<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THIRTEEN WEEK PERIOD
----------------------------
ENDED AUGUST 28, 1996
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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
------------------------------------
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 August 28, 1996 - 4,611,287 shares
<PAGE>
AMERICAN RECREATION CENTERS, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN WEEK PERIOD
ENDED AUGUST 28, 1996
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<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 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
SIGNATURES 11
</TABLE>
2
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CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
August 28, May 29,
1996 1996
(Unaudited) (Audited)
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<S> <C> <C>
ASSETS
------
Current assets:
Cash and equivalents $ 2,481 $ 3,489
Other current assets 3,267 3,266
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Total current assets 5,748 6,755
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Property, equipment and leaseholds, at cost
Land and buildings 41,962 41,965
Machinery and equipment 38,191 37,777
Leaseholds and leasehold improvements 8,752 8,532
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88,905 88,274
Less - accumulated depreciation and amortization (29,479) (28,572)
------- --------
59,426 59,702
------- --------
Property held for sale 2,558 2,557
Notes receivable 1,688 1,741
Other assets 1,383 1,376
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$70,803 $ 72,131
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 5,628 $ 6,134
Short-term borrowings 300 -
Current maturities of long-term debt 1,821 1,796
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Total current liabilities 7,749 7,930
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Long-term debt and capital leases 25,754 26,194
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Deferred taxes and other liabilities 7,209 7,209
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Minority interests in consolidated partnerships 1,872 2,060
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Shareholders' equity
Common stock:
Authorized - 21,484,375 shares
Issued and outstanding - 1996 and 1995,
4,611,287 and 5,055,592 shares 9,584 9,845
Preferred stock:
Authorized - 5,000,000 shares
Issued and outstanding - none - -
Retained earnings 18,635 18,893
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Total shareholders' equity 28,219 28,738
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Commitments and contingencies
$70,803 $ 72,131
======= ========
</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
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August 28, August 30,
1996 1995
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<S> <C> <C>
Operating revenue:
Bowling and entertainment activities $ 6,337 $ 6,111
Beverage and food 2,402 2,359
Other 268 355
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9,007 8,825
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Operating, general and administrative expenses:
Salaries, wages and employee benefits 4,254 4,027
Operating costs 3,380 3,262
Cost of beverage and food sales 816 728
Selling, general and administrative 476 428
Depreciation and amortization 936 912
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9,862 9,357
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Operating loss (855) (532)
Interest expense (646) (749)
Interest and other income 97 126
Gain on sale of stock option 800 --
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Loss from continuing operations before
provision for income taxes and minority interests (604) (1,155)
Provision for income taxes 203 422
Minority interests 82 79
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Loss from continuing operations (319) (654)
Discontinued operations:
Gain on sale of investment in The Right Start, Inc.,
net of applicable income taxes of $320 and $1,568 360 2,251
Income from operations of The Right Start, Inc.,
net of applicable income taxes of $49 - 54
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Net income 41 1,651
Retained earnings, beginning of period 18,893 16,898
Cash dividends ($.065 and $.0625) (299) (316)
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Retained earnings, end of period $18,635 $18,233
======= =======
Earnings (Loss) per share:
Continuing operations ($0.07) ($0.13)
Discontinued operations 0.08 0.43
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$0.01 $0.30
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
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August 28, August 30,
1996 1995
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<S> <C> <C>
Cash Flows from (used in) Operating Activities:
Net income $ 41 $ 1,651
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 936 912
Income from discontinued operations (360) (2,305)
Gain on sale of stock option (800) -
Results attributed to minority interests (82) (79)
(Increase) Decrease in other current assets (1) 119
Decrease in accounts payable and accrued expenses (146) (1,109)
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Net cash used in operations (412) (811)
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Cash Flows from (used in) Investing Activities:
Proceeds from sale of subsidiary's stock - 11,811
Proceeds from sale of stock option 800 -
Expenditures for property, equipment and leaseholds (633) (1,707)
Other (88) 9
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Net cash from investing activities 79 10,113
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Cash Flows from (used in) Financing Activities:
Short-term borrowings 300 -
Issuance of long-term debt - 810
Repayment of long-term debt (415) (2,879)
Dividends to shareholders (299) (316)
Issuance (Retirement) of common stock (261) 8
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Net cash used in financing activities (675) (2,377)
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Net increase (decrease) in cash and equivalents (1,008) 6,925
Cash and equivalents at beginning of period 3,489 4,508
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Cash and equivalents at end of period $2,481 $11,433
====== =======
</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 August 28, 1996 and for the three month periods ended August 28, 1996 and
August 30, 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.
"Discontinued Operations" include the operations and gain on sale of the
Company's majority interest in The Right Start, Inc. (Right Start), a catalog
company and retailer of infants' and children's products. See Note 6.
NOTE 2 - Long-term Debt:
-----------------------
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
August 28, May 29,
1996 1996
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<S> <C> <C>
Long-term notes:
Secured notes payable in monthly
installments with a weighted
average interest rate of 8.94%
at August 28, 1996 $26,759 $27,095
Other 816 895
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27,575 27,990
Less-amounts due within one year 1,821 1,796
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$25,754 $26,194
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</TABLE>
NOTE 3 - Operations:
-------------------
The results of operations for this thirteen week period is not necessarily
indicative of the results to be expected for the entire year. Bowling is
highly seasonal with revenues during the first quarter normally not exceeding
19% to 22% of those for a full year.
6
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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
4,627,163 and 5,054,924 for the thirteen week periods ended August 28, 1996 and
August 30, 1995.
NOTE 5 - Gain on Sale of Stock Option:
-------------------------------------
During the first quarter of fiscal 1997 the Company sold its option to
repurchase up to 400,000 shares of Right Start common stock for $800,000 cash,
resulting in an after-tax gain of $480,000, equal to $.10 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 Right Start
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. In connection with the
transaction, the Company had agreed to reimburse Right Start 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. During the first quarter of fiscal 1997 the Company received a
favorable ruling from the IRS allowing ARC to reverse the reserve established
for the agreement at the time of the sale. This resulted in a $360,000
increase in the gain on sale which has been reported in discontinued
operations.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations
--------------------------------
Revenue for the first quarter of fiscal 1997 increased 2% from $8,825,000 to
$9,007,000 while the loss from continuing operations improved from ($654,000),
or ($.13) per share to ($319,000), or ($.07) per share. However, this year's
results included a one-time after-tax gain on the sale of a stock option of
$480,000, or $.10 per share.
The overall increase in revenue for the quarter was attributable to
acquisitions and new revenue attractions. The Company's new Bowl Aire center
in Wisconsin, the new Fun Fest family entertainment center (FEC) in Texas and
other "FEC-type" attractions installed at existing locations totaled almost $1
million for the quarter. These new revenue sources contributed nearly $130,000
to operating income even though the first quarter is typically the Company's
slowest and least profitable.
Revenue for comparable centers and comparable bowling operations declined
nearly $700,000, or 8%. The decrease resulted primarily from a decline in
bowler traffic as the volume of games bowled was down 9% in the quarter. This
led to a 9% drop in bowling lineage revenue which comprises 64% of total
revenue. Ancillary revenue sources such as beverage and food declined 7% and
5%, respectively from the decrease in bowler traffic.
The Company's operating loss for the quarter worsened from ($532,000) last year
to ($855,000) this year, in spite of the increase in revenue. This was due to
the decline in same store, comparable operations revenue as discussed above.
The impact of the decline in revenue on the operating loss was partially
mitigated by a reduction in operating costs for comparable center operations
and by the incremental operating income generated by new locations and new
revenue attractions as discussed above.
First quarter interest expense was reduced almost 14% from $749,000 to $646,000
due to last year's prepayment of approximately $2.5 million in debt using a
portion of the proceeds from the sale of the Company's investment in Right
Start. In addition, $2.6 million in debt was retired during last year's fourth
quarter in connection with the sale of a commercial real estate project.
During fiscal 1997's first quarter, an option to repurchase 400,000 shares of
Right Start's common stock was sold for $800,000 in cash, resulting in an
after-tax gain of $480,000, or $.10. The option had been retained after last
year's first quarter sale of the Company's investment in Right Start and
contained exercise prices ranging from $3.30 to $6.00 over a seven year period.
The option was sold when Right Start's common stock was trading at $6 3/8.
8
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Results of Discontinued Operations
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During the first quarter of fiscal 1996, the Company sold its 62.5% ownership
in Right Start for $11,811,000 in cash and recorded a $2,251,000 after-tax
gain, equal to $.45 per share. In connection with the transaction, the Company
had agreed to reimburse Right Start 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 2000. During the first
quarter of fiscal 1997, the Company received a favorable ruling from the IRS
allowing it to reverse the reserve established for the reimbursement agreement
at the time of the sale. This resulted in a $360,000 increase in the gain on
sale which has been reported in discontinued operations.
Liquidity and Capital Resources
-------------------------------
At August 28, 1996, the Company had $10,155,000 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 August 28, 1996 and August 30,
1995, there were no borrowings outstanding under the Company's $2,000,000 line-
of-credit. Advances under this line would bear interest at the prime rate plus
.5%. There was $300,000 outstanding at August 28, 1996 under a $1,000,000
line-of-credit which is designated for use by one of the Company's wholly-owned
subsidiaries. This line bears interest at the prime rate plus 1%.
The Company's Board of Directors approved a stock repurchase plan in October
1995 that authorizes repurchase of up to 20% of the Company's outstanding
stock. Through August 28, 1996, the Company has repurchased 499,530 shares,
representing nearly 10% of its common stock outstanding when the plan was
approved. The total cost of the reacquired shares is $3,337,000. The
repurchased shares are retired by the Company and not held as treasury shares.
The Company has paid quarterly cash dividends for over 28 consecutive years.
The first quarter dividend of $.065 per share represents a 4% increase over
last year when the quarterly dividend was $.0625 per share.
9
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
On September 24, 1996 the Company held its annual meeting of shareholders. The
shareholders voted upon the following matters: (1) the election of directors:
the number of directors who stood for election was five, which comprises the
entire Board of Directors; and (2) the ratification of the appointment of Price
Waterhouse as independent auditors for the fiscal year ended May 29, 1996.
Each matter was approved. The results of the vote were as follows:
(1) Board of Directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
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<S> <C> <C>
Stewart Bloom 3,785,624 28,630
Stephen R. Chanecka 3,752,662 61,592
Robert A. Crist 3,779,479 34,775
Bruce Feuchter 3,744,328 69,926
Stanley B. Schneider 3,784,082 30,172
</TABLE>
(2) Ratification of Price Waterhouse as auditors for fiscal year 1996:
WITHHOLD
FOR AUTHORITY
--- ---------
3,779,522 34,731
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 October 7, 1996 /s/ Robert A. Crist
----------------- -----------------------------------
Robert A. Crist, President
Date October 7, 1996 /s/ Karen B. Wagner
----------------- -----------------------------------
Karen B. Wagner, Vice President/Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-28-1997
<PERIOD-START> MAY-30-1996
<PERIOD-END> AUG-28-1996
<CASH> 2,481
<SECURITIES> 0
<RECEIVABLES> 787
<ALLOWANCES> 50
<INVENTORY> 596
<CURRENT-ASSETS> 5,748
<PP&E> 88,905
<DEPRECIATION> 29,479
<TOTAL-ASSETS> 70,803
<CURRENT-LIABILITIES> 7,749
<BONDS> 27,575
0
0
<COMMON> 9,583
<OTHER-SE> 18,635
<TOTAL-LIABILITY-AND-EQUITY> 70,803
<SALES> 9,007
<TOTAL-REVENUES> 9,904
<CGS> 1,057
<TOTAL-COSTS> 9,862
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 646
<INCOME-PRETAX> (522)
<INCOME-TAX> (203)
<INCOME-CONTINUING> (319)
<DISCONTINUED> 360
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
