UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10 - Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 November 1, 1999, 83,597,550 shares of common stock, par value of $.01 per
share, of the Registrant were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 30,182 $ 33,002
Accounts and notes receivable, net of allowance for
doubtful accounts of $10,772 and $6,492, respectively 82,374 82,435
Inventories 51,499 64,735
Deferred taxes and other current assets 28,182 23,960
----------- -----------
Total current assets 192,237 204,132
Property and equipment, net 837,161 873,985
Other assets 81,504 111,677
Goodwill, net 757,955 772,744
Investments in and advances to joint ventures 5,926 17,436
----------- -----------
Total assets $ 1,874,783 $ 1,979,974
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 32,427 $ 33,912
Accrued expenses 64,909 61,809
Income taxes payable 5,892 5,389
Long-term debt, current portion 34,250 32,375
----------- -----------
Total current liabilities 137,478 133,485
Long-term debt, less current portion 1,198,879 1,311,589
Other long-term liabilities 4,166 5,265
----------- -----------
Total liabilities 1,340,523 1,450,339
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01 per share, 200,000,000 shares
authorized, 83,597,550 and 59,747,550 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively) 836 597
Paid-in capital 868,623 749,305
Retained deficit (318,755) (200,942)
Foreign currency translation adjustment (16,444) (19,325)
----------- -----------
Total stockholders' equity 534,260 529,635
----------- -----------
Total liabilities and stockholders' equity $ 1,874,783 $ 1,979,974
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
2
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
Operating revenue $ 182,799 $ 172,104 $ 546,461 $ 521,145
--------- --------- --------- ---------
Operating expenses:
Cost of goods sold 66,191 54,077 143,599 139,098
Bowling center operating expenses 92,782 84,556 276,719 244,958
Selling, general, and administrative expenses 34,274 15,680 64,719 48,740
Restructuring charges 7,500 - 7,500 -
Depreciation and amortization 37,732 30,929 104,059 87,744
--------- --------- --------- ---------
Total operating expenses 238,479 185,242 596,596 520,540
--------- --------- --------- ---------
Operating income (loss) (55,680) (13,138) (50,135) 605
--------- --------- --------- ---------
Nonoperating expenses (income):
Interest expense 31,080 30,852 95,483 84,457
Other expenses, net 99 5,261 6,541 7,818
Interest income (535) (376) (1,988) (1,446)
--------- --------- --------- ---------
Total nonoperating expenses 30,644 35,737 100,036 90,829
--------- --------- --------- ---------
Loss before income taxes (86,324) (48,875) (150,171) (90,224)
Provision (benefit) for income taxes 23,088 (14,548) 26,322 (21,088)
--------- --------- --------- ---------
Net loss before equity in loss of joint ventures and extraordinary item (109,412) (34,327) (176,493) (69,136)
Equity in loss of joint ventures (79) (1,343) (5,780) (2,906)
--------- --------- --------- ---------
Net loss before extraordinary item (109,491) (35,670) (182,273) (72,042)
Extraordinary item 64,460 - 64,460 -
--------- --------- --------- ---------
Net loss $ (45,031) $ (35,670) $(117,813) $ (72,042)
========= ========= ========= =========
Net loss per share - basic and diluted
Net loss per share before extraordinary item $ (1.43) $ (0.60) $ (2.79) $ (1.21)
Per share effect of extraordinary item 0.84 - 0.99 -
========= ========= ========= =========
Net loss per share $ (0.59) $ (0.60) $ (1.80) $ (1.21)
========= ========= ========= =========
Weighted average shares outstanding 76,617 59,744 65,335 59,707
========= ========= ========= =========
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,
-------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $(117,813) $ (72,042)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 104,059 87,744
Equity in loss of joint ventures 5,780 2,906
Extraordinary item (64,460) -
Deferred income taxes 20,830 (27,031)
Amortization of bond discount 33,754 25,178
Loss on the sale of property and equipment, net 2,833 5,856
Changes in assets and liabilities:
Accounts and notes receivable, net (1,771) (4,784)
Inventories 12,829 (14,221)
Other assets (5,945) (18,561)
Accounts payable and accrued expenses (388) (23,080)
Income taxes payable - (2,344)
Other long-term liabilities (437) 1,650
--------- ---------
Net cash used in operating activities (10,729) (38,729)
--------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,424) (168,865)
Investments in and advances to joint ventures - (2,583)
Purchases of property and equipment (34,971) (47,739)
Proceeds from the sale of property and equipment 744 29
--------- ---------
Net cash used in investing activities (35,651) (219,158)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 53,000 537,641
Payments on long-term debt (128,529) (266,014)
Repurchase of common shares (180) -
Issuance of common shares 119,737 1,253
Payments of noncompete obligations (184) (589)
--------- ---------
Net cash provided by financing activities 43,844 272,291
--------- ---------
Effect of exchange rates on cash (284) 3,991
Net (decrease) increase in cash (2,820) 18,395
Cash and cash equivalents at beginning of period 33,002 35,790
--------- ---------
Cash and cash equivalents at end of period $ 30,182 $ 54,185
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations for the interim periods presented. The interim financial information
and notes thereto should be read in conjunction with the December 31, 1998, 1997
and 1996 audited consolidated financial statements of AMF Bowling, Inc. ("AMF
Bowling") and its subsidiaries (collectively, the "Company") presented in AMF
Bowling's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
filed with the U.S. Securities and Exchange Commission. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for the entire year.
The Company is principally engaged in two business segments: (i) the
ownership and operation of bowling centers, consisting of 418 U.S. bowling
centers and 122 international bowling centers in 10 other countries ("Bowling
Centers"), including 15 joint venture centers, as of September 30, 1999, 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 AMF
Bowling are holding companies only. The principal assets in each are comprised
of investments in subsidiaries. The Company was acquired in 1996 by an investor
group led by affiliates of Goldman, Sachs & Co. (the "Acquisition").
As of September 30, 1999, the Company has acquired 263 bowling centers and
constructed two bowling centers since the Acquisition for a combined purchase
price of $499.0 million. The Company has funded its acquisitions and center
construction from internally generated cash, borrowings under the senior secured
revolving credit facility (the "Bank Facility") under the Credit Agreement (as
defined in "Note 5. Long-Term Debt and Recapitalization Plan"), and issuances of
AMF Bowling common stock (the "Common Stock"). See "Note 7. Acquisitions."
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, 1999 and
1998, respectively. All significant intercompany balances and transactions have
been eliminated in the accompanying condensed consolidated financial statements.
Certain amounts in the prior year's financial statements have been reclassified
to conform to the current year presentation. 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 7. Acquisitions", and in accordance with the purchase method
of accounting used in 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 $5,130 and $15,404 for the three months and nine months
ended September 30, 1999, and $5,123 and $15,177 for the three months and nine
months ended September 30, 1998, respectively.
5
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
As of December 31, 1998, the Company had net operating losses of
approximately $194.5 million and foreign tax credits of $19.7 million that 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, 1999, for $67.0 million related to net operating losses and
foreign tax credits that the Company may not utilize prior to their expirations.
The tax provision recorded for the nine months ended September 30, 1999 reflects
valuation allowance of $21.4 million and certain international taxes.
COMPREHENSIVE LOSS
Comprehensive loss was $42,811 and $114,932 for the three months and nine
months ended September 30, 1999, and $36,835 and $75,409 for the three months
and nine months ended September 30, 1998, respectively. Accumulated other
comprehensive loss consists of the foreign currency translation adjustment on
the accompanying condensed consolidated balance sheets.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Options to purchase shares of Common Stock are not
included because their effect would be antidilutive. As a result, the basic and
diluted net loss per share amounts are identical.
RECENT ACCOUNTING PRONOUNCEMENT
Effective for the quarter ended March 31, 2001, the Company will be
required to adopt SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect that adoption of this standard
will have a material adverse impact on the Company's financial position or
results of operations.
NOTE 3. INVENTORIES
Inventories at September 30, 1999, and December 31, 1998, consisted of the
following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(unaudited)
Bowling Products, at FIFO:
Raw materials $12,049 $11,471
Work in progress 1,662 1,548
Finished goods and spare parts 29,386 42,980
Bowling Centers, at average cost:
Merchandise and spare parts 8,402 8,736
------- -------
$51,499 $64,735
======= =======
6
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999, and December 31, 1998,
consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited)
Land $ 132,204 $ 131,906
Buildings and improvements 369,966 362,297
Equipment, furniture and fixtures 572,350 553,203
Other 12,515 7,476
----------- -----------
1,087,035 1,054,882
Less: accumulated depreciation and amortization (249,874) (180,897)
----------- -----------
$ 837,161 $ 873,985
=========== ===========
Depreciation and amortization expense related to property and equipment was
$24,838 and $73,536 for the three months and nine months ended September 30,
1999, and $22,985 and $65,480 for the three months and nine months ended
September 30, 1998, respectively.
NOTE 5. LONG-TERM DEBT AND RECAPITALIZATION PLAN
Long-term debt at September 30, 1999, and December 31, 1998, consisted of
the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(unaudited)
Bank debt $ 578,346 $ 581,877
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 233,125 213,226
Zero coupon convertible debentures 169,667 296,873
Mortgage and equipment note 1,991 1,988
----------- -----------
Total debt 1,233,129 1,343,964
Current maturities (34,250) (32,375)
----------- -----------
Total long-term debt $ 1,198,879 $ 1,311,589
=========== ===========
The Company's bank debt (the "Senior Debt") was incurred pursuant to
Bowling Worldwide's credit agreement, dated as of May 1, 1996, which was amended
and restated, as of November 3, 1997, in connection with AMF Bowling's initial
public offering (the "Initial Public Offering") of Common Stock in November 1997
and which has since been further amended and restated (the "Credit Agreement").
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, 1999, amounts outstanding under the Term Facilities and Bank
Facility were $399.3 million and $179.0 million, respectively.
7
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Credit Agreement contains certain financial covenants, as well as
affirmative and negative covenants, constraining Bowling Worldwide. In 1998,
Bowling Worldwide entered into Amendment No. 1 and Waiver to the Credit
Agreement that amended certain and waived certain financial covenants of the
Credit Agreement and imposed certain restrictions on the Company's operations
through December 31, 1999. In addition, for 1999, borrowings to finance
acquisitions were substantially restricted and limits were placed on Bowling
Worldwide's ability to make capital expenditures, investments and acquisitions.
In connection with the Company's recapitalization plan discussed below, the
lenders under the Credit Agreement approved Amendment No. 2 and Waiver to the
Credit Agreement and entered into the Fourth Amended and Restated Credit
Agreement. The key provisions of the Fourth Amended and Restated Credit
Agreement (i) waive mandatory prepayment provisions previously existing under
the Credit Agreement with respect to the Company's recapitalization plan
(described below), (ii) require AMF Bowling to contribute $30.0 million as
equity to Bowling Worldwide to be used to repay amounts borrowed under the Bank
Facility and treat such prepayment as prefunding for new bowling center
acquisitions, (iii) permit the Company to resume borrowing to fund acquisitions
subject to certain criteria and maintenance of minimum availability under the
Bank Facility of $65.0 million through 2000 and $40.0 million through 2001, (iv)
permit AMF Bowling to make equity contributions to Bowling Worldwide which will
be included in the calculation of EBITDA for financial covenant purposes under
the Credit Agreement up to an aggregate of $10.0 million during any four
consecutive quarters through December 31, 2001, (v) modify or waive certain
financial covenants and (vi) allow Bowling Worldwide to exclude from EBITDA
covenant calculations certain restructuring and Special Charges (described
below).
Bowling Worldwide is in compliance with the amended covenants as of
September 30, 1999. In this connection, AMF Bowling made a contribution of $1.0
million as equity to Bowling Worldwide on November 8, 1999 to meet EBITDA
requirements under its financial covenant tests as of September 30, 1999. The
Company believes that Bowling Worldwide will be in compliance for the remainder
of 1999 including the effect of a presently anticipated equity contribution as
permitted under the Credit Agreement. The Credit Agreement permits AMF Bowling
to make an additional equity contribution during the remainder of 1999 as
specified above. Any downturn in the current performance of Bowling Worldwide
could result in non-compliance with these financial covenants. Failure by
Bowling Worldwide to comply with its Credit Agreement covenants could result in
an event of default which, if not cured or waived, would have a material adverse
effect on the Company.
RECAPITALIZATION PLAN
As part of a recapitalization plan and in conjunction with the Amendment
No. 2 and Waiver, AMF Bowling completed on July 28, 1999 an offering of rights
to purchase Common Stock and a tender offer for a portion of its outstanding
zero coupon convertible debentures due 2018 (the "Debentures") at a discount to
carrying value.
In the rights offering, AMF Bowling raised $120.0 million of gross proceeds
in equity capital and issued 24.0 million additional shares of Common Stock at
the subscription price of $5.00 per share. As a result of the rights offering,
AMF Bowling had 83,597,550 shares of Common Stock outstanding as of November 1,
1999.
AMF Bowling purchased $514,286,000 in aggregate principal amount at
maturity of the Debentures in the tender offer at a price of $140 per $1,000
principal amount at maturity. The Company used approximately $72.0 million of
the proceeds from the rights offering to fund the purchase of the Debentures and
recorded an extraordinary gain of approximately $64.5 million representing the
difference between the accreted value of the Debentures purchased and the
purchase price therefor. As a result of consummation of the tender offer,
$610,714,000 in aggregate principal amount at maturity of Debentures remain
outstanding as of November 1, 1999.
AMF Bowling contributed $30.0 million of the proceeds of the rights
offering as equity to Bowling Worldwide to repay amounts borrowed under the Bank
Facility. The prepayment amount was treated as prefunding of future bowling
center acquisitions. AMF Bowling has used and will use the remainder of the
proceeds to pay expenses of the rights offering and the tender offer and for
general corporate purposes.
8
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NONRECURRING RESTRUCTURING CHARGES AND SPECIAL CHARGES
During the third quarter of 1999, the Company recorded nonrecurring
restructuring charges of approximately $7.5 million that were related primarily
to a plan to reorganize and downsize the Bowling Products business in response
to market weakness in the Asia Pacific region and increased competition which
has negatively impacted sales and profitability of new center packages ("NCPs"
which include all the equipment necessary to outfit a new bowling center or
expand an existing bowling center). The restructuring plan was developed in
conjunction with a strategic business assessment performed by Bain & Co. and was
designed to reduce the overall volatility of the Bowling Products business.
Actions taken included closing one plant in the U.S., and one plant in Korea,
three warehouses in China, one warehouse in Taiwan, four sales offices in China
and one sales office in Belgium. Additionally sales offices were downsized in
four other countries. The restructuring charges relate primarily to employee
termination benefits, asset write-offs and contract cancellations.
In addition, the strategic assessment by Bain & Co. led to programs
designed to improve product line profitability and quality. This assessment was
a catalyst to the Company recording certain charges. These charges, along with
additional reserves (collectively, the "Special Charges") recorded by the
Company totaled $27.5 million. The Special Charges are non-cash, relate
primarily to receivables and inventory and are included within operating
expenses. The Credit Agreement allows Bowling Worldwide to exclude the
restructuring charges and Special Charges for covenant purposes.
The following table summarizes the nature of the restructuring charges and
Special Charges:
BOWLING BOWLING
CENTERS PRODUCTS CORPORATE TOTAL
-------- -------- --------- -------
Restructuring Charges 0.2 7.2 0.1 7.5
Special Charges 6.6 20.7 0.2 27.5
-------- -------- -------- -------
Total Charges $ 6.8 $ 27.9 $ 0.3 $ 35.0
======== ======== ======== =======
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
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.
9
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation against the Company, The Goldman Sachs Group, L.P., Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Cowen & Company, Schroder & Co. Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased the
Common Stock in the Initial Public Offering or within 25 days of the effective
date of the registration statement relating to the Initial Public Offering,
seek, among other things, damages and/or rescission against all defendants
jointly and severally pursuant to Sections 11, 12 and/or 15 of the Securities
Act of 1933 based on allegedly inaccurate and misleading disclosures in
connection with and following the Initial Public Offering. Management believes
that the litigation is without merit and intends to defend it vigorously.
NOTE 7. ACQUISITIONS
From May 1, 1996 through December 31, 1998, AMF Bowling Centers, Inc., a
direct subsidiary of Bowling Worldwide, purchased an aggregate of 262 bowling
centers from various unrelated sellers in the U.S. and foreign countries. From
January 1, 1999 through September 30, 1999, AMF Bowling Centers, Inc. acquired
one center in the United States. The combined net purchase price for all
acquisitions was approximately $499.0 million, and was funded with approximately
$76.6 million from the sale of equity by AMF Bowling, $421.2 million from
available borrowing under Bowling Worldwide's then existing Acquisition Facility
and current Bank Facility, and with $1.2 million from the issuance of Common
Stock.
As a result of these acquisitions, and after giving effect to the
construction of two new U.S. centers, the closing of 21 U.S. centers and two
international centers and the sale of a center in Switzerland and a center in
China since the Acquisition, the Company owned and operated 418 U.S. bowling
centers and 122 international bowling centers, including 15 joint venture
centers, as of September 30, 1999. As of October 31, 1999, the Company had no
commitments to acquire additional bowling centers. The Company has committed to
build one Michael Jordan Golf Center in 2000.
10
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8. 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, 1999 and
1998, respectively, is presented below (in millions):
THREE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------
BOWLING CENTERS BOWLING PRODUCTS
--------------------- -------------------------
INTER- SUB- INTER- SUB- ELIM-
U.S. NATIONAL TOTAL U.S. NATIONAL TOTAL CORPORATE INATIONS TOTAL
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 94.9 $ 31.0 $ 125.9 $ 28.4 $ 28.5 $ 56.9 $ - $ - $ 182.8
Intersegment sales - - - 2.4 1.4 3.8 - (3.8) -
Operating income (loss) (18.3) (2.3) (20.6) (27.3) (1.4) (28.7) (6.6) 0.3 (55.6)
Identifiable assets 831.2 326.1 1,157.3 608.1 76.5 684.6 29.8 3.1 1,874.8
Depreciation and amortization 21.1 10.7 31.8 5.5 0.4 5.9 0.4 (0.5) 37.6
Capital expenditures 10.0 2.2 12.2 1.4 0.1 1.5 - - 13.7
Research and development expense - - - - - - - - -
THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------------------
BOWLING CENTERS BOWLING PRODUCTS
---------------- -------------------
INTER- SUB- INTER- SUB- ELIM-
U.S. NATIONAL TOTAL U.S. NATIONAL TOTAL CORPORATE INATIONS TOTAL
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers (a) $ 87.0 $ 29.9 $ 116.9 $ 26.9 $ 28.3 $ 55.2 $ - $ - $ 172.1
Intersegment sales - - - 2.9 1.9 4.8 - (4.8) -
Operating income (loss) (b) (11.0) 3.1 (7.9) 0.6 (1.5) (0.9) (4.5) 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 - - - - - - - - -
(a) To provide comparability to 1999 results, $0.4 million of 1998 U.S.
Bowling Centers food and beverage discounts has been reclassified
from operating expense to revenue.
(b) To provide comparability to 1999 results, $1.5 million of selling,
general and administrative expenses have been reclassified from
corporate to U.S. Bowling Centers expense.
11
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, 1999 and 1998, respectively, is presented below (in
millions):
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------
BOWLING CENTERS BOWLING PRODUCTS
------------------- ----------------------
INTER- SUB- INTER- SUB- ELIM-
U.S. NATIONAL TOTAL U.S. NATIONAL TOTAL CORPORATE INATIONS TOTAL
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $333.6 $ 94.2 $ 427.8 $56.6 $ 62.1 $ 118.7 $ - $ - $ 546.5
Intersegment sales - - - 9.8 3.1 12.9 - (12.9) -
Operating income (loss) 4.6 4.2 8.8 (34.6) (6.4) (41.0) (18.9) 1.0 (50.1)
Identifiable assets 831.2 326.1 1,157.3 608.1 76.5 684.6 29.8 3.1 1,874.8
Depreciation and amortization 63.5 22.4 85.9 16.5 1.1 17.6 1.8 (1.3) 104.0
Capital expenditures 25.7 4.8 30.5 4.2 0.3 4.5 - - 35.0
Research and development expense - - - 0.1 - 0.1 - - 0.1
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
BOWLING CENTERS BOWLING PRODUCTS
------------------- ----------------------
INTER- SUB- INTER- SUB- ELIM-
U.S. NATIONAL TOTAL U.S. NATIONAL TOTAL CORPORATE INATIONS TOTAL
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers (a) $ 298.5 $ 84.2 $ 382.7 $ 63.7 $ 74.8 $ 138.5 $ - $ - $ 521.2
Intersegment sales - - - 10.5 3.7 14.2 - (14.2) -
Operating income (loss) (b) 12.2 8.7 20.9 (3.1) (4.9) (8.0) (13.3) 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
(a) To provide comparability to 1999 results, $1.1 million of 1998 U.S.
Bowling Centers food and beverage discounts has been reclassified
from operating expense to revenue.
(b) To provide comparability to 1999 results, $3.3 million of selling,
general and administrative expenses have been reclassified from
corporate to U.S. Bowling Centers expense.
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of September 30, 1999, and
condensed consolidating statements of income and cash flows for the nine months
ended September 30, 1999 and (ii) elimination entries necessary to combine the
entities comprising the Company.
Bowling Worldwide's subsidiary senior subordinated notes and subsidiary
senior subordinated discount notes are jointly and severally guaranteed on a
full and unconditional basis by AMF Group Holdings and the first and second-tier
subsidiaries of Bowling Worldwide. AMF Bowling and the third-tier and lower-tier
subsidiaries of Bowling Worldwide have not provided guarantees of such
indebtedness.
12
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, 1999
(UNAUDITED)
(IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 11,766 $ 18,416 $ - $ 30,182
Accounts and notes receivable, net
of allowance for doubtful accounts 82,083 291 - 82,374
Accounts receivable - intercompany 6,638 9,413 (16,051) -
Inventories 50,457 1,042 - 51,499
Deferred taxes and other current assets 21,425 6,757 - 28,182
----------- ----------- ----------- -----------
Total current assets 172,369 35,919 (16,051) 192,237
Notes receivable - intercompany 47,704 7,741 (55,445) -
Property and equipment, net 762,309 73,612 1,240 837,161
Investment in subsidiaries 21,227 758,670 (779,897) -
Goodwill and other assets 827,342 18,043 - 845,385
=========== =========== =========== ===========
Total assets $ 1,830,951 $ 893,985 $ (850,153) $ 1,874,783
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 30,356 $ 2,071 $ - $ 32,427
Accounts payable - intercompany 9,413 6,638 (16,051) -
Accrued expenses 55,808 9,101 - 64,909
Income taxes payable 1,183 4,709 - 5,892
Long-term debt, current portion 34,250 - - 34,250
----------- ----------- ----------- -----------
Total current liabilities 131,010 22,519 (16,051) 137,478
Long-term debt, less current portion 1,011,879 187,000 - 1,198,879
Notes payable - intercompany 7,741 47,704 (55,445) -
Other long-term liabilities 3,130 1,036 - 4,166
----------- ----------- ----------- -----------
Total liabilities 1,153,760 258,259 (71,496) 1,340,523
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock - 836 - 836
Paid-in capital 1,037,172 863,311 (1,031,860) 868,623
Retained deficit (343,537) (212,754) 237,536 (318,755)
Foreign currency translation adjustment (16,444) (15,667) 15,667 (16,444)
----------- ----------- ----------- -----------
Total stockholders' equity 677,191 635,726 (778,657) 534,260
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,830,951 $ 893,985 $ (850,153) $ 1,874,783
=========== =========== =========== ===========
13
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
Operating revenue $ 501,618 $ 45,045 $ (202) $ 546,461
--------- --------- --------- ---------
Operating expenses:
Cost of goods sold 138,781 4,953 (135) 143,599
Bowling center operating expenses 251,843 24,943 (67) 276,719
Selling, general, and administrative expenses 56,036 8,683 - 64,719
Restructuring charges 7,500 - - 7,500
Depreciation and amortization 97,613 6,506 (60) 104,059
--------- --------- --------- ---------
Total operating expenses 551,773 45,085 (262) 596,596
--------- --------- --------- ---------
Operating loss (50,155) (40) 60 (50,135)
--------- --------- --------- ---------
Nonoperating expenses (income):
Interest expense 80,436 15,047 - 95,483
Other expenses, net 4,044 2,497 - 6,541
Interest income (1,468) (520) - (1,988)
Equity in loss (income) of subsidiaries 116 162,303 (162,419) -
--------- --------- --------- ---------
Total nonoperating expenses 83,128 179,327 (162,419) 100,036
--------- --------- --------- ---------
Loss before income taxes (133,283) (179,367) 162,479 (150,171)
Provision for income taxes 23,256 3,066 - 26,322
--------- --------- --------- ---------
Net loss before equity in loss of
joint ventures and extraordinary item (156,539) (182,433) 162,479 (176,493)
Equity in loss of joint ventures (5,780) - - (5,780)
--------- --------- --------- ---------
Net loss before extraordinary item (162,319) (182,433) 162,479 (182,273)
Extraordinary item - 64,460 - 64,460
--------- --------- --------- ---------
Net loss $(162,319) $(117,973) $ 162,479 $(117,813)
========= ========= ========= =========
14
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, 1999
(UNAUDITED)
(IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
Cash flows from operating activities:
Net loss $(162,319) $(117,973) $ 162,479 $(117,813)
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 97,613 6,506 (60) 104,059
Equity in loss of joint ventures 5,780 - - 5,780
Amortization of bond discount 19,698 14,056 - 33,754
Equity in earnings of subsidiaries 116 162,303 (162,419) -
Extraordinary item - (64,460) - (64,460)
Deferred taxes 20,830 - - 20,830
Loss on the sale of property and equipment, net 1,922 911 - 2,833
Changes in assets and liabilities:
Accounts and notes receivable (1,889) 118 - (1,771)
Receivables and payables - affiliates - - - -
Inventories 12,871 (42) - 12,829
Other assets (1,797) (4,148) - (5,945)
Accounts payable and accrued expenses 2,834 (3,222) - (388)
Income taxes payable (941) 941 - -
Other long-term liabilities (437) - - (437)
--------- --------- --------- ---------
Net cash used in operating activities (5,719) (5,010) - (10,729)
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,424) - - (1,424)
Investment in subsidiary - (33,911) 33,911 -
Investments in and advances to joint ventures - - - -
Purchases of property and equipment (32,447) (2,524) - (34,971)
Proceeds from sale of property and equipment 744 - - 744
--------- --------- --------- ---------
Net cash used in investing activities (33,127) (36,435) 33,911 (35,651)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 53,000 - 53,000
Payments on long-term debt (56,529) (72,000) - (128,529)
Issuance of shares - 119,737 - 119,737
Repurchase shares - (180) - (180)
Capital contribution from parent 33,911 (33,911) -
Noncompete obligations (184) - - (184)
--------- --------- --------- ---------
Net cash provided by financing activities 30,198 47,557 (33,911) 43,844
--------- --------- --------- ---------
Effect of exchange rates on cash 571 (855) - (284)
--------- --------- --------- ---------
Net (decrease) increase in cash (8,077) 5,257 - (2,820)
Cash and cash equivalents at beginning of period 19,843 13,159 - 33,002
========= ========= ========= =========
Cash and cash equivalents at end of period $ 11,766 $ 18,416 $ - $ 30,182
========= ========= ========= =========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed in this report contain forward-looking
statements, which are statements other than historical information or statements
of current condition. Statements set forth in this report or statements
incorporated by reference from documents filed with the Commission are or may be
forward-looking statements, including possible or assumed future results of the
operations of AMF Bowling, Inc. ("AMF Bowling" or "AMF") and its subsidiaries
(collectively, the "Company"), including but not limited to any statements
contained in this report concerning: (i) the expected results of AMF Bowling's
recapitalization plan and related activities and charges, (ii) the expected
success of the Company's plans to improve its bowling centers operations,
including revenue enhancement and cost management programs, (iii) the ability of
the Company's new management to execute its strategies, (iv) the success of the
recent management reorganization of the Company's bowling centers and bowling
products businesses, (v) the ability to increase the pace of the Company's
bowling center acquisition program, (vi) the expected success of changes
contemplated in the Company's bowling products business, (vii) the Company's
expectations concerning the Asia Pacific region and the joint distribution and
related arrangements with Shanghai Zhonglu Industrial Corporation ("Zhonglu"),
(viii) the success of the Company's employee incentive efforts, (ix) the outcome
of existing or potential litigation, (x) the timing or amount of any changes in
the interest expense of the Company's indebtedness, (xi) the Company's ability
to generate cash flow to service its indebtedness and meet its debt payment
obligations, (xii) the amounts of capital expenditures needed to maintain or
improve the Company's bowling centers, (xiii) any statements preceded by,
followed by or including the words "believes," "expects," "predicts,"
"anticipates," "intends," estimates," "should," "may" or similar expressions and
(xiv) other statements contained in this report regarding matters that are not
historical facts.
These forward-looking statements relate to the plans and objectives of the
Company or future operations. In light of the risks and uncertainties inherent
in all future projections, the inclusion of forward-looking statements in this
report should not be regarded as a representation by AMF Bowling that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the
forward-looking statements, including: (i) the Company's ability, and the
ability of its new management team, to carry out the Company's long-term
business strategies, including increasing the pace of the Company's acquisition
program, (ii) the Company's ability to integrate acquired operations into its
business, (iii) the Company's ability to identify and develop new bowling
markets to assist in the growth of such markets, (iv) the continuation of
adverse financial results and substantial competition in the Company's bowling
products business, (v) the Company's ability to retain and attract experienced
bowling center management, (vi) the Company's ability to successfully implement
initiatives designed to improve customer traffic in its bowling centers, (vii)
the continuation or worsening of economic difficulties in overseas markets,
including the Asia Pacific region, (viii) the risk of adverse political acts or
developments in the Company's existing and proposed international markets, (ix)
the fluctuations in foreign currency exchange rates affecting the Company's
translation of operating results, (x) continued or increased competition, (xi)
the popularity of bowling, (xii) the decline in general economic conditions,
(xiii) the status or effectiveness of the Company's year 2000 efforts, (xiv)
adverse judgments in pending or future litigation, (xv) the Company's ability to
effectively implement the joint distribution and related arrangements with
Zhonglu and (xvi) changes in interest and exchange rates.
The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included elsewhere in this report. AMF Bowling undertakes no obligation
to release publicly the results of any future revisions it may make to
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
BACKGROUND
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and AMF Bowling's Condensed
Consolidated Financial Statements (unaudited) included elsewhere herein.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
a company's historical ability to service debt. EBITDA 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.
16
GENERAL
The Company principally operates in two business segments in the United
States and international markets: (i) the ownership and operation of 418 U.S.
bowling centers and 122 international bowling centers ("Bowling Centers"),
including 15 joint venture centers operated with third parties, as of September
30, 1999; and (ii) the manufacture and sale of bowling equipment and bowling
products ("Bowling Products").
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations discuss
results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
are set forth below. The business segment results presented below are before
intersegment eliminations since the Company's management believes that this will
provide a more accurate comparison of performance by segment from year to year.
The intersegment eliminations are not material. Interest expense is presented on
a gross basis. The comparative results of Bowling Centers for the first nine
months of 1999 versus 1998 reflect the inclusion of seven centers acquired, one
center constructed, the closing of four centers and the sale of two centers
since September 30, 1998.
ACQUISITION
From January 1, 1999 through September 30, 1999, AMF Bowling Centers, Inc.,
a direct subsidiary of Bowling Worldwide, acquired one bowling center in the
United States.
17
AMF BOWLING, INC.
SELECTED FINANCIAL DATA
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Bowling Centers (before intersegment eliminations)
Operating revenue (a) $ 125.9 $116.9 $ 427.8 $ 382.7
--------- -------- ------- -------
Cost of goods sold 13.9 12.2 44.5 38.1
Bowling center operating expenses (b) 93.1 86.0 277.5 247.7
Selling, general, and administrative expenses 7.5 1.3 10.9 4.4
Restructuring charges 0.2 - 0.2 -
Depreciation and amortization 31.8 25.3 85.9 71.6
--------- -------- ------- -------
Operating income (loss) (b) $ (20.6) $ (7.9) $ 8.8 $ 20.9
--------- -------- ------- -------
BOWLING PRODUCTS (before intersegment eliminations)
Operating revenue $ 60.7 $ 60.0 $ 131.6 $ 152.7
--------- -------- ------- -------
Cost of goods sold 55.6 45.1 110.9 112.2
Gross profit 5.1 14.9 20.7 40.5
Selling, general, and administrative expenses 20.7 10.3 36.9 32.0
Restructuring charges 7.2 - 7.2 -
Depreciation and amortization 5.9 5.5 17.6 16.5
` --------- -------- ------- -------
Operating loss $ (28.7) $ (0.9) $ (41.0) $ (8.0)
--------- -------- ------- -------
CONSOLIDATED
Operating revenue (a) $ 182.8 $172.1 $ 546.5 $ 521.2
--------- -------- ------- -------
Cost of goods sold 66.2 54.1 143.6 139.1
Bowling center operating expenses (b) 92.8 84.6 276.7 245.0
Selling, general, and administrative expenses (b) 34.3 15.6 64.8 48.7
Restructuring charges 7.5 - 7.5 -
Depreciation and amortization 37.6 30.9 104.0 87.8
--------- -------- ------- -------
Operating income (loss) (55.6) (13.1) (50.1) 0.6
Interest expense, gross 31.1 30.9 95.5 84.5
Other income (expense), net (0.4) 4.9 4.6 6.3
--------- -------- ------- -------
Loss before income taxes (86.3) (48.9) (150.2) (90.2)
Provision (benefit) for income taxes 23.1 (14.6) 26.3 (21.1)
--------- -------- ------- -------
Net loss before equity in loss of joint ventures and extraordinary items (109.4) (34.3) (176.5) (69.1)
Equity in loss of joint ventures (0.1) (1.3) (5.8) (2.9)
--------- -------- ------- -------
Net loss before extraordinary items (109.5) (35.6) (182.3) (72.0)
Extraordinary item 64.5 - 64.5 -
--------- -------- ------- -------
Net income (loss) $ (45.0) $(35.6) $(117.8) $ (72.0)
========= ======== ======= =======
SELECTED DATA:
RECURRING EBITDA (C)
Bowling Centers $ 18.0 $ 17.4 $ 101.5 $ 92.5
Bowling Products $ 5.1 $ 4.6 $ 4.5 $ 8.5
RECURRING EBITDA MARGIN
Bowling Centers 14.3% 14.9% 23.7% 24.2%
Bowling Products 8.4% 7.7% 3.4% 5.6%
(a)To provide comparability to 1999 results, $0.4 million and $1.1 million
for the three months and nine months ended September 30, 1998,
respectively, of U.S. Bowling Centers food and beverage discounts have
been reclassified from operating expense to revenue.
(b)To provide comparability to 1999 results, $1.5 million and $3.3 million
for the three months and nine months ended September 30, 1998 of
selling, general and administrative expenses have been reclassified
from corporate to U.S. Bowling Centers expense.
(c)Recurring EBITDA represents EBITDA before nonrecurring restructuring
charges and Special Charges of approximately $7.5 million and $27.5
million, respectively.
18
BOWLING CENTERS
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. To facilitate a meaningful
comparison, the constant center results discussed below reflect the results of
334 centers that had been in operation one full fiscal year as of December 31,
1998. The discussion of new center results reflects the results of 84 centers
that were either purchased since January 1, 1998 or had been in operation less
than one full fiscal year as of December 31, 1998. Bowling Centers derives its
revenue and cash flows from three principal sources: (i) bowling, (ii) food and
beverage and (iii) other sources, such as shoe rental, amusement games,
billiards and pro shops. For the nine months ended September 30, 1999, bowling,
food and beverage and other revenue represented 58.3%, 27.0% and 14.7% of total
Bowling Centers revenue, respectively. For the nine months ended September 30,
1998, bowling, food and beverage and other revenue represented 58.8%, 26.8% and
14.4% of total Bowling Centers revenue, respectively.
To facilitate a meaningful comparison, the results of Bowling Centers for
the quarter and nine months ended September 30, 1999, have been restated to
exclude nonrecurring restructuring charges Special Charges (as defined in
"--Consolidated-Nonrecurring Restructuring Charges and Special Charges")as shown
in the table below. The discussion below gives effect to this restatement. See
"Note 5. Long-Term Debt and Recapitalization Plan" in the Notes to Condensed
Consolidated Financial Statements and "--Consolidated-Nonrecurring Restructuring
Charges and Special Charges".
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------- ---------------------------------------
1999 1998 1999 1998
AS SPECIAL AS AS AS SPECIAL AS AS
REPORTED CHARGES ADJUSTED REPORTED REPORTED CHARGES ADJUSTED REPORTED
-------- ------ -------- -------- -------- ------- -------- --------
Bowling Centers (before intersegment
eliminations)
Operating revenue $ 125.9 $ - $ 125.9 $ 116.9 $ 427.8 $ - $ 427.8 $ 382.7
------- ------- --------- ------- ------- ---- ------- -------
Cost of goods sold 13.9 0.9 13.0 12.2 44.5 0.9 43.6 38.1
Bowling center operating expenses 93.1 - 93.1 86.0 277.5 - 277.5 247.7
Selling, general, and administrative expenses 7.5 5.7 1.8 1.3 10.9 5.7 5.2 4.4
Restructuring charges 0.2 0.2 - - 0.2 0.2 - -
Depreciation and amortization 31.8 - 31.8 25.3 85.9 - 85.9 71.6
------- ------- --------- ------- ------- ------ ------- -------
Operating income (loss) $ (20.6) $(6.8) $ (13.8) $ (7.9) $ 8.8 $ (6.8) $ 15.6 $ 20.9
======= ======= ========= ======== ======= ======= ======= =======
SELECTED DATA:
RECURRING EBITDA $ 18.0 $ 17.4 $ 101.5 $ 92.5
RECURRING EBITDA MARGIN 14.3% 14.9% 23.7% 24.2%
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Bowling Centers operating revenue increased $9.0 million, or 7.7%. An
increase of $3.4 million is attributable to new centers, of which $3.1 million
is from new U.S. centers and $0.3 million is from new international centers.
Seven new centers were acquired and one new center was constructed between
October 1, 1998 and September 30, 1999. Constant centers operating revenue
increased $6.6 million, or 7.0%. U.S. constant centers operating revenue
increased $5.3 million, or 7.5%, primarily as a result of increases in open play
revenue, and food and beverage and ancillary revenue associated with open play
traffic. International constant centers operating revenue increased $1.3
million, or 5.7%. A decrease of $1.0 million in total operating revenue was
attributable to four centers that were closed and two centers that were sold
since September 30, 1998.
Cost of goods sold increased $0.8 million, or 6.3%. Of the total increase
in cost of goods sold, $0.3 million is attributable to new centers. Constant
centers cost of goods sold increased $0.6 million, or 6.1%, primarily as a
result of increased food and beverage sales. A decrease of $0.1 million was
attributable to closed and sold centers.
Operating expenses increased $7.1 million, or 8.3%. An increase of $3.7
million was attributable to new centers and an increase of $4.5 million was
attributable to constant centers. A decrease of $0.9 million was attributable to
closed and sold centers and a decrease of $0.2 million was attributable to lower
regional and district operations expenses. As a percentage of its revenue,
Bowling Centers operating expenses, adjusted for the nonrecurring restructuring
charges and Special Charges, were 73.9% for the third quarter of 1999 compared
with 73.6% for the third quarter of 1998. The 0.3% increase is due primarily to
higher expenses resulting from AMF's operating initiatives, including increased
spending on payroll, advertising and maintenance, designed to improve customer
traffic.
Selling, general and administrative expenses increased $0.5 million, or
38.5%, due to an increase in costs associated with acquisition growth
experienced in Australia and Europe.
19
Recurring EBITDA increased $0.6 million, or 3.5%. The recurring EBITDA
contribution of new centers was partially offset by the increased expenses
discussed above. Recurring EBITDA margin for the third quarter of 1999 was 14.3%
compared with 14.9% for the third quarter of 1998. The lower recurring EBITDA
margin in 1999 was attributable to AMF's operating initiatives to improve
customer traffic.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Bowling Centers operating revenue increased $45.2 million, or 11.8%. An
increase of $40.1 million is attributable to new centers, of which $30.5 million
is from new U.S. centers and $9.6 million is from new international centers.
Seven new centers were acquired and one new center was constructed between
October 1, 1998 and September 30, 1999. Constant centers operating revenue
increased $8.9 million, or 2.7%. U.S. constant centers operating revenue
increased $7.5 million, or 2.9%, primarily as a result of increases in open play
revenue, and food and beverage and ancillary revenue associated with open play
traffic. International constant centers operating revenue increased $1.4
million, or 1.9%. A decrease of $3.8 million in total operating revenue was
attributable to four centers that were closed and two centers that were sold
since September 30, 1998.
Cost of goods sold increased $5.5 million, or 14.4%. Of the total increase
in cost of goods sold, $4.6 million is attributable to new centers. Constant
centers cost of goods sold increased $1.2 million, or 3.9%, as a result of
higher food costs experienced in the first half of 1999 and increased food and
beverage sales. A decrease of $0.3 million is attributable to closed and sold
centers.
Operating expenses increased $29.8 million, or 12.0%. An increase of $24.5
million was attributable to new centers and an increase of $9.8 million was
attributable to constant centers. A decrease of $3.3 million was attributable to
closed and sold centers, and a decrease of $1.2 million was attributable to
lower regional and district operations expenses. As a percentage of its revenue,
Bowling Centers operating expenses were 64.9% for the first nine months of 1999
compared with 64.7% for the first nine months of 1998. The increase of 0.2% was
primarily attributable to higher expenses resulting from AMF's operating
initiatives, including increased spending on payroll, advertising and
maintenance, designed to improve customer traffic.
Selling, general and administrative expenses increased $0.8 million, or
18.2%, due to an increase in costs associated with acquisition growth
experienced in Australia and Europe.
Recurring EBITDA increased $9.0 million, or 9.7%. The recurring EBITDA
contribution of new centers was partially offset by the increased expenses
discussed above. Recurring EBITDA margin for the first nine months of 1999 was
23.7% compared with 24.2% for the first nine months of 1998.
BOWLING PRODUCTS
To facilitate a meaningful comparison, the results of Bowling Products for
the quarter and nine months ended September 30, 1999, have been restated to
exclude nonrecurring restructuring charges and Special Charges as shown in the
table below. The discussion below gives effect to this restatement. See "Note 5.
Long-Term Debt and Recapitalization Plan" in the Notes to Condensed Consolidated
Financial Statements and "--Consolidated-Nonrecurring Restructuring Charges and
Special Charges".
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------- -------------------------------------
1999 1998 1999 1998
AS SPECIAL AS AS AS SPECIAL AS AS
REPORTED CHARGES ADJUSTED REPORTED REPORTED CHARGES ADJUSTED REPORTED
-------- ------ -------- -------- -------- ------- -------- --------
Bowling Products (before intersegment
eliminations)
Operating revenue $ 60.7 $ - $ 60.7 $ 60.0 $ 131.6 $ - $ 131.6 $ 152.7
Cost of goods sold 55.6 8.0 47.6 45.1 110.9 8.0 102.9 112.2
------- ------ ------ ------ ------- ------ ------- ------
Gross profit 5.1 (8.0) 13.1 14.9 20.7 (8.0) 28.7 40.5
Selling, general, and administrative expenses 20.7 12.7 8.0 10.3 36.9 12.7 24.2 32.0
Restructuring charges 7.2 7.2 - - 7.2 7.2 - -
Depreciation and amortization 5.9 - 5.9 5.5 17.6 - 17.6 16.5
------- ------ ------ ------ ------- ------ ------- ------
Operating loss $ (28.7) $ (27.9) $ (0.8) $ (0.9) $ (41.0) $ (27.9) $ (13.1) $ (8.0)
======= ====== ====== ====== ======= ====== ======= ======
SELECTED DATA:
RECURRING EBITDA $ 5.1 $ 4.6 $ 4.5 $ 8.5
RECURRING EBITDA MARGIN 8.4% 7.7% 3.4% 5.6%
20
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Bowling Products operating revenue increased $0.7 million, or 1.2%. Revenue
from sales of New Center Packages ("NCPs" which include all the equipment
necessary to outfit a new bowling center or expand an existing bowling center)
decreased $0.6 million, or 2.7%, and Modernization and Consumer Products (which
include modernization equipment, supplies, spare parts and consumable products)
revenue increased $1.3 million, or 3.4%. During the third quarter of 1999,
Bowling Products recorded NCP shipments of 489 units compared to shipments of
422 units for the first half of 1999 and 683 units for the third quarter of
1998. Although lower compared with the third quarter of 1998, NCP shipments for
the third quarter of 1999 exceeded total NCP shipments for the first half of
1999. Economic difficulties in certain Asia Pacific markets and increased
competition in general continue to adversely impact results.
Gross profit decreased $1.8 million, or 12.1%, primarily as a result of
continuing lower levels of NCP shipments, lower pricing and unabsorbed fixed
overhead resulting from low production levels.
Selling, general and administrative expenses decreased $2.3 million, or
22.3%, primarily as a result of an ongoing cost reduction program in which the
Bowling Products organization has been streamlined to reduce expenses. Such cost
reduction has served to partially offset the impact of lower sales volume and
unit pricing on EBITDA.
Recurring EBITDA increased $0.5 million, or 10.9%, from $4.6 million in the
third quarter of 1998 to $5.1 in the third quarter of 1999, and the recurring
EBITDA margin increased from 7.7% in the third quarter of 1998 to 8.4% in the
third quarter of 1999 primarily as a result of savings achieved through cost
reductions partially offset by lower gross profit.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Bowling Products operating revenue decreased $21.1 million, or 13.8%.
Revenue from sales of NCPs decreased $22.7 million, or 36.8%, and Modernization
and Consumer Products revenue increased $1.6 million, or 1.8%. Economic
difficulties in certain Asia Pacific markets and increased competition in
general continue to impact results. The strong U.S. dollar also unfavorably
affected pricing and financial statement translation during the first half of
1999. During the first nine months of 1999, Bowling Products recorded NCP
shipments of 911 units compared to shipments of 1,846 units for the first nine
months of 1998.
Gross profit decreased $11.8 million, or 29.1%, primarily as a result of
the decreased levels of NCP shipments, lower pricing and unabsorbed fixed
overhead resulting from low production levels.
Selling, general and administrative expenses decreased $7.8 million, or
24.4%, primarily as a result of an ongoing cost reduction program in which the
Bowling Products organization has been streamlined in order to reduce expenses.
Such cost reduction has served to partially offset the impact of lower sales
volume and unit pricing on EBITDA.
Bowling Products recurring EBITDA decreased $4.0 million, or 47.1%, from
$8.5 million in the first nine months of 1998 to $4.5 million in the first nine
months of 1999, and the Bowling Products recurring EBITDA margin decreased from
5.6% in the first nine months of 1998 to 3.4% in the first nine months of 1999
primarily as a result of lower revenue and gross profit which exceeded the
effect of savings achieved through cost reductions.
CONSOLIDATED
NONRECURRING RESTRUCTURING AND SPECIAL CHARGES
During the third quarter of 1999, the Company recorded restructuring
charges of approximately $7.5 million that were related primarily to a plan to
reorganize and downsize the Bowling Products business in response to market
weakness in the Asia Pacific region and increased competition which has
negatively and materially impacted NCP sales and profitability. The
restructuring plan was developed in conjunction with a strategic business
assessment performed by Bain & Co. and was designed to reduce the overall
volatility of the Bowling Products business. The restructuring charges relate
primarily to employee termination benefits, asset write-offs and contract
cancellations.
In addition, the strategic assessment by Bain & Co. led to programs
designed to improve product line profitability and quality. This assessment was
a catalyst to the Company recording certain charges. These charges, along with
additional reserves (collectively, the "Special Charges") recorded by the
Company totaled $27.5 million. The Special Charges are non-cash, relate
primarily to receivables and inventory write-offs and are included within
operating expenses. The Company's Fourth Amended and Restated Credit Agreement
dated as of June 14, 1999 (the "Credit Agreement") allows Bowling Worldwide to
exclude the restructuring and Special Charges for covenant purposes. See "Note
5. Long-Term Debt and Recapitalization Plan" in the Notes to Condensed
Consolidated Financial Statements.
21
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $6.7 million, or 21.7%, in the
third quarter of 1999, and $16.2 million, or 18.5%, in the nine months ended
September 30, 1999 compared with the same periods in 1998. The increase was
attributable to depreciation of property and equipment of centers acquired and
constructed since September 30, 1998, acceleration of the amortization schedule
for the excess of the Company's investment over its equity in its Brazilian
joint venture's net assets, and incremental depreciation expense incurred as a
result of capital expenditures.
INTEREST EXPENSE
Gross interest expense increased $0.2 million, or 0.6%, in the third
quarter of 1999, and $11.0 million, or 13.0%, in the nine months ended September
30, 1999 compared with the same periods in 1998. Interest incurred on AMF's
outstanding zero coupon convertible debentures due 2018 (the "Debentures") was
higher in the first half of 1999 and lower in the third quarter of 1999,
compared with the same periods in 1998, as a result of AMF's purchase on July
28, 1999 of 45.7% of the outstanding principal amount at maturity of Debentures
in a tender offer in connection with the Company's recapitalization plan (see
"Note 5. Long-Term Debt and Recapitalization Plan" in the Notes to Condensed
Consolidated Financial Statements.) In addition, $1.8 million of deferred
finance costs associated with a prior amendment to the Credit Agreement was
expensed in the second quarter of 1999. See "--Liquidity" and "--Capital
Resources" for further discussion of the bank debt and the Debentures. Non-cash
bond interest amortization totaled $10.5 million and $33.8 million for the
quarter and nine months ended September 30, 1999, respectively, compared to
$11.0 million and $25.2 million for the quarter and nine months ended September
30, 1998, respectively.
INCOME TAXES
As of December 31, 1998, the Company had net operating losses of
approximately $194.5 million and foreign tax credits of $19.7 million that 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, 1999, for $67.0 million related to net operating losses and
foreign tax credits that the Company may not utilize prior to their expirations.
The tax provision recorded for the nine months ended September 30, 1999 reflects
valuation allowance of $21.4 million and certain international taxes.
NET LOSS BEFORE EXTRAORDINARY ITEM
Net losses before extraordinary items in the third quarter and nine months
ended September 30, 1999 totaled $109.5 million and $182.3 million,
respectively, compared with net losses of $35.6 million and $72.0 million in the
third quarter and nine months ended September 30, 1998, respectively. The
increased loss of $73.9 million in the third quarter was primarily a result of
nonrecurring restructuring charges and Special Charges of $7.5 million and $27.5
million, respectively, a difference of $37.7 million between the tax provision
recorded in 1999 and tax benefit recorded in 1998, and the increase in
depreciation and interest expenses. The increased loss of $110.3 million in the
first nine months of 1999 was primarily a result of nonrecurring restructuring
charges and Special Charges of $7.5 million and $27.5 million, respectively, a
difference of $47.4 million between the tax provision recorded in 1999 and tax
benefit recorded in 1998, decreases in Bowling Products revenue and EBITDA
discussed above, and the increase in depreciation and interest expenses. The
Company recorded $0.1 million and $5.8 million in equity in loss of joint
ventures in the third quarter and nine months ended September 30, 1999,
respectively, compared with equity in loss of joint ventures of $1.3 million and
$2.9 million in the third quarter and nine months ended September 30, 1998,
respectively.
22
EXTRAORDINARY ITEM
As part of a recapitalization plan, AMF Bowling completed on July 28, 1999
an offering of rights to purchase shares of Common Stock and a tender offer for
a portion of its outstanding principal amount at maturity of Debentures at a
discount to carrying value. In the rights offering, AMF Bowling raised $120.0
million of gross proceeds in equity capital and issued 24.0 million additional
shares of Common Stock at the subscription price of $5.00 per share. AMF Bowling
purchased $514,286,000 in aggregate principal amount at maturity of the
Debentures in the tender offer at a price of $140 per $1,000 principal amount at
maturity. The Company used approximately $72.0 million of the proceeds from the
rights offering to fund the purchase of the Debentures and recorded an
extraordinary gain of approximately $64.5 million representing the difference
between the accreted value of the Debentures purchased and the purchase price
therefor. See "Note 5. Long-Term Debt and Recapitalization Plan" in the Notes to
Condensed Consolidated Financial Statements.
NET LOSS AFTER EXTRAORDINARY ITEM
Net losses after extraordinary items in the third quarter and nine months
ended September 30, 1999 totaled $45.0 million and $117.8 million, respectively,
compared with net losses of $35.6 million and $72.0 million in the third quarter
and nine months ended September 30, 1998, respectively.
LIQUIDITY
The Company's primary source of liquidity is cash provided by operations
and funds available under credit facilities, as described below. Working capital
on September 30, 1999 was $54.8 million compared to $70.6 million as of December
31, 1998, a decrease of $15.8 million. Decreases in working capital were
primarily attributable to a decrease of $2.8 million in cash, a decrease of
$13.2 million in inventory due to lower sale levels and Special Charges, an
increase in accrued expenses of $3.1 million, an increase of $1.9 million in the
current portion of long-term debt and an increase of $0.5 million in income
taxes payable. These decreases in working capital were offset by an increase in
working capital caused by an increase of $4.2 million in deferred taxes and
other current assets, and a decrease of $1.5 million in accounts payable.
Net cash flows used by operating activities were $10.7 million for the nine
months ended September 30, 1999 compared to net cash flows used of $38.7 million
for the nine months ended September 30, 1998, a difference of $28.0 million. An
increase of $22.7 million was attributable to increased levels of accounts
payable and accrued expenses; an increase of $47.9 million is due to deferred
taxes; an increase of $12.6 million was attributable to decreased levels of
other assets; an increase of $27.1 million was attributable to lower inventory
balances resulting from lower Bowling Products sales volumes in 1999; an
increase of $16.3 million was due to higher amounts of depreciation and
amortization; an increase of $8.6 million was attributable to higher levels of
bond amortization attributable to the Debentures; an increase of $2.9 million
was due to the increased loss in equity of joint ventures caused by the
Company's Brazilian joint venture results which were adversely impacted by a
currency devaluation and a net increase of $0.2 million was attributable to
changes in other operating activities. These increases were partially offset by
a decrease of $45.8 million attributable to a net loss of $117.8 million
recorded in the first nine months of 1999 compared with a net loss of $72.0
million in the same period in 1998 and a decrease of $64.5 million attributable
to extraordinary item, net of tax.
Net cash flows used in investing activities were $35.7 million for the nine
months ended September 30, 1999 compared to net cash flows used of $219.2
million for the nine months ended September 30, 1998, a decrease of $183.5
million. Bowling Center acquisition spending decreased by $167.5 million and
purchases of property and equipment decreased by $12.7 million in the first nine
months of 1999 compared with the same period in 1998. In the first nine months
of 1999, one center was purchased compared with 77 centers in the same period in
1998. Investments in and advances to joint ventures were zero in the first nine
months of 1999 compared with $2.6 million in the same period in 1998. Proceeds
from the sale of property and equipment increased $0.7 million. See "Note 7.
Acquisitions" in the Notes to Condensed Consolidated Financial Statements and
"--Capital Expenditures" for additional discussion of these investing
activities.
23
Net cash provided by financing activities was $43.8 million for the nine
months ended September 30, 1999 compared to net cash provided of $272.3 million
for the nine months ended September 30, 1998, a difference of $228.5 million.
Proceeds from long term debt decreased $484.6 million. Borrowings under the
Credit Agreement decreased $211.5 million as a result of the curtailment of the
pace of acquisitions. Additionally, the Debentures were issued on May 12, 1998
for net proceeds of approximately $273.1 million. Payments on long-term debt
decreased $137.5 million primarily because $249.6 million of the proceeds of the
Debentures was used to pay down the Bank Facility under the Credit Agreement. In
accordance with the terms of the Credit Agreement, scheduled principal payments
in the first nine months of 1999 were $3.1 million higher than payments made in
the same period in 1998. Additionally, in the first nine months of 1999, $37.0
million was paid against amounts outstanding under the Bank Facility and the
Company used approximately $72.0 million of the proceeds from the rights
offering to fund the purchase in the tender offer of the Debentures in July
1999. In the first nine months of 1999, $119.7 million was provided from net
proceeds of the rights offering. 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 acquisition of the Active West chain of bowling centers and $0.7
million was attributable to shares issued upon exercise of employee stock
options. Expenses of the Initial Public Offering totaling $0.7 million were paid
in 1998. See "Note 5. Long-Term Debt and Recapitalization Plan" and "Note 7.
Acquisitions" in the Notes to Condensed Consolidated Financial Statements and
"--Capital Resources".
As a result of the aforementioned, cash decreased by $2.8 million for the
nine months ended September 30, 1999 compared with an increase of $18.4 million
for the nine months ended September 30, 1998.
CAPITAL RESOURCES
The Company's total indebtedness is primarily a result of the financing of
the acquisition of the Company in 1996 by an investor group led by affiliates of
Goldman, Sachs & Co. (the "Acquisition") and the Company's bowling center
acquisition program. At September 30, 1999, the Company's debt consisted of
$580.3 million of borrowings under the Credit Agreement and a mortgage
(collectively, the "Senior Debt"), $250.0 million of Bowling Worldwide's senior
subordinated notes ("Subsidiary Senior Subordinated Notes"), $233.1 million of
Bowling Worldwide's senior subordinated discount notes ("Subsidiary Senior
Subordinated Discount Notes"), and $169.7 million of Debentures. At September
30, 1999, the Company's Senior Debt consisted of $399.3 million outstanding
under term loan facilities under the Credit Agreement (the "Term Facilities"),
$179.0 million outstanding under a non-amortizing revolving credit facility
under the Credit Agreement (the "Bank Facility") and $2.0 million represented by
one mortgage note.
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, 1999, $179.0 million
was outstanding and $176.0 million was available for borrowing under the Bank
Facility subject to certain limitations regarding acquisitions and capital
expenditures. Between September 30, 1999 and October 31, 1999, there were $10.0
million in additional borrowings and $5.0 million in payments resulting in a
balance, as of October 31, 1999, of $184.0 million under the Bank Facility.
In connection with the Company's recapitalization plan, the lenders under
the Credit Agreement amended the terms of the Credit Agreement, as of June 14,
1999, to provide the Company with (i) the ability to increase the pace of its
bowling center acquisition program, (ii) greater financial flexibility under the
covenants contained in the Credit Agreement and (iii) certain other
modifications. See "Note 5. Long-Term Debt and Recapitalization" in the Notes to
Condensed Consolidated Financial Statements. Bowling Worldwide is in compliance
with the amended covenants as of September 30, 1999. In this connection, AMF
Bowling made a contribution of $1.0 million as equity to Bowling Worldwide on
November 8, 1999 to meet EBITDA requirements under its financial covenant tests
as of September 30, 1999. Management believes that Bowling Worldwide will remain
in compliance for the remainder of 1999 including the effect of a presently
anticipated equity contribution as permitted under the Credit Agreement. The
Credit Agreement permits AMF Bowling to make an additional equity contribution
during the remainder of 1999 as specified above. Any downturn in the current
performance of Bowling Worldwide could result in non-compliance with these
financial covenants. Failure by Bowling Worldwide to comply with its Credit
Agreement covenants could result in an event of default which, if not cured or
waived, would have a material adverse effect on the Company.
24
During the first nine months of 1999, the Company funded its cash needs
through the Bank Facility as well as cash flow from operations and cash
balances. A substantial portion of the Company's available cash will be applied
to service outstanding indebtedness. For the nine months ended September 30,
1999, the Company incurred cash interest expense of $60.0 million, representing
67.5% of recurring EBITDA for the period. 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.
The indentures governing the Subsidiary Senior Subordinated Notes and the
Subsidiary Senior Subordinated Discount Notes (together with the Subsidiary
Senior Subordinated Notes, the "Subsidiary Notes") and certain provisions of the
Credit Agreement contain financial and operating covenants and significant
restrictions on the ability of the Company to pay dividends, incur indebtedness,
make investments and take certain other corporate actions. As of September 30,
1999, the Company was 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 performance, management believes that cash flow from operations,
together with available borrowings under the Credit Agreement and other sources
of liquidity, will be adequate to meet the Company's requirements for working
capital, capital expenditures, scheduled payments of principal of, and interest
on, its Senior Debt, and interest on the Subsidiary Notes for the remainder of
1999 and the year 2000. In the calendar year 2001, principal payment obligations
under the facilities of the Credit Agreement increase significantly and cash
interest becomes payable on the Subsidiary Senior Subordinated Discount Notes.
Based on current levels of performance, the Company anticipates that refinancing
will be required to meet the Company's financial requirements for calendar years
after 2000. 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 meet its payment
obligations under 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, 1999, the Company's capital
expenditures were $35.0 million compared to $47.7 million for the nine months
ended September 30, 1998, a decrease of $12.7 million. Bowling Centers
maintenance and modernization expenditures decreased $2.7 million. Bowling
Products expenditures decreased $3.5 million. Company-wide information systems
expenditures increased $0.9 million. Investments in Xtreme (TM) bowling
equipment at various AMF bowling centers increased by $0.2 million. Capital
expenditures for new centers were $5.1 million higher in 1998 due to the
construction of a Michael Jordan Golf Center. In 1999, other expenditures
decreased $2.5 million.
While the Company's intention is to continue consolidating the U.S. bowling
center industry by acquiring additional bowling centers, the Company will
evaluate acquisitions on a more selective basis and will consider acquisition
targets which meet specific operating and valuation parameters. At the same
time, management will continue its focus on improving financial performance of
its current centers. As of October 31, 1999, the Company had no formal
commitments to build or acquire bowling centers. The Company has committed to
build one Michael Jordan Golf Center in 2000.
The Company has funded 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 Stock. See
"Note 7. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources."
In connection with the Company's recapitalization plan, the lenders under
the Credit Agreement amended the terms of the Credit Agreement, as of June 14,
1999, to provide the Company with (i) the ability to increase the pace of its
bowling center acquisition program, (ii) greater financial flexibility under the
covenants contained in the Credit Agreement and (iii) certain other
modifications. See "Note 5. Long-Term Debt and Recapitalization Plan" in the
Notes to Condensed Consolidated Financial Statements.
25
SEASONALITY AND CYCLICALITY
The financial performance of Bowling Centers' operations is seasonal. Cash
flows typically peak in the winter and reach their lows in the summer. While the
geographic diversity of the Company's Bowling Centers operations has helped
reduce this seasonality in the past, the increase in U.S. centers resulting from
acquisitions has increased the seasonality of that business.
Modernization and Consumer Products sales also display seasonality. The
U.S. market, which is the largest market for Modernization and Consumer
Products, is driven by the beginning of league play in the fall of each year.
While operators purchase consumer products throughout the year, they often place
larger orders during the summer in preparation for the start of league play in
the fall. Summer is also generally the peak period for installation of
modernization equipment. Operators typically sign purchase orders for
modernization equipment during the first four months of the year after they
received winter league revenue indications. Equipment is then shipped and
installed during the summer when leagues are generally less active. However,
sales of some modernization equipment such as automatic scoring and synthetic
lanes are less predictable and fluctuate from year to year because of the longer
life cycle of these major products.
Sales of NCPs can fluctuate dramatically as a result of economic
fluctuations in international markets, as seen in the reduction of sales of NCPs
to markets in the Asia Pacific region following economic difficulties in that
region.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the risks inherent in
operating abroad, including, but not limited to, currency exchange rate
fluctuations, economic and political fluctuations and destabilization, other
disruption of markets, restrictive laws, tariffs and other actions by foreign
governments (such as restrictions on transfer of funds, import and export duties
and quotas, foreign customs, tariffs and value added taxes and unexpected
changes in regulatory environments), difficulty in obtaining distribution and
support for products, the risk of nationalization, the laws and policies of the
United States affecting trade, international investment and loans, and foreign
tax law changes.
The Company has a history of operating in a number of international
markets, in some cases, for over 30 years. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate adversely impacts sales volume and profit margins
during such periods.
The continuing economic difficulties in the Asia Pacific region have had
and will continue to have a material adverse impact on NCP sales. One of the
reasons for the decline in NCP sales is the limited availability of financing
for customers desiring to build new bowling centers, especially in the Asia
Pacific region. In addition, Zhonglu became a significant competitor in China.
On June 13, 1999, AMF Bowling Products signed a three-year joint distribution
agreement with Zhonglu. Under the terms of the agreement, Zhonglu became the
exclusive distributor of AMF products and parts in China, and Bowling Products
became the exclusive distributor of Zhonglu bowling products and parts outside
China. These agreements are intended to improve Bowling Products' competitive
position in both China and other developing markets. However, there is no
assurance that such an improvement will occur.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 42.9% of total NCP unit sales for the nine months ended
September 30, 1999 compared to 52.8% for the year ended December 31, 1998.
China has strengthened its import restrictions by requiring the payment of
full customs duties and value-added taxes on the importation of new and used
capital goods. The Chinese government has also begun to prohibit importation of
used capital equipment without permits. Permits for the importation of used
bowling equipment are very difficult to obtain. Local Chinese companies,
however, are not subject to the same restrictions. For example, in addition to
being the exclusive distributor of AMF Products Zhonglu produces locally and
sells bowling equipment that is not subject to the customs duties or permit
requirements that affect the Company's imported equipment. Zhonglu has
experienced significant acceptance by local customers. These Chinese import
restrictions have had, and for the foreseeable future management believes will
continue to have, an adverse effect on the Bowling Products business.
26
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the nine months ended September
30, 1999, revenue and recurring EBITDA of international bowling centers
represented 17.2% and 29.9% of consolidated revenue and recurring EBITDA,
respectively. For the nine months ended September 30, 1998, revenue and EBITDA
of international bowling centers represented 16.2% and 26.6% of consolidated
revenue and EBITDA, respectively. For the year ended December 31, 1998, revenue
and EBITDA of international bowling centers represented 15.7% and 24.3% of
consolidated revenue and EBITDA, respectively.
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 quarter ended March 31, 2001, the Company will be
required to adopt SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect that adoption of this standard
will have a material adverse impact on the Company's financial position or
results of operations.
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:
27
IT. The Company has a number of financial, retail and operational
systems worldwide. The retail systems in many of its bowling centers
are already Year 2000 compliant. The effort to complete the Year 2000
conversions within the bowling centers is 98% complete. Several
manufacturers of the computer systems used in certain centers went out
of business in 1999 thus hampering the conversion efforts. The Company
is responding by replacing the systems of those manufacturers with
systems from other manufacturers that are Year 2000 compliant. The
Company has installed new financial and operational systems at several
locations. In connection with this effort, 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. The
financial and operational systems have been installed for U.S. Bowling
Centers and Bowling Products operations, European Bowling Centers and
Bowling Products operations and corporate. Existing systems in the Asia
Pacific Bowling Centers and Bowling Products operations are Year 2000
compliant. In 1997, 1998 and for the nine months ended September 30,
1999, the Company spent approximately $12.6 million, $4.1 million and
$7.1 million, respectively, on systems that are designed to be Year
2000 compliant. The Company expects to spend an additional $0.5 million
to complete the installation. These costs include normal system
software and equipment upgrades or replacements that 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 that 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 100% of its critical vendors regarding
their Year 2000 readiness. Approximately 99% of the Company's critical
vendors have provided oral or written confirmation that they are Year
2000 compliant. The Company 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 installation of new systems
which effectively address the Year 2000 issue is not successful, 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 has been and 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 potentially non-compliant computer systems or material third parties,
contingency plans will be developed at that time.
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PART II
ITEM 1. LEGAL PROCEEDINGS
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.
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation against the Company, The Goldman Sachs Group, L.P., Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Cowen & Company, Schroder & Co. Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased the
Common Stock in the Initial Public Offering or within 25 days of the effective
date of the registration statement relating to the Initial Public Offering,
seek, among other things, damages and/or rescission against all defendants
jointly and severally pursuant to Sections 11, 12 and/or 15 of the Securities
Act of 1933 based on allegedly inaccurate and misleading disclosures in
connection with and following the Initial Public Offering. Management believes
that the litigation is without merit and intends to defend it vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement, dated as of August 4, 1999, between AMF
Bowling, Inc. and Stephen E. Hare.
27.1 Financial Data Schedule for the nine months ended September 30,
1999.
(b) REPORTS ON FORM 8-K:
1. A Current Report on Form 8-K was filed on July 30, 1999, with
respect to the July 29, 1999 announcement by AMF Bowling, Inc. of the
completion of its rights offering and the final results of the tender
offer for a portion of its outstanding zero coupon convertible
debentures due 2018.
29
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 15, 1999
- ----------------------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Michael P. Bardaro November 15, 1999
- ---------------------------------
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
30