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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 28, 1996
-----------------------
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
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Telephone: Area Code (916) 852-8005
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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 28, 1996 - 4,867,112 shares
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AMERICAN RECREATION CENTERS, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS
ENDED FEBRUARY 28, 1996
PART I - FINANCIAL INFORMATION
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<S> <C>
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 9-11
PART II - OTHER INFORMATION
Not applicable
SIGNATURES 12
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CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
February 28, May 31,
1996 1995
(Unaudited) (Audited)
------------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and equivalents $ 6,058 $ 4,508
Other current assets 2,207 2,294
Net investment in discontinued operations -- 6,683
-------- --------
Total current assets 8,265 13,485
======== ========
Property, equipment and leaseholds, at cost
Land and buildings 44,000 40,466
Machinery and equipment 36,885 34,922
Leaseholds and leasehold improvements 8,162 7,201
Construction in progress 229 892
-------- --------
89,276 83,481
Less - accumulated depreciation and amortization (28,639) (26,018)
-------- --------
60,637 57,463
-------- --------
Property held for sale 2,551 2,545
Notes receivable 2,393 2,267
Other assets 1,062 1,165
-------- --------
$ 74,908 $ 76,925
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 7,535 $ 7,904
Current maturities of long-term debt 1,693 1,638
-------- --------
Total current liabilities 9,228 9,542
-------- --------
Long-term debt and capital leases 26,277 28,747
-------- --------
Deferred taxes 7,233 7,233
-------- --------
Minority interests in consolidated partnerships 1,920 1,732
-------- --------
Shareholders' equity:
Common stock:
Authorized - 21,484,375 shares
Issued and outstanding - 1996 and 1995,
4,867,112 and 5,054,259 shares 11,524 12,773
Preferred stock:
Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Retained earnings 18,726 16,898
-------- --------
Total shareholders' equity 30,250 29,671
-------- --------
$ 74,908 $ 76,925
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
--------------------- -----------------------
Feb. 28, Feb. 22, Feb. 28, Feb. 22,
1996 1995 1996 1995
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Operating revenue:
Bowling $13,143 $12,666 $33,002 $31,840
Other 214 250 655 791
------- ------- ------- -------
13,357 12,916 33,657 32,631
------- ------- ------- -------
Operating, general and
administrative expense:
Bowling 11,107 10,123 29,991 27,901
Other 125 97 417 407
Corporate 255 258 771 755
------- ------- ------- -------
11,487 10,478 31,179 29,063
------- ------- ------- -------
Operating income (loss):
Bowling 2,036 2,543 3,011 3,939
Other 89 153 238 384
Corporate (255) (258) (771) (755)
------- ------- ------- -------
1,870 2,438 2,478 3,568
Interest expense (650) (763) (2,025) (2,181)
Interest and other income 147 79 466 189
Gain on property transactions -- 533 -- 2,479
------- ------- ------- -------
Income before provision for income
taxes and minority interests 1,367 2,287 919 4,055
Provision for income taxes (505) (836) (326) (1,405)
Minority interests (134) (162) (136) (436)
------- ------- ------- -------
Income from continuing operations 728 1,289 457 2,214
Discontinued operations, net of income
taxes:
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 $0 and ($416) for the
thirteen weeks and $49 and ($1,218)
for the thirty-nine week period -- (396) 54 (1,259)
------- ------- ------- -------
Net income $ 728 $ 893 2,762 955
======= =======
Retained earnings, beginning of period 16,898 16,494
Cash dividends ($.1875 and $.18 per
share) (934) (903)
------- -------
Retained earnings, end of period $18,726 $16,546
======= =======
Earnings (Loss) per share:
Continuing operations $0.14 $0.26 $0.09 $0.44
Discontinued operations -- ($0.08) $0.46 ($0.25)
------- ------- ------- -------
$0.14 $0.18 $0.55 $0.19
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
--------------------------
February 28, February 22,
1996 1995
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<S> <C> <C>
Cash Flows from (used in) Operating Activities:
Net income $ 2,762 $ 955
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,712 2,487
Gain on sale of The Right Start, Inc. (2,251) --
Gain on sale of property and equipment -- (2,479)
Results attributed to minority interests 136 436
(Income) Loss from discontinued operations (54) 1,259
(Increase) Decrease in other current assets 89 (684)
Increase (Decrease) in income taxes payable (3,954) 2,017
Increase in accounts payable and accrued expenses 1,176 1,734
------- --------
Net cash from operations 616 5,725
------- --------
Cash Flows from (used in) Investing Activities:
Expenditures for property, equipment and property held
for sale (5,837) (12,526)
Proceeds from sale of property and equipment -- 8,450
Proceeds from sale of The Right Start, Inc. 11,811 --
Payments received on loan to ESOP -- 54
Other (27) 220
------- --------
Net cash from (used in) investing activities 5,947 (3,802)
------- --------
Cash Flows from (used in) Financing Activities:
Repayment of short-term borrowings (415) --
Repayment of long-term debt (5,349) (9,019)
Issuance of long-term debt 2,934 8,931
Dividends to shareholders (934) (903)
Issuance (Retirement) of common stock, net (1,249) 86
------- --------
Net cash used in financing activities (5,013) (905)
------- --------
Net increase in cash and equivalents 1,550 1,108
Cash and equivalents at beginning of period 4,508 3,513
------- --------
Cash and equivalents at end of period $ 6,058 $ 4,531
======= ========
Supplemental 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.
<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 February 28, 1996 and for the thirteen and thirty-nine week periods ended
February 28, 1996 and February 22, 1995 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):
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<CAPTION>
February 28, May 31,
1996 1995
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<S> <C> <C>
Long-term notes:
Secured notes payable in monthly
installments with a weighted
average interest rate of 9.1%
at February 28, 1996. $27,314 $29,554
Other 656 831
------- -------
27,970 30,385
Less-amounts due within one year 1,693 1,638
------- -------
$26,277 $28,747
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</TABLE>
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NOTE 3 - Operations:
-------------------
The results of operations for these thirteen and thirty-nine 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 and third 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
4,937,719 and 5,019,699 for the thirteen week periods ended February 28, 1996
and February 22, 1995; and 5,017,400 and 5,013,853 for the thirty-nine 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.
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 $.07 per share.
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.
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NOTE 7 - Subsequent Event:
-------------------------
On March 19, 1996, the Company's 85%-owned American Red Carpet joint venture
acquired a 32-lane bowling center in Beloit, Wisconsin. The total purchase
price was $1.4 million for the center's land, building and equipment. $1.0
million in long-term debt was incurred in connection with the acquisition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations
- --------------------------------
Operating revenue for the third quarter of fiscal 1996 rose 3% from $12.9
million to $13.4 million. Net income from continuing operations for the quarter
was $728,000, or $.14 per share compared to $1,289,000, or $.26 per share in the
year earlier period. Last year's results included the sale of the Company's 60-
lane center in San Pablo, California for an after-tax gain of $325,000, or $.07
per share.
Operating revenue for the nine months ended February 28, 1996 also increased 3%
from $32.6 million to $33.7 million. Net income from continuing operations for
the same period declined from $2,214,000, or $.44 per share to $457,000, or $.09
per share. However, last year's results included gains from property
transactions totaling $1.4 million, or $.28 per share. There were no such gains
in the current year.
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 nine months
ended February 22, 1995 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
- -------
Third quarter bowling revenue increased 4% from $12.7 million to $13.1 million,
primarily due to the opening of the Fun Fest entertainment center in Addison,
Texas. The new revenue from Fun Fest offset a 2% decline in comparable center
revenue. The decline in comparable center revenue reflects an industry-wide
downturn that was apparent in all but the Company's Red Carpet centers in
Milwaukee, Wisconsin. Revenue at these centers increased 4% due to last year's
installation of automatic scoring equipment which attracted new bowlers to those
centers.
Bowling operating income for the third quarter declined from $2.5 million to
$2.0 million. Operating income was impacted by the decline in comparable center
revenue, start-up costs associated with the opening of Fun Fest and the
conversion of the former Oakridge Lanes bowling center to a family entertainment
center, certain repair costs and higher than usual operating expenses associated
with winter weather conditions. Revenue for the nine months rose 4% from $31.8
million to $33.0 million, primarily due to the opening of Fun Fest and last
year's second quarter acquisition of the six American Red Carpet bowling centers
in Milwaukee, Wisconsin. Comparable center revenue was off 2%. California
center revenue was off almost 4% for the period, while Texas center revenue
climbed almost 3%. Mid-America centers were off 1%.
Operating income for the nine months declined from $3.9 million to $3.0 million
due in part to
<PAGE>
the Milwaukee centers acquisitions. These centers, which traditionally operate
at a loss during the summer months (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 and third quarter and year-to-date results for these
centers are profitable). Operating income from comparable centers for the nine
month period declined approximately 24% due primarily to the decrease in revenue
at comparable centers.
Late in 1995, the Company embarked upon a plan to test the concept of broadening
the Company's operations from 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 completed during
the third quarter. 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. 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.
The third quarter results for the Company's two entertainment centers have
surpassed expectations and weekly revenues are in excess of the average for the
Company's stand alone bowling centers. Based on these results, management is
planning to refurbish and diversify up to six more of its centers by the second
quarter of its fiscal 1997. The expanded centers will include childrens' play
areas, private party rooms, night clubs, billiards, laser tag, glow-in-the-dark
bowling and branded food operations. The exact composition of the expanded
entertainment areas will depend on the individual demographics of each center.
Total cost of the refurbishments is estimated to be between $150,000 and
$300,000 per center.
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 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.
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. The Company recorded an after-tax gain of
approximately $1.0 million, or $.21 per share on the sale.
<PAGE>
During fiscal 1995's third quarter, the Company sold the land and building
housing its 60-lane bowling center in San Pablo, California for $2.5 million.
Proceeds were used to retire $1.8 million in long-term debt. The Company's
after-tax gain was approximately $325,000, or $.07 per share.
Liquidity and Capital Resources
- -------------------------------
At February 28, 1996, the Company had $11.7 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%.
The Company also maintains various line-of-credit arrangements to augment
seasonal shortfalls in working capital. At February 28, 1996 and February 22,
1995, 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 $440,000 outstanding at February 22, 1995 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 February
28, 1996. Any advances would bear interest at the prime rate plus 1%.
The Company has paid quarterly cash dividends for over 27 consecutive years.
The third quarter dividend of $.0625 per share represents a 4% increase over
last year when the quarterly dividend was $.06 per share.
During the second quarter of fiscal 1996, the Company instituted a stock
repurchase program. Through February 28, 1996, the Company has repurchased
199,730 shares of its common stock, representing approximately 4% of the stock
outstanding at the beginning of the repurchase program. Total cost of the
repurchase program to-date is $1.3 million.
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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 4-11-96 Robert A. Crist
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Robert A. Crist, President
Date 4-11-96 Karen B. Wagner
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Karen B. Wagner, Vice President/Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-29-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> NOV-29-1995
<CASH> 6,058
<SECURITIES> 0
<RECEIVABLES> 272
<ALLOWANCES> 16
<INVENTORY> 619
<CURRENT-ASSETS> 8,265
<PP&E> 89,276
<DEPRECIATION> 28,639
<TOTAL-ASSETS> 74,908
<CURRENT-LIABILITIES> 9,228
<BONDS> 27,970
11,524
0
<COMMON> 0
<OTHER-SE> 18,726
<TOTAL-LIABILITY-AND-EQUITY> 74,908
<SALES> 33,657
<TOTAL-REVENUES> 34,123
<CGS> 3,620
<TOTAL-COSTS> 31,179
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,025
<INCOME-PRETAX> 783
<INCOME-TAX> 326
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<NET-INCOME> 2,762
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
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