UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 1998
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 October 23, 1998, 59,747,550 shares of common stock, par value of $.01, 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)
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 54,185 $ 35,790
Accounts and notes receivable, net of allowance for
doubtful accounts of $5,146 and $5,012, respectively 78,485 73,991
Inventories 71,767 56,568
Deferred taxes and other current assets 21,994 17,049
---------- ----------
Total current assets 226,431 183,398
Property and equipment, net 874,497 750,885
Leasehold interests, net 44,122 47,180
Deferred financing costs, net 28,782 18,911
Goodwill, net 772,991 772,348
Investments in and advances to joint ventures 22,581 19,999
Other assets 70,075 39,331
---------- ----------
Total assets $2,039,479 $1,832,052
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 34,136 $ 41,583
Accrued expenses 47,486 64,865
Income taxes payable 2,919 5,644
Long-term debt, current portion 30,501 27,376
---------- ----------
Total current liabilities 115,042 139,468
Long-term debt, less current portion 1,337,921 1,033,223
Other long-term liabilities 6,646 5,333
---------- ----------
Total liabilities 1,459,609 1,178,024
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01, 200,000,000 shares authorized,
59,747,550 and 59,630,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively) 597 596
Paid-in capital 749,303 748,053
Retained deficit (147,090) (75,048)
Accumulated other comprehensive income (22,940) (19,573)
---------- ----------
Total stockholders' equity 579,870 654,028
---------- ----------
Total liabilities and stockholders' equity $2,039,479 $1,832,052
========== ==========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Operating revenue $172,525 $187,526 $522,283 $505,594
-------- -------- -------- --------
Operating expenses:
Cost of goods sold 54,077 64,396 139,098 150,480
Bowling center operating expenses 83,483 65,123 242,815 181,161
Selling, general, and administrative expenses 17,174 17,054 52,021 47,226
Depreciation and amortization 30,929 23,387 87,744 66,811
-------- -------- -------- --------
Total operating expenses 185,663 169,960 521,678 445,678
-------- -------- -------- --------
Operating income (loss) (13,138) 17,566 605 59,916
-------- -------- -------- --------
Nonoperating expenses (income):
Interest expense 30,852 31,727 84,457 89,181
Other expenses, net 5,261 1,255 7,818 3,623
Interest income (376) (453) (1,446) (1,579)
-------- -------- -------- --------
Total nonoperating expenses 35,737 32,529 90,829 91,225
-------- -------- -------- --------
Loss before income taxes (48,875) (14,963) (90,224) (31,309)
Benefit for income taxes (14,548) (4,714) (21,088) (8,896)
-------- -------- -------- --------
Net loss before equity in loss of joint ventures (34,327) (10,249) (69,136) (22,413)
Equity in loss of joint ventures (1,343) - (2,906) -
======== ======== ======== ========
Net loss $(35,670) $(10,249) $(72,042) $(22,413)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.60) $ (0.24) $ (1.21) $ (0.53)
======== ======== ======== ========
Weighted average shares outstanding 59,744 42,636 59,707 42,396
======== ======== ======== ========
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)
Nine Months
Ended September 30,
--------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (72,042) $ (22,413)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 87,744 66,811
Equity in loss of joint ventures 2,906 -
Deferred income taxes (27,031) (2,912)
Amortization of bond discount 25,178 25,507
Loss on the sale of property and equipment, net 5,856 96
Changes in assets and liabilities:
Accounts and notes receivable, net (4,784) (35,326)
Inventories (14,221) (19,857)
Other assets (29,561) (18,206)
Accounts payable and accrued expenses (23,080) 4,992
Income taxes payable (2,344) 4,270
Other long-term liabilities 1,650 (1,506)
--------- ---------
Net cash (used in) provided by operating activities (49,729) 1,456
--------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (168,865) (192,395)
Investments in and advances to joint ventures (2,583) -
Purchases of property and equipment (47,739) (42,589)
Proceeds from the sale of property and equipment 29 3,644
--------- ---------
Net cash used in investing activities (219,158) (231,340)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 548,641 210,000
Payments on long-term debt (266,014) (25,782)
Repurchase of common shares - (500)
Capital contribution - 35,600
Issuance of common shares 1,253 -
Payments of noncompete obligations (589) (478)
--------- ---------
Net cash provided by financing activities 283,291 218,840
--------- ---------
Effect of exchange rates on cash 3,991 (587)
--------- ---------
Net increase (decrease) in cash 18,395 (11,631)
Cash and cash equivalents at beginning of period 35,790 43,568
--------- ---------
Cash and cash equivalents at end of period $ 54,185 $ 31,937
========= =========
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. The interim financial information and notes
thereto should be read in conjunction with the December 31, 1997 and 1996
audited consolidated financial statements of AMF Bowling, Inc. ("AMF Bowling")
and its subsidiaries (collectively, the "Company") presented in AMF Bowling's
Form 10-K Annual Report for the fiscal year ended December 31, 1997 filed with
the U.S. Securities and Exchange Commission. The results of operations for the
nine months ended September 30, 1998, 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 or operation of bowling centers, consisting of 416 U.S. bowling
centers and 123 international bowling centers ("Bowling Centers"), including
fifteen joint venture centers described in "Note 8. Acquisitions", as of
September 30, 1998, 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.
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 Group Holdings and
Bowling Worldwide are Delaware corporations organized by GS Capital Partners II,
L.P., and certain other investment funds (collectively, "GSCP") affiliated with
Goldman, Sachs & Co. ("Goldman Sachs") to effect the Acquisition (defined
below). AMF Group Holdings and AMF Bowling are holding companies only. The
principal assets in each are comprised of investments in subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between AMF
Group Holdings and the stockholders (the "Prior Owners") of AMF Bowling Group
(the "Predecessor Company"), on May 1, 1996 (the "Closing Date"), AMF Group
Holdings acquired the Predecessor Company through a stock purchase by AMF Group
Holdings' subsidiaries of all the outstanding stock of the separate domestic and
foreign corporations that constituted substantially all of the Predecessor
Company and through the purchase of certain of the assets of the Predecessor
Company's bowling center operations in Spain and Switzerland (the
"Acquisition"). The purchase price for the Acquisition was approximately $1.37
billion. The Acquisition was accounted for by the purchase method of accounting,
pursuant to which the purchase price was allocated among the acquired assets and
liabilities in accordance with estimates of fair market value on the Closing
Date.
On November 7, 1997, AMF Bowling completed an initial public offering (the
"Initial Public Offering") of 15,525,000 shares of common stock (the "Common
Stock"), which trades on the New York Stock Exchange under the symbol "PIN". The
net proceeds of $278.5 million from the Initial Public Offering were contributed
by AMF Bowling to Bowling Worldwide and used by Bowling Worldwide to reduce and
refinance its bank debt pursuant to Bowling Worldwide's third amended and
restated credit agreement (the "Credit Agreement") and to redeem a portion of
Bowling Worldwide's senior subordinated discount notes.
As of September 30, 1998, the Company has acquired 256 bowling centers and
constructed one bowling center since the Acquisition for a combined purchase
price of $491.7 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, and
issuances of Common Stock. See "Note 8. Acquisitions".
5
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 nine months ended September 30, 1998 and
1997, 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
discussed in "Note 8. Acquisitions", and in accordance with the purchase method
of accounting for all 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
was $5,123 and $15,177 for the three months and nine months ended September 30,
1998, and $4,958 and $14,818 for the three months and nine months ended
September 30, 1997, respectively.
Comprehensive Income
Effective January 1, 1998, the Company adopted, as required, Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income." Comprehensive loss was $36,835 and $75,409 for the three months and
nine months ended September 30, 1998, respectively, and $13,486 and $30,665 for
the three months and nine months ended September 30, 1997, respectively.
Note 3. Inventories
Inventories at September 30, 1998, and December 31, 1997 consisted of the
following:
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
Bowling Products, at FIFO:
Raw materials $13,052 $15,283
Work in progress 1,892 2,279
Finished goods and spare parts 48,452 33,082
Bowling Centers, at average cost:
Merchandise and spare parts 8,371 5,924
------- -------
$71,767 $56,568
======= =======
6
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Property and Equipment
Property and equipment at September 30, 1998, and December 31, 1997,
consisted of the following:
September 30, December 31,
1998 1997
------------- -----------
(unaudited)
Land $ 131,150 $113,629
Buildings and improvements 351,477 280,046
Equipment, furniture and fixtures 537,305 444,437
Other 13,302 7,282
---------- --------
1,033,234 845,394
Less: accumulated depreciation and amortization (158,737) (94,509)
---------- --------
$ 874,497 $750,885
========== ========
Depreciation and amortization expense related to property and equipment was
$22,985 and $65,480 for the three months and nine months ended September 30,
1998, respectively, and $15,941 and $46,816 for the three months and nine months
ended September 30, 1997, respectively.
Note 5. Long-Term Debt
Long-term debt at September 30, 1998, and December 31, 1997 consisted of
the following:
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
Bank debt $ 617,846 $ 619,362
Senior subordinated notes 250,000 250,000
Senior subordinated discount notes 206,829 189,261
Zero coupon convertible debentures 291,762 -
Mortgage and equipment notes 1,985 1,976
----------- ----------
Total debt 1,368,422 1,060,599
Current maturities (30,501) (27,376)
---------- ----------
Total long-term debt $1,337,921 $1,033,223
========== ==========
The Company's bank debt (the "Senior Debt") was incurred pursuant to a
credit agreement, dated as of May 1, 1996, which was amended and restated in
connection with the Initial Public Offering, as of November 3, 1997, as the
Credit Agreement among Bowling Worldwide and its lenders. The Credit Agreement
provides for (i) three senior secured term loan facilities aggregating $455.3
million (the "Term Facilities") and (ii) the Bank Facility which provides for
borrowings up to $355.0 million on a revolving basis. At September 30, 1998,
amounts outstanding under the Term Facilities and Bank Facility were $429.8
million and $188.0 million, respectively.
On September 30, 1998, the Third Amended and Restated Credit Agreement
was amended by Amendment No. 1 and Waiver (the "Amendment and Waiver") in which
certain financial covenants were adjusted, and certain restrictions on the
Company's operations were imposed, for the third and fourth quarters of 1998 and
the year 1999. In addition, for the third and fourth quarters of 1998 and the
year 1999, borrowings to finance acquisitions are substantially restricted and
limits have been placed on the Company's ability to make capital expenditures,
investments and acquisitions.
7
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On May 12, 1998, AMF Bowling issued its zero coupon convertible debentures
(the "Debentures") for gross proceeds of approximately $284.1 million. The
Debentures mature on May 12, 2018 and have a yield to maturity of 7% per annum.
The Debentures were issued at an original price of $252.57 per $1,000 principal
amount at maturity. The Debentures are convertible at any time prior to maturity
into shares of Common Stock at a conversion rate of 8.6734 shares per $1,000
principal amount at maturity. If held to maturity and not redeemed or
repurchased by AMF Bowling, the Debentures will accrue to an aggregate principal
amount at maturity of $1.125 billion. The Debentures are not entitled to a
sinking fund. The Debentures are not redeemable at the option of AMF Bowling
before May 12, 2003. Thereafter, the Debentures are redeemable for cash at the
option of AMF Bowling at redemption prices specified in the Debentures.
The Debentures will be purchased by AMF Bowling, at the option of
holders of the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for
purchase prices specified in the Debentures. The Debentures may also be redeemed
at the option of the holders of the Debentures upon the occurrence of a Change
of Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof. In connection with
the issuance of the Debentures, AMF Bowling has filed a shelf registration
statement in respect of the Debentures and the Common Stock issuable on
conversion, redemption or repurchase thereof. If the shelf registration
statement has not been declared effective within 180 days, after May 12, 1998,
AMF Bowling must pay liquidated damages as specified in the related registration
rights agreement.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance upon
conversion, redemption or repurchase of the Debentures, based on the Common
Stock price at the time of issuance of the Debentures.
The net proceeds of the Debentures were approximately $273.6 million, of
which $249.6 million was used to repay senior bank indebtedness under the Credit
Agreement and $24.0 million was used for acquisitions and general corporate
purposes.
Note 6. Commitments and Contingencies
Litigation and Claims
AMF Bowling Products, Inc., an indirect subsidiary of AMF Bowling ("AMF
Bowling Products"), is a defendant in an action pending in the Harbin
Intermediate People's Court in Heilongiiang, China. Harbin Hai Heng Bowling
Entertainment Co. Ltd. ("Hai Heng") filed the action in June 1998 to recover
$1,748,000 from AMF Bowling Products. Hai Heng purchased 38 NCPs and asserts
that the poor quality of 38 NCPs entitles it to recover the purchase price
thereof. Although Hai Heng has not amended its initial complaint, in a recent
hearing before the Court, Hai Heng stated that its damages could be in the range
of approximately $3,000,000 to $4,000,000 and noted lost profits and the cost of
storage for the NCPs as the basis for such damages. The Company believes Hai
Heng's claim is a warranty issue and that Hai Heng is not entitled to recover
the purchase price, lost profits or the cost of storage.
The Court attached $871,000 of cash and inventory in AMF Bowling
Products' warehouses and bank account in Beijing. AMF Bowling Products may not
dispose of these assets until the action is concluded. Management does not
believe that this attachment has interfered with the Company's operations in
China. AMF Bowling Products is vigorously defending the claim. Management of the
Company does not expect a decision to be rendered by the Court until 1999. If an
adverse decision is rendered, AMF Bowling Products has the right to appeal to a
higher court for a new trial. Management does not believe that the outcome of
the action will have a material adverse impact on the financial position of the
Company.
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. Employee Benefit Plans
AMF Bowling, Inc. 1996 Stock Incentive Plan
The total number of shares of Common Stock ("Stock Options") initially
reserved and available for grant under the AMF Bowling, Inc. 1996 Stock
Incentive Plan (the "1996 Plan") was 1,767,151. At September 30, 1998, the
number of Stock Options outstanding to senior management, other employees,
consultants and directors totaled 1,394,550 at an exercise price of $10.00 per
share. In addition to Stock Options outstanding under the 1996 Plan, 130,000
Stock Options granted to Douglas J. Stanard on May 1, 1996 were outstanding at
September 30, 1998. Of the total Stock Options awarded under the 1996 Plan,
469,150 were exercisable at September 30, 1998, and 21,100 and 67,550 were
exercised in the three months and nine months ended September 30, 1998,
respectively. Forfeited Stock Options under the 1996 Plan totaled 358,900
through September 30, 1998. There were 305,051 shares of Common Stock available
for grant under the 1996 Plan as of September 30, 1998.
8
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF Bowling, Inc. 1998 Stock Incentive Plan
Under the AMF Bowling, Inc. 1998 Stock Incentive Plan (the "1998 Plan"),
AMF Bowling may grant incentive awards in the form of restricted stock awards,
Stock Options and stock appreciation rights in substantially the same manner as
provided under the 1996 Plan. Two million shares of Common Stock have been
reserved and will be available for issuance under the 1998 Plan. In addition,
shares of Common Stock that have been reserved but not issued under the 1996
Plan, and shares which are subject to awards under the 1996 Plan that expire or
otherwise terminate, may be granted as awards pursuant to the 1998 Plan. As of
September 30, 1998, options to purchase 78,400 shares were granted under the
1998 Plan.
Note 8. Acquisitions
From the Acquisition until December 31, 1997, Bowling Centers purchased an
aggregate of 179 bowling centers from unrelated sellers. The combined purchase
price, net of cash acquired, was approximately $340.7 million (including amounts
paid in 1998 for certain bowling centers included in the 1997 total), and was
funded with approximately $40.0 million from the sale of equity by AMF Bowling
to its institutional stockholders and one of its directors, and with $299.8
million from available borrowing under Bowling Worldwide's acquisition facility
then existing under the bank credit agreement and under the Bank Facility.
From January 1, 1998 through September 30, 1998, the Company acquired 55
centers in the United States, 15 centers in the United Kingdom, six centers in
Australia and one center in France from unrelated sellers, including 15 centers
from Active West, Inc. ("Active West") and the Playcenter joint venture opened
one new bowling center in Brazil. The aggregate purchase price was approximately
$151.0 million, including $130.1 million funded with borrowings under the Bank
Facility and, with respect to the Active West acquisition, the issuance of
50,000 shares of Common Stock.
Between September 30, 1998 and October 23, 1998, the Company acquired one
center in the United States and two centers in Australia and sold one center in
Switzerland. As a result of these acquisitions and the sale of the Swiss center,
and after giving effect to the closing of 17 U.S. centers and one international
center since the Acquisition, the Company owned or operated 417 U.S. bowling
centers and 124 international bowling centers as of October 23, 1998. As of
October 23, 1998, the Company had no commitments regarding the acquisition of
additional bowling centers.
9
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9. 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 September 30, 1998 and
1997, respectively, is presented below (in millions):
Three Months Ended September 30, 1998 (unaudited)
--------------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------ ------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 87.4 $ 29.9 $ 117.3 $ 26.9 $28.3 $ 55.2 $ - $ - $ 172.5
Intersegment sales - - - 2.9 1.9 4.8 - - 4.8
Operating income (loss) (9.5) 3.1 (6.4) 0.6 (1.5) (0.9) (6.0) 0.2 (13.1)
Identifiable assets 912.4 366.7 1,279.1 649.6 79.5 729.1 29.2 2.1 2,039.5
Depreciation and amortization 19.9 5.4 25.3 5.2 0.3 5.5 0.4 (0.3) 30.9
Capital expenditures 15.2 2.9 18.1 1.7 0.1 1.8 0.1 - 20.0
Research and development expense - - - - - - - - -
Three Months Ended September 30, 1997 (unaudited)
--------------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------ ------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 69.4 $ 27.4 $ 96.8 $ 34.4 $ 56.3 $ 90.7 $ - $ - $ 187.5
Intersegment sales - - - 1.8 1.7 3.5 - - 3.5
Operating income (loss) (1.3) 3.3 2.0 13.8 5.3 19.1 (3.7) 0.1 17.5
Identifiable assets 795.0 307.0 1,102.0 646.2 52.8 699.0 17.2 0.8 1,819.0
Depreciation and amortization 14.2 4.8 19.0 4.5 0.2 4.7 - (0.3) 23.4
Capital expenditures 11.9 1.7 13.6 1.7 0.1 1.8 1.8 (0.2) 17.0
Research and development expense - - - 0.3 - 0.3 - - 0.3
10
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information concerning operations in these businesses for the nine months
ended September 30, 1998 and 1997, respectively, is presented below (in
millions):
Nine Months Ended September 30, 1998 (unaudited)
--------------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------ ------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $299.6 $ 84.2 $ 383.8 $ 63.7 $74.8 $138.5 $ - $ - $ 522.3
Intersegment sales - - - 10.5 3.7 14.2 - - 14.2
Operating income (loss) 15.5 8.7 24.2 (3.1) (4.9) (8.0) (16.6) 1.0 0.6
Identifiable assets 912.4 366.7 1,279.1 649.6 79.5 729.1 29.2 2.1 2,039.5
Depreciation and amortization 56.8 14.8 71.6 15.5 1.0 16.5 1.0 (1.3) 87.8
Capital expenditures 32.8 7.0 39.8 6.9 0.8 7.7 0.2 - 47.7
Research and development expense - - - 0.2 - 0.2 - - 0.2
Nine Months Ended September 30, 1997 (unaudited)
--------------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------ ------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $218.1 $ 79.8 $ 297.9 $ 82.1 $125.6 $ 207.7 $ - $ - $ 505.6
Intersegment sales - - - 7.1 4.1 11.2 - - 11.2
Operating income (loss) 21.5 9.2 30.7 29.9 10.6 40.5 (12.0) 0.7 59.9
Identifiable assets 795.0 307.0 1,102.0 646.2 52.8 699.0 17.2 0.8 1,819.0
Depreciation and amortization 39.3 14.0 53.3 13.8 0.8 14.6 - (1.1) 66.8
Capital expenditures 30.9 4.7 35.6 3.6 0.5 4.1 3.3 (0.4) 42.6
Research and development expense - - - 1.0 - 1.0 - - 1.0
Note 10. Condensed Consolidating Financial Statements
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of September 30, 1998, and
condensed consolidating statements of income and cash flows for the nine months
ended September 30, 1998 and (ii) elimination entries necessary to combine the
entities comprising the Company.
Bowling Worldwide's senior subordinated notes and 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. AMF Bowling and the third-tier subsidiaries of Bowling
Worldwide have not provided guarantees of such indebtedness.
11
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 1998
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
Assets
------
Current assets:
Cash and cash equivalents $ 43,079 $ 11,106 $ - $ 54,185
Accounts and notes receivable, net
of allowance for doubtful accounts 78,107 378 - 78,485
Accounts receivable - intercompany 11,281 8,928 (20,209) -
Inventories 70,716 1,051 - 71,767
Deferred taxes and other current assets 18,420 3,574 - 21,994
---------- --------- ----------- ----------
Total current assets 221,603 25,037 (20,209) 226,431
Notes receivable - intercompany 43,501 5,663 (49,164) -
Property and equipment, net 793,132 80,197 1,168 874,497
Investment in subsidiaries 20,300 824,488 (844,788) -
Goodwill and other assets 915,068 23,483 - 938,551
---------- ---------- ---------- ----------
Total assets $1,993,604 $ 958,868 $ (912,993) $2,039,479
========== ========= =========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 28,470 $ 5,666 $ - $ 34,136
Accounts payable - intercompany 8,928 11,281 (20,209) -
Accrued expenses 39,697 7,789 - 47,486
Income taxes payable 934 1,985 - 2,919
Long-term debt, current portion 30,501 - - 30,501
---------- --------- ----------- ----------
Total current liabilities 108,530 26,721 (20,209) 115,042
Long-term debt, less current portion 1,029,143 308,778 - 1,337,921
Notes payable - intercompany 5,663 43,501 (49,164) -
Other long-term liabilities 5,480 1,166 - 6,646
---------- --------- ----------- ----------
Total liabilities 1,148,816 380,166 (69,373) 1,459,609
---------- --------- ----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 597 - - 597
Paid-in capital 1,005,716 747,896 (1,004,309) 749,303
Retained (deficit) earnings (138,585) (146,254) 137,749 (147,090)
Accumulated other
comprehensive income (22,940) (22,940) 22,940 (22,940)
---------- --------- ----------- ----------
Total stockholders' equity 844,788 578,702 (843,620) 579,870
---------- --------- ----------- ----------
Total liabilities and stockholders' equity $1,993,604 $ 958,868 $ (912,993) $2,039,479
========== ========= =========== ==========
12
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended September 30, 1998
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
Operating revenue $482,904 $ 39,379 $ - $522,283
-------- -------- -------- --------
Operating expenses:
Cost of goods sold 134,672 4,426 - 139,098
Bowling center operating expenses 220,245 22,570 - 242,815
Selling, general, and administrative expenses 45,587 6,434 - 52,021
Depreciation and amortization 82,181 5,723 (160) 87,744
-------- -------- -------- --------
Total operating expenses 482,685 39,153 (160) 521,678
-------- -------- -------- --------
Operating income 219 226 160 605
-------- -------- -------- --------
Nonoperating expenses (income):
Interest expense 75,246 9,211 - 84,457
Other expenses, net 6,893 925 - 7,818
Interest income (1,201) (245) - (1,446)
Equity in loss (income) of subsidiaries 2,613 61,746 (64,359) -
-------- -------- -------- --------
Total nonoperating expenses 83,551 71,637 (64,359) 90,829
-------- -------- -------- --------
Loss before income taxes (83,332) (71,411) 64,519 (90,224)
Provision (benefit) for income taxes (18,973) (2,115) - (21,088)
-------- -------- -------- --------
Net (loss) income before equity in loss of
joint ventures (64,359) (69,296) 64,519 (69,136)
Equity in loss of joint ventures - (2,906) - (2,906)
-------- -------- -------- --------
Net (loss) income $ (64,359) $ (72,202) $ 64,519 $(72,042)
========= ========= ======== ========
13
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 Nine Months Ended September 30, 1998
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
Cash flows from operating activities:
Net loss $ (64,359) $ (72,202) $ 64,519 $ (72,042)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 82,181 5,723 (160) 87,744
Equity in loss of joint ventures 2,906 - - 2,906
Deferred income taxes (27,067) 36 - (27,031)
Amortization of bond discount 17,557 7,621 - 25,178
Equity in earnings of subsidiaries 2,613 61,746 (64,359) -
Loss on the sale of property and equipment, net 5,856 - - 5,856
Changes in assets and liabilities:
Accounts and notes receivable (5,798) 1,014 - (4,784)
Receivables and payables - affiliates (21,661) 21,661 - -
Inventories (14,102) (119) - (14,221)
Other assets (11,835) (17,726) - (29,561)
Accounts payable and accrued expenses (27,898) 4,818 - (23,080)
Income taxes payable (1,993) (351) - (2,344)
Other long-term liabilities 1,553 97 - 1,650
--------- --------- -------- ---------
Net cash provided by (used in) operating activities (62,047) 12,318 - (49,729)
--------- --------- -------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (120,647) (48,218) - (168,865)
Investments in and advances to joint ventures (2,583) - - (2,583)
Investment in subsidiaries - (258,417) - (258,417)
Purchases of property and equipment (45,158) (2,581) - (47,739)
Proceeds from sale of property and equipment 29 - - 29
--------- --------- -------- ---------
Net cash used in investing activities (168,359) (309,216) - (477,575)
--------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 224,500 324,141 - 548,641
Payments on long-term debt (243,017) (22,997) - (266,014)
Capital contribution from Parent 258,417 - - 258,417
Issuance of shares 1,253 - - 1,253
Noncompete obligations (589) - - (589)
--------- --------- -------- ---------
Net cash provided by financing activities 240,564 301,144 - 541,708
--------- --------- -------- ---------
Effect of exchange rates on cash (536) 4,527 - 3,991
--------- --------- -------- ---------
Net increase in cash 9,622 8,773 - 18,395
Cash and cash equivalents at beginning of period 33,457 2,333 - 35,790
--------- --------- -------- ---------
Cash and cash equivalents at end of period $ 43,079 $ 11,106 $ - $ 54,185
========= ========= ======== =========
14
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information in this report contains forward-looking statements, which
are statements other than historical information or statements of current
condition. Some forward-looking statements may be identified by use of terms
such as "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans and objectives of AMF Bowling,
Inc. ("AMF Bowling") and its subsidiaries (collectively, the "Company") for
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 the Company or any other person
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, among other things: (i) the Company's
ability to integrate acquired operations into its business, (ii) the Company's
ability to execute its long term strategies, including to identify, finance and
execute further acquisitions, (iii) the development and growth of new bowling
markets and the Company's ability to identify those markets and to generate
sales of products in those markets, (iv) the risk of adverse political acts or
developments in the Company's existing or proposed markets for its products or
in which it operates its bowling centers, (v) the Company's ability to retain
experienced senior management, (vi) the ability of AMF Bowling and its
subsidiaries to generate sufficient cash flow in a timely manner to satisfy
principal and interest payments on their indebtedness, (vii) the popularity of
bowling as an activity in the United States and abroad, (viii) the continuation
or worsening of economic difficulties currently being experienced by certain
countries in the Asia Pacific and other regions and (ix) fluctuations in
currency exchange rates which affect translation of operating results. In
addition, actual results may differ materially from forward-looking statements
in this report as a result of factors generally applicable to companies in
similar businesses, including, among other things: (i) a decline in general
economic conditions, (ii) an adverse judgment in pending or future litigation
and (iii) increased competitive pressure from current competitors and future
market entrants. 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) 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
an issuer's historical ability to service debt. EBITDA 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 is principally engaged in two business segments: (i) the
ownership or operation of 416 U.S. bowling centers and 123 international bowling
centers ("Bowling Centers"), including 15 joint venture centers operated with
third parties, as of September 30, 1998; 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").
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
15
eliminations are not material. Interest expense is presented on a gross basis.
The results of Bowling Centers for the first nine months of 1998 reflect the
inclusion of 105 centers acquired since October 1, 1997.
Current Developments
Recent operating results for U.S. bowling centers have declined in
comparison with historical performance. In connection with curtailing its
acquisition efforts over the near term, management will focus its attention on
the improvement of constant centers (centers in operation for at least one full
fiscal year) revenue growth and profitability. See "--Capital Resources". As
part of its efforts to improve revenue growth and profitability, the Company has
established a new senior management team to lead U.S. bowling centers, including
the appointment of a President, U.S. Bowling Centers in September 1998. This new
management team will concentrate on increasing customer satisfaction, improving
training for center managers and staff, more effectively marketing and promoting
bowling to increase bowling center traffic and continue to develop a nationally
recognized brand of bowling-based family recreation centers.
The Company has historically participated in the international demand
for bowling products primarily through the sale of its New Center Packages
("NCP" or "NCPs") which include all of the equipment necessary to outfit one new
bowling lane. Beginning in the fourth quarter of 1997, the Company has seen a
decline in the demand for NCPs primarily in Asia Pacific markets as a result of
the region's economic difficulties which has led to reduced construction of new
bowling centers. In response to this decline, management is implementing a
significant cost reduction program, which should be completed by the end of
1998, designed to align more effectively the bowling products operations with
existing and projected demand. Over the long term the Company continues to
believe that international markets, including Asia Pacific, will represent
opportunities for the sale of bowling products.
On November 2, 1998, Douglas J. Stanard resigned, effective as of
January 1, 1999, from his positions as President, Chief Executive Officer and a
director of AMF Bowling, and from all other positions with AMF Bowling and its
subsidiaries. Stephen E. Hare, Executive Vice President, Chief Financial Officer
and Treasurer of AMF Bowling, was named Acting Chief Executive Officer of AMF
Bowling on November 2, 1998 following the resignation of Mr. Stanard and until a
successor to Mr. Stanard is named. See "--Settlement Agreement".
Acquisitions
From January 1, 1998 through September 30, 1998, the Company acquired 55
bowling centers in the United States, 15 centers in the United Kingdom, six
centers in Australia and one center in France from unrelated sellers. Between
September 30, 1998 and October 23, 1998, the Company acquired one additional
center in the United States and two centers in Australia from unrelated sellers
and sold one center in Switzerland. See "Note 8. Acquisitions" in the Notes to
Condensed Consolidated Financial Statements for a discussion of these
transactions.
16
AMF BOWLING, INC.
Selected Financial Data
(unaudited)
(in millions of dollars)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Bowling Centers (before intersegment eliminations)
- ---------------
Operating revenue $ 117.3 $ 96.8 $383.8 $297.9
------- ------ ------ ------
Cost of goods sold 12.2 8.9 38.1 27.2
Bowling center operating expenses 84.9 65.5 245.5 182.1
Selling, general, and administrative expenses 1.3 1.4 4.4 4.6
Depreciation and amortization 25.3 19.0 71.6 53.3
------- ------ ------ ------
Operating income (loss) $ (6.4) $ 2.0 $ 24.2 $ 30.7
======= ====== ====== ======
Bowling Products (before intersegment eliminations)
- ----------------
Operating revenue $ 60.0 $ 94.2 $152.7 $218.9
Cost of goods sold 45.1 58.4 112.2 133.1
------- ------ ------ ------
Gross profit 14.9 35.8 40.5 85.8
Selling, general, and administrative expenses 10.3 12.0 32.0 30.7
Depreciation and amortization 5.5 4.7 16.5 14.6
------- ------ ------ ------
Operating income (loss) $ (0.9) $ 19.1 $ (8.0) $ 40.5
======= ====== ====== ======
Consolidated
- ------------
Operating revenue $ 172.5 $187.5 $522.3 $505.6
------- ------ ------ ------
Cost of goods sold 54.1 64.4 139.1 150.5
Bowling center operating expenses 83.5 65.1 242.8 181.2
Selling, general, and administrative expenses 17.1 17.1 52.0 47.2
Depreciation and amortization 30.9 23.4 87.8 66.8
------- ------ ------ ------
Operating income (loss) (13.1) 17.5 0.6 59.9
Interest expense, gross 30.9 31.7 84.5 89.2
Other expense, net 4.9 0.8 6.3 2.0
------- ------ ------ ------
Loss before income taxes (48.9) (15.0) (90.2) (31.3)
Benefit for income taxes (14.6) (4.7) (21.1) (8.9)
------- ------ ------ ------
Net loss before equity in loss of joint ventures (34.3) (10.3) (69.1) (22.4)
Equity in loss of joint ventures (1.3) - (2.9) -
------- ------ ------ ------
Net loss $ (35.6) $(10.3) $(72.0) $(22.4)
======= ====== ====== ======
Selected Data:
- -------------
EBITDA
Bowling Centers $ 18.9 $ 21.0 $ 95.8 $ 84.0
Bowling Products $ 4.6 $ 23.8 $ 8.5 $ 55.1
EBITDA margin
Bowling Centers 16.1% 21.7% 25.0% 28.2%
Bowling Products 7.7% 25.3% 5.6% 25.2%
17
Bowling Centers
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. Bowling Centers derives its
revenue and profits 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 nine months ended September 30, 1998, bowling,
food and beverage and other revenue represented 58.7%, 27.0% and 14.3% of total
Bowling Centers revenue, respectively. For the nine months ended September 30,
1997, bowling, food and beverage and other revenue represented 60.6%, 25.1% and
14.3% of total Bowling Centers revenue, respectively.
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Bowling Centers operating revenue increased $20.5 million, or 21.2%. An
increase of $26.8 million is attributable to new centers, of which $20.6 million
is from U.S. centers and $6.2 million is from international centers. Of these
new centers, 105 centers were acquired and one center was constructed between
October 1, 1997 and September 30, 1998. Constant centers operating revenue
decreased $5.0 million, or 6.9%. U.S. constant centers revenue decreased $1.9
million, or 3.9%, primarily as a result of lower lineage (games per lane per
day) caused, in part, by the later start of league play, which normally
coincides with the Labor Day holiday, in 1998 compared to 1997. Of the total
percentage decline, 1.6% is attributable to the late start of league play and
2.3% is attributable to normal operations. In the second quarter of 1998, U.S.
constant centers revenue declined 8.0% compared to the same period in 1997.
International constant centers operating revenue decreased $3.1 million due to
unfavorable currency translation of results. On a constant exchange rate basis,
international constant centers operating revenue would have increased $0.2
million, or 0.8%, in the third quarter of 1998 compared to the third quarter of
1997. A decrease of $1.3 million in total operating revenue was attributable to
11 centers which were closed since September 30, 1997.
Cost of goods sold increased $3.3 million, or 37.1%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $19.4 million, or 29.6%. An increase of $20.8
million was attributable to the net increase in the number of centers and a
decrease of $0.5 million was primarily attributable to constant centers. A
decrease of $0.9 million was attributable to closed centers. As a percentage of
its revenue, Bowling Centers operating expenses were 72.4% for the third quarter
of 1998 compared to 67.7% for the third quarter of 1997. The 4.7% increase was
primarily attributable to expenses associated with nationally branded chain
development activities, increased advertising expense in 1998 compared to the
same period in 1997, in which approximately $0.9 million in vendor rebates were
recorded, and lower constant centers revenue on which certain fixed operating
expenses became a higher percentage of revenue in the third quarter of 1998
compared to the third quarter of 1997. Generally, Bowling Centers operating
expenses are a higher percentage of revenue in the second and third quarters as
compared to the first and fourth quarters, in which league play is significant.
Selling, general and administrative expenses decreased $0.1 million, or
7.1%, due to expense management.
EBITDA decreased $2.1 million, or 10.0%, primarily as a result of the
effects of the decrease in constant centers revenue discussed above, increased
advertising and staffing and, internationally, as a result of unfavorable
currency translation, which accounted for $1.3 million of the total decrease.
EBITDA margin for the third quarter of 1998 was 16.1% compared to 21.7% in the
third quarter of 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Bowling Centers operating revenue increased $85.9 million, or 28.8%. An
increase of $105.0 million is attributable to 199 new centers which were
acquired and one new center which was constructed after December 31, 1996, of
which $91.6 million is from U.S. centers, and $13.4 million is from
international centers. Constant centers operating revenue decreased $15.3
million, or 6.1%. U.S. constant centers revenue decreased $8.2 million, or 4.5%,
primarily as a result of lower lineage, orienting and integrating newly acquired
centers, nationally branded chain development activities, record-setting hot
weather which adversely affected customer visits and the later start of league
play in 1998, which accounted for 0.5% of the decline. International constant
centers operating revenue decreased $7.1 million primarily due to unfavorable
currency translation of results and the World Cup which
18
adversely impacted revenue throughout Europe in the second quarter of 1998. On a
constant exchange rate basis, international operating revenue would have
increased $2.1 million, or 2.9%, in the first nine months of 1998 compared to
the first nine months of 1997. A decrease of $3.8 million in total operating
revenue was attributable to 11 centers which were closed since September 30,
1997.
Cost of goods sold increased $10.9 million, or 40.1%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $63.4 million, or 34.8%. An increase of $66.0
million was attributable to the net increase in the number of centers and an
increase of $0.1 million was primarily attributable to increased regional
staffing costs and expenses associated with nationally branded chain development
activities. A decrease of $2.7 million was attributable to closed centers. As a
percentage of its revenue, Bowling Centers operating expenses were 64.0% for the
first nine months of 1998 compared to 61.1% for the first nine months of 1997,
which increase was primarily attributable to the lag in achieving cost
reductions in newly acquired centers, expenses associated with nationally
branded chain development activities and the higher fixed operating costs as a
percentage of constant centers revenue which decreased in the second and third
quarters of 1998.
Selling, general and administrative expenses decreased $0.2 million, or
4.3%, primarily due to expense management.
EBITDA increased $11.8 million, or 14.0%, primarily as a result of the
net increase in the number of centers. Additionally, Bowling Centers EBITDA was
impacted by the late start of league play, the lag in achieving cost reductions
in newly acquired centers, increased advertising and staffing and,
internationally, by the unfavorable currency translation which decreased
international constant centers EBITDA by $2.8 million. EBITDA margin for the
first nine months of 1998 was 25.0% compared to 28.2% in the first nine months
of 1997.
Bowling Products
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Bowling Products operating revenue decreased $34.2 million, or 36.3%. NCP
revenue decreased $30.2 million, or 58.0%, and Modernization and Consumer
Products (which includes modernization equipment, supplies, spare parts and
consumable products) revenue decreased $4.0 million, or 9.5%. Operating results
have been adversely impacted by current economic difficulties in certain markets
of the Asia Pacific region which have reduced the level of shipments for NCPs
and Modernization and Consumer Products sales. The Company believes that it has
improved its competitive position in international markets with attractive
long-term potential through increased investment and a more aggressive pricing
strategy. The strong U.S. dollar also unfavorably affected pricing and financial
statement translation. During the third quarter of 1998, Bowling Products
recorded NCP shipments of 683 units compared to shipments of 1,255 units for the
third quarter of 1997. The decrease in Modernization and Consumer Products
revenue is primarily due to decreased Consumer Products sales across all sales
regions except Europe, which was slightly ahead of the third quarter of 1997,
partially offset by an increase in Modernization sales in the United States,
Europe and Japan.
Gross profit decreased $20.9 million, or 58.4%, primarily as a result of
the decreased levels of NCP shipments, the strong U.S. dollar and competitive
pricing as discussed above, lower margins on the 1998 Modernization product mix
compared to margins on the 1997 Modernization product mix and unabsorbed fixed
overhead resulting from low production levels.
Bowling Products selling, general and administrative expenses decreased
$1.7 million, or 14.2%, primarily as a result of the implementation of an
overall profit improvement plan. The Bowling Products organization was
streamlined as part of a cost reduction program in order to further reduce
selling, general and administrative expenses to offset the impact of lower sales
volume on EBITDA.
Bowling Products EBITDA decreased $19.2 million, or 80.7%, and the Bowling
Products EBITDA margin decreased from 25.3% in the third quarter of 1997 to 7.7%
in the third quarter of 1998 primarily as a result of the lower revenue and
gross profit discussed above.
19
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Bowling Products operating revenue decreased $66.2 million, or 30.2%. NCP
revenue decreased $53.2 million, or 46.3%, and Modernization and Consumer
Products revenue decreased $13.0 million, or 12.5%. Operating results have been
adversely impacted by current economic difficulties in certain markets of the
Asia Pacific region, the strong U.S. dollar and lower prices as discussed above.
During the first nine months of 1998, Bowling Products recorded NCP shipments of
1,846 units compared to shipments of 3,324 units for the first nine months of
1997. The decrease in Modernization and Consumer Products revenue is primarily
due to decreased Consumer Product sales to Japanese and Korean customers due to
economic conditions and to U.S. customers who delayed their purchases of pins
and balls during the summer months.
Gross profit decreased $45.3 million, or 52.8%, primarily as a result of
the decreased levels of NCP shipments, the strong U.S. dollar and competitive
pricing as discussed above, the lower margin Modernization product mix in 1998
compared to 1997 and unabsorbed fixed overhead resulting from low production
levels.
Bowling Products selling, general and administrative expenses increased
$1.3 million, or 4.2%, primarily as a result of increases of $0.9 million in
advertising expenses and $0.4 million related to staffing. Increased investment
in international markets with long term potential in earlier quarters was
partially offset by reductions in selling, general and administrative expenses
in the third quarter of 1998 as a result of the cost reduction program discussed
above.
Bowling Products EBITDA decreased $46.6 million, or 84.6%, and the Bowling
Products EBITDA margin decreased from 25.2% in the first nine months of 1997 to
5.6% in the first nine months of 1998 as a result of the lower revenue and gross
profit and increased selling, general and administrative expense discussed
above.
Consolidated
Depreciation and Amortization
Depreciation and amortization increased $7.5 million, or 32.1%, in the
third quarter of 1998, and $21.0 million, or 31.4%, in the nine months ended
September 30, 1998 compared to the comparable periods in 1997. The increase for
the third quarter and the nine months ended September 30, 1998 was primarily
attributable to depreciation of property and equipment of centers acquired since
September 30, 1997. Incremental depreciation expense was also incurred as a
result of capital expenditures.
Interest Expense
Gross interest expense decreased $0.8 million, or 2.5%, in the third
quarter of 1998, and $4.7 million, or 5.3%, in the nine months ended September
30, 1998 compared to the comparable periods in 1997. Interest savings associated
with the reduction of bank debt and the redemption of a portion of Bowling
Worldwide's senior subordinated discount notes with proceeds of AMF Bowling's
initial public offering (the "Initial Public Offering") were partially offset by
interest incurred on increased levels of bank debt as a result of center
acquisitions and the issuance by AMF Bowling of zero coupon convertible
debentures (the "Debentures") on May 12, 1998. See "--Liquidity" and "--Capital
Resources" for further discussion of the bank debt and the Debentures. Non-cash
bond interest amortization totaled $11.0 million and $25.2 million for the
quarter and nine months ended September 30, 1998, respectively, compared to $8.7
million and $25.5 million for the quarter and nine months ended September 30,
1997, respectively.
20
Net Loss
Net losses in the third quarter and nine months ended September 30, 1998
were $35.6 million and $72.0 million, respectively, compared to net losses of
$10.3 million and $22.4 million in the third quarter and nine months ended
September 30, 1997, respectively. The decrease of $25.3 million in the third
quarter was primarily a result of decreases in Bowling Products revenue and
EBITDA discussed above and the increase in depreciation expense. The decrease of
$49.6 million for the nine months ended September 30, 1998 was primarily a
result of decreases in Bowling Products revenue and EBITDA discussed above and
the increase in depreciation expense. Additionally, the Company recorded $1.3
million and $2.9 million in equity in loss of joint ventures in the third
quarter and nine months ended September 30, 1998, respectively.
Income Taxes
Prior to the Acquisition, certain of the companies within the
Predecessor Company elected S corporation status under the Internal Revenue Code
of 1986, as amended (the "Code"). Upon consummation of the Acquisition, those
companies became taxable corporations under the Code.
In connection with the Acquisition, the two principal subsidiaries of
the Company elected under Section 338 (h) (10) of the Code to treat the stock
purchase in the Acquisition as a deemed asset acquisition for the purposes of
U.S. federal income taxes. These elections permitted both of the affiliated
companies to revalue their assets to fair market value and to treat any
amortizable goodwill as tax deductible over 15 years.
As of December 31, 1997, the Company had net operating losses of
approximately $110.0 million and foreign tax credits of $12.4 million which will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company has recorded a valuation reserve as of
September 30, 1998, for $20.1 million related to net operating losses and
foreign tax credits that the Company does not expect will be utilized prior to
their expirations.
Liquidity
The Company's primary source of liquidity is cash provided by operations
and credit facilities as described below. Working capital on September 30, 1998
was $111.4 million compared to $43.9 million as of December 31, 1997, an
increase of $67.5 million. Increases in working capital were primarily
attributable to an increase of $18.4 million in cash attributable to cash
balances held to fund general corporate purposes, an increase of $15.2 million
in inventory balances primarily due to new product introductions, an increase of
$4.5 million in accounts receivable primarily as a result of use of fall dating
(sales made during the summer with payment terms calling for payment in the
fourth quarter) for Modernization and Consumer Products sales in the United
States, a decrease of $7.5 million in accounts payable, a decrease of $17.4
million in accrued expenses, and a net increase of $7.6 million in other current
assets and liabilities. These increases in working capital were offset by a
decrease in working capital caused by an increase of $3.1 million in the current
portion of long term debt.
Net cash flows used in operating activities were $49.7 million for the nine
months ended September 30, 1998 compared to net cash flows provided of $1.5
million for the nine months ended September 30, 1997, a decrease of $51.2
million. A decrease of $49.6 million was attributable to the net loss of $72.0
million recorded in the first nine months of 1998 compared to a net loss of
$22.4 million in the same period in 1997; a decrease of $28.1 million was caused
by decreased levels of accounts payable and accrued expenses; a decrease of
$24.1 million was attributable to an increase in the level of deferred taxes; a
decrease of $11.5 million was attributable to the increase in other assets; a
decrease of $6.6 million was attributable to the decrease in income taxes
payable; and a decrease of $0.3 million was attributable to lower levels of bond
amortization resulting from the redemption of a portion of Bowling Worldwide's
senior subordinated discount notes in connection with the Initial Public
Offering, partially offset by bond amortization attributable to the Debentures.
These decreases were offset by an increase of $30.5 million attributable to
lower levels of accounts receivable, an increase of $20.9 million in
depreciation and amortization, loss on the sale of property and equipment, net
of $5.8 million attributable to the closure of nine bowling centers in 1998, an
increase of $5.7 million attributable to lower inventory balances resulting from
lower Bowling Products sales volumes in 1998 and a net increase of $6.0 million
attributable to changes in other operating activities.
21
Net cash flows used in investing activities were $219.2 million for the
nine months ended September 30, 1998 compared to net cash flows used of $231.3
million for the nine months ended September 30, 1997, a decrease of $12.1
million. Bowling Center acquisition spending decreased by $23.5 million and
purchases of property and equipment increased by $5.1 million in the first nine
months of 1998 compared to the same period in 1997. A total of $17.9 million was
paid in the first half of 1998 for eight centers which were acquired in 1997. In
the first nine months of 1998, 77 centers were purchased compared to 103 centers
in the same period in 1997. Investments in and advances to joint ventures
totaled $2.6 million in the first nine months of 1998 compared to no investments
in or advances to joint ventures in the first nine months of 1997. Other cash
flows provided from investing activities decreased $3.7 million. See "Note 8.
Acquisitions" in the Notes to Condensed Consolidated Financial Statements and
"--Capital Expenditures" for additional discussion of these investing
activities.
Net cash provided by financing activities was $283.3 million for the nine
months ended September 30, 1998 compared to net cash provided of $218.8 million
for the nine months ended September 30, 1997, an increase of $64.5 million.
Proceeds from long term debt increased $338.6 million primarily as a result of
the issuance of the Debentures on May 12, 1998 for gross proceeds of
approximately $284.1 million. In addition, borrowings under the Credit Agreement
increased $54.5 million primarily as a result of funding center acquisitions and
working capital. Payments on long-term debt were higher by $240.2 million in
1998 compared to 1997 primarily because $249.6 million of the proceeds from the
Debentures, contributed as capital to Bowling Worldwide from AMF Bowling, was
used to pay down the Bank Facility under the Credit Agreement, and such repaid
indebtedness is available for reborrowing. In accordance with the terms of the
Credit Agreement, scheduled principal payments in the first nine months of 1998
were $9.4 million lower than payments made in the same period in 1997. In the
first nine months of 1998, $1.9 million of Common Stock was issued, of which
$1.2 million was attributable to shares issued in the Active West acquisition
and $0.7 million was attributable to shares issued upon exercise of employee
stock options. Expenses of the Initial Public Offering totaling $0.6 million
were paid in the first half of 1998. In the first nine months of 1997, $35.6
million was provided as a capital contribution by the Parent's institutional
stockholders to be used in part to fund acquisitions and for other corporate
purposes. Net cash flows provided by other financing activities increased $0.4
million. See "Note 5. Long-Term Debt", "Note 7. Employee Benefit Plans", and
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements and "--Capital Resources".
As a result of the aforementioned, cash increased by $18.4 million for the
nine months ended September 30, 1998 compared to a decrease of $11.7 million for
the nine months ended September 30, 1997.
The net proceeds of the Debentures discussed above were approximately
$273.6 million, of which $249.6 million was used to repay senior bank
indebtedness under the Credit Agreement and $24.0 million was used for general
corporate purposes.
Capital Resources
The Company's total indebtedness increased substantially as a result of the
Acquisition and the Company's recent aggressive bowling center acquisition
program. At September 30, 1998, the Company's debt structure consisted of $619.8
million of Senior Debt, $250.0 million of senior subordinated notes, $206.8
million of senior subordinated discount notes, and $291.8 million of Debentures.
The Company's Senior Debt consisted of $429.8 million outstanding under the Term
Facilities, $188.0 million outstanding under the Bank Facility and $2.0 million
represented by one mortgage note. At September 30, 1998, the Company was also
capitalized with equity of $579.9 million.
The Company has the ability to borrow for general corporate purposes and,
to a limited extent, for acquisitions pursuant to the $355.0 million Bank
Facility, subject to certain conditions. At September 30, 1998, $188.0 million
was outstanding and $167.0 million was available for borrowing under the Bank
Facility. Between September 30, 1998 and October 23, 1998, there were no
additional borrowings under the Bank Facility.
On September 30, 1998, the Third Amended and Restated Credit Agreement was
amended by Amendment No. 1 and Waiver (the "Amendment and Waiver") in which
certain financial covenants were adjusted, and certain restrictions were
imposed, for the third and fourth quarters of 1998 and the year 1999. In
addition, for the third and fourth quarters of 1998 and the year 1999,
borrowings to finance acquisitions are substantially restricted and limits have
been placed on the Company's ability to make capital expenditures, investments
and acquisitions. See "Note 5. Long-Term Debt" in the Notes to Condensed
Consolidated Financial Statements.
22
On May 12, 1998, AMF Bowling issued the Debentures for gross proceeds of
approximately $284.1 million. The Debentures mature on May 12, 2018 and have a
yield to maturity of 7% per annum. The Debentures were issued at an original
price of $252.57 per $1,000 principal amount at maturity and are convertible at
any time prior to maturity into shares of Common Stock at a conversion rate of
8.6734 shares per $1,000 principal amount at maturity. If held to maturity and
not redeemed or repurchased by AMF Bowling, the Debentures will accrue to an
aggregate principal amount at maturity of $1.125 billion. The Debentures are not
entitled to a sinking fund. The Debentures are not redeemable at the option of
AMF Bowling before May 12, 2003. Thereafter, the Debentures are redeemable for
cash at the option of AMF Bowling at redemption prices specified in the
Debentures.
The Debentures will be purchased by AMF Bowling, at the option of
holders of the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for
purchase prices specified in the Debentures. The Debentures may also be redeemed
at the option of the holders of the Debentures upon the occurrence of a Change
of Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof. In connection with
the issuance of the Debentures, AMF Bowling has filed a shelf registration
statement in respect of the Debentures and the Common Stock issuable on
conversion, redemption or repurchase thereof. If the shelf registration
statement has not been declared effective within 180 days, after May 12, 1998,
AMF Bowling must pay liquidated damages as specified in the related registration
rights agreement.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance upon
conversion, redemption or repurchase of the Debentures, based on the Common
Stock price at the time of issuance of the Debentures.
The Company has funded its cash needs through the Bank Facility as well
as cash flow from operations. A substantial portion of the Company's available
cash will be applied to service outstanding indebtedness. For the nine months
ended September 30, 1998, the Company incurred cash interest expense of $57.9
million, representing 65.5% of EBITDA for the period. For the nine months ended
September 30, 1997, the Company incurred cash interest expense of $62.3 million,
representing 49.2% of EBITDA for the period.
The indentures governing the senior subordinated notes and the senior
subordinated discount notes and certain provisions of the Credit Agreement
contain financial and operating covenants and significant restrictions on the
ability of the Company to pay dividends, incur indebtedness, make investments
and take certain other corporate actions. As of September 30, 1998, the Company
is in compliance with all of its covenants.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance 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. Based upon the current
level of operations, management believes that available cash flow, together with
available borrowings under the Credit Agreement and other sources of liquidity,
will be adequate to meet the Company's requirements for working capital, capital
expenditures, scheduled payments of principal of, and interest on, its Senior
Debt, and interest on the senior subordinated notes and senior subordinated
discount notes. There can be no assurance, however, that the Company'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 service its
indebtedness, or make necessary capital expenditures, or that any refinancing
would be available on commercially reasonable terms or at all.
Capital Expenditures
For the nine months ended September 30, 1998, the Company's capital
expenditures were $47.7 million compared to $42.6 million for the nine months
ended September 30, 1997, an increase of $5.1 million. Bowling Centers
maintenance and modernization expenditures increased $5.2 million, which was
attributable to the higher number of centers as a result of the Company's
acquisition program; Bowling Products expenditures increased $3.2 million as a
result of expenditures on production equipment for certain new products and
equipment for international sales offices; Company-wide information systems
expenditures decreased $5.5 million; and other expenditures increased $3.5
million. Expenditures for the construction of the Chelsea Piers center totaled
$5.3 million in 1997. Expenditures for the construction of the Marina City
bowling center in Chicago and Michael Jordan golf center in Charlotte, North
Carolina totaled $3.1 million and $0.9 million, respectively, in 1998.
Management has announced a curtailment of the Company's acquisition activities.
23
The Company funds its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new centers,
internally generated cash, the Bank Facility and issuances of common equity. The
Company's management believes that after the issuance of the Debentures, the
amount available under the Bank Facility will be adequate to fund the Company's
ongoing acquisition program at least 12 months following the issuance of the
Debentures subject to the restrictions imposed by the Amendment and Waiver. See
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources" for discussions of funding
of acquisitions of new bowling centers and a description of the Debentures.
Seasonality and Cyclicality
On a consolidated basis, revenue and EBITDA of the Company's businesses are
neither highly seasonal nor highly cyclical. The geographic diversity of the
Company's bowling centers, which operate across different regions of the U.S.
and across 11 other countries, has helped provide stability to the Company's
annual cash flows. Although financial performance of Bowling Centers operations
is seasonal in nature in many countries, with cash flows typically peaking in
the winter months and reaching their lows in the summer months, the geographic
diversity of the Company's bowling centers has helped reduce this seasonality as
bowling centers in certain countries in which the Company operates exhibit
different seasonal sales patterns. As a result of the growing number of U.S.
centers attributable to the Company's acquisition program, however, the
seasonality described above is accentuated. In Australia, where the Company has
its largest number of international centers, the reversal of seasons relative to
the U.S. helps mitigate the seasonality in worldwide operations. The Company's
cash flows are further stabilized by the location of many centers in regions
where the climates have high average temperatures and high humidity. In the
U.S., during the summer months when league bowling is generally less active,
bowling centers in the southern U.S. generally show stronger performance
compared to centers in other U.S. regions. See "Note 9. Business Segments" in
the Notes to Condensed Consolidated Financial Statements.
Modernization and Consumer Products sales 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. Operators
typically sign purchase orders, particularly for replacement equipment, during
the first four months of the year, after they receive winter league revenue
indications. Equipment is shipped and installed during the summer months, when
leagues are generally less active. Sales of modernization equipment, such as
automatic scoring and synthetic lane overlays, are less predictable and
fluctuate more than the replacement equipment because of the four to ten year
life cycles of these major products.
The NCP category of Bowling Products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
South Korea and Taiwan) which, in the Company's experience, last five years or
more. Current economic difficulties in certain markets of the Asia Pacific
region have resulted in the reduction in the order rate, level of shipments and
backlog for NCPs. See "--International Operations."
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and 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,
nationalization, and the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
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.
Current economic difficulties in certain markets of the Asia Pacific region
have resulted in a reduction in the order rate, level of shipments and backlog
for NCPs. Management believes that many Asia Pacific customers are delaying
purchases of NCP and modernization equipment as they await the return of
economic stability to their regions. Contributing to such delays is the
continuing limited availability of financing for Asia Pacific customers to
24
construct new centers and purchase AMF bowling equipment. As of September 30,
1998, the NCP backlog was 1,329 units, which represents a reduction of 33.7%
compared to a backlog of 2,005 units as of September 30, 1997, and a reduction
of 23.0% compared to a backlog of 1,725 units as of December 31, 1997. It is
expected that NCP backlog will continue for the foreseeable future at levels
which are substantially lower than those experienced in 1997.
NCP unit sales to China, Japan and other Asia Pacific markets represented
49.9% for the nine months ended September 30, 1998 compared to 72.7% for the
year ended December 31, 1997. NCP unit backlog related to China, Japan and other
Asia Pacific markets represented 67.6% of total NCP unit backlog at September
30, 1998 compared to 70.4% at December 31, 1997.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the nine months ended September
30, 1998, revenue and EBITDA of international bowling centers represented 16.1%
and 26.6% of consolidated results, respectively. For the nine months ended
September 30, 1997, revenue and EBITDA of international bowling centers
represented 15.8% and 18.3% of consolidated results, respectively. For the year
ended December 31, 1997, revenue and EBITDA of international bowling centers
represented 14.6% and 16.0% of consolidated results, respectively.
Backlog: Recent NCP Sales
The total backlog of NCPs was 1,329 units as of September 30, 1998,
representing a reduction of 23.0% compared to 1,725 units as of December 31,
1997, and a reduction of 33.7% compared to 2,005 units as of September 30, 1997.
It is expected that NCP backlog will continue for the foreseeable future at
levels which are substantially lower than those experienced in 1997. NCP orders
included in the backlog are sometimes cancelled by customers in the normal
course of business. Accordingly, the Company has experienced, and expects to
continue to experience, the cancellation of a portion of its NCP orders. NCP
shipments were 1,846 units for the nine months ended September 30, 1998,
representing a reduction of 44.5% compared to shipments of 3,324 units for the
nine months ended September 30, 1997, which was largely attributable to the
recent economic difficulties in the Asia Pacific region. See "--International
Operations."
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.
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 fiscal year ended December 31, 1998, the Company is
required to adopt Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
25
About Segments of an Enterprise and Related Information." Effective for the
quarter ended March 31, 2000, the Company is required to adopt SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The Company does
not expect that adoption of these standards will have a material adverse impact
on the Company's financial position or results of operations. See "Note 2.
Significant Accounting Policies - Comprehensive Income" in the Notes to
Condensed Consolidated Financial Statements regarding adoption of SFAS No. 130.
Year 2000
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the Year 2000 as "00" and may assume that the year is 1900 rather
than 2000. This could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures, and is in the process of preparing for the Year
2000.
The Company has evaluated its Year 2000 risk in three separate
categories: information technology systems ("IT"), non-IT systems ("Non-IT") and
material third party relationships ("Third Party Risk"). The Company has
developed a plan in which the risks in each of these categories are being
reviewed and addressed by the appropriate level of management as follows:
IT. The Company is actively engaged in developing and installing new
worldwide financial, information, retail and operational systems which
are expected to be completed and installed by December 31, 1999. In
connection with this implementation, system programs have been designed
so that the Year 2000 will be recognized as a valid date and will not
affect the processing of date-sensitive information. Certain systems
have already been installed in the U.S. Bowling Centers operations and
at the corporate level. By June 30, 1999, systems in the U.S. Bowling
Centers operations will be completed. Systems will be installed in the
international locations of Bowling Centers and Bowling Products by
December 31, 1999. In 1997 and for the nine months ended September 30,
1998, the Company spent approximately $12.6 million and $3.5 million,
respectively, on systems that are designed to be Year 2000 compliant.
The Company expects to spend an additional $8.2 million to complete the
installation. These costs include normal system software and equipment
upgrades or replacements which the Company anticipated incurring and
budgeted in the normal course of business, separate from the Year 2000
issue.
Non-IT. Non-IT systems involve embedded technologies, such as
microcontrollers or microprocessors. Examples of Non-IT systems include
telephones, security systems and computer-controlled manufacturing
equipment. The Company sells automatic scoring that is computerized and
has developed a software program for a cost to the Company of
approximately $50,000 that will address the Year 2000 issue in its
automatic scoring. This software will be made available to customers
with service contracts at no cost and will be sold to customers without
service contracts. To date, management believes the Company's Non-IT
risks are minimal. For the most part, costs of addressing Non-IT risks
are included in normal upgrade and replacement expenditures which were
planned outside of the Company's Year 2000 review.
Third Party Risk. The Company's review of its Third Party Risk includes
detailed reviews of critical relationships with vendors and certain
business partners. The Company is monitoring and assessing the progress
of its vendors and certain business partners to determine whether they
will be able to successfully interact with the Company in the Year
2000. The Company has contacted and received oral or written responses
from at least half of its critical vendors, all of which are in various
stages of addressing the Year 2000 issue, and is currently awaiting
response from the remainder of its critical vendors.
If the steps taken by the Company and its vendors and certain business
partners to be Year 2000 compliant are not successful, the Company could
experience various operational difficulties. These could include, among other
things, processing transactions to an incorrect accounting period, difficulties
in posting general ledger interfaces and lapse of certain services by vendors to
the Bowling Centers operations. If the Company's plan to install new systems
which effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed through the implementation of these new systems
and software development and by its critical vendors and certain business
partners and does not expect the Year 2000 issue to have a material adverse
impact on the financial position, results of operations or cash flows of the
Company in future periods. However, should the remaining review of the Company's
Year 2000 risks reveal
26
potentially non-compliant computer systems or material third parties,
contingency plans will be developed at that time.
Settlement Agreement
Pursuant to the terms of a settlement agreement (the "Settlement
Agreement"), dated as of November 2, 1998, by and among Douglas J. Stanard, AMF
Bowling and Bowling Worldwide, effective as of January 1, 1999, Mr. Stanard has
resigned all of his positions with AMF Bowling and its subsidiaries, including
his positions as Chief Executive Officer, President, and a director of AMF
Bowling. In connection with his resignation, Mr. Stanard will receive payments
of (i) $400,000 with respect to severance under his Executive Employment
Agreement and (ii) $850,000 with respect to his compliance with certain
obligations under the Settlement Agreement, including non-competition and
non-solicitation provisions, and obligations to cooperate with information
requests from the Company and to reasonably assist the Company with respect to
pending and future dispute resolutions. In addition, Mr. Stanard will transfer
all of his Common Stock to AMF Bowling in exchange for the cancellation of a
non-recourse promissory note relating to his original purchase of the Common
Stock. Pursuant to the Settlement Agreement, all stock options previously
granted to Mr. Stanard were cancelled and forfeited as of November 2, 1998, and
Mr. Stanard will be subject to non-competition and non-solicitation provisions
for two years following his date of termination. Until a successor to Mr.
Stanard has been named, Stephen E. Hare, Executive Vice President and Chief
Financial Officer and Treasurer, has been appointed acting Chief Executive
Officer to assume all of Mr. Stanard's operational, managerial and other
responsibilities.
27
PART II
Item 1. Legal
AMF Bowling Products, Inc., an indirect subsidiary of AMF Bowling ("AMF
Bowling Products"), is a defendant in an action pending in the Harbin
Intermediate People's Court in Heilongiiang, China. Harbin Hai Heng Bowling
Entertainment Co. Ltd. ("Hai Heng") filed the action in June 1998 to recover
$1,748,000 from AMF Bowling Products. Hai Heng purchased 38 NCPs and asserts
that the poor quality of 38 NCPs entitles it to recover the purchase price
thereof. Although Hai Heng has not amended its initial complaint, in a recent
hearing before the Court, Hai Heng stated that its damages could be in the range
of approximately $3,000,000 to $4,000,000 and noted lost profits and
the cost of storage for the NCPs as the basis for such damages. The Company
believes Hai Heng's claim is a warranty issue and that Hai Heng is not entitled
to recover the purchase price, lost profits or the cost of storage.
The Court attached $871,000 of cash and inventory in AMF Bowling Products'
warehouses and bank account in Beijing. AMF Bowling Products may not dispose of
these assets until the action is concluded. Management does not believe that
this attachment has interfered with the Company's operations in China. AMF
Bowling Products is vigorously defending the claim. Management of the Company
does not expect a decision to be rendered by the Court until 1999. If an adverse
decision is rendered, AMF Bowling Products has the right to appeal to a higher
court for a new trial. Management does not believe that the outcome of the
action will have a material adverse impact on the financial position of the
Company.
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
10.1 Amendment No. 1 and Waiver to the Third Amended and Restated
Credit Agreement is hereby incorporated by reference to
Exhibit 10.1 of AMF Bowling, Inc.'s Current Report on Form
8-K dated September 30, 1998.
10.2 Termination and Release Agreement, dated as of November 2,
1998, by and among AMF Bowling, Bowling Worldwide and
Douglas J. Stanard.
10.3 Employment Agreement, dated as of September 8, 1998, by and
among the Company and John P. Watkins.
27.1 Financial Data Schedule for the nine months ended September
30, 1998.
(b) Reports on Form 8-K:
A current report dated September 30, 1998, was filed October 2, 1998,
announcing that AMF Bowling Worldwide, Inc., a wholly-owned subsidiary
of the Company, amended the terms of its $810 million credit facility
with its lenders.
28
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 November 5, 1998
____________________________
Stephen E. Hare
Acting Chief Executive Officer,
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Michael P. Bardaro November 5, 1998
____________________________
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)