UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-12131
---------------------
AMF BOWLING WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3873272
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 AMF Drive
Richmond, Virginia 23111
(Address of principal executive offices, including zip code)
--------------------
(804) 730-4000
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| . No _____.
At August 3, 1998, 100 shares of common stock, par value of $.01, of the
Registrant were outstanding.
<PAGE>
PART I
Item 1. Financial Statements
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, December 31,
1998 1997
----------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 32,034 $ 35,790
Accounts and notes receivable, net of allowance for
doubtful accounts of $5,050 and $5,012, respectively 65,989 73,991
Receivable from Parent 1,246 -
Inventories 71,292 56,568
Deferred taxes and other current assets 20,756 17,049
-------- ----------
Total current assets 191,317 183,398
Property and equipment, net 872,430 750,885
Leasehold interests, net 46,219 47,180
Deferred financing costs, net 24,934 18,911
Goodwill, net 775,036 772,348
Investments in and advances to joint ventures 23,813 19,999
Other assets 45,418 39,092
---------- ------------
Total assets $ 1,979,167 $ 1,831,813
=========== =============
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 29,371 $ 41,583
Accrued expenses 48,735 64,865
Income taxes payable 5,603 5,571
Long-term debt, current portion 29,875 27,376
----------- ------------
Total current liabilities 113,584 139,395
Long-term debt, less current portion 984,411 1,033,223
Long-term payable to Parent 256,027 -
Other long-term liabilities 5,268 5,333
----------- ------------
Total liabilities 1,359,290 1,177,951
----------- ------------
Commitments and contingencies
Stockholder's equity:
Common stock (par value $.01, 100 shares authorized,
issued and outstanding at June 30, 1998
and December 31, 1997) - -
Paid-in capital 750,190 749,149
Retained deficit (108,538) (75,714)
Equity adjustment from foreign currency translation (21,775) (19,573)
----------- -----------
Total stockholder's equity 619,877 653,862
----------- -----------
Total liabilities and stockholder's equity $ 1,979,167 $ 1,831,813
=========== =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six months
Ended June 30, Ended June 30,
---------------------- ---------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating revenue $ 162,194 $ 160,479 $ 349,758 $ 318,068
--------- --------- --------- ----------
Operating expenses:
Cost of goods sold 46,164 48,034 85,021 86,084
Bowling center operating expenses 80,619 60,696 159,332 116,038
Selling, general and administrative 17,132 16,172 34,071 30,172
Depreciation and amortization 29,967 22,924 56,757 43,424
--------- -------- --------- ---------
Total operating expenses 173,882 147,826 335,181 275,718
--------- -------- --------- ---------
Operating income (loss) (11,688) 12,653 14,577 42,350
--------- -------- --------- ---------
Nonoperating expenses (income):
Interest expense 24,982 29,782 50,956 57,454
Other expenses, net 1,982 859 2,555 2,320
Interest income (496) (406) (986) (1,055)
--------- -------- --------- ---------
Total nonoperating expenses 26,468 30,235 52,525 58,719
--------- -------- --------- --------
Loss before income taxes (38,156) (17,582) (37,948) (16,369)
Benefit for income taxes (7,123) (5,311) (6,687) (4,191)
--------- -------- --------- --------
Net loss before equity in loss of joint ventures (31,033) (12,271) (31,261) (12,178)
Equity in loss of joint ventures (1,211) - (1,563) -
--------- -------- -------- --------
Net loss $ (32,244) $ (12,271) $ (32,824) $ (12,178)
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------
1998 1997
---------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (32,824)$ (12,178)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 56,757 43,424
Equity in loss of joint ventures 1,563 -
Deferred income taxes - (1,775)
Amortization of bond discount 11,543 16,788
Loss on the sale of property and equipment, net 267 94
Changes in assets and liabilities:
Accounts and notes receivable, net 8,726 (17,942)
Payable to Parent 254,781 -
Inventories (13,908) (15,877)
Other assets (18,743) (21,394)
Accounts payable and accrued expenses (29,181) 1,432
Income taxes payable 314 2,248
Other long-term liabilities (126) 13,345
---------- --------
Net cash provided by operating activities 239,169 8,165
---------- --------
Acquisitions of operating units, net of cash acquired (152,791) (122,165)
Investments in and advances to joint ventures (5,377) -
Purchases of property and equipment (27,685) (25,639)
Proceeds from the sale of property and equipment 193 268
---------- --------
Net cash used in investing activities (185,660) (147,536)
---------- --------
Proceeds from long-term debt, net of deferred financing costs 204,500 133,500
Payments on long-term debt (262,358) (20,250)
Dividend to parent - (500)
Contribution from Parent 1,042 -
Payments of noncompete obligations (423) (322)
---------- --------
Net cash (used in) provided by financing activities (57,239) 112,428
---------- --------
Effect of exchange rates on cash (26) 15
---------- --------
Net decrease in cash (3,756) (26,928)
Cash and cash equivalents at beginning of period 35,790 43,568
---------- --------
Cash and cash equivalents at end of period $ 32,034 $ 16,640
========== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations for the interim periods. The interim financial information and notes
thereto should be read in conjunction with the December 31, 1997 and 1996
audited consolidated financial statements of AMF Group Holdings Inc. ("AMF Group
Holdings") and its subsidiaries (collectively, the "Company") presented in the
Form 10-K Annual Report of AMF Bowling Worldwide, Inc. (Bowling Worldwide") for
the fiscal year ended December 31, 1997 filed with the U.S. Securities and
Exchange Commission. The results of operations for the six months ended June 30,
1998, are not necessarily indicative of results to be expected for the entire
year.
The Company is principally engaged in two business segments: (i) the
ownership or operation of bowling centers, consisting of 413 U.S. bowling
centers and 120 international bowling centers ("Bowling Centers"), including
fourteen joint venture centers described in "Note 8. Acquisitions", as of June
30, 1998, and (ii) the manufacture and sale of bowling equipment such as
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare parts, and the resale of allied products such as bowling
balls, bags, shoes, and certain other spare parts ("Bowling Products"). The
principal markets for bowling equipment are U.S. and international bowling
center operators.
Bowling Worldwide is a wholly owned, direct subsidiary of AMF Group Holdings.
AMF Group Holdings is a wholly owned, direct subsidiary of AMF Bowling, Inc.
("AMF Bowling"). AMF Group Holdings and Bowling Worldwide are Delaware
corporations organized by GS Capital Partners II, L.P., and certain other
investment funds (collectively, "GSCP") affiliated with Goldman, Sachs & Co.
("Goldman Sachs") to effect the Acquisition (defined below). AMF Group Holdings
and AMF Bowling are holding companies only. The principal assets in each are
comprised of investments in subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between AMF
Group Holdings and the stockholders (the "Prior Owners") of AMF Bowling Group
(the "Predecessor Company"), on May 1, 1996 (the "Closing Date"), AMF Group
Holdings acquired the Predecessor Company through a stock purchase by AMF Group
Holdings' subsidiaries of all the outstanding stock of the separate domestic and
foreign corporations that constituted substantially all of the Predecessor
Company and through the purchase of certain of the assets of the Predecessor
Company's bowling center operations in Spain and Switzerland (the
"Acquisition"). The purchase price for the Acquisition was approximately $1.37
billion. The Acquisition was accounted for by the purchase method of accounting,
pursuant to which the purchase price was allocated among the acquired assets and
liabilities in accordance with estimates of fair market value on the Closing
Date.
On November 7, 1997, AMF Bowling completed an initial public offering (the
"Initial Public Offering") of 15,525,000 shares of common stock (the "Common
Stock"), which trades on the New York Stock Exchange under the symbol "PIN". The
net proceeds of $278.5 million from the Initial Public Offering were contributed
by AMF Bowling to Bowling Worldwide and used by Bowling Worldwide to reduce and
refinance its bank debt pursuant to Bowling Worldwide's third amended and
restated credit agreement (the "Credit Agreement") and to redeem a portion of
Bowling Worldwide's senior subordinated discount notes.
As of June 30, 1998, the Company has acquired 245 bowling centers and
constructed one bowling center since the Acquisition for a combined purchase
price of $475.6 million. The Company has funded its acquisitions and center
construction from internally generated cash, borrowings under the senior secured
revolving credit facility (the "Bank Facility") under the Credit Agreement, and
issuances of Common Stock. See "Note 8. Acquisitions".
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated results of operations of the Company have been
presented for the three months and six months ended June 30, 1998 and 1997,
respectively. All significant intercompany balances and transactions have been
eliminated in the accompanying condensed consolidated financial statements. All
dollar amounts are in thousands, except where otherwise indicated.
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 8. Acquisitions", and in accordance with the purchase method
of accounting for all acquisitions, the Company recorded goodwill representing
the excess of the purchase price over the allocation among the acquired assets
and liabilities in accordance with estimates of fair market value on the dates
of acquisition. Goodwill is being amortized over 40 years. Amortization expense
was $5,017 and $10,054 for the three months and six months ended June 30, 1998,
and $4,960 and $9,860 for the three months and six months ended June 30, 1997,
respectively.
Comprehensive Income
Effective January 1, 1998, the Company adopted, as required, Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income." Comprehensive loss was $35,845 and $35,026 for the three months and six
months ended June 30, 1998, respectively, and $21,070 and $17,193 for the three
months and six months ended June 30, 1997, respectively.
Note 3. Inventories
Inventories at June 30, 1998, and December 31, 1997 consisted of the
following:
June 30, December 31,
1998 1997
--------------------------
(unaudited)
Bowling Products, at FIFO:
Raw materials $ 14,718 $ 15,283
Work in progress 2,474 2,279
Finished goods and spare parts 46,129 33,082
Bowling Centers, at average cost:
Merchandise and spare parts 7,971 5,924
--------------------------
$ 71,292 $ 56,568
==========================
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Property and Equipment
Property and equipment at June 30, 1998, and December 31, 1997, consisted of
the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-----------------------------------
(unaudited)
<S> <C> <C>
Land $ 130,793 $ 113,629
Buildings and improvements 348,350 280,046
Equipment, furniture and fixtures 521,191 444,437
Other 7,778 7,282
-----------------------------------
1,008,112 845,394
Less: accumulated depreciation and amortization (135,682) (94,509)
===================================
$ 872,430 $ 750,885
===================================
</TABLE>
Depreciation and amortization expense related to property and equipment was
$21,976 and $42,495 for the three months and six months ended June 30, 1998,
respectively, and $17,140 and $30,875 for the three months and six months ended
June 30, 1997, respectively.
Note 5. Long-Term Debt
Long-term debt at June 30, 1998, and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------------------------
(unaudited)
<S> <C> <C>
Bank debt $ 561,502 $ 619,362
Senior subordinated notes 250,000 250,000
Senior subordinated discount notes 200,802 189,261
Mortgage and equipment notes 1,982 1,976
---------------------------------
Total debt 1,014,286 1,060,599
Current maturities (29,875) (27,376)
=================================
Total long-term debt $ 984,411 $ 1,033,223
=================================
</TABLE>
The Company's bank debt (the "Senior Debt") was incurred pursuant to a
credit agreement, dated as of May 1, 1996, which was amended and restated in
connection with the Initial Public Offering, as of November 3, 1997, as the
Credit Agreement among Bowling Worldwide and its lenders. The Credit Agreement
provides for (i) three senior secured term loan facilities aggregating $455.3
million (the "Term Facilities") and (ii) the Bank Facility which provides for
borrowings up to $355.0 million on a revolving basis. At June 30, 1998, amounts
outstanding under the Term Facilities and Bank Facility were $433,499 and
$128,003, respectively.
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On May 12, 1998, AMF Bowling issued its zero coupon convertible debentures
(the "Debentures") for gross proceeds of approximately $284.1 million. The
Debentures mature on May 12, 2018 and have a yield to maturity of 7% per annum.
The Debentures were issued at an original price of $252.57 per $1,000 principal
amount at maturity. The Debentures are convertible at any time prior to maturity
into shares of Common Stock at a conversion rate of 8.6734 shares per $1,000
principal amount at maturity. If held to maturity and not redeemed or
repurchased by AMF Bowling, the Debentures will accrue to an aggregate principal
amount at maturity of $1.125 billion. The Debentures are not entitled to a
sinking fund. The Debentures are not redeemable at the option of AMF Bowling
before May 12, 2003. Thereafter, the Debentures are redeemable for cash at the
option of AMF Bowling at redemption prices specified in the Debentures.
The Debentures will be purchased by AMF Bowling, at the option of
holders of the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for
purchase prices specified in the Debentures. The Debentures may also be redeemed
at the option of the holders of the Debentures upon the occurrence of a Change
of Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof. In connection with
the issuance of the Debentures, AMF Bowling has agreed to file a shelf
registration statement in respect of the Debentures and the Common Stock
issuable on conversion, redemption or repurchase thereof. If the shelf
registration statement has not been filed within 90 days, or declared effective
within 180 days, after May 12, 1998, AMF Bowling must pay liquidated damages as
specified in the related registration rights agreement.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance upon
conversion, redemption or repurchase of the Debentures.
The net proceeds of the Debentures were approximately $273.1 million, of
which $249.6 million was used to repay senior bank indebtedness under the Credit
Agreement and $23.5 million was used for acquisitions and general corporate
purposes.
Note 6. Commitments and Contingencies
Litigation and Claims
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at bowling centers.
Management believes that the ultimate resolution of such matters will not have a
material adverse effect on the Company's results of operations or financial
position. While the ultimate outcome of the litigation and claims against the
Company cannot presently be determined, management believes the Company has made
adequate provision for possible losses.
Note 7. Employee Benefit Plans
AMF Bowling, Inc. 1996 Stock Incentive Plan
The total number of shares of Common Stock ("Stock Options") initially
reserved and available for grant under the AMF Bowling, Inc. 1996 Stock
Incentive Plan (the "1996 Plan") was 1,767,151. At June 30, 1998, the number
Stock Options outstanding to senior management, other employees, consultants and
directors totaled 1,464,450 at an exercise price of $10.00 per share. In
addition to Stock Options outstanding under the 1996 Plan, 130,000 Stock Options
granted to Douglas J. Stanard on May 1, 1996 were outstanding at June 30, 1998.
Of the total Stock Options awarded under the 1996 Plan, 313,910 were exercisable
at June 30, 1998, and 29,200 and 46,450 were exercised in the three months and
six months ended June 30, 1998, respectively. Forfeited Stock Options under the
1996 Plan totaled 310,100 through June 30, 1998. There were 256,251 shares of
Common Stock available for grant under the 1996 Plan as of June 30, 1998.
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF Bowling, Inc. 1998 Stock Incentive Plan
Under the AMF Bowling, Inc. 1998 Stock Incentive Plan (the "1998
Plan"), AMF Bowling may grant incentive awards in the form of restricted stock
awards, Stock Options and stock appreciation rights in substantially the same
manner as provided under the 1996 Plan. Two million shares of Common Stock have
been reserved and will be available for issuance under the 1998 Plan. In
addition, shares of Common Stock that have been reserved but not issued under
the 1996 Plan, and shares which are subject to awards under the 1996 Plan that
expire or otherwise terminate, may be granted as awards pursuant to the 1998
Plan. As of June 30, 1998, options to purchase 78,400 shares were granted under
the 1998 Plan.
Note 8. Acquisitions
From the Acquisition and until December 31, 1997, Bowling Centers purchased
an aggregate of 179 bowling centers from unrelated sellers. The combined
purchase price, net of cash acquired, was approximately $340.7 million
(including amounts paid in 1998 for certain bowling centers included in the 1997
total), and was funded with approximately $40.0 million from the sale of equity
by AMF Bowling to its institutional stockholders and one of its directors, and
with $299.8 million from available borrowing under Bowling Worldwide's
acquisition facility then existing under the bank credit agreement and under the
Bank Facility.
From January 1, 1998 through June 30, 1998, the Company acquired 46 centers
in the United States, 15 centers in the United Kingdom and five centers in
Australia from unrelated sellers, including 15 centers from Active West, Inc.
("Active West"). The aggregate purchase price was approximately $134.9 million,
including $114.0 million funded with borrowings under the Bank Facility and,
with respect to the Active West acquisition, the issuance of 50,000 shares of
Common Stock.
Between June 30, 1998 and July 31, 1998, the Company acquired six bowling
centers in the United States from unrelated sellers. As a result of these
acquisitions, and after giving effect to the closing of 11 U.S. centers and one
international center since the Acquisition, the Company owned or operated 419
U.S. bowling centers and 120 international bowling centers as of July 31, 1998.
As of July 31, 1998, the Company had entered into purchase agreements
regarding the acquisitions of ten additional U.S. bowling centers from unrelated
sellers and Ebonite International Inc., a marketer and manufacturer of bowling
balls and bowling accessories. The aggregate purchase price is expected to be
approximately $35.1 million and is expected to be funded with available
borrowing under the Bank Facility and cash generated from operations.
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9. Business Segments
The Company operates in two major lines of business: operating bowling
centers and manufacturing of bowling and related products. Information
concerning operations in these businesses for the three months ended June 30,
1998 and 1997, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------- ----------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
------- -------- -------- ------ -------- ------ --------- ------- --------
<S> <C>
Revenue from unaffiliated customers $ 86.9 $ 29.1 $ 116.0 $ 23.2 $ 23.0 $ 46.2 $ - $ - $ 162.2
Intersegment sales - - - 3.9 1.5 5.4 - - 5.4
Operating income (loss) (7.6) 3.3 (4.3) 0.2 (2.0) (1.8) (5.7) 0.1 (11.7)
Identifiable assets 897.3 352.1 1,249.4 637.1 71.3 708.4 19.5 1.9 1,979.2
Depreciation and amortization 19.5 4.9 24.4 5.2 0.4 5.6 0.3 (0.3) 30.0
Capital expenditures 10.6 3.2 13.8 2.0 0.2 2.2 0.1 - 16.1
Research and development expense - - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
-------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------- ----------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
------- -------- -------- ------ -------- ------ --------- ------- --------
<S> <C>
Revenue from unaffiliated customers $ 66.1 $ 26.5 $ 92.6 $ 24.2 $ 43.7 $ 67.9 $ - $ - $ 160.5
Intersegment sales - - - 3.3 1.5 4.8 - - 4.8
Operating income (loss) (0.2) 3.1 2.9 9.4 4.8 14.2 (4.8) 0.4 12.7
Identifiable assets 729.0 306.1 1,035.1 615.7 58.2 673.9 5.8 0.6 1,715.4
Depreciation and amortization 13.5 4.7 18.2 4.8 0.3 5.1 - (0.4) 22.9
Capital expenditures 15.0 1.5 16.5 1.0 0.2 1.2 1.1 (0.1) 18.7
Research and development expense - - - 0.5 - 0.5 - - 0.5
</TABLE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information concerning operations in these businesses for the six months
ended June 30, 1998 and 1997, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
-------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------- ----------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
------- -------- -------- ------ -------- ------ --------- ------- --------
<S> <C>
Revenue from unaffiliated customers $ 212.2 $ 54.3 $ 266.5 $ 36.8 $ 46.5 $ 83.3 $ - $ - $ 349.8
Intersegment sales - - - 7.6 1.8 9.4 - - 9.4
Operating income (loss) 25.0 5.6 30.6 (3.7) (3.4) (7.1) (9.7) 0.8 14.6
Identifiable assets 897.3 352.1 1,249.4 637.1 71.3 708.4 19.5 1.9 1,979.2
Depreciation and amortization 36.9 9.4 46.3 10.3 0.7 11.0 0.5 (1.0) 56.8
Capital expenditures 17.6 4.1 21.7 5.2 0.7 5.9 0.1 - 27.7
Research and development expense - - - 0.2 - 0.2 - - 0.2
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
-------------------------------------------------------------------------------
Bowling Centers Bowling Products
------------------------- ----------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
------- -------- -------- ------ -------- ------ --------- ------- --------
<S> <C>
Revenue from unaffiliated customers $ 148.7 $ 52.4 $ 201.1 $ 47.7 $ 69.3 $117.0 $ - $ - $ 318.1
Intersegment sales - - - 5.3 2.4 7.7 - - 7.7
Operating income (loss) 22.8 5.9 28.7 16.1 5.3 21.4 (8.4) 0.7 42.4
Identifiable assets 729.0 306.1 1,035.1 615.7 58.2 673.9 5.8 0.6 1,715.4
Depreciation and amortization 25.1 9.2 34.3 9.3 0.6 9.9 - (0.8) 43.4
Capital expenditures 19.0 3.0 22.0 1.9 0.4 2.3 1.5 (0.2) 25.6
Research and development expense - - - 0.7 - 0.7 - - 0.7
</TABLE>
Note 10. Condensed Consolidating Financial Statements
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of June 30, 1998, and condensed
consolidating statements of income and cash flows for the six months ended June
30, 1998 and (ii) elimination entries necessary to combine the entities
comprising the Company.
Bowling Worldwide's senior subordinated notes and senior subordinated
discount notes are jointly and severally guaranteed on a full and unconditional
basis by AMF Group Holdings and the first and second-tier subsidiaries of
Bowling Worldwide. AMF Bowling and the third-tier subsidiaries of Bowling
Worldwide have not provided guarantees of such indebtedness.
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 29,127 $ 2,907 $ - $ 32,034
Accounts and notes receivable, net
of allowance for doubtful accounts 65,890 99 - 65,989
Receivable from Parent 1,246 - - 1,246
Accounts receivable - intercompany 10,410 5,620 (16,030) -
Inventories 70,288 1,004 - 71,292
Deferred taxes and other current assets 18,051 2,705 - 20,756
---------------- ---------------- ---------------- -----------------
Total current assets 195,012 12,335 (16,030) 191,317
Notes receivable - intercompany 44,008 5,663 (49,671) -
Property and equipment, net 789,465 81,850 1,115 872,430
Investment in subsidiaries 21,342 - (21,342) -
Goodwill and other assets 909,031 6,389 - 915,420
================ ================ ================ =================
Total assets $ 1,958,858 $ 106,237 $ (85,928) $ 1,979,167
================ ================ ================ =================
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 23,330 $ 6,041 $ - $ 29,371
Accounts payable - intercompany 5,620 10,410 (16,030) -
Accrued expenses 43,117 5,618 - 48,735
Income taxes payable 2,834 2,769 - 5,603
Long-term debt, current portion 29,875 - - 29,875
---------------- ---------------- ---------------- -----------------
Total current liabilities 104,776 24,838 (16,030) 113,584
Long-term debt , less current portion 969,408 15,003 - 984,411
Long-term payable to Parent 256,027 - - 256,027
Notes payable - intercompany 5,663 44,008 (49,671) -
Other long-term liabilities 4,222 1,046 - 5,268
---------------- ---------------- ---------------- -----------------
Total liabilities 1,340,096 84,895 (65,701) 1,359,290
---------------- ---------------- ---------------- -----------------
Commitments and contingencies
Stockholder's equity:
Common stock - - - -
Paid-in capital 748,186 27,629 (25,625) 750,190
Retained (deficit) earnings (107,649) 1,481 (2,370) (108,538)
Equity adjustment from foreign
currency translation (21,775) (7,768) 7,768 (21,775)
---------------- ---------------- ---------------- -----------------
Total stockholder's equity 618,762 21,342 (20,227) 619,877
---------------- ---------------- ---------------- -----------------
Total liabilities and stockholder's equity $ 1,958,858 $ 106,237 $ (85,928) $ 1,979,167
================ ================ ================ =================
</TABLE>
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C>
Operating revenue $ 324,653 $ 25,105 $ - $ 349,758
----------------- -------------- ----------------- -----------------
Operating expenses:
Cost of goods sold 82,168 2,853 - 85,021
Bowling center operating expenses 145,386 13,946 - 159,332
Selling, general, and administrative expenses 32,514 1,557 - 34,071
Depreciation and amortization 53,464 3,400 (107) 56,757
----------------- -------------- ----------------- -----------------
Total operating expenses 313,532 21,756 (107) 335,181
----------------- -------------- ----------------- -----------------
Operating income 11,121 3,349 107 14,577
----------------- -------------- ----------------- -----------------
Nonoperating expenses (income):
Interest expense 50,546 410 - 50,956
Other expenses, net 21 2,534 - 2,555
Interest income (888) (98) - (986)
Equity in loss (income) of subsidiaries 989 - (989) -
----------------- -------------- ----------------- -----------------
Total nonoperating expenses 50,668 2,846 (989) 52,525
----------------- -------------- ----------------- -----------------
Income (loss) before income taxes (39,547) 503 1,096 (37,948)
Provision (benefit) for income taxes (8,179) 1,492 - (6,687)
----------------- -------------- ----------------- -----------------
Net (loss) income before equity in loss of
joint ventures (31,368) (989) 1,096 (31,261)
Equity in loss of joint ventures (1,563) - - (1,563)
================= ============== ================= =================
Net (loss) income $ (32,931) $ (989) $ 1,096 $ (32,824)
================= ============== ================= =================
</TABLE>
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
------------- ------------- ------------ -------------
<S> <C>
Cash flows from operating activities:
Net loss $ (32,931) $ (989) $ 1,096 $ (32,824)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 53,464 3,400 (107) 56,757
Equity in loss of joint ventures 1,563 - - 1,563
Deferred income taxes - - - -
Amortization of bond discount 11,543 - - 11,543
Equity in earnings of subsidiaries 989 - (989) -
Loss on the sale of property and equipment, net 267 - - 267
Changes in assets and liabilities:
Accounts and notes receivable 7,258 1,468 - 8,726
Receivable from Parent 254,781 - - 254,781
Receivables and payables - intercompany (25,646) 25,646 - -
Inventories (13,835) (73) - (13,908)
Other assets (18,832) 89 - (18,743)
Accounts payable and accrued expenses (32,352) 3,171 - (29,181)
Income taxes payable (240) 554 - 314
Other long-term liabilities (126) - - (126)
------------ ----------------- ------------------ ------------------
Net cash provided by operating activities 205,903 33,266 - 239,169
------------ ----------------- ------------------ ------------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (106,573) (46,218) - (152,791)
Investments in and advances to joint ventures (5,377) - - (5,377)
Purchases of property and equipment (25,839) (1,846) - (27,685)
Proceeds from sale of property and equipment 193 - - 193
------------ ----------------- ------------------ ------------------
Net cash used in investing activities (137,596) (48,064) - (185,660)
------------ ----------------- ------------------ ------------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred
financing costs 166,500 38,000 204,500
Payments on long-term debt (239,361) (22,997) - (262,358)
Contribution from Parent 1,042 - - 1,042
Noncompete obligations (423) - - (423)
------------ ----------------- ------------------ ------------------
Net cash (used in) provided by financing activities (72,242) 15,003 - (57,239)
------------ ----------------- ------------------ ------------------
Effect of exchange rates on cash (395) 369 - (26)
------------
----------------- ------------------ ------------------
Net (decrease) increase in cash (4,330) 574 - (3,756)
Cash and cash equivalents at beginning of period 33,457 2,333 - 35,790
============ ================= ================== ==================
Cash and cash equivalents at end of period $ 29,127 $ 2,907 $ - $ 32,034
============ ================= ================== ==================
</TABLE>
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information in this report contains forward-looking statements, which
are statements other than historical information or statements of current
condition. Some forward-looking statements may be identified by use of terms
such as "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans and objectives of AMF Group
Holdings Inc. ("AMF Group Holdings") and its subsidiaries (collectively, the
"Company"), including AMF Bowling Worldwide, Inc. ("Bowling Worldwide"), for
future operations. In light of the risks and uncertainties inherent in all
future projections, the inclusion of forward-looking statements in this report
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. Many factors could
cause the Company's actual results to differ materially from those in the
forward-looking statements, including, among other things: (i) the Company's
ability to 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, (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
the Company to generate sufficient cash flow in a timely manner to satisfy
principal and interest payments on its indebtedness, (vi) the popularity of
bowling as an activity in the United States and abroad, (vii) the continuation
or worsening of economic difficulties currently being experienced by certain
countries in the Asia Pacific region and (viii) fluctuations in currency
exchange rates which affect translation of operating results. In addition,
actual results may differ materially from forward-looking statements in this
report as a result of factors generally applicable to companies in similar
businesses, including, among other things: (i) a decline in general economic
conditions, (ii) an adverse judgment in pending or future litigation and (iii)
increased competitive pressure from current competitors and future market
entrants. The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included elsewhere in this report. Bowling Worldwide undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Background
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and AMF Group Holdings' Condensed
Consolidated Financial Statements (unaudited) included elsewhere herein.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
an issuer's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
General
The Company is principally engaged in two business segments: (i) the
ownership or operation of 413 U.S. bowling centers and 120 international bowling
centers ("Bowling Centers"), including fourteen joint venture centers operated
with third parties, as of June 30, 1998; and (ii) the manufacture and sale of
bowling equipment such as automatic pinspotters, automatic scoring equipment,
bowling pins, lanes, ball returns, certain spare parts, and the resale of allied
products such as bowling balls, bags, shoes, and certain other spare parts
("Bowling Products").
<PAGE>
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations discuss
results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
are set forth below. The business segment results presented below are before
intersegment eliminations since the Company's management believes that this will
provide a more accurate comparison of performance by segment from year to year.
The intersegment eliminations are not material. Interest expense is presented on
a gross basis. The results of Bowling Centers for the first six months of 1998
reflect the inclusion of 154 centers acquired and one new center constructed
since July 1, 1997.
Acquisitions
The Company continued its aggressive bowling center acquisition program
during the second quarter of 1998. While the Company will continue its
acquisition and consolidation program, the number of centers acquired will be
reduced over the next 12 months as the Company will become more selective in
its acquisitions in response to lower EBITDA of Bowling Products and the demands
of integration of newly acquired centers. The Company is engaged in ongoing
evaluations of and discussions with third parties regarding possible bowling
center acquisitions. Management's plans to expand the bowling center operations
are subject to, among other things, the availability of funds and the
continuation of favorable economic and financial conditions, which are generally
not within the Company's control.
From January 1, 1998 through June 30, 1998, the Company acquired 46 bowling
centers in the United States, 15 centers in the United Kingdom and five centers
in Australia from unrelated sellers. Between June 30, 1998 and July 31, 1998,
the Company acquired six bowling centers in the United States from unrelated
sellers. See "Note 8. Acquisitions" in the Notes to Condensed Consolidated
Financial Statements for a discussion of these transactions.
<PAGE>
AMF GROUP HOLDINGS INC.
Selected Financial Data
(unaudited)
(in millions of dollars)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C>
Bowling Centers (before intersegment eliminations)
Operating revenue $ 116.0 $ 92.6 $ 266.5 $ 201.1
------- ------ ------- -------
Cost of goods sold 12.5 8.9 25.9 18.3
Bowling center operating expenses 81.8 61.0 160.6 116.6
Selling, general, and administrative expenses 1.6 1.6 3.1 3.2
Depreciation and amortization 24.4 18.2 46.3 34.3
------- ------ ------- -------
Operating income (loss) $ (4.3) $ 2.9 $ 30.6 $ 28.7
======= ====== ======= =======
Bowling Products (before intersegment eliminations)
Operating revenue $ 51.6 $ 72.7 $ 92.7 $ 124.7
Cost of goods sold 37.8 43.5 67.1 74.7
------- ------ ------- -------
Gross profit 13.8 29.2 25.6 50.0
-
Selling, general, and administrative expenses 10.0 9.9 21.7 18.7
Depreciation and amortization 5.6 5.1 11.0 9.9
------- ------ ------- -------
Operating income (loss) $ (1.8) $ 14.2 $ (7.1) $ 21.4
======= ====== ======= =======
Consolidated
Operating revenue $ 162.2 $ 160.5 $ 349.8 $ 318.1
------- ------- ------- -------
Cost of goods sold 46.1 48.0 85.0 86.1
Bowling center operating expenses 80.7 60.7 159.4 116.0
Selling, general, and administrative expenses 17.1 16.2 34.0 30.2
Depreciation and amortization 30.0 22.9 56.8 43.4
------- ------- ------- -------
Operating income (loss) (11.7) 12.7 14.6 42.4
Interest expense, gross 25.0 29.8 51.0 57.5
Other expense, net 1.3 0.5 1.5 1.3
------- ------- ------- -------
Loss before income taxes (38.0) (17.6) (37.9) (16.4)
Benefit for income taxes (7.1) (5.3) (6.7) (4.2)
------- ------- ------- -------
Net loss before equity in loss of joint ventures (30.9) (12.3) (31.2) (12.2)
Equity in loss of joint ventures (1.3) - (1.6) -
------- ------- ------- -------
Net loss $ (32.2) $ (12.3) $ (32.8) $ (12.2)
======= ======= ======= =======
Selected Data:
EBITDA
Bowling Centers $ 20.1 $ 21.1 $ 76.9 $ 63.0
Bowling Products $ 3.8 $ 19.3 $ 3.9 $ 31.3
EBITDA margin
Bowling Centers 17.3% 22.8% 28.9% 31.3%
Bowling Products 7.4% 26.5% 4.2% 25.1%
</TABLE>
<PAGE>
Bowling Centers
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. Bowling Centers derives its
revenue and profits from three principal sources: (i) bowling, (ii) food and
beverage and (iii) other sources, such as shoe rental, amusement games,
billiards and pro shops. For the six months ended June 30, 1998, bowling, food
and beverage and other revenue represented 59.3%, 27.1% and 13.6% of total
Bowling Centers revenue, respectively. For the six months ended June 30, 1997,
bowling, food and beverage and other revenue represented 61.0%, 25.2% and 13.8%
of total Bowling Centers revenue, respectively.
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Bowling Centers operating revenue increased $23.4 million, or 25.3%. An
increase of $31.0 million is attributable to new centers, of which $25.8 million
is from U.S. centers and $5.2 million is from international centers. Of these
new centers, 154 centers were acquired and one center was constructed since July
1, 1997. Constant centers (centers in operation for at least one full fiscal
year) operating revenue decreased $6.5 million, or 8.5%. U.S. constant centers
revenue decreased $4.4 million primarily as a result of lower lineage (games per
lane per day), orienting and integrating newly acquired centers and developing
nationally branded chain development activities, and record-setting hot weather
which adversely affected customer visits. International constant centers
operating revenue decreased $2.1 million primarily due to unfavorable currency
translation of results and the World Cup which adversely impacted revenue
throughout Europe. On a constant exchange rate basis, international operating
revenue would have increased $0.7 million in the second quarter of 1998 compared
to the second quarter of 1997. A decrease of $1.1 million in total operating
revenue was also attributable to ten centers which were closed since June 30,
1997.
Cost of goods sold increased $3.6 million, or 40.4%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $20.8 million, or 34.1%. An increase of $21.7
million was attributable to the net increase in the number of centers and a
decrease of $0.1 million was primarily attributable to constant centers. A
decrease of $0.8 million was attributable to closed centers. As a percentage of
its revenue, Bowling Centers operating expenses were 70.5% for the second
quarter of 1998 compared to 65.9% for the second quarter of 1997. The 4.6%
increase was primarily attributable to the lag in achieving cost reductions in
newly acquired centers, expenses associated with nationally branded chain
development activities and lower constant centers revenue on which certain fixed
operating expenses became a higher percentage of revenue in the second quarter
of 1998 compared to the second quarter of 1997. Generally, Bowling Centers
operating expenses are a higher percentage of revenue in the second and third
quarters as compared to the first and fourth quarters in which league play is
significant.
Selling, general and administrative expenses were flat in the quarter
ended June 30, 1998 compared to the quarter ended June 30, 1997.
EBITDA decreased $1.0 million, or 4.7%, primarily as a result of the
effects of the decrease in constant centers revenue discussed above.
Additionally, Bowling Centers EBITDA was impacted by the lag in achieving cost
reductions in newly acquired centers, increased staffing and, internationally,
by the unfavorable currency translation discussed above. EBITDA margin for the
second quarter of 1998 was 17.3% compared to 22.8% in the second quarter of
1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Bowling Centers operating revenue increased $65.4 million, or 32.5%. An
increase of $78.1 million is attributable to 188 new centers which were acquired
and one new center which was constructed after December 31, 1996, of which $71.0
million is from U.S. centers, and $7.1 million is from international centers.
Constant centers operating revenue decreased $10.3 million, or 5.7%. U.S.
constant centers revenue decreased $6.3 million primarily as a result of lower
lineage (games per lane per day), orienting and integrating newly acquired
centers and developing nationally branded chain development activities, and
record-setting hot weather which adversely affected customer visits.
International constant centers operating revenue decreased $4.0 million
primarily due to unfavorable currency translation of results and the World Cup
which adversely impacted revenue throughout Europe. On a constant exchange rate
basis, international operating revenue would have increased $0.8 million in the
first six months of 1998 compared to the first six months of 1997. A decrease of
$2.4 million in total operating revenue was also attributable to ten centers
which were closed since June 30, 1997.
Cost of goods sold increased $7.6 million, or 41.5%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $44.0 million, or 37.7%. An increase of $45.2
million was attributable to the net increase in the number of centers and an
increase of $0.7 million was primarily attributable to increased regional
staffing costs and expenses associated with nationally branded chain development
activities. A decrease of $1.9 million was attributable to closed centers. As a
percentage of its revenue, Bowling Centers operating expenses were 60.3% for the
first six months of 1998 compared to 58.0% for the first six months of 1997
primarily attributable to the lag in achieving cost reductions in newly acquired
centers, expenses associated with nationally branded chain development
activities and the higher fixed operating costs as a percentage of constant
centers revenue which decreased in the second quarter of 1998.
Selling, general and administrative expenses decreased $0.1 million, or
3.1%, primarily due to exchange rate fluctuations in the first quarter of 1998.
EBITDA increased $13.9 million, or 22.1%, primarily as a result of the
net increase in the number of centers. Additionally, Bowling Centers EBITDA was
impacted by the lag in achieving cost reductions in newly acquired centers,
increased staffing and, internationally, by the unfavorable currency translation
discussed above. EBITDA margin for the first six months of 1998 was 28.9%
compared to 31.3% in the first six months of 1997.
Bowling Products
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Bowling Products operating revenue decreased $21.1 million, or 29.0%. New
Center Package (defined as all the equipment necessary to outfit one bowling
lane) ("NCP" or "NCPs") revenue decreased $16.9 million, or 43.3%, and
Modernization and Consumer Products (which includes modernization equipment,
supplies, spare parts and consumable products) revenue decreased $4.2 million,
or 12.5%. Operating results have been adversely impacted by current economic
difficulties in certain markets of the Asia Pacific region which have reduced
the level of shipments for NCPs and Modernization and Consumer Products sales.
The Company believes has improved its competitive position in international
markets with attractive long term potential through increased investment and a
more aggressive pricing strategy. The strong U.S. dollar also unfavorably
affected pricing and financial statement translation. During the second quarter
of 1998, Bowling Products recorded NCP shipments of 659 units compared to
shipments of 1,172 units for the second quarter of 1997. The decrease in
Modernization and Consumer Products revenue is primarily due to decreased sales
to Japanese customers due to economic conditions and to U.S. customers who have
delayed orders in anticipation of new product introductions.
Gross profit decreased $15.4 million, or 52.7%, primarily as a result of
the decreased levels of NCP shipments, the strong U.S. dollar and competitive
pricing as discussed above and unabsorbed fixed overhead resulting from low
production levels.
Bowling Products selling, general and administrative expenses increased
$0.1 million, or 1.0%. Bowling Products' reductions in selling, general and
administrative expenses were offset by increased investment in international
markets with long term potential.
Bowling Products EBITDA decreased $15.5 million, or 80.3%, and the Bowling
Products EBITDA margin decreased from 26.5% in the second quarter of 1997 to
7.4% in the second quarter of 1998 primarily as a result of the lower gross
profit discussed above.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Bowling Products operating revenue decreased $32.0 million, or 25.7%. NCP
revenue decreased $23.0 million, or 36.6%, and Modernization and Consumer
Products revenue decreased $9.0 million, or 14.5%. Operating results have been
adversely impacted by current economic difficulties in certain markets of the
Asia Pacific region, the strong U.S. dollar and lower prices as discussed above.
During the first six months of 1998, Bowling Products recorded NCP shipments of
1,163 units compared to shipments of 2,069 units for the first six months of
1997. The decrease in Modernization and Consumer Products revenue is primarily
due to decreased sales to Japanese customers due to economic conditions and to
U.S. customers who have delayed orders in anticipation of new product
introductions.
Gross profit decreased $24.4 million, or 48.8%, primarily as a result of
the decreased levels of NCP shipments, the strong U.S. dollar and competitive
pricing as discussed above and unabsorbed fixed overhead resulting from low
production levels.
Bowling Products selling, general and administrative expenses increased
$3.0 million, or 16.0%, primarily as a result of increases of $1.0 million in
advertising expenses and $1.9 million related to staffing. These increases are
primarily related to increased investment in international markets with long
term potential.
Bowling Products EBITDA decreased $27.4 million, or 87.5%, and the Bowling
Products EBITDA margin decreased from 25.1% in the first six months of 1997 to
4.2% in the first six months of 1998 as a result of the lower gross profit and
increased selling, general and administrative expense discussed above.
Consolidated
Depreciation and Amortization
Depreciation and amortization increased $7.1 million, or 31.0%, in the
second quarter of 1998, and $13.4 million, or 30.9%, in the six months ended
June 30, 1998 compared to the comparable periods in 1997. The increase for the
second quarter and the six months was primarily attributable to depreciation of
property and equipment of centers acquired since June 30, 1997. Incremental
depreciation expense was also incurred as a result of capital expenditures.
Interest Expense
Gross interest expense decreased $4.8 million, or 16.1%, in the second
quarter of 1998, and $6.5 million, or 11.3%, in the six months ended June 30,
1998 compared to the comparable periods in 1997. Interest savings associated
with the reduction of bank debt and the redemption of a portion of Bowling
Worldwide's senior subordinated discount notes with proceeds of AMF Bowling's
initial public offering (the "Initial Public Offering") and AMF Bowling's
issuance of zero coupon convertible debentures (the "Debentures") on May 12,
1998 were partially offset by interest incurred on increased levels of bank debt
as a result of center acquisitions. See "Liquidity and Capital Resources" for
further discussion of the bank debt and the Debentures. Non-cash bond interest
amortization totaled $5.8 million and $11.5 million for the quarter and six
months ended June 30, 1998, respectively, compared to $8.5 million and $16.8
million for the quarter and six months ended June 30, 1997, respectively.
Net Loss
Net losses in the second quarter and six months ended June 30, 1998 were
$32.2 million and $32.8 million, respectively, compared to net losses of $12.3
million and $12.2 million in the second quarter and six months ended June 30,
1997, respectively. The decrease of $19.9 million in the second quarter was
primarily a result of decreases in Bowling Products revenue and EBITDA discussed
above and the increase in depreciation expense. The decrease of $20.6 million
for the six months was primarily a result of decreases in Bowling Products
revenue and EBITDA discussed above and the increase in depreciation expense.
Additionally, the Company recorded $1.3 million and $1.6 million in equity in
loss of joint ventures in the second quarter and six months ended June 30, 1998,
respectively.
Income Taxes
Prior to the Acquisition, certain of the companies within the
Predecessor Company elected S corporation status under the Internal Revenue Code
of 1986, as amended (the "Code"). Upon consummation of the Acquisition, those
companies became taxable corporations under the Code.
In connection with the Acquisition, the two principal subsidiaries of
the Company elected under Section 338 (h) (10) of the Code to treat the stock
purchase in the Acquisition as a deemed asset acquisition for the purposes of
U.S. federal income taxes. These elections permitted both of the affiliated
companies to revalue their assets to fair market value and to treat any
amortizable goodwill as tax deductible over fifteen years.
As of December 31, 1997, the Company had net operating losses of
approximately $110.0 million and foreign tax credits of $12.4 million which will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company has recorded a valuation reserve as of June
30, 1998, for $15.6 million related to net operating losses and foreign tax
credits that the Company does not expect will be utilized prior to their
expirations.
Liquidity
The Company's primary source of liquidity is cash provided by operations
and credit facilities as described below. Working capital on June 30, 1998 was
$77.7 million compared to $44.0 million as of December 31, 1997, an increase of
$33.7 million. Increases in working capital were primarily attributable to an
increase of $14.7 million in inventory balances primarily due to new product
introductions, a decrease of $12.2 in accounts payable, a decrease of $16.1
million in accrued expenses, and a net increase of $1.2 million in other current
assets and liabilities. These increases in working capital were offset by a
decrease in working capital caused by a decrease of $8.0 million in accounts
receivable primarily as a result of lower Bowling Products sales and an increase
of $2.5 million in the current portion of long term debt.
Net cash flows provided by operating activities were $239.2 million for the
six months ended June 30, 1998 compared to net cash flows provided of $8.2
million for the six months ended June 30, 1997, an increase of $231.0 million. A
decrease of $30.6 million was caused by decreased levels of accounts payable and
accrued expenses, a decrease of $20.6 million was attributable to the net loss
of $32.8 million recorded in the first six months of 1998 compared to a net loss
of $12.2 million in the same period in 1997, a decrease of $5.3 million was
attributable to lower levels of bond amortization resulting from the redemption
of a portion of Bowling Worldwide's senior subordinated discount notes in
connection with the Initial Public Offering, a decrease of $1.9 million was
attributable to the decrease in income taxes payable, and a net decrease of $5.4
million was attributable to changes in other operating activities. These
decreases were offset by an increase of $254.8 million in the payable to AMF
Bowling primarily attributable to the equity contribution made by AMF Bowling to
Bowling Worldwide from the net proceeds of the Debentures (defined below) to be
used for repayment of borrowings under the Credit Agreement, an increase of
$26.7 million attributable to lower levels of accounts receivable and an
increase of $13.3 million in depreciation and amortization.
Net cash flows used in investing activities were $185.7 million for the six
months ended June 30, 1998 compared to net cash flows used of $147.5 million for
the six months ended June 30, 1997, an increase of $38.2 million. Bowling Center
acquisition spending and purchases of property and equipment increased by $30.6
million and $2.1 million, respectively, in the first six months of 1998 compared
to the same period in 1997. In the first six months of 1998, 66 centers were
purchased compared to 64 centers in the same period in 1997. Investments in and
advances to joint ventures totaled $5.4 million in the first six months of 1998
compared to no investments in or advances to joint ventures in the first six
months of 1997. Other cash flows provided from investing activities increased
$0.1 million. See "Note 8. Acquisitions" in the Notes to Condensed Consolidated
Financial Statements and "--Capital Expenditures" for additional discussion of
these investing activities.
Net cash used in financing activities was $57.2 million for the six months
ended June 30, 1998 compared to net cash provided of $112.4 million for the six
months ended June 30, 1997. Proceeds from long term debt increased $71.0 million
primarily as a result of funding center acquisitions and working capital.
Payments on long-term debt were higher by $242.1 million in 1998 compared to
1997 primarily because $249.6 million of the proceeds from the Debentures was
used to pay down the Bank Facility under the Credit Agreement, and such repaid
indebtedness is available for reborrowing. In accordance with the terms of the
Credit Agreement, scheduled principal payments in the first six months of 1998
were $7.5 million lower than payments made in the same period in 1997. In the
first six months of 1998, AMF Bowling contributed $1.1 million in equity to
Bowling Worldwide. This net contribution was composed of $1.2 million
attributable to shares of Common Stock issued in the Active West acquisition,
$0.5 million attributable to shares of Common Stock issued upon exercise of
employee stock options, and $0.6 million of expenses of the Initial Public
Offering paid in the first half of 1998. Net cash flows provided by other
financing activities increased $0.4 million. See "Note 5. Long-Term Debt", "Note
7. Employee Benefit Plans", and "Note 8. Acquisitions" in the Notes to Condensed
Consolidated Financial Statements and "--Capital Resources".
As a result of the aforementioned, cash decreased by $3.8 million for the
six months ended June 30, 1998 compared to a decrease of $26.9 million for the
six months ended June 30, 1997.
The net proceeds of the Debentures discussed above were approximately
$273.1 million, of which $249.6 million was used to repay senior bank
indebtedness under the Credit Agreement and $23.5 million was used for
acquisitions and general corporate purposes. The senior bank indebtedness repaid
remains available for reborrowing, subject to certain conditions, and such
repayment and resulting ability to reborrow will enable the Company to incur
additional indebtedness under the Credit Agreement to fund the Company's ongoing
bowling center acquisition program and for other corporate purposes.
Capital Resources
The Company's total indebtedness increased substantially as a result of the
Acquisition and the Company's ongoing bowling center acquisition program. At
June 30, 1998, the Company's debt structure consisted of $563.5 million of
Senior Debt, $250.0 million of senior subordinated notes, and $200.8 million of
senior subordinated discount notes. The Company's Senior Debt consisted of
$433.5 million outstanding under the Term Facilities, $128.0 million outstanding
under the Bank Facility and $2.0 million represented by one mortgage note. At
June 30, 1998, the Company was also capitalized with equity of $619.9 million.
The Company has the ability to borrow for general corporate purposes and
for acquisitions pursuant to the $355.0 million Bank Facility, subject to
certain conditions. At June 30, 1998, $227.0 million was available for borrowing
under the Bank Facility. Between June 30, 1998 and July 31, 1998, additional
borrowings under the Bank facility totaled $20.0 million and were used to fund
the acquisitions of bowling centers described above and for general corporate
purposes. At July 31, 1998, $148.0 million was outstanding under the Bank
Facility.
On May 12, 1998, AMF Bowling issued the Debentures for gross proceeds of
approximately $284.1 million. The Debentures mature on May 12, 2018 and have a
yield to maturity of 7% per annum. The Debentures were issued at an original
price of $252.57 per $1,000 principal amount at maturity and are convertible at
any time prior to maturity into shares of Common Stock at a conversion rate of
8.6734 shares per $1,000 principal amount at maturity. If held to maturity and
not redeemed or repurchased by AMF Bowling, the Debentures will accrue to an
aggregate principal amount at maturity of $1.125 billion. The Debentures are not
entitled to a sinking fund. The Debentures are not redeemable at the option of
AMF Bowling before May 12, 2003. Thereafter, the Debentures are redeemable for
cash at the option of AMF Bowling at redemption prices specified in the
Debentures.
The Debentures will be purchased by AMF Bowling, at the option of
holders of the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for
purchase prices specified in the Debentures. The Debentures may also be redeemed
at the option of the holders of the Debentures upon the occurrence of a Change
of Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof. In connection with
the issuance of the Debentures, AMF Bowling has agreed to file a shelf
registration statement in respect of the Debentures and the Common Stock
issuable on conversion, redemption or repurchase thereof. If the shelf
registration statement has not been filed within 90 days, or declared effective
within 180 days, after May 12, 1998, AMF Bowling must pay liquidated damages as
specified in the related registration rights agreement.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance
upon conversion, redemption or repurchase of the Debentures.
The Company has funded its cash needs through the Bank Facility as well
as cash flow from operations. A substantial portion of the Company's available
cash will be applied to service outstanding indebtedness. For the six months
ended June 30, 1998, the Company incurred cash interest expense of $38.5
million, representing 53.9% of EBITDA 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 for the period.
The indentures governing the senior subordinated notes and the senior
subordinated discount notes and the provisions of the Credit Agreement contain
financial and operating covenants and significant restrictions on the ability of
the Company to pay dividends, incur indebtedness, make investments and take
certain other corporate actions. As of June 30, 1998, the Company is in
compliance with all of its covenants.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control,
including the conditions of the debt and equity markets. Based upon the current
level of operations, management believes that available cash flow, together with
available borrowings under the Credit Agreement and other sources of liquidity,
will be adequate to meet the Company's requirements for working capital, capital
expenditures, scheduled payments of principal of, and interest on, its Senior
Debt, and interest on the senior subordinated notes and senior subordinated
discount notes. There can be no assurance, however, that the Company's business
will generate sufficient cash flow from operations or that future borrowings
will be available in an amount sufficient to enable the Company to service its
indebtedness, or make necessary capital expenditures, or that any refinancing
would be available on commercially reasonable terms or at all.
Capital Expenditures
For the six months ended June 30, 1998, the Company's capital expenditures
were $27.7 million compared to $25.6 million for the six months ended June 30,
1997, an increase of $2.1 million. Bowling Centers maintenance and modernization
expenditures increased $3.3 million attributable to the higher number of centers
as a result of the Company's acquisition program, Bowling Products expenditures
increased $3.6 million as a result of expenditures on production equipment for
certain new products and equipment for international sales offices, and other
expenditures increased $2.4 million. Expenditures on company-wide information
systems decreased $3.1 million. Expenditures for the construction of the Chelsea
Piers center totaled $4.1 million in 1997.
The Company funds its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new centers,
the Bank Facility and issuances of common equity. The Company's management
believes that after the issuance of the Debentures, the amount available under
the Bank Facility will be adequate to fund the Company's ongoing acquisition
program for at least 12 months following the issuance of the Debentures. See
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources" for discussions of funding
of acquisitions of new bowling centers and a description of the Debentures.
Seasonality and Cyclicality
On a consolidated basis, revenue and EBITDA of the Company's businesses are
neither highly seasonal nor highly cyclical. The geographic diversity of the
Company's bowling centers, which operate across different regions of the U.S.
and across 11 other countries, has 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 the Company operates exhibit
different seasonal sales patterns. As a result of the growing number of U.S.
centers attributable to the Company's acquisition program, however, the
seasonality described above is accentuated. In Australia, where the Company has
its largest number of international centers, the reversal of seasons relative to
the U.S. helps mitigate the seasonality in worldwide operations. The Company's
cash flows are further stabilized by the location of many centers in regions
where the climates have high average temperatures and high humidity. In the
U.S., during the summer months when league bowling is generally less active,
bowling centers in the southern U.S. generally show stronger performance
compared to centers in other U.S. regions. See "Note 9. Business Segments" in
the Notes to Condensed Consolidated Financial Statements.
Modernization and Consumer Products sales display seasonality. The U.S.
market, which is the largest market for Modernization and Consumer Products, is
driven by the beginning of league play in the fall of each year. Operators
typically sign purchase orders, particularly for replacement equipment, during
the first four months of the year, after they receive winter league revenue
indications. Equipment is shipped and installed during the summer months, when
leagues are generally less active. Sales of modernization equipment, such as
automatic scoring and synthetic lane overlays, are less predictable and
fluctuate more than the replacement equipment because of the four to ten year
life cycles of these major products.
The NCP category of Bowling Products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
South Korea and Taiwan) which, in the Company's experience, last five years or
more. Current economic difficulties in certain markets of the Asia Pacific
region have resulted in the reduction in the order rate, level of shipments and
backlog for NCPs. See "--International Operations."
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments (such
as restrictions on transfer of funds, import and export duties and quotas,
foreign customs, tariffs and value added taxes and unexpected changes in
regulatory environments), difficulty in obtaining distribution and support,
nationalization, and the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
The Company has a history of operating in a number of international
markets, in some cases, for over 30 years. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate adversely impacts sales volume and profit margins
during such periods.
Current economic difficulties in certain markets of the Asia Pacific region
have resulted in a reduction in the order rate, level of shipments and backlog
for NCPs. Management believes that many Asia Pacific customers are delaying
purchases of NCP and modernization equipment as they await the return of
economic stability to their regions. As of June 30, 1998, the NCP backlog was
1,615 units, which represents a reduction of 28.4% compared to a backlog of
2,255 units as of June 30, 1997, and a reduction of 6.4% compared to a backlog
of 1,725 units as of December 31, 1997.
NCP unit sales to China, Japan and other Asia Pacific markets represented
51.5% for the six months ended June 30, 1998 compared to 72.7% for the year
ended December 31, 1997. NCP unit backlog related to China, Japan and other Asia
Pacific markets represented 63.4% of total NCP unit backlog at June 30, 1998
compared to 70.4% at December 31, 1997.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the six months ended June 30,
1998, revenue and EBITDA of international bowling centers represented 15.5% and
20.3% of consolidated results, respectively. For the six months ended June 30,
1997, revenue and EBITDA of international bowling centers represented 16.5% and
17.6% of consolidated results, respectively. For the year ended December 31,
1997, revenue and EBITDA of international bowling centers represented 14.6% and
16.0% of consolidated results, respectively.
Backlog: Recent NCP Sales
The total backlog of NCPs was 1,615 units as of June 30, 1998, representing
a reduction of 6.4% compared to 1,725 units as of December 31, 1997, and a
reduction of 28.4% compared to 2,255 units as of June 30, 1997. NCP orders
included in the backlog are sometimes cancelled by customers in the normal
course of business. Accordingly, the Company has experienced, and expects to
continue to experience, the cancellation of a portion of its NCP orders. NCP
shipments were 1,163 units for the six months ended June 30, 1998, representing
a reduction of 43.8% compared to shipments of 2,069 units for the six months
ended June 30, 1997, largely attributable to the recent economic difficulties in
the Asia Pacific region. See "--International Operations."
Impact of Inflation
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have a
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
<PAGE>
Recent Accounting Pronouncements
Effective for the fiscal year ended December 31, 1998, the Company is
required to adopt Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132 "Employers' Disclosures
About Pensions and Other Post-Retirement Benefits." Effective for the quarter
ended June 30, 1999, the Company is required to adopt SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities." The Company does not expect
that adoption of these standards will have a material adverse impact on the
Company's financial position or results of operations. See "Note 2. Significant
Accounting Policies - Comprehensive Income" in the Notes to Condensed
Consolidated Financial Statements regarding adoption of SFAS No. 130.
Year 2000
The Company is currently developing and installing new worldwide financial,
information, retail and operational systems. Worldwide system implementation is
expected to be complete by December 31, 1999. In connection with this
implementation, system programs have been designed so that the year 2000 will be
recognized as a valid date and will not affect the processing of date-sensitive
information. As of June 30, 1998, the Company spent a total of $15.6 million on
systems installation. The Company expects to spend an additional $4.6 million to
complete the installation. In addition, the Company sells automatic scoring that
is computerized and has developed a software program for a cost to the Company
of approximately $50,000 that will address the year 2000 issue in its automatic
scoring. This software will be made available to customers with service
contracts at no cost and will be sold to customers without service contracts.
The Company believes that the year 2000 issue is being appropriately addressed
through the implementation of these new systems and software development and
does not expect the year 2000 issue to have a material adverse impact on the
financial position, results of operations or cash flows in future periods.
PART II
Item 1. Legal
The Company currently and from time to time is subject to claims and
actions arising in the ordinary course of its business, including environmental
claims, discrimination claims, workers' compensation claims, and personal injury
claims from customers of Bowling Centers. In some actions, plaintiffs request
punitive or other damages that may not be covered by insurance. In management's
opinion, the claims and actions in which the Company is involved will not have a
material adverse impact on its financial position or results of operations.
However, it is not possible to assure the outcome of such claims and actions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the six months ended June 30,
1998.
(b) Reports on Form 8-K:
1. A current report was filed April 27, 1998 reporting certain
financial results for the quarter ended March 31, 1998 and
regarding the announcement by AMF Bowling of a private
offering of zero coupon convertible debentures.
2. A current report was filed on May 8, 1998 describing the
pricing by AMF Bowling of the previously announced zero
coupon convertible debentures.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMF Bowling Worldwide, Inc.
(Registrant)
/s/ Stephen E. Hare August 7, 1998
- -------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Michael P. Bardaro August 7, 1998
- ----------------------
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
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