UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-13539
---------------------
AMF BOWLING, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3873268
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 AMF Drive
Richmond, Virginia 23111
(Address of principal executive offices, including zip code)
--------------------
(804) 730-4000
(Registrant's telephone number, including area code)
--------------------
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 _____.
-----
At August 1, 2000, 83,597,550 shares of common stock, par value of $.01 per
share, of the Registrant were outstanding.
PART I
Item 1. Financial Statements
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 16,114 $ 35,743
Accounts and notes receivable, net of allowance for
doubtful accounts of $8,021 and $9,531, respectively 62,436 63,175
Inventories 71,131 53,499
Other current assets 16,686 14,876
------------ ------------
Total current assets 166,367 167,293
Property and equipment, net 776,534 806,425
Other assets 82,111 88,092
Goodwill, net 751,033 765,092
------------ ------------
Total assets $ 1,776,045 $ 1,826,902
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 37,246 $ 35,296
Accrued expenses 63,260 71,784
Income taxes payable 1,222 3,450
Current portion of long-term debt 44,000 34,250
----------- -----------
Total current liabilities 145,728 144,780
Long-term debt, less current portion 1,206,742 1,186,982
Other long-term liabilities 5,321 5,204
------------ ------------
Total liabilities 1,357,791 1,336,966
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01 per share, 200,000,000 shares
authorized, 83,597,550 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively) 836 836
Paid-in capital 905,490 905,610
Retained deficit (462,990) (401,186)
Accumulated other comprehensive loss (25,082) (15,324)
------------ ------------
Total stockholders' equity 418,254 489,936
------------ ------------
Total liabilities and stockholders' equity $ 1,776,045 $ 1,826,902
============ ============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
Operating revenue $ 160,697 $ 161,095 $ 370,159 $ 363,662
Operating expenses:
Cost of goods sold 37,221 37,826 80,607 77,408
Bowling center operating expenses 91,085 90,716 188,024 183,937
Selling, general, and administrative expenses 14,432 15,692 28,264 30,445
Depreciation and amortization 33,723 32,961 67,141 66,327
------------ ------------ ------------ ------------
Total operating expenses 176,461 177,195 364,036 358,117
------------ ------------ ------------ ------------
Operating (loss) income (15,764) (16,100) 6,123 5,545
------------ ------------ ------------ ------------
Nonoperating expenses (income):
Interest expense 32,100 33,430 64,135 64,403
Other, net 1,918 3,468 1,667 6,442
Interest income (172) (758) (590) (1,453)
------------ ------------ ------------ ------------
Total nonoperating expenses 33,846 36,140 65,212 69,392
------------ ------------ ------------ ------------
Loss before income taxes (49,610) (52,240) (59,089) (63,847)
Provision for income taxes 1,038 1,665 2,098 3,234
------------ ------------ ------------ ------------
Net loss before equity in loss of joint ventures (50,648) (53,905) (61,187) (67,081)
Equity in loss of joint ventures (510) (178) (617) (5,701)
------------ ------------ ------------ ------------
Net loss $ (51,158) $ (54,083) $ (61,804) $ (72,782)
Net loss per share - basic and diluted $ (0.61) $ (0.91) $ (0.74) $ (1.22)
============ ============ ============ ============
Weighted average shares outstanding 83,598 59,598 83,598 59,600
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months
Ended June 30,
-------------------------------
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (61,804) $ (72,782)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 67,141 66,327
Equity in loss of joint ventures 617 5,701
Amortization of bond discount 20,635 23,278
Loss on the sale of property and equipment, net 195 2,145
Changes in assets and liabilities:
Accounts and notes receivable, net (1,543) (3,415)
Inventories (18,651) (1,838)
Other assets 11,881 (9,775)
Accounts payable and accrued expenses (7,123) (1,581)
Income taxes payable (1,820) 1,194
Other long-term liabilities (2,230) (460)
----------- -----------
Net cash provided by operating activities 7,298 8,794
----------- -----------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,792) (1,374)
Purchases of property and equipment (32,699) (21,336)
Proceeds from the sale of property and equipment 3,334 206
----------- -----------
Net cash used in investing activities (31,157) (22,504)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 29,100 20,000
Payments on long-term debt (22,125) (22,250)
Repurchase of common shares - (180)
Rights offering cost (120) -
Payments of noncompete obligations (193) (264)
----------- -----------
Net cash (used in) provided by financing activities 6,662 (2,694)
----------- -----------
Effect of exchange rates on cash (2,432) (1,396)
----------- -----------
Net decrease in cash (19,629) (17,800)
Cash and cash equivalents at beginning of period 35,743 33,002
----------- -----------
Cash and cash equivalents at end of period $ 16,114 $ 15,202
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations for the interim periods presented. The interim financial information
and notes thereto should be read in conjunction with the December 31, 1999, 1998
and 1997 audited consolidated financial statements of AMF Bowling, Inc. ("AMF
Bowling") and its subsidiaries (collectively, the "Company") presented in AMF
Bowling's Annual Report on Form 10-K for the fiscal year ended December 31, 1999
filed with the U.S. Securities and Exchange Commission. The results of
operations for the six months ended June 30, 2000 are not necessarily indicative
of results to be expected for the entire year.
The Company is principally engaged in two business segments: (i) the
ownership and operation of bowling centers, consisting of 407 U.S. bowling
centers and 119 international bowling centers ("Bowling Centers"), including 15
joint venture centers, as of June 30, 2000, and (ii) the manufacture and sale of
bowling equipment such as automatic pinspotters, automatic scoring equipment,
bowling pins, lanes, ball returns, certain spare parts, and the resale of allied
products such as bowling balls, bags, shoes, and certain other spare parts
("Bowling Products"). The principal markets for bowling equipment are U.S. and
international bowling center operators. The Company also manufactures and sells
the Playmaster, Highland and Renaissance brands of billiards tables, and owns
the Michael Jordan Golf Company, which currently operates two golf practice
ranges.
AMF Bowling Worldwide, Inc. ("Bowling Worldwide") is a wholly owned, direct
subsidiary of AMF Group Holdings Inc. ("AMF Group Holdings"). AMF Group Holdings
is a wholly owned, direct subsidiary of AMF Bowling. AMF Bowling, AMF Group
Holdings and Bowling Worldwide are Delaware corporations. AMF Bowling and AMF
Group Holdings are holding companies. The principal assets in each are comprised
of investments in subsidiaries. The Company was acquired in 1996 by an investor
group led by affiliates of Goldman, Sachs & Co. (the "Acquisition").
Since the Acquisition and through June 30, 2000, AMF Bowling Centers,
Inc., a direct subsidiary of Bowling Worldwide, purchased an aggregate of 265
bowling centers from various unrelated sellers, and it has constructed two
bowling centers and one Michael Jordan Golf practice range as part of its
capital expenditure program. The combined net purchase price for all
acquisitions was approximately $500.7 million. The Company has funded its
acquisitions and center construction from internally-generated cash, borrowings
under the senior secured revolving credit facility (the "Bank Facility") under
the Credit Agreement (as defined in "Note 5. Long-Term Debt"), and issuances of
AMF Bowling common stock (the "Common Stock"). From January 1, 2000 through June
30, 2000, AMF Bowling Centers, Inc. acquired two bowling centers.
The Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance or restructure its indebtedness depends on its
future performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control, including the conditions of the debt and equity markets.
Bowling Worldwide and the lenders under the Credit Agreement have recently
entered into an amendment (the "Amendment") of the Credit Agreement pursuant to
which compliance with all financial covenants has been waived through December
31, 2000. In the Amendment, Bowling Worldwide has indicated that it will not
make the September 15, 2000 interest payment due on its senior subordinated
notes (the "Senior Subordinated Notes") and the lenders under the Credit
Agreement have agreed to waive any default under the Credit Agreement resulting
from such non-payment unless the Company's other creditors commence the exercise
of remedies, including the acceleration of the Company's debt obligations.
However, failure to make such payment within 30 days of its due date will result
in a default under the Senior Subordinated Notes and could result in the
acceleration of the obligations under such Senior Subordinated Notes and
substantially all of the Company's other indebtedness. The Amendment also
provides for the immediate permanent termination of $88.0 million of the
otherwise available
5
working capital commitments under the Credit Agreement, and for an additional
permanent termination of $4.0 million of such commitments on each of October 31,
2000, November 30, 2000 and December 31, 2000. After giving effect to all of
these commitment terminations, Bowling Worldwide will have an aggregate
available working capital commitment under the Credit Agreement of $255.0
million. Based upon the current level of performance, management believes that
cash flow from operations, together with available borrowings under the Credit
Agreement and other sources of liquidity, will be adequate to meet Bowling
Worldwide's requirements for working capital, capital expenditures and scheduled
payments on the principal of, and interest on, its senior debt for the remainder
of 2000.
The Company is considering options to restructure and reduce its long-term
debt. In this regard, the Amendment also requires Bowling Worldwide to deliver
to the lenders under the Credit Agreement on or before September 30, 2000 a plan
to restructure the Company's debt and a timeline for the implementation of such
plan, which plan and timeline must be in form and substance satisfactory to a
majority of the lenders under the Credit Agreement on or before October 15,
2000.
The Company has been advised by its independent public accountants that
if a refinancing or restructuring of its indebtedness has not been completed
prior to the completion of their audit of the Company's financial statements
for the year ending December 31, 2000, their auditors' report on those
financial statements will be modified to reflect this contingency.
6
In calendar year 2001, principal payment obligations under the facilities
of the Credit Agreement increase significantly and cash interest becomes payable
on the subsidiary senior subordinated discount notes. In the first quarter of
calendar year 2002, the financial covenants under the Credit Agreement will be
reset to their original, more stringent, levels. Based on current levels of
performance, the Company anticipates that a refinancing or restructuring of its
indebtedness will be required to meet the Company's financial requirements for
calendar years 2001 and beyond. There can be no assurance, however, that
Bowling Worldwide's business will generate sufficient cash flow from
operations or that future borrowings will be available in an amount sufficient
to enable the Company to meet its payment obligations under its indebtedness, or
make necessary capital expenditures, or that any refinancing or restructuring of
its indebtedness would be available on commercially reasonable terms or at all.
7
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated results of operations of the Company have been
presented for the three months and six months ended June 30, 2000 and 1999,
respectively. All significant intercompany balances and transactions have been
eliminated in the accompanying condensed consolidated financial statements. All
dollar amounts are in thousands, except where otherwise indicated.
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers,
and in accordance with the purchase method of accounting used in all the
Company's acquisitions, the Company recorded goodwill representing the excess of
the purchase price over the allocation among the acquired assets and liabilities
in accordance with estimates of fair market value on the dates of acquisition.
Goodwill is being amortized over 40 years. Amortization expense related to
goodwill was $4,388 and $10,408 for the three months and six months ended June
30, 2000, and $5,133 and $10,274 for the three months and six months ended June
30, 1999.
Income Taxes
As of June 30, 2000, the Company had net operating losses of approximately
$263.6 million and foreign tax credits of $11.5 million that will carry over to
future years to offset U.S. income taxes. The foreign tax credits will begin to
expire in the fiscal year 2001 and the net operating losses will begin to expire
in the fiscal year 2011. The Company has recorded a valuation reserve, as of
December 31, 1999, for $113.0 million related to net operating losses, foreign
tax credits and other deferred tax assets that the Company may not utilize prior
to their expirations. The tax provision recorded for the six months ended June
30, 2000 primarily reflects certain international taxes.
Comprehensive Loss
Comprehensive loss was $55,223 and $71,562 for the three months and six
months ended June 30, 2000, and $52,505 and $72,121 for the three months and six
months ended June 30, 1999, respectively. Accumulated other comprehensive loss
consists of the foreign currency translation adjustment on the accompanying
condensed consolidated balance sheets.
Net Loss Per Share
Basic and diluted net loss per share is calculated based on the actual
weighted-average shares outstanding. Outstanding stock options and warrants are
not considered as their effect is antidilutive.
Recent Accounting Pronouncement
Effective for the quarter ended March 31, 2001, the Company will be
required to adopt SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect that adoption of this standard
will have a material adverse impact on the Company's financial position or
results of operations.
8
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3. Inventories
Inventories at June 30, 2000 and December 31, 1999, consisted of the
following:
June 30, December 31,
2000 1999
---------------- ---------------
(unaudited)
Bowling Products, at FIFO:
Raw materials $ 15,520 $ 14,285
Work in progress 2,782 1,562
Finished goods and spare parts 44,277 28,789
Bowling Centers, at average cost:
Merchandise and spare parts 8,552 8,863
---------------- ---------------
$ 71,131 $ 53,499
================ ===============
Note 4. Property and Equipment
Property and equipment at June 30, 2000 and December 31, 1999, consisted of
the following:
June 30, December 31,
2000 1999
--------------- -------------
(unaudited)
Land $ 133,057 $ 133,953
Buildings and improvements 360,022 357,365
Equipment, furniture and fixtures 601,682 588,342
Other 6,125 5,537
-------------- -------------
1,100,886 1,085,197
Less: accumulated depreciation and amortization (324,352) (278,772)
-------------- -------------
$ 776,534 $ 806,425
============== =============
Depreciation and amortization expense related to property and equipment was
$26,355 and $51,125 for the three months and six months ended June 30, 2000 and
$24,791 and $48,698 for the three months and six months ended June 30, 1999,
respectively.
9
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Long-Term Debt
Long-term debt at June 30, 2000, and December 31, 1999, consisted of the
following:
June 30, December 31,
2000 1999
-------------- -------------
(unaudited)
Bank debt $ 565,374 $ 556,499
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 254,722 240,111
Zero coupon convertible debentures 178,653 172,630
Mortgage and equipment note 1,993 1,992
-------------- -------------
Total debt 1,250,742 1,221,232
Current maturities (a) (44,000) (34,250)
-------------- -------------
Total long-term debt $ 1,206,742 $ 1,186,982
============== =============
- ---------------------------
(a) Current maturities reflect scheduled principal payments due in the next
12 months on the Term Facilities.
Bowling Worldwide's bank debt (the "Bank Debt") is governed by a credit
agreement (the "Credit Agreement") to which Bowling Worldwide is party with
Goldman Sachs, its affiliate Goldman Sachs Credit Partners, L.P., Citibank, N.A.
("Citibank") and its affiliates Citicorp Securities, Inc. and Citicorp USA, Inc.
and certain other banks, financial institutions and institutional lenders
(collectively, the "Lenders") and provides for (i) senior secured term loan
facilities aggregating $369.4 million (the "Term Facilities") and (ii) the Bank
Facility of up to $355.0 million (together with the Term Facilities, the "Senior
Facilities"). In connection with such financing, Goldman Sachs Credit Partners,
L.P. acted as Syndication Agent, Goldman Sachs Credit Partners, L.P. and
Citicorp Securities, Inc. acted as Arrangers, and Citibank is acting as
Administrative Agent. The initial borrowings under a predecessor of the Credit
Agreement were used to partially fund the Acquisition. As of June 30, 2000,
Bowling Worldwide had $159.0 million available for borrowing under the Bank
Facility and $196.0 million outstanding.
On June 14, 1999, the lenders under the Credit Agreement approved Amendment
No. 2 and Waiver to the Credit Agreement and entered into the Fourth Amended and
Restated Credit Agreement. The provisions of the Fourth Amended and Restated
Credit Agreement, among other things, waived mandatory prepayment provisions
previously existing under the Credit Agreement with respect to the Company's
recapitalization plan in 1999, permitted Bowling Worldwide to resume borrowing
to fund acquisitions subject to certain criteria and maintenance of minimum
availability under the Bank Facility of $65.0 million through 2000 and $40.0
million through 2001, permitted AMF Bowling to make equity contributions to
Bowling Worldwide which may be included in the calculation of EBITDA for
financial covenant purposes under the Credit Agreement up to an aggregate of
$10.0 million during any four consecutive quarters through December 31, 2001 and
modified or waived certain financial covenants.
Bowling Worldwide was in compliance with the amended covenants under the
Credit Agreement as of June 30, 2000. In this connection, since November 1999,
AMF Bowling made cumulative contributions of $8.0 million, including $2.0
million in August 2000, as equity to Bowling Worldwide to meet EBITDA
requirements under its financial covenant tests for the prior four quarters
including the quarter ended June 30, 2000. The Credit Agreement permitted AMF
Bowling to make additional equity contributions through 2001 as specified above.
Bowling Worldwide and the lenders under the Credit Agreement have recently
entered into the Amendment pursuant to which compliance with all financial
covenants has been waived through December 31, 2000 and the revolving credit
facility will be reduced to $255.0 million by year-end. In the Amendment,
Bowling Worldwide has indicated that it will not make the September 15, 2000
interest payment due on its Senior Subordinated Notes and the lenders under the
Credit Agreement have agreed to waive any default under the Credit Agreement
resulting from such non-payment unless the Company's other creditors commence
the
10
exercise of remedies, including the acceleration of the Company's debt
obligations. However, failure to make such payment within 30 days of its due
date will result in a default under the Senior Subordinated Notes and could
result in the acceleration of the obligations under such Senior Subordinated
Notes and substantially all of the Company's other indebtedness. See "Note 1.
Organization" in the Notes to Condensed Consolidated Financial Statements.
Note 6. Commitments and Contingencies
Litigation and Claims
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation against AMF Bowling, The Goldman Sachs Group, L.P., Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Cowen & Company, Schroder & Co., Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased
Common Stock in the Company's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, among other
things, damages and/or rescission against all defendants jointly and severally
pursuant to Sections 11, 12 and/or 15 of the Securities Act of 1933 based on
allegedly inaccurate and misleading disclosures in connection with and following
the Initial Public Offering. Management believes that the litigation is without
merit and intends to defend it vigorously.
11
In addition, the Company is involved in certain lawsuits arising out of
normal business operations. The majority of these relate to accidents at bowling
centers. Management believes that the ultimate resolution of such matters will
not have a material adverse effect on the Company's results of operations or
financial position. While the ultimate outcome of the litigation and claims
against the Company cannot presently be determined, management believes the
Company has made adequate provision for possible losses.
Note 7. Business Segments
The Company operates in two major lines of business: operating bowling centers
and manufacturing bowling and related products. Information concerning
operations in these businesses for the three months ended June 30, 2000 and
1999, respectively, is presented below (in millions):
Three Months Ended June 30, 2000
-------------------------------------------------------------------------------------------
Bowling Centers Bowling Products
--------------------------- ----------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ------ ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 98.2 $ 29.0 $ 127.2 $ 19.1 $ 14.4 $ 33.5 $ - $ - $ 160.7
Intersegment sales - - - 3.3 1.7 5.0 - (5.0) -
Operating income (loss) (9.6) 2.4 (7.2) (3.0) (0.2) (3.2) (5.7) 0.3 (15.8)
Identifiable assets 787.8 301.0 1,088.8 601.7 70.6 672.3 10.8 4.1 1,776.0
Depreciation and amortization 22.2 5.5 27.7 5.8 0.2 6.0 0.6 (0.5) 33.8
Capital expenditures 14.6 2.6 17.2 2.3 0.1 2.4 0.4 - 20.0
Research and development expense - - - - - - - - -
Three Months Ended June 30, 1999
-------------------------------------------------------------------------------------------
Bowling Centers Bowling Products
--------------------------- ----------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
----- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 97.8 $ 31.5 $ 129.3 $ 14.8 $ 17.0 $ 31.8 $ - $ - $ 161.1
Intersegment sales - - - 6.3 0.8 7.1 - (7.1) -
Operating income (loss) (6.8) 2.8 (4.0) (4.1) (1.7) (5.8) (6.6) 0.3 (16.1)
Identifiable assets 853.8 334.4 1,188.2 642.5 72.9 715.4 22.3 2.8 1,928.7
Depreciation and amortization 20.8 6.2 27.0 5.5 0.3 5.8 0.6 (0.4) 33.0
Capital expenditures 13.7 1.5 15.2 1.4 - 1.4 - - 16.6
Research and development expense - - - - - - - - -
12
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information concerning operations in these businesses for the six months
ended June 30, 2000 and 1999 respectively, is presented below (in millions):
Six Months Ended June 30, 2000
-------------------------------------------------------------------------------------------
Bowling Centers Bowling Products
--------------------------- ----------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 240.7 $ 60.6 $ 301.3 $ 34.6 $ 34.3 $ 68.9 $ - $ - $ 370.2
Intersegment sales - - - 6.0 2.0 8.0 - (8.0) -
Operating income (loss) 17.7 5.7 23.4 (6.1) (0.6) (6.7) (11.3) 0.7 6.1
Identifiable assets 787.8 301.0 1,088.8 601.7 70.6 672.3 10.8 4.1 1,776.0
Depreciation and amortization 43.9 11.2 55.1 11.5 0.5 12.0 1.0 (0.9) 67.2
Capital expenditures 21.9 5.3 27.2 4.7 0.1 4.8 0.7 - 32.7
Research and development expense - - - 0.1 - 0.1 - - 0.1
Six Months Ended June 30, 1999
-------------------------------------------------------------------------------------------
Bowling Centers Bowling Products
--------------------------- ----------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 238.7 $ 63.2 $ 301.9 $ 28.2 $ 33.6 $ 61.8 $ - $ - $ 363.7
Intersegment sales - - - 7.4 1.7 9.1 - (9.1) -
Operating income (loss) 22.9 6.5 29.4 (7.3) (5.0) (12.3) (12.3) 0.7 5.5
Identifiable assets 853.8 334.4 1,188.2 642.5 72.9 715.4 22.3 2.8 1,928.7
Depreciation and amortization 42.4 11.7 54.1 11.0 0.7 11.7 1.4 (0.8) 66.4
Capital expenditures 15.7 2.6 18.3 2.8 0.2 3.0 - - 21.3
Research and development expense - - - 0.1 - 0.1 - - 0.1
Note 8. Condensed Consolidating Financial Statements
Bowling Worldwide's subsidiary senior subordinated notes and subsidiary
senior subordinated discount notes are jointly and severally guaranteed on a
full and unconditional basis by AMF Group Holdings and the first and second-tier
subsidiaries of Bowling Worldwide (the "Guarantor Companies"). AMF Bowling and
the third-tier and lower-tier subsidiaries of Bowling Worldwide have not
provided guarantees of such indebtedness (the "Non-Guarantor Companies").
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet for the Guarantor Companies, the
Non-Guarantor Companies and the Company as of June 30, 2000, and condensed
consolidating statements of income and cash flows for the Guarantor Companies,
the Non-Guarantor Companies and the Company for the six months ended June 30,
2000 and (ii) elimination entries necessary to combine the entities comprising
the Company.
13
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2000
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ------------- ------------- --------------
Assets
------
Current assets:
Cash and cash equivalents $ 7,910 $ 8,204 $ - $ 16,114
Accounts and notes receivable, net
of allowance for doubtful accounts 62,101 335 - 62,436
Accounts receivable - intercompany 14,768 16,871 (31,639) -
Inventories 70,098 1,033 - 71,131
Other current assets 9,365 7,321 - 16,686
-------------- ------------- ------------- --------------
Total current assets 164,242 33,764 (31,639) 166,367
Notes receivable - intercompany 48,997 5,663 (54,660) -
Property and equipment, net 723,063 52,106 1,365 776,534
Investment in subsidiaries 15,640 576,292 (591,932) -
Goodwill and other assets 807,638 25,506 - 833,144
-------------- ------------- ------------- --------------
Total assets $ 1,759,580 $ 693,331 $ (676,866) $ 1,776,045
============== ============= ============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 34,993 $ 2,218 $ 35 $ 37,246
Accounts payable - intercompany 16,871 14,768 (31,639) -
Accrued expenses 53,612 9,648 - 63,260
Income taxes payable (3,526) 4,748 - 1,222
Current portion of long-term debt 44,000 - - 44,000
-------------- ------------- ------------- --------------
Total current liabilities 145,950 31,382 (31,604) 145,728
Long-term debt, less current portion 1,011,086 195,656 - 1,206,742
Notes payable - intercompany 5,663 48,997 (54,660) -
Other long-term liabilities 4,035 1,286 - 5,321
-------------- ------------- ------------- --------------
Total liabilities 1,166,734 277,321 (86,264) 1,357,791
-------------- ------------- ------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock - 836 - 836
Paid-in capital 1,052,782 902,907 (1,050,199) 905,490
Retained deficit (434,854) (462,651) 434,515 (462,990)
Accumulated other comprehensive loss (25,082) (25,082) 25,082 (25,082)
-------------- ------------- ------------- --------------
Total stockholders' equity 592,846 416,010 (590,602) 418,254
-------------- ------------- ------------- --------------
Total liabilities and stockholders' equity $ 1,759,580 $ 693,331 $ (676,866) $ 1,776,045
============== ============= ============= ==============
14
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ------------- ------------- --------------
Operating revenue $ 340,852 $ 30,402 $ (1,095) $ 370,159
-------------- ------------- ------------- --------------
Operating expenses:
Cost of goods sold 77,982 3,358 (733) 80,607
Bowling center operating expenses 172,310 16,074 (360) 188,024
Selling, general, and administrative expenses 22,594 5,670 - 28,264
Depreciation and amortization 62,275 4,927 (61) 67,141
-------------- ------------- ------------- --------------
Total operating expenses 335,161 30,029 (1,154) 364,036
-------------- ------------- ------------- --------------
Operating income 5,691 373 59 6,123
-------------- ------------- ------------- --------------
Nonoperating expenses (income):
Interest expense 57,258 6,877 - 64,135
Other expenses, net 1,576 91 - 1,667
Interest income (578) (12) - (590)
Equity in loss (income) of subsidiaries (2,538) 54,543 (52,005) -
-------------- ------------- ------------- --------------
Total nonoperating expenses 55,718 61,499 (52,005) 65,212
-------------- ------------- ------------- --------------
Loss before income taxes (50,027) (61,126) 52,064 (59,089)
Provision for income taxes 1,361 737 - 2,098
-------------- ------------- ------------- --------------
Net loss before equity in loss of
joint ventures (51,388) (61,863) 52,064 (61,187)
Equity in loss of joint ventures (617) - - (617)
-------------- ------------- ------------- --------------
Net loss $ (52,005) $ (61,863) $ 52,064 $ (61,804)
============== ============= ============= ==============
15
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2000
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
------------- ------------- --------------- --------------
Cash flows from operating activities:
Net loss $ (52,005) $ (61,863) $ 52,064 $ (61,804)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 62,275 4,927 (61) 67,141
Equity in loss of joint ventures 617 - - 617
Amortization of bond discount 14,612 6,023 - 20,635
Equity in (loss) income of subsidiaries (2,538) 54,543 (52,005) -
(Gain) Loss on the sale of property and equipment, net 1,910 (1,715) - 195
Changes in assets and liabilities:
Accounts and notes receivable (1,570) 27 - (1,543)
Receivables and payables - affiliates 3,590 (3,590) - -
Inventories (18,655) 4 - (18,651)
Other assets 13,751 (1,870) - 11,881
Accounts payable and accrued expenses (10,092) 2,969 - (7,123)
Income taxes payable (1,623) (197) - (1,820)
Other long-term liabilities (2,230) - - (2,230)
------------- ------------- --------------- --------------
Net cash provided by (used in) operating activities 8,042 (742) (2) 7,298
------------- ------------- --------------- --------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,792) - - (1,792)
Investment in subsidiary - (5,000) 5,000 -
Purchases of property and equipment (29,647) (3,054) 2 (32,699)
Proceeds from sale of property and equipment 677 2,657 - 3,334
------------- ------------- --------------- --------------
Net cash used in investing activities (30,762) (5,397) 5,002 (31,157)
------------- ------------- --------------- --------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 29,100 - - 29,100
Payments on long-term debt (22,125) - - (22,125)
Rights offering costs - (120) - (120)
Capital contribution from Parent 5,000 - (5,000) -
Payments of noncompete obligations (193) - - (193)
------------- ------------- --------------- --------------
Net cash provided by (used in) financing activities 11,782 (120) (5,000) 6,662
------------- ------------- --------------- --------------
Effect of exchange rates on cash 216 (2,648) - (2,432)
------------- ------------- --------------- --------------
Net decrease in cash (10,722) (8,907) - (19,629)
Cash and cash equivalents at beginning of period 18,632 17,111 - 35,743
------------- ------------- --------------- --------------
Cash and cash equivalents at end of period $ 7,910 $ 8,204 $ - $ 16,114
============= ============= =============== ==============
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain matters discussed in this report contain forward-looking
statements, which are statements other than historical information or statements
of current condition. Statements set forth in this report or statements
incorporated by reference from documents filed with the Securities and Exchange
Commission are or may be forward-looking statements, including possible or
assumed future results of the operations of AMF Bowling, Inc. ("AMF Bowling")
and its subsidiaries (collectively, the "Company"), including but not limited to
any statements contained in this report concerning: (i) the results of the
Company's plans to improve its bowling centers operations, including revenue
enhancement and cost management programs, (ii) the ability of the Company's
management to execute its strategies, (iii) the timing or amount of any changes
in the interest expense and/or principal repayment obligations of the Company's
indebtedness, (iv) the results of the Company's plans to refinance or
restructure its long-term indebtedness, (v) the Company's ability to generate
cash flow to service its indebtedness and meet its debt payment obligations,
(vi) the results of operations and initiatives engaged in with respect to the
Company's bowling products business, (vii) the results of the Company's employee
incentive and retention efforts, (viii) the outcome of existing or potential
litigation, (ix) the amounts of capital expenditures needed to maintain or
improve the Company's bowling centers, (x) any statements preceded by, followed
by or including the words "believes," "expects," "predicts," "anticipates,"
"intends," estimates," "should," "may" or similar expressions and (xi) other
statements contained or incorporated in this report regarding matters that are
not historical facts.
These forward-looking statements relate to the plans and objectives of the
Company or future operations. In light of the risks and uncertainties inherent
in all future projections, the inclusion of forward-looking statements in this
report should not be regarded as a representation by AMF Bowling that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the forward-
looking statements, including: (i) the Company's ability, and the ability of its
management team, to carry out the Company's business strategies, (ii) the
Company's ability to refinance or restructure its long-term indebtedness at
commercially reasonable terms or at all, (iii) the Company's ability to
integrate acquired operations into its business, (iv) the Company's ability to
sell to existing bowling markets and identify and participate in sales to new
bowling markets, (v) the continuation of adverse financial results and
substantial competition in the Company's bowling products business, (vi) the
Company's ability to retain and attract experienced bowling center management,
(vii) the Company's ability to successfully implementinitiatives designed to
improve and retain customer traffic in its bowling centers, (viii) the Company's
ability to attract and retain league bowlers in its bowling centers and
customers in its Bowling Products business, (ix) the risk of adverse political
acts or developments in the Company's existing and proposed international
markets, (x) fluctuations in foreign currency exchange rates affecting the
Company's translation of operating results, (xi) continued or increased
competition, (xii) the popularity of bowling, (xiii) the decline in general
economic conditions, (xiv) adverse judgments in pending or future litigation,
(xv) the Company's ability to amend and effectively implement the joint
distribution and related arrangements with Zhonglu and (xvi) changes in interest
and exchange rates.
The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included elsewhere in this report. AMF Bowling undertakes no obligation
to release publicly the results of any future revisions it may make to
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Background
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and AMF Bowling's Condensed
Consolidated Financial Statements (unaudited) and the notes thereto included
elsewhere herein.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
a company's historical ability to service debt. EBITDA
17
is not intended to represent and should not be considered more meaningful than,
or an alternative to, other measures of performance determined in accordance
with U.S. generally accepted accounting principles.
General
The Company principally operates in two business segments in the United
States and international markets: (i) the ownership and operation of 407 U.S.
bowling centers and 119 international bowling centers ("Bowling Centers"),
including 15 joint venture centers operated with third parties, as of June 30,
2000, and (ii) the manufacture and sale of bowling equipment and bowling
products ("Bowling Products").
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations discuss
results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
are set forth below. The business segment results presented below are before
intersegment eliminations since the Company's management believes that this will
provide a more accurate comparison of performance by segment from year to year.
The intersegment eliminations are not material. Interest expense is presented on
a gross basis. The comparative results of Bowling Centers for the first six
months of 2000 versus 1999 reflect the closing of 17 centers since June 30,
1999.
Acquisitions and Dispositions
From January 1, 2000 through June 30, 2000, AMF Bowling Centers, Inc.,
a direct subsidiary of Bowling Worldwide, acquired two bowling centers, closed
twelve centers in the United States and one center in Japan, and sold one center
in the United Kingdom and one center in Canada.
18
AMF BOWLING, INC.
Selected Financial Data
(unaudited)
(in millions of dollars)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Bowling Centers (before intersegment eliminations)
- ---------------
Operating revenue $ 127.2 $ 129.3 $ 301.3 $ 301.9
------------ ------------ ------------ -----------
Cost of goods sold 13.5 13.7 30.8 30.6
Bowling center operating expenses 91.5 90.9 188.5 184.4
Selling, general, and administrative expenses 1.7 1.7 3.5 3.4
Depreciation and amortization 27.7 27.0 55.1 54.1
------------ ------------ ------------ -----------
Operating (loss) income $ (7.2) $ (4.0) $ 23.4 $ 29.4
============ ============ ============ ===========
Bowling Products (before intersegment eliminations)
- ----------------
Operating revenue $ 38.5 $ 38.9 $ 76.9 $ 70.9
Cost of goods sold 28.1 30.9 57.1 55.3
------------ ------------ ------------ -----------
Gross profit 10.4 8.0 19.8 15.6
Selling, general, and administrative expenses 7.6 8.0 14.5 16.2
Depreciation and amortization 6.0 5.8 12.0 11.7
------------ ------------ ------------ -----------
Operating loss $ (3.2) $ (5.8) $ (6.7) $ (12.3)
============ ============ ============ ===========
Consolidated
- ------------
Operating revenue $ 160.7 $ 161.1 $ 370.2 $ 363.7
------------ ------------ ------------ -----------
Cost of goods sold 37.2 37.8 80.6 77.4
Bowling center operating expenses 91.1 90.7 188.0 183.9
Selling, general, and administrative expenses 14.4 15.7 28.3 30.5
Depreciation and amortization 33.8 33.0 67.2 66.4
------------ ------------ ------------ -----------
Operating (loss) income (15.8) (16.1) 6.1 5.5
Interest expense, gross 32.1 33.4 64.1 64.4
Other expense, net 1.8 2.7 1.1 5.0
------------ ------------ ------------ -----------
Loss before income taxes (49.7) (52.2) (59.1) (63.9)
Provision for income taxes 1.0 1.7 2.1 3.2
------------ ------------ ------------ -----------
Net loss before equity in loss of joint ventures (50.7) (53.9) (61.2) (67.1)
Equity in loss of joint ventures (0.5) (0.2) (0.6) (5.7)
------------ ------------ ------------ -----------
Net loss $ (51.2) $ (54.1) $ (61.8) $ (72.8)
============ ============ ============ ===========
Selected Data:
- -------------
EBITDA
Bowling Centers $ 20.5 $ 23.0 $ 78.5 $ 83.5
Bowling Products $ 2.8 $ 0.0 $ 5.3 $ (0.6)
EBITDA margin
Bowling Centers 16.1% 17.8% 26.1% 27.7%
Bowling Products 7.3% 0.0% 6.9% -0.8%
19
Bowling Centers
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. To facilitate a meaningful
comparison, the constant center results discussed below reflect the results of
509 centers that had been in operation one full fiscal year as of December 31,
1999. Bowling Centers derives its revenue and cash flows from three principal
sources: (i) bowling, (ii) food and beverage and (iii) other sources, such as
shoe rental, amusement games, billiards and pro shops. For the six months ended
June 30, 2000, bowling, food and beverage and other revenue represented 58.2%,
27.5% and 14.3% of total Bowling Centers revenue, respectively. For the six
months ended June 30, 1999, bowling, food and beverage and other revenue
represented 58.8%, 27.2% and 14.0% of total Bowling Centers revenue,
respectively.
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Bowling Centers operating revenue decreased $2.1 million, or 1.6%. An
increase of $1.7 million, or 1.7%, was attributable to U.S. constant centers,
primarily as a result of increases in open play revenue, and food and beverage
and ancillary revenue associated with open play traffic. International constant
centers operating revenue decreased $2.2 million, or 7.2%, primarily due to
unfavorable currency translation of results. On a constant currency basis,
international operating revenue would have decreased $0.6 million, or 1.9%. An
increase of $0.1 million is attributable to two new U.S. centers. A decrease of
$1.7 million in total operating revenue was attributable to fifteen centers that
were closed and two centers that were sold since June 30, 1999.
Cost of goods sold decreased $0.2 million, or 1.5%, primarily as a result
of closing centers. Constant centers cost of goods sold was flat compared with
1999.
Operating expenses increased $0.6 million, or 0.7%. An increase of $0.5
million was attributable to constant centers, an increase of $0.1 million was
attributable to new centers and an increase of $1.0 million was attributable to
higher regional, district and support staff operations expenses. A decrease of
$1.0 million was attributable to closed centers. As a percentage of its revenue,
Bowling Centers operating expenses were 71.9% for the second quarter of 2000
compared with 70.3% for the second quarter of 1999. The increase of 1.6% is due
primarily to higher expenses resulting from new field level positions and
national advertising programs. Due to significantly lower league play in the
second and third quarters, Bowling Center operating expenses as a percentage of
operating revenue are higher in these quarters than in the first and fourth
quarters.
Selling, general and administrative expenses were flat compared with the
same period in 1999.
EBITDA decreased $2.5 million, or 10.9%. EBITDA margin for the second
quarter of 2000 was 16.1% compared with 17.8% for the second quarter of 1999.
The lower EBITDA margin in 2000 was attributable to the higher operating
expenses as discussed above.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Bowling Centers operating revenue decreased $0.6 million, or 0.2%. An
increase of $4.3 million, or 1.8%, was attributable to U.S. constant centers,
primarily as a result of increases in open play revenue, and food and beverage
and ancillary revenue associated with open play traffic. International constant
centers operating revenue decreased $1.4 million, or 2.3%, primarily due to
unfavorable currency translation of results. On a constant currency basis,
international operating revenue would have increased $0.6 million, or 1.0%. An
increase of $0.1 million was attributable to two new U.S. centers. A decrease of
$3.6 million in total operating revenue was attributable to fifteen centers that
were closed and two centers that were sold since June 30, 1999.
Cost of goods sold increased $0.2 million, or 0.7%. Constant centers cost
of goods sold increased $0.5 million, or 1.7%, primarily as a result of
increased food and beverage sales primarily in the U.S. centers. A decrease of
$0.3 million was attributable to closed centers.
Operating expenses increased $4.1 million, or 2.2%. An increase of $4.5
million was attributable to constant centers, an increase of $0.1 million was
attributable to new centers and an increase of $2.1 million was attributable to
higher regional, district and support staff operations expenses. A decrease of
$2.6 million was attributable to
20
closed centers. As a percentage of its revenue, Bowling Centers operating
expenses were 62.6% for the first six months of 2000 compared with 61.1% for the
first six months of 1999. The increase of 1.5% is due primarily to higher
expenses resulting from new field level positions and national advertising
programs.
Selling, general and administrative expenses were flat compared with 1999.
EBITDA decreased $5.0 million, or 6.0%. EBITDA margin for the first six
months of 2000 was 26.1% compared with 27.7% for the first six months of 1999.
The lower EBITDA margin in 2000 was attributable to the higher operating
expenses as discussed above and the change in the revenue mix, including higher
food and beverage sales.
Bowling Products
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Bowling Products operating revenue decreased $0.4 million, or 1.0%. Revenue
from sales of New Center Packages ("NCPs", which include all the equipment
necessary to outfit a new bowling center or expand an existing bowling center)
increased $3.5 million, or 40.2%, primarily as a result of improved sales to
Europe and Japan. Modernization and Consumer Products (which include
modernization equipment, supplies, spare parts and consumable products) revenue
decreased $3.9 million, or 12.9%, primarily as a result of decreased sales to
North America and Asia.
Gross profit increased $2.4 million, or 30.0%, primarily as a result of
increased sales volume, more favorable product mix and aggressive product cost
reduction efforts in the second quarter of 2000 compared with the second quarter
of 1999.
Selling, general and administrative expenses decreased $0.4 million, or
5.0%, reflecting the cost reduction program for the Bowling Products
organization implemented in this area through the second half of 1999.
EBITDA was $2.8 million in the second quarter of 2000 compared with zero in
the second quarter of 1999. The EBITDA margin was 7.3% in the second quarter of
2000 compared with zero in the second quarter of 1999 primarily as a result of
the increase in sales and gross profit and selling, general and administrative
savings achieved through cost reductions.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Bowling Products operating revenue increased $6.0 million, or 8.5%. Revenue
from sales of NCPs increased $6.2 million, or 35.0%, primarily as a result of
improved sales to Europe and Japan. Modernization and Consumer Products revenue
decreased $0.2 million, or 0.4%, primarily as a result of improved sales to
North America and Asia partially offset by improved sales to Europe in the first
quarter of 2000.
Gross profit increased $4.2 million, or 26.9%, primarily as a result of
increased sales volume, more favorable product mix and aggressive product cost
reduction efforts in the first six months of 2000 compared with the first six
months of 1999.
Selling, general and administrative expenses decreased $1.7 million, or
10.5%, reflecting the cost reduction program for the Bowling Products
organization implemented in this area through the second half of 1999.
EBITDA was $5.3 million in the first six months of 2000 compared with a
loss of $0.6 million in the first six months of 1999. The EBITDA margin was 6.9%
in the first six months of 2000 compared with (0.8)% in the first six months of
1999 primarily as a result of the increase in sales and gross profit and
selling, general and administrative savings achieved through cost reductions.
Consolidated
21
Depreciation and Amortization
Depreciation and amortization increased $0.8 million, or 2.4%, in the
second quarter of 2000, and $0.8 million, or 1.2%, in the six months ended June
30, 2000 compared to the same periods in 1999. These increases were primarily
attributable to incremental depreciation expense incurred as a result of capital
expenditures.
Interest Expense
Gross interest expense decreased $1.3 million, or 3.9%, in the second
quarter of 2000, and $0.3 million, or 0.5%, in the six months ended June 30,
2000 compared with the same periods in 1999. Interest incurred on bank debt
increased as the impact of higher average borrowing rates offset the effect of a
decrease in average amounts outstanding. See "--Liquidity" and "--Capital
Resources" for further discussion of the bank debt. Non-cash bond interest
amortization totaled $10.5 million and $20.6 million for the quarter and six
months ended June 30, 2000, respectively, compared to $11.9 million and $23.3
million for the quarter and six months ended June 30, 1999, respectively.
Income Taxes
As of June 30, 2000, the Company had net operating losses of approximately
$263.6 million and foreign tax credits of $11.5 million that will carry over to
future years to offset U.S. income taxes. The foreign tax credits will begin to
expire in the fiscal year 2001 and the net operating losses will begin to expire
in the fiscal year 2011. The Company has recorded a valuation reserve, as of
December 31, 1999, for $113.0 million related to net operating losses, foreign
tax credits and other deferred tax assets that the Company may not utilize prior
to their expirations. The tax provision recorded for the six months ended June
30, 2000 reflects certain international taxes.
Net Loss
Net losses in the second quarter and six months ended June 30, 2000 totaled
$51.2 million and $61.8 million, respectively, compared with a net loss of $54.1
million and $72.8 million in the second quarter and six months ended June 30,
1999, respectively. In addition to the impact of EBITDA, depreciation, interest
and taxes discussed above, the Company recorded $0.5 million and $0.6 million in
equity in loss of joint ventures in the second quarter and first six months of
2000, respectively, compared with equity in loss of joint ventures of $0.2
million and $5.7 million in the second quarter and first six months of 1999,
respectively. Additionally, the Company recorded other expense of $1.8 million
and $1.1 million in the second quarter and first six months of 2000 compared
with other expense of $2.7 million and $5.0 million in the second quarter and
first six months of 1999, respectively.
Liquidity
The Company's primary source of liquidity is cash provided by operations
and funds available under credit facilities, as described below. Working capital
on June 30, 2000 was $20.6 million compared with $22.5 million on December 31,
1999, a decrease of $1.9 million. The decrease in working capital was primarily
attributable to a decrease of $19.6 million in cash, a decrease of $0.7 million
in accounts receivable, and an increase of $9.8 million in current portion of
long-term debt. These factors contributing to the decrease in working capital
were offset by an increase of $17.6 million in inventory primarily attributable
to a timing difference between planned production and related shipments, an
increase of $1.8 million in other current assets, a decrease of $6.6 million in
accounts payable and accrued expenses and a decrease of $2.2 million in income
taxes payable.
Net cash provided by operating activities was $7.3 million for the six
months ended June 30, 2000 compared with net cash provided of $8.8 million for
the six months ended June 30, 1999, a decrease of $1.5 million. An increase of
$11.0 million was attributable to a net loss of $61.8 million recorded in the
first six months of 2000 compared with a net loss of $72.8 million in the same
period in 1999. An increase of $1.9 million was attributable to decreased levels
of accounts receivable and an increase of $21.7 million was attributable to
lower levels of other assets. These factors contributing to the increase in net
cash were offset by a decrease of $5.1 million due to the lower equity in loss
of joint ventures recorded by the Company in the first six months of 2000
compared with the same period in 1999, a decrease of $5.5 million attributable
to lower levels of accounts payable and accrued
22
expenses, a decrease of $16.9 million attributable to higher inventory balances,
a net decrease of $2.7 million due to lower levels of bond amortization and a
net decrease of $5.9 million attributable to changes in other operating
activities.
Net cash used in investing activities was $31.2 million for the six months
ended June 30, 2000 compared with net cash used of $22.5 million for the six
months ended June 30, 1999, an increase of $8.7 million. An increase of $11.4
million was attributable to an increase in purchases of property and equipment
in 2000. An increase of $0.4 million is attributable to an increase in Bowling
Center acquisition spending in the first six months of 2000 compared with the
same period in 1999. In the first six months of 2000, two centers were purchased
compared with one center in the same period in 1999. These factors contributing
to the increase in net cash flows were offset by an increase of $3.1 million in
proceeds from the sale of property and equipment. See "--Capital Expenditures"
for additional discussion of purchases of property and equipment.
Net cash provided by financing activities was $6.7 million for the six
months ended June 30, 2000 compared with net cash used of $2.7 million for the
six months ended June 30, 1999, a difference of $9.4 million. Proceeds from long
term debt increased $9.1 million. Payments on long-term debt decreased $0.1
million. In accordance with the terms of the Credit Agreement, scheduled
principal payments in the first six months of 2000 were $1.9 million higher than
payments made in the same period in 1999. Additionally, in the first six months
of 2000, $5.0 million was paid against amounts outstanding under the Bank
Facility compared with $7.0 million for the same period in 1999. Net cash flow
of $0.2 million was also provided by other financing activities. See "Note 5.
Long-Term Debt" in the Notes to Condensed Consolidated Financial Statements and
"--Capital Resources".
As a result of the aforementioned, cash decreased by $19.6 million for the
six months ended June 30, 2000 compared with a decrease of $17.8 million for the
six months ended June 30, 1999.
AMF Bowling is a holding company with limited financial resources. Based on
current projections, it is likely that AMF Bowling will deplete its cash balance
by the end of 2000. If this occurs, it would be necessary for Bowling Worldwide
to receive an amendment to its Credit Agreement to permit advances to AMF
Bowling. Any such amendment would be subject to the approval of the lenders
under the Credit Agreement.
Capital Resources
The Company's total indebtedness is primarily a result of the financing of
the acquisition of the Company in 1996 by an investor group led by affiliates of
Goldman, Sachs & Co. (the "Acquisition") and the Company's bowling center
acquisition program. At June 30, 2000, the Company's debt consisted of $567.4
million of borrowings under the Credit Agreement and a mortgage (collectively,
the "Senior Debt"), $250.0 million of Bowling Worldwide's senior subordinated
notes (the "Senior Subordinated Notes"), $254.7 million of Bowling Worldwide's
senior subordinated discount notes ("Subsidiary Senior Subordinated Discount
Notes"), and $178.7 million of AMF Bowling's zero coupon convertible debentures
due 2018. At June 30, 2000, the Company's Senior Debt consisted of $369.4
million outstanding under term loan facilities under the Credit Agreement (the
"Term Facilities"), $196.0 million outstanding under a non-amortizing revolving
credit facility under the Credit Agreement (the "Bank Facility") and $2.0
million represented by one mortgage note.
Bowling Worldwide has the ability to borrow for general corporate purposes
and, to a limited extent, for acquisitions pursuant to the Bank Facility,
subject to certain conditions. At June 30, 2000, $196.0 million was outstanding
and $159.0 million was available for borrowing under the Bank Facility subject
to certain limitations applicable to borrowings regarding acquisitions and
capital expenditures. Between June 30, 2000 and July 31, 2000, there were
borrowings of $15.0 million and no payments under the Bank Facility.
The lenders under the Credit Agreement amended the terms of the Credit
Agreement, as of June 14, 1999, to provide Bowling Worldwide, among other
things, with greater financial flexibility under the covenants contained in the
Credit Agreement. See "Note 5. Long-Term Debt" in the Notes to Condensed
Consolidated Financial Statements. Bowling Worldwide was in compliance with the
amended covenants as of June 30, 2000. In this connection, since November 1999,
AMF Bowling made cumulative contributions of $8.0 million, including $2.0
million in August 2000, as equity to Bowling Worldwide to meet EBITDA
requirements under its financial covenant tests for the prior four quarters
including the quarter ended June 30, 2000. The Credit Agreement, as then
amended, would permit AMF Bowling to make an additional equity contribution of
up to $2.0 million dollars for the third quarter of 2000 and up to an aggregate
of $10.0 million for any four consecutive quarters through the end of 2001.
23
During the first six months of 2000, the Company funded its cash needs
through cash flow from operations, cash balances and the Bank Facility. A
substantial portion of the Company's available cash will be applied to service
outstanding indebtedness. For the six months ended June 30, 2000, Bowling
Worldwide incurred cash interest expense of $42.6 million, representing 58.2% of
EBITDA for the period. For the six months ended June 30, 1999, Bowling Worldwide
incurred cash interest expense of $41.1 million, representing 57.2% of EBITDA
for the period.
The indentures governing the Senior Subordinated Notes and the Subsidiary
Senior Subordinated Discount Notes (together with the Senior Subordinated Notes,
the "Subsidiary Notes") and certain provisions of the Credit Agreement contain
financial and operating covenants and significant restrictions on the ability of
Bowling Worldwide to pay dividends, incur indebtedness, make investments and
take certain other corporate actions. As of June 30, 2000, Bowling Worldwide was
in compliance with all of its covenants under these indentures and the Credit
Agreement. See "Note 5. Long-Term Debt" in the Notes to Condensed Consolidated
Financial Statements.
On August 14, 2000, Bowling Worldwide and the lenders under the Credit
Agreement entered into an amendment (the "Amendment"), pursuant to which (1)
compliance with all financial covenants were waived through December 31, 2000,
(2) Bowling Worldwide indicated not to make the September 15, 2000 interest
payment due on its Senior Subordinated Notes, (3) the lenders under the Credit
Agreement agreed to waive any default under the Credit Agreement resulting from
such non-payment unless the Company's other creditors commence the exercise of
remedies, including the acceleration of the Company's debt obligations and (4)
the revolving credit facility will be reduced to $255.0 million by year-end.
However, failure to make such payment within 30 days of its due date will result
in a default under the Senior Subordinated Notes and could result in the
acceleration of the obligations under such Senior Subordinated Notes and
substantially all of the Company's other indebtedness. See "Note 1.
Organization" in the Notes to Condensed Consolidated Financial Statements. Based
upon the current level of performance, management believes that cash flow from
operations, together with available borrowings under the Credit Agreement and
other sources of liquidity, will be adequate to meet Bowling Worldwide's
requirements for working capital, capital expenditures and scheduled payments on
the principal of, and interest on, its senior debt for the remainder of 2000.
The Company is considering options to restructure and reduce its long-term
debt. In this regard, the Amendment also requires Bowling Worldwide to deliver
to the lenders under the Credit Agreement on or before September 30, 2000 a plan
to restructure the Company's debt and a timeline for the implementation of such
plan, which plan and timeline must be in form and substance satisfactory to a
majority of the lenders under the Credit Agreement on or before October 15,
2000.
24
In calendar year 2001, principal payment obligations under the facilities
of the Credit Agreement increase significantly and cash interest becomes payable
on the Subsidiary Senior Subordinated Discount Notes. In the first quarter of
calendar year 2002, the financial covenants under the Credit Agreement will be
reset to their original, more stringent, levels. Based on current levels of
performance, the Company anticipates that a refinancing or restructuring of its
indebtedness will be required to meet the Company's financial requirements for
calendar years 2001 and beyond. There can be no assurance, however, that Bowling
Worldwide's business will generate sufficient cash flow from operations or that
future borrowings will be available in an amount sufficient to enable the
Company to meet its payment obligations under its indebtedness, or make
necessary capital expenditures, or that any refinancing or restructuring of its
indebtedness would be available on commercially reasonable terms or at all.
The Company was notified on July 19, 2000 that it did not at that time meet
the New York Stock Exchange's continued listing requirements because the stock
had traded below $1 per share for over a 30 trading-day period. If this
situation continues for six months, the Company may be delisted from the New
York Stock Exchange and the liquidity of its shares and its ability to sell
shares in the market may be negatively impacted.
25
Capital Expenditures
For the six months ended June 30, 2000, Bowling Worldwide's capital
expenditures were $32.7 million compared to $21.3 million for the six months
ended June 30, 1999, an increase of $11.4 million. Bowling Centers maintenance
and modernization expenditures increased $5.4 million. Bowling Products
expenditures increased $0.5 million. Company-wide information systems
expenditures increased $1.0 million. Investments in Xtreme(TM) bowling equipment
at various AMF bowling centers increased by $5.1 million. Capital expenditures
for new centers were $0.6 million higher in 1999 due to the construction of a
Michael Jordan Golf Center.
Bowling Worldwide has historically funded its capital expenditures and
construction and acquisition of new centers with internally-generated cash, the
Bank Facility and issuances of Common Stock by AMF Bowling. Bowling Worldwide's
ability to make acquisitions and capital expenditures is subject to availability
of funds under the Credit Agreement for such purposes. Bowling Worldwide now
considers acquisitions of new bowling centers only on a very selective basis.
See "Note 1. Organization" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources."
On August 14, 2000, Bowling Worldwide and the lenders under the Credit
Agreement entered into the Amendment, pursuant to which compliance with all
financial covenants were waived through December 31, 2000 and the revolving
credit facility will be reduced to $255.0 million by year-end. See "Note 1.
Organization" in the Notes to Condensed Consolidated Financial Statements.
Seasonality and Market Development Cycles
The financial performance of Bowling Centers' operations is seasonal. Cash
flows typically peak in the winter when U.S. leagues are most active and reach
their lows in the summer. While the geographic diversity of the Company's
Bowling Centers operations has helped reduce this seasonality in the past, the
increase in U.S. centers resulting from acquisitions has increased the
seasonality of that business.
26
Modernization and Consumer Products sales also display seasonality. The
U.S. market, which is the largest market for Modernization and Consumer
Products, is driven by the beginning of league play in the fall of each year.
While operators purchase consumer products throughout the year, they often place
larger orders during the summer in preparation for the start of league play in
the fall. Summer is also generally the peak period for installation of
modernization equipment. Operators typically sign purchase orders for
modernization equipment during the first four months of the year after they
receive winter league revenue indications. Equipment is then shipped and
installed during the summer when leagues are generally less active. However,
sales of some modernization equipment such as automatic scoring and synthetic
lanes are less predictable and fluctuate from year to year because of the longer
life cycle of these major products.
While sales of NCPs are slightly seasonal, sales of NCPs can fluctuate
dramatically as a result of economic fluctuations in international markets, as
seen in the reduction of sales of NCPs to markets in the Asia Pacific region
following economic difficulties in that region.
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, currency exchange
rate fluctuations, economic and political fluctuations and destabilization,
other disruption of markets, restrictive laws, tariffs and other actions by
foreign governments (such as restrictions on transfer of funds, import and
export duties and quotas, foreign customs, tariffs and value added taxes and
unexpected changes in regulatory environments), difficulty in obtaining
distribution and support for products, the risk of nationalization, the laws and
policies of the United States affecting trade, international investment and
loans, and foreign tax law changes.
The Company has a history of operating in a number of international
markets, in some cases, for over 30 years. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate adversely impacts sales volume and profit margins
during such periods.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the six months ended June 30,
2000, revenue and EBITDA of international bowling centers represented 16.4% and
23.2% of consolidated revenue and EBITDA, respectively. For the six months ended
June 30, 1999, revenue and EBITDA of international bowling centers represented
17.4% and 25.3% of consolidated revenue and EBITDA, respectively.
Economic difficulties in the Asia Pacific region, including the limited
availability of financing for customers seeking to build new centers, have
continued to keep demand for NCPs below peak levels achieved during 1997. In
response to these market conditions, Bowling Products entered into three-year
joint distribution agreements with Zhonglu on June 13, 1999. Under the terms of
these agreements, Zhonglu is the exclusive distributor of AMF products in China,
and Bowling Products is the exclusive distributor of Zhonglu's bowling products
and parts outside of China. In 1999 and the first six months of 2000, Bowling
Products has purchased component arts from Zhonglu as part of its long-term
strategy to reduce manufacturing costs. However, sales of both AMF products in
China and Zhonglu products outside China have been slower to develop than
anticipated. Discussions are underway to amend the distribution agreements to
better reflect current global market conditions for bowling equipment sales.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 38.5% of total NCP unit sales for the six months ended June
30, 2000 compared to 43.0% for the year ended December 31, 1999.
China has strengthened enforcement of its import restrictions by requiring
the payment of full customs duties and value-added taxes on the importation of
new and used capital goods. The Chinese government also prohibits importation of
used capital equipment without permits. Permits for the importation of used
bowling equipment are very difficult to obtain. Local Chinese companies,
however, are not subject to the same restrictions. For example, in addition to
being the exclusive distributor of AMF products, Zhonglu produces locally and
sells bowling equipment that is not subject to the customs duties or permit
requirements that affect the Company's imported equipment. Zhonglu has
experienced significant acceptance by local customers. Management believes that
these import restrictions will continue for the foreseeable future.
27
Impact of Inflation
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have a
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow. There
was no significant impact on the Company's operations as a result of inflation
for the six months ended June 30, 2000 and 1999, respectively, or for the year
ended December 31, 1999.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
Recent Accounting Pronouncements
Effective for the quarter ended March 31, 2001, the Company will be
required to adopt SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect that adoption of this standard
will have a material adverse impact on the Company's financial position or
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could impact its results of operations
and financial condition. The Company manages its exposure to these risks through
its normal operating and financing activities and through the use of interest
rate cap agreements with respect to interest rates. There were no other material
derivative instrument transactions during any of the periods presented.
The Company has generally accepted the exposure to exchange rate movements
relative to its investment in foreign operations without using derivative
financial instruments to manage the risk. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate may adversely impact sales volume and profit margins
during such periods. Foreign currency exchange rates can also affect the
translation of operating results from international bowling centers. For the six
months ended June 30, 2000, revenue and EBITDA of international bowling centers
represented 16.4% and 23.2% of consolidated revenue and EBITDA, respectively.
For the six months ended June 30, 1999, revenue and EBITDA of international
bowling centers represented 17.4% and 25.3% of consolidated revenue and EBITDA,
respectively.
The Company uses interest rate cap agreements to mitigate the effect of
changes in interest rates on the Company's variable rate borrowings under its
Credit Agreement. While the Company is exposed to credit risk in the event of
non-performance by the counterparty to interest rate swap agreements, in all
cases such counterparty is a highly-rated financial institution and the Company
does not anticipate non-performance. The Company does not hold or issue
derivative financial instruments for trading purposes or speculation. The
following table provides
28
information about the Company's fixed and variable rate debt, weighted average
interest rates and respective maturity dates (dollar amount in millions.)
Weighted Weighted
Average Variable Average
Fixed Interest Rate Interest
Maturity Rate Debt Rate Debt Rate
-------- --------- -------- -------- --------
2000 $ - - $ 17.2 10.56 %
2001 - - 83.0 10.81
2002 - - 302.0 10.66
2003 - - 116.4 11.33
2004 - - 46.8 11.49
Thereafter 1,139.7 9.13% - N/A
---------- ---------
Total $1,139.7 $ 565.4
========== =========
During December 1999 and March 2000, Bowling Worldwide entered into two
interest rate cap agreements with Goldman Sachs Credit Partners, L.P. (the
"Counterparty") to reduce the interest rate risk of its Bank Debt. The table
below summarizes the interest rate cap agreements in effect at June 30, 2000:
Notional
Amount
Expiration Date (in millions) Cap Rate (a)
----------------- ------------- ------------
December 31, 2000 $ 100.0 7.6525 %
April 1, 2001 200.0 7.7800
- ------------------------
(a) The cap rate is the 3-month U.S. Dollar-London Interbank Offer Rate
("USD-LIBOR") quoted by the Counterparty.
Bowling Worldwide paid a fixed fee of $75,000 and $160,000, respectively, for
the two interest rate caps. Bowling Worldwide will receive quarterly payments
from the Counterparty if the quoted 3-month USD-LIBOR on the quarterly floating
rate reset dates is above the respective cap rates.
29
PART II
Item 1. Legal Proceedings
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation against AMF Bowling, The Goldman Sachs Group, L.P., Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Cowen & Company, Schroder & Co., Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased
Common Stock in the Company's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, among other
things, damages and/or rescission against all defendants jointly and severally
pursuant to Sections 11, 12 and/or 15 of the Securities Act of 1933 based on
allegedly inaccurate and misleading disclosures in connection with and following
the Initial Public Offering. Management believes that the litigation is without
merit and intends to defend it vigorously.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
environmental claims, discrimination claims, workers' compensation claims, and
personal injury claims from customers of Bowling Centers. In some actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. In management's opinion, the claims and actions in which the Company
is involved will not have a material adverse impact on its financial position or
results of operations. However, it is not possible to predict the outcome of
such claims and actions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the six months ended June 30, 2000.
(b) Reports on Form 8-K:
None
30
SIGNATURES
Pursuant to the requirements 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.
AMF Bowling, Inc.
(Registrant)
/s/ Stephen E. Hare August 14, 2000
- ----------------------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Michael P. Bardaro August 14, 2000
- ---------------------------------
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
31