<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS
---------------------------------------------
ENDED FEBRUARY 22, 1995
-----------------------
Commission File Number 0-2849
AMERICAN RECREATION CENTERS, INC.
Incorporated in California Federal Employer No. 94-1441151
11171 Sun Center Drive, Suite 120, Rancho Cordova, CA 95670
Mail Address: P.O. Box 580, Rancho Cordova, CA 95741
-------------------------------------------------------
Telephone: Area Code (916) 852-8005
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Capital Stock Outstanding as of February 22, 1995 - 5,019,699 shares
<PAGE>
AMERICAN RECREATION CENTERS, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS
ENDED FEBRUARY 22, 1995
<TABLE>
<C> <S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (all of which are unaudited)
Condensed Consolidated Balance Sheet 3
Consolidated Statement of Income and Retained Earnings 4
Condensed Consolidated Statement of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II - OTHER INFORMATION
Item 5. Other Information
The Company's Board of Directors has retained Allen &
Company Incorporated, a nationally recognized investment
banking firm, to assist in evaluating all reasonable
alternatives available to the Company to achieve the greatest
long-term value to the Company's shareholders, including,
but not limited to, an evaluation of an unsolicited offer from
Fulcrum Capital Partners of Providence, Rhode Island to
acquire the Company.
The Board of Directors has approved Change-in-Control
Arrangements for the Company's President, Vice President/
Treasurer and Vice President/Bowling to compensate such
key executives for their efforts in maximizing shareholder value
in any transaction that may occur. The agreements provide for
payments to the key executive officers in the event of a change
in control or a substantial change in the nature of their offices
or duties. The agreements provide for the payment of 28 months
of base pay for the President and 12 months for the Vice
Presidents, plus the continuation of existing employee benefits
for the same periods.
</TABLE>
SIGNATURES 13
2
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
February 22, May 25,
1995 1994
(Unaudited) (Audited)
------------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and equivalents $ 6,103 $ 5,757
Marketable securities, at cost which
approximates market -- 1,461
Other current assets 11,379 10,653
------- -------
Total current assets 17,482 17,871
------- -------
Property, equipment and leaseholds, at cost
Land and buildings 40,822 36,923
Machinery and equipment 38,004 34,087
Leaseholds and leasehold improvements 9,526 8,100
------- -------
88,352 79,110
Less - accumulated depreciation and amortization (26,611) (25,142)
------- --------
61,741 53,968
------- -------
Property held for sale 2,539 5,437
Notes receivable 2,311 1,655
Other assets 1,554 5,082
------- -------
$85,627 $84,013
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $11,438 $ 9,760
Current maturities of long-term debt 2,334 2,190
------- -------
Total current liabilities 13,772 11,950
------- -------
Long-term debt and capital leases 28,893 29,125
------- -------
Deferred taxes and other liabilities 8,210 8,122
------- -------
Minority interests in consolidated partnerships 5,680 5,936
------- -------
Shareholders' equity:
Common stock:
Authorized - 21,484,375 shares
Issued and outstanding - 1995 and 1994,
5,019,699 and 5,003,553 shares 12,526 12,440
Preferred stock:
Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Retained earnings 16,546 16,494
Loan to ESOP -- (54)
------- -------
Total shareholders' equity 29,072 28,880
------- -------
$85,627 $84,013
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
Feb. 22, Feb. 23, Feb. 22, Feb. 23,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenue:
Bowling $12,666 $10,985 $31,840 $29,199
Direct marketing 9,170 9,763 35,457 36,684
Other 250 377 791 1,118
------- ------- ------- -------
22,086 21,125 68,088 67,001
------- ------- ------- -------
Operating, general and
administrative expenses:
Bowling 10,123 8,648 27,901 25,081
Direct marketing 10,191 9,515 36,976 37,046
Other 97 216 407 575
Corporate 258 302 755 773
------- ------- ------- -------
20,669 18,681 66,039 63,475
------- ------- ------- -------
Operating income (loss):
Bowling 2,543 2,337 3,939 4,118
Direct marketing (1,021) 248 (1,519) (362)
Other 153 161 384 543
Corporate (258) (302) (755) (773)
------ ------- ------- -------
Operating income 1,417 2,444 2,049 3,526
------ ------- ------- -------
Interest expense (775) (689) (2,211) (2,077)
Interest and other income 101 71 250 237
Gain on property
transactions 533 -- 2,479 --
Loss on sale of Children's
Wear Digest -- -- (1,744) --
Gain on sale of subsidiary's
stock -- -- -- 297
------ ------- ------- -------
Income before provision
for income taxes and
minority interests 1,276 1,826 823 1,983
Provision for income taxes (458) (772) (187) (864)
Minority interests 75 (165) 319 (83)
------ ------- ------- -------
Net income $ 893 $ 889 955 1,036
====== =======
Retained earnings,
beginning of period 16,494 15,678
Cash dividends ($.18 and $.165) (903) (816)
------- -------
Retained earnings, end of period $16,546 $15,898
======= =======
Earnings per share $ 0.18 $ 0.18 $ 0.19 $ 0.21
====== ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
----------------------------
February 22, February 24,
1995 1994
------------- -------------
<S> <C> <C>
Cash Flows from (used in) Operating Activities:
Net income $ 955 $1,036
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,070 2,801
Gain on sale of stock of subsidiary -- (297)
Gain on sale of property and equipment (2,479) --
Loss on sale of Children's Wear Digest 1,744 --
Results attributed to minority interests (320) 83
Increase in inventory (1,188) (155)
Increase in other current assets (304) (368)
Increase in accounts payable
and accrued expenses 1,794 1,002
------ ------
Net cash from operations 3,272 4,102
------ ------
Cash Flows from (used in) Investing Activities:
Proceeds from sale of marketable securities 1,461 1,996
Expenditures for property, equipment
and property held for sale (14,257) (6,373)
Proceeds from sale of property and equipment 8,650 --
Proceeds from sale of stock of subsidiary -- 425
Proceeds from sale of Children's Wear Digest 2,437 --
Payment of earnout associated with catalog acquisition (120) (504)
Minority interest transactions (147) 94
Net increase in other assets and liabilities (99) (141)
------- -------
Net cash used in investing activities (2,075) (4,503)
------- -------
Cash Flows from (used in) Financing Activities:
Repayment of long-term debt (8,652) (2,631)
Issuance of long-term debt 8,618 4,190
Dividends to shareholders (903) (815)
Issuance of common stock 86 654
------ ------
Net cash from (used in) financing activities (851) 1,398
------- ------
Net increase (decrease) in cash and equivalents 346 997
Cash and equivalents at beginning of period 5,757 4,440
------ ------
Cash and equivalents at end of period $6,103 $5,437
====== ======
Supplemental schedule of non-cash investing and
financing activities:
Net change in reserve for losses of property
held for sale $ (191)
=======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Description of Business and Significant Accounting Policies:
- - --------------------------------------------------------------------
American Recreation Centers, Inc. and its subsidiaries (the Company) operate
bowling centers in California, Texas, Wisconsin, Oklahoma, Kentucky and
Missouri. In addition to its bowling business, the Company owns a majority
interest in The Right Start, Inc. which trades on the NASDAQ National Market
System under the symbol RTST. Right Start is a direct marketer and retailer of
high quality products for infants and children.
There have been no changes in the Company's significant accounting policies as
set forth in the Company's annual report. These unaudited financial statements
as of February 22, 1995 and for the thirteen and thirty-nine week periods ended
February 22, 1995 and February 23, 1994 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain financial statement reclassifications have been made for comparative
purposes.
NOTE 2 - Long-term Debt:
- - -----------------------
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
February 22, May 25,
1995 1994
------------ -------
<S> <C> <C>
Long-term notes:
Secured notes payable in monthly
installments with a weighted
average interest rate of 9.62%
at February 22, 1995. $28,622 $29,319
Other, including installment
contracts and present value of
capital lease obligations 2,605 1,996
------- -------
31,227 31,315
Less-amounts due within one year 2,334 2,190
------- -------
$28,893 $29,125
======= =======
</TABLE>
6
<PAGE>
NOTE 3 - Operations:
- - -------------------
The results of operations for these thirteen and thirty-nine week periods is not
necessarily indicative of the results to be expected for the entire year. The
bowling division is highly seasonal with revenue during the first quarter
normally not exceeding 20% to 22% of those for a full year. Second and third
quarter bowling revenue typically comprises 24% to 28% of the full year. The
direct marketing division fluctuates throughout the year in relation to the size
and number of catalog mailings.
NOTE 4 - Earnings Per Share of Common Stock:
- - -------------------------------------------
Earnings per share is computed on the weighted average number of shares of
common stock and common stock equivalents outstanding during each period. Common
stock equivalents include the Company's stock options and certain stock options
of The Right Start, Inc. The weighted average number of common shares and common
stock equivalents outstanding were 5,019,699 and 4,943,952 for the thirteen week
periods ended February 22, 1995 and February 23, 1994; and 5,013,853 and
4,919,431 for the thirty-nine week periods then ended.
NOTE 5 - Loss on Sale of Children's Wear Digest:
- - -----------------------------------------------
During the second quarter of fiscal 1995, The Right Start, Inc. entered into an
agreement to sell the Children's Wear Digest catalog. The sale was completed in
late December 1994 and produced a pre-tax loss of $1,744,000. The Company's
after-tax share of this non-recurring charge was $672,000, or $.13 per share.
NOTE 6 - Gain on Property Transactions:
- - ---------------------------------------
In July 1994, the Company's 90 percent-owned partnership sold its Budget Mini-
Storage facility in Milpitas, California for $3.6 million. Proceeds were used to
retire $2.5 million in long-term debt and to acquire bowling centers in
Milwaukee, Wisconsin (see Note 8). The Company recorded an after-tax gain of
approximately $1.0 million, or $.22 per share. The sale of the Budget Mini-
Storage and the acquisition of the Milwaukee centers was accounted for as a
like-kind exchange for income tax purposes.
In February 1995, the Company sold the land and building housing its 60-lane
bowling center located in San Pablo, California for $2.5 million. Proceeds were
used to retire $1.8 million in long-term debt. The Company recorded an after-tax
gain of $325,000, or $.06 per share.
7
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NOTE 7 - Gain on Sale of Stock of Subsidiary:
- - --------------------------------------------
During the first quarter of fiscal 1994, the Company sold 63,000 shares of The
Right Start, Inc. common stock for a pre-tax gain of $297,000. Cash proceeds
from the sale totaled $425,000. The sale reduced the Company's ownership in
Right Start from 63.5 percent to 62.5 percent.
NOTE 8 - Major Transaction:
- - --------------------------
On September 16, 1994, the Company's 85 percent-owned joint venture, American
Red Carpet, completed the acquisition of substantially all of the Red Carpet
bowling chain in Milwaukee, Wisconsin. The $8.0 million purchase price included
the land, building and equipment of six bowling centers totaling 316 lanes. The
six centers generated approximately $7 million in revenue for its fiscal year
ended May 31, 1994. The acquisition was accounted for as a purchase.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operations
- - ----------
Operating revenue for the third quarter of fiscal 1995 increased 4% from $21.1
million to $22.1 million. The third quarter's net income was $893,000, or $.18
per share compared to net income of $889,000, or $.18 per share in the year
earlier period. This year's third quarter included a net gain of $325,000, or
$.06 on the sale of bowling center real estate.
For the nine months ended February 22, 1995, operating revenue totalled $68.1
million, compared to $67.0 million a year ago. Net income for the same period
was $955,000, or $.19 per share, compared to last year's $1,036,000, or $.21 per
share. Fiscal 1995's year-to-date net income includes a $672,000 loss on the
sale of Right Start's CWD operations, which was more than offset by an after-tax
gain of $1.0 million, or $.22 per share on the sale of non-bowling real estate
and the $325,000, or $.06 per share gain on the sale of the bowling center real
estate described above. Last year's year-to-date net income included the after-
tax charge of $179,000 related to the Weebok Catalog write-off and a $169,000
after-tax gain on the sale by the Company of 63,000 shares of The Right Start,
Inc.'s common stock.
Bowling Division
- - ----------------
Third quarter operating revenue for the bowling division increased 15% from
$11.0 million to $12.7 million, while operating income advanced almost 9% from
$2,337,000 to $2,543,000. The increase in both revenue and operating income was
due to acquisitions. The acquisition of the six bowling centers comprising
substantially all of the Red Carpet bowling chain in Milwaukee, Wisconsin was
completed early in the second quarter. Revenue from comparable centers was down
slightly during the quarter (less than 2%) and certain localized issues,
particularly in California, hurt results at some locations. Accordingly, profit
for comparable centers was down 7%.
For the nine months to-date the bowling division's revenue increased 9% from
$29.2 million to $31.8 million in the year earlier period. Operating income for
the same period declined from $4,118,000 to $3,939,000. Fiscal 1995's year-to-
date results were significantly impacted by the division's disappointing first
quarter results which saw an 11% decline in comparable California center revenue
due to the excellent summer weather, the discontinuance of a seasonal marketing
program and the impact on certain centers of changes in local smoking
ordinances. The first quarter's results also included the operating losses of
four Midwest centers acquired during the first
9
<PAGE>
quarter of the previous year. Summers tend to produce particularly soft results
in the Midwest, while the remainder of the year in these regions may be
comparatively better than in the majority of our market area. The first quarter
operating losses for these acquisitions was expected and it is anticipated that
they will generate operating income for the total of fiscal 1995.
Direct Marketing Division
- - -------------------------
Third quarter operating revenue for the direct marketing division, which
comprises the operations of The Right Start, Inc. was $9.2 million, down 6% from
$9.8 million last year. Substantial increases in the company's comparable retail
stores sales were offset by weaker response rates and a decrease in the number
of catalogs mailed for The Right Start Catalog. Right Start's operating loss for
the quarter of $1,021,000 declined from last year's operating income of
$248,000. Among the factors that affected the Company's catalog performance in
the third quarter were catalog production delays due to the shortage of paper
that forced the winter catalog to be mailed later than planned. This resulted in
lower response rates to a time-sensitive catalog promotion as well as increased
mailing and shipping expenses.
For the nine months ended February 22, 1995, Right Start's operating revenue
decreased 3% to $35.5 million from $36.7 million in the year earlier period. As
was the case for the first two quarters, the year-to-date revenue decline was
attributable to lower catalog mailings and response rates which more than offset
an increase in retail store sales. Right Start's operating loss for the year-to-
date increased from a $362,000 operating loss last year to a $1,519,000
operating loss this year. Last year's nine month results include the Weebok
charge discussed above.
Major Transactions
- - ------------------
During the third quarter of fiscal 1995 the Company sold the land and building
housing its 60-lane bowling center located in San Pablo, California for $2.5
million. The proceeds were used to retire $1.8 million in long-term debt. An
after-tax gain of $325,000, or $.06 per share, was recorded.
During the second quarter of fiscal 1995, Right Start sold its Children's Wear
Digest catalog for approximately $2.5 million in cash. A pre-tax loss of $1.7
million was recorded on the transaction. Proceeds from the sale will be used to
fund Right Start's retail store expansion which included the opening of eight
retail units during the Holiday 1994 season.
10
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During the first quarter of 1995, the Company's 90 percent-owned partnership
sold its mini-warehouse facility for $3.6 million. The Company's after-tax gain
on the sale totalled $1.0 million, or $.22 per share. Proceeds were used to
retire $2.5 million in debt and to acquire six bowling centers comprising
substantially all of the Red Carpet bowling chain in Milwaukee, Wisconsin. The
$8.0 million purchase price included the land, building and equipment of the
centers and the acquisition was completed during the second quarter of fiscal
1995. The sale of the mini-warehouse and acquisition of the bowling centers was
accounted for as a like-kind exchange for income tax purposes.
During the first quarter of 1994, the Company sold 63,000 shares of The Right
Start, Inc. common stock for an after-tax gain of $169,000, or $.03 per share.
Cash proceeds totalled $425,000. The sale reduced the Company's ownership in
Right Start from 63.5 percent to 62.5 percent.
Liquidity and Capital Resources
- - -------------------------------
While bowling center operations require minimal inventory, the direct marketing
business requires substantial inventory investment. However, virtually all
bowling and direct marketing revenues are in the form of cash, so the Company is
not required to carry significant customer accounts.
At February 22, 1995, the Company had a $2 million unsecured line-of-credit
available to augment seasonal shortfalls in working capital. There were no
borrowings outstanding under this agreement at that date. The line requires a
30-day out-of-debt period each year. The Company's wholly-owned subsidiary, ARC
Games, Inc. has a $1 million bank line-of-credit. $440,000 was outstanding at
February 22, 1995.
Subsequent to quarter-end, the Company finalized negotiations for a long-term,
secured, revolving bank commitment for up to $13 million. Advances under the
commitment will bear interest at the prime rate plus .75%. The Company intends
to refinance approximately $2.9 million in existing debt. The balance of the
commitment can be used to acquire bowling centers or other compatible
recreational business, or for capital improvements or expansion in existing
centers.
During the fourth quarter of 1995, the Company expects to commence construction
of a 48,000 square foot family entertainment complex in Addison, Texas. The
facility will feature 30 lanes of bowling, billiards, bumper cars, ride
simulators and other attractions. Total cost of the project is $4.8 million. The
Company has bank financing commitments for $3.8 million.
11
<PAGE>
The Company is aggressively moving forward on its long-standing strategy of
selling non-bowling real estate and reinvesting the proceeds in the expansion of
its core and new operating activities. In addition to the real estate
transactions described above, the Company recently entered into a contract to
sell its Union City commercial center which includes a former bowling center
site. The sale is expected to close by the end of fiscal 1995 at a small gain.
It will allow for the retirement of approximately $2.6 million in long-term
debt.
The Right Start, Inc. has received and accepted a proposal from a bank to
provide a three year working capital line which provides for borrowings, subject
to a defined borrowing base of up to $5 million. The agreement is subject to
final negotiation and management believes that the line will be in place by the
end of fiscal 1995. Right Start has entered into lease agreements for four
additional retail store locations, three of which become available in the first
half of fiscal 1996. Its management believes that cash flows from operations and
current cash balances will be sufficient to fund operations and the capital
investments currently planned.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AMERICAN RECREATION CENTERS, INC.
Date 4-7-95 /s/ Robert A. Crist
-------- -----------------------------------------
Robert A. Crist, President
Date 4-7-95 /s/ Karen B. Wagner
--------- -----------------------------------------
Karen B. Wagner, Vice President/Treasurer
13
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- - -------------- -----------
27 Article 5 of Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> MAY-26-1994
<PERIOD-END> FEB-22-1995
<CASH> 6,103
<SECURITIES> 0
<RECEIVABLES> 1,111
<ALLOWANCES> 55
<INVENTORY> 5,900
<CURRENT-ASSETS> 17,482
<PP&E> 88,352
<DEPRECIATION> 26,611
<TOTAL-ASSETS> 85,627
<CURRENT-LIABILITIES> 13,772
<BONDS> 31,227
<COMMON> 12,526
0
0
<OTHER-SE> 16,546
<TOTAL-LIABILITY-AND-EQUITY> 85,627
<SALES> 68,088
<TOTAL-REVENUES> 68,338
<CGS> 21,946
<TOTAL-COSTS> 66039
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,211
<INCOME-PRETAX> 823
<INCOME-TAX> 187
<INCOME-CONTINUING> 955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 955
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
