<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For The Fifty-Two Week Fiscal Year Ended May 29, 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, California 95670
Mailing Address: P. O. Box 580, Rancho Cordova, CA 95741
Registrant's Telephone Number: (916) 852-8005
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, No Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
Registrant was $28,152,709 based upon the average trading price quoted on the
NASDAQ system on August 14, 1996. The number of shares of Registrant's only
class of common stock outstanding at fiscal year end was 4,647,899 shares.
Documents Incorporated by Reference - See pages 2 and 3
1
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DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part of Form 10-K Document
- ----------------- --------
Part I None
Part II
Item 6. Selected Financial Data Company's Annual Report
----------------------- to Shareholders for the
fiscal year ended
May 29, 1996, page 3
Item 7. Management's Discussion and Company's Annual Report
--------------------------- to Shareholders for the
Analysis of Financial Condition fiscal year ended
------------------------------- May 29, 1996, pages 4-5
and Results of Operations
-------------------------
Item 8. Financial Statements and Company's Annual Report
------------------------ to Shareholders for the
Supplementary Data fiscal year ended
------------------ May 29, 1996, pages 6-13,
and Price Waterhouse LLP
Report dated July 22, 1996,
page 14
Item 9. Changes in and Disagreements with Not applicable
---------------------------------
Accountants on Accounting and
-----------------------------
Financial Disclosure
--------------------
Part III
Item 10. Directors and Executive Officers Company's Proxy Statement
-------------------------------- to be filed in connection
of the Registrant with its Annual Meeting
----------------- of Shareholders to be held
September 24, 1996, pages 5-6
Item 11. Executive Compensation Company's Proxy Statement
---------------------- to be filed in connection
with its Annual Meeting
to Shareholders to be held
September 24, 1996, pages 8-15
2
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Item 12. Security Ownership of Certain Company's Proxy Statement
----------------------------- to be filed in connection
Beneficial Owners and Management with its Annual Meeting
-------------------------------- to Shareholders to be held
September 24, 1996, pages 3-4
Item 13. Certain Relationships and Related Company's Proxy Statement
--------------------------------- to be filed in connection
Transactions with its Annual Meeting
------------ to Shareholders to be held
September 24, 1996, pages 7-8
Part IV
Item 14. Exhibits, Financial Statement Exhibits as specified in
----------------------------- Item 14 of this Report,
Schedules, and Reports on pages 16-17
-------------------------
Form 8-K
--------
3
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PART I
ITEM 1. BUSINESS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. Certain statements in this
Form 10-K under "Item 1. Business," and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form 10-K constitute "forward-looking statements" within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-
looking statements involve known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance, or achievements of
American Recreation Centers, Inc. (the Company) to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; advertising, marketing and sales
efforts; success of the Company's efforts to restage certain bowling centers as
family entertainment centers; acceptance of new programs and entertainment
offerings; business abilities and judgement of personnel; availability of
qualified management personnel; changes in, or the failure to comply with,
government regulations; weather conditions; operating cost containment efforts;
continued availability of lines of credit; availability of qualified
construction personnel; ability to remodel, refurbish and restage Company
facilities in a cost effective manner; uncertainties surrounding consolidation
of the industry; the historically cyclical nature of the bowling industry; and
other factors referenced in this Form 10-K.
(a) GENERAL DEVELOPMENT OF BUSINESS - BOWLING AND RECREATION OPERATIONS. The
Company was incorporated in California in 1959. It is one of the largest chain
operators of bowling centers in the United States. As of August 14, 1996 it
operates a total of 41 bowling centers (eighteen in Northern California, three
in Southern California, eight in Texas, seven in Wisconsin, three in Oklahoma
and one each in Kentucky and Missouri) containing an aggregate of 1,624 lanes.
ARC's bowling centers range in size from 24 to 72 lanes. Twelve centers are
located in buildings that are leased from third parties; nine centers are
located in buildings that are owned by the Company or its wholly-owned
subsidiaries; and twenty are operated by joint ventures which own the buildings
and in which the Company is an 85% owner.
ARC's bowling centers include food and beverage facilities and coin-operated
video and other games. ARC operates the beverage facilities in all the bowling
centers, each of which sells beer, wine and mixed drinks with the exception of
one center which sells only beer and wine. The Company operates the snack bars
in all centers except three older centers that lease restaurants to independent
operators. Beverage operations are profitable. Profits from food operations
are generally minimal; this service is offered primarily for the convenience of
bowling patrons. The bowling division receives a percentage of the gross
revenues from coin-operated video and other games which are owned by third party
vendors or, in the case of the California bowls, by a wholly-owned
4
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subsidiary, ARC Games, Inc. Most centers contain pro shops leased to independent
operators. ARC does, however, operate the pro shops in seven of its centers and
these pro shops generate a modest profit. All of ARC's bowling centers have
child care facilities and parking. The Company provides child care for the
convenience of bowlers free of charge. The Company's bowling centers have
computerized cash receipt control systems to control receipt of funds for all
games bowled as well as computer terminals that communicate with the corporate
office computer system to further enhance these controls.
Approximately 61% of ARC's bowling lineage revenues are derived from bowling
leagues that enter into league reservation agreements to use a specified number
of lanes for a specified time on a weekly, or other periodic basis over the
course of a bowling season. The seasons for league play are generally nine
months in the winter and three months in the summer. However, shorter
"midseason" leagues are also offered throughout the year.
The Company aggressively markets its primary product league bowling, through a
continuous personal sales program at each of its centers. ARC sales personnel
call on employers and a wide variety of nonprofit organizations, such as
churches, social clubs, civic clubs, P.T.A.'s and fraternal groups, offering
them free bowling parties as an inducement to visit the bowling centers, try
league bowling and hopefully contract for league bowling. In numerous centers,
the Company utilizes full-time direct sales personnel. In addition the Company
advertises in all the recognized mass media--radio, television and newspaper--
and engages in on-going direct mail marketing programs aimed at specific age and
demographic groups.
The bowling industry is highly competitive on a local basis. Most of ARC's
centers compete with a number of individually owned and operated centers.
Several of the Company's centers in Southern California, Texas and the Midwest
also compete with centers owned by bowling center chains of equivalent or larger
size. Further competition for ARC's bowling centers could arise if bowling
chains or independent owners construct new bowling facilities in the same areas
as ARC's existing centers. To date, the Company has experienced modest
competition for acquisition of independently owned bowling centers, but expects
that as the industry consolidates, ARC could experience competition from other
chains such as AMF (approximately 265 centers), Brunswick Corporation
(approximately 150 centers), Bowling Corporation of America (approximately 50
centers), and Bowl America (approximately 25 centers).
The Company has access to bowling equipment from Brunswick Corporation and AMF
Incorporated, several smaller manufacturers and through purchases of used
equipment from other bowling centers. The Company maintains a warehouse of
equipment, including lanes and automatic pinsetters for replacements and to
equip new centers. The restaurant and beverage business also have multiple
sources of supply. The Company has not experienced problems or interruptions as
a result of inadequate supplies of any type.
ARC has approximately 1,400 employees in total. With the exception of 20 people
at the
5
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Company's headquarters, the remaining employees are bowling and recreation
operations employees and are based in individual bowling centers. The Company
maintains a variety of training programs and incentive compensation plans, and
believes that relations with its employees are good. The Company has no
organized labor agreements.
Over the past three fiscal years, revenue growth in the Company's bowling
business has been attributable to acquisitions, as thirteen bowling centers were
added. During the same period, revenue in comparable centers declined 3% per
year. The decline in comparable center revenue reflects a nationwide decline in
the popularity of bowling. Industry-wide, bowling proprietors have been faced
with heightened competition from other entertainment and recreational venues,
including the rapidly expanding movie theater industry and formula restaurant
chains. Military base closures and anti-smoking legislation continued to impact
business, particularly in the Company's California centers. Lastly, league
bowling continues to decline due to societal changes including longer work
weeks, emphasis on family activities and other factors that have made bowlers
less likely to commit to league schedules.
Foreseeing the pressure on the bowling industry, management embarked upon a plan
to test the concept of broadening the Company's operations from one that offers
primarily bowling as family entertainment to one that offers a broader menu of
recreational activities, with bowling being only one of those alternatives. The
objective has been to create a broader base of entertainment attractions that
will increase the frequency and revenue per customer per visit. Two test
locations were completed in fiscal 1996.
Ten lanes of the 60-lane Pastimes center in San Jose, California have been
converted to space that contains children's soft-play, redemption games and
branded food operations. These activities are targeted to families with young
children. Secondly, a 49,000 square foot family entertainment center in
Addison, Texas opened in December 1995. This facility, called Fun Fest,
features branded food operations, high tech electronic games including virtual
reality and laser activities, billiards, darts, and other recreational
attractions, all designed to attract young adult customers. Fun Fest generated
$1.3 million in its first five and a half months of operations and has been
consistently profitable. The Pastimes concept has been slower to gain consumer
acceptance, but revenue has been improving, particularly this summer.
Based on the preliminary results of the two family entertainment center concepts
and on the continued decline in bowling-related revenue, the Company plans to
pursue adding new revenue sources to select bowling centers. These include
Pizza Hut Express, redemption games, darts, billiards, themed bars, party rooms,
virtual reality games and combinations thereof. As of the date of this Form 10-
K, redemption centers and other new entertainment attractions have already been
introduced at a number of centers. This new strategy has begun to change the
overall sales mix and profit margins of the Company. Revenue from bowling
lineage, which has very little direct cost associated with it, has been steadily
declining. Revenue from new entertainment attractions has been increasing but
6
<PAGE>
usually carries an associated cost of goods or other direct costs. Consequently,
profit margins have been negatively impacted. However, the Company believes that
the conversion strategy will ultimately produce higher revenue and profits than
if the Company remained a "bowling-only" concern. Although the Company believes
that refurbishing and restaging its centers is necessary for these reasons, no
assurance can be given that these actions will be successful or that similar or
different actions will not be required in the future.
The Company is also engaged on a continuous basis in discussion regarding the
possibility of acquiring additional bowling centers, both within and outside of
its current operating areas. However, the Company is more focused on the
Midwest and Southern states where land and building prices tend to be more
favorable and regional economies tend to be stronger. A majority of the over
7,000 bowling centers in the United States are independently owned and the
Company believes that many of these independent owners and operators may now
have an interest in selling their centers. The Company's strategy is to acquire
centers when it believes that a center's operations can be improved by
instituting professional management, staff training and controls, by aggressive
marketing, facilities remodeling and updating, and by introduction of the family
entertainment concept.
Information regarding the Company's significant acquisitions and dispositions is
set forth in Part II, Item 8, through incorporation by reference to the 1996
Annual Report to Shareholders, Note 3 to financial statements.
GENERAL DEVELOPMENT OF BUSINESS - DISCONTINUED OPERATIONS. Prior to the first
quarter of fiscal 1996, the Company operated in two business segments: bowling
and direct marketing. On August 4, 1995, the Company sold its 62.5 percent
interest in The Right Start, Inc., a catalog company and retailer of infants'
and children's products that comprised the operations of the direct marketing
segment. The sale price for the 3,937,000 shares was $11,811,000 cash plus an
option to repurchase 400,000 shares of Right Start's common stock at an exercise
price ranging from $3.30 to $6.00 over a seven year period. The option was
subsequently sold during the Company's first fiscal 1997 quarter for $800,000 in
cash.
Information regarding the Company's sale of its interest in The Right Start,
Inc. is set forth in Part II, Item 8, through incorporation by reference to the
1996 Annual Report to Shareholders, Note 2 to the financial statements.
(b) Not applicable to Registrant.
(c) NARRATIVE DESCRIPTION OF BUSINESS. Included in (a) above.
(d) Not applicable to Registrant
7
<PAGE>
ITEM 2. PROPERTIES.
Facilities. The following table on pages 9 through 12 sets forth the name and
address of each bowling center, the number of lanes that it contains and whether
the building in which the center is located is leased or owned. With one
exception, the Company owns all of the equipment at each center. Leases on the
centers, giving the effect of option renewal periods, expire as follows: one in
1999; six from 2000 through 2009; five from 2010 through 2019; and one from 2020
through 2029. The leases provide for minimum and percentage rentals and, in a
majority of cases, for the payment of property taxes and insurance by the
lessee. With a single exception, the Company's leases with unaffiliated parties
do not provide for cost of living adjustments in the lease payments.
8
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
SAN FRANCISCO BAY AREA
<S> <C> <C>
Mel's Southshore Bowl 40 Owned
300 Park Street
Alameda, California
Mission Lanes 40 Owned
1287 South Park Victoria
Milpitas, California
Pinole Valley Lanes 40 Leased
1580 Pinole Valley Road
Pinole, California
19th Avenue Bowl 32 Leased
1830 South Delaware
San Mateo, California
Mowry Lanes 40 Owned
585 Mowry Avenue
Fremont, California
Mel's Redwood Bowl 40 Owned(2)
2580 El Camino Real
Redwood City, California
Valle Vista Bowl 42 Leased
3345 Sonoma Boulevard
Vallejo, California
SAN JOSE
Pastimes 60 Leased
5420 Thornwood Drive
San Jose, California
Fiesta Lanes 40 Leased
1523 West San Carlos
San Jose, California
Saratoga Lanes 32 Leased
1585 Saratoga Avenue
San Jose, California
SACRAMENTO/SAN JOAQUIN VALLEY
Mardi Gras Lanes 50 Leased
4800 Madison Avenue
Sacramento, California
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
<S> <C> <C>
Alpine Valley Bowl 40 Owned
2326 Florin Road
Sacramento, California
Birdcage Bowl 40 Leased
6149 Sunrise Boulevard
Citrus Heights, California
Rocklin Bowl 40 Owned
2325 Sierra Meadow Drive
Rocklin, California
Land Park Bowl 32 Owned
5850 Freeport Boulevard
Sacramento, California
Visalia Lanes 40 Owned
1740 West Caldwell Avenue
Visalia, California
Rodeo Lanes 40 Leased
140 Shaw Avenue
Clovis, California
Sunnyside Lanes 36 Leased
5693 East Kings Canyon Road
Fresno, California
SOUTHERN CALIFORNIA
Cerritos Lanes 40 Leased
18811 Carmenita Road
Cerritos, California
Friendly Hills Lanes 32 Owned
15545 East Whittier Boulevard
Whittier, California
Forest Lanes 40 Leased
22771 Centre Drive
Lake Forest, California
DALLAS, TEXAS
Triangle Bowl - Lewisville 32 Owned(1)
1398 West Main Street
Lewisville, Texas
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
<S> <C> <C>
Triangle Bowl - Richardson 40 Owned(1)
2101 North Central Expressway
Richardson, Texas
Triangle Bowl - Irving 48 Owned(1)
1717 North Beltline Road
Irving, Texas
Triangle Bowl - Desoto 40 Owned(1)
121 Northgate Drive
Desoto, Texas
Triangle Bowl - Arlington 48 Owned(1)
1801 East Lamar Boulevard
Arlington, Texas
Triangle Bowl - Midland Park 32 Owned
5320 West Loop 250 North
Midland, Texas
Fun Fest 30 Owned(1)
3805 Beltline Road
Addison, TX 75244
HOUSTON, TEXAS
Triangle Bowl -Houston 28 Owned(1)
650 West Crosstimbers
Houston, Texas
OWENSBORO, KENTUCKY
Bowlodrome 24 Owned(1)
600 East 14th Street
Owensboro, Kentucky
OKLAHOMA
Sunny Lanes 24 Owned(1)
4330 South East 15th Street
Del City, Oklahoma
Windsor Lanes 40 Owned(1)
4600 North West 23rd Street
Oklahoma City, Oklahoma
Moore Bowl 40 Owned(1)
420 South West 6th Street
Moore, Oklahoma
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
KANSAS CITY, MISSOURI
<S> <C> <C>
Capital Lanes 24 Owned(1)
11611 Hickman Mill Road
Kansas City, Missouri
MILWAUKEE, WISCONSIN
Bowlero Bowl 72 Owned(1)
11737 West Burleigh
Wauwatosa, Wisconsin
West Allis Bowl 48 Owned(1)
10901 West Lapham
West Allis, Wisconsin
West Bowl 48 Owned(1)
7505 West Oklahoma
Milwaukee, Wisconsin
South Park Bowl 40 Owned(1)
305 North Chicago
South Milwaukee, Wisconsin
Waukesha Bowl 48 Owned(1)
901 Northview Road
Waukesha, Wisconsin
Regency Lanes 60 Owned(1)
6014 North 76th Street
Milwaukee, Wisconsin
Bowl Aire 32 Owned(1)
2547 Park Avenue
Beloit, WI 53511
</TABLE>
(1) Owned by joint ventures in which the Company has an 85 percent interest.
(2) Building is owned, land is leased.
12
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REAL ESTATE
The following table sets forth certain information about the real estate owned
or partially owned by the Company or in partnership with others as of August 14,
1996.
<TABLE>
<CAPTION>
COMPANY OWNED REAL ESTATE
FISCAL
SIZE OF LAND BUILDING IN % OWNED YEAR
BOWLING PROPERTIES LOCATION IN ACRES SQUARE FEET BY ARC ACQUIRED CURRENT USE
- ------------------ -------- ------------ ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mowry Lanes Fremont, CA 2.30 35,000 100 1987 Bowling Center
Land Park Bowl Sacramento, CA 2.53 30,000 100 1987 Bowling Center
Mel's Southshore Bowl Alameda, CA 2.10 40,000 100 1986 Bowling Center
Alpine Valley Lanes Sacramento, CA 4.00 40,000 100 1985 Bowling Center
Rocklin Bowl Rocklin, CA 2.85 36,000 100 1986 Bowling Center
Visalia Lanes Visalia, CA 3.00 33,000 100 1983 Bowling Center
Mission Lanes Milpitas, CA 3.07 33,000 100 1978 Bowling Center
Friendly Hills Lanes Whittier, CA 2.75 34,000 100 1972 Bowling Center
Mel's Redwood Bowl Redwood City, CA 0.00 40,000 100 1993 Bowling Center
Triangle Bowl - Houston Houston, TX 2.33 28,000 85 (4) 1982 Bowling Center
Triangle Bowl - Lewisville (1) Lewisville, TX 2.80 30,000 85 (4) 1986 Bowling Center
Triangle Bowl - Richardson Richardson, TX 3.22 38,000 85 (4) 1988 Bowling Center
Triangle Bowl - Irving Irving, TX 4.04 60,000 85 (4) 1988 Bowling Center
Triangle Bowl - Desoto Desoto, TX 4.00 38,000 85 (4) 1991 Bowling Center
Triangle Bowl - Arlington Arlington, TX 4.28 44,000 85 (4) 1993 Bowling Center
Triangle Bowl - Midland Midland, TX 4.21 38,000 85 (4) 1995 Bowling Center
Fun Fest Addison, TX 4.29 49,000 85 (4) 1995 Family Entertainment
Center
Bowlodrome Owensboro, KY 0.83 24,000 85 (5) 1993 Bowling Center
Capital Lanes Kansas City, MO 4.00 26,000 85 (5) 1994 Bowling Center
Sunny Lanes Del City, OK 3.50 22,000 85 (5) 1993 Bowling Center
Windsor Lanes Oklahoma City, OK 4.14 40,000 85 (5) 1994 Bowling Center
Moore Bowl Moore, OK 3.00 38,000 85 (5) 1994 Bowling Center
Bowlero Bowl Wauwatosa, WI 9.00 71,000 85 (5) 1995 Bowling Center
West Allis Bowl West Allis, WI 4.00 45,000 85 (5) 1995 Bowling Center
West Bowl Milwaukee, WI 1.00 41,500 85 (5) 1995 Bowling Center
South Park Bowl S. Milwaukee, WI 4.00 40,000 85 (5) 1995 Bowling Center
Waukesha Bowl Waukesha, WI 5.00 50,000 85 (5) 1995 Bowling Center
Regency Lanes Milwaukee, WI 6.25 90,000 85 (5) 1995 Bowling Center
Bowl Aire Beloit, WI 6.00 33,000 85 (5) 1995 Bowling Center
---- ------
Total Bowling 102.49 1,166,500
------ ---------
<CAPTION>
NON-BOWL REAL ESTATE
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Visalia (Land - Retail site) Visalia, CA 1.34 100 1983 Vacant lot
Rocklin (Land - Retail site) Rocklin, CA 2.30 87.5 (3) 1982 Vacant lot
Livermore (Warehouse) Livermore, CA 1.00 20,000 50 (2) 1979 Current warehouse
Madison Avenue (Office) Sacramento, CA 0.00 6,000 100 1987 Office building
Raley Boulevard (Land -
Warehouse site) Sacramento, CA 3.57 100 1985 Vacant lot
Broadway Grand (Land -
Office site) Oakland, CA 1.13 60 (2) 1978 Parking lot
Commercial - Restaurant (1) Lewisville, TX 0.68 4,000 100 1986 Restaurant
Sun Center (Office) (6) Rancho Cordova, CA 2.40 37,000 100 1990 Office building
---- ------
Total Non-Bowling 12.42 67,000
----- ------
</TABLE>
1. These properties are on adjoining parcels of land in Lewisville, TX.
2. Partnership with Bernal Investments, Inc., a Northern California real estate
contractor and not an affiliate with the Company.
3. Partnership with Fong, Eatough and Borges, a Northern California
architecture and planning firm and not an affiliate with the Company.
4. Joint Venture with Neil Hupfauer.
5. Joint Venture with William Kratzenberg.
6. The Company's headquarters occupies approximately 20% of the rentable office
space. The rest is leased or available for lease to tenants.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Registrant is normally engaged in a number of cases of ordinary and routine
litigation incidental to its business, substantially all of which actions
involve personal injuries, minor wage disputes, or workers' compensation claims,
and occasional landlord-tenant disputes. Substantially all of the claims under
such routine litigation are covered by insurance or adequate reserves, and most
such cases are being defended by an insurance carrier at no direct cost to
Registrant.
Registrant is not engaged in any significant litigation, nor is it aware of any
significant claims or threatened litigation as of August 14, 1996.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS.
(a), (b) and (c) - On August 14, 1996 the average price for a share of the
Registrant's Common Stock was $6.50. At August 14, 1996, there were
approximately 4,700 holders of record of the Registrant's Common Stock.
The following table sets forth (i) the quarterly range of high and low bid
prices per share of the Registrant's Common Stock in the over-the-counter
market, as reported by NASDAQ (National Association of Securities Dealers'
Automated Quotation System), and (ii) the quarterly cash dividends per share
declared by the Registrant on its Common Stock.
<TABLE>
<CAPTION>
Cash
Fiscal Quarters: High Low Dividends
- ---------------- ---- --- ---------
<S> <C> <C> <C>
1996:
First Quarter $7.375 $5.875 $.0625
Second Quarter $6.75 $5.75 $.0625
Third Quarter $6.625 $5.875 $.0625
Fourth Quarter $7.125 $5.75 $.065
1995:
First Quarter $7.00 $6.375 $.060
Second Quarter $7.00 $5.875 $.060
Third Quarter $6.50 $4.50 $.060
Fourth Quarter $7.625 $6.125 $.0625
</TABLE>
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference to 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements together with the report thereon of Price Waterhouse
dated July 22, 1996, appearing in the American Recreation Centers, Inc. 1996
Annual Report to Shareholders are incorporated by reference in this Form 10-K
Annual Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference to Definitive Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to Definitive Proxy Statement.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements of the Company as set forth under Item 8 of this report
on Form 10-K are incorporated herein by reference to the following pages of the
1996 Annual Report to Shareholders:
<TABLE>
<CAPTION>
Page in
Annual
Report**
--------
<S> <C>
Report of Independent Accountants 14
Consolidated Balance Sheet at
May 29, 1996 and May 31, 1995 6
Consolidated Statement of Income
and Retained Earnings for the
three years ended May 29, 1996 7
Consolidated Statement of Cash Flows
for the three years ended May 29, 1996 8
Notes to Consolidated Financial Statements 9-13
(a)(2) Financial Statement Schedules
Report of Independent Accountants
on Financial Statement Schedule
for the three years ended May 29, 1996 19
II - Valuation Reserves 20
</TABLE>
(a)(3) Financial Statements of the American Recreation Centers, Inc. Employee
Stock Ownership Plan for the year ended May 29, 1996 to be filed by
amendment.
** Incorporated by reference from the indicated pages of the 1996 Annual Report
to Shareholders.
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
16
<PAGE>
(a)(4) Listing of Exhibits
The following exhibits of the Company are included or incorporated herein.
(Note: The numbers preceding the exhibits correspond to the specific number
within Item 601 of Regulation S-K.)
Exhibit
Number
- ------
10.1 Contract for investment banking services between the Company and Allen &
Company Incorporated, dated March 30, 1995.**
10.2 Executive Severance Agreement between the Company and Robert A. Crist,
dated April 1, 1995.**
10.3 Executive Severance Agreement between the Company and Karen B. Wagner,
dated April 1, 1995.**
10.4 Executive Severance Agreement between the Company and Susan K. Cook,
dated April 1, 1995.**
13.1 Annual Report to Shareholders for fiscal year ended May 29, 1996.
13.2 Proxy statement to be filed in connection with the Annual Shareholders
Meeting on September 24, 1996.**
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the fiscal year
ended May 29, 1996:
August 4, 1995 Reporting the sale of the Company's majority interest
in The Right Start, Inc.
May 3, 1996 Reporting the repurchase of a 240,000 share block of
the Company's common stock, which represented 4.9% of
the shares outstanding.
(c) Not applicable.
(d) Not applicable.
**Previously filed.
17
<PAGE>
SIGNATURES
Pursuant to the requirement of Sections 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN RECREATION CENTERS, INC.
(Registrant)
Dated: August 20, 1996 /s/ Robert A. Crist
-----------------------------
Robert A. Crist, President and
Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Robert A. Crist August 20, 1996
- ---------------------------------
Robert A. Crist, Principal
Executive Officer and Director,
President
/s/ Karen B. Wagner August 20, 1996
- ---------------------------------
Karen B. Wagner, Principal
Financial and Accounting Officer,
Vice President/Treasurer
/s/ Stanley B. Schneider August 20, 1996
- ---------------------------------
Stanley B. Schneider, Director
/s/ G. Gervaise Davis III August 20, 1996
- ---------------------------------
G. Gervaise Davis III, Vice
President/Legal and Secretary
/s/ Stephen R. Chanecka August 20, 1996
- ---------------------------------
Stephen R. Chanecka, Director
18
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of American Recreation Centers, Inc.
Our audits of the consolidated financial statements referred to in our report
dated July 22, 1996 appearing in the 1996 Annual Report to Shareholders of
American Recreation Centers, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a.2.) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
- ------------------------------------
Sacramento, California
July 22, 1996
19
<PAGE>
AMERICAN RECREATION CENTERS, INC. SCHEDULE II
AND CONSOLIDATED SUBSIDIARIES
VALUATION RESERVES
------------------
<TABLE>
<CAPTION>
Additions charged to
--------------------
Balance at Balance at
beginning Costs and Other end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Fifty-two weeks ended:
- ----------------------
May 29, 1996
- ------------
Allowance for doubtful accounts 16,000 34,000 50,000
- -------------------------------
Fifty-three weeks ended:
- ------------------------
May 31, 1995
- ------------
Allowance for doubtful accounts 96,000 (80,000) 16,000
Property held for sale 3,077,000 (3,077,000) 0
Fifty-two weeks ended:
- ----------------------
May 25, 1994
- ------------
Allowance for doubtful accounts 101,000 (5,000) 96,000
Property held for sale 5,644,000 397,000 (2,964,000) 3,077,000
</TABLE>
20
<PAGE>
EXHIBIT 13.1
To Our Shareholders
In last year's annual report, we discussed the
process of transformation occurring at American
Recreation Centers as we re-stage our business from
one primarily offering bowling into one offering an
expanded menu of entertainment alternatives at
neighborhood locations in six states. Fiscal 1996
proved that this strategy is both correct and
necessary.
Nationwide, bowling's popularity continued to lag.
ARC and other bowling proprietors faced heightened
competition from other entertainment and
recreational venues, including the rapidly expanding
movie theater industry and formula restaurant
chains. Also, military base closures and
anti-smoking legislation continued to impact
business at several of our bowls, particularly in
California. Nationwide, league bowling saw continued
declines as bowlers resist committing to league
schedules due to longer work weeks, family
activities and other factors.
The financial impact of these trends was obvious. It
was difficult maintaining revenue levels at
comparable bowls and, despite extremely tight cost
controls, profitability declined at most of our
centers. Also, the changing revenue mix put further
pressure on profit margins as high-profit bowling
lineage comprised a smaller percentage of total
revenue in fiscal 1996 than in previous years. See
the Management's Discussion and Analysis for more
details on the financial results for the year.
Bowling is a cyclical industry and has endured other
downturns in the past. While there is no guarantee
the current slide has bottomed, ARC and other
proprietors are working diligently to strengthen
marketing programs and entice customers back into our
centers. Bowling remains an affordable family
entertainment option and it is our charge to heighten
the visibility of bowling as a popular entertainment
option. At ARC, for instance, we have created special
pricing programs and packages to attract bowlers at
many centers particularly impacted by base closures
and local economic factors.
In addition to working harder and smarter to rebuild
bowling lineage, our expansion in the "family
entertainment center" (FEC) concept kicked off in
fiscal 1996. Fun Fest in Addison, Texas is our first
FEC constructed from scratch. In less than six
months, this 49,000 square foot facility has
generated $1.3 million in revenue and consistent
profits. At Fun Fest, bowling is one alternative
among many to attract young adult customers. Fun Fest
has created a great deal of excitement among bowling
proprietors nationwide who view it as the look of the
future for the industry.
Our other "FEC" at Pastimes in San Jose, California
has enjoyed moderate success. There, we converted ten
lanes of bowling into a children's area complete with
soft play apparatus, redemption games and branded
food. This approach targeted families with young
children. After a slow start, Pastimes' new concept
has been steadily taking hold with improved revenue,
particularly this summer.
<PAGE>
With these two FECs, ARC is the leader in the
industry as we point to broadening our entertainment
offerings in the future. In addition, we have
expanded redemption games, darts and billiards at
several ARC centers in fiscal 1996 and plan to add
more in fiscal 1997. Also, in fiscal 1996, we took
over vending operations from third-party providers,
thus giving ARC more control while adding revenue and
profitability to our operations.
At the end of the fiscal year, we restructured our
California bowling division, eliminating one layer of
management. At the same time, the Company has
undertaken a nationwide search to recruit a high
quality marketing director with broad entertainment
experience who can help guide the Company as it
offers expanded entertainment options to the
consumer.
In fiscal 1996 ARC grew to 41 centers in six states
with our acquisition of a 32 lane center in Beloit,
Wisconsin. ARC is the fourth largest chain bowling
proprietor in America.
Our stock repurchase program has acquired about
500,000 shares, equal to approximately 10 percent of
the shares outstanding. Your Board of Directors
continues to believe ARC shares represent excellent
value considering the Company's long-term prospects
and opportunities. Also, long-term debt was at a near
five-year low at the end of fiscal 1996, totaling
just under $28 million. The debt load is about the
same today that it was in fiscal 1992 when ARC owned
25 centers.
Lastly, Robert Feuchter, Chairman of the Board, at
age 70, announced his retirement in August and will
not be included in the slate of directors to be voted
upon at the September annual meeting. Bob joined the
company in 1959 and was elected President in 1965 and
Chairman of the Board in 1967. He served as Chairman,
President and CEO until 1990 and has served as
Chairman since then. Under Bob's leadership ARC grew
from a small Northern California chain into one of
the largest in the Nation. Bob's success and force of
personality made him one of the more respected
members of the industry. His experience, candor and
guidance will be missed by his peers, employees and
members of the Board of Directors. His son, Bruce
Feuchter, a securities lawyer, has agreed to accept a
nomination for a board position to be voted on at the
September annual meeting.
As we enter fiscal 1997, we believe ARC is prepared
to meet the continuing challenges in bowling as well
as hasten our evolution into a broader entertainment
company.
Sincerely,
Robert A. Crist
President and Chief Executive Officer
<PAGE>
About The Company
American Recreation Centers, Inc. (ARC) is one of the
largest chain operators of bowling centers in the
United States and the largest publicly-owned company
whose principal business is bowling and recreation.
The Company's bowling operations include 41 bowling
centers, 21 in California, eight in Texas, seven in
Wisconsin, three in Oklahoma and one each in Kentucky
and Missouri with a total of 1,624 lanes. The
non-California centers are owned and operated by
three 85 percent company-owned joint ventures:
Triangle Bowl Associates, American Red Carpet, and
Mid-America Associates.
League bowling provides stability to the bowling
industry through commitments to use lanes at specific
times on a periodic basis. Approximately 61 percent
of ARC's bowling revenue was derived from league
bowling during 1996 and approximately 60,000 bowlers
regularly participate in ARC league programs.
Non-league bowling, consisting of open play and
special events, is also an important contributor of
revenue and profits.
ARC is leveraging the broad appeal of bowling by
creating a wide variety of entertainment attractions
within its centers which are designed to increase the
frequency and revenue per customer per visit. A
49,000 square foot family entertainment center in
Addison, Texas opened in December 1995. It contains
30 lanes of bowling, and features branded food
operations, high tech electronic games including
virtual reality and laser activities, billiards,
darts, and other recreational attractions. Ten lanes
of a former 60-lane center in San Jose, California
were recently converted to include children's
soft-play, redemption games and branded food
operations.
The Company's common stock is traded on the NASDAQ
National Market System under the symbol AMRC. Stock
prices are quoted daily and appear in the Wall Street
Journal and other newpapers. At May 29, 1996, the
Company had approximately 4,700 shareholder accounts.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
<S> <C> <C>
Table of Contents Financial Highlights 2
Selected Financial Data 3
Management's Discussion and Analysis 4
Consolidated Financial Statements 6
Notes to Consolidated Financial Statements 9
Report of Independent Accountants 14
Officers and Directors 15
Corporate Information 15
Company Locations 16
</TABLE>
1
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
May 29, May 31, May 25,
Dollars in thousands, except per share amounts 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 46,080 $ 45,694 $ 41,196
Operating income 3,659 5,513 5,884
Net income (loss):
Continuing operations, excluding
property transactions 738 1,566 1,904
Gain (Loss) on property transactions 173 1,361 (127)
Discontinued operations 2,305 (1,316) 112
----------- ----------- -----------
3,216 1,611 1,889
----------- ----------- -----------
Earnings (Loss) per share:
Continuing operations, excluding
property transactions .15 .31 .38
Gain (Loss) on property transactions .03 .27 (.02)
Discontinued operations .46 (.26) .02
----------- ----------- -----------
.64 .32 .38
----------- ----------- -----------
Cash dividends per share .2525 .2425 .225
</TABLE>
2
<PAGE>
Selected Financial Data
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
May 29, May 31, May 25, May 26, May 27,
Dollars in thousands, except per share amounts 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $ 46,080 $ 45,694 $ 41,196 $ 38,783 $ 37,868
Net income (loss):
Continuing operations 738 1,566 1,904 1,364 1,358
Property transactions 173 1,361 (127) (178) 908
Discontinued operations 2,305 (1,316) 112 655 720
----------- ----------- ----------- ----------- -----------
3,216 1,611 1,889 1,841 2,986
----------- ----------- ----------- ----------- -----------
Net income from continuing operations
as a percent of operating revenue 1.6% 3.4% 4.6% 3.5% 3.6%
Earnings (Loss) per share:
Continuing operations .15 .31 .38 .27 .27
Property transactions .03 .27 (.02) (.03) .18
Discontinued operations .46 (.26) .02 .14 .15
----------- ----------- ----------- ----------- -----------
.64 .32 .38 .38 .60
----------- ----------- ----------- ----------- -----------
Cash dividends per share .2525 .2425 .225 .205 .185
Shareholders' equity per share 6.18 5.87 5.77 5.56 5.36
Return on equity 11% 5% 7% 7% 12%
Total assets 72,131 76,925 73,439 70,020 65,932
Long-term debt and capital leases
(includes current maturities) 27,990 30,800 31,315 30,516 28,822
<CAPTION>
Quarterly Data and Market Price Information
The following table sets forth supplementary financial information for each quarter in the Company's fiscal years ended May 29,
1996 and May 31, 1995.
Fiscal 1996 quarters ended August 30, November 29, February 28, May 29,
Dollars in thousands, except per share amounts 1995 1995 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $ 8,825 $ 11,475 $ 13,357 $ 12,423
Operating income (loss) (532) 1,140 1,870 1,181
Net income (loss):
Continuing operations (654) 383 728 281
Property transactions -- -- -- 173
Discontinued operations 2,305 -- -- --
----------- ---------- ----------- -----------
1,651 383 728 454
----------- ---------- ----------- -----------
Earnings (Loss) per share:
Continuing operations (.13) .08 .14 .06
Property transactions -- -- -- .03
Discontinued operations .46 -- -- --
----------- ---------- ---------- -----------
.33 .08 .14 .09
----------- ---------- ---------- -----------
Price range
High 7.375 6.75 6.625 7.125
Low 5.875 5.75 5.875 5.75
Dividends paid .0625 .0625 .0625 .065
<CAPTION>
Fiscal 1995 quarters ended August 24, November 23, February 22, May 31,
Dollars in thousands, except per share amounts 1994 1994 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $ 8,310 $ 11,405 $ 12,916 $ 13,063
Operating income (loss) (336) 1,466 2,438 1,945
Net income (loss):
Continuing operations (541) 429 965 713
Property transactions 1,037 -- 324 --
Discontinued operations 34 (897) (396) (57)
----------- ----------- ----------- -----------
530 (468) 893 656
----------- ----------- ----------- -----------
Earnings (Loss) per share:
Continuing operations (.11) .08 .20 .14
Property transactions .21 -- .06 --
Discontinued operations .01 (.18) (.08) (.01)
----------- ----------- ---------- -----------
.11 (.10) .18 .13
----------- ----------- ---------- -----------
Price range
High 7.00 7.00 6.50 7.625
Low 6.375 5.875 4.50 6.125
Dividends paid .06 .06 .06 .0625
</TABLE>
The fiscal 1995 quarterly information has been restated from that previously
filed in the Company's Form 10-Qs to reflect the Company's disposition of its
majority-owned subsidiary, The Right Start, Inc. The results of operations of
The Right Start, Inc. were previously included in the consolidated results as
the direct marketing division. They have been reclassified as income (loss) from
discontinued operations. (See Note 2).
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations For an understanding of the significant factors that
influenced the Company's performance during the past three fiscal years, this
discussion and analysis should be read in conjunction with the consolidated
financial statements which appear on pages 6 through 13 of this report.
Results of Continuing Operations The Company's operating revenue increased 1% in
1996 and 11% in 1995 due to acquisitions. Revenue from comparable operating
units declined in both years. Net income from continuing operations, which
totaled $911,000 in 1996, $2,927,000 in 1995 and $1,777,000 in 1994 was
significantly impacted each year by non-operating transactions. These
transactions and operating results are discussed below.
Discontinued Operations 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. The
1996 sale of the Company's investment in Right Start produced an after-tax gain
of $2,251,000. Discontinued operations also include the Company's majority share
of Right Start's operating results which totaled $54,000 in 1996, a loss of
($1,316,000) in 1995, and $112,000 in 1994.
Bowling Bowling revenue increased 1% in 1996 and 12% in 1995 due to
acquisitions. In addition, 1995 was a 53 week fiscal year, whereas 1996 and 1994
each comprised 52 weeks. 1996 additions included the construction of the Fun
Fest family entertainment center in Addison, Texas and the acquisition of a
32-lane center in Beloit, Wisconsin. Six bowling centers comprising most of the
former Red Carpet chain in Milwaukee, Wisconsin were acquired in the second
quarter of 1995. These centers aggregated 316 lanes.
Comparable center revenue declined nearly 5% in 1996 and 1% in 1995. The
comparable center declines were 3% in both years when the impact of the 53rd
week is eliminated. Revenue from bowling lineage comprised 55% of total revenue
in 1996, 57% in 1995, and 58% in 1994. For comparable centers, 1996 lineage
revenues were down 5% when the 53rd week is eliminated. This decline was a
combination of a 4% price increase which was offset by a nearly 9% decline in
volume. In 1995, a 2% price decrease combined with a 1% decline in bowler
traffic to produce a 3% decrease in lineage revenue. With the decline in bowler
traffic both years, ancillary revenue from beverage, food, video games and other
sources were also impacted. Consequently, total revenue per lane bed was $28,200
in 1996, $30,200 in 1995, and $31,000 in 1994. These numbers also reflect the
1995 purchase of the Red Carpet centers which have much lower revenue per lane
bed results than the Company's historical average but were acquired for their
opportunity for growth.
The decline in bowling revenue is consistent with an industry-wide downturn
caused by competing recreational and entertainment activities, demographic
changes and other economic influences. The industry has experienced increased
competition from formula restaurant chains, the proliferation of movie theaters
and other activities, all of which compete for consumers' recreation and
entertainment dollars. League bowling has experienced a substantial decline as
bowlers are less likely to commit to league schedules due to longer work weeks,
family activities, and other factors. Lastly, military base closures and
anti-smoking legislation have had a major impact on bowling centers influenced
by these factors.
The bowling industry has traditionally been cyclical in nature with downturns
similar to the current situation followed by a resurgence in the popularity of
the activity, however, no assurance can be given that such a resurgence in
business will occur. Various industry membership organizations are consolidating
their efforts to further strengthen industry marketing programs and to increase
the visibility of bowling as a family entertainment business. The Company has
been a market leader offering short season leagues and creating more special
group party programs to address the demographic issues facing the industry. The
Company had also created special pricing programs and value packaging,
especially in centers hard hit by economic factors.
Foreseeing the downward trend in the bowling industry, the Company embarked upon
a plan to broaden its operations from one that offers primarily bowling as
family entertainment into one that offers a broader menu of recreation options,
with bowling being an alternative. Two test locations were opened in the latter
part of 1996. The 49,000 square foot Fun Fest family entertainment center was
constructed in Addison, Texas. This facility blends 30 lanes of bowling with
other recreation formats designed to attract young adult customers. In its first
five and a half months of operations Fun Fest generated revenue of $1.3 million
and has been consistently profitable. Secondly, ten lanes of a former 60 lane
center in San Jose, California were converted to include children's soft play,
redemption games and branded food operations, all targeted to families with
small children. In addition to the two test concepts, the Company also expanded
its redemption games, darts and billiards operations in a number of centers and
converted its vending operations from the use of third party vendors to
in-house. 4
4
<PAGE>
Operating income in 1996 declined 28% overall and 32% for comparable centers.
Operating income in 1995 was even with 1994 levels as operating income from
newly acquired centers was offset by a 15% decline in profitability for
comparable centers. For both periods, the decline in profitability was
principally due to the overall drop in revenue which was so pronounced in
certain centers due to the factors discussed above that cost controls could not
mitigate the loss of revenue. Additionally, in 1996 the introduction of new
non-bowling activities added new revenue but at a lower margin than traditional
bowling activities.
1996's operating income included a $134,000 pre-tax charge for the restructuring
of the California bowling division which includes 21 centers. The reorganization
eliminated a layer of management that should result in more effective and less
costly management in the future. The Company is currently recruiting for a new
marketing executive, which should allow the Company to further restage itself.
Corporate and Other Other operating activities include the Company's non-bowling
real estate activities. The decline in "Other" revenue and operating income in
1996 and 1995 relates primarily to the sale of certain commercial real estate
properties as described below.
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 bowling. Corporate expense decreased 4% in 1996 and
increased 14% in 1995 primarily due to the costs of investment banking and
related services incurred in connection with an unsolicited offer for the
acquisition of the Company in 1995.
Gain (Loss) on Property Transactions It is the Company's policy to strategically
sell its non-bowling real estate and redeploy the proceeds to operating
activities. Gains and losses on the disposition of such assets have been
recognized in 1996, 1995 and 1994 and are described in Note 3 to the
consolidated financial statements.
Liquidity and Capital Resources Cash generated from continuing operations was
$4,374,000 in 1996 after adding back $4,679,000 in taxes paid on the gain on
sale of Right Start. Financing activities included repayment of $8,827,000 in
long-term debt, new long-term debt totaling $6,017,000 to finance acquisitions
and other capital expenditures, payment of $1,236,000 in dividends to
shareholders, and the repurchase of $2,928,000 (net of stock issued for stock
options) of the Company's common stock in connection with a stock repurchase
program authorized by the Board of Directors.
Investing activities included the receipt of $7,132,000 (net of $4,679,000 in
taxes) in connection with the sale of the Company's discontinued operations,
receipt of $2,840,000 in proceeds from the sale of commercial real estate and
bowling equipment, and capital expenditures totaling $8,254,000. In 1997, the
Company plans to expend approximately $3,000,000 for conversion of certain
bowling centers to family entertainment centers and for general bowling center
refurbishments. These capital expenditures will be financed through cash
generated from operations and long-term bank financing.
At May 29, 1996, the Company had $10,128,000 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 May 29, 1996, 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 were also no borrowings outstanding 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 long-term debt at May 29, 1996 totaled $27,990,000. The current
debt load represents a five year low, despite having grown from 25 centers in
1992 to 41 centers today.
The Company has paid quarterly cash dividends for 28 consecutive years. Cash
dividends for 1996 of $.2525 per share represent a 4% increase of 1995's
dividend which was up 8% over 1994's dividend.
Outlook The Company's core business is bowling which has experienced an
industry-wide downturn over the last several years. To counteract the industry
trend, the Company's strategy is to systematically convert bowling-only
facilities into neighborhood-based family entertainment centers that offer
bowling. The objective is to attract more customers to Company facilities and
increase the amount each customer spends per visit. This strategy may result in
highly profitable but declining bowling lineage revenue being replaced by new
revenue from sources that carry a lower profit margin. Consequently, the Company
expects that operating margins may be less than historical levels but that
overall operating results will be greater than if the Company offered only
bowling activities. Although the Company believes that refurbishing and
restaging its centers is necessary, no assurance can be given that these actions
will be successful or that similar or different actions will not be required in
the future.
5
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
May 29, May 31,
Dollars in thousands 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 3,489 $ 4,508
Accounts and notes receivable 810 274
Inventories 609 510
Current deferred income tax benefits 520 --
Other current assets 1,327 1,510
Net investment in discontinued operations -- 6,683
----------- -----------
Total current assets 6,755 13,485
----------- -----------
Property, equipment and leaseholds, at cost:
Land and buildings 41,965 40,466
Machinery and equipment 37,777 34,922
Leaseholds and leasehold improvements 8,532 7,201
Construction in progress -- 892
----------- -----------
88,274 83,481
Less--Accumulated depreciation and amortization (28,572) (26,018)
----------- -----------
59,702 57,463
----------- -----------
Other assets 5,674 5,977
----------- -----------
$ 72,131 $ 76,925
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,952 $ 4,191
Current maturities of long-term debt and capital leases 1,796 2,053
Accrued salaries and related expenses 1,182 987
Current deferred taxes -- 2,311
----------- -----------
Total current liabilities 7,930 9,542
----------- -----------
Long-term debt and capital leases 26,194 28,747
----------- -----------
Income taxes deferred to future years 7,209 7,233
----------- -----------
Minority interests 2,060 1,732
----------- -----------
Shareholders' equity:
Common stock:
Authorized--21,484,375 shares
Issued and outstanding--1996, 4,647,899
shares; 1995, 5,054,259 shares 9,845 12,773
Preferred stock:
Authorized--5,000,000 shares
Issued and outstanding--None
Retained earnings 18,893 16,898
----------- -----------
Total shareholders' equity 28,738 29,671
----------- -----------
Commitments and contingencies
----------- -----------
$ 72,131 $ 76,925
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Consolidated Statement of Income and Retained Earnings
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
May 29, May 31, May 25,
Dollars in thousands, except per share amounts 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue:
Bowling $ 45,222 $ 44,687 $ 39,690
Other 858 1,007 1,506
----------- ----------- -----------
46,080 45,694 41,196
----------- ----------- -----------
Operating, general and administrative expense:
Bowling 40,777 38,505 33,540
Other 550 535 770
Corporate 1,094 1,141 1,002
----------- ----------- -----------
42,421 40,181 35,312
----------- ----------- -----------
Operating income (loss):
Bowling 4,445 6,182 6,150
Other 308 472 736
Corporate (1,094) (1,141) (1,002)
----------- ----------- -----------
Operating income 3,659 5,513 5,884
Interest expense (2,677) (2,984) (2,759)
Interest and other income 584 331 242
Gain (Loss) on property transactions, net 411 2,483 (509)
Gain on sale of subsidiary's stock -- -- 297
----------- ----------- -----------
Income from continuing operations before provision for
income taxes and minority interests 1,977 5,343 3,155
Provision for income taxes (705) (1,867) (1,102)
Minority interests (361) (549) (276)
----------- ----------- -----------
Income from continuing operations 911 2,927 1,777
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, ($1,254) and $102 54 (1,316) 112
----------- ----------- -----------
Net income 3,216 1,611 1,889
Retained earnings, beginning of year 16,898 16,494 15,678
Cash dividends ($.2525, $.2425 and $.225 per share) (1,236) (1,220) (1,116)
Income tax benefits 15 13 43
----------- ----------- -----------
Retained earnings, end of year $ 18,893 $ 16,898 $ 16,494
=========== =========== ===========
Earnings per share:
Continuing operations $ .18 $ .58 $ .36
Discontinued operations .46 (.26) .02
----------- ----------- -----------
$ .64 $ .32 $ .38
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
May 29, May 31, May 25,
Dollars in thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,216 $ 1,611 $ 1,889
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,662 3,390 3,137
(Income) Loss from discontinued operations (2,305) 1,316 (112)
Gain on sale of subsidiary's stock -- -- (297)
(Gain) Loss from property transactions (411) (2,483) 509
Results attributed to minority interests 361 549 276
(Decrease) Increase in deferred income taxes (3,406) 2,193 1,132
Decrease (Increase) in other current assets 188 (490) 187
(Decrease) Increase in accounts payable and accrued expenses (1,610) 1,078 (381)
----------- ----------- -----------
Net cash (used in) from operations (305) 7,164 6,340
----------- ----------- -----------
Cash Flows from (used in) Investing Activities:
Proceeds from sale of subsidiary's stock 11,811 -- 425
Expenditures for property, equipment and leaseholds (8,254) (12,866) (5,757)
Proceeds from sale of property and equipment 2,840 8,479 --
Payments received on loan to ESOP -- 54 239
Other (137) 31 (215)
----------- ----------- -----------
Net cash from (used in) investing activities 6,260 (4,302) (5,308)
----------- ----------- -----------
Cash Flows from (used in) Financing Activities:
Issuance of long-term debt 6,017 11,401 5,755
Repayment of long-term debt (8,827) (12,381) (5,091)
Dividends to shareholders (1,236) (1,220) (1,116)
(Retirement) Issuance of common stock (2,928) 333 655
----------- ----------- -----------
Net cash (used in) from financing activities (6,974) (1,867) 203
----------- ----------- -----------
Net (decrease) increase in cash and equivalents (1,019) 995 1,235
Cash and equivalents at beginning of year 4,508 3,513 2,278
----------- ----------- -----------
Cash and equivalents at end of year $ 3,489 $ 4,508 $ 3,513
=========== =========== ===========
Supplementary schedule of noncash investing and financing activities:
Assets received in lieu of payment of note receivable $ 465
Note receivable as partial payment for real property sold $ 650
Stock issued and retired in connection with exercise of stock options $ 525
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
Notes to Consolidated Financial Statements
Note I: Description of Business and Significant Accounting Policies
- --------------------------------------------------------------------------------
American Recreation Centers, Inc. and its subsidiaries (the Company) operate
bowling centers in California, Texas, Wisconsin, Kentucky, Missouri and
Oklahoma. The Company's non-California bowling centers are owned and operated by
three 85 percent owned partnerships; Triangle Bowl Associates, Mid-America
Associates and American Red Carpet. The accompanying financial statements
include the accounts of American Recreation Centers, Inc., its wholly and
majority-owned corporate subsidiaries and general partnerships in which the
Company has controlling financial interests.
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. Significant data related to
discontinued operations is disclosed in Note 2.
Certain financial statement reclassifications of 1995 and 1994 amounts have been
made for comparative purposes.
A summary of the accounting principles and practices used in the preparation of
the consolidated financial statements follows.
Financial Statement Presentation The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount 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.
Fiscal Year The Company's fiscal year is a fifty-two or fifty-three week period
ending on the last Wednesday in May. Fiscal years 1996 and 1994 each comprised
52 weeks. Fiscal year 1995 comprised 53 weeks.
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. Average shares outstanding were 4,968,484,
5,020,649 and 4,940,461 in 1996, 1995 and 1994. Common stock equivalents include
the Company's stock options. Common stock equivalents in the aggregate are not
dilutive and, accordingly, are excluded from the computations of earnings per
share.
Cash and Equivalents Cash equivalents include certificates of deposit, money
market accounts, and demand deposits all of which have original maturities of
three months or less.
Inventories Inventories consist of products purchased for resale and are stated
at the lower of cost, determined on a first-in, first-out basis, or market
value.
Property, Equipment and Leaseholds Additions, major renewals and betterments are
included in the asset accounts at cost. Maintenance, repairs and minor renewals
are charged to operations when incurred. Generally, depreciation for financial
statement purposes is computed using the straight-line method over the estimated
useful life of the asset. Accelerated methods are used for income tax purposes.
The estimated lives of the assets for financial statement purposes are as
follows: building, 25-40 years; equipment, 3-25 years; and leaseholds and
leasehold improvements, 10 years or life of lease. The costs and related
accumulated depreciation of assets retired or otherwise disposed of are
eliminated from the accounts. Gains and losses from disposals are included in
operations.
Sale of Stock by Subsidiaries Upon the sale of stock by its corporate
subsidiaries, the Company has elected to reflect in its consolidated income
statement the difference between the book value of its interest in such
subsidiaries after the sale of stock, and the book value of its interest in such
subsidiaries prior to the sale of stock.
Income Taxes The Company accounts for income taxes using an asset and liability
approach under which deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of other assets and liabilities.
9
<PAGE>
Note 2: Discontinued Operations and Subsequent Event
- --------------------------------------------------------------------------------
During fiscal 1996, the Company sold its majority interest in Right Start to an
investment group led by Kayne, Anderson Investment Management Inc. for
$11,811,000 cash plus an option to repurchase 400,000 shares of Right Start's
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
Right Start up to $680,000 should it be unable to sustain ordinary loss
treatment for its deferred tax loss carryforward and it have sufficient taxable
income in or before its fiscal year 2000.
The Company's share of Right Start's results of operations up to the date of
sale, is included in the consolidated statement of income as discontinued
operations. Income (Loss) from operations of Right Start, net of applicable
income taxes, is summarized as follows:
<TABLE>
<CAPTION>
Dollars in thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 7,830 $ 45,741 $ 50,515
----------- ----------- -----------
Operating income (loss) 118 (1,659) 224
Interest and other income and expense, net 16 43 54
Loss on sale of Children's Wear Digest -- (1,744) --
----------- ----------- -----------
Income (Loss) from operations of Right Start
before income taxes and minority interest 134 (3,360) 278
Income taxes (49) 1,254 (102)
Minority interest (31) 790 (64)
----------- ----------- -----------
$ 54 $ (1,316) $ 112
=========== =========== ===========
</TABLE>
Subsequent to May 29, 1996, the Company sold the option to repurchase 400,000
shares of Right Start for $800,000. An after-tax gain of $480,000, or $.10 per
share, will be recorded in the first quarter of fiscal 1997.
Note 3: Acquisitions and Dispositions and Sales of Subsidiary's Stock
- --------------------------------------------------------------------------------
1996 In 1996's fourth quarter, the Company's seventy percent owned Union Square
Associates partnership sold its commercial real estate holdings in Union City,
California for $2,580,000. A pre-tax, pre-minority interest gain of $411,000 was
realized on the sale.
During the fourth quarter of 1996, the American Red Carpet joint venture
acquired the land, building and equipment of a 32-lane bowling center in Beloit,
Wisconsin for $1,400,000.
1995 During the first quarter of 1995, 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 long-term debt of $2,487,000 and to
acquire bowling centers in Milwaukee, Wisconsin (see below). A pre-tax,
pre-minority interest gain of $2,007,000 was recorded on the sale. 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 the second quarter, the Company formed the American Red Carpet joint venture
to acquire 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. 1995 acquisitions also
included the purchase of the $700,000 Fun Fest building site in Addison, Texas
by Triangle Bowl Associates.
In the third quarter of 1995, the Company sold the land and building housing its
60-lane bowling center in San Pablo, California for $2,500,000. Proceeds were
used to retire $1,768,000 in long-term debt. A pre-tax gain of $533,000 was
recognized on the sale which will be deferred for income tax purposes provided
the Company reinvests the proceeds from the sale in similar assets within three
years.
1994 During the first quarter of 1994, the Company sold 63,000 shares of The
Right Start, Inc.'s common stock for a pre-tax gain of $297,000. Cash proceeds
totaled $425,000. The sale reduced the Company's ownership in Right Start from
63.5 percent to 62.5 percent.
1994 acquisitions included the purchase by Triangle Bowl Associates of a 32-lane
bowling center in Midland, Texas for $600,000. The purchase included a ten year
lease on the land and building with a stated option price exercisable anytime
during the ten years. The purchase option for $1,000,000 was exercised during
the third quarter of 1995. Mid-America Associates acquired a 24-lane center in
Kansas City, Missouri and two 40-lane centers in Oklahoma City, Oklahoma. The
total purchase price for all three centers, which included land and buildings,
was approximately $3,400,000.
During the fourth quarter of 1994, a $398,000 pre-tax charge was recorded in
anticipation of the pending sale of a real estate investment in Oakland,
California. The sale was completed during the second quarter of 1995.
Subsequent to year-end, the Company repossessed the operating assets of a
36-lane bowling center in Fresno, California in lieu of payment on a note
receivable and assumed the center's lease. A loss of $111,000 reflecting the
excess of the note balance over the fair market value of the assets received was
recorded in 1994.
10
<PAGE>
<TABLE>
<CAPTION>
Note 4: Long-term Debt and Lease Commitments
- ---------------------------------------------------------------------------------------------------------------------------
May 29, May 31,
Dollars in thousands 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured notes payable in monthly installments with weighted average
interest rates of 9.0% and 9.6% $ 27,095 $ 29,554
Other 895 1,246
----------- -----------
27,990 30,800
Less--Amounts due within one year 1,796 2,053
----------- -----------
$ 26,194 $ 28,747
=========== ===========
</TABLE>
Notes payable and installment contracts are secured by real property and
equipment with a cost of $43,702,000 and assignment of rents under real property
leases. Installment contracts, which bear interest at annual rates varying from
7.5% to 10.25%, are payable in fixed monthly amounts.
Maturities of long-term indebtedness at May 29, 1996, excluding capital lease
obligations, during the next five years are: 1997-$1,456,000; 1998-$3,485,000;
1999-$2,595,000; 2000-$5,108,000; 2001-$2,225,000.
The Company has $10,128,000 available under an unused bank commitment. Proceeds
from the unused commitment can be used to acquire, construct or refurbish
bowling centers or to acquire other compatible recreational businesses. Advances
would bear interest at the prime rate plus .75%.
The Company also maintains a secured line-of-credit arrangement with a bank
whereby the Company may borrow up to $2,000,000 for short-term cash needs.
Interest is payable on the outstanding balance at a rate of .5% over the bank's
prime rate. The line-of-credit requires a 30 day out-of-debt period each fiscal
year. At May 29, 1996 and May 31, 1995 there were no borrowings outstanding
under the line-of-credit.
The Company's wholly-owned subsidiary, ARC Games, Inc., maintains a $1,000,000
unsecured bank line-of-credit. Advances bear interest at the bank's prime rate
plus 1%. $415,000 was outstanding under the line as of May 31, 1995 and is
included in current maturities of long-term debt. The line-of-credit agreement
requires that the Company maintain a $250,000 interest bearing minimum balance
with the bank.
Of the forty-one bowling centers operated by the Company at May 29, 1996,
thirteen are leased under noncancelable agreements expiring from 1999 through
2020. The other bowling centers are owned by the Company or leased from
partnerships in which the Company owns majority interests. The Company's minimum
rental commitments under noncancelable operating leases at May 29, 1996 are as
follows:
<TABLE>
<CAPTION>
Operating
Dollars in thousands Lease
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
1997 $ 1,568
1998 1,582
1999 1,574
2000 1,317
2001 1,205
2002 and after 4,272
-----------
$ 11,518
===========
</TABLE>
The leases provide for minimum and percentage rentals and in the majority of
cases, for the payment of property taxes and insurance by the lessee. Rental
expense under operating leases, including property taxes of $242,000, $270,000
and $239,000 was $2,027,000, $1,845,000 and $2,064,000 in 1996, 1995 and 1994.
Included in the rental expense above are additional rents of $236,000, $270,000
and $317,000 based on sales volume above minimums. The Company is also
contingently liable for rent payments on a lease assigned to a third party in
the event of nonpayment by the assignee.
<TABLE>
<CAPTION>
Note 5: Common Stock Activity and Stock Options
- ----------------------------------------------------------------------------------------------------------------------------
Dollars in thousands Shares Issued Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, May 26, 1993 4,886,291 $ 11,785
Issued 117,262 655
--------- -----------
Balance, May 25, 1994 5,003,553 12,440
Issued 50,706 333
--------- -----------
Balance, May 31, 1995 5,054,259 12,773
Issued 131,333 660
Repurchase of stock (537,693) (3,588)
--------- -----------
Balance, May 29, 1996 4,647,899 $ 9,845
========= ===========
</TABLE>
11
<PAGE>
The Company has an employee stock ownership plan (ESOP) and an employee stock
purchase plan (ESPP) for the benefit of its eligible employees as defined in the
plans. The ESOP is funded exclusively by employer contributions made at the
discretion of the Board of Directors. Contributions to the ESOP totaled $300,000
in 1996 and $425,000 in 1995 and 1994. The ESOP held 710,882 and 686,479 shares
of the Company's common stock at May 29, 1996 and May 31, 1995. All of the
shares were allocated to the benefit of plan participants. Under the ESPP,
employees' contributions are matched by the Company at a rate of fifty percent.
Employer contributions to the ESPP totaled $65,000, $73,000 and $84,000 in 1996,
1995 and 1994.
In accordance with the 1988 Key Employee Incentive Stock Option Plan, as amended
(Employee Plan), options to purchase 850,000 common shares of the Company can be
issued to key employees. Under the 1988 Stock Option Plan for Non-Employee
Directors, as amended (Directors' Plan), options to purchase 150,000 common
shares of the Company can be issued to non-employee directors for services to
the Company.
Under both plans, options are required to be granted at the fair market value of
the stock at the date of grant. Options may be granted until September 30, 1998.
Participants are generally required to exercise their options within five years
of vesting or within sixty days of termination. Under the Employee Plan, options
granted generally can vest up to five years (or less at the discretion of the
Board of Directors). Under the Directors' Plan, directors automatically receive
a grant of 5,000 options three months after becoming a director and 2,500
options for each of the next four years to a maximum of 15,000 options. Such
options are vested at the date of grant.
At May 29, 1996, 227,207 and 90,000 options were available for grant under the
Employee and Directors' Plans, respectively. Transactions for stock options are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year 594,617 651,450 565,901
Granted 100,000 12,500 197,900
Exercised (131,333) (21,000) (60,000)
Canceled (130,834) (48,333) (52,351)
----------- ------------ ------------
Balance at end of year 432,450 594,617 651,450
----------- ------------ ------------
Exercisable at end of year 281,250 488,183 417,700
----------- ------------ ------------
Range of exercise prices at end of year $5.00-$8.75 $5.00-$8.75 $5.00-$8.75
----------- ------------ ------------
Grant prices $6.375 $6.25 $6.00-$6.375
----------- ------------ ------------
</TABLE>
Note 6: Income Taxes
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
The Company files a consolidated federal income tax return which includes the results of operations of its partnerships and
corporate subsidiaries, with the exception of The Right Start, Inc. which filed a separate federal return. Tax payments in 1996,
1995 and 1994 were $5,295,000, $72,000 and $113,000.
<CAPTION>
The provision for income taxes consists of the following:
Dollars in thousands 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,856 $ (383) $ (274)
State 823 36 20
----------- ------------ ------------
5,679 (347) (254)
----------- ------------ ------------
Deferred:
Federal (3,138) 1,899 1,110
State (268) 315 246
----------- ------------ ------------
(3,406) 2,214 1,356
----------- ------------ ------------
Total provision $ 2,273 $ 1,867 $ 1,102
=========== ============ ============
</TABLE>
12
<PAGE>
The effective income tax rates on pre-tax earnings from continuing operations
are 44% in 1996, 39% in 1995 and 38% in 1994. The following table details the
major differences between the effective tax rates and the statutory federal
income tax rate of 34%.
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 34% 34% 34%
Increase (Decrease) in tax rate resulting from:
State income taxes, net of federal tax benefits 7 5 6
Rate differentials applied to reversing of temporary differences 3 -- --
Dividends on ESOP shares -- -- (2)
----------- ------------ ------------
44% 39% 38%
=========== ============ ============
<CAPTION>
May 29, May 31,
Deferred tax liabilities (assets) are comprised of the following (in thousands): 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 5,113 $ 5,258
Gain on sale of stock by subsidiary -- 2,991
Real property transactions 1,940 2,026
Other 452 171
------------ ------------
Gross deferred tax liabilities 7,505 10,446
------------ ------------
State taxes (605) (442)
Other (520) (129)
------------ ------------
Gross deferred tax assets (1,125) (571)
------------ ------------
Net deferred tax liability $ 6,380 $ 9,875
============ ============
</TABLE>
Tax benefits of $15,000 in 1996 and $13,000 in 1995 resulting from employees'
exercise of stock options have been credited directly to equity. At May 29,
1996, the Company has a net operating loss carryforward which can be used to
offset future income. This carryforward is expected to generate a future tax
benefit of $103,000.
The American Red Carpet joint venture is currently being audited by the
Wisconsin Department of Revenue. While the audit has not been finalized, based
on preliminary results, the Company believes it has adequately provided for any
additional taxes that may result.
Note 7: Disclosures about Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value:
Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates fair value due to their short-term maturities.
Long-term debt: Fair value was determined by discounting future cash flows using
the Company's current incremental borrowing rates for similar types of borrowing
arrangements. At May 29, 1996 the fair value of long-term debt approximates the
carrying amount reported in the balance sheet.
Note 8: Litigation and Contingencies
- --------------------------------------------------------------------------------
The Company is a party to legal actions arising in the ordinary course of its
business. Management and the Company's legal counsel are of the opinion that
none of these legal actions will have a significant effect on the Company's
financial position.
13
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of American Recreation Centers, Inc.
- --------------------------------------------------------------------------------
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income and retained earnings and of cash flows
appearing on pages 6 through 13 of this report present fairly, in all material
respects, the financial position of American Recreation Centers, Inc. and its
subsidiaries at May 29, 1996 and May 31, 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
May 29, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Sacramento, California
July 22, 1996
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAY-29-1996 MAY-31-1995
<PERIOD-START> JUN-01-1995 MAY-26-1994
<PERIOD-END> MAY-29-1996 MAY-31-1995
<CASH> 3,389 4,508
<SECURITIES> 100 0
<RECEIVABLES> 810 274
<ALLOWANCES> 50 16
<INVENTORY> 609 510
<CURRENT-ASSETS> 6,755 13,485
<PP&E> 88,274 83,481
<DEPRECIATION> 28,572 26,018
<TOTAL-ASSETS> 72,131 76,925
<CURRENT-LIABILITIES> 7,930 9,542
<BONDS> 0 0
0 0
0 0
<COMMON> 9,845 12,773
<OTHER-SE> 18,893 16,898
<TOTAL-LIABILITY-AND-EQUITY> 72,131 76,925
<SALES> 46,080 45,694
<TOTAL-REVENUES> 46,080 45,694
<CGS> 5,071 4,540
<TOTAL-COSTS> 42,421 40,181
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 34 0
<INTEREST-EXPENSE> 2,677 2,984
<INCOME-PRETAX> 1,616 4,794
<INCOME-TAX> 705 1,867
<INCOME-CONTINUING> 911 2,927
<DISCONTINUED> 2,305 (1,316)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,216 1,611
<EPS-PRIMARY> .64 .32
<EPS-DILUTED> .64 .32
</TABLE>
