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REGISTRATION STATEMENT NO. 333-4877
AMF BOWLING WORLDWIDE, INC.
(FORMERLY AMF GROUP INC.)
SUPPLEMENT NO. 4 TO PROSPECTUS DATED JUNE 26, 1997,
AS SUPPLEMENTED BY SUPPLEMENT NO. 1 DATED AUGUST 15, 1997,
SUPPLEMENT NO. 2 DATED AUGUST 22, 1997 AND
SUPPLEMENT NO. 3 DATED OCTOBER 6, 1997.
THE DATE OF THIS SUPPLEMENT NO. 4 IS OCTOBER 29, 1997.
On October 29, 1997, AMF Group Inc. changed its name to AMF Bowling
Worldwide, Inc.
On August 21, 1997, AMF Bowling, Inc. (formerly AMF Holdings Inc.), the
parent company of AMF Bowling Worldwide, Inc., issued the attached press release
regarding an initial public offering of Common Stock by AMF Bowling Inc. On
October 29, 1997, AMF Bowling, Inc. filed Pre-Effective Amendment No. 2 to the
Registration Statement referred to in the attached press release, and AMF
Bowling Worldwide, Inc. further supplemented the prospectus of AMF Bowling
Worldwide, Inc. as follows.
The information contained in this Supplement No. 4 fully supersedes the
information contained in Supplement No. 3.
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[AMF LETTERHEAD]
For Immediate Release Contact: Stephen E. Hare
Chief Financial Officer
804/730-4401
NEWS RELEASE
AMF BOWLING, INC. FILES FOR INITIAL PUBLIC OFFERING
RICHMOND, VIRGINIA, AUGUST 21, 1997 -- AMF Bowling, Inc. President and Chief
Executive Officer Douglas J. Standard announced today that AMF Bowling, Inc.
has filed a registration statement with the Securities and Exchange Commission
for a proposed initial public offering of common stock by the Company.
The underwriting group, which will be led by Goldman, Sachs & Co.,
includes Morgan Stanley & Co. Incorporated, Cowen & Company and Schroder & Co.
Inc.
AMF is the world's largest operator of bowling centers with 335 U.S.
bowling centers and 87 international bowling centers. AMF is also one of the
world's leading manufacturers of bowling center equipment and supplies, such as
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns and modernization equipment.
The proceeds of the proposed offering are to be used to repay
indebtedness under the bank credit agreement of the Company's subsidiary and,
subject to market conditions and the consent of the lenders under that
agreement, may also be used to redeem a portion of the publicly-traded bonds of
AMF's subsidiary. Any remaining proceeds will be available for general
corporate purposes.
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A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This press release shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
AMF Bowling is headquartered at 8100 AMF Drive, Richmond, Virginia;
Telephone (804) 730-4000.
# # #
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EXPLANATORY NOTE
On October 29, 1997, AMF Group Inc. changed its name to AMF Bowling
Worldwide, Inc. ("AMF Bowling Worldwide").
As noted in the foregoing press release, on August 21, 1997, AMF Bowling,
Inc. ("AMF Bowling") filed a Registration Statement on Form S-1, File No.
333-34099 relating to a proposed initial public offering of its Common Stock,
par value $.01 per share (the "Common Stock"). AMF Bowling (formerly AMF
Holdings Inc.) is the indirect parent of AMF Bowling Worldwide. AMF Bowling
filed Pre-Effective Amendment No. 2 to the Registration Statement on October 29,
1997. This Supplement contains the following excerpts from the prospectus
contained in that Pre-Effective Amendment No. 2; Forward-Looking Statements,
Risk Factors, Use of Proceeds, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Business, Certain Transactions and
Description of Certain Indebtedness.
The initial public offering is proposed to be conducted through concurrent
offerings in the U.S. and outside the U.S. (collectively, the "Offerings").
As used in this Supplement, the term "Company" or "AMF" means AMF Bowling
and all of its subsidiaries, including AMF Bowling Worldwide. AMF Bowling
Worldwide is referred to as "AMF Bowling Worldwide", and is included within AMF.
Unless otherwise specified, other capitalized terms used but not defined in this
Supplement have the meanings specified in the Prospectus, dated June 26, 1997,
of AMF Bowling Worldwide.
THIS SUPPLEMENT AND THE RELATED PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK. THE COMMON STOCK
WILL BE OFFERED ONLY BY MEANS OF THE PROSPECTUS RELATING TO THE COMMON STOCK.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, which are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as
"believes", "anticipates", "intends" or "expects". The forward-looking
statements contained in this Prospectus are generally located in the material
set forth under "Prospectus Summary", "Risk Factors", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business",
but may be found in other locations as well. These forward-looking statements
relate to the plans and objectives of the Company for future operations. In
light of the risks and uncertainties inherent in all future projections, the
inclusion of forward-looking statements in this Prospectus should not be
regarded as a representation by AMF Bowling or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the forward-
looking statements, including, among other things: (i) the Company's ability to
execute successfully acquisition opportunities and to integrate acquired
operations into its business, (ii) the continued development and growth of new
bowling markets and the Company's ability to continue to identify those markets
and to generate sales of products in those markets before market saturation,
(iii) the risk of adverse political acts or developments in the Company's
existing or proposed markets for its products or in which it operates its
bowling centers, (iv) the Company's ability to retain experienced senior
management, (v) the ability of AMF Bowling and its subsidiaries to generate
sufficient cash flow in a timely manner to satisfy principal and interest
payments on their indebtedness and (vi) the popularity of bowling as an activity
in the United States and abroad. In addition, actual results may also differ
materially from forward-looking statements in this Prospectus as a result of
factors generally applicable to companies in similar businesses, including,
among other things: (i) a decline in general economic conditions, (ii) an
adverse judgment in pending or future litigation and (iii) increased competitive
pressure from current competitors and future market entrants. The foregoing
review of important factors should not be construed as exhaustive and should be
read in conjunction with other cautionary statements that are included in the
Registration Statement. 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.
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RISK FACTORS
ABILITY TO IMPLEMENT GROWTH STRATEGIES
The Company's Bowling Centers business has grown, and the Company
anticipates that it will continue to grow, through acquisitions of centers and
improvements at existing centers. There can be no assurance that the Company
will continue to be successful in acquiring centers and improving operations of
acquired and existing centers.
Historically, the Company has financed acquisitions through issuances of
Common Stock, cash on hand and borrowings. The Company anticipates that it will
finance future acquisitions in the same manner. The Credit Agreement (as
hereinafter defined) and Note Indentures (as hereinafter defined) restrict the
Company's ability to incur indebtedness and make certain investments and as a
result may limit the number of centers acquired by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity", "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources", "Business -- Business
Strategy" and "Description of Certain Indebtedness". There can be no assurance
that the Company will generate cash or obtain debt or equity financing on
acceptable terms in amounts sufficient to fund its growth strategies.
The Company also seeks to grow through increased sales of NCPs and
Modernization and Consumer Products. Integral to such increased sales is the
Company's strategy of exploiting increased demand for bowling products in
developed as well as in emerging bowling markets. There can be no assurance that
such increased demand will materialize or that the Company will be able to
successfully exploit such demand. See "-- Seasonality and Market Development
Cycles" and "Business -- Business Strategy".
BOWLING INDUSTRY CHARACTERISTICS
BOWLING CENTERS
In the United States, the operation of bowling centers generally has been
characterized by slightly declining lineage (number of games bowled per lane per
day), offset by increasing average price per game. Total lineage, according to
an industry source, has declined despite an average annual increase in the total
number of people bowling since 1987. This trend is largely a result of a decline
in league participation, partially offset by an increase in recreational (i.e.,
non-league) play, resulting in more people bowling, but bowling less frequently.
Bowling center operators have offset the decrease in overall lineage by
increasing prices and creating additional sources of income. Contrary to the
overall lineage trend in the industry, AMF's U.S. lineage has remained
relatively stable over recent years due to its ability to retain existing league
bowlers and attract new recreational bowlers due to, management believes, the
generally higher quality of AMF's centers. Internationally, although trends vary
by country, certain of the markets in which AMF operates have experienced
increasing competition as they have matured, resulting in declining lineage. AMF
has offset these lineage declines through higher prices and additional focus on
food and beverage and other amusement revenue. There can be no assurance that
AMF will be able to continue to maintain lineage or increase prices in the U.S.
or internationally in the future. See "Business -- AMF Bowling Centers".
In addition, bowling, as both a competitive sport and a recreational
activity, faces competition from numerous alternative activities. The continued
success of AMF's bowling operations is subject to consumers' continued interest
in bowling, the availability and cost of other sport, recreational and
entertainment alternatives and the amount of leisure time, as well as various
other social and economic factors over which AMF has no control. There can be no
assurance that bowling will continue to exhibit its current level of popularity
or that AMF will continue to compete effectively in the industry. See
"Business -- Industry Overview".
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BOWLING PRODUCTS
The Bowling Products industry has been characterized by relatively stable
sales of Modernization and Consumer Products to the installed base of equipment
operators, and more varied results in sales of New Center Packages to newly
constructed bowling centers. While established bowling markets continue to
produce some NCP sales, the primary driver of NCP sales in recent years has been
the rapid growth experienced in new markets as bowling has become popular in
particular countries and the economics of constructing and operating a bowling
center have become attractive to local developers and entrepreneurs. Continued
growth in AMF's sale of NCPs depends, in part, on similar bowling growth
patterns developing in other emerging bowling markets, such as Eastern Europe,
India, Indonesia and South America, and on AMF's ability to successfully exploit
new demand. Sales of NCPs for 1996 declined substantially from 1995, reflecting
the maturing bowling markets in Taiwan and Korea. There can be no assurance that
future international expansion will occur or, if it does occur, that AMF will be
able to successfully compete in such emerging markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Backlog; Recent NCP Sales" and "Business -- AMF Bowling Products".
SEASONALITY AND MARKET DEVELOPMENT CYCLES
Financial performance of Bowling Centers is seasonal in nature, with cash
flows typically peaking in the winter months and reaching their lows in the
summer months. The geographic diversity of AMF's Bowling Centers operations
helps to reduce this seasonality as bowling centers in certain countries in
which AMF operates exhibit different seasonal sales patterns. However, as a
result of the growing number of U.S. centers attributable to the Company's
acquisition program, the seasonality of financial performance of AMF's Bowling
Centers business may be accentuated. See "Business -- Business Strategy".
NCP sales experience significant fluctuations due to changes in demand for
NCPs as certain markets experience high growth followed by market maturity, at
which times sales to that market decline, sometimes rapidly. Management believes
market cycles for individual countries have, in the past, spanned several years,
with periods of high demand for several markets (e.g., Japan, Korea, Taiwan)
which, in AMF's experience, last five years or more. These growth patterns do
not seem to be closely tied to general economic cycles. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Market Development Cycles".
SUBSTANTIAL LEVERAGE; INDEBTEDNESS
The Company is, and will continue to be, highly leveraged as a result of
the substantial indebtedness that it incurred in connection with the Acquisition
and intends to incur to finance acquisitions and expand its operations. As of
June 30, 1997, the Company had total indebtedness of $1,221.3 million and
stockholders' equity of $391.1 million, resulting in a ratio of debt to total
capitalization of approximately 75.7%. Although the Company believes it will be
able to meet its debt obligations, there is no assurance that there will be
adequate cash available to make interest payments under the Company's
indebtedness when they become due. The Company intends to incur additional
indebtedness in the future, subject to limitations imposed by the Note
Indentures and the Credit Agreement. Although AMF Bowling intends to repay
certain indebtedness with the proceeds of the Offerings, it also intends to
incur additional indebtedness to finance acquisitions and expand its operations,
and will therefore remain highly leveraged after giving effect to the Offerings.
See "Capitalization". The Credit Agreement requires the maintenance of certain
financial ratios and imposes certain operating and financial restrictions on the
Company which restrict, among other things, the Company's ability to declare
dividends, redeem stock, incur indebtedness, incur obligations under leases,
create liens, consummate mergers, sell assets, and make capital expenditures,
investments and acquisitions. See "Description of Certain Indebtedness".
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A principal component of the Company's strategy for future growth is the
acquisition of additional bowling centers, which the Company expects to finance
with the Acquisition Facility (as hereinafter defined) under the Credit
Agreement or, following adoption of the Proposed Amendments (as hereinafter
defined), with the Working Capital Facility (as hereinafter defined) thereunder.
As of September 30, 1997, $59.0 million remained available under the Acquisition
Facility. Actual borrowings must meet certain financial tests under the Credit
Agreement and the Note Indentures. The Company's leverage may adversely affect
its ability to meet these tests, and, as a result, to obtain such financing. See
"-- Ability to Implement Growth Strategies" and "Description of Certain
Indebtedness".
NET LOSSES
The Company recorded a net loss of $21.5 million, on a pro forma basis, in
1996 and a net loss of $12.2 million for the first six months of 1997. There can
be no assurance that the Company will not continue to generate net losses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Recent Developments", "Selected Financial Data" and the
Consolidated Financial Statements and Condensed Consolidated Financial
Statements of AMF Bowling.
EXTRAORDINARY CHARGES
In accordance with GAAP, the Company will incur after-tax extraordinary
charges totalling $21.5 million in the fourth quarter of 1997 arising from the
Third Amended and Restated Credit Agreement (as hereinafter defined) and the
resulting write-off of costs previously incurred to obtain bank financing for
the Acquisition, the premium associated with the portion of the 12 1/4% Senior
Subordinated Discount Notes Due 2006 of Bowling Worldwide (as hereinafter
defined) expected to be redeemed with the proceeds of the Offerings and the
write-off of the portion of deferred financing costs attributable to the Senior
Subordinated Discount Notes expected to be so redeemed.
HOLDING COMPANY STRUCTURE
AMF Bowling conducts all of its business through subsidiaries and has no
operations of its own. AMF Bowling is dependent on the cash flow of its
subsidiaries and distributions thereof from its subsidiaries to AMF Bowling. The
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to make funds available to AMF Bowling, whether in the
form of loans, dividends or otherwise. In addition, the Credit Agreement
effectively prohibits AMF Bowling Worldwide, Inc., the subsidiary through which
all of the Company's operations are held (which was formerly named AMF Group
Inc.) ("Bowling Worldwide"), from paying, and the Note Indentures restrict the
ability of Bowling Worldwide to pay, dividends. The Credit Agreement is secured
by all of the stock of Bowling Worldwide and certain of its present and future
domestic and international subsidiaries and by substantially all of Bowling
Worldwide's and certain of its present and future domestic subsidiaries' present
and future property and assets. In addition, AMF Bowling's subsidiaries may,
subject to limitations contained in the Credit Agreement and the Note
Indentures, become parties to financing arrangements which contain limitations
on the ability of such subsidiaries to pay dividends or to make loans or
advances to AMF Bowling. In the event of any insolvency, bankruptcy or similar
proceedings of a subsidiary, creditors of such subsidiary would generally be
entitled to priority over AMF Bowling with respect to assets of the affected
subsidiary. See "Description of Certain Indebtedness".
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by certain key executive officers. The
loss of the services of certain of these executives could have a material
adverse impact on AMF. There can be no assurance that the services of such
personnel will continue to be made available to the Company. The Company does
not maintain key-person insurance with respect to its executive officers.
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CONTROL BY GSCP
Upon completion of the Offerings, GSCP and The Goldman Sachs Group, L.P.
("The Goldman Sachs Group"), which has a 99% interest in Goldman, Sachs & Co.
("Goldman Sachs"), together will beneficially own 53.7% of the Common Stock.
Richard A. Friedman and Terence M. O'Toole, each of whom is a Managing Director
of Goldman Sachs, and Peter M. Sacerdote, who is a limited partner of The
Goldman Sachs Group, are directors of AMF Bowling, and Mr. Friedman is Chairman
of AMF Bowling. See "Principal Stockholders".
As a result of its ownership of a majority of the outstanding Common Stock
and the terms of the Stockholders Agreement (as hereinafter defined), GSCP has
the ability to control the election of a majority of the Board of Directors of
AMF Bowling (the "Board of Directors"), appoint new management and approve or
block any action requiring the approval of AMF Bowling's stockholders, including
adoption of amendments to AMF Bowling's Restated Certificate of Incorporation
(the "Certificate of Incorporation") and approval of mergers or sales of
substantially all of AMF Bowling's assets, in each case, subject to the
restrictions contained in the Stockholders Agreement. The Stockholders Agreement
also provides for three of the investment funds which are stockholders of AMF
Bowling each to nominate a director, subject to GSCP's consent, and for the
formation of the Executive Committee (as hereinafter defined), which consists of
two directors nominated by GSCP. See "Description of Capital Stock" and
"Principal Stockholders -- Stockholders Agreement".
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments (such
as restrictions on transfer of funds, import and export duties and quotas,
foreign customs and tariffs, value added taxes ("VATs") and unexpected changes
in regulatory environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its international sales or on its
results of operations. For the six months ended June 30, 1997, 26.1% of Bowling
Centers operations revenue was generated by the Company's international centers.
For the year ended December 31, 1996, 33.8% of AMF's Bowling Centers revenue was
generated by the Company's international centers. For the six months ended June
30, 1997, 59.2% of Bowling Products sales were international sales. For the year
ended December 31, 1996, approximately 62.7% of Bowling Products sales were
international sales. See "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- International
Operations" and "-- Backlog; Recent NCP Sales".
ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAWS
PROVISIONS
Certain provisions of the Certificate of Incorporation and the By-Laws of
AMF Bowling (the "By-Laws") may have the effect of delaying, deterring or
preventing a sale or change in control of the Company. Such provisions may also
render the removal of directors and management more difficult. Specifically, the
By-Laws provide for restrictions on who may call a special meeting of
stockholders. In addition, the Certificate of Incorporation authorizes the
issuance of preferred stock, par value $.01 per share ("Preferred Stock"), and
of rights or options entitling holders thereof to purchase from AMF Bowling
securities of AMF Bowling or any other corporation ("Purchase Rights"), in any
case without stockholder approval and upon such terms as the Board of Directors
may determine. The issuance of Preferred Stock or Purchase Rights may have the
effect of delaying, deterring or preventing a sale or change in control of the
Company. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of holders
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of Preferred Stock that may be issued in the future. See "-- Control by GSCP"
and "Description of Capital Stock".
ABSENCE OF PRIOR PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the NYSE,
subject to official notice of issuance, there can be no assurance that an active
trading market for the Common Stock will develop or be sustained following the
Offerings or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price will be
determined by negotiation between AMF Bowling and the representatives of the
Underwriters based upon several factors and may not be indicative of future
market prices. The price at which the Common Stock will trade will depend upon a
number of factors, some of which are beyond the Company's control. Such factors
include, but are not limited to, the Company's historical and anticipated
operating results, general market and economic conditions, quarterly
fluctuations in the Company's financial and operating results, announcements by
the Company or others and developments affecting the Company, the markets in
which it competes or the bowling industry generally. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations.
These broad market fluctuations may have an adverse effect on the market price
of the Common Stock. See "Underwriting".
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 ("Rule
144") of the Securities Act or otherwise could have an adverse effect on the
price of the Common Stock. The shares of Common Stock sold in the Offerings will
be eligible for immediate resale, except to the extent acquired by "affiliates"
of the Company, as such term is defined in Rule 144. Additionally, 42,225,000
shares of Common Stock will be eligible for sale in the public market pursuant
to Rule 144, or otherwise, 180 days after the effective date of the Registration
Statement of which this Prospectus is a part, upon expiration of lock-up
agreements with the Underwriters. Sales of such shares in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock or impair the Company's ability to raise additional
capital in the future through the sale of equity securities. Any additional
shares outstanding upon completion of the Offerings will be eligible for sale
pursuant to Rule 144 upon the expiration of the applicable holding period. See
"Principal Stockholders -- Registration Rights Agreement" and "Shares Eligible
for Future Sale".
ABSENCE OF DIVIDENDS
AMF Bowling has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. See "Dividend
Policy".
DILUTION
Investors purchasing shares of Common Stock in the Offerings will incur
substantial and immediate dilution in the amount of approximately $22.34 in net
tangible book value per share of the Common Stock from the initial public
offering price. See "Dilution".
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USE OF PROCEEDS
The net proceeds of the Offerings, estimated to be $226.7 million after
deducting the underwriting discount and expenses payable by the Company, will be
used to repay $100 million of senior bank indebtedness and, assuming receipt of
consent to the Proposed Amendments from the lenders under the Credit Agreement,
the remainder is expected to be used to redeem a portion of Bowling Worldwide's
12 1/4% Senior Subordinated Discount Notes Due 2006 at a price of 112.25% of the
accreted value. However, the Company may elect to apply some or all of the
remainder to redemption of a portion of Bowling Worldwide's 10 7/8% Senior
Subordinated Notes Due 2006 at a price of 110.875% of the principal amount
and/or additional repayment of senior bank indebtedness. The Senior Subordinated
Discount Notes do not accrue cash interest prior to March 15, 2001, while
interest on the Senior Subordinated Notes is currently payable in cash. As a
result of the Proposed Amendments, the senior bank indebtedness to be repaid
would remain available for reborrowing and would mature in 2002, and at
September 30, 1997 would have borne interest at a weighted average rate of
8.68%.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and in AMF Bowling's Consolidated
Financial Statements and Condensed Consolidated Financial Statements included
elsewhere herein.
Management believes that a comparison of the results of operations for the
six months ended June 30, 1997 and 1996, and the years ended December 31, 1996
and 1995, on a pro forma basis, is more meaningful than a comparison on an
historical basis. This is due primarily to significant changes in depreciation
and amortization that result from the application of the purchase method of
accounting for the Acquisition and from the increased interest expense due to
the debt incurred related to the Acquisition. Discussion of the results of
Predecessor Company operations for the years ended December 31, 1995 and 1994,
are on an historical basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Consolidated Financial Statements of AMF Bowling as of December 31,
1996 and the Notes to Condensed Consolidated Financial Statements as of June 30,
1997.
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
of companies are set forth below. The two European centers that were not
acquired by the Company as part of the Acquisition, as discussed in "Note 1.
Organization" in the Notes to Consolidated Financial Statements of AMF Bowling
as of December 31, 1996, are included in the 1996 actual Predecessor Company
results and excluded from 1996 pro forma results. The two centers have no
material impact on the Company's financial statements or on the information
presented in this section.
For 1995, Bowling Centers adopted a calendar year end; accordingly, the
Bowling Centers results of operations for the year ended December 31, 1995
include the results of U.S. operations for the period from December 26, 1994
through December 31, 1995. Total revenue for the period from December 26, 1994
through December 31, 1994 was approximately $2.0 million.
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.
RECENT DEVELOPMENTS
On October 24, 1997, the Company reported its results of operations for the
quarter and nine months ended September 30, 1997 compared to the results of
operations for the quarter ended September 30, 1996 and the pro forma results of
operations for the nine months ended September 30, 1996. Revenue increased 42.3%
to $187.5 million for the third quarter of 1997 as compared to $131.8 million
for the third quarter of 1996. EBITDA increased 27.0% to $40.9 million for the
third quarter of 1997 as compared to $32.2 million for the third quarter of
1996. Net loss was $10.3 million for the third quarter of 1997 as compared to a
net loss of $5.2 million for the third quarter of 1996.
Revenue increased 36.9% to $505.6 million for the first nine months of 1997
as compared to $369.3 million for the first nine months of 1996. EBITDA
increased 29.3% to $126.7 million for the first nine months of 1997 as compared
to $98.0 million for the first nine months of 1996. Net loss for the first nine
months of 1997 was $22.4 million as compared to a net loss of $17.4 million for
the first nine months of 1996.
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Both revenue and EBITDA for the third quarter of 1997 reflect the inclusion
of results of 160 bowling centers acquired and one new bowling center built
since May 1996 through September 30, 1997, and increased levels of NCP shipments
to several international regions. Net loss for the third quarter of 1997
reflects incremental depreciation and interest expense related to increased
levels of assets and indebtedness under the Credit Agreement as a result of
bowling center acquisitions.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996(1)
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues................................... $187.5 $131.8 $505.6 $369.3
Net loss............................................. (10.3) (5.2) (22.4) (17.4)
Selected Data:
EBITDA.......................................... $ 40.9 $ 32.2 $126.7 $ 98.0
</TABLE>
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(1) The information presented with respect to the nine months ended September
30, 1996 is presented on a pro forma basis.
On October 20, 1997, the Company acquired Michael Jordan Golf Company,
Inc., a company formed to build and operate golf practice ranges in select U.S.
locations. In addition, Michael Jordan agreed to become a spokesperson for and
endorser of AMF bowling centers and bowling products under a personal services
contract which grants the Company rights to use Mr. Jordan's image and name in
advertising and marketing campaigns.
PERFORMANCE BY BUSINESS SEGMENT
BOWLING CENTERS
Bowling Centers derives its revenue and profits from three principal
sources: (i) bowling, (ii) food and beverage and (iii) other sources, such as
shoe rental, amusement games, billiards and pro shops. In 1996, bowling, food
and beverage and other revenue represented 62%, 24% and 14% of total Bowling
Centers revenue, respectively.
11
<PAGE> 13
The results shown below reflect both U.S. and international Bowling Centers
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------
PRO FORMA PRO FORMA
PREDECESSOR AMF AMF AMF
COMPANY BOWLING, INC BOWLING, INC BOWLING, INC
------------------ ------------ ------------ ------------
1994 1995 1996(a) 1996(b) 1997
------ ------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BOWLING CENTERS (before
intersegment eliminations):
Operating revenue............... $225.4 $292.3 $ 307.3 $ 147.2 $ 201.1
Cost of goods sold.............. 22.3 26.3 27.5 12.6 18.3
Bowling center operating
expenses...................... 120.3 168.7 177.2 83.3 116.6
Selling, general and
administrative expenses....... 17.0 10.5 7.0 3.0 3.2
Depreciation and amortization... 21.8 36.6 56.2 26.1 34.3
------ ------ ------ ------ ------
Operating income................ $ 44.0 $ 50.2 $ 39.4 $ 22.2 $ 28.7
====== ====== ====== ====== ======
SELECTED DATA:
EBITDA.......................... $ 65.8 $ 86.8 $ 95.6 $ 48.3 $ 63.0
EBITDA margin................... 29.2% 29.7% 31.1% 32.8% 31.3%
Number of centers, end of
period........................ 293 286 341 284 408
Number of lanes, end of
period........................ 9,586 9,430 11,782 9,386 14,206
</TABLE>
- ---------------
(a) Represents pro forma results of operations from January 1, 1996 through
December 31, 1996. See "Note 3. Pro Forma Results of Operations" in the
Notes to Consolidated Financial Statements of AMF Bowling as of December 31,
1996. The pro forma 1996 amount of selling, general and administrative
expenses has been adjusted to reflect a reallocation to corporate of certain
general and administrative expenses previously allocated to the Bowling
Centers segment. The 1995 and 1994 amounts have not been restated to reflect
this change.
(b) Represents results of operations from January 1, 1996 through June 30, 1996,
on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Condensed Consolidated Financial Statements of AMF Bowling as of
June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996. Of the $53.9 million, or 36.6%, increase in operating revenue, $52.5
million was attributable to new centers, of which $48.8 million was from U.S.
centers, and $3.7 million was from international centers. An increase of $2.8
million, or 1.9%, in constant centers (centers in operation for at least one
full fiscal year) revenue was primarily a result of an increase in revenue in
the Northeast region of the U.S., a region in which the Company has a large
number of centers and which experienced severe weather conditions during the
first quarter of 1996. The increase in constant centers revenue in the first six
months of 1997 compared to the same period in 1996 was net of $1.0 million
additional revenue in 1996 due to leap year, and a $1.6 million decrease in
revenue from the Japanese centers in 1997 which was primarily caused by recent
poor economic conditions in Japan. The overall increase was also offset in part
by a $1.4 million decrease attributable to seven U.S. centers which were closed
since May 1996.
Cost of goods sold increased $5.7 million, or 45.2%, primarily as a result
of new centers, partially offset by savings associated with closed centers.
Of the increase of $33.3 million, or 40.0%, in operating expenses,
approximately $31.4 million was attributable to new centers, of which $29.4
million was attributable to U.S. centers and $2.0 million was attributable to
international centers. As a percentage of its revenue, Bowling Centers operating
expenses were 56.6% for the six months ended June 30, 1996, on a pro forma
basis, versus 58.0% for the six months ended June 30, 1997.
12
<PAGE> 14
The increase of $0.2 million, or 6.7%, in selling, general and
administrative expenses was attributable to new centers, partially offset by
savings associated with closed centers.
The increase of $14.7 million, or 30.4%, in EBITDA was attributable to new
centers. EBITDA margin decreased from 32.8% for the six months ended June 30,
1996, on a pro forma basis, to 31.3% for the six months ended June 30, 1997.
EBITDA margin for the six-month period ended June 30, 1997 was affected, as
expected, by the increasing proportion of U.S. centers purchased. U.S. centers
typically have lower margins in the second quarter compared with international
centers and compared with U.S. margins in the first and fourth quarters of the
year, primarily because revenue declines in the second quarter as fall leagues
finish the season. See" -- Seasonality and Market Development Cycles".
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995. Operating revenue increased $15.0 million, or 5.1%. Increases of $19.0
million attributable to the addition of 57 new centers purchased during the last
two quarters of 1996 and $0.5 million attributable to increases at constant
centers were offset by decreases of $2.2 million attributable to the two bowling
centers which were not acquired as part of the Acquisition and $2.3 million
attributable to the closure of seven of the 106 bowling centers originally
purchased by the Predecessor Company from Fair Lanes. The constant center
revenue increase was attributable to an increase in international revenue of
$2.4 million, offset by a decrease in U.S. constant centers revenue of $1.9
million. The decrease in U.S. constant centers revenue was largely a result of a
decrease in revenue due to the severe weather conditions in the Northeast, a
region in which the Company has a large number of centers, during the first
quarter of 1996. An increase in bowling prices in the U.S. during 1996 was
partially offset by a decrease in U.S. lineage. The increase in international
revenue was primarily a result of an increase in average price per game and
increased food and beverage revenue.
Cost of goods sold increased $1.2 million, or 4.6%, primarily as a result
of new centers.
Bowling Centers operating expenses increased by $8.5 million, or 5.0%. An
increase of $10.0 million attributable to new centers and a net increase of $2.2
million attributable to constant centers were offset by a decrease of $3.7
million primarily attributable to the two centers not acquired in the
Acquisition and the closure of seven Fair Lanes centers. The net increase in
constant centers operating expenses was a result of an increase of $4.1 million
in international centers due to increased rents and payroll expenses, and a
decrease of $1.9 million in U.S. centers resulting from the implementation of
cost reduction plans developed by management after assessing the impact of the
severe weather conditions during the first quarter of 1996. As a percentage of
total revenue, Bowling Centers operating expenses remained constant at 57.7%
during 1996 and 1995.
Of the $3.5 million decrease in selling, general and administrative
expenses, $3.6 million is due to a reallocation to corporate of certain selling,
general and administrative expenses previously allocated to the Bowling Centers
segment.
An increase of $8.8 million, or 10.1%, in EBITDA was attributable to new
centers. EBITDA margin in 1996 was 31.1% compared to 29.7% in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994. Operating revenue increased by $66.9 million, or 29.7%. U.S. centers
revenue (excluding centers purchased from Fair Lanes) increased $3.6 million, or
3.7%, over 1994 revenue of $96.2 million, primarily as a result of an increase
in average price per game and lineage, and an increase of $67.2 million was
attributable to the Fair Lanes centers. These increases were offset by a
decrease of $3.9 million in international revenue which resulted primarily from
a weakening of the Mexican peso.
The increase of $4.0 million, or 17.9%, in cost of goods sold was primarily
attributable to the acquisition of the Fair Lanes centers in September, 1994.
Bowling Centers total operating expenses increased by $48.4 million, or
40.2%, of which an increase of $44.0 million was attributable to Fair Lanes
centers operations, an increase of $2.3
13
<PAGE> 15
\million was attributable to non-recurring costs which resulted from integrating
Fair Lanes centers into the Company's risk management program and the closure of
seven centers, and an increase of $2.1 million was primarily attributable to
non-recurring costs related to changes in management personnel implemented in
1995. As a percent of Bowling Centers operating revenue, operating expenses
increased from 53.4% in 1994, to 57.7% in 1995, primarily as a result of the
non-recurring costs described above.
The decrease of $6.5 million, or 38.2%, in Bowling Centers selling, general
and administrative expenses was primarily attributable to the Fair Lanes centers
integration into Bowling Centers operations.
EBITDA increased $21.0 million, or 31.9%. An increase of $22.6 million
attributable to the Fair Lanes centers was offset by a decrease of $1.6 million
which was primarily attributable to centers in Mexico impacted by the weakening
of the peso. EBITDA margin increased from 29.2% in 1994 to 29.7% in 1995
primarily because the Fair Lanes centers EBITDA margin improved from 12.6% for
the fourth quarter in 1994 to 27.8% for the full year in 1995.
BOWLING PRODUCTS
The results shown below reflect Bowling Products operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, -------------------------------
-----------------------------------
PRO FORMA PRO FORMA
PREDECESSOR AMF AMF AMF
COMPANY BOWLING, INC. BOWLING, INC. BOWLING, INC.
----------------- ------------- ------------- -------------
1994 1995 1996(A) 1996(B) 1997
------ ------ ------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BOWLING PRODUCTS (before
intersegment eliminations):
Operating revenue............... $301.7 $286.5 $ 252.1 $96.8 $ 124.7
Cost of goods sold.............. 178.9 166.9 153.3 58.2 74.7
------ ------ ------ ------ ------
Gross profit.................... 122.8 119.6 98.8 38.6 50.0
Selling, general and
administrative expenses....... 38.2 40.3 36.2 15.7 18.7
Depreciation and amortization... 3.7 3.6 18.5 9.4 9.9
------ ------ ------ ------ ------
Operating income................ $ 80.9 $ 75.7 $ 44.1 $13.5 $ 21.4
====== ====== ====== ====== ======
SELECTED DATA:
Gross profit margin............. 40.7% 41.7% 39.2% 39.9% 40.1%
EBITDA.......................... $ 84.6 $ 79.3 $ 62.6 $22.9 $ 31.3
EBITDA margin................... 28.0% 27.7% 24.8% 23.7% 25.1%
New Center Packages sold........ 4,941 4,437 3,029 1,152 1,933
New Center Packages backlog
end of period(c).............. 2,078 940 1,426 1,144 2,182
</TABLE>
- ---------------
(a) Represents results of operations from January 1, 1996 through December 31,
1996 on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in
the Notes to Consolidated Financial Statements of AMF Bowling as of December
31, 1996. The pro forma 1996 amount of selling, general and administrative
expenses has been adjusted to reflect a reallocation to corporate of certain
overhead expenses previously allocated to the Bowling Products segment. The
1995 and 1994 amounts have not been restated to reflect this change.
(b) Represents results of operations from January 1, 1996 through June 30, 1996,
on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Condensed Consolidated Financial Statements of AMF Bowling as of
June 30, 1997.
(c) Orders of NCPs included in the backlog are subject to cancellation by
customers in the normal course of business. Accordingly, the Company has
experienced, and expects to continue to experience, the cancellation of a
portion of such orders. See "-- Backlog; Recent NCP Sales". Data is not
provided for 1992 and 1993 because the Company does not maintain this data
for such periods.
Bowling Products' long-standing customer relationships, Bowling Centers'
and third-party centers' predictable demand for Modernization and Consumer
Products, a steadily increasing
14
<PAGE> 16
installed base of NCPs and Bowling Products' ability to supply a full product
line have historically made the Modernization and Consumer Products category a
stable and recurring base of revenue and EBITDA. Revenue growth from 1991 to
1994 for the NCP category resulted primarily from increased unit sales to Taiwan
and Korea, and since 1995 to China and to emerging bowling markets, where the
popularity of bowling and consequent demand for new bowling centers increased
dramatically. During 1995 and 1996, NCP revenue declined primarily because the
markets in Taiwan and Korea had matured. The decline was partially offset by
continued demand in China and in certain emerging bowling markets. During the
first six months of 1997, NCP revenue increased due to continued demand in China
and other international markets, such as Japan and Malaysia.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996. Bowling Products total operating revenue increased $27.9 million, or
28.8%, primarily due to an increase of $25.3 million, or 67.5%, in NCP revenue,
and an increase of $2.0 million, or 3.4%, in Modernization and Consumer Products
revenue. The increase in NCP revenue was due to an overall increase in NCP sales
of 781 units which occurred primarily in China, Malaysia, the Americas and
Japan. See "Risk Factors -- Seasonality and Market Development Cycles" and
"-- Seasonality and Market Development Cycles".
Total gross profit from Bowling Products increased by $11.4 million, or
29.5%, primarily as a result of increased NCP sales. Gross profit margin was
39.9% and 40.1% for the six months ended June 30, 1996 and 1997, respectively.
Bowling Products selling, general and administrative expenses increased by
$3.0 million, or 19.1%, primarily as a result of a $2.4 million increase
attributable to payroll and facilities expenses related to staffing the
Company's international sales and service offices, and an increase of $1.5
million attributable to advertising and promotion expenses in the U.S.
locations. These increases were offset by a decrease of $0.9 million in payroll,
facilities and related expenses at the U.S. locations.
EBITDA increased from $22.9 million to $31.3 million, resulting in an
increase in EBITDA margin from 23.7% to 25.1%, primarily due to the increased
NCP revenue, offset in part by the increased expenses discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995. Operating
revenue decreased by $34.4 million, or 12.0%, primarily due to a decrease of
$35.3 million, or 22.7%, in NCP revenue offset by an increase of $0.9 million,
or 0.7%, in Modernization and Consumer Products revenue. The drop in NCP revenue
was due to an overall decrease in NCP sales by 1,408 units in 1996 compared to
1995, particularly for maturing markets including Korea and Taiwan, offset by an
increase in NCP revenue from sales to China. From 1995 to 1996, total NCP sales
to Korea decreased by 1,165 units and to Taiwan decreased by 1,323 units.
Additionally, there was a moderate increase in NCP units sold in the Americas
and southern Europe during 1996. The increase in sales to China occurred during
the last six months of 1996. See "Risk Factors -- Seasonality and Market
Development Cycles" and "-- Seasonality and Market Development Cycles". The
increase in Modernization and Consumer Products revenue was due in part to
increased sales of synthetic lanes and automatic scoring in the United States.
Gross profit decreased by $20.8 million, or 17.4%. Gross profit margin was
41.7% in 1995 and 39.2% in 1996. Of this 2.5% decrease, 0.8% was attributable to
an increase in certain inventory and warranty reserves in the Modernization and
Consumer Products categories of $2.1 million, and 1.7% was attributable to the
lower margins on decreased revenues, particularly in Japan, due to price cuts
implemented by the Company's management in response to stiffer competition in
the Modernization and Consumer Products category.
15
<PAGE> 17
Of the $4.1 million decrease in selling, general and administrative
expenses, $4.2 million was due to a reallocation to corporate of certain
overhead expenses previously allocated to the Bowling Products segment.
EBITDA decreased $16.7 million, or 21.1%, and EBITDA margin decreased from
27.7% in 1995, to 24.8% in 1996, primarily due to the decreased NCP revenue and
gross profit discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994. Operating
revenue decreased $15.2 million, or 5.0%, as a result of a decrease of $15.1
million, or 8.8%, in NCP revenue, and a less than 1.0% decrease of $0.1 million
in Modernization and Consumer Products revenue.
A significant portion of the decrease in NCP revenue was attributable to a
decrease in sales to Taiwan and Korea during November and December 1995, which
had significantly lower sales than the comparable period in 1994. Management
believes that the sales to Taiwan and Korea peaked during 1994. Additionally,
NCP sales in Japan were significantly affected by uncertain economic conditions
following the Kobe earthquake and the subway gas attacks, which resulted in
delayed investments in recreational activities.
Gross profit decreased by $3.2 million, or 2.6%, and the gross profit
margin of 40.7% in 1994 increased to 41.7% in 1995. Decreases of $3.8 million
caused by the decrease in NCPs sold and $1.7 million primarily attributable to
start up expenses incurred in pool cue, bumper, and automatic scoring systems
manufacturing were offset by a $2.3 million increase which resulted from
decreased warranty costs.
The increase of $2.1 million, or 5.5%, in selling, general and
administrative expenses was primarily attributable to non-recurring costs of
$2.9 million in 1995, offset by $0.8 million which was primarily due to net
reversals of reserves.
EBITDA decreased $5.3 million, or 6.3%, and EBITDA margin decreased from
28.0% in 1994 to 27.7% in 1995, primarily due to the decreased revenue and
increased selling, general and administrative expenses discussed above. The 1995
EBITDA was depressed by the non-recurring selling, general and administrative
costs of $2.9 million described above.
CONSOLIDATED ITEMS
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $8.5 million, or 24.4%, in the
six months ended June 30, 1997 compared with the same period in 1996, primarily
due to depreciation of property and equipment of centers acquired since May 1996
and incremental depreciation expense incurred as a result of capital
expenditures.
For the year ended December 31, 1996, depreciation and amortization
increased by $34.4 million, or 88.0%, over the same period in 1995, primarily as
a result of recording fixed assets at fair market value and goodwill in
accordance with the purchase accounting method applied to the Acquisition.
For the year ended December 31, 1995, depreciation and amortization
increased by $14.3 million, or 57.7%, over the same period in 1994, primarily
due to the inclusion of Fair Lanes centers for the entire 12 months of 1995, as
compared with three months during 1994.
INTEREST EXPENSE
Gross interest expense increased by $5.3 million, or 10.2%, in the six
months ended June 30, 1997 compared with the same period in 1996, primarily due
to interest paid on increased levels of bank debt as a result of the center
acquisitions described under "Business -- AMF Bowling Centers -- Recent
Acquisitions and Joint Ventures". See "-- Liquidity" and "-- Capital Re-
16
<PAGE> 18
sources". Cash interest paid by the Company for the six months ended June 30,
1997 totaled $39.8 million, while non-cash bond interest amortization totaled
$16.8 million.
For the year ended December 31, 1996, gross interest expense increased by
$90.5 million, or 576.4%, compared with the same period in 1995 due to interest
paid on debt incurred to finance the Acquisition and interest on the Acquisition
Facility. Cash interest paid by the Company for the year ended December 31, 1996
totaled $44.5 million, while non-cash bond interest amortization totaled $24.7
million.
Gross interest expense increased by $8.3 million, or 112.2%, for the year
ended December 31, 1995, compared with the same period in 1994 as a result of
additional debt incurred in connection with the acquisition of the Fair Lanes
centers on September 29, 1994. This debt was paid in full by the prior owners of
the Predecessor Company before the Acquisition.
NET INCOME (LOSS). Net loss decreased $1.3 million, or 9.6%, for the six
months ended June 30, 1997 compared with the same period in 1996, as a result of
the increases in EBITDA discussed above on a segment basis, offset by increases
in depreciation and amortization expense, interest expense and the current tax
provision for the Company.
The decline of $118.3 million, or 122.2%, in net income from $96.8 million
in 1995 to a net loss of $(21.5) million in 1996, on a pro forma basis, was
primarily attributable to a decrease in Bowling Products EBITDA resulting from
the decline in NCP revenue and higher depreciation and amortization and interest
expense resulting from the Acquisition after allowing for an $8.9 million tax
benefit.
Net income decreased $2.5 million, or 2.5%, for the year ended December 31,
1995, compared with the same period in 1994 as a result of higher depreciation
and amortization and interest expense incurred in 1995 as a result of the
full-year impact of the acquisition of the Fair Lanes centers which occurred in
the fourth quarter of 1994.
The Company will incur after-tax extraordinary charges totalling $21.5
million in the fourth quarter of 1997 arising from the Third Amended and
Restated Credit Agreement and the resulting write-off of costs previously
incurred to obtain bank financing for the Acquisition, the premium associated
with the portion of the Senior Subordinated Discount Notes expected to be
redeemed with the proceeds of the Offering and the write-off of the portion of
deferred financing costs attributable to the Senior Subordinated Discount Notes
expected to be so redeemed. See "Description of Certain Indebtedness -- Credit
Agreement".
INCOME TAXES. Prior to the Acquisition, certain of the companies within
the Predecessor Company elected S corporation status under the Internal Revenue
Code of 1986, as amended (the "Code"). Upon consummation of the Acquisition,
those companies became taxable corporations under the Code.
Pursuant to the Stock Purchase Agreement, the two principal companies
within the affiliated group elected under Section 338(h)(10) of the Code, to
treat the stock purchase as a deemed asset acquisition for the purposes of U.S.
income taxes. These elections permitted both of the affiliated companies to
revalue their assets to fair market value and to treat any amortizable goodwill
as tax deductible over fifteen years.
As of June 30, 1997, the Company had net operating losses of approximately
$38.0 million and foreign tax credits of $9.6 million which will carry over to
future years to offset U.S. taxes. The foreign tax credits will begin to expire
in the year 2001 and the net operating losses will begin to expire in the year
2010. The Company has not booked a valuation reserve as of June 30, 1997 because
the Company expects to utilize these net operating losses prior to expiration.
17
<PAGE> 19
LIQUIDITY
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
The following discussion compares AMF Bowling's results for the period
ended June 30, 1997 with the period ended June 30, 1996, on an historical basis.
The Company's primary source of liquidity is cash provided by operations
and credit facilities as described below. Working capital on December 31, 1996
was $7.8 million compared with a negative $23.3 million as of June 30, 1997, a
decrease of $31.1 million. Cash decreased $27.0 million primarily as a result of
payments on debt under the Credit Agreement and internal funding of certain
bowling center acquisitions, and the note payable under the Credit Agreement
increased $30.0 million as a result of borrowings under the Working Capital
Facility under the Credit Agreement which was used to fund increases in working
capital. Accounts receivable increased $14.5 million primarily as a result of
increased NCP revenue, and inventory increased $15.5 million in advance of
future shipments. These increases in working capital were partially offset by a
decrease of $4.1 million caused by changes in other current assets and
liabilities.
Net cash flows used in operating activities were $28.0 million for the six
months ended June 30, 1996 compared with net cash provided of $8.2 million for
the six months ended June 30, 1997, a difference of $36.2 million. Net cash
provided resulted from a decrease of $0.1 million in net loss, an increase of
$31.7 million in depreciation and amortization primarily as a result of
application of the purchase method of accounting for the Acquisition, an
increase of $8.0 million in amortization of the discount related to the bonds
used to partially fund the Acquisition, a net loss of $0.1 million on the sale
of property and equipment, a net change of $3.3 million in deferred taxes and
income taxes payable, and a change of $19.8 million in other assets and
liabilities. Net cash used resulted from an increase of $14.3 million in
accounts receivable primarily resulting from the increased levels of NCP sales
compared with the same period in 1996, and an increase of $12.5 million in
inventory primarily reflecting the increased backlog of NCP orders to be shipped
after June 30, 1997.
Net cash flows used in investing activities were $1,336.3 million for the
six months ended June 30, 1996 compared with net cash flows used of $147.5
million for the six months ended June 30, 1997. During the six months ended June
30, 1996, cash flows used for the Acquisition totaled $1,333.1 million, capital
spending was $3.3 million and other investing cash flows provided were $0.1
million. During the six months ended June 30, 1997, acquisitions of bowling
centers totaled $122.2 million, capital spending was $25.6 million, and other
cash flows provided by investing activities were $0.3 million. See "Note 9.
Acquisitions" in the Notes to Condensed Consolidated Financial Statements of AMF
Bowling as of June 30, 1997 and "-- Capital Expenditures".
Net cash provided by financing activities was $1,409.8 million for the six
months ended June 30, 1996 compared with net cash provided of $112.4 million for
the six months ended June 30, 1997. During the six months ended June 30, 1996,
cash flows were primarily provided by $1,029.9 million of proceeds of long-term
debt and $380.3 million from a capital contribution, both of which were used to
fund the Acquisition. During the six months ended June 30, 1997, cash flows were
primarily provided by drawing down $103.5 million and $30.0 million from
available borrowings under the Acquisition Facility and the Working Capital
Facility, respectively, to fund the acquisitions of centers and increases in
working capital. During 1997, funds were used primarily for the payment of long-
term debt totaling $20.3 million, and $0.5 million was used for the repurchase
of an officer's shares in connection with the termination of his employment with
the Company. See "Note 13. Employee Benefit Plans" in the Notes to Consolidated
Financial Statements of AMF Bowling as of December 31, 1996.
As a result of the aforementioned, cash increased by $45.1 million for the
six months ended June 30, 1996 compared to a decrease of $26.9 million for the
six months ended June 30, 1997.
18
<PAGE> 20
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
The following discussion compares AMF Bowling's results for the period
ended December 31, 1996, with the Predecessor Company's results for the year
ended December 31, 1995, on an historical basis.
Net cash flows from operating activities decreased $51.0 million from
$124.8 million for the year ended December 31, 1995 to $73.8 million for the
period ended December 31, 1996. This decrease was primarily due to the decrease
in net income from $96.8 million for the year ended December 31, 1995 to a net
loss of $(19.5) million for the period ended December 31, 1996 and higher
depreciation, amortization and interest expenses as a result of the Acquisition.
Net cash flows used in investing activities were $28.3 million for the year
ended December 31, 1995 compared with net cash flows used of $1,467.1 million
for the period ended December 31, 1996. The change was due primarily to the
Acquisition. During the year ended December 31, 1995, capital spending was $30.0
million and other investing cash flows provided were $1.7 million. During the
period ended December 31, 1996, acquisitions of operating units, net of cash
acquired, including the Acquisition, totaled $1,450.9 million, capital spending
was $16.9 million, and other cash flows provided by investing activities were
$0.7 million.
Net cash used for financing activities was $94.7 million for the year ended
December 31, 1995 compared with net cash provided of $1,438.3 million for the
period ended December 31, 1996. This change primarily resulted from the issuance
of debt and capital contributions related to the Acquisition. During 1995, the
Predecessor Company made distributions to its owners of $71.9 million, net
payments on notes payable to its owners of $3.8 million, net payments on credit
note agreements and long-term debt of $21.3 million and a payment for redemption
of stock of $4.0 million. Additionally, cash of $8.3 million was received as
capital contributions by stockholders.
During the period ended December 31, 1996, the Company had borrowings, net
of deferred financing costs, of $1,059.3 million from debt incurred to finance
the Acquisition and from the Acquisition Facility, and made payments of $38.9
million on this debt. Additionally, a total of $420.8 million was received as
capital contributions by the institutional stockholders of AMF Bowling and
certain of its officers and directors. Of the total capital contributed, $380.8
million was for the initial capitalization of the Company and the Acquisition,
and $40.0 million was received as additional capital contributions in connection
with the acquisition of centers from Charan Industries, Inc. ("Charan"). See
"Business -- AMF Bowling Centers -- Recent Acquisitions and Joint Ventures".
As a result of the aforementioned, cash increased by $1.6 million for the
year ended December 31, 1995 compared with an increase of $43.6 million for the
period ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Net cash flow from operating activities increased from $119.7 million for
the year ended December 31, 1994 to $124.8 million for the year ended December
31, 1995. This increase was primarily a result of the fact that although net
income decreased from $99.3 million to $96.8 million and assets and liabilities
changes occurred which reflected a net use of cash of $5.3 million and $10.9
million for the year ended December 31, 1994 and for the year ended December 31,
1995, respectively, depreciation and amortization increased by $14.3 million,
from $24.8 million for the year ended December 31, 1994 to $39.1 million for the
fiscal year ended December 31, 1995.
Net cash used for investing activities decreased from $32.6 million for the
year ended December 31, 1994 to $28.3 million for the year ended December 31,
1995. During 1994, cash of $17.3 million was used for the acquisition of
centers, primarily Fair Lanes centers. Capital spending was $17.8 million for
the year ended December 31, 1994 compared with $30.0 million for the year ended
December 31, 1995.
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<PAGE> 21
Net cash used for financing activities increased from $89.6 million for the
year ended December 31, 1994 to $94.7 million for the year ended December 31,
1995. During 1994, the Predecessor Company made distributions to its owners of
$78.2 million, net payments on notes payable to its owners of $8.6 million and
net payments on credit note agreements and long-term debt of $4.8 million.
Additionally, cash of $2.1 million was received as capital contributions by its
owners. During 1995, the Predecessor Company made distributions to its owners of
$71.9 million, net payments on notes payable to its owners of $3.8 million, net
payments on credit note agreements and long-term debt of $21.3 million and a
payment for redemption of stock of $4.0 million. Additionally, cash of $8.3
million was received as capital contributions by its owners.
As a result of the aforementioned, cash increased by $0.2 million for the
year ended December 31, 1994 compared to an increase of $1.6 million for the
year ended December 31, 1995.
CAPITAL RESOURCES
As a result of the Acquisition, the Company's total indebtedness has
increased substantially. At June 30, 1997, the Company's debt structure
consisted of senior debt of $679.9 million, senior subordinated notes of $250.0
million and senior subordinated discount notes of $291.4 million. At June 30,
1997, the Company was also capitalized with equity of $391.1 million. The
Company also has the ability to borrow for general corporate purposes pursuant
to the $50.0 million Working Capital Facility and for acquisitions pursuant to
the $230.0 million Acquisition Facility, subject to certain conditions. At June
30, 1997, $112.0 million and $30.0 million was outstanding under the Acquisition
Facility and the Working Capital Facility, respectively. Between June 30, 1997
and October 24, 1997, additional borrowings under the Acquisition Facility
totaled $59.0 million and were used to fund the acquisitions of centers. See
"Business -- AMF Bowling Centers -- Recent Acquisitions and Joint Ventures". In
addition, the Company borrowed an additional $17.5 million under the Working
Capital Facility to fund increases in working capital. At October 24, 1997,
$171.0 million and $47.5 million was outstanding under the Acquisition Facility
and the Working Capital Facility, respectively.
In September 1997, certain current stockholders of AMF Bowling purchased an
aggregate of 1,780,000 shares of Common Stock for $20.00 per share pursuant to
the "overcall" provisions of the Stockholders Agreement. The aggregate $35.6
million capital contribution was used to fund acquisitions, including 15 centers
from Conbow Corporation ("Conbow"), and for other permitted purposes. See
"Business -- AMF Bowling Centers -- Recent Acquisitions and Joint Ventures" and
"Principal Stockholders -- Stockholders Agreement".
The Company funds its cash needs through cash flow from operations,
existing cash balances and the Working Capital Facility and Acquisition
Facility. A substantial portion of the Company's available cash will be applied
to service outstanding indebtedness. For the period beginning January 12, 1996
and ending December 31, 1996, the Company incurred cash interest expense of
$53.0 million, representing 55.5% of EBITDA of $95.5 million for the period. For
the six months ended June 30, 1997, the Company incurred cash interest expense
of $39.8 million, representing 46.4% of EBITDA of $85.8 million for the six
month period.
The Note Indentures and 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. See "Risk Factors -- Substantial Leverage; Indebtedness",
"Risk Factors -- Holding Company Structure", "Risk Factors -- Net Losses",
"Description of Certain Indebtedness" and "Note 9. Long-Term Debt" in the Notes
to Consolidated Financial Statements of AMF Bowling as of December 31, 1996.
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. Based
upon the current level of operations and anticipated growth, management believes
20
<PAGE> 22
that available cash flow, together with available borrowings under the Credit
Agreement and other sources of liquidity, will be adequate to meet the Company's
anticipated future requirements for working capital, capital expenditures,
scheduled payments of principal of, and interest on, its senior debt, and
interest on the Notes. There can be no assurance, however, that the Company's
business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable the Company to
service its indebtedness or that any refinancing would be available on
commercially reasonable terms or at all. See "Risk Factors -- Substantial
Leverage; Indebtedness" and "Risk Factors -- Net Losses".
The Company and the lenders under the Credit Agreement have agreed in
principle to the Proposed Amendments, pursuant to which the Credit Agreement
will be amended and restated as the Third Amended and Restated Credit Agreement,
the Acquisition Facility and a portion of the Term Facilities under the Credit
Agreement will be converted into a non-amortizing revolving Working Capital
Facility the aggregate size of which will be increased to $355.0 million, and a
portion of such revolving credit indebtedness will be repaid with proceeds of
the Offerings. Borrowings under the amended Working Capital Facility will
provide the Company the ability to finance acquisitions or new center
construction. At October 24, 1997, $161.5 million would have been available
under such Working Capital Facility, assuming the Proposed Amendments were
effective at such time and $100.0 million of the proceeds of the Offerings was
used to repay indebtedness under the Credit Agreement. See "Use of Proceeds" and
"Description of Certain Indebtedness".
CAPITAL EXPENDITURES
For the six months ended June 30, 1997, the Company's actual capital
expenditures were $25.6 million compared with $10.2 million for the six months
ended June 30, 1996, on a pro forma basis (capital expenditures of the acquired
business from January 1, 1996 through June 30, 1996). The increase was primarily
due to an ongoing modernization program in Bowling Centers, a new point-of-sale
information system in U.S. Bowling Centers, new Company-wide information
systems, and construction of a new 40 lane, state-of-the-art bowling and family
entertainment center at Chelsea Piers in New York City.
For the period ended December 31, 1996, the Company's capital expenditures
were $16.9 million. For the year ended December 31, 1997, the Company's capital
expenditures are expected to be approximately $50.0 million. For the year ended
December 31, 1995, the Company's capital expenditures were $30.0 million,
including $9.7 million for the construction of three new centers. In 1994, the
Company's capital expenditures were $17.8 million. The 1996 expenditures level
was lower than the 1995 level in part because in 1995 three new bowling centers
were constructed at a cost of approximately $9.7 million.
The Company conducts an ongoing modernization and maintenance program that
results in its centers having upgraded physical plants and generally attractive
appearances. Management believes that its historical spending level of 3.7% of
Bowling Centers revenue is fully adequate to cover all modernization and
maintenance capital expenditures. Management estimates that approximately 2.0%
of Bowling Centers revenue is required for maintenance capital expenditures
alone.
Bowling Products has relatively modest capital investment requirements, and
the Company has followed a relatively conservative approach to capital
investment. Maintenance and replacement investments have been made when clearly
needed, but as close to the end of the useful lives of assets as possible.
Investment in production machinery and equipment has received the highest
investment priority and has focused on projects with projected payback periods
of one to three years. Management is not planning significant changes in the
policy for non-strategic projects.
The Company has the opportunity to acquire and build additional bowling
centers, both in the U.S. and internationally. The Company is prepared to
acquire or build additional bowling centers as appropriate opportunities arise
and is engaged in ongoing evaluations of and discussions with third parties
regarding possible acquisitions. See "Business -- Business Strategy". Management
plans to acquire centers with funding provided under the Credit Agreement to the
extent available. Under
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<PAGE> 23
the Acquisition Facility, as of October 24, 1997, the Company had the ability to
borrow up to an additional $59.0 million (or $161.5 million, assuming the
Proposed Amendments were effective at such time and $100.0 million of the
proceeds of the Offerings was used to repay indebtedness under the Credit
Agreement) for acquisitions or to refinance new center construction, subject to
certain conditions. Management's plans to expand the Bowling Centers operations
are subject to the continuation of favorable economic and financial conditions,
which are generally not within the Company's control. Currently, the Company has
entered into purchase agreements to acquire eighteen centers from several
unrelated sellers. The aggregate purchase price for such centers is expected to
be approximately $38.5 million and is expected to be funded with borrowings
under the Acquisition Facility (or, under the Proposed Amendments, the Working
Capital Facility) and cash generated from operations.
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 Acquisition Facility, and issuances of common
equity. See "Note 9. Acquisitions" in the Notes to Condensed Consolidated
Financial Statements of AMF Bowling as of June 30, 1997, "-- Liquidity" and
"-- Capital Resources".
SEASONALITY AND MARKET DEVELOPMENT CYCLES
The following table sets forth AMF's U.S. constant centers revenue for the
last four quarters:
<TABLE>
<CAPTION>
QUARTER ENDING
---------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Total Revenue............ $38.7 $ 50.5 $58.1 $ 41.1
% of Total............... 20.6% 26.8% 30.8% 21.8%
</TABLE>
On a consolidated basis, revenue and EBITDA of the Company's businesses are
neither highly seasonal nor highly cyclical. The geographic diversity of the
Company's bowling centers, which operate across different regions of the U.S.
and across nine other countries, along with the bowling industry's historic
relative insulation from recessions, has provided stability to the Company's
annual cash flows. Although financial performance of Bowling Centers operations
is seasonal in nature in many countries, with cash flows typically peaking in
the winter months and reaching their lows in the summer months, the geographic
diversity of the Company's bowling centers has helped reduce this seasonality as
bowling centers in certain countries in which AMF operates exhibit different
seasonal sales patterns. As a result of the growing number of U.S. centers
attributable to the Company's acquisition program, the seasonality described
above may be accentuated. In Australia, where AMF has its largest number of
international centers, the reversal of seasons relative to the U.S. helps
mitigate the seasonality in worldwide operations. AMF's cash flows are further
stabilized by the location of many centers in regions where the climates have
high average temperatures and high humidity. In the U.S., during the summer
months when league bowling is generally less active, bowling centers in the
southern U.S. continue to show strong performance. Similarly, in regions with
warm summer climates such as Hong Kong and Mexico, where bowling in
air-conditioned centers may be more attractive than outdoor activities, bowling
centers show strong performance. See "Business -- Business Strategy" and "Note
10. Business Segments" in the Notes to Condensed Consolidated Financial
Statements of AMF Bowling as of June 30, 1997.
Modernization and Consumer Products sales display significant seasonality.
The U.S. market, which is the largest market for Modernization and Consumer
Products, is driven by the beginning of leagues in the fall of each year.
Operators typically sign purchase orders, particularly for replacement
equipment, during the first four months of the year, after they receive winter
league revenue indications. Equipment is shipped and installed during the summer
months, when leagues are generally less active. Sales of modernization
equipment, such as automatic scoring and synthetic
22
<PAGE> 24
lane overlays, are less predictable and fluctuate more than the replacement
equipment because of the four to ten year life cycles of these major products.
The NCP category of bowling products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
Korea and Taiwan) which, in the Company's experience, last five years or more.
These growth patterns do not seem to be closely tied to general economic cycles.
INTERNATIONAL OPERATIONS
For the six months ended June 30, 1997, 26.1% of Bowling Centers revenue
was generated by its international centers. For the year ended December 31,
1996, 33.8% of the Bowling Centers revenue was generated by international
centers. Historically, the Company has not engaged in any significant currency
hedging activities.
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments (such
as restrictions on transfer of funds, import and export duties and quotas,
foreign customs, tariffs and VATs and unexpected changes in regulatory
environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
For the six months ended June 30, 1997, 59.2% of Bowling Products sales
were international sales. For the year ended December 31, 1996, approximately
62.7% of Bowling Products sales were made in international markets. To minimize
credit and international exchange risk, equipment is sold primarily using
letters of credit denominated in U.S. dollars. Letters of credit are usually
received before shipments leave U.S. ports. International sales offices sell
some products in local currency, but adjust pricing, to the extent that market
conditions permit, with changes in exchange rates. This policy enables the
Bowling Products operations generally to avoid any material adverse effect from
exchange rate fluctuations. Management believes that this policy should continue
to protect the Company from material adverse consequences of exchange rate
fluctuations, except in the event of severe international exchange rate
volatility. See "Risk Factors -- International Operations".
BACKLOG; RECENT NCP SALES
The total backlog of NCPs (which include all of the equipment necessary to
outfit one new bowling lane) as of October 19, 1997 was 2,059 units, which is an
approximately 44% increase over the December 31, 1996 backlog of 1,426 units.
The increased backlog was directly attributable to strong NCP orders generated
throughout the world as a result of an aggressive program to increase sales in
early stage and developed markets. The backlog as of October 19, 1997 reflects a
significant number of orders from customers in China, Malaysia, North and South
America, Japan and Europe. Orders of NCPs included in the backlog are subject to
cancellation by customers from time to time in the normal course of business.
Accordingly, the Company has experienced, and expects to continue to experience,
the cancellation of a portion of such orders.
NCP sales for the first six months of 1997 totaled $62.8 million, a 67.5%
increase over the same period in 1996. The significant increase was attributable
to the market development and sales programs implemented in mid-1996 which were
designed to maximize NCP sales activity in a variety of marketplaces of the
world. While China currently represents the largest market for the Company's NCP
sales and backlog, other markets such as South America, India, Poland, Russia
and the Middle East are being developed.
The total NCP backlog of approximately 1,426 units as of December 31, 1996
represented an increase of 486 units from the backlog of 940 units at December
31, 1995. This increase was
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<PAGE> 25
primarily composed of increases in the backlogs in China, the United States and
Malaysia, partially offset by decreases in the backlogs in Korea and Taiwan.
Reflecting the decline in orders in the fourth quarter of 1995,
manufacturing revenue from NCP sales declined very substantially during the
first six months of 1996 representing a decrease of over 59.0% compared with NCP
sales during the first six months of 1995. Overall NCP sales in the second half
of 1996 exceeded NCP sales for the first half of 1996, reflecting continued
progress in establishing a direct sales presence in China. The drop in NCP
revenue for the year ended December 31, 1996 was due to a decrease in NCP unit
sales, particularly in Korea and Taiwan. For the full year 1996, total NCP sales
to Korea decreased by 1,165 units and to Taiwan decreased by 1,323 units
compared with the full year 1995. The decrease in sales to Korea and Taiwan
during 1996 was offset in part by an increase in NCP sales to China of 825
units. Management believes that the initial expansion period in both Korea and
Taiwan peaked during 1994. Management believes that the decreased sales to Korea
were also partially attributable to the effect of the Company's decreased
presence in Korea while it was in the process of establishing a direct sales
office to replace its former distributor. As a result of the maturing state of
the markets in Korea and Taiwan, management does not expect NCP sales to these
markets to return to the levels realized in 1994.
IMPACT OF INFLATION
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have an
adverse effect on the Company to the extent that increased borrowing costs for
floating rate debt may not be offset by increases in revenue.
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. It is the opinion of management that the various asserted claims in
which the Company currently is involved are not likely to have a material
adverse effect on its financial position or results of operations. However, no
assurance can be given as to the ultimate outcome with respect to 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. See "Business -- Environmental Matters".
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the fiscal year ended December 31, 1997, the Company is
required to adopt Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" and No. 129 "Disclosure of Information About Capital
Structure". Effective for the fiscal year ended December 31, 1998, the Company
is required to adopt SFAS No. 130 "Reporting Comprehensive Income" and SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information".
The Company does not expect that adoption of these standards will have a
material impact on the Company's financial position or results of operations.
The adoption of SFAS No. 130 will require reporting comprehensive income, which
includes the foreign currency translation adjustment, in an alternative format
prescribed by the standard.
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<PAGE> 26
BUSINESS
GENERAL
AMF is the largest bowling company in the world. The Company operates 439
bowling centers worldwide which generate over 60 million customer visits per
year. AMF is the U.S. market leader with 353 bowling centers, and is also the
largest operator internationally, with 86 bowling centers in nine countries. In
addition, AMF has been a leader in the bowling equipment industry for over 50
years, having revolutionized ten pin bowling with the introduction of the first
automatic pinspotter in 1946. AMF is one of only two bowling equipment
manufacturers that compete on a global basis. Management believes that AMF
bowling equipment accounts for approximately 41% of the world's installed base
of bowling equipment.
The worldwide bowling center and bowling equipment industry generates
approximately $9 billion in annual revenue and includes approximately 13,000
bowling centers in over 80 countries. The U.S. bowling center and bowling
equipment industry generates in excess of $4 billion of revenue annually and
includes approximately 5,900 centers. Over 100 million people participate
annually in bowling worldwide, according to the FIQ, the official organization
of the worldwide bowling industry. The bowling center industry in both the U.S.
and abroad is highly fragmented. In the U.S., the next closest competitor to
AMF's 353 centers has approximately 111 centers. The next three largest
operators collectively account for only approximately 55 of the total 5,900
centers.
An investor group led by GSCP, an affiliate of Goldman Sachs, acquired AMF
in May 1996 for a total purchase price of approximately $1.37 billion. The
investor group appointed a new management team that has aggressively pursued a
three-part strategy:
- consolidate the U.S. bowling center industry,
- build a nationally recognized brand of superior bowling and
entertainment centers, and
- capitalize on the demand for bowling products and centers in certain
international markets.
Management is utilizing the well-recognized AMF name to build the only
national branded network of bowling and entertainment centers in the U.S.
through a series of initiatives. These include introducing innovative new
products, such as bumper bowling and Xtreme(TM) Bowling, upgrading the physical
appearance of centers, and improving the food and beverage offerings. Since May
1996, AMF's management team has grown the number of AMF's U.S. centers from 207
to 353, an increase of approximately 71%, principally through acquisitions.
AMF is also capitalizing on the strong international growth in the demand
for Bowling Products through direct sales of equipment and the building of new
bowling centers abroad. Strong demand for AMF's New Center Packages of bowling
equipment drove AMF's backlog from 1,426 NCP units at December 31, 1996 to 2,059
NCP units at October 19, 1997, an increase of approximately 44%. Over 90% of the
Company's NCP backlog is to international markets such as China, Japan and
Germany. Further, AMF is acting to accelerate the development of bowling in key
potential markets. During 1997, AMF entered into joint ventures to build and
operate bowling centers equipped with AMF bowling products in China and selected
Southeast Asian countries, and in Brazil and Argentina.
INDUSTRY OVERVIEW
BOWLING CENTERS
Bowlers represent a broad cross-section of the population. Several key
reasons for bowling's popularity in the U.S. and abroad are that it is (i) an
indoor, all-weather sport with year-round appeal, (ii) a lifetime sport suitable
for all age groups, and (iii) low in cost relative to other forms of
entertainment, requiring minimal expenditure on equipment to participate.
Approximately 50% of U.S. bowling revenue is derived from league bowlers, who
register in leagues and commit to
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<PAGE> 27
participate on a scheduled basis generally once a week for a period of up to 40
weeks. Management believes that outside the U.S., league revenue generally
comprises a smaller percentage of bowling revenue.
The bowling center industry is highly fragmented, and consists of two
relatively large bowling center operators, AMF (which has 353 U.S. centers as of
October 24, 1997) and Brunswick Corporation ("Brunswick") (which has
approximately 111 U.S. centers), three medium-sized chains, which together
account for 55 bowling centers, and over 5,300 bowling centers owned by
single-center and small-chain operators, which typically own four or fewer
centers. The top five operators (including AMF) account for less than 9% of the
total number of U.S. bowling centers.
The international bowling center industry is also highly fragmented. There
are typically few chain operators in any one country and a large number of
single-center operators. AMF generally enjoys a relative size advantage (i.e., a
larger number of lanes per center), and is competitively well positioned in
markets such as the United Kingdom and Australia.
In the United States, the operation of bowling centers is a mature industry
characterized by slightly decreasing lineage (games per lane per day) offset by
increasing average price per game and creating additional sources of income.
Management believes that AMF's U.S. lineage has remained relatively stable in
recent years due to AMF's ability to better maintain existing league bowlers and
attract new recreational bowlers.
U.S. BOWLING CENTER INDUSTRY(a)
<TABLE>
<CAPTION>
NUMBER OF
OPERATOR LOCATIONS % OF TOTAL
- ---------------------------------------------------------------------- --------- ----------
<S> <C> <C>
AMF................................................................... 353 6.0%
Brunswick............................................................. 111 1.9
Bowl America.......................................................... 23 0.4
Active West........................................................... 17 0.3
Bowl New England...................................................... 15 0.2
----- -----
Subtotal............................................................ 519 8.8
----- -----
Single-center and small-chain operators............................... 5,381 91.2
----- -----
Total....................................................... 5,900 100.0%
===== =====
</TABLE>
- ---------------
(a) AMF estimate at October 24, 1997.
BOWLING PRODUCTS
The Bowling Products business consists of two categories: (i) New Center
Packages (all of the equipment necessary to outfit a new bowling center or
expand an existing bowling center); and (ii) Modernization and Consumer Products
(which includes modernization equipment which upgrades an existing center, spare
parts, supplies and consumable products). AMF and Brunswick are the only bowling
center equipment manufacturers that compete on a global basis. Management
believes that AMF's bowling equipment accounts for approximately 41% of the
world's installed base of bowling equipment. Other competitors are typically
smaller companies that tend to offer a narrower range of products and are often
regionally focused. See "-- AMF Bowling Products -- Competition".
New Center Package sales follow the trends in the growth of bowling. As
bowling is introduced and becomes popular in new markets, the economics of
constructing and operating bowling centers become attractive to local market
developers and entrepreneurs. Consequently, they build new bowling centers,
which need to be outfitted with equipment, driving demand for NCPs. For at least
the last 15 years, the vast majority of NCP sales have been to international
markets. This
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<PAGE> 28
international trend has been fueled by the growth of bowling in several
countries, particularly China, Taiwan and Korea.
Sales of Modernization and Consumer Products to bowling center operators
who manage the growing installed base of bowling equipment provide a stable base
of recurring revenue. These products include both proprietary and standard spare
parts for existing equipment and other products including pins, shoes, supplies
and modernization equipment. Some of these products, such as bowling pins,
should be replaced on approximately an annual basis to maintain a center, while
certain less frequent investments in other equipment are necessary to modernize
a center and are often required to maintain a customer base.
In the U.S. and Korea, which are mature bowling markets, the population per
lane in 1996 was approximately 2,000 and 3,600, respectively. (These figures are
calculated by dividing total population by number of lanes: total population is
obtained from the Population Reference Bureau; lane numbers are estimates
received from AMF regional sales representatives.) In developing markets, the
population per lane is significantly higher, suggesting the opportunity for
additional growth, although there can be no assurance that these markets will
develop to the same extent as the U.S. or Korea, as only a small number of
markets have achieved this level of development. For example, India has over 25
million people per lane of installed bowling equipment, Poland has over 2
million people per lane, Indonesia has over 650,000 people per lane and Brazil
has over 450,000 people per lane.
BUSINESS STRATEGY
AMF believes that its future growth will depend on the continued success of
its three-part strategy to consolidate the U.S. bowling center industry, build a
nationally recognized AMF brand of superior bowling and entertainment centers,
and capitalize on the demand for bowling products and centers in certain
international markets. The key elements of the strategy are:
CONSOLIDATE THE FRAGMENTED U.S. BOWLING CENTER INDUSTRY
In addition to the 152 centers that AMF has acquired since May 1996, the
Company's dedicated acquisition team has identified approximately 2,000
potential center acquisition candidates in the United States. The Company
employs a regional clustering strategy for its U.S. centers and focuses on
acquiring centers that either fit into existing geographic clusters or could be
the base for forming new clusters. Management believes that none of the
Company's competitors in the U.S. bowling industry is pursuing such an active
acquisition strategy.
IMPROVE ACQUIRED CENTERS' PROFITABILITY
The Company believes that its EBITDA margins are among the highest of
operators of U.S. bowling center chains. This belief is based on publicly
available information and on the Company's knowledge of the industry, due to the
Company's experience in operating the largest U.S. bowling center chain, in
participating in various industry trade associations and in evaluating many U.S.
bowling centers and chains for possible acquisition. Following an acquisition,
management acts to increase profitability by cutting costs and introducing
programs to increase revenue. Specifically, the Company improves marketing
programs, reduces overhead, optimizes staffing, implements improved financial
controls, centralizes management and maintenance of equipment, and centralizes
purchasing. The Company often makes immediate capital and other improvements to
upgrade the centers it acquires which are designed to generate increased revenue
and to further AMF's goal of creating a nationally recognized brand of superior
bowling and entertainment centers.
BUILD A NATIONALLY RECOGNIZED BRAND OF SUPERIOR BOWLING AND ENTERTAINMENT
CENTERS
AMF believes it offers a superior bowling and entertainment experience
utilizing innovative products such as Xtreme(TM) Bowling, which uses
glow-in-the-dark pins and equipment, black lighting
27
<PAGE> 29
and music; bumper bowling for children, in which bumpers prevent balls from
rolling into the gutter; computerized, automatic and color scoring; and time
period discounts for certain groups, such as seniors and children. The Company
is also increasing concourse space in certain of its centers for amusement
games, billiards and other activities. AMF is selectively introducing the
"Family Fun Fest" bowling center, which offers expanded state-of-the-art arcade
and video games. The Company also seeks to increase its profile through the
sponsorship of Special Olympics International and by hosting professional
bowling tournaments.
BUILD NEW CENTERS
The Company has built new bowling centers in attractive markets to enhance
its Bowling Centers business and also to serve as a showcase for the products
manufactured by its Bowling Products business. These centers utilize
state-of-the-art equipment and present bowling as part of a family entertainment
experience and are an integral part of AMF's efforts to build a nationally
branded network of superior bowling and entertainment centers. For instance, in
August 1997, the Company opened a new 40-lane bowling center at Chelsea Piers in
New York, the first new bowling center in Manhattan in 30 years.
IMPROVE FOOD AND BEVERAGE REVENUES
The Company estimates that it has over 60 million customer visits per year
in its bowling centers. The Company is expanding and improving the food and
beverage product offerings at many of its centers to take better advantage of
its significant customer traffic. AMF also capitalizes on purchasing economies
of scale. The Company is one of the nation's leading on-premise accounts for
both Anheuser Busch Companies, Inc. and The Coca-Cola Company.
CAPITALIZE ON GROWING GLOBAL DEMAND FOR BOWLING PRODUCTS
Management believes that AMF's well-established global brand name, the
quality of its products, and its comprehensive service and strong direct sales
force and distribution network will enable it to take advantage of growing NCP
demand worldwide. The Company is focused on sales of NCPs (which comprised 48%
of AMF's Bowling Products sales in 1996) into selected countries with
demonstrated strong demand for bowling products. AMF's backlog of NCPs increased
by approximately 44% from 1,426 units at December 31, 1996 to 2,059 units at
October 19, 1997. Customers outside the U.S. comprise over 90% of the current
NCP backlog total, with the largest portion going to markets such as China,
Japan and Germany. In addition, AMF will continue to acquire and to build
international bowling centers on a selective basis, either to enhance the growth
of bowling in countries which present attractive opportunities for the sale of
bowling products or to enhance AMF's competitive position in a particular
country's bowling center industry.
ACCELERATE THE DEVELOPMENT OF BOWLING IN SELECTED INTERNATIONAL MARKETS
In addition to the international markets that currently have a high demand
for bowling products, management believes that selected international markets
which are in the early development stage have the potential for high growth.
Examples of such early stage markets are India which has over 25 million people
per lane of installed bowling equipment, Poland which has over 2 million people
per lane, Indonesia which has over 650,000 people per lane, and Brazil which has
450,000 people per lane. By contrast, mature markets, such as the U.S. and
Korea, have populations per lane of 2,000 and 3,600, respectively. There can be
no assurance that early stage markets will develop to the same extent as the
United States or Korea, as only a small number of markets have achieved this
level of development. AMF seeks to accelerate the industry's growth in early
stage markets by building showcase centers and conducting promotional programs.
As bowling becomes more popular, local developers and entrepreneurs build new
bowling centers, which are outfitted with equipment, and drive demand for NCPs.
To capitalize on this development cycle, AMF has entered into joint ventures to
build, own and operate up to 20 bowling centers in China and Southeast Asia
28
<PAGE> 30
and 39 bowling centers in Brazil and Argentina. The Company is also developing a
center in India and pursuing opportunities in Russia and Poland.
PROVIDE INNOVATIVE AND QUALITY PRODUCTS
AMF expects to continue to maintain its leadership position in
manufacturing by setting industry standards for quality and innovation.
Management believes that AMF has the fastest pinspotters, the highest scoring
lanes and the most durable pins. Since the development of the first automatic
pinspotter over fifty years ago, AMF has been an innovator in the advancement of
such products as automatic scoring, bumpers, and Xtreme(TM) Bowling. AMF
positions its products as high quality and technologically advanced, allowing it
generally to command premium prices. Management believes that AMF uses its
position as an integrated bowling centers operator and bowling products
manufacturer to AMF's advantage in testing and developing product innovations.
INCREASE MODERNIZATION AND CONSUMER PRODUCT SALES
Management expects AMF to benefit as the worldwide base of bowling centers
grows due to the increased popularity of bowling. AMF's brand name, the large
installed base of AMF bowling equipment, AMF's established direct sales force
and distribution network and its quality products will position AMF to increase
sales of Modernization and Consumer Products. These products, which include
modernization equipment, supplies, spare parts and consumable products,
comprised 52% of AMF's Bowling Products sales in 1996. Furthermore, when AMF
acquires or constructs a center and installs state-of-the-art equipment in that
center, management believes that competing centers may purchase Modernization
and Consumer Products, often from AMF, to remain viable competitors to the AMF
center.
RECENT FINANCIAL PERFORMANCE
AMF's management has significantly improved financial results since the May
1996 acquisition. Revenue and EBITDA increased by 33.9% to $318.1 million and by
30.4% to $85.8 million, respectively, for the first six months of 1997 as
compared to the pro forma results for the first six months of 1996. Net loss for
the first six months of 1997 was $12.2 million compared to a pro forma net loss
of $13.5 million for the first six months of 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Consolidated Items -- Net Income (Loss)".
Management believes that AMF's Bowling Centers and Bowling Products businesses
have been characterized by high EBITDA margins and attractive returns on
investment. Management believes that the Company is well-positioned, due to its
long established industry leadership position, the AMF brand, the Company's
large installed base and its strategy, to develop and capitalize on the growth
potential of bowling worldwide.
AMF BOWLING CENTERS
In the United States, AMF is the largest operator of bowling centers, with
(as of October 24, 1997) 353 bowling centers in 36 states and Puerto Rico.
Outside the United States, AMF is also the largest operator of bowling centers,
with (as of October 24, 1997) 86 bowling centers in nine countries: Australia
(38), the United Kingdom (22), Mexico (9), Japan (4), China (including Hong
Kong) (6), France (3), Spain (2), Switzerland (1), and Canada (1). Of the U.S.
centers, 207 were acquired as part of the Acquisition (seven of which were
subsequently closed), 152 were acquired thereafter and one was constructed. Of
the international centers, 78 were acquired as part of the Acquisition, nine
were acquired thereafter, including seven in the United Kingdom and two in
Australia, and one in Japan was closed.
The Company's number of U.S. centers, regional clustering for U.S. centers
(53 clusters) and average size (an average of 37 lanes per U.S. center versus an
industry average of 21 lanes per U.S. center) provide both additional revenue
opportunities and economies of scale. These revenue opportunities include (i)
scheduling flexibility, which improves lane utilization, (ii) the ability to
support an expanded food and beverage operation and (iii) more concourse space
for food and
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<PAGE> 31
beverage offerings, amusement games, billiards and pro shops. Cost savings
resulting from the economies of scale include (a) the ability to distribute
operating and corporate overhead costs (including marketing and advertising
costs) over a larger revenue base and (b) attractive terms from certain of the
Company's suppliers.
Internationally, AMF's centers also are, on average, larger than those of
its competitors. As with its U.S. operations, the number of centers, geographic
clustering and size result in additional revenue opportunities and economies of
scale. The Company is particularly well positioned in the United Kingdom and
Australia.
The geographic diversity of AMF's Bowling Centers operations across
different regions of the U.S. and across nine other countries, along with the
bowling centers industry's historic relative insulation from recessions, has
provided stability to AMF's annual cash flows. See "Risk Factors -- Seasonality
and Market Development Cycles" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality and Market
Development Cycles".
The Company has an ongoing modernization program that results in its
bowling centers having more upgraded physical plants and attractive appearances
than those of other operators. Management believes that its historical spending
level of approximately 3.7% of Bowling Centers revenue is adequate to cover
routine capital expenditures. Management estimates that only 2% of Bowling
Centers revenue is required for nondiscretionary capital expenditures alone. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Expenditures".
The Bowling Centers business derives its revenue and profits from three
principal sources: (i) bowling, (ii) food and beverage and (iii) other sources,
such as shoe rental, amusement games, billiards and pro shops. In 1996, bowling,
food and beverage and other revenue represented 62%, 24% and 14% of total
Bowling Centers revenue, respectively.
Bowling revenue, the largest portion of a bowling center's revenue and
profitability, is derived from league play, tournament play and recreational
play. Food and beverage sales occur primarily through snack bars that offer
snack foods, soft drinks and, at many centers, alcoholic beverages. AMF has
acquired several centers with large sports bars that provide a large portion of
such centers' revenue. Other revenue is derived from shoe rental and the
operation of amusement games, billiards and pro shops. The shoe rental business
is driven primarily by recreational bowlers who usually do not own a pair of
bowling shoes. Recreational bowlers and non-bowling customers are also the
primary users of amusement games and billiards tables.
RECENT ACQUISITIONS AND JOINT VENTURES
On October 10, 1996, AMF completed the acquisition of 50 bowling centers
and certain related assets and liabilities from Charan. The purchase price of
the Charan acquisition was approximately $106.5 million, subject to certain
adjustments. The Charan acquisition was funded with approximately $40 million
from the sale of equity by AMF Bowling to its existing institutional
stockholders and one of its directors, and with approximately $66.5 million
borrowed under the Acquisition Facility.
On April 24, 1997, AMF completed the acquisition of American Recreation
Centers, Inc. ("ARC"), which operated 43 bowling centers in six states. The
aggregate price of the ARC acquisition was approximately $70.0 million,
including repayment of certain debt and the purchase of related joint venture
interests, and was funded with borrowings under the Acquisition Facility.
In addition, between May 1, 1996 and October 24, 1997, the Company acquired
44 centers in the United States, seven centers in the U.K. and two centers in
Australia from various single-center and small chain operators, and one chain of
15 bowling centers from Conbow. The aggregate purchase price for such
acquisitions was approximately $130.3 million, and was funded with borrowings
under the Acquisition Facility.
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<PAGE> 32
As a result of the foregoing acquisitions and after giving effect to the
construction of one center and the closing of eight centers since the
Acquisition, the Company operated 353 U.S. bowling centers and 86 international
bowling centers as of October 24, 1997.
As of October 24, 1997, after giving effect to such acquisitions, $59.0
million remained available under the Acquisition Facility, of which a portion is
expected to partially fund acquisitions that are scheduled to close by the end
of January 1998.
The Company has entered into purchase agreements to acquire eighteen U.S.
centers from several unrelated sellers. The aggregate purchase price for such
centers is expected to be approximately $38.5 million and is expected to be
funded with borrowings under the Acquisition Facility (or, under the Proposed
Amendments, the Working Capital Facility) and internally generated cash. See
"Management's Discussion and Analysis of Financial Statements and Results of
Operation -- Capital Resources".
In April 1997, the Company entered into a joint venture arrangement with
Hong Leong Corporation Limited, a Singapore based conglomerate ("Hong Leong").
Pursuant to the arrangement, the joint venture, to be owned 50% by the Company
and 50% by Hong Leong, is expected to build and operate up to 20 bowling centers
during the next three years. These bowling centers, the first of which is
expected to open during 1997 in Tianjin, China, will be located in China,
Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
In August 1997, the Company entered into a joint venture arrangement with
Playcenter S.A., a Sao Paulo based amusement and entertainment company
("Playcenter"). Pursuant to the arrangement, the joint venture, owned 50% by the
Company and 50% by Playcenter, is expected to build or assume ownership of, and
operate, up to 39 bowling centers in Brazil and Argentina during the next four
years.
The Company expects its total investments in the joint ventures with Hong
Leong and Playcenter to be approximately $12 million and $14 million,
respectively, and expects each joint venture to finance the construction and
acquisition of bowling centers with financing that is non-recourse to the
Company.
On October 20, 1997, the Company acquired Michael Jordan Golf Company,
Inc., a company formed to build and operate golf practice ranges in select U.S.
locations. In connection with such acquisition, the Company agreed to build two
golf practice ranges by the end of 1999.
COMPETITION (BOWLING CENTERS)
Bowling, both as a competitive sport and a recreational activity, faces
competition from numerous alternative activities. The ongoing success of the
Company's Bowling Centers operations is subject to the level of interest in
bowling, the availability and relative cost of other sport, recreational and
entertainment alternatives, the amount of leisure time enjoyed by potential
players, as well as various other social and economic factors over which AMF has
no control. There can be no assurance that bowling will continue to be popular
or that the Company will continue to compete effectively in the industry. See
"Risk Factors -- Bowling Industry Characteristics", "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Performance by
Business Segment -- Bowling Centers" and "-- Business Strategy".
The Company's centers also compete with other bowling centers. See
"-- Industry Overview". The Company competes primarily through the quality,
appearance and location of its facilities and through the range of amenities and
service level offered.
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<PAGE> 33
FACILITIES (BOWLING CENTERS)
As of October 24, 1997, AMF operated 353 centers in the United States and
86 centers in nine other countries. A regional list of these facilities is set
forth below:
U.S. CENTERS*
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF OWNED/
CLUSTERS CENTERS LEASED
--------- --------- -------
<S> <C> <C> <C>
REGION
Pacific........................................... 8 54 24/30
Great Lakes....................................... 7 51 39/12
Baltimore/Washington.............................. 3 24 15/9
Northeast......................................... 7 52 28/24
Southern.......................................... 10 58 42/16
Mid-Atlantic...................................... 6 40 25/15
Midwest........................................... 6 37 27/10
Texas............................................. 6 35 28/7
--
--- -------
Total........................................... 53 351 228/123
== === =======
</TABLE>
- ---------------
* AMF operates two centers for an unrelated party. The two managed centers are
neither owned nor leased by AMF and, therefore, are not included in the
foregoing table.
INTERNATIONAL CENTERS
<TABLE>
<CAPTION>
NUMBER OF OWNED/
LOCATIONS LEASED
--------- ------
<S> <C> <C>
COUNTRY
Australia....................................................... 38 23/15
United Kingdom.................................................. 22 3/19
Mexico.......................................................... 9 5/4
China (including Hong Kong)..................................... 6 0/6
Japan........................................................... 4 0/4
France.......................................................... 3 0/3
Spain........................................................... 2 0/2
Switzerland..................................................... 1 0/1
Canada.......................................................... 1 1/0
--
-----
Total......................................................... 86 32/54
== =====
</TABLE>
AMF's leases are subject to periodic renewal. Thirty-five of the U.S.
Bowling Centers have leases which expire during the next three years. Twenty-two
of such leases have renewal options. Nineteen of the international Bowling
Centers have leases which expire during the next three years. Twelve of such
leases have renewal options. AMF generally does not have difficulty renewing
leases.
EMPLOYEES (BOWLING CENTERS)
As of July 31, 1997, Bowling Centers operations had approximately 12,882
full- and part-time employees. The Company believes that its relations with its
Bowling Centers employees are satisfactory.
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<PAGE> 34
NUMBER OF EMPLOYEES
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEES
----------
<S> <C>
COUNTRY
United States................................................ 10,624
------
International:
Australia................................................. 1,144
United Kingdom............................................ 550
Mexico.................................................... 220
China (including Hong Kong)............................... 122
Japan..................................................... 48
France.................................................... 77
Spain..................................................... 33
Switzerland............................................... 13
Canada.................................................... 51
------
Total International.................................. 2,258
------
Total Worldwide...................................... 12,882
======
</TABLE>
AMF BOWLING PRODUCTS
AMF is one of only two bowling center equipment manufacturers that compete
on a global basis. Management believes that AMF bowling equipment accounts for
approximately 41% of the world's installed base of bowling center equipment and
has supplied or is supplying equipment to an estimated 10,000 bowling centers in
over 50 countries. The Company manufactures and sells bowling center equipment,
including automatic pinspotters, automatic scoring equipment, bowling pins,
lanes, ball returns, and certain spare and modernization parts, and resale
products, such as bowling balls, bags, shoes and other bowlers' aids, sold
primarily through pro shops.
The bowling products business consists of two categories: (i) New Center
Packages (all of the equipment necessary to outfit a new bowling center or
expand an existing bowling center); and (ii) Modernization and Consumer Products
(which includes modernization equipment, spare parts, supplies and consumable
products).
AMF positions its products as high quality, technologically advanced
products, allowing AMF generally to command premium prices. AMF's long history
of bowling equipment innovation began over 50 years ago when AMF revolutionized
ten pin bowling with the introduction of the automatic pinspotter. Today, AMF
manufactures 8800 Gold (the fastest pinspotter for play conducted under
conditions specified by the American Bowling Congress) and 8290 pinspotters,
and, management believes, the highest-scoring lanes and the most durable pins.
The superior speed of AMF's pinspotter directly influences the amount of bowling
revenue a bowling center can generate, and the reliability and ease of repair is
an important marketing tool against sellers of refurbished equipment. AMF's HPL
synthetic lanes, introduced in 1988, are the performance leaders. In the annual
American Bowling Congress tournament, where AMF and Brunswick supply the
equipment in alternating years, every major scoring record has been set on AMF's
synthetic lanes. Internal tests demonstrate that AMF pins are more durable under
stress conditions and are less likely to break. In general, AMF's products are
developed through internal research and development efforts. AMF holds over 40
U.S. patents for its various proprietary products and technologies.
MODERNIZATION AND CONSUMER PRODUCTS
The potential customers for Modernization and Consumer Products include all
bowling centers in operation today, and the number of these potential customers
will continue to grow as the number
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<PAGE> 35
of centers increases. In order for a bowling center to remain competitive and to
satisfy its customers, the center operator must make certain periodic
investments in the center's equipment. Some of these investments, such as
replacing pins, must be made on approximately an annual basis. These annual
investments represent relatively modest expenditures necessary to maintain the
center. Other equipment, such as automatic scoring systems, replacement lanes
and upgraded automated lane maintenance equipment, require less frequent but
more significant investments by center operators. Management believes that many
of these modernizations are necessary for a center to maintain its existing
customer base.
NEW CENTER PACKAGES
New Center Packages include the equipment necessary to outfit new or expand
existing bowling centers, such as lanes, pinspotters, automatic scoring, bowler
seating, ball returns, masking units and bumpers. AMF is focused on sales of
NCPs into selected countries with demonstrated strong demand for bowling
products, such as China, Japan and Germany. In addition, AMF believes that
markets, such as Argentina, Brazil, Indonesia, India, Poland and other selected
markets in Asia, Eastern Europe and South America, hold the potential for high
growth over the next several years, but are currently in the early stages of the
industry's development. As bowling is introduced in a market and becomes more
popular, local developers and entrepreneurs build new bowling centers, which are
outfitted with equipment, and drive demand for NCPs. To capitalize on this
development cycle, AMF has entered into the joint ventures with Hong Leong and
Playcenter described under "-- AMF Bowling Centers -- Recent Acquisitions and
Joint Ventures". See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Backlog; Recent NCP Sales".
BILLIARDS
In addition to bowling equipment and supplies, AMF manufactures and sells
PlayMaster billiards tables. PlayMaster sells an extensive line of home
billiards tables and a limited line of commercial billiards tables. For the six
months ended June 30, 1997, PlayMaster had revenue of $3.8 million.
COMPETITION (BOWLING PRODUCTS)
AMF is one of the largest manufacturers of bowling center equipment in the
world. Management estimates that AMF accounts for approximately 41% of the
worldwide installed base of bowling center equipment.
AMF and Brunswick are the two largest manufacturers of bowling center
equipment, and are the only full-line manufacturers of NCPs and Modernization
and Consumer Products that compete on a global basis. The Company also competes
with smaller, often regionally focused companies in certain product lines. For
example, DACOS, a Korean-based manufacturer, competes with the Company in the
Asia-Pacific region, primarily in China and Korea.
Because of bowling equipment's relatively long useful life, used equipment
can be refurbished and sold, often to builders of new centers. The Company
actively purchases and resells used equipment in new, high growth markets in
order to compete with refurbishers who often are U.S. based.
PROPERTIES (BOWLING PRODUCTS)
As of October 24, 1997, AMF owned or leased facilities at five locations in
the U.S., four of which are used for its Bowling Products business and one of
which is used for its billiards business. AMF also leased facilities at 28
international locations, which are used as offices or warehouses. These
facilities are listed below.
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<PAGE> 36
U.S. FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION PRODUCTS SQUARE FOOTAGE LEASED
- ----------------------- -------------------------------------------- -------------- -------
<S> <C> <C> <C>
Richmond, VA........... World headquarters,
pinspotters, automatic scoring, synthetic
lanes, other capital equipment, 360,000 Owned
consumer products, used pinspotters 54,000 Leased
Lowville, NY........... Pins and wood lanes 121,000 Owned
50,000 Owned
Golden, CO............. Lane maintenance equipment (Century) 50,000 Leased
Bland, MO.............. Billiard tables (PlayMaster) 37,210 Owned
33,373 Leased
32,000 Owned
24,000 Owned
16,000 Owned
11,000 Leased
Miami, FL.............. Office 200 Leased
</TABLE>
INTERNATIONAL FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION FUNCTIONS SQUARE FOOTAGE LEASED
- ---------------------------------------------------- ---------- -------------- -------
<S> <C> <C> <C>
Emu Plains, Australia............................... Office 400 Leased
Warehouse 10,100 Leased
Brussels, Belgium................................... Office 1,000 Leased
Ontario, Canada..................................... Office 400 Leased
Beijing, China...................................... Office 390 Leased
Guangzhou, China.................................... Office 380 Leased
Warehouse 1,650 Leased
Hong Kong........................................... Office 2,500 Leased
Office 1,125 Leased
Shanghai, China..................................... Office 400 Leased
Levallois-Perret, France............................ Office 984 Leased
Warehouse 1,470 Leased
Mainz-Kastel, Germany............................... Office 656 Leased
Warehouse 1,650 Leased
Bangalore, India.................................... Office 1,050 Leased
New Delhi, India.................................... Office 2,000 Leased
Yokohama, Japan..................................... Office 4,626 Leased
Warehouse 8,880 Leased
Service
Center 1,634 Leased
Seoul, Korea........................................ Office 5,119 Leased
Warehouse 7,472 Leased
Mexico City, Mexico................................. Office 1,300 Leased
Warehouse 11,431 Leased
Warsaw, Poland...................................... Office 209 Leased
Granna, Sweden...................................... Office 4,515 Leased
Warehouse 12,705 Leased
Hemel Hempstead, United Kingdom..................... Office 11,500 Leased
Warehouse 11,770 Leased
</TABLE>
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<PAGE> 37
EMPLOYEES (BOWLING PRODUCTS)
As of July 31, 1997, the Bowling Products business had approximately 995
full-time employees. The Company believes that its relations with its Bowling
Products employees are satisfactory. Employees are divided along functional
lines as shown in the table below.
EMPLOYEES
<TABLE>
<CAPTION>
SEGMENT NUMBER OF EMPLOYEES
--------------------------------------------------------- -------------------
<S> <C>
Manufacturing............................................ 653
---
Sales
Australia.............................................. 8
Americas............................................... 48
Europe................................................. 53
Asia-Pacific........................................... 192
Japan.................................................. 41
---
Total Sales......................................... 342
---
Total Worldwide................................ 995
===
</TABLE>
EMPLOYEES (CORPORATE)
As of July 31, 1997, the Company had approximately 142 full-time corporate
employees. The Company believes that its relations with its corporate employees
are satisfactory.
LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of its business, including employment
discrimination claims, workers' compensation claims, and personal injury claims
from customers of Bowling Centers. In certain such actions, plaintiffs request
punitive or other damages that may not be covered by insurance. In the opinion
of management, the various asserted claims and litigation in which the Company
currently is involved will not have a material adverse effect on its financial
position or results of operations. However, no assurance can be given as to the
ultimate outcome with respect to such claims and litigation.
On March 5, 1996, the defendant in an action entitled Northland Bowl and
Sports Center, Inc. and Recreation Association, II v. Golden Giant, Inc., d/b/a
Golden Giant Building Systems, Court of Common Pleas, Centre County,
Pennsylvania, asserted a third-party claim against AMF Bowling Products, Inc.
(formerly named AMF Bowling, Inc.), a wholly owned, indirect subsidiary of AMF
Bowling ("AMF Bowling Products"), and other parties. Defendant, Golden Giant,
Inc. ("Golden Giant"), a construction company, was originally named as the sole
defendant by a bowling center (not owned or operated by the Company) in
connection with the collapse of such center's roof in early 1994. Golden Giant
named AMF Bowling Products as an additional defendant, charging it with
negligence and breach of implied warranty for installing scoring monitors (four
years before the roof collapsed) on a portion of the building that allegedly
could not adequately support the additional weight of the equipment. The bowling
center plaintiff claims total damages in amounts exceeding $3.5 million, and
Golden Giant asserts that, if the plaintiff is entitled to any recovery, it
should be in whole or part against AMF Bowling Products. On March 25, 1997, an
order was entered dismissing AMF Bowling Products from the lawsuit, which
continues against the other defendants. The plaintiff has appealed the order
dismissing AMF Bowling Products, and in October 1997, the appellate court denied
the plaintiff permission to appeal.
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<PAGE> 38
REGULATORY MATTERS
There are no unique federal or state regulations applicable to bowling
center operations or equipment manufacturing. State and local governments
require establishments to hold permits to sell alcoholic beverages, and,
although regulations vary from state to state, once permits are issued, they
generally remain in place indefinitely (except for routine renewals) without
burdensome reporting or supervision other than revenue tax reports. See "Risk
Factors -- International Operations".
ENVIRONMENTAL MATTERS
AMF'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. AMF believes that its operations are in material compliance with the
terms of all applicable environmental laws and regulations as currently
interpreted.
The Company currently and from time to time is subject to environmental
claims. It is the opinion of management that the various asserted claims in
which the Company currently is involved are not likely to have a material
adverse effect on its financial position or results of operations. However, no
assurance can be given as to the ultimate outcome with respect to such claims.
AMF has received notices of potential liability under CERCLA or analogous
state statutes at eight off-site disposal facilities. AMF believes that the
entity involved was a de minimis contributor of waste at each of these sites. In
addition, in connection with the Acquisition, AMF Reece Inc., which is owned by
certain of the prior owners of AMF, will be required to indemnify AMF for the
liability at three of these sites under an indemnity agreement which certain of
the prior owners of AMF were required by such agreement to procure. AMF does not
believe that CERCLA liabilities for these eight sites in the aggregate will have
a material adverse effect on AMF's business or financial condition taken as a
whole.
AMF 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 AMF's products, or
providing its services, or otherwise adversely affect the demand for its
products or services. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental Matters".
CERTAIN TRANSACTIONS
Messrs. Friedman and O'Toole, each of whom is a Managing Director of
Goldman Sachs, and Mr. Sacerdote, who is a limited partner of The Goldman Sachs
Group, are directors of AMF Bowling, AMF Group Holdings and Bowling Worldwide.
Mr. Friedman is also Chairman of AMF Bowling. Goldman Sachs and its affiliates
together currently beneficially own and will, following consummation of the
Offerings, continue to own a majority of the outstanding Common Stock. See
"Principal Stockholders". Goldman Sachs and its affiliates were the initial
purchasers of the debt issued by Bowling Worldwide in connection with the
Acquisition and received an underwriting discount of approximately $19.0 million
in connection with the purchase and resale of certain senior subordinated notes
and senior subordinated discount notes, each issued in March 1996, which were
subsequently exchanged by the holders thereof for the Senior Subordinated Notes
(as hereinafter defined) and the Senior Subordinated Discount Notes (as
hereinafter defined). Goldman Sachs also served as financial advisor to the
owners of the Predecessor Company in connection with the Acquisition and
received a fee in the form of 10-year warrants (the "Warrants") to purchase
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<PAGE> 39
870,000 shares of the Common Stock, on a fully diluted basis, at a purchase
price of $.01 per share. The Warrants were valued for accounting purposes at
approximately $8.7 million.
In connection with the Credit Agreement and the amendments thereto, Goldman
Sachs Credit Partners, L.P., an affiliate of Goldman Sachs, acted as Syndication
Agent, Goldman Sachs Credit Partners, L.P. and Citicorp Securities, Inc. acted
as Arrangers, and Citibank, N.A. is acting as Administrative Agent. Total fees
payable to Goldman Sachs Credit Partners, L.P. aggregate approximately $10.0
million, and such entity is reimbursed for expenses in connection with such
services. Goldman Sachs Credit Partners, L.P. is also a lender under the Credit
Agreement. See "Description of Certain Indebtedness -- Credit Agreement".
Goldman Sachs also received a cash fee of $5.0 million from AMF in connection
with the Acquisition and was reimbursed for related expenses. Blackstone
Management Partners L.P., an affiliate of Blackstone Group, and Kelso & Company,
L.P., an affiliate of Kelso, each received an investment banking fee of $1.0
million, and Bain Capital, Inc., an affiliate of Bain, received a fee of
$300,000, each in connection with the Acquisition.
Bowling Worldwide and Goldman Sachs are parties to an engagement letter
pursuant to which Goldman Sachs are retained as Bowling Worldwide's financial
advisor to provide investment banking and financial advisory services, including
in connection with any acquisitions, dispositions or financings. Pursuant to the
engagement, Bowling Worldwide has agreed to reimburse Goldman Sachs for their
out-of-pocket expenses and indemnify Goldman Sachs in connection with their
services arising under the engagement.
AMF Bowling has also entered into two interest rate cap agreements with
Goldman Sachs Capital Markets, L.P. ("GSCM"), an affiliate of Goldman Sachs,
both of which were executed to hedge the Company's exposure to fluctuations in
the interest rates applicable to borrowings under the Credit Agreement. The
Company paid a fee of $3.6 million to GSCM in 1996 in connection with the
execution of the first of these transactions, which "caps" the interest rate on
$500 million principal amount of debt at 6.5% until April 1998 and at 7.5% from
May 1998 through October 1998. The Company paid a fee of $15,000 to GSCM in
respect of the second transaction executed on July 2, 1997, which caps the rate
applicable to $100 million in debt at 7.0% until March 31, 1998. See "Note 9.
Long-Term Debt" in the Consolidated Financial Statements of AMF Bowling as of
December 31, 1996 and "Note 6. Long-Term Debt" in the Condensed Consolidated
Financial Statements of AMF Bowling as of June 30, 1997.
The Company retained Michael Stanard Design, Inc. ("MSD"), a market
consultant, to provide marketing and related services in 1996 for an aggregate
of $114,000 and in 1997 for an aggregate of $446,000 to date. A majority owner
of MSD is H. Michael Stanard, who is Mr. Stanard's brother. A substantial
portion of such amounts were reimbursement of costs for materials, travel,
printing and other out-of-pocket expenses.
The Company has agreed to pay a fee of $300,000 to Goldman Sachs for their
representation of the Company in connection with the Company's lease of its new
bowling center at Chelsea Piers in New York.
AMF and the Stockholders have entered into the Stockholders Agreement and
the Registration Rights Agreement. See "Principal Stockholders -- Stockholders
Agreement" and "Principal Stockholders -- Registration Rights Agreement".
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT AGREEMENT
Bowling Worldwide is party to a Credit Agreement amended and restated as of
June 30, 1997 (and as further amended, modified, renewed, refunded, replaced or
refinanced, in whole or in part, from time to time, the "Credit Agreement") with
Goldman Sachs, their affiliate Goldman Sachs
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<PAGE> 40
Credit Partners, L.P., Citibank, N.A. ("Citibank") and its affiliates Citicorp
and Citicorp USA, Inc. and certain other banks, financial institutions and
institutional lenders (collectively, the "Lenders") providing for (i) senior
secured term loan facilities aggregating $580.0 million (the "Term Facilities"),
(ii) a senior secured multiple-draw term facility of $230.0 million (the
"Acquisition Facility") and (iii) a senior secured revolving credit facility of
up to $50.0 million (the "Working Capital Facility", and together with the Term
Facilities and the Acquisition Facility, the "Senior Facilities"). In connection
with such financing, Goldman Sachs Credit Partners, L.P. acted as Syndication
Agent, Goldman Sachs Credit Partners, L.P. and Citicorp Securities, Inc. acted
as Arrangers, and Citibank is acting as Administrative Agent. The initial
borrowings under the Credit Agreement were used to partially fund the
Acquisition. In connection with the Offerings, Bowling Worldwide and the lenders
under the Credit Agreement have approved in principle an amendment to the Credit
Agreement that will constitute the Third Amended and Restated Credit Agreement
(the "Proposed Amendments"). The Proposed Amendments will, among other things,
(i) convert the Acquisition Facility and a portion of the Term Facilities under
the Credit Agreement into a non-amortizing Working Capital Facility which
matures in 2002 and the aggregate size of which will be increased to $355.0
million, (ii) extend the final maturity of the Working Capital Facility and
certain of the Term Facilities, (iii) reduce the interest rates under the Credit
Agreement, (iv) amend certain covenants contained in the Credit Agreement to
provide Bowling Worldwide and its subsidiaries with additional operating
flexibility and (v) permit a portion of the proceeds of the Offerings to be
applied to repayment of the Notes.
The following summary of the material provisions of the Credit Agreement is
qualified in its entirety by reference to the full text of the Credit Agreement.
A copy of the Credit Agreement giving effect to the Proposed Amendments has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
THE FACILITIES
The Term Facilities consist of the following three tranches: (i) a Term
Loan Facility of $250.0 million, (ii) an Amortization Extended Loan
("AXELs(SM)") Series A Facility of $190.0 million and (iii) an AXELs(SM) Series
B Facility of $140.0 million. The Term Loan Facility bears interest, at Bowling
Worldwide's option, at Citibank's customary base rate or at Citibank's
Eurodollar rate, in each case plus a margin which varies in accordance with a
performance pricing grid which is based on the Total Debt to EBITDA Ratio (as
defined in the Credit Agreement) for the Rolling Period (as hereinafter defined)
then most recently ended. As of June 30, 1997 pro forma for the Offerings, the
applicable margin for base rate loans was 1.25% and for Eurodollar rate loans
was 2.25%. The AXELs(SM) Series A Facility bears interest, at Bowling
Worldwide's option, at Citibank's customary base rate plus 1.875% or at
Citibank's Eurodollar rate plus 2.875%. The AXELs(SM) Series B Facility bears
interest, at Bowling Worldwide's option, at Citibank's customary base rate plus
2.125% or at Citibank's Eurodollar rate plus 3.125%. The Term Facilities provide
for quarterly amortization until final maturity. The Term Loan Facility has a
term of five years, the AXELs(SM) Series A Facility has a term of seven years
and the AXELs(SM) Series B Facility has a term of eight years. The Proposed
Amendments will (i) reduce the Term Loan Facility to $130.0 million and
substantially increase the Working Capital Facility, as discussed below, (ii)
extend the final maturity of the Working Capital Facility and the Term Loan
Facility to March 31, 2002 and (iii) reduce the applicable interest rates. Based
on the Total Debt to EBITDA Ratio as of June 30, 1997 pro forma for the
Offerings, the Proposed Amendments would result in base rate margins of .75%,
1.00% and 1.25%, and Eurodollar rate margins of 1.75%, 2.00% and 2.25%, for the
Term Loan Facility, the AXELs(SM) Series A Facility and the AXELs(SM) Series B
Facility, respectively.
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<PAGE> 41
Average amounts outstanding and average borrowing rates for the period
ended June 30, 1997, were as follows (dollars in millions):
<TABLE>
<CAPTION>
OUTSTANDING AVERAGE AVERAGE
JUNE 30, AMOUNTS BORROWING
DESCRIPTION MATURITY DATES 1997 OUTSTANDING RATES
- ----------------------------------- --------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Term Loan Facility................. March 31, 2001 $210,000 $ 232,620 8.15%
AXELs(SM) Series A Facility........ March 31, 2003 $187,750 $ 189,007 8.54%
AXELs(SM) Series B Facility........ March 31, 2004 $138,125 $ 104,759 8.77%
</TABLE>
Under the terms currently in effect, Bowling Worldwide will be required to
make scheduled amortization payments on the Term Facilities as follows (dollars
in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS TERM AXELS(SM) AXELS(SM)
ENDING LOAN SERIES A SERIES B
DECEMBER 31, FACILITY FACILITY FACILITY TOTAL
----------------------------------------- -------- -------- -------- ------
<S> <C> <C> <C> <C>
1997.................................. $ 38.1 $ 2.0 $ 2.3 $ 42.4
1998.................................. 43.1 2.0 2.2 47.3
1999.................................. 51.3 2.0 2.2 55.5
2000.................................. 67.5 2.0 2.3 71.8
2001.................................. 28.1 50.8 2.2 81.1
2002.................................. -- 92.5 2.3 94.8
2003.................................. -- 37.5 78.9 116.4
2004.................................. -- -- 46.8 46.8
------ ------ ------ ------
$228.1 $188.8 $139.2 $556.1
====== ====== ====== ======
</TABLE>
The Proposed Amendments will not affect the scheduled amortization payments
on the AXELs(SM) Series A Facility or the AXELs(SM) Series B Facility, but will
reduce the scheduled amortization payments on the Term Loan Facility to $7.5
million on December 31, 1997 and thereafter as follows (dollars in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING
DECEMBER 31,
----------------------------------------------------------------------------
<S> <C>
1998..................................................................... $ 23.1
1999..................................................................... 28.1
2000..................................................................... 30.0
2001..................................................................... 30.0
2002..................................................................... 11.3
------
$122.5
======
</TABLE>
In addition, under the terms currently in effect, Bowling Worldwide will be
required to make prepayments which permanently reduce the availability under the
Senior Facilities under certain circumstances, including upon certain asset
sales, issuances of debt and public issuance of equity securities of AMF
Bowling. Bowling Worldwide will also be required to make prepayments which
permanently reduce the availability under the Senior Facilities in an amount
equal to (i) 75% (to be reduced to 50% for years in which Bowling Worldwide's
Total Debt to EBITDA Ratio for the prior 12 months is less than 4.0 to 1.0) of
Bowling Worldwide's Excess Cash Flow (as defined in the Credit Agreement) or
(ii) during each of the first three years after the closing of the Senior
Facilities, if less than the amount described in clause (i), the amount by which
Bowling Worldwide's Excess Cash Flow for such year exceeds $10.0 million (during
the first two years after closing) or $20.0 million (during the third year after
closing). The Proposed Amendments will require for such prepayment based on
Excess Cash Flow to permanently reduce the availability under the Senior
Facilities only if
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<PAGE> 42
the Total Debt to EBITDA Ratio is greater than or equal to 5.50 to 1.0, and will
reduce the percentage referred to in clause (i) of the preceding sentence from
75% to 50%. The Proposed Amendments will also provide that the first $100
million of the net cash proceeds of the Offerings will be used to repay
borrowings that, under such Proposed Amendments, would constitute a portion of
the expanded Working Capital Facility (and thus would be available for
reborrowing), and the remaining net cash proceeds anticipated from the Offerings
may be used, at Bowling Worldwide's option, to redeem a portion of the Senior
Subordinated Notes and/or the Senior Subordinated Discount Notes and/or to repay
borrowings under the Working Capital Facility. See "Use of Proceeds".
The terms currently in effect also provide for a $50.0 million Working
Capital Facility for general corporate purposes and a $230.0 million Acquisition
Facility to finance acquisitions and to refinance new center construction.
Borrowings under these facilities are subject to Bowling Worldwide meeting
certain pro forma financial covenants and limitations imposed on the amount
borrowed, including that the amount borrowed under the Acquisition Facility may
not exceed 4.5 times the Deemed EBITDA (as defined in the Credit Agreement) of
the business to be acquired or the newly constructed center.
The existing Acquisition Facility has a term of five years and will begin
to amortize in December 1999, with final maturity at March 31, 2001. The
Acquisition Facility bears interest, at Bowling Worldwide's option, at
Citibank's customary base rate or at Citibank's Eurodollar rate, in each case,
plus a margin which varies in accordance with a performance pricing grid which
is based on the Total Debt to EBITDA Ratio for the Rolling Period then most
recently ended. As of June 30, 1997, the applicable margin for base rate loans
was 1.50% and for Eurodollar rate loans was 2.50%. As of October 24, 1997,
$171.0 million was outstanding under the Acquisition Facility.
The Proposed Amendments (i) will convert the entire Acquisition Facility
and a portion of the Term Loan Facility into an amended Working Capital Facility
having an aggregate amount of $355.0 million, of which $193.5 million is
expected to be outstanding after giving effect to the Offerings and the related
repayment of $100.0 million under the Working Capital Facility and (ii) will
eliminate the above described limitation on the amount that may be borrowed for
an acquisition or new construction (although the pro forma compliance with
covenants requirement will remain).
The Working Capital Facility, as currently in effect, matures in 2001, is
fully revolving until its final maturity and bears interest, at Bowling
Worldwide's option, at Citibank's customary base rate or at Citibank's
Eurodollar rate, in each case, plus a margin which varies in accordance with a
performance pricing grid which is based on the Total Debt to EBITDA Ratio for
the four fiscal quarter rolling period then most recently ended. As of June 30,
1997, the applicable margin for base rate loans was 1.50% and for Eurodollar
rate loans was 2.50%. As of October 24, 1997, $47.5 million was outstanding
under the Working Capital Facility. The Proposed Amendments will extend the
maturity of the Working Capital Facility to March 31, 2002 and increase the
amount of the Working Capital Facility to $355.0 million and will decrease the
interest rates thereunder. Based on the Total Debt to EBITDA Ratio as of June
30, 1997, the Proposed Amendments, without giving pro forma effect to the
Offerings, would result in a base rate margin of 0.875% and would result in a
Eurodollar rate margin of 1.875%.
The Senior Facilities are (and following the Proposed Amendments will
continue to be) guaranteed by AMF Group Holdings and by each of Bowling
Worldwide's present and future domestic Subsidiaries (as defined in the Credit
Agreement) and are secured by all of the stock of Bowling Worldwide and Bowling
Worldwide's present and future domestic Subsidiaries and Second-Tier
Subsidiaries (as defined in the Credit Agreement), by 66% of the stock of
Bowling Worldwide's present and future international subsidiaries and by
substantially all of Bowling Worldwide's and its present and future domestic
Subsidiaries' present and future property and assets.
In accordance with GAAP, the Company will incur after-tax extraordinary
charges totalling $21.5 million arising from the Third Amended and Restated
Credit Agreement and the resulting write-
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off of costs previously incurred to obtain bank financing for the Acquisition,
the premium associated with the portion of the Senior Subordinated Discount
Notes expected to be redeemed with the proceeds of the Offerings and the
write-off of the portion of deferred financing costs attributable to the Senior
Subordinated Discount Notes expected to be so redeemed. Costs incurred with
respect to the Third Amended and Restated Credit Agreement will be amortized
over seven years.
COVENANTS
The Credit Agreement contains certain financial covenants, as well as
additional affirmative and negative covenants, constraining Bowling Worldwide.
Under the terms currently in effect, Bowling Worldwide must maintain a minimum
EBITDA (as defined in the Credit Agreement) of not less than the sum of (i) an
amount ranging from $150 million for the "Rolling Period" (defined as a calendar
quarter together with the three consecutive immediately preceding calendar
quarters) ending June 30, 1997, to $200 million for the Rolling Period ending
March 31, 2004 and thereafter, and (ii) the EBITDA Adjustment Amount (as defined
in the Credit Agreement) for such Rolling Period, which is equal to 80% of the
aggregate amount of the EBITDA of each bowling center acquired or constructed by
Bowling Worldwide or any of its Subsidiaries after May 1, 1996 and acquired or
constructed at least 15 months prior to such time of determination.
Bowling Worldwide must also maintain a Cash Interest Coverage Ratio
(defined in the Credit Agreement as the ratio of (i) consolidated EBITDA of
Bowling Worldwide and its Subsidiaries during a Rolling Period, as modified with
respect to certain bowling centers acquired or constructed after May 1, 1996
("Modified Consolidated EBITDA") to (ii) cash interest payable on all Debt (as
defined in the Credit Agreement) of Bowling Worldwide and its Subsidiaries) at
an amount ranging from not less than 2.00 for the Rolling Period ending June 30,
1997, to not less than 2.50 for the Rolling Period ending September 30, 2004 and
thereafter. Bowling Worldwide is required to maintain a Fixed Charge Coverage
Ratio (defined in the Credit Agreement as the ratio of (i) Modified Consolidated
EBITDA less the sum of (a) cash taxes paid plus (b) Capital Expenditures (as
defined in the Credit Agreement) made by Bowling Worldwide and its Subsidiaries
during such Rolling Period to (ii) the sum of (a) cash interest payable on all
Debt plus (b) principal amounts of all Debt payable by Bowling Worldwide and its
Subsidiaries during such Rolling Period) at an amount ranging from not less than
1.05 for the Rolling Period ending June 30, 1997, to not less than 1.10 for the
Rolling Period ending March 31, 2004 and thereafter. A Senior Debt to EBITDA
Ratio (defined in the Credit Agreement as the ratio of Consolidated Debt, as
defined in the Credit Agreement (other than Subordinated Debt and Hedge
Agreements, as defined in the Credit Agreement), of Bowling Worldwide and its
Subsidiaries to Modified Consolidated EBITDA for that Rolling Period) must be
maintained at levels ranging from not more than 3.75 for the Rolling Period
ending June 30, 1997 to not more than 1.50 for the Rolling Period ending March
31, 2004 and thereafter. A Total Debt to EBITDA Ratio (defined in the Credit
Agreement as the ratio of consolidated total Debt (other than Hedge Agreements)
of Bowling Worldwide and its Subsidiaries to Modified Consolidated EBITDA) must
be maintained at levels ranging from not more than 6.50 for the Rolling Period
ending June 30, 1997 to not more than 4.00 for the Rolling Period ending March
31, 2004 and thereafter. In each case, the above-mentioned ratios are calculated
on a quarterly basis. The Proposed Amendments will change certain of the above
financial ratios and covenants to reflect the capital structure which will
result from the Offerings and the application of the proceeds therefrom.
Negative covenants under the Senior Facilities prohibit Bowling Worldwide
and its Subsidiaries from incurring any liens (except for those created under
the loan documents or otherwise permitted under the Credit Agreement, including
those securing Bowling Worldwide's obligations as borrower on other indebtedness
not to exceed $5 million at any time outstanding). Bowling Worldwide and its
Subsidiaries are also prohibited from incurring any debt, other than (in the
case of Bowling Worldwide) debt owed to its Subsidiaries or in respect of hedge
agreements not entered into for speculative purposes or (in the case of any
Subsidiary) debt owed to Bowling Worldwide or any of
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<PAGE> 44
its wholly owned Subsidiaries, to the extent permitted under the Credit
Agreement or (in the case of either Bowling Worldwide or its Subsidiaries) debt
secured by permitted liens, capitalized leases not to exceed $10 million at any
time outstanding and any debt existing at the time of the Acquisition, among
other things. Bowling Worldwide and its Subsidiaries may not incur any
obligations under leases having a term of one year or more that would cause
their direct and contingent liabilities for any 12 months to exceed the sum of
(i) $25 million, (ii) the product of (x) $200,000 and (y) the number of leased
bowling centers acquired by Bowling Worldwide or any Subsidiaries after May 1,
1996 and (iii) in each calendar year after 1996, an amount equal to 4% of the
amount permitted by this provision in the immediately preceding calendar year.
Bowling Worldwide is also prohibited from entering into a merger of which it is
not the survivor or to sell, lease, or otherwise transfer its assets other than
in the ordinary course of business, except as otherwise permitted by the Credit
Agreement. Investments by Bowling Worldwide or its Subsidiaries in any other
person are also limited by formulas set forth in the Credit Agreement. The
negative covenants also relate to the payment of dividends, prepayments of, and
amendments of the terms of, other debt (including the Notes), amendment of
Related Documents (as defined in the Credit Agreement), ownership changes,
negative pledges, partnerships, speculative transactions, capital expenditures
and payment restrictions affecting subsidiaries. Bowling Worldwide is also
subject to certain financial and other reporting requirements. The Proposed
Amendments will not materially affect the foregoing covenants.
Under the Proposed Amendments, Bowling Worldwide is prohibited from making
a material change in the nature of its existing business, except that it may
have up to $50 million invested at any one time in golf driving ranges and other
golf-related activities.
So long as Bowling Worldwide is not in default of the covenants contained
in the Credit Agreement, it may (i) declare and pay dividends in common stock,
(ii) declare and pay cash dividends to the extent necessary to make payments
under certain noncompete agreements with stockholders of the Predecessor
Company, (iii) declare and pay cash dividends for general administrative
expenses not to exceed $0.25 million and (iv) declare and pay cash dividends not
to exceed $2.0 million for the repurchase of Common Stock. As of June 30, 1997,
Bowling Worldwide is in compliance with all of its covenants.
SENIOR SUBORDINATED NOTES
Bowling Worldwide has outstanding $250.0 million in principal amount of
10 7/8% Series B Senior Subordinated Notes due 2006 (the "Senior Subordinated
Notes") and $291.4 million principal amount of 12 1/4% Series B Senior
Subordinated Discount Notes due 2006 (the "Senior Subordinated Discount Notes",
and together with the Senior Subordinated Notes, the "Notes"). The following
description of the Notes and the Note Indentures is a summary and is qualified
in its entirety by the provisions of the Notes and the Note Indentures, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
The Senior Subordinated Notes will mature on March 15, 2006. Interest
thereon accrues from the date of issuance at an annual rate of 10 7/8% and is
payable in cash semiannually in arrears on March 15 and September 15 of each
year which commenced on September 15, 1996.
The Senior Subordinated Discount Notes will mature on March 15, 2006 at a
fully-accreted value of $452 million. The Senior Subordinated Discount Notes
will result in an effective yield of 12 1/4% per annum, computed on a semiannual
bond equivalent basis. No interest will be payable prior to March 15, 2001.
Commencing March 15, 2001, interest will accrue and be payable in cash
semiannually in arrears on March 15 and September 15 of each year beginning with
September 15, 2001.
Bowling Worldwide's payment obligations under the Notes are jointly and
severally guaranteed on a senior subordinated basis by Bowling Worldwide's
direct and indirect domestic subsidiaries
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<PAGE> 45
and by any other subsidiaries of Bowling Worldwide that act as guarantors under
the Credit Agreement (collectively, the "Guarantors").
The guarantees of the Notes are subordinated to the guarantees of the
indebtedness under the Credit Agreement and certain other indebtedness
(collectively, the "Senior Debt"). The Notes are general, unsecured obligations
of Bowling Worldwide, are subordinated in right of payment to all Senior Debt of
Bowling Worldwide, and rank pari passu with all existing and future subordinated
debt of Bowling Worldwide. The claims of the holders of the Notes will be
effectively subordinated to all other indebtedness and other liabilities
(including trade payables and capital lease obligations) of Bowling Worldwide's
subsidiaries that are not Guarantors and through which Bowling Worldwide will
conduct a portion of its operations.
Prior to March 15, 1999, up to $100 million in aggregate principal amount
of Senior Subordinated Notes will be redeemable at the option of Bowling
Worldwide, on one or more occasions, from the net proceeds of public or private
sales of common stock of, or contributions to the common equity capital of,
Bowling Worldwide, at a price of 110.875% of the principal amount of the Senior
Subordinated Notes, together with accrued and unpaid interest, if any, to the
date of redemption; so long as at least $150 million in aggregate principal
amount of Senior Subordinated Notes remains outstanding after such redemption.
Similarly, prior to March 15, 1999, the Senior Subordinated Discount Notes will
be redeemable at the option of Bowling Worldwide, on one or more occasions, from
the net proceeds of public or private sales of common stock of, or contributions
to the common equity capital of, Bowling Worldwide, at a price of 112.25% of the
accreted value of the Senior Subordinated Discount Notes; so long as at least
$150 million in accreted value of Senior Subordinated Discount Notes remains
outstanding after such redemption. The Proposed Amendments will enable Bowling
Worldwide to use a portion of the proceeds of the Offerings to redeem Senior
Subordinated Notes and/or Senior Subordinated Discount Notes. See "Use of
Proceeds".
The indenture governing the Senior Subordinated Notes and the indenture
governing the Senior Subordinated Discount Notes (collectively, the "Note
Indentures") contain certain covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries (as defined in the
applicable Note Indenture) to incur additional indebtedness and issue
Disqualified Stock (as defined in the applicable Note Indenture), pay dividends
or distributions or make investments or make certain other Restricted Payments
(as defined in the applicable Note Indenture), enter into certain transactions
with affiliates, dispose of certain assets, incur liens securing pari passu and
subordinated indebtedness of Bowling Worldwide and engage in mergers and
consolidations. As of June 30, 1997, Bowling Worldwide is in compliance with all
of its covenants under the Note Indentures.
44
