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
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
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
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
ITEM 2.
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.
(1) Owned by joint ventures in which the Company has an 85 percent interest. (2) Building is owned, land is leased.
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.
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.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to 1996 Annual Report to Shareholders.
ITEM 7.
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.
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.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to Definitive Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to Definitive Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to Definitive Proxy Statement.
PART IV
ITEM 14.
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:
(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.
(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.
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
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
AMERICAN RECREATION CENTERS, INC. SCHEDULE II
AND CONSOLIDATED SUBSIDIARIES
VALUATION RESERVES ------------------