<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10 - Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ------- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------- --------
COMMISSION FILE NUMBER 001-12131
---------------------
AMF GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3873272
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
8100 AMF DRIVE
RICHMOND, VIRGINIA 23111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
--------------
(804) 730-4000
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
-------- ------
At May 1, 1997, 100 shares of common stock, par value of $.01, of the
Registrant were outstanding.
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53,066 $ 43,568
Accounts and notes receivable, net of allowance for
doubtful accounts of $4,354 and $4,492, respectively 46,693 42,625
Inventories 51,367 41,001
Deferred taxes and other 15,000 11,178
----------- -----------
Total current assets 166,126 138,372
Property and equipment, net 647,342 630,796
Deferred financing costs, net 39,011 40,595
Goodwill, net 766,246 771,146
Other assets 22,563 12,964
=========== ===========
Total assets $ 1,641,288 $ 1,593,873
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 34,311 $ 31,563
Accrued expenses 63,248 54,357
Income taxes payable 1,186 2,220
Long-term debt, current portion 44,250 42,376
----------- -----------
Total current liabilities 142,995 130,516
Long-term debt 1,084,306 1,048,877
Other long-term liabilities 2,753 1,851
Deferred income taxes 6,877 3,895
----------- -----------
Total liabilities 1,236,931 1,185,139
----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock (par value $.01, 100 shares
issued and outstanding) -- --
Paid-in capital 429,450 429,450
Retained deficit (19,972) (19,565)
Equity adjustment from foreign
currency translation (5,121) (1,151)
----------- -----------
Total stockholder's equity 404,357 408,734
----------- -----------
Total liabilities and stockholder's equity $ 1,641,288 $ 1,593,873
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 3
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC. PREDECESSOR
THREE MONTHS ENDED MARCH 31, COMPANY
---------------------------- THREE MONTHS
1997 1996 * ENDED 03/31/96
---- ------ --------------
<S> <C> <C> <C>
Operating revenues $ 157,589 $ -- $ 123,343
--------- --------- ---------
Operating expenses:
Cost of goods sold 38,050 -- 30,700
Bowling center operating expenses 55,342 -- 42,216
Selling, general, and administrative expenses 14,000 -- 11,568
Depreciation and amortization 20,500 -- 10,969
--------- --------- ---------
Total operating expenses 127,892 -- 95,453
--------- --------- ---------
Operating income 29,697 -- 27,890
Nonoperating expenses:
Interest expense 27,672 1,600 3,802
Other expenses, net 1,461 -- 186
Interest income (649) (1,000) (394)
--------- --------- ---------
Total nonoperating expenses 28,484 600 3,594
--------- --------- ---------
Income (loss) before income taxes 1,213 (600) 24,296
Provision for income taxes 1,120 -- 2,720
========= ========= =========
Net income (loss) $ 93 $ (600) $ 21,576
========= ========= =========
</TABLE>
* For the period from the inception date of January 12, 1996 through March
31, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC. PREDECESSOR
THREE MONTHS ENDED MARCH 31, COMPANY
-------------------------------- THREE MONTHS
1997 1996 * ENDED 03/31/96
---- ------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 93 $ (600) $ 21,576
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 20,500 -- 10,969
Deferred income taxes (410) -- --
Amortization of bond discount 8,301 800 --
Loss on the sale of property and equipment, net 106 -- --
Changes in assets and liabilities:
Accounts and notes receivable, net (4,128) -- 7,606
Receivables and payables - affiliates -- -- (7,861)
Inventories (10,265) -- (4,404)
Other assets (4,190) (9,600) (1,232)
Accounts payable and accrued expenses 12,094 800 (915)
Income taxes payable (1,029) -- (1,470)
Other long-term liabilities 2,495 -- --
--------- -------- ---------
Net cash provided by (used in) operating activities 23,567 (8,600) 24,269
--------- -------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (33,641) -- --
Purchases of property and equipment (6,907) -- (4,408)
Proceeds from the sale of property and equipment 215 -- 811
--------- -------- ---------
Net cash used in investing activities (40,333) -- (3,597)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 29,002 499,900 7,638
Proceeds from deposit from seller -- 15,000 --
Payments on notes payable - stockholders, net -- -- (15,921)
Capital contribution -- 100,000 --
Dividend to Parent (500) -- --
Distributions to stockholders -- -- (9,137)
Noncompete obligations (166) -- --
--------- -------- ---------
Net cash provided by (used in) financing activities 28,336 614,900 (17,420)
--------- -------- ---------
Effect of exchange rates on cash (2,072) -- (215)
--------- -------- ---------
Net increase in cash 9,498 606,300 3,037
Cash and cash equivalents at beginning of period 43,568 -- 9,732
--------- -------- ---------
Cash and cash equivalents at end of period $ 53,066 $606,300 $ 12,769
========= ======== =========
</TABLE>
* For the period from the inception date of January 12, 1996 through March
31, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the interim periods. The interim financial information and notes thereto
should be read in conjunction with the April 30, 1996, and December 31, 1995
audited combined financial statements of AMF Bowling Group (the "Predecessor
Company") and the December 31, 1996 audited consolidated financial statements of
the Company presented in the Form 10-K Annual Report filed with the U.S.
Securities and Exchange Commission on March 28, 1997. The results of
operations for the three months ended March 31, 1997, are not necessarily
indicative of results to be expected for the entire year.
AMF Group Inc. (the "Company") is principally engaged in two business segments:
(i) the ownership and operation of bowling centers, consisting of 271 U.S.
bowling centers and 84 international bowling centers ("Bowling Centers") as of
March 31, 1997, and (ii) the manufacture and distribution of bowling equipment
such as automatic pinspotters, automatic scoring equipment, bowling pins,
lanes, ball returns, certain spare and replacement parts, and the resale of
allied products such as bowling balls, bags, shoes, and certain other spare and
replacement parts ("Bowling Products"). The principal markets for bowling
equipment are U.S. and international bowling center operators.
The Company is a wholly owned subsidiary of AMF Group Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of AMF Holdings Inc. (the
"Parent"). Holdings and the Company are Delaware corporations organized by GS
Capital Partners II, L.P., and certain other investment funds (collectively,
"GSCP") affiliated with Goldman, Sachs & Co. ("Goldman Sachs") to effect the
acquisition (described below). Holdings and the Parent are holding companies
only. The primary assets in each are comprised of investments in direct and/or
indirect subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between
Holdings and the stockholders (the "Sellers") of the Predecessor Company, on
May 1, 1996 (the "Closing Date"), Holdings acquired the Predecessor Company
through a stock purchase by Holdings' subsidiaries of all the outstanding stock
of the separate domestic and foreign corporations that constituted
substantially all of the Predecessor Company and through the purchase of
certain of the assets of the Predecessor Company's bowling center operations in
Spain and Switzerland (the "Acquisition"). Holdings did not acquire the assets
of two bowling centers located in Madrid, Spain and Geneva, Switzerland (both
of which were retained by the Sellers).
The purchase price for the Acquisition was approximately $1.373 billion, less
approximately $2.0 million representing debt of the Predecessor Company which
remained in place following the closing of the Acquisition. The Acquisition
was accounted for by the purchase method of accounting, pursuant to which the
purchase price was allocated among the acquired assets and liabilities in
accordance with estimates of fair market value on the date of acquisition.
5
<PAGE> 6
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated results of operations of Holdings have been presented for the
three months ended March 31, 1997, and for the period from the inception date
of January 12, 1996 through March 31, 1996. Additionally, the combined results
of operations of the Predecessor Company for the three months ended March 31,
1996, have been presented. All significant intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements. All dollar amounts are in thousands, except where otherwise
indicated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
estimates made by management include allowances for obsolete inventory,
uncollectible accounts receivable, realization of goodwill and other deferred
assets, litigation and claims, product warranty costs, and self-insurance
costs. Actual results could differ from those estimates.
Goodwill
As a result of the Acquisition and in accordance with the purchase method of
accounting for the Acquisition, the Company recorded goodwill representing the
excess of the purchase price over the allocation among the acquired assets and
liabilities in accordance with estimates of fair market value on the date of
acquisition. Goodwill is being amortized over 40 years. Amortization expense
was $4,900 for the three months ended March 31, 1997. Accumulated amortization
at March 31, 1997 was $17,970.
6
<PAGE> 7
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3. PRO FORMA RESULTS OF OPERATIONS
A pro forma statement of income for Holdings is presented below for the three
months ended March 31, 1996, as if the Acquisition of the Predecessor Company
had occurred on January 1, 1996, and is based on the Predecessor Company's
statement of income for the three months ended March 31, 1996, Holdings'
statement of income for the period from the inception date of January 12, 1996
through March 31, 1996, and adjustments giving effect to the Acquisition under
the purchase method of accounting as described in the notes below. The pro
forma results are for illustrative purposes only and do not purport to be
indicative of the actual results which occurred, nor are they indicative of
future results of operations.
PRO FORMA RESULTS OF OPERATIONS (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR AMF GROUP
AMF GROUP COMPANY HOLDINGS INC.
HOLDINGS INC. THREE MONTHS THREE MONTHS
PERIOD ENDED ENDED PRO FORMA ENDED
MARCH 31, 1996 (a) MARCH 31, 1996 ADJUSTMENTS MARCH 31, 1996
------------------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
Operating revenues: $ - $ 123.3 $ (0.6) (b) $ 122.7
---------------- -------------- ----------- ---------
Operating expenses:
Cost of goods sold - 30.7 (0.1) (b) 30.6
Bowling center operating expenses - 42.2 (0.5) (b) 41.7
Selling, general, and administrative expenses - 11.5 - 11.5
Depreciation and amortization - 11.0 2.3 (c) 13.3
---------------- -------------- ----------- ---------
Total operating expenses - 95.4 1.7 97.1
---------------- -------------- ----------- ---------
Operating income (loss) - 27.9 (2.3) 25.6
Nonoperating expenses:
Interest expense 1.6 3.8 21.2 (d) 26.6
Other expenses, net - 0.2 - 0.2
Interest income (1.0) (0.4) - (1.4)
---------------- ------------- ------------ ---------
Income (loss) before income taxes (0.6) 24.3 (23.5) 0.2
Provision (benefit) for income taxes - 2.7 (2.6) (e) 0.1
================ ============= ============ =========
Net income (loss) $ (0.6) $ 21.6 $ (20.9) $ 0.1
================ ============= ============ =========
</TABLE>
- ---------
(a) Represents the results of Holdings for the period from the inception date
of January 12, 1996 through March 31, 1996.
(b) To reflect the impact of Holdings not acquiring the operations of one
bowling center in Switzerland and one bowling center in Spain.
(c) To reflect the increase in depreciation and amortization expense from the
allocation of the purchase price to fixed assets and goodwill and a change
in the method of depreciation of fixed assets. The Predecessor Company
principally used the double declining balance method. The amount of the
pro forma adjustment for depreciation was determined using the
straight-line method over the estimated lives of the assets acquired.
Goodwill is being amortized over 40 years.
(d) To reflect the incremental interest expense associated with the issuance
of debt which partially funded the Acquisition.
(e) To give effect to the change in status of the U.S. and international
subsidiaries of Holdings from S corporations to taxable
corporation under the Internal Revenue Code upon consummation of the
Acquisition.
7
<PAGE> 8
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4. INVENTORIES
Inventories at March 31, 1997, and December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------------- ------------------
<S> <C> <C>
Bowling Products, at FIFO:
Raw materials $ 13,019 $ 11,683
Work in progress 1,607 2,335
Finished goods and spare parts 32,346 23,195
Bowling Centers, at average cost:
Merchandise inventory 4,395 3,788
----------------- ------------------
$ 51,367 $ 41,001
================= ==================
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1997, and December 31, 1996, consists of
the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------------------- ----------------
<S> <C> <C>
Land $ 92,416 $ 90,512
Buildings and improvements 276,903 265,461
Equipment, furniture, and fixtures 318,639 304,067
Other 4,994 2,631
--------------------- ----------------
692,952 662,671
Less: accumulated depreciation and amortization (45,610) (31,875)
--------------------- ----------------
$ 647,342 $ 630,796
===================== ================
</TABLE>
Depreciation and amortization expense related to property and equipment was
$13,735 and $10,969 for the three months ended March 31, 1997 and 1996,
respectively.
8
<PAGE> 9
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt at March 31, 1997 and December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Bank debt $ 593,625 $ 564,625
Exchange senior subordinated notes 250,000 250,000
Exchange senior subordinated discount notes 282,964 274,663
Mortgage and equipment notes 1,967 1,965
----------- --------------
Total debt 1,128,556 1,091,253
Current maturities (44,250) (42,376)
=========== ==============
Total long-term debt $1,084,306 $ 1,048,877
=========== ==============
</TABLE>
Deferred Financing Costs
Costs incurred to obtain bank financing and issue bond financing for the
Acquisition are amortized over the lives of the various types of debt. Bank
financing costs are amortized over eight years and bond financing costs are
amortized over ten years using the effective interest rate method. An interest
rate cap agreement included in deferred financing costs is amortized over the
term of the agreement beginning November 1, 1996, and ending October 31, 1998.
Amortization expense for financing costs was $1,129 for the three months ended
March 31, 1997. Interest expense for the interest rate cap agreement was $455
for the three months ended March 31, 1997.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Litigation and Claims
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at bowling centers.
Management believes that the ultimate resolution of such matters will not have
a material adverse effect on Holdings' results of operations or financial
position. While the ultimate outcome of the litigation and claims against the
Company cannot presently be determined, management believes the Company has
made adequate provision for possible losses.
9
<PAGE> 10
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8. EMPLOYEE BENEFIT PLANS
The total number of shares of Parent Common Stock currently reserved and
available for grant under the AMF Holdings Inc. 1996 Stock Incentive Plan is
1,767,151. The number of Stock Options outstanding to senior management, other
employees, and directors at March 31, 1997, after giving effect to forfeited
Stock Options, total 1,169,000 at an exercise price of $10.00 per share.
On February 28, 1997, one executive, Robert L. Morin, resigned from all
positions with the Company and its related entities. As part of Mr. Morin's
severance arrangements, Parent repurchased all of the shares of Parent Common
Stock owned by Mr. Morin and all options held by Mr. Morin were canceled. The
Company paid a dividend of $500 to the Parent for the repurchase of Mr. Morin's
shares.
NOTE 9. ACQUISITIONS
Between January 1, 1997 and March 31, 1997, the Company acquired nine bowling
centers in the United States and six bowling centers in the United Kingdom,
all of which were previously owned by several unrelated single-center and
small-chain operators. The total purchase price was approximately $31.1
million, including certain adjustments and transaction costs, and was funded
with $19.0 million from available borrowing under the Company's Acquisition
Facility and the remainder from internally generated cash.
On April 24, 1997, the Company completed the acquisition of American Recreation
Centers, Inc. ("ARC"), which operates 43 bowling centers in six states. The
aggregate price of the ARC acquisition was approximately $70 million, including
repayment of certain debt and the purchase of related joint venture interests,
and is being funded from available borrowing under the Acquisition Facility.
In addition, between April 1, 1997, and April 30, 1997, the Company acquired
three bowling centers in the United States from two unrelated sellers. The
aggregate purchase price was approximately $4.8 million, and was funded with
$4.0 million from available borrowing under the Acquisition Facility and the
remainder from internally generated cash.
As a result of the acquisitions, and after giving effect to the closing of one
center, the Company owned and operated 317 U.S. bowling centers and 84
international bowling centers as of April 30, 1997.
In April 1997, the Company entered into a $40 million joint venture arrangement
with Hong Leong Corporation Limited, a Singapore based conglomerate. Pursuant
to the arrangement, the joint venture, 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 the Philippines,
Malaysia, Vietnam, Indonesia, Thailand and China.
10
<PAGE> 11
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10. BUSINESS SEGMENTS
The Company operates in two major lines of business: operation of bowling
centers and manufacturing of bowling and related products. Information
concerning operations in these businesses for the three months ended March 31,
1997 and 1996, is presented below (in millions):
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997
BOWLING CENTERS BOWLING PRODUCTS
--------------------------- --------------------------
INTER- SUB- INTER- SUB- ELIM-
U.S. NATIONAL TOTAL U.S. NATIONAL TOTAL CORPORATE INATIONS TOTAL
--- -------- ----- ---- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 82.6 $ 25.9 $108.5 $ 23.5 $ 25.6 $ 49.1 $ - $ - $ 157.6
Intersegment sales - - - 2.0 0.9 2.9 - - 2.9
Operating income 23.0 2.8 25.8 6.7 0.5 7.2 (3.6) 0.3 29.7
Identifiable assets 630.8 308.4 939.2 620.3 50.0 670.3 32.2 (0.4) 1,641.3
Depreciation and amortization 11.6 4.5 16.1 4.5 0.3 4.8 - (0.4) 20.5
Capital expenditures 4.0 1.5 5.5 0.9 0.2 1.1 0.4 (0.1) 6.9
Research and development expense - - - 0.2 - 0.2 - - 0.2
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996
BOWLING CENTERS BOWLING PRODUCTS
------------------------- ----------------------------
INTER- SUB- INTER- SUB- ELIM-
U.S. NATIONAL TOTAL U.S. NATIONAL TOTAL CORPORATE INATIONS TOTAL
--- -------- ----- ---- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 58.1 $ 25.0 $ 83.1 $ 18.3 $ 21.9 $40.2 $ - $ - $123.3
Intersegment sales - - - 2.1 0.7 2.8 - - 2.8
Operating income 15.3 5.7 21.0 6.8 0.4 7.2 - (0.3) 27.9
Depreciation and amortization 8.5 1.9 10.4 0.8 0.1 0.9 - (0.3) 11.0
Capital expenditures 3.5 1.2 4.7 0.3 - 0.3 - (0.6) 4.4
Research and development expense - - - 0.4 - 0.4 - - 0.4
</TABLE>
NOTE 11. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial information presents:
- Consolidating balance sheet as of March 31, 1997, and consolidating
statements of income and cash flows for the three months ended March 31,
1997.
- Elimination entries necessary to combine the entities comprising
Holdings.
The Exchange Notes are jointly and severally guaranteed on a full and
unconditional basis by Holdings and by the first and second-tier subsidiaries
of the Company. Third-tier subsidiaries of the Company have not provided
guarantees.
11
<PAGE> 12
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
ASSETS --------- --------- ------------ ------------
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 50,906 $ 2,160 $ -- $ 53,066
Accounts and notes receivable, net
of allowance for doubtful accounts 44,962 1,731 -- 46,693
Accounts receivable - intercompany 3,077 3,045 (6,122) --
Inventories 49,629 1,738 -- 51,367
Deferred taxes and other 13,563 1,437 -- 15,000
------------ ----------- ------------- ------------
Total current assets 162,137 10,111 (6,122) 166,126
Notes receivable - intercompany 15,157 9,163 (24,320) --
Property and equipment, net 602,511 43,786 1,045 647,342
Investment in subsidiaries 57,328 -- (57,328) --
Goodwill and other assets 826,916 904 -- 827,820
------------ ----------- -------------- ------------
Total assets $ 1,664,049 $ 63,964 $ (86,725) $ 1,641,288
============ =========== ============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 31,949 $ 2,362 $ -- $ 34,311
Accounts payable - intercompany 409 5,713 (6,122) --
Accrued expenses 58,375 4,873 -- 63,248
Income taxes payable 729 457 -- 1,186
Long-term debt, current portion 44,250 -- -- 44,250
------------ ----------- -------------- ------------
Total current liabilities 135,712 13,405 (6,122) 142,995
Long-term debt 1,076,806 7,500 -- 1,084,306
Notes payable - intercompany 9,689 14,631 (24,320) --
Other long-term liabilities 2,753 -- -- 2,753
Deferred income taxes 5,846 1,031 -- 6,877
------------ ----------- -------------- ------------
Total liabilities 1,230,806 36,567 (30,442) 1,236,931
------------ ----------- -------------- ------------
Commitments and contingencies
Stockholder's equity:
Common stock 289 3,940 (4,229) --
Paid-in capital 454,506 24,522 (49,578) 429,450
Retained earnings (deficit) (11,685) 4,793 (13,080) (19,972)
Equity adjustment from foreign
currency translation (9,867) (5,858) 10,604 (5,121)
------------- ----------- -------------- ------------
Total stockholder's equity 433,243 27,397 (56,283) 404,357
------------- ----------- -------------- ------------
Total liabilities and stockholder's equity $ 1,664,049 $ 63,964 $ (86,725) $ 1,641,288
============= =========== ============== ============
</TABLE>
12
<PAGE> 13
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ 147,740 $ 10,287 $ (438) $157,589
-------------- ------------- ------------ -----------
Operating expenses:
Cost of goods sold 36,960 1,383 (293) 38,050
Bowling center operating expenses 54,713 715 (86) 55,342
Selling, general, and administrative expenses 8,540 5,460 - 14,000
Depreciation and amortization 19,258 1,395 (153) 20,500
-------------- ------------- ------------ -----------
Total operating expenses 119,471 8,953 (532) 127,892
-------------- ------------- ------------ -----------
Operating income 28,269 1,334 94 29,697
Nonoperating expenses:
Interest expense 27,661 11 - 27,672
Other expense, net 808 653 - 1,461
Interest income (603) (46) - (649)
Equity in earnings of subsidiaries (48) - 48 -
-------------- ------------- ------------ -----------
Total nonoperating expenses 27,818 618 48 28,484
-------------- ------------- ------------ -----------
Income before income taxes 451 716 46 1,213
Provision for income taxes 452 668 - 1,120
============== ============= ============ ===========
Net income (loss) $ (1) $ 48 46 $ 93
============== ============= ============ ===========
</TABLE>
13
<PAGE> 14
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1) $ 48 $ 46 $ 93
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 19,258 1,395 (153) 20,500
Deferred income taxes (412) 2 - (410)
Amortization of bond discount 8,301 - - 8,301
Equity in earnings of subsidiaries (48) - 48 -
Loss on the sale of property and equipment, net 106 - - 106
Changes in assets and liabilities:
Accounts and notes receivable (3,525) (603) - (4,128)
Receivables and payables - affiliates (5,689) 5,689 - -
Inventories (9,826) (439) - (10,265)
Other assets (4,410) 161 59 (4,190)
Accounts payable and accrued expenses 9,969 2,125 - 12,094
Income taxes payable (960) (69) - (1,029)
Other long-term liabilities 2,495 - - 2,495
------------ ---------- ----------- ------------
Net cash provided by operating activities 15,258 8,309 - 23,567
------------ ---------- ----------- ------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (18,217) (15,424) - (33,641)
Purchases of property and equipment (5,824) (1,083) - (6,907)
Proceeds from sale of property and equipment 215 - - 215
------------ ----------- ----------- ------------
Net cash used in investing activities (23,826) (16,507) - (40,333)
------------ ---------- ----------- ------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 21,502 7,500 - 29,002
Dividend to Parent (500) - - (500)
Noncompete obligations (166) - - (166)
------------ ---------- ----------- ------------
Net cash provided by financing activities 20,836 7,500 - 28,336
------------ ---------- ----------- ------------
Effect of exchange rates on cash (1,039) (1,033) - (2,072)
------------ ---------- ----------- ------------
Net increase (decrease) in cash 11,229 (1,731) - 9,498
Cash and cash equivalents at beginning of period 39,677 3,891 - 43,568
------------ ---------- ----------- ------------
Cash and cash equivalents at end of period $ 50,906 $ 2,160 $ - $ 53,066
============ ========== =========== ============
</TABLE>
14
<PAGE> 15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information in this report relating to future prospects and performance is
"forward-looking" and, as such, is subject to certain risks and uncertainties
that could cause actual results to differ materially. Potential risks and
uncertainties include but are not limited to: (i) continuing competitive
pricing in the markets in which the Company competes; (ii) the gain or loss of
significant customers or the decrease in demand from existing customers; (iii)
the timing of significant orders received from customers; (iv) seasonal
changes in the demand for the Company's products; (v) changes in the Company's
product sales mix; (vi) continued success in the integration of recently
acquired businesses; and (vii) the continued development and growth of new
bowling markets and the Company's ability to identify and exploit the growth in
such emerging markets prior to market saturation. In addition, the highly
leveraged nature of the Company may impair its ability to finance its future
operations and capital needs and its flexibility to respond to changing
business and economic conditions and business opportunities.
BACKGROUND
This discussion should be read in conjunction with the "Selected Financial
Data" and the Consolidated Financial Statements (unaudited) and Notes thereto
included elsewhere within this report.
Management believes that a more meaningful comparison of the results of
operations for the three months ended March 31, 1997 and 1996, is on a pro
forma rather than an historical basis. This is due 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. Accordingly, the
following discussion of the results of operations will include comparisons of
the three months ended March 31, 1997, with Predecessor Company results for the
three months ended March 31, 1996, on a pro forma basis.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with generally
accepted accounting principles.
GENERAL
The Company is principally engaged in two business segments: (i) the
ownership and operation of 271 domestic bowling centers and 84 international
bowling centers ("Bowling Centers") as of March 31, 1997; and (ii) the design,
manufacture and sale of bowling center equipment, including
15
<PAGE> 16
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, and certain spare and replacement parts, and the resale of allied
products such as bowling balls, bags, shoes and certain other spare and
replacement parts ("Bowling Products").
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, this Management's Discussion and Analysis
of Financial Condition and Results of Operations separately discusses results
of Bowling Centers and Bowling Products.
The results of Bowling Centers, Bowling Products and the combined group are set
forth below. The two European centers that were not acquired by the Company,
as discussed in "Note 1. Organization" in the Notes to the Consolidated
Financial Statements, 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.
Results below are presented before intersegment eliminations, as 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.
ACQUISITIONS
The Company is prepared to acquire or build additional bowling centers as
appropriate opportunities arise. The Company is engaged in ongoing evaluations
of and discussions with third parties regarding possible acquisitions and joint
ventures. Management's plans to expand the bowling center operations are
subject to the continuation of favorable economic and financial conditions,
which are generally not within the Company's control.
Between January 1, 1997 and April 30, 1997, the Company acquired 55 bowling
centers in the United States and six bowling centers in the United Kingdom,
all of which were previously owned by several unrelated single-center and
small-chain operators. In April 1997, the Company entered into a $40 million
joint venture arrangement with Hong Leong Corporation Limited, a Singapore
based conglomerate. See "Note 9. Acquisitions" in the Notes to Consolidated
Financial Statements for a discussion of these transactions.
16
<PAGE> 17
AMF GROUP HOLDINGS INC.
SELECTED FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
(IN MILLIONS OF DOLLARS)
PRO FORMA
AMF GROUP AMF GROUP PREDECESSOR
HOLDINGS INC. HOLDINGS INC. COMPANY
------------- ------------- -------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
CONSOLIDATED
- ------------
Total operating revenue $ 157.6 $ 122.7 $ 123.3
--------- ----------- -----------
Cost of goods sold 38.1 30.6 30.7
Bowling center operating expenses 55.3 41.7 42.2
Selling, general and administrative expenses 14.0 11.5 11.5
Depreciation and amortization 20.5 13.3 11.0
--------- ----------- -----------
Operating income 29.7 25.6 27.9
Interest expense, gross 27.7 26.6 3.8
Other (income) expense, net 0.8 (1.2) (0.2)
--------- ----------- -----------
Income before income taxes 1.2 0.2 24.3
Provision for income taxes 1.1 0.1 2.7
---------- ----------- -----------
Net income $ 0.1 $ 0.1 $ 21.6
========= =========== ===========
BOWLING CENTERS (before intersegment eliminations)
- ---------------
Total operating revenue $ 108.5 $ 82.5 $ 83.1
--------- ----------- -----------
Cost of goods sold 9.4 6.8 6.9
Bowling center operating expenses 55.6 42.1 42.6
Selling, general, and administrative expenses 1.6 1.2 2.2
Depreciation and amortization 16.1 9.2 10.4
--------- ----------- -----------
Operating income 25.8 23.2 21.0
Interest expense, gross 14.8 14.9 3.7
Other expense, net 4.2 0.1 0.1
--------- ----------- -----------
Income before income taxes 6.8 8.2 17.2
Provision for income taxes 2.9 0.1 2.4
--------- ----------- -----------
Net income $ 3.9 $ 8.1 $ 14.8
========= =========== ===========
BOWLING PRODUCTS (before intersegment eliminations)
- ----------------
Total operating revenue $ 52.0 $ 43.0 $ 43.0
Cost of goods sold 31.2 25.6 25.6
--------- ----------- -----------
Gross profit 20.8 17.4 17.4
Selling, general and administrative expenses 8.8 7.8 9.3
Depreciation and amortization 4.8 4.4 0.9
--------- ----------- -----------
Operating income 7.2 5.2 7.2
Interest expense, gross 12.8 10.1 0.1
Other (income) expense, net 2.3 (0.3) (0.3)
--------- ----------- -----------
Income (loss) before income taxes (7.9) (4.6) 7.4
Provision (benefit) for income taxes (2.8) - 0.3
--------- ----------- -----------
Net income (loss) $ (5.1) $ (4.6) $ 7.1
========= =========== ===========
</TABLE>
17
<PAGE> 18
BOWLING CENTERS
For the three months ended March 31, 1997, Bowling Centers total operating
revenue increased by $26.0 million, or 31.5%, from $82.5 million for the three
months ended March 31, 1996, on a pro forma basis, to $108.5 million for the
three months ended March 31, 1997. Of this increase, $25.5 million is
attributable to the new centers acquired since May, 1996, and $0.7 million is
attributable primarily to U.S. and international constant centers, partially
offset by a decrease of $0.2 million attributable to two U.S. centers closed
in May, 1996, and February, 1997, respectively. Of the increase in new centers
revenue, $24.0 million is from centers in the United States, while $1.5 million
is from centers in the United Kingdom. The increase in constant centers
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 quarter of 1997
compared to the same period in 1996 is net of $1.0 million additional revenue
in 1996 due to leap year, and $0.5 million attributable to the Easter holiday
which occurred in the first quarter of 1997 versus the second quarter of 1996.
Bowling Centers cost of goods sold increased by $2.6 million, or 38.2%, from
$6.8 million for the three months ended March 31, 1996, on a pro forma basis,
to $9.4 million for the three months ended March 31, 1997. Of this increase,
$2.5 million is attributable to new centers of which $2.3 million is
attributable to U.S. centers and $0.2 million is attributable to U.K. centers.
Constant centers cost of goods sold rose $0.2 million, or 4.1%. These
increases were offset by a decrease of $0.1 million attributable to the closed
centers discussed above.
Bowling Centers operating expenses increased by $13.5 million, or 32.1%, from
$42.1 million for the three months ended March 31, 1996, on a pro forma basis,
to $55.6 million for the three months ended March 31, 1997. Of this increase,
$12.9 million is attributable to new centers of which $12.1 million is
attributable to U.S. centers and $0.8 million is attributable to U.K. centers.
Constant centers operating expenses increased by $0.7 million, or 1.7%. These
increases were offset by a decrease of $0.1 million attributable to the closed
centers discussed above. Operating expenses increased $0.3 million, or 1.1%, in
the U.S. constant centers and $0.4 million, or 2.9%, in the international
constant centers. The increase in the U.S. constant centers operating
expenses is primarily caused by increased advertising expenses aimed at
improving constant center lineage (games per lane per day), and increased
travel expenses related to a new management training program begun in January
1997 for centers operating personnel. The increase in the U.S. constant
centers is partially offset by favorable general liability claims results.
Also, operating expenses were lower in 1996 due to cost controls implemented in
response to the severe weather conditions experienced during the first quarter
of 1996. The increase in international constant centers operating expenses is
primarily attributable to higher rents in Hong Kong and payroll in Australia
resulting from one time severance payments. As a percentage of total Bowling
Centers revenue, Bowling Centers operating expenses were 51.0% for the three
months ended March 31, 1996, on a pro forma basis, versus 51.2% for the three
months ended March 31, 1997.
Bowling Centers selling, general and administrative expenses increased by $0.4
million, or 33.3%, from $1.2 million for the three months ended March 31, 1996,
on a pro forma basis, to $1.6 million
18
<PAGE> 19
for the three months ended March 31, 1997. This increase is due primarily to an
increase in international center expenses of which $0.2 is attributable to
incremental costs related to the new U.K. bowling centers and the remaining
increase to all other centers combined.
Bowling Centers EBITDA increased by $9.5 million, or 29.3%, from $32.4 million
for the three months ended March 31, 1996, on a pro forma basis, to $41.9
million for the three months ended March 31, 1997. An increase of $10.1
million is attributable to new centers and is offset by a $0.5 million decrease
in constant centers and a $0.1 million decrease attributable to the closed
centers discussed above. Constant center EBITDA and EBITDA margin decreased
from $32.3 million and 39.5% during the first three months of 1996, to $31.8
million and 38.3% during the first three months of 1997. These decreases are
primarily attributable to the impact of leap year and Easter week on revenues
as discussed above. An increase in U.S. constant centers EBITDA of $0.2
million, or 0.9%, was partially offset by a decrease in international constant
centers EBITDA of $0.7 million, or 1.5%. The increase in U.S. EBITDA is largely
the result of the cost reduction plans developed by management to offset
revenue lost from the severe weather discussed above. The decrease in
international EBITDA is primarily attributable to the increase in expenses
discussed above.
BOWLING PRODUCTS
The two categories of Bowling Products operations are (i) recurring sales of
replacements and spare parts and supplies, resale products, and major
modernization equipment ("Modernization and Consumer" products) to established
bowling centers in both mature and developing markets; and (ii) sales of
bowling equipment necessary to outfit new bowling centers or expand existing
bowling centers ("New Center Packages" or "NCPs").
Bowling Products total operating revenue increased by $9.0 million, or 20.9%,
from $43.0 million for the three months ended March 31, 1996, on a pro forma
basis, to $52.0 million for the three months ended March 31, 1997. This figure
is primarily attributable to an increase of $7.0 million, or 41.7%, in NCP
revenue, and an increase of $1.7 million, or 6.5%, in Modernization and
Consumer revenue. The increase in NCP revenue is due to an overall increase
in NCP sales of 331 units which occurred primarily in Malaysia, the Americas
and Japan. Sales to China for the three months ended March 31, 1997 also are
slightly higher versus the same period in 1996. See "Seasonality and
Cyclicality".
Total gross profit from Bowling Products increased by $3.4 million, or 19.5%,
from a gross profit of $17.4 million for the three months ended March 31, 1996,
on a pro forma basis, to a gross profit of $20.8 million for the three months
ended March 31, 1997, and is primarily the result of increased NCP sales. This
represents a gross profit margin of 40.5% and 40.0% for the first three months
of 1996 and 1997, respectively.
Bowling Products selling, general and administrative expenses increased by $1.0
million, or 12.8%, from $7.8 million for the three months ended March 31, 1996,
on a pro forma basis, to $8.8 million for the three months ended March 31,
1997. This increase is primarily attributable to increased
19
<PAGE> 20
payroll and facilities expenses relating to the staffing of the Company's sales
and service offices in Hong Kong, which promote and support sales of Bowling
Products equipment, particularly NCPs, to markets in China and Asia.
EBITDA and EBITDA margin increased from $9.6 million and 22.3%, respectively,
for the three months ended March 31, 1996, on a pro forma basis, to $12.0
million and 23.1%, respectively, for the three months ended March 31, 1997,
primarily due to the increased NCP revenue, offset in part by the increased
expenses discussed above.
CONSOLIDATED
Depreciation and Amortization
Depreciation and amortization increased by $7.2 million, or 54.1%, from $13.3
million for the three months ended March 31, 1996, on a pro forma basis, to
$20.5 million for the three months ended March 31, 1997. Of this increase, $6.9
million is attributable to Bowling Centers and is primarily due to depreciation
of property and equipment of centers acquired since May 1996. The remainder can
be attributed to incremental depreciation expense incurred as a result of
capital expenditures.
Interest Expense
Gross interest expense increased by $1.1 million, or 4.1%, from $26.6 million
for the three months ended March 31, 1996, on a pro forma basis, to $27.7
million for the three months ended March 31, 1997. This increase is primarily
due to interest paid on increased levels of bank debt as a result of the
acquisitions described above. Non-cash bond interest amortization for the
three months ended March 31, 1997 totaled $8.3 million.
Net Income
Net income remained constant at $0.1 million for the three months ended March
31, 1996, on a pro forma basis, and the three months ended March 31, 1997.
Increases in revenues and EBITDA discussed above on a segment basis were offset
by increases in depreciation expense and the current tax provision for the
Company.
Income Taxes
Under the Sellers, certain of the companies within the Predecessor Company
elected S corporation status under the Internal Revenue Code. As S
corporations, the companies were historically liable for U.S. federal income
taxes under certain circumstances and liable for state income taxes in certain
jurisdictions; all other domestic income taxes were the responsibility of the
stockholders. The international branches of the S corporations and other
international entities historically filed income tax returns and paid taxes in
their respective countries. The prior owners historically received a tax
credit, subject to certain limitations, in their U.S. federal income tax
returns for international taxes paid by the international branches of the S
corporations and certain other international entities.
20
<PAGE> 21
Upon consummation of the Acquisition, the domestic subsidiaries of the Company
became taxable corporations under the Internal Revenue Code.
Liquidity and Capital Resources
The following discussion of liquidity and capital resources compares Holdings'
results for the three months ended March 31, 1997, with Predecessor Company
results for the three months ended March 31, 1996, on a 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
$7.9 million compared to $23.1 million as of March 31, 1997.
Net cash flows provided by operating activities decreased $0.7 million from
$24.3 million for the three months ended March 31, 1996 to $23.6 million for
the three months ended March 31, 1997. A decrease in net income of $21.5
million due to increased depreciation, amortization and interest expenses as a
result of the Acquisition is offset primarily by an increase in (non-cash)
depreciation and amortization of $17.8 million, and an increase in changes in
assets and liabilities of $3.0 million.
Net cash flows used in investing activities were $3.6 million for the three
months ended March 31, 1996 compared to net cash flows used of $40.3 million
for the three months ended March 31, 1997. The increase during the first three
months of 1997 was due primarily to the acquisition of nine bowling centers in
the United States and six bowling centers in the United Kingdom during that
period. During the three months ended March 31, 1996, capital spending was
$4.4 million and other investing cash flows provided were $0.8 million. During
the three months ended March 31, 1997, acquisition of operating units, or
bowling centers, net of cash acquired, totaled $33.6 million, capital spending
was $6.9 million, and other cash flows provided by investing activities were
$0.2 million.
Net cash used in financing activities was $17.4 million for the three months
ended March 31, 1996 compared to net cash provided of $28.3 million for the
three months ended March 31, 1997. This change primarily resulted from drawing
down $19.0 million and $10.0 million from available borrowings under the
Acquisition Facility and the Working Capital Facility, respectively, to fund
the acquisitions of bowling centers discussed above and Company operations.
The Company paid a dividend of $0.5 million to the Parent on February 28, 1997,
for the repurchase of Robert L. Morin's shares in connection with his
resignation from the Company. See "Note 8. Employee Benefit Plans" in the
Notes to Consolidated Financial Statements.
As a result of the aforementioned, cash increased by $3.0 million for the three
months ended March 31, 1996 compared to an increase of $9.5 million for the
three months ended March 31, 1997.
As a result of the Acquisition, the Company's total indebtedness has increased
substantially. At March 31, 1997, the Company's debt structure consisted of
Senior Debt of $595.6 million, senior subordinated notes of $250.0 million and
senior subordinated discount notes of $283.0 million. At March 31, 1997, the
Company was also capitalized with equity of $404.4 million. The Company
21
<PAGE> 22
also has the ability to borrow $50.0 million for general corporate purposes
pursuant to a Working Capital Facility and up to $150.0 million for
acquisitions pursuant to the Acquisition Facility, subject to certain
conditions. At March 31, 1997, $27.5 million and $10.0 million was outstanding
under the Acquisition Facility and the Working Capital Facility, respectively.
Between March 31, 1997 and April 30, 1997, additional borrowings under the
Acquisition facility totaled $35.9 million and were used to fund the
acquisitions of bowling centers described above.
The Company is funding 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 the indebtedness incurred to finance the Acquisition.
The indentures and the Bank Credit Agreement of the Company 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.
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 of the Company believes that available cash flow, together with
available borrowings under the Bank Credit Agreement and other sources of
liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments
of principal of, and interest on, its Senior Debt, and interest on the Exchange
Notes. However, a portion of the principal payments at maturity on the
Exchange Notes may require refinancing. There can be no assurance 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, including the Exchange Notes, or that any
refinancing would be available on commercially reasonable terms or at all.
Capital Expenditures
For the three months ended March 31, 1997, the Company's actual capital
expenditures were $6.9 million compared to $4.4 million for the three months
ended March 31, 1996.
The Company funds its capital expenditures from cash generated by operations
and, with respect to the construction and acquisition of new centers,
internally generated cash and the Acquisition Facility. See "Note 9.
Acquisitions" in the Notes to Consolidated Financial Statements and "Liquidity
and Capital Resources" for discussions of funding of acquisitions of new
bowling centers.
Seasonality and Cyclicality
On a consolidated basis, revenue and EBITDA of the Company's combined
businesses are neither highly seasonal nor highly cyclical. The geographic
diversity of the Company's Bowling Centers operations across different regions
of the U.S. and across 10 different countries, along with the bowling
industry's historic resistance to recessions, has provided stability to the
Company's annual
22
<PAGE> 23
cash flows. See "Note 10. Business Segments" in the Notes to the Consolidated
Financial Statements for geographic information on the Company's business.
Modernization and Consumer 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 buying agreements, particularly for replacement equipment,
during the first four months of the year, after they receive winter league
revenue indications. Equipment is shipped and installed during the summer
months, when leagues are generally less active. Sales of modernization
equipment, such as automatic scoring and synthetic lane overlays, are less
predictable and fluctuates more than the replacement equipment because of the
extended life cycles of these major products, which range from four to 10
years.
The NCP segment 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 small and medium sized markets
(e.g., Japan, Korea, Taiwan,) lasting from three to five years. These growth
patterns do not seem to be closely tied to general economic cycles.
International Operations
For the three months ended March 31, 1997, 23.9% of the Company's Bowling
Centers operations revenue was generated by its international centers.
Historically, the Company has not engaged in any significant hedging
activities.
For the three months ended March 31, 1997, 52.1% of Bowling Products sales were
made through international affiliates and distributors. 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. Affiliate offices sell some products in
local currency, but adjust pricing, to the extent that market conditions
permit, with changes in exchange rates. This policy has enabled the Company's
Bowling Products operations generally to avoid any material adverse effect from
exchange rate fluctuations, except during periods of severe international
exchange rate volatility.
Backlog: Recent NCP Sales
The total NCP backlog as of March 31, 1997 was approximately 1,625 units. This
figure represents an increase of 199 units from the backlog of 1,426 units at
December 31, 1996, and an increase of 137 units from the backlog of 1,488 units
as of March 31, 1996. This increase from March 31, 1996 to March 31, 1997 is
primarily composed of increases in the backlogs in China, Malaysia, the
Americas and Japan, partially offset by decreases in the backlogs in Korea and
Taiwan. Management believes that the decrease in the backlog of orders for
Taiwan and Korea is primarily the result of NCP sales to these countries having
peaked in 1994
23
<PAGE> 24
Overall NCP sales for the three months ended March 31, 1997 exceeded NCP sales
for the three month ended March 31, 1996, by $7.0 million, or 41.7%, reflecting
continued progress in establishing a direct sales presence in China. The
Chinese bowling market is in the early stages of development which management
believes should provide several years of activity to follow.
On December 28, 1995, the State Council of China announced the reform and
adjustment of its policy towards foreign invested joint ventures. With effect
from April 1, 1996, joint ventures importing capital equipment, including
bowling equipment, are required to pay customs duty and Value Added Tax ("VAT")
on such equipment, though certain grandfather rule exemptions will apply. For
bowling equipment, the current customs duty rate is 50%, while the VAT rate is
17%. Prior to the change in policy, the joint ventures were exempt from
customs duty and VAT on most imported capital equipment, including bowling
equipment. As a grandfather concession, the joint ventures that were approved
to set up prior to April 1, 1996, with a total investment of less than US $30
million had until December 31, 1996 to import capital equipment duty free. This
concession has been extended until December 31, 1997. Accordingly, management
expects a strong order rate in China to continue through 1997. However, there
is a risk that the change in import duty policy in China will adversely affect
the sale of NCP units to China. Because the Company believes, based on
available information, that its competitors will be affected similarly by this
new policy, the Company believes that the policy will not put it at a
competitive disadvantage with respect to its competitors.
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. To the best of the Company's knowledge, its operations are in
material compliance with the terms of all applicable environmental laws and
regulations.
The Company currently and from time to time is subject to environmental claims
and suits. It is the opinion of management that the various asserted claims
and litigation 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 and litigation.
The Company cannot predict with any certainty whether 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.
24
<PAGE> 25
PART II
ITEM 1. LEGAL
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of its business, including environmental claims,
employment discrimination claims, workers' compensation claims, and minor
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. It is the opinion of management that 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 Associates, II v. Golden Giant, Inc., d/b/a Golden
Giant Building Systems, Court of Common Pleas, Centre County, Pa. (Index No.
96-75), asserted a third-party claim against AMF Bowling Inc. ("AMF Bowling")
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 the center's roof in early 1994. Golden Giant named AMF Bowling 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
plaintiff is entitled to any recovery, it should be in whole or part against
AMF Bowling. The matter was scheduled to go to trial during September 1997.
On March 25, 1997, an order was entered dismissing AMF Bowling from the
lawsuit, which continues against the other defendants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule for the three months ended
March 31, 1997. (SEC filing only)
99 First quarter, 1997, earnings release dated May 15,
1997. (SEC filing only)
(b) Reports on Form 8-K:
1. A current report was filed January 17, 1997, describing the
agreement and plan of merger by which the Company acquired (on
April 24, 1997) 43 bowling centers from ARC.
2. A current report was filed on May 2, 1997, describing the
consummation of the acquisition of 43 bowling centers from ARC on
April 24, 1997.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMF Group Inc.
(Registrant)
<TABLE>
<S> <C>
/s/ Stephen E. Hare May 15, 1997
- ----------------------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer
(Duly Authorized Officer)
/s/ Michael P. Bardaro May 15, 1997
- --------------------------
Michael P. Bardaro
Vice President, Secretary and
Corporate Controller
(Chief Accounting Officer)
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 53,066
<SECURITIES> 0
<RECEIVABLES> 46,693
<ALLOWANCES> 4,354
<INVENTORY> 51,367
<CURRENT-ASSETS> 166,126
<PP&E> 647,342
<DEPRECIATION> 45,610
<TOTAL-ASSETS> 1,641,288
<CURRENT-LIABILITIES> 142,995
<BONDS> 1,084,306
0
0
<COMMON> 429,950
<OTHER-SE> (25,093)
<TOTAL-LIABILITY-AND-EQUITY> 1,641,288
<SALES> 157,589
<TOTAL-REVENUES> 157,589
<CGS> 38,050
<TOTAL-COSTS> 127,892
<OTHER-EXPENSES> 812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,672
<INCOME-PRETAX> 1,213
<INCOME-TAX> 1,120
<INCOME-CONTINUING> 93
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EARNINGS RELEASE [AMF LOGO]
================================================================================
8100 AMF Drive Contact: Stephen E. Hare
Richmond, VA 23111 Chief Financial Officer
(804) 730-4401
FOR IMMEDIATE RELEASE
MAY 15, 1997
AMF BOWLING WORLDWIDE REPORTS AN INCREASE OF 29% IN OPERATING CASH FLOW FOR THE
FIRST QUARTER
Richmond, VA, May 15, 1997 -- AMF Bowling Worldwide today reported revenue of
$157.6 million for the quarter ended March 31, 1997 compared with $122.7
million for the first quarter of 1996, an increase of 28.4%. Operating cash
flow (earnings before interest, income taxes, depreciation and amortization or
"EBITDA") was $50.2 million in the current quarter compared with $38.9 million
for the first quarter of 1996, an increase of 29.0%. Operating results for
1996 are presented on a pro forma basis to provide more meaningful comparisons
with 1997.
OPERATING RESULTS BY BUSINESS
AMF's Bowling Centers generated a revenue increase of 31.5% to $108.5 million
and an operating cash flow increase of 29.3% to $41.9 million for the first
quarter of 1997 versus 1996. EBITDA margin (EBITDA as a percent of revenue)
decreased from 39.3% in 1996 to 38.6% in 1997. Revenue and operating cash flow
for the quarter ended March 31, 1997 were favorably impacted by the inclusion
of results for the 72 bowling centers acquired since May, 1996, and by an
increase in lineage.
AMF's Bowling Products generated a revenue increase of 20.9% to $52.0 million
and an increase in operating cash flow of 25.0% to $12.0 million for the first
quarter of 1997 versus 1996. EBITDA margin increased from 22.3% in 1996 to
23.1% in 1997. The improvement in operating performance for Bowling Products
during the first quarter of 1997 resulted primarily from increased levels of
New Center Product ("NCP") shipments to the U.S. and several international
markets including Japan and Malaysia. NCP order rates remained strong during
the quarter, especially in China, with a total backlog of 1,625 units as of
March 31, 1997 versus 1,488 units last year.
<PAGE> 2
Page 2 - AMF Bowling Worldwide Reports an Increase of 29% in Operating Cash
Flow for the First Quarter
ACQUISITION PROGRAM
In May 1996, the Company launched an ongoing acquisition program for bowling
centers in the U.S. and selected international markets. On April 24, 1997, the
Company completed the acquisition of the American Recreation Centers chain
consisting of 43 bowling centers. In total since May 1996, the Company has
acquired 112 bowling centers in the U.S. and 6 in the United Kingdom. The
combined purchase price for these acquisitions was approximately $221 million
and has been funded with a $40 million equity contribution from its
institutional stockholders, $167 million of borrowings from the Acquisition
Facility under its Bank Credit Agreement, and from internally generated cash of
the Company. As a result of these acquisitions, AMF owns or operates 317 U.S.
and 84 international bowling centers as of April 30, 1997.
JOINT VENTURE UPDATE
On April 21, 1997, AMF announced that it has entered into a $40 million joint
venture with Hong Leong Corporation Limited, a Singapore-based conglomerate.
The joint venture, owned 50% each by AMF and Hong Leong, initially plans to
build and operate up to 20 bowling centers to be located in the Philippines,
Malaysia, Indonesia, Thailand, Vietnam and China. AMF will be the exclusive
bowling equipment supplier and will provide a variety of training and technical
services to the joint venture.
"Our partnership with Hong Leong Corporation provides us with the opportunity
to accelerate our growth in one of the most dynamic bowling markets in the
world," noted Douglas J. Stanard, AMF's President and Chief Operating Officer.
"In addition, these centers will be state-of-the-art facilities with a variety
of recreational options, creating showcase centers for what bowling will become
in the next century."
FINANCING UPDATE
In January 1997, the Company completed an amendment to its $715 million Bank
Credit Agreement to increase the flexibility and borrowing capacity of its
ongoing acquisition program. In conjunction with the amendment, the Company
issued $65 million of long term debt and used the proceeds to reduce the
outstanding borrowings under its Acquisition Facility. As a result, the
Company increased the availability for borrowings under its Acquisition
Facility to $150 million.
FIRST QUARTER REVIEW AND OUTLOOK
Stephen E. Hare, AMF's Chief Financial Officer, said "Our first quarter results
highlight the success of our ongoing acquisition program to acquire, integrate
and enhance operating performance of newly acquired bowling centers. In
addition, we were pleased to see an increase in NCP shipments to a variety of
U.S. and international markets, which combined with a growing NCP backlog,
continues to favorably position the Company for growth during 1997."
AMF Bowling Worldwide, headquartered in Richmond, Virginia, is the largest
owner and operator of bowling centers in the world. AMF is also one of the
world's leading manufacturers and marketers of bowling products.
<PAGE> 3
AMF BOWLING WORLDWIDE (1)
FINANCIAL SUMMARY
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
------------------------------------------
1997 1996(2)
----------- ------------
<S> <C> <C>
Revenue $157.6 $122.7
EBITDA(3) 50.2 38.9
</TABLE>
CAPITALIZATION
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
---------------------- ------------------------
<S> <C> <C>
Cash and Cash Equivalents $53.1 $43.6
====================== ========================
Debt:
Working Capital Facility $10.0 $--
Acquisition Facility 27.5 73.5
Term Loans 556.1 491.0
10 7/8% Senior Subordinated Notes 250.0 250.0
12 1/4% Senior Subordinated Discount Notes 283.0 274.7
Other Debt 2.0 2.0
---------------------- ------------------------
Total Debt 1,128.6 1,091.2
Stockholder's Equity 404.4 408.7
---------------------- ------------------------
Total Capitalization $1,533.0 $1,500.0
====================== ========================
</TABLE>
- --------------------------------------
(1) AMF Group Inc.
(2) Pro forma operating results have been presented for 1996 to provide a
more meaningful comparison with 1997 results. The pro forma results
include operations for the Predecessor Company ("AMF Bowling Group")
through March 31, 1996. Pro forma adjustments for the quarter ended
March 31, 1996: i) eliminate two bowling centers retained by the
Sellers, and ii) reclassify certain Bowling Centers and Bowling Products
administrative costs of $1.0 million and $1.5 million, respectively, to
Corporate.
(3) Represents a measure of operating cash flow defined as earnings before
net interest expense, income taxes, depreciation and amortization, and
other income and expenses, net.
.
<PAGE> 4
AMF BOWLING WORLDWIDE (1)
SEGMENT INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
------------- -------------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
1997 Revenue
- ------------
Bowling Centers $108.5 $108.5
Bowling Products 52.0 52.0
Intersegment Elimination (2.9) (2.9)
---------- --------
TOTAL $157.6 $157.6
1996 Revenue(2)
- ------------
Bowling Centers $82.5 $64.7 $65.4 $94.7 $307.3
Bowling Products 43.0 53.8 68.8 86.5 252.1
Intersegment Elimination (2.8) (3.7) (2.4) (1.6) (10.5)
---------- -------- -------- -------- --------
TOTAL $122.7 $114.8 $131.8 $179.6 $548.9
1997 EBITDA(3)
- -----------
Bowling Centers $41.9 $41.9
Bowling Products 12.0 12.0
Corporate (3.6) (3.6)
Intersegment Elimination (0.1) (0.1)
---------- --------
TOTAL $50.2 $50.2
1996 EBITDA (2)(3)
- -----------
Bowling Centers $32.4 $16.2 $15.3 $32.1 $96.0
Bowling Products 9.6 13.7 19.3 20.3 62.9
Corporate (2.5) (2.1) (2.4) (4.7) (11.7)
Intersegment Elimination (0.6) (0.9) 0.0 (0.2) (1.7)
---------- -------- -------- -------- --------
TOTAL $38.9 $26.9 $32.2 $47.5 $145.5
</TABLE>
- --------------------------------------
See notes (1-3) to Financial Summary.
