<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 TWENTY-SIX WEEK PERIODS
--------------------------------------------
ENDED NOVEMBER 29, 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 November 29, 1995 - 5,047,619 shares
<PAGE>
AMERICAN RECREATION CENTERS, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
ENDED NOVEMBER 29, 1995
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements (all of which are unaudited)
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of
Income and Retained Earnings 4
Condensed Consolidated Statement of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-10
PART II - OTHER INFORMATION
NOT APPLICABLE
SIGNATURES 11
</TABLE>
2
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
November 29, May 31,
1995 1995
(Unaudited) (Audited)
------------- ---------
<S> <C> <C>
ASSETS
- ---------------------------------------------------
Current assets:
Cash and equivalents $ 7,601 $ 4,508
Net investment in discontinued operations -- 6,683
Other current assets 2,218 2,294
-------- --------
Total current assets 9,819 13,485
-------- --------
Property, equipment and leaseholds, at cost
Land and buildings 40,522 40,466
Machinery and equipment 35,628 34,922
Leaseholds and leasehold improvements 7,458 7,201
Construction in progress 3,679 892
-------- --------
87,287 83,481
Less - accumulated depreciation and amortization (27,713) (26,108)
-------- --------
59,574 57,463
-------- --------
Property held for sale 2,545 2,545
Notes receivable 2,269 2,267
Other assets 1,069 1,165
-------- --------
$ 75,276 $ 76,925
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 7,569 $ 7,904
Current maturities of long-term debt 1,723 1,638
-------- --------
Total current liabilities 9,292 9,542
-------- --------
Long-term debt and capital leases 26,006 28,747
-------- --------
Deferred taxes and other liabilities 7,233 7,233
-------- --------
Minority interests in consolidated partnerships 1,734 1,732
-------- --------
Shareholders' equity:
Common stock:
Authorized - 21,484,375 shares
Issued and outstanding - 1996 and 1995,
5,047,619 and 5,019,699 shares 12,709 12,773
Preferred stock:
Authorized - 5,000,000 shares
Issued and outstanding - none
Retained earnings 18,302 16,898
-------- --------
Total shareholders' equity 31,011 29,671
-------- --------
$ 75,276 $ 76,925
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
--------------------- -----------------------
Nov. 29, Nov. 23, Nov. 29, Nov. 23,
1995 1994 1995 1994
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Operating revenue:
Bowling $11,288 $11,152 $19,859 $19,174
Other 187 253 441 541
------- ------- ------- -------
11,475 11,405 20,300 19,715
------- ------- ------- -------
Operating, general and
administrative expenses:
Bowling 9,939 9,542 18,884 17,778
Other 122 149 292 310
Corporate 274 248 516 497
------- ------- ------- -------
10,335 9,939 19,692 18,585
------- ------- ------- -------
Operating income (loss):
Bowling 1,349 1,617 975 1,396
Other 65 104 149 231
Corporate (274) (248) (516) (497)
------- ------- ------- -------
Operating income 1,140 1,473 608 1,130
------- ------- ------- -------
Interest expense (626) (749) (1,375) (1,418)
Interest and other income 193 52 319 110
Gain on property
transactions -- -- -- 1,946
------- ------- ------- -------
Income before provision
for income taxes and
minority interests 707 776 (448) 1,768
Provision for income taxes (243) (260) 179 (569)
Minority interests (81) (87) (2) (274)
------- ------- ------- -------
Income (Loss) from
continuing operations 383 429 (271) 925
Discontinued operations:
Gain on sale of investment in
The Right Start, Inc., net of
applicable income taxes
of $1,568 -- -- 2,251 --
Income (Loss) from operations
of The Right Start, Inc., net of
applicable income taxes of
$49 and ($170) -- (897) 54 (863)
------- ------- ------- -------
Net income (loss) $ 383 ($468) 2,034 62
======= =======
Retained earnings, beginning
of period 16,898 16,494
Cash dividends ($.13 and $.12
per share) (630) (602)
------- -------
Retained earnings, end of period $18,302 $15,954
======= =======
Earnings (Loss) per share:
Continuing operations $.08 $.08 ($.05) $.18
Discontinued operations -- (.18) .46 (.17)
------- ------- ------- -------
$.08 ($.10) $.41 $.01
======= ======= ======= =======
</TABLE>
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six weeks ended
---------------------------------------
November 29, November 23,
1995 1994
----------------- ---------------
<S> <C> <C>
Cash Flows from (used in) Operating Activities:
Net income $ 2,034 $ 62
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,813 1,651
Gain on sale of The Right Start, Inc. (2,251) --
Gain on property transactions -- (1,946)
Results attributed to minority interests 2 274
(Income) Loss from discontinued operations (54) 863
(Increase) Decrease in other current assets 76 (291)
Increase (Decrease) in income taxes payable (2,859) 1,210
Increase in accounts payable
and accrued expenses 117 1,005
------- -------
Net cash from (used in) operations (1,122) 2,828
------- -------
Cash Flows from (used in) Investing Activities:
Expenditures for property, equipment
and property held for development (3,829) (9,992)
Proceeds from property transactions -- 5,612
Proceeds from sale of The Right Start, Inc. 11,811 --
Payments received on loan to ESOP -- 54
Other (2) 157
------- -------
Net cash from (used in) investing activities 7,980 (4,169)
------- -------
Cash Flows from (used in) Financing Activities:
Repayment of short-term borrowings (415) --
Repayment of long-term debt (4,856) (5,458)
Issuance of long-term debt 2,200 6,175
Dividends to shareholders (630) (602)
Issuance (Retirement) of common stock, net (64) 86
------- -------
Net cash from (used in) financing activities (3,765) 201
------- -------
Net increase (decrease) in cash and equivalents 3,093 (1,140)
Cash and equivalents at beginning of period 4,508 3,513
------- -------
Cash and equivalents at end of period $ 7,601 $ 2,373
======= =======
Supplementary schedule of non-cash investing and
financing activities:
Note receivable as partial payment for real
property sold $ 650
=======
</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.
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 November 29, 1995 and for the thirteen and twenty-six week periods ended
November 29, 1995 and November 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.
Reflecting the sale of The Right Start, Inc. on August 4, 1995, its revenues and
expenses are no longer consolidated in ARC's operating income and expenses.
Right Start's profit or loss is now shown as "Discontinued Operations" in ARC's
statement of income. Prior year statements have been restated to reflect this
change.
NOTE 2 - Long-term Debt:
- -----------------------
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
November 29, May 31,
1995 1995
------------ -------
<S> <C> <C>
Long-term notes:
Secured notes payable in monthly
installments with a weighted
average interest rate of 9.3%
at November 29, 1995. $27,014 $29,554
Other 715 831
------- -------
27,729 30,385
Less-amounts due within one year 1,723 1,638
------- -------
$26,006 $28,747
======= =======
</TABLE>
6
<PAGE>
NOTE 3 - Operations:
-------------------
The results of operations for these thirteen and twenty-six week periods are
not necessarily indicative of the results to be expected for the entire year.
Bowling is highly seasonal with revenue during the first quarter normally not
exceeding 18% to 22% of those for a full year. Second quarter revenue
typically represents between 25% to 27% of the full year.
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. The weighted
average number of common shares and common stock equivalents outstanding were
5,059,557 and 5,018,905 for the thirteen week periods ended November 29, 1995
and November 23, 1994; and 5,057,241 and 5,011,323 for the twenty-six week
periods then ended.
NOTE 5 - Acquisitions and Dispositions:
--------------------------------------
In July 1994, the Company's 90 percent-owned partnership sold its Budget Mini-
Storage facility in Milpitas, California for $3,600,000. Proceeds were used to
retire $2,500,000 in long-term debt and to acquire bowling centers in
Milwaukee, Wisconsin. The Company recorded an after-tax gain of approximately
$1,000,000, or $.21 per share.
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 $8,000,000 purchase price included
the land, building and equipment of six bowling centers totaling 316 lanes.
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.
NOTE 6 - Gain on Sale of The Right Start, Inc.:
-----------------------------------------------
On August 4, 1995, the Company sold its 62.5 percent ownership in The Right
Start, Inc. for $11,811,000 in cash and recorded a $2,251,000 after-tax gain,
equal to $.45 per share, in the first quarter of fiscal 1996. Also, the
Company received an option to reacquire up to 400,000 shares of The Right
Start, Inc. common stock at exercise prices ranging from $3.30 to $6.00 over a
seven year period. In connection with the transaction, the Company has agreed
to reimburse The Right Start, Inc. up to $680,000 should it be unable to
sustain ordinary loss treatment for its deferred loss tax carry-forward and it
have sufficient taxable income in or before its fiscal year 2000.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations
--------------------------------
Operating revenue for the second quarter of fiscal 1996 rose slightly to $11.5
million from $11.4 million in the prior year. Net income from continuing
operations for the quarter was $383,000, or $.08 per share compared to
$429,000, also $.08 per share last year.
Operating revenue for the six months ended November 29, 1995 increased 3% from
$19.7 million to $20.3 million. Net income from continuing operations for the
same period declined from $975,000, or $.18 per share in the year earlier
period to a loss of $271,000, or $.05 per share. However, last year's results
included a gain from the sale of a mini-warehouse totaling $1.07 million, or
$.21 per share.
Results of Discontinued Operations
----------------------------------
Discontinued operations includes the gain on sale of the Company's investment
in The Right Start, Inc. on August 4, 1995 and the Company's share of that
entity's operations through the date of sale for fiscal 1996, and for the six
months ended November 23, 1994 for fiscal 1995. The sale price for the
Company's 3,937,000 shares was $11,811,000 cash plus an option to reacquire up
to 400,000 shares of The Right Start's common stock at exercise prices ranging
from $3.30 to $6.00 over a seven year period.
Bowling
-------
Second quarter bowling revenue increased 1% from $11.2 million to $11.3 million
due to the acquisition near the beginning for the second quarter last year of
six centers in Milwaukee, Wisconsin. Revenue for comparable centers was down
3% as a 5% increase in revenue in our Texas centers was more than offset by a
nearly 6% decline in our California centers. Revenue at the five Mid-America
centers was flat. California's revenue decline is attributable to an industry-
wide downturn in California where revenue at both Company-owned and competitors
lag behind our non-California centers and the rest of the industry.
Furthermore, unseasonably dry and mild weather in the important fall months
also hurt open play and league lineage in California. Marketing activities have
been intensified in California in an effort to increase bowler traffic.
8
<PAGE>
Bowling operating income for the second quarter declined 16% from $1.6 million
to $1.3 million. Incremental second quarter operating profit from the
acquisition of the six Milwaukee centers was not enough to offset the loss of
revenue at comparable centers. The second quarter decline in operating income
at comparable centers was $277,000, the same as the decline in revenue at those
centers.
Revenue for the six months ended in November rose 4% from $19.2 million to
$19.9 million due to the Milwaukee centers acquisition. Comparable center
revenue declined 2%. California center revenue was off almost 5% for the
period, while Texas center revenue climbed 5%. Mid-America centers were off
less than 1%.
Operating income for the six months declined from $1.4 million to $975,000,
primarily due to the Milwaukee centers acquisition. These centers, which
traditionally operate at a loss during the summer months which constitute the
Company's first quarter, were not owned during last year's first quarter. This
year, they contributed a $200,000 loss for that period. (Second quarter and
year-to-date results for these centers are profitable). Operating income from
comparable centers for the six month period declined 10%, or 105,000 due to a
$333,000 decline in revenue at those centers. The decline in operating income
was less than the decline in revenue due to improved cost controls,
particularly in staffing costs.
Late in 1995, the Company embarked upon a plan to test the concept of
broadening the Company's operations form one that offers primarily bowling as
family entertainment into one that offers a broader menu of recreation options,
with bowling being only one alternative. Two test locations were recently
completed. Ten bowling lanes of a former 60-lane center in San Jose,
California was converted to space that provides for other forms of
entertainment and expanded food and beverage operations targeted primarily to
families with young children. This facility opened late in the second quarter
of 1996. Secondly, a 49,000 square foot family entertainment center in
Addison, Texas opened in the middle of December. This facility blends bowling
with other recreation formats designed to attract young adult customers. Both
concepts are designed to create a broader base of entertainment revenue in our
facilities. Future expansion of these concepts will be based on the results of
these two tests.
Corporate and Other
-------------------
Other operating activities include the Company's non-bowling real estate
activities. The decline in the revenue and operating income from these
activities was due to the sale of the Budget Mini-Storage in Milpitas,
California (see Gain on Property Transactions below) and results of the
Company's Sun Center office building. Two substantial tenants were recently
lost to lease expiration, which impacted the project's revenue and
profitability. These tenants have now been replaced and the building is over
90% leased.
9
<PAGE>
Corporate expense includes the costs of the corporate office and staff,
shareholder relations, directors' fees, professional and consulting fees, and
other costs not allocable to operating activities.
Gain on Property Transactions
-----------------------------
During the first quarter of last year, the Company's 90% owned partnership
sold its Budget Mini-Storage facility for $3.6 million. Proceeds were used to
retire $2.5 million in long-term debt and to acquire the six Red Carpet bowling
centers in Milwaukee, Wisconsin.
Liquidity and Capital Resources
-------------------------------
At November 29, 1995, the Company had $11.6 million available under an unused
bank commitment. Advances can be used to acquire, construct or refurbish
bowling centers or to acquire other compatible recreation businesses and would
bear interest at the prime rate plus .75%. An 85% owned joint venture has $2.7
million available under a separate bank commitment that can be used for the
acquisition of bowling centers. Advances under this facility would bear
interest at the prime rate plus 1%.
The Company also maintains various line-of-credit arrangements to augment
seasonal shortfalls in working capital. At November 29, 1995 and November 23,
1994, there were no borrowings outstanding under the Company's $2 million line-
of-credit. Advances under this line would bear interest at the prime rate plus
.5%. There was $400,000 outstanding at November 23, 1994 under a $1 million
line-of-credit which is designated for use by one of the Company's wholly-owned
subsidiaries. There were no borrowings outstanding under this line at November
29, 1995. Any advances would bear interest at the prime rate plus 1%.
The Company has paid quarterly cash dividends for over 27 consecutive years.
The second quarter dividend of $.0625 per share represents a 4% increase over
last year when the quarterly dividend was $.06 per share.
10
<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 1-12-96 Robert A. Crist
----------- -------------------------------------
Robert A. Crist, President
Date 1-12-96 Karen B. Wagner
----------- ------------------------------------------
Karen B. Wagner, Vice President/Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-29-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> NOV-29-1995
<CASH> 7,601
<SECURITIES> 0
<RECEIVABLES> 265
<ALLOWANCES> 16
<INVENTORY> 570
<CURRENT-ASSETS> 9,819
<PP&E> 87,287
<DEPRECIATION> 27,713
<TOTAL-ASSETS> 75,276
<CURRENT-LIABILITIES> 9,292
<BONDS> 27,729
0
0
<COMMON> 12,709
<OTHER-SE> 18,302
<TOTAL-LIABILITY-AND-EQUITY> 75,276
<SALES> 20,300
<TOTAL-REVENUES> 20,619
<CGS> 2,139
<TOTAL-COSTS> 19,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,375
<INCOME-PRETAX> (450)
<INCOME-TAX> (179)
<INCOME-CONTINUING> (271)
<DISCONTINUED> 2,305
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,034
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
