <C>
Statutory rate........................................... 34.0% 34.0% 35.0%
State income taxes....................................... 14.8% 106.1% 9.0%
Allowance for tax credit carryforwards................... 35.5%
Tax credits earned....................................... (6.9%) (33.9%) (2.1%)
Other.................................................... .9% (23.0%) (1.4%)
----- ------ -----
Income taxes provided.................................... 78.3% 83.2% 40.5%
===== ====== =====
</TABLE>

16. 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 and long-term debt 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.

17. SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................... $1,781 $3,055 $3,429
Income taxes........................................... 1,389 801 2,222
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>

18. RELATED PARTY TRANSACTIONS:

The Hallwood Group, Incorporated ("Hallwood") is the beneficial owner of
approximately 2.6 million shares or 14.2% of the outstanding common stock of the
Company. The directors of Hallwood serve as a majority of the directors of the
Company. In February 1997, the Company announced a public offering of 3.2
million shares of common stock to be sold by Hallwood and certain of its
affiliates. The selling stockholders have also granted underwriters an option to
purchase an additional 454,746 shares of common stock to cover over allotments,
if any. All of the 2.6 million shares owned by Hallwood are offered for sale in
the public offering and over allotment option. It is anticipated that after the
closing of the public offering, the directors of Hallwood will resign as
directors of the Company. The Company will not receive any proceeds from the
proposed sale of shares by the selling stockholders.

F-14
<PAGE> 50

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company made annual payments to Hallwood of $125,000 for consulting
services in 1996, 1995 and 1994. The consulting agreement will be terminated
upon the closing of the public offering. 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 with a fair value of approximately $120,000
per year.

The Company has advanced amounts to joint ventures in which the Company has
a 50% interest or less. At December 27, 1996, approximately $757,000 was
outstanding under these notes. Principal and interest are payable in monthly
installments, with interest at various rates from prime to 12%. The Company also
has miscellaneous accounts receivable from joint ventures of approximately
$669,000 and $410,000 at December 27, 1996 and December 29, 1995, respectively.

The Company has granted three separate operating lines of credit to the
International Association of ShowBiz Pizza Time Restaurants, Inc. (the
"Association"). In December 1996, the lines were renewed to provide the
Association with available borrowings of $2.5 million at 10.5% interest and are
due December 31, 1997. The Association develops entertainment attractions and
produces system wide advertising. Two officers of the Association are also
officers of the Company. At December 27, 1996, approximately $1,787,000 was
outstanding under these lines of credit. The Company also had miscellaneous
accounts receivable from the Association of $6,000 and $5,000 at December 27,
1996 and December 29, 1995, respectively.

19. EMPLOYEE BENEFIT PLANS:

The Company has employee benefit plans that include: a) executive bonus
compensation plans based on the performance of the Company; b) non-statutory
stock option plans for its employees and non-employee directors; c) a stock
grant plan and d) a retirement and savings plan.

In 1995, the Company increased the number of shares of the Company's common
stock which may be issued under its employee stock option plan by 750,000 shares
to an aggregate of 2,772,038 shares. All shares must be granted before December
31, 1998. The exercise price for options granted under the plan may not be less
than the fair market value of the Company's common stock at date of grant.
Options may not be exercised until the employee has been continuously employed
at least one year after the date of grant. Options which expire or terminate may
be re-granted under the plan.

In 1995, the Company adopted a stock option plan for its non-employee
directors. The number of shares of the Company's common stock that may be issued
under this plan cannot exceed 150,000 shares.

At December 27, 1996, there were 810,515 shares available for grant. Stock
option transactions are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE
NUMBER OF SHARES PRICE PER SHARE
-------------------------------- ---------------------------
1994 1995 1996 1994 1995 1996
--------- -------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year........ 558,993 759,953 848,942 $15.08 $10.92 $ 9.08
Granted.................. 512,250 391,860 276,734 8.10 6.08 8.39
Exercised................ (77,570) (19,239) (77,495) 2.92 4.70 12.10
Terminated............... (233,720) (283,632) (37,670) 17.60 10.17 11.01
--------- -------- ---------
Options outstanding, end
of year.................. 759,953 848,942 1,010,511 10.92 9.08 8.58
========= ======== =========
</TABLE>

All stock options are granted at fair market value of the common stock at
the grant date. The estimated fair value of options granted during 1996 was
$3.08 per share. The fair value of each stock option grant is estimated

F-15
<PAGE> 51

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996: risk free
interest rate of 6.5%; no dividend yield; expected lives of four years; and
expected volatility of 40%. Stock options expire five years from the grant date.
Stock options vest over various periods ranging from one to four years. The
number of stock option shares exercisable at December 27, 1996 was 430,794.
These stock options have exercise prices ranging from $5.29 to $22.33 per share
and have a weighted average exercise price of $10.56 per share. In January 1997,
the Company granted 789,933 additional options at exercise prices of $17.25 to
$17.65 per share.

The number of shares of the Company's common stock which may be awarded to
senior executives of the Company under the Stock Grant Plan is 1,718,637 shares.
No grants were awarded in 1994, 1995 or 1996. In connection with an employment
agreement effective January 1998, the Company granted 105,000 shares in January
1997. Compensation expense recognized by the Company pursuant to this plan was
$2,734,000, $1,821,000 and $1,821,000 in 1994, 1995 and 1996, respectively. All
shares vest over periods ranging from 3 years to 6 years and are subject to
forfeiture upon termination of the participant's employment by the Company. The
shares are nontransferable during the vesting periods.

As a result of shares awarded to the Company's Chairman of the Board and
Chief Executive Officer, the Company recognized deferred compensation of $12.0
million in 1993. In 1995, the Company's Chairman of the Board and Chief
Executive Officer forfeited 90,000 shares of unvested common stock of the
Company previously awarded to him under the Company's stock grant plan. As a
result of this forfeiture, deferred compensation and capital in excess of par
value were reduced by approximately $1.7 million. The deferred compensation is
amortized over the compensated periods of service through 1997.

The Company applies the provisions of APB Opinion 25 and related
Interpretations in accounting for its employee benefit plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock -based compensation plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the method prescribed by SFAS 123, the Company's proforma
net income would have been $12.8 million in 1996 and a net loss of $154,000 in
1995. Proforma earnings per share would have been $.67 per share in 1996 and a
loss of $.03 per share in 1995.

The Company has adopted the ShowBiz 401(k) Retirement and Savings Plan, to
which it may at its discretion make an annual contribution out of its current or
accumulated earnings. Contributions by the Company may be made in the form of
its common stock or in cash. In 1996, the Company made contributions of
approximately $15,000 and $37,000 in common stock for the 1994 and 1995 plan
years, respectively. The Company plans to contribute $59,000 in common stock for
the 1996 plan year.

F-16
<PAGE> 52

SHOWBIZ PIZZA TIME, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The following summarizes the unaudited quarterly results of operations for
the years ended December 27, 1996 and December 29, 1995 (thousands, except per
share data).

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 27, 1996
----------------------------------------------
MARCH 29 JUNE 28 SEPT. 27 DEC. 27
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues................................... $78,452 $69,848 $74,777 $70,913
Income before income taxes................. 8,771 3,840 5,993 3,617
Net income................................. 5,175 2,265 3,537 2,244
Per Share:
Primary and fully diluted:
Net income............................... $ 0.28 $ 0.12 $ 0.19 $ 0.12
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 29, 1995
----------------------------------------------
MARCH 31 JUNE 30 SEPT. 29 DEC. 29
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues................................... $72,751 $62,643 $66,976 $61,413
Income (loss) before income taxes.......... 4,266 (1,963) 287 (2,215)
Net income (loss).......................... 2,565 (1,180) 61 (1,383)
Per Share:
Primary and fully diluted:
Net income (loss)........................ $ .14 $ (.07) $ .00 $ (.08)
</TABLE>

F-17
<PAGE> 53

<TABLE>
<C> <C>
[Picture of a family of four [Picture of a table-setting
dining at a typical of food, beverages and tokens.]
Chuck E. Cheese's restaurant.]
</TABLE>

<TABLE>
<C> <C>
[Picture of the exterior of a typical [Picture of the interior of a typical
Chuck E. Cheese's restaurant.] Chuck E. Cheese's restaurant.]
</TABLE>
<PAGE> 54

------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 3
Recent Developments.................... 5
Risk Factors........................... 6
Use of Proceeds........................ 8
Capitalization......................... 8
Price Range of Common Stock and
Dividend Policy...................... 9
Selected Historical Consolidated
Financial and Operating Data......... 10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 11
Business............................... 16
Management............................. 24
Selling Stockholders................... 26
Description of Capital Stock........... 27
Certain United States Tax Consequences
to Non-United States Holders......... 30
Underwriting........................... 32
Notice to Canadian Residents........... 33
Legal Matters.......................... 34
Experts................................ 34
Incorporation of Certain Documents by
Reference............................ 34
Additional Information................. 35
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

======================================================

[SHOWBIZ PIZZA TIME LOGO]

3,200,000 SHARES

COMMON STOCK
($.10 PAR VALUE)
PROSPECTUS

CREDIT SUISSE FIRST BOSTON

PRINCIPAL FINANCIAL SECURITIES, INC.

------------------------------------------------------