<PAGE> 1
Pursuant to Rule 424(b)(3)
Registration No. 333-4877
[AMF LOGO]
AMF BOWLING WORLDWIDE, INC.
10 7/8% SENIOR SUBORDINATED NOTES DUE 2006
AND
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
(GUARANTEED BY CERTAIN AFFILIATED COMPANIES AS DESCRIBED HEREIN)
------------------------
The 10 7/8% Series B Senior Subordinated Notes Due 2006 (the "Exchange
Senior Subordinated Notes") and the 12 1/4% Series B Senior Subordinated
Discount Notes Due 2006 (the "Exchange Senior Subordinated Discount Notes" and,
collectively with the Exchange Senior Subordinated Notes, the "Exchange Notes")
have been issued by AMF Bowling Worldwide, Inc. (the "Company"), a Delaware
corporation formerly named AMF Group Inc. The Exchange Notes are fully and
unconditionally guaranteed on a senior subordinated basis, jointly and
severally, by AMF Group Holdings Inc. ("Holdings"), a Delaware corporation of
which the Company is a wholly owned subsidiary, and by the Company's direct and
indirect domestic subsidiaries (collectively, the "Guarantors"). See
"Description of Exchange Notes."
As of the date of this Prospectus, the Exchange Notes are not senior in
priority to any outstanding indebtedness of the Company or its subsidiaries. The
Company has no current plan or intention to incur any indebtedness to which the
Exchange Notes would be senior in priority. The Exchange Senior Subordinated
Notes and the Exchange Senior Subordinated Discount Notes rank pari passu with
one another.
The Exchange Senior Subordinated Notes and the Exchange Senior Subordinated
Discount Notes, are listed under the symbols "AMFG 06" and "AMFG ZR06,"
respectively, on the New York Stock Exchange.
The Exchange Notes are general, unsecured obligations of the Company, are
subordinated to all Senior Debt of the Company, rank pari passu with all other
senior subordinated debt of the Company and will rank senior in right of payment
to all future subordinated debt, if any, of the Company. The claims of holders
of the Exchange Notes are subordinated to the Senior Debt of the Company, which,
as of June 30, 1997, was approximately $679.9 million, $677.9 million of which
consisted of fully secured borrowings under the Credit Agreement, and are
effectively
(cover text continued on next page)
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus has been prepared for and is to be used by Goldman, Sachs &
Co. in connection with offers and sales in market-making transactions of the
Exchange Notes. The Company will not receive any of the proceeds of such sales.
Goldman, Sachs & Co. may act as a principal or agent in such transactions. The
Exchange Notes may be offered in negotiated transactions or otherwise.
------------------------
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus is November 7, 1997.
<PAGE> 2
subordinated to all indebtedness and other liabilities (including trade payables
and capital lease obligations) of the Company's subsidiaries that are not
Guarantors, which as of June 30, 1997, aggregated $9.1 million. The Company's
ratio of debt to total capitalization at June 30, 1997 was approximately 75.7%.
The Exchange Senior Subordinated Notes bear interest at a rate equal to
10 7/8% per annum. Interest on the Exchange Senior Subordinated Notes is payable
semiannually on March 15 and September 15 of each year. The Exchange Senior
Subordinated Discount Notes will not bear interest until March 15, 2001, and
thereafter will bear interest at a rate equal to 12 1/4% per annum. Interest on
the Exchange Senior Subordinated Discount Notes will be payable semiannually on
March 15 and September 15 of each year commencing September 15, 2001. The
Exchange Senior Subordinated Discount Notes are considered to have been issued
with "original issue discount" for federal income tax purposes. See "Risk
Factors -- Original Issue Discount Consequences" and "Description of Certain
Federal Income Tax Consequences of an Investment in the Exchange Notes."
The Exchange Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after March 15, 2001, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date of
redemption. See "Prospectus Summary -- Summary of Terms of Exchange Notes."
Prior to March 15, 1999, up to $100 million in aggregate principal amount
of Exchange Senior Subordinated Notes will be redeemable at the option of the
Company, on one or more occasions, from the net proceeds of public or private
sales of common stock of, or contributions to the common equity capital of, the
Company, at a price of 110.875% of the principal amount of the Exchange Senior
Subordinated Notes, together with accrued and unpaid interest, if any, to the
date of redemption; provided that at least $150 million in aggregate principal
amount of Exchange Senior Subordinated Notes remains outstanding immediately
after such redemption. In addition, prior to March 15, 1999, the Exchange Senior
Subordinated Discount Notes will be redeemable at the option of the Company, on
one or more occasions, from the net proceeds of public or private sales of
common stock of, or contributions to the common equity capital of, the Company,
at a price of 112.250% of the Accreted Value of the Exchange Senior Subordinated
Discount Notes; provided that at least $150 million in Accreted Value of
Exchange Senior Subordinated Discount Notes remains outstanding immediately
after such redemption. The selection of Exchange Notes to be redeemed pursuant
to the options described in this paragraph would be pro rata, by lot or by such
method as the applicable Trustee deems fair and appropriate.
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
may require the Company to repurchase all or a portion of such Holder's Exchange
Notes at 101% of the aggregate principal amount of the Exchange Senior
Subordinated Notes and 101% of the Accreted Value of the Exchange Senior
Subordinated Discount Notes, as applicable, together with accrued and unpaid
interest, if any, to the date of repurchase. There can be no assurance that the
Company will have sufficient funds, or will obtain the requisite consent of
Lenders under the Credit Agreement, to satisfy the Change of Control repurchase
requirement if such requirement arises. See "Risk Factors -- Payment Upon a
Change of Control" and "Description of Exchange Notes."
2
<PAGE> 3
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or Goldman, Sachs & Co. This
Prospectus does not constitute an offer to sell or the solicitation of an offer
to buy any security other than the Exchange Notes, nor does it constitute an
offer to sell or the solicitation of an offer to buy any of the Exchange Notes
to any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation to such person. Neither the delivery of this Prospectus nor any
sale made in connection herewith shall under any circumstances create any
implication that the information contained herein is correct as of any date
subsequent to the date hereof.
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act") for the registration
of the Exchange Notes (together with any supplements, post-effective amendments
and exhibits thereto, the "Registration Statement"). This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company or the
Exchange Notes, reference is hereby made to the Registration Statement. The
Registration Statement, including all exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at the Commission's principal offices at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's regional offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, NW., Washington, D.C. 20549 at prescribed rates.
Statements made in this Prospectus concerning the contents of any contract
or other document referred to herein are not necessarily complete, although the
material terms thereof are described in this Prospectus. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the periodic reporting and other information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Commission. Such materials filed by the Company can be
inspected and copied at the public reference facilities of the Commission and in
the manner described above, as well as on the World Wide Web site maintained by
the Commission at http://www.sec.gov. Such materials are also available at the
office of The New York Stock Exchange, Inc. (the "NYSE").
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be filed
with the Commission to: (i) IBJ Schroder Bank and Trust Company as trustee (the
"Senior Subordinated Note Trustee"), under the Indenture dated as of March 21,
1996 (the "Senior Subordinated Note Indenture") among the Company, the
Guarantors and the Senior Subordinated Note Trustee, pursuant to which the
Exchange Senior Subordinated Notes were issued; and (ii) American Bank National
Association as trustee (the "Senior Subordinated Discount Note Trustee" and,
collectively with the Senior Subordinated Note Trustee, the "Trustees"), under
the Indenture dated as of March 21, 1996 (the "Senior Subordinated Discount Note
Indenture" and, collectively with the Senior Subordinated Note Indenture, the
"Indentures") among the Company, the Guarantors and the Senior Subordinated
Discount Note Trustee, pursuant to which the Exchange Senior Subordinated
Discount Notes were issued and (iii) the holders of the Exchange Notes. The
Company has agreed that, even if it is not required under the Exchange Act to
furnish such information to the Commission, it nonetheless will continue to
furnish information that would be required to be furnished by the Company by
Section 13 of the Exchange Act to the Trustees and the holders of the Exchange
Notes as if it were subject to such periodic reporting requirements.
3
<PAGE> 4
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, which are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as
"believes," "anticipates," "intends" or "expects." The forward-looking
statements contained in this Prospectus are generally located in the material
set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
but may be found in other locations as well. These forward-looking statements
relate to the plans and objectives of the Company for future operations. In
light of the risks and uncertainties inherent in all future projections, the
inclusion of forward-looking statements in this Prospectus should not be
regarded as a representation by 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 before market saturation,
(iii) the risk of adverse political acts or developments in the Company's
existing or proposed markets for its products or in which it operates its
bowling centers, (iv) the Company's ability to retain experienced senior
management, (v) the ability of the Company and its subsidiaries to generate
sufficient cash flow in a timely manner to satisfy principal and interest
payments on their indebtedness and (vi) the popularity of bowling as an activity
in the United States and abroad. In addition, actual results may also differ
materially from forward-looking statements in this Prospectus as a result of
factors generally applicable to companies in similar businesses, including,
among other things: (i) a decline in general economic conditions, (ii) an
adverse judgment in pending or future litigation and (iii) increased competitive
pressure from current competitors and future market entrants. The foregoing
review of important factors should not be construed as exhaustive and should be
read in conjunction with other cautionary statements that are included in the
Registration Statement. The Company 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.
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements appearing elsewhere in this
Prospectus. As used in this Prospectus, the "Company" refers to AMF Bowling
Worldwide, Inc. and, unless the context requires otherwise, "AMF" refers to the
Company and its subsidiaries. Except as otherwise indicated herein, all pro
forma information has been prepared to give effect to the Acquisition (as
defined below) of AMF as if it had occurred on January 1, 1996. EBITDA (which
represents earnings before net interest expense, income taxes, depreciation and
amortization, and other income and expenses) 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 ("GAAP"). The fragmented nature of the bowling centers
business makes it difficult to compile reliable industry-wide statistics.
Accordingly, industry statistics provided in this Prospectus should be regarded
as approximations with a potentially significant margin of error.
THE COMPANY
AMF is the largest bowling company in the world. The Company operates 447
bowling centers worldwide which generate over 60 million customer visits per
year. AMF is the U.S. market leader with 361 bowling centers, and is also the
largest operator internationally, with 86 bowling centers in nine countries. In
addition, AMF has been a leader in the bowling equipment industry for over 50
years, having revolutionized ten pin bowling with the introduction of the first
automatic pinspotter in 1946. AMF is one of only two bowling equipment
manufacturers that compete on a global basis. Management believes that AMF
bowling equipment accounts for approximately 41% of the world's installed base
of bowling equipment.
The worldwide bowling center and bowling equipment industry generates
approximately $9 billion in annual revenue and includes approximately 13,000
bowling centers in over 80 countries. The U.S. bowling center and bowling
equipment industry generates in excess of $4 billion of revenue annually and
includes approximately 5,900 centers. Over 100 million people participate
annually in bowling worldwide, according to the Federation Internationale des
Quilleurs (the "FIQ"), the official organization of the worldwide bowling
industry. The bowling center industry in both the U.S. and abroad is highly
fragmented. In the U.S., the next closest competitor to AMF's 361 centers has
approximately 111 centers. The next three largest operators collectively account
for approximately 55 of the total 5,900 centers.
An investor group led by GS Capital Partners II, L.P. (together with
affiliated investment funds, "GSCP"), an affiliate of Goldman, Sachs & Co.,
acquired AMF in May 1996 for a total purchase price of approximately $1.37
billion. The investor group appointed a new management team that has
aggressively pursued a three-part strategy:
- consolidate the U.S. bowling center industry,
- build a nationally recognized brand of superior bowling and
entertainment centers, and
- capitalize on the demand for bowling products and centers in certain
international markets.
Management is utilizing the well-recognized AMF name to build the only
national branded network of bowling and entertainment centers in the U.S.
through a series of initiatives. These include introducing innovative new
products, such as bumper bowling and Xtreme(TM) Bowling, upgrading the physical
appearance of centers, and improving the food and beverage offerings. Since May
1996, AMF's management team has grown the number of AMF's U.S. centers from 207
to 361, an increase of approximately 74%, principally through acquisitions.
AMF is also capitalizing on the strong international growth in the demand
for bowling products through direct sales of equipment and the building of new
bowling centers abroad. Strong demand
5
<PAGE> 6
for AMF's New Center Packages ("NCPs"), which include all of the equipment
necessary to outfit one new bowling lane, drove AMF's backlog from 1,426 NCP
units at December 31, 1996 to 2,085 NCP units at October 26, 1997, an increase
of approximately 46%. Over 90% of the Company's NCP backlog is to international
markets such as China, Japan and Germany. Further, AMF is acting to accelerate
the development of bowling in key potential markets. During 1997, AMF entered
into joint ventures to build and operate bowling centers equipped with AMF
bowling products in China and selected Southeast Asian countries, and in Brazil
and Argentina.
BUSINESS STRATEGY
AMF believes that its future growth will depend on the continued success of
its three-part strategy to consolidate the U.S. bowling center industry, build a
nationally recognized AMF brand of superior bowling and entertainment centers,
and capitalize on the demand for bowling products and centers in certain
international markets. The key elements of the strategy are:
CONSOLIDATE THE FRAGMENTED U.S. BOWLING CENTER INDUSTRY. In addition to
the 160 centers that AMF has acquired since May 1996, the Company's dedicated
acquisition team has identified approximately 2,000 potential center acquisition
candidates in the United States. The Company employs a regional clustering
strategy for its U.S. centers and focuses on acquiring centers that either fit
into existing geographic clusters or could be the base for forming new clusters.
Management believes that none of the Company's competitors in the U.S. bowling
industry is pursuing such an active acquisition strategy.
IMPROVE ACQUIRED CENTERS' PROFITABILITY. The Company believes that its
EBITDA margins are among the highest of operators of U.S. bowling center chains.
This belief is based on publicly available information and on the Company's
knowledge of the industry, due to the Company's experience in operating the
largest U.S. bowling center chain, in participating in various industry trade
associations and in evaluating many U.S. bowling centers and chains for possible
acquisition. Following an acquisition, management acts to increase profitability
by cutting costs and introducing programs to increase revenue. Specifically, the
Company improves marketing programs, reduces overhead, optimizes staffing,
implements improved financial controls, centralizes management and maintenance
of equipment, and centralizes purchasing. The Company often makes immediate
capital and other improvements to upgrade the centers it acquires which are
designed to generate increased revenue and to further AMF's goal of creating a
nationally recognized brand of superior bowling and entertainment centers.
BUILD A NATIONALLY RECOGNIZED BRAND OF SUPERIOR BOWLING AND ENTERTAINMENT
CENTERS. AMF believes it offers a superior bowling and entertainment experience
utilizing innovative products such as Xtreme(TM) Bowling, which uses
glow-in-the-dark pins and equipment, black lighting and music; bumper bowling
for children, in which bumpers prevent balls from rolling into the gutter;
computerized, automatic and color scoring; and time period discounts for certain
groups, such as seniors and children. The Company is also increasing concourse
space in certain of its centers for amusement games, billiards and other
activities. AMF is selectively introducing the "Family Fun Fest" bowling center,
which offers expanded state-of-the-art arcade and video games. The Company also
seeks to increase its profile through the sponsorship of Special Olympics
International and by hosting professional bowling tournaments.
BUILD NEW CENTERS. The Company has built new bowling centers in attractive
markets to enhance its Bowling Centers business and also to serve as a showcase
for the products manufactured by its Bowling Products business. These centers
utilize state-of-the-art equipment and present bowling as part of a family
entertainment experience and are an integral part of AMF's efforts to build a
nationally branded network of superior bowling and entertainment centers. For
instance, in August 1997, the Company opened a new 40-lane bowling center at
Chelsea Piers in New York, the first new bowling center in Manhattan in 30
years.
6
<PAGE> 7
IMPROVE FOOD AND BEVERAGE REVENUES. The Company estimates that it has over
60 million customer visits per year in its bowling centers. The Company is
expanding and improving the food and beverage product offerings at many of its
centers to take better advantage of its significant customer traffic. AMF also
capitalizes on purchasing economies of scale. The Company is one of the nation's
leading on-premise accounts for both Anheuser Busch Companies, Inc. and The
Coca-Cola Company.
CAPITALIZE ON GROWING GLOBAL DEMAND FOR BOWLING PRODUCTS. Management
believes that AMF's well-established global brand name, the quality of its
products, and its comprehensive service and strong direct sales force and
distribution network will enable it to take advantage of growing NCP demand
worldwide. The Company is focused on sales of NCPs (which comprised 48% of AMF's
Bowling Products sales in 1996) into selected countries with demonstrated strong
demand for bowling products. AMF's backlog of NCPs increased by approximately
46% from 1,426 units at December 31, 1996 to 2,085 units at October 26, 1997.
Customers outside the U.S. comprise over 90% of the current NCP backlog total,
with the largest portion going to markets such as China, Japan and Germany. In
addition, AMF will continue to acquire and to build international bowling
centers on a selective basis, either to enhance the growth of bowling in
countries which present attractive opportunities for the sale of bowling
products or to enhance AMF's competitive position in a particular country's
bowling center industry.
ACCELERATE THE DEVELOPMENT OF BOWLING IN SELECTED INTERNATIONAL
MARKETS. In addition to the international markets that currently have a high
demand for bowling products, management believes that selected international
markets which are in the early development stage have the potential for high
growth. Examples of such early stage markets are India which has over 25 million
people per lane of installed bowling equipment, Poland which has over 2 million
people per lane, Indonesia which has over 650,000 people per lane, and Brazil
which has 450,000 people per lane. By contrast, mature markets, such as the U.S.
and Korea, have populations per lane of 2,000 and 3,600, respectively. There can
be no assurance that these early stage markets will develop to the same extent
as the United States or Korea, as only a small number of markets have achieved
this level of development. AMF seeks to accelerate the industry's growth in
early stage markets by building showcase centers and conducting promotional
programs. As bowling becomes more popular, local developers and entrepreneurs
build new bowling centers, which are outfitted with equipment, and drive demand
for NCPs. To capitalize on this development cycle, AMF has entered into joint
ventures to build, own and operate up to 20 bowling centers in China and
Southeast Asia and 39 bowling centers in Brazil and Argentina. The Company is
also developing a center in India and pursuing opportunities in Russia and
Poland.
PROVIDE INNOVATIVE AND QUALITY PRODUCTS. AMF expects to continue to
maintain its leadership position in manufacturing by setting industry standards
for quality and innovation. Management believes that AMF has the fastest
pinspotters, the highest scoring lanes and the most durable pins. Since the
development of the first automatic pinspotter over 50 years ago, AMF has been an
innovator in the advancement of such products as automatic scoring, bumpers, and
Xtreme(TM) Bowling. AMF positions its products as high quality and
technologically advanced, allowing it generally to command premium prices.
Management believes that AMF uses its position as an integrated bowling center
operator and bowling products manufacturer to AMF's advantage in testing and
developing product innovations.
INCREASE MODERNIZATION AND CONSUMER PRODUCT SALES. Management expects AMF
to benefit as the worldwide base of bowling centers grows due to the increased
popularity of bowling. AMF's brand name, the large installed base of AMF bowling
equipment, AMF's established direct sales force and distribution network and its
quality products will position AMF to increase sales of Modernization and
Consumer Products. These products, which include modernization equipment,
supplies, spare parts and consumable products, comprised 52% of AMF's Bowling
Products sales in 1996. Furthermore, when AMF acquires or constructs a center
and installs state-of-the-art
7
<PAGE> 8
equipment in that center, management believes that competing centers may
purchase Modernization and Consumer Products, often from AMF, to remain viable
competitors to the AMF center.
RECENT FINANCIAL PERFORMANCE
AMF's management has significantly improved financial results since the May
1996 acquisition. Revenue and EBITDA of Holdings, which includes the results of
the Company, increased by 33.9% to $318.1 million and by 30.4% to $85.8 million,
respectively, for the first six months of 1997 as compared to the pro forma
results for the first six months of 1996. For the year ended December 31, 1996,
on a consolidated basis, Holdings had pro forma revenue and pro forma EBITDA of
$548.9 million and $145.5 million, respectively, for an EBITDA margin of 26.5%.
For the six months ended June 30, 1997, Holdings had a net loss of $12.2
million, a deficiency of earnings to fixed charges of $16.4 million, an interest
coverage ratio of 1.49x, and a percentage of revenues represented by interest
expense of 18.1%. For the year ended December 31, 1996, on a pro forma basis,
Holdings had a net loss of $21.6 million, a deficiency of earnings to fixed
charges of $30.6 million, an interest coverage ratio of 1.37x, and a percentage
of revenues represented by interest expense of 19.3%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Consolidated Items -- Net Income (Loss)." Management believes that
AMF's Bowling Centers and Bowling Products businesses have been characterized by
high EBITDA margins and attractive returns on investment. Management believes
that the Company is well-positioned, due to its long established industry
leadership position, the AMF brand, the Company's large installed base and its
strategy, to develop and capitalize on the growth potential of bowling
worldwide.
BACKGROUND
The Company, Holdings and AMF Bowling, Inc. (the "Parent"), the direct
holder of all the common stock of Holdings and, through Holdings, the indirect
holder of all the Company's common stock, are Delaware corporations which were
incorporated in 1996 by GSCP to effect the acquisition of AMF (the
"Acquisition"). The Company was initially incorporated under the name "AMF Group
Inc." and was subsequently renamed "AMF Bowling Worldwide, Inc." The Parent and
Holdings are holding companies, and are not expected to hold any material assets
other than the capital stock of Holdings and the Company, respectively.
After the incorporation of the Parent, GSCP sold certain equity interests
in the Parent to investment funds affiliated with The Blackstone Group, Kelso &
Company, Bain Capital Inc. and Citicorp North America, Inc. and to certain
officers and directors of the Parent.
Holdings, the direct holder of all of the outstanding capital stock of the
Company, acquired substantially all of the assets of AMF's predecessor (the
"Predecessor Company") on May 1, 1996 pursuant to the Stock Purchase Agreement,
dated February 16, 1996, between AMF Group Holdings and the then-current
stockholders of the Predecessor Company, as amended (the "Stock Purchase
Agreement"). The purchase price for the Acquisition was approximately $1.37
billion.
8
<PAGE> 9
The following table sets forth the sources and uses of funds related to the
Acquisition:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
SOURCES OF FUNDS
Senior Debt(a)................................................ $ 517.0
10 7/8% Senior Subordinated Notes due 2006.................... 250.0
12 1/4% Senior Subordinated Discount Notes due 2006........... 249.9
--------
Total Debt............................................... 1,016.9
Equity(b)..................................................... 389.5
Cash.......................................................... 11.3
--------
Total............................................... $ 1,417.7
========
USES OF FUNDS
Purchase Price(a)............................................. $ 1,325.0
Transaction Costs(b)(c)....................................... 92.7
--------
Total............................................... $ 1,417.7
========
</TABLE>
- ---------------
(a) Includes an existing mortgage payable by AMF in the amount of approximately
$2.0 million as of April 30, 1996. All other debt of AMF was extinguished at
or prior to the completion of the Acquisition.
(b) Includes warrants to purchase approximately 2.2% of the fully diluted common
stock of the Parent issued upon the closing of the Acquisition to the
sellers' financial advisor in lieu of a cash fee. Such warrants have been
valued for accounting purposes at approximately $8.7 million.
(c) Includes $44.2 million of deferred financing costs associated with debt
incurred to fund the Acquisition.
The Exchange Notes were issued by the Company in exchange for the 10 7/8%
Senior Subordinated Notes due 2006 and 12 1/4% Senior Subordinated Discount
Notes due 2006 initially issued by the Company in connection with the
Acquisition.
The senior debt portion of the financing for the Acquisition was provided
pursuant to a credit agreement (as amended, the "Credit Agreement") with a group
of lenders. In connection with such financing, Goldman, Sachs & Co. ("Goldman
Sachs") acted as Syndication Agent, Goldman Sachs and Citicorp Securities, Inc.
acted as Arrangers, and Citibank, N.A. is acting as administrative agent. See
"Description of Senior Debt."
The Company's principal executive offices are located at 8100 AMF Drive,
Richmond, Virginia, and the telephone number of the Company is (804) 730-4000.
9
<PAGE> 10
RISK FACTORS
The Exchange Notes involve a high degree of risk. Prospective purchasers of
the Exchange Notes should carefully consider the factors set forth below. See
"Risk Factors" commencing on page 17 as well as the other information set forth
in this Prospectus. The risks of investing in the Exchange Notes include the
following factors: the Company's current substantial indebtedness and its
ability to service such indebtedness, the subordination of the Exchange Notes
and the current encumbrances on the Company's assets, recent net losses, recent
extraordinary charges, the holding company structure, dependence on key
personnel, control by GSCP, the requirement for payment upon a change of
control, characteristics of the bowling industry, the ability of the Company to
implement its growth strategies, seasonality and market development cycles, the
Company's international operations, the possible lack of a trading market for
the Exchange Notes, the consequences of certain Exchange Notes being originally
issued at discount and the possibility of fraudulent conveyance.
RECENT DEVELOPMENTS
Holdings' revenue increased 42.3% to $187.5 million for the third quarter
of 1997 as compared to $131.8 million for the third quarter of 1996. EBITDA
increased 27.0% to $40.9 million for the third quarter of 1997 as compared to
$32.2 million for the third quarter of 1996. Net loss was $10.3 million for the
third quarter of 1997 as compared to a net loss of $5.3 million for the third
quarter of 1996.
Revenue increased 36.9% to $505.6 million for the first nine months of 1997
as compared to $369.3 million for the first nine months of 1996. EBITDA
increased 29.3% to $126.7 million for the first nine months of 1997 as compared
to $98.0 million for the first nine months of 1996. Net loss for the first nine
months of 1997 was $22.5 million as compared to a net loss of $18.8 million for
the first nine months of 1996.
Both revenue and EBITDA for the third quarter of 1997 reflect the inclusion
of results of 160 bowling centers acquired and one new bowling center built
since May 1996 through September 30, 1997, and increased levels of NCP shipments
to several international regions. Net loss for the third quarter of 1997
reflects incremental depreciation and interest expense related to increased
levels of assets and indebtedness under the Credit Agreement as a result of
bowling center acquisitions.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996(1)
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues................................... $187.5 $131.8 $505.6 $369.3
Net loss............................................. (10.3) (5.3) (22.5) (18.8)
Selected Data:
EBITDA.......................................... $ 40.9 $ 32.2 $126.7 $ 98.0
</TABLE>
- ---------------
(1) The information presented with respect to the nine months ended September
30, 1996 is presented on a pro forma basis.
On October 20, 1997, AMF aquired Michael Jordan Golf Company, Inc., a
company formed to build and operate golf practice ranges in select U.S.
locations. In addition, Michael Jordan agreed to become a spokesperson for and
endorser of AMF bowling centers and bowling products under a personal services
contract which grants AMF rights to use Mr. Jordan's image and name in
advertising and marketing campaigns.
On November 7, 1997, the Parent completed an initial public offering of its
common stock, par value $.01 per share (the "Parent Common Stock"). The initial
public offering was conducted through concurrent offerings in the U.S. and
outside the U.S. (collectively, the "Parent Offerings").
10
<PAGE> 11
After completion of the Parent Offerings, GSCP and The Goldman Sachs Group,
L.P. ("The Goldman Sachs Group"), which has a 99% interest in Goldman Sachs,
together beneficially own 51.0% of the Parent Common Stock. Richard A. Friedman
and Terence M. O'Toole, each of whom is a Managing Director of Goldman Sachs,
and Peter M. Sacerdote, who is a limited partner of The Goldman Sachs Group, are
directors of the Company, and Mr. Friedman is Chairman of the Company. See
"Principal Stockholders."
SUMMARY FINANCIAL DATA
The summary financial data set forth below for the fiscal years indicated
were derived from Holdings' consolidated pro forma results for the year ended
December 31, 1996, and the Predecessor Company's audited combined financial
statements for the years ended December 31, 1995, 1994, 1993, and unaudited
combined financial statements for the year ended December 31, 1992. The summary
financial data include results for the six months ended June 30, 1997, compared
to pro forma results for the six months ended June 30, 1996. The pro forma
results set forth below are presented as if the Acquisition had occurred on
January 1, 1996, and are based on the Predecessor Company's statement of income
for the period ending April 30, 1996, Holdings' statement of operations from its
inception through the relevant reporting date and adjustments giving effect to
the Acquisition under the purchase method of accounting. See "Note 3. Pro Forma
Results of Operations" in the Notes to Consolidated Financial Statements and the
Notes to Condensed Consolidated Financial Statements of Holdings. The data
should be read in conjunction with Holdings' Consolidated Financial Statements
and Condensed Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which appear
elsewhere herein.
The summary financial data include operating results expressed in terms of
EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, and other income and expenses. EBITDA information
is included because the Company understands that such information is a standard
measure commonly reported and widely used by certain investors and analysts.
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 GAAP.
11
<PAGE> 12
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, --------------------------------
-------------------------------------------------------------
PRO FORMA PRO FORMA
AMF GROUP AMF GROUP AMF GROUP
PREDECESSOR COMPANY HOLDINGS INC. HOLDINGS INC. HOLDINGS INC.
------------------------------------------- ------------- ------------- -------------
1992 1993 1994(a) 1995 1996(b) 1996(c) 1997
------ ------ ------- ------ ------------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue.......... $391.2 $427.6 $517.8 $564.9 $ 548.9 $ 237.5 $ 318.1
------ ------ ------ ------ ------ ------ ------
Cost of goods sold......... 132.1 153.2 196.0 184.1 173.6 66.5 86.1
Bowling center operating
expenses.................. 103.1 108.5 115.2 166.5 178.8 82.5 116.0
Selling, general and
administrative expenses... 43.2 41.9 57.1 50.8 51.0 22.7 30.2
Depreciation and
amortization.............. 25.5 21.4 24.8 39.1 73.5 34.9 43.4
------ ------ ------ ------ ------ ------ ------
Operating income........... 87.3 102.6 124.7 124.4 72.0 30.9 42.4
Interest expense, gross.... 7.9 5.0 7.4 15.7 106.2 52.2 57.5
Other income (expense),
net....................... 0.1 (0.1) (1.5) 0.2 3.6 3.4 (1.3)
------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes..................... 79.5 97.5 115.8 108.9 (30.6) (17.9) (16.4)
Provision (benefit) for
income taxes.............. 15.4 15.1 16.5 12.1 (9.0) (4.4) (4.2)
------ ------ ------ ------ ------ ------ ------
Net income (loss).......... $ 64.1 $ 82.4 $ 99.3 $ 96.8 $ (21.6) $ (13.5) $ (12.2)
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges(d)................ 7.1x 11.0x 10.3 x 6.1x -- -- --
SELECTED DATA:
EBITDA..................... $112.8 $124.0 $149.5 $163.5 $ 145.5 $ 65.8 $ 85.8
EBITDA margin.............. 28.8% 29.0% 28.9 % 28.9% 26.5% 27.7% 27.0%
Revenue:(e)
Bowling Centers........... $204.5 $192.6 $225.4 $292.3 $ 307.3 $ 147.2 $ 201.1
Bowling Products.......... 195.4 243.6 301.7 286.5 252.1 96.8 124.7
EBITDA:(f)
Bowling Centers........... $ 65.2 $ 54.5 $ 65.8 $ 86.8 $ 95.6 $ 48.3 $ 63.0
Bowling Products.......... 48.7 71.1 84.6 79.3 62.6 22.9 31.3
New Center Packages sold... 2,210 3,577 4,941 4,437 3,029 1,152 1,933
New Center Packages
backlog, end of
period(g)................. N/A N/A 2,078 940 1,426 1,144 2,182
Number of centers, end of
period.................... 197 190 293 286 341 284 408
Number of lanes, end of
period.................... 5,988 5,896 9,586 9,430 11,782 9,386 14,206
Capital Expenditures:
Routine modernization and
maintenance(h).......... $ 8.3 $ 9.0 $ 11.4 $ 13.1 $ 14.5 $ 6.9 $ 12.2
Expansion and acquisition
capital(i).............. 3.8 5.7 6.4 16.9 117.4 3.3 135.6
------ ------ ------- ------ ------ ------ ------
Total..................... $ 12.1 $ 14.7 $ 17.8 $ 30.0 $ 131.9 $ 10.2 $ 147.8
====== ====== ======== ====== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 JUNE 30, 1997
----------------------- --------------------
AMF AMF
GROUP HOLDINGS INC. GROUP HOLDINGS INC.
----------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital(j)............................................... $ 7.9 $ (23.2)
Goodwill, net.................................................... 771.1 766.7
Total assets..................................................... 1,593.9 1,715.4
Total debt....................................................... 1,091.3 1,221.3
Stockholder's equity............................................. 408.7 391.0
Total capitalization............................................. $ 1,500.0 $1,612.3
</TABLE>
- ---------------
(a) Includes results of Fair Lanes, Inc., a bowling center operator ("Fair
Lanes"), which operated 106 centers and was acquired on September 29, 1994.
12
<PAGE> 13
(b) Represents results of operations from January 1, 1996 through December 31,
1996 on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in
the Notes to Consolidated Financial Statements of Holdings as of December
31, 1996.
(c) Represents results of operations from January 1, 1996 through June 30, 1996,
on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Condensed Consolidated Financial Statements of Holdings as of June
30, 1997.
(d) The ratios of earnings to fixed charges are computed by dividing earnings by
the fixed charges. Earnings consist of net income to which has been added
fixed charges and income taxes. Fixed charges consist of interest expenses,
amortization of debt issuance costs, and the portion of rent expense
considered to represent interest. For the year ended December 31, 1996, on a
pro forma basis, Holdings had a deficiency of earning to fixed charges of
$30.6 million.
(e) Before intersegment eliminations.
(f) Before intersegment eliminations and corporate general and administrative
expenses.
(g) Orders of New Center Packages included in the backlog are subject to
cancellation by customers in the normal course of business. Accordingly, the
Company has experienced, and expects to continue to experience, the
cancellation of a portion of such orders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Backlog; Recent
NCP Sales". Data is not provided for 1992 and 1993 because the Company does
not maintain this data for such periods.
(h) Defined as capital expenditures for existing product lines and manufacturing
operations and capital expenditures for modernizing and refurbishing bowling
centers.
(i) Includes (i) the construction of centers and (ii) the acquisition of centers
since May 1, 1996. Excludes the acquisition of Fair Lanes and all other
acquisitions prior to May 1, 1996.
(j) Predecessor Company amounts reflect elimination of affiliate receivables and
payables.
13
<PAGE> 14
SUMMARY OF TERMS OF EXCHANGE NOTES
THE COMPANY................... AMF Bowling Worldwide, Inc. (formerly AMF Group
Inc.)
SECURITIES OUTSTANDING........ As of June 30, 1997, $250.0 million principal
amount of 10 7/8% Series B Senior Subordinated
Notes Due 2006 (the "Exchange Senior
Subordinated Notes") and $291.4 million
Accreted Value of 12 1/4% Series B Senior
Subordinated Discount Notes Due 2006
(increasing to full accreted value of $452.0
million on March 15, 2001) (the "Exchange
Senior Subordinated Discount Notes" and,
collectively with the Exchange Senior
Subordinated Notes, the "Exchange Notes").
INTEREST PAYMENT DATES........ Interest on the Exchange Senior Subordinated
Notes accrues at a rate of 10 7/8% and is
payable in cash semi-annually in arrears on
each March 15 and September 15.
The Exchange Senior Subordinated Discount Notes
were originally sold at a substantial discount
to their face amount. See "Description of
Certain Federal Income Tax Consequences of an
Investment in the Exchange Notes." No interest
will accrue on the Exchange Senior Subordinated
Discount Notes prior to March 15, 2001 (the
"Full Accretion Date"). Thereafter, interest
will accrue and will be payable in cash
semi-annually in arrears on each March 15 and
September 15, commencing September 15, 2001.
The effective yield of the Exchange Senior
Subordinated Discount Notes will be 12 1/4% per
annum, computed on a semi-=annual bond
equivalent basis.
For the year ended December 31, 1996, on a pro
forma basis, Holdings had a deficiency of
earnings to fixed charges of $30.6 million.
Although the Company believes it will be able
to meet its obligations under the Exchange
Notes, there is no assurance that there will be
adequate cash available to make interest
payments under the Exchange Notes when they
become due.
MATURITY DATE................. March 15, 2006.
OPTIONAL REDEMPTION........... The Exchange Notes will be redeemable, at the
option of the Company, on one or more
occasions, at any time on or after March 15,
2001, at the redemption prices set forth
herein, together with accrued and unpaid
interest, if any, to the redemption date. Prior
to March 15, 1999, up to $100 million in
aggregate principal amount of Exchange Senior
Subordinated Notes will be redeemable at the
option of the Company, on one or more
occasions, from the net proceeds of public or
private sales of common stock of, or
contributions to the common equity capital of,
the Company, at a price of 110.875% of the
principal amount of the Exchange Senior
Subordinated Notes, together with accrued and
unpaid interest, if any, to the date of
redemption; provided that at least $150 million
in aggregate principal amount of Exchange
Senior Subordinated Notes remains outstanding
immediately after such redemption. In addition,
prior to March 15, 1999,
14
<PAGE> 15
the Exchange Senior Subordinated Discount Notes
are redeemable at the option of the Company, on
one or more occasions, from the net proceeds of
public or private sales of common stock of, or
contributions to the common equity capital of,
the Company, at a price of 112.250% of the
Accreted Value of the Senior Subordinated
Discount Notes; provided that at least $150
million in Accreted Value of Exchange Senior
Subordinated Discount Notes remains outstanding
immediately after such redemption.
CHANGE OF CONTROL PUT......... In the event of a Change of Control, each
Holder of Exchange Notes may require the
Company to repurchase all or a portion of such
Holder's Exchange Notes at 101% of the
aggregate principal amount of the Exchange
Senior Subordinated Notes and 101% of the
Accreted Value of the Exchange Senior
Subordinated Discount Notes (or, following the
Full Accretion Date, 101% of the principal
amount thereof), as applicable, together with
accrued and unpaid interest, if any, and
Liquidated Damages (as defined below), if any,
to the date of repurchase. There can be no
assurance that the Company will have sufficient
funds, or will obtain the requisite consent of
the Lenders required under the indentures for
the Exchange Notes and the Credit Agreement, to
satisfy the Change of Control repurchase
requirement if such requirement arises. See
"Description of Exchange Notes."
MANDATORY SINKING FUND........ None.
GUARANTEES.................... The Company's payment obligations under the
Exchange Notes are jointly and severally
guaranteed on a senior subordinated basis (the
"Senior Subordinated Guarantees") by Holdings,
by each of the Company's First-Tier
Subsidiaries (as defined below) and Second-Tier
Subsidiaries (as defined below) and by any
other Subsidiaries (as defined below) of the
Company that act as guarantors under the Credit
Agreement (collectively, the "Guarantors"). The
Senior Subordinated Guarantees are subordinated
to the guarantees issued by the Guarantors
under the Credit Agreement. See "Description of
Exchange Notes -- Senior Subordinated
Guarantees."
RANKING....................... The Exchange Notes are general, unsecured
obligations of the Company, are subordinated in
right of payment to all Senior Debt (as defined
below) of the Company, rank pari passu with all
other senior subordinated debt of the Company
and will rank senior in right of payment to all
future subordinated debt, if any, of the
Company. The claims of the Holders (as defined
below) of the Exchange Notes are subordinated
to the Senior Debt, which, as of June 30, 1997,
was approximately $679.9 million, $677.9
million of which consisted of fully secured
borrowings under the Credit Agreement. In
addition, the Exchange Notes are effectively
subordinated to all indebtedness and other
liabilities (including trade payables and
capital lease obligations) of the Company's
subsidiaries that are not Guarantors and
through
15
<PAGE> 16
which the Company will conduct a portion of its
operations. See "Description of Exchange
Notes -- Subordination."
The Exchange Notes are not senior in priority
to any outstanding indebtedness of the Company
or its subsidiaries. The Company has no current
plan or intention to incur any indebtedness to
which the Exchange Notes would be senior in
priority. The Exchange Senior Subordinated
Notes and the Exchange Senior Subordinated
Discount Notes rank pari passu with each
another.
FORM AND DENOMINATION......... The Exchange Notes are in fully registered
form, in minimum denominations of $1,000 and
integral multiples thereof. The Exchange Notes
were initially issued in the form of one or
more global notes and deposited with a
custodian for and registered in the name of a
nominee of The Depository Trust Company.
Exchange Notes will not be issued in
certificated, fully registered form, except in
the circumstances provided for in the
Indentures. See "Description of Exchange
Notes -- Book-Entry, Delivery and Form."
CERTAIN COVENANTS............. The Indentures contain certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined below) to incur additional indebtedness
and issue Disqualified Stock (as defined
below), pay dividends or distributions or make
investments or make certain other Restricted
Payments (as defined below), enter into certain
transactions with affiliates, dispose of
certain assets, incur liens securing pari passu
and subordinated indebtedness of the Company
and engage in mergers and consolidations. See
"Description of Exchange Notes -- Certain
Covenants."
ORIGINAL ISSUE DISCOUNT....... For federal income tax purposes, each Exchange
Senior Subordinated Discount Note is considered
to have been issued with "original issue
discount" equal to the difference between the
issue price of the 12 1/4% Senior Subordinated
Discount Note due 2006 for which it was
exchanged and the sum of all cash payments
(whether denominated as principal or interest)
to be made on such Exchange Senior Subordinated
Discount Note. Each Holder of an Exchange
Senior Subordinated Discount Note must include
in gross income for federal income tax purposes
the sum of the daily portions of such original
issue discount for each day during each taxable
year in which the Exchange Senior Subordinated
Discount Note is held, even though no interest
payments will be received prior to September
15, 2001. Further, an Exchange Note acquired in
a subsequent resale may be considered to have
been purchased with market discount or
acquisition premium. See "Description of
Certain Federal Income Tax Consequences of an
Investment in the Exchange Notes."
16
<PAGE> 17
RISK FACTORS
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is, and will continue to be, highly leveraged as a result of
the substantial indebtedness that it incurred in connection with the Acquisition
and intends to incur to finance acquisitions and expand its operations. As of
June 30, 1997, the Company had total indebtedness of $1,221.3 million and
stockholder's equity of $391.0 million, resulting in a ratio of debt to total
capitalization of approximately 75.7%. The Company had deficiencies of earnings
to fixed charges of $16.4 million and $30.6 million for the six months ended
June 30, 1997, and the year ended December 31, 1996, on a pro forma basis,
respectively. Although the Company believes it will be able to meet its debt
obligations, there is no assurance that there will be adequate cash available to
make interest payments under the Company's indebtedness when they become due.
Interest expense for the six months ended June 30, 1997 and for the year ended
December 31, 1996 was $57.5 million and $78.0 million, respectively, of which
$39.8 million and $53.0 million, respectively, was cash interest expense. The
Company intends to incur additional indebtedness in the future, subject to
limitations imposed by the Indentures and the Credit Agreement. Although the
Company intends to repay certain indebtedness with the proceeds of the Parent
Offerings, it also intends to incur additional indebtedness to finance
acquisitions and expand its operations, and will therefore remain highly
leveraged after giving effect to the Parent Offerings. The Credit Agreement
requires the maintenance of certain financial ratios and imposes certain
operating and financial restrictions on the Company which restrict, among other
things, the Company's ability to declare dividends, redeem stock, incur
indebtedness, incur obligations under leases, create liens, consummate mergers,
sell assets, and make capital expenditures, investments and acquisition. See
"Description of Senior Debt."
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness (including the Exchange Notes)
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 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. 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 make necessary capital expenditures, or that
any refinancing would be available on commercially reasonable terms or at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources."
The degree to which the Company is now leveraged could have important
consequences to holders of the Exchange Notes, including, but not limited to,
the following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
financing in the future could be limited; (iii) certain of the Company's
borrowings are at variable rates of interest, which could result in higher
interest expense in the event of increases in interest rates; and (iv) the
Indentures and the Credit Agreement contain financial and restrictive covenants
that limit the ability of the Company to, among other things, borrow additional
funds, dispose of assets or pay cash dividends. Failure by the Company to comply
with such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. In addition, the
degree to which the Company is leveraged could prevent it from repurchasing all
Exchange Notes
17
<PAGE> 18
tendered to it upon the occurrence of a Change of Control. See "Description of
Exchange Notes" and "Description of Senior Debt."
A principal component of the Company's strategy for future growth is the
acquisition of additional bowling centers, which the Company expects to finance
with the Working Capital Facility (as defined below) under the Credit Agreement.
As of October 31, 1997, $59.0 million remained available under the Acquisition
Facility (the "Acquisition Facility") that existed under the Credit Agreement
before it was amended and restated effective November 7, 1997. Pursuant to the
amendment and restatement of the Credit Agreement, the Acquisition Facility and
a portion of the Term Facilities which existed under the Credit Agreement, as
previously in effect, were converted into a non-amortizing revolving Working
Capital Facility the aggregate size of which is $355.0 million, and a portion of
such revolving credit indebtedness will be repaid with proceeds of the Parent
Offerings. As of November 7, 1997, $161.5 million is available under the current
Working Capital Facility, assuming $100.0 million of the proceeds of the Parent
Offerings were to be used to repay indebtedness under the Credit Agreement.
Actual borrowing under the Credit Agreement must meet certain financial
tests under the Credit Agreement and the Indentures. The Company's leverage may
adversely affect its ability to meet these tests, and, as a result, to obtain
such financing. See "-- Ability to Implement Growth Strategies," "Description of
Senior Debt" and "Description of Exchange Notes -- Certain Covenants -- Issuance
of Indebtedness and Issuance of Disqualified Stock."
NET LOSSES
Holdings, which is merely a holding company for the Company, recorded a net
loss of $21.6 million, on a pro forma basis, in 1996 and a net loss of $12.2
million for the first six months of 1997. There can be no assurance that the
Company will not continue to generate net losses. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments," "Selected Financial Data" and the Consolidated Financial
Statements and Condensed Consolidated Financial Statements of Holdings.
EXTRAORDINARY CHARGES
In accordance with GAAP, Holdings will incur after-tax extraordinary
charges totalling $22.7 million in the fourth quarter of 1997 arising from the
amendment and restatement of the Credit Agreement that became effective on
November 7, 1997 and the resulting write-off of costs previously incurred to
obtain bank financing for the Acquisition, the premium associated with the
portion of the Exchange Senior Subordinated Discount Notes expected to be
redeemed with the proceeds of the Parent Offerings and the write-off of the
portion of deferred financing costs attributable to the Exchange Senior
Subordinated Discount Notes expected to be so redeemed.
18
<PAGE> 19
SUBORDINATION; ASSET ENCUMBRANCES
The Exchange Notes are subordinated in right of payment to all existing and
future Senior Debt, including the principal of (and premium, if any) and
interest on and all other amounts due on or payable in connection with Senior
Debt. At June 30, 1997, there was outstanding approximately $679.9 million of
Senior Debt, $677.9 million of which was fully secured borrowings under the
Credit Agreement. In addition, the Exchange Notes are effectively subordinated
to all indebtedness and other liabilities (including trade payables and capital
lease obligations) of the Company's subsidiaries that are not Guarantors, which
as of June 30, 1997, aggregated $9.1 million. By reason of such subordination,
in the event of the insolvency, liquidation, reorganization, dissolution or
other winding-up of the Company or upon a default in payment with respect to, or
the acceleration of, any Senior Debt, the holders of such Senior Debt and any
other creditors who are holders of Senior Debt and creditors of subsidiaries
that are not Guarantors must be paid in full before the Holders of the Exchange
Notes may be paid. If the Company incurs any additional pari passu debt, the
holders of such debt would be entitled to share ratably with the Holders of the
Exchange Notes in any proceeds distributed in connection with any insolvency,
liquidation, reorganization, dissolution or other winding-up of the Company.
This may have the effect of reducing the amount of proceeds paid to Holders of
the Exchange Notes. In addition, no payments may be made with respect to the
principal of (and premium, if any) or interest or Liquidated Damages, if any, on
the Exchange Notes if a payment default exists with respect to Senior Debt and,
under certain circumstances, no payments may be made with respect to the
principal of (and premium, if any) or interest or Liquidated Damages, if any, on
the Exchange Notes for a period of up to 179 days if a non-payment default
exists with respect to Senior Debt. In addition, the Indentures permit
subsidiaries of the Company to incur debt provided certain conditions are met.
Any debt incurred by a subsidiary of the Company that is not a Guarantor will be
structurally senior to the Exchange Notes. See "Description of Exchange Notes."
Holdings and the Company have granted to the Lenders under the Credit
Agreement security interests in all of the capital stock of the Company and
substantially all of the current and future assets of the Company, including a
pledge of all of the issued and outstanding shares of capital stock of certain
of the Company's subsidiaries. In addition, the Guarantors have granted to such
Lenders security interests in all of the current and future assets of the
Guarantors (other than 35% of the outstanding capital stock of any foreign
subsidiary of any Guarantor). In the event of a default on secured indebtedness,
including the guarantees with respect to the Credit Agreement (whether as a
result of the failure to comply with a payment or other covenant, a
cross-default, or otherwise), the parties granted such security interests will
have a prior secured claim on the capital stock of the Company and the assets of
the Company and the Guarantors. If such parties should attempt to foreclose on
their collateral, the Company's financial condition and the value of the
Exchange Notes will be materially adversely affected. In the event of a
foreclosure on the collateral consisting of the Company's stock, unless the
purchaser of such stock were an affiliate of Goldman Sachs, a Change of Control
would occur, with the consequences set forth below under "-- Payment Upon Change
of Control." See "Description of Senior Debt."
HOLDING COMPANY STRUCTURE
The Company conducts all of its business through subsidiaries and has no
operations of its own. The Company is dependent on the cash flow of its
subsidiaries and distributions of such cash flow from its subsidiaries to the
Company in order to meet its debt service obligations. The subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to make funds available to the Company, whether in the form of loans,
dividends or otherwise. It is not expected that Holdings will have any assets
other than the common stock of the Company.
As a result of the holding company structure of the Company, the Holders of
the Exchange Notes are structurally junior to all creditors of the subsidiaries
that are not Guarantors, except to the extent that the Company or a Guarantor is
itself recognized as a creditor of such subsidiary, in
19
<PAGE> 20
which case the claims of the Company or such Guarantor would still be
subordinate to any security in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company or a
Guarantor. See "-- Subordination; Asset Encumbrance" above. In the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of the
subsidiaries that are not Guarantors, the Company will not receive funds
available to pay to the Holders of the Exchange Notes in respect of the Exchange
Notes until after the payment in full of the claims of the creditors of the
subsidiaries. As of June 30, 1997 and December 31, 1996, the aggregate amount of
indebtedness and other obligations of the subsidiaries that are not Guarantors
(including trade payables and capital lease obligations) was approximately $9.1
million and $6.9 million, respectively. See Note 11 to the Condensed
Consolidated Financial Statements of Holdings for the six months ended June 30,
1997 and Note 19 to the Consolidated Financial Statements of Holdings for the
period ended December 31, 1996, respectively.
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by certain key executive officers. The
loss of the services of certain of these executives could have a material
adverse impact on AMF. There can be no assurance that the services of such
personnel will continue to be made available to the Company. The Company does
not maintain key-person insurance with respect to its executive officers.
CONTROL BY GSCP
After completion of the Parent Offerings, GSCP and The Goldman Sachs Group,
which has a 99% interest in Goldman Sachs, together beneficially own 51.0% of
the Parent Common Stock. Richard A. Friedman and Terence M. O'Toole, each of
whom is a Managing Director of Goldman Sachs, and Peter M. Sacerdote, who is a
limited partner of The Goldman Sachs Group, are directors of the Company.
Messrs. Friedman, O'Toole and Sacerdote are also directors of the Parent, and
Mr. Friedman is Chairman of the Parent. See "Principal Stockholders."
As a result of its ownership of a majority of the outstanding Parent Common
Stock and the terms of the Stockholders Agreement (as defined below), GSCP
controls Holdings and the Company and has the ability to control the election of
a majority of the Board of Directors of the Parent and all the directors of
Holdings and the Company, appoint new management and approve or block any action
requiring the approval of the Parent's, Holdings' or the Company's stockholders,
including adoption of amendments to the Company's Certificate of Incorporation
and approval of mergers or sales of substantially all of the Company's assets,
in each case subject to the restrictions contained in the Stockholders
Agreement. The Stockholders Agreement also provides for three of the investment
funds which are stockholders of the Parent each to nominate a director of the
Parent, subject to GSCP's consent, and for the formation of the Executive
Committee of the Parent's Board of Directors, which consists of two directors
nominated by GSCP. There can be no assurance that the interests of GSCP will not
conflict with the interests of the Holders of the Exchange Notes. See
"Management," "Principal Stockholders" and "Certain Transactions."
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
may require the Company to repurchase all or a portion of such Holder's Exchange
Notes at 101% of the principal amount of the Exchange Senior Subordinated Notes
and 101% of the Accreted Value of the Exchange Senior Subordinated Discount
Notes (or, following the Full Accretion Date, 101% of the principal amount
thereof), as applicable, together with accrued and unpaid interest, if any, and
Liquidated Damages, if any, to the date of repurchase. The Indentures require
that prior to such a repurchase, the Company must either repay all outstanding
indebtedness under the Credit Agreement or obtain any required consent of the
Lenders to such repurchase. If a Change of Control were to occur, the Company
may not have the financial resources to repay all of its obligations under the
Credit Agreement, the Indentures and the other indebtedness that would become
payable upon the
20
<PAGE> 21
occurrence of such Change of Control. See "Description of Exchange
Notes -- Repurchase at the Option of Holders."
BOWLING INDUSTRY CHARACTERISTICS
BOWLING CENTERS
In the United States, the operation of bowling centers generally has been
characterized by slightly declining lineage (number of games bowled per lane per
day), offset by increasing average price per game. Total lineage, according to
an industry source, has declined despite an average annual increase in the total
number of people bowling since 1987. This trend is largely a result of a decline
in league participation, partially offset by an increase in recreational (i.e.,
non-league) play, resulting in more people bowling, but bowling less frequently.
Bowling center operators have offset the decrease in overall lineage by
increasing prices and creating additional sources of income. Contrary to the
overall lineage trend in the industry, AMF's U.S. lineage has remained
relatively stable over recent years due to its ability to retain existing league
bowlers and attract new recreational bowlers due to, management believes, the
generally higher quality of AMF's centers. Internationally, although trends vary
by country, certain of the markets in which AMF operates have experienced
increasing competition as they have matured, resulting in declining lineage. AMF
has offset these lineage declines through higher prices and additional focus on
food and beverage and other amusement revenue. There can be no assurance that
AMF will be able to continue to maintain lineage or increase prices in the U.S.
or internationally in the future. See "Business -- AMF Bowling Centers."
In addition, bowling, both as a competitive sport and a recreational
activity, faces competition from numerous alternative activities. The continued
success of AMF's bowling operations is subject to consumers' continued interest
in bowling, the availability and cost of other sport, recreational and
entertainment alternatives and the amount of leisure time, as well as various
other social and economic factors over which AMF has no control. There can be no
assurance that bowling will continue to exhibit its current level of popularity
or that AMF will continue to compete effectively in the industry. See
"Business -- Industry Overview."
BOWLING PRODUCTS
The Bowling Products industry has been characterized by relatively stable
sales of Modernization and Consumer Products to the installed base of equipment
operators, and more varied results in sales of New Center Packages to newly
constructed bowling centers. While established bowling markets continue to
produce some NCP sales, the primary driver of NCP sales in recent years has been
the rapid growth experienced in new markets as bowling has become popular in
particular countries and the economics of constructing and operating a bowling
center have become attractive to local developers and entrepreneurs. Continued
growth in AMF's sale of NCPs depends, in part, on similar bowling growth
patterns developing in other emerging markets, such as Eastern Europe, India,
Indonesia and South America, and on AMF's ability to successfully exploit new
demand. Sales of NCPs for 1996 declined substantially from 1995, reflecting the
maturing bowling markets in Taiwan and Korea. There can be no assurance that
future international expansion will occur or, if it does occur, that AMF will be
able to successfully compete in such emerging markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Backlog; Recent NCP Sales" and "Business -- AMF Bowling Products."
ABILITY TO IMPLEMENT GROWTH STRATEGIES
The Company's Bowling Centers business has grown, and the Company
anticipates that it will continue to grow, through acquisitions of centers and
improvements at existing centers. There can be no assurance that the Company
will continue to be successful in acquiring centers and improving operations of
acquired and existing centers.
21
<PAGE> 22
Historically, the Company financed acquisitions through issuances by the
Parent of Parent Common Stock, cash on hand and borrowings. The Company
anticipates that it will finance future acquisitions in the same manner. The
Credit Agreement and Indentures restrict the Company's ability to incur
indebtedness and make certain investments and as a result may limit the number
of centers acquired by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources," "Business -- Business Strategy," "Description
of Senior Debt" and "Description of Exchange Notes." There can be no assurance
that the Company will generate cash or obtain debt or equity financing on
acceptable terms in amounts sufficient to fund its growth strategies.
The Company also seeks to grow through increased sales of NCPs and
Modernization and Consumer Products. Integral to such increased sales is the
Company's strategy of exploiting increased demand for bowling products in
developed as well as in emerging bowling markets. There can be no assurance that
such increased demand will materialize or that the Company will be able to
successfully exploit such demand. See "-- Seasonality and Market Development
Cycles" and "Business -- Business Strategy."
SEASONALITY AND MARKET DEVELOPMENT CYCLES
Financial performance of Bowling Centers is seasonal in nature, with cash
flows typically peaking in the winter months and reaching their lows in the
summer months. The geographic diversity of AMF's Bowling Centers operations
helps to reduce this seasonality as bowling centers in certain countries in
which AMF operates exhibit different seasonal sales patterns. However, as a
result of the growing number of U.S. centers attributable to the Company's
acquisition program, the seasonality of financial performance of AMF's Bowling
Centers business may be accentuated. See "Business -- Business Strategy."
NCP sales experience significant fluctuations due to changes in demand for
NCPs as certain markets experience high growth followed by market maturity, at
which times sales to that market decline, sometimes rapidly. Management believes
market cycles for individual countries have, in the past, spanned several years,
with periods of high demand for several markets (e.g., Japan, Korea, Taiwan)
which, in AMF's experience, last five years or more. These growth patterns do
not seem to be closely tied to general economic cycles. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Market Development Cycles."
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments (such
as restrictions on transfer of funds, import and export duties and quotas,
foreign customs and tariffs, value added taxes ("VATs") and unexpected changes
in regulatory environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its international sales or on its
results of operations. For the six months ended June 30, 1997, 26.1% of Bowling
Centers operations revenue was generated by the Company's international centers.
For the year ended December 31, 1996, 33.8% of AMF's Bowling Centers revenue was
generated by the Company's international centers. For the six months ended June
30, 1997, 59.2% of Bowling Products sales were international sales. For the year
ended December 31, 1996, approximately 62.7% of Bowling Products sales were
international sales. See "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- International
Operations" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Backlog; Recent NCP Sales."
22
<PAGE> 23
TRADING MARKET FOR THE EXCHANGE NOTES
Although it is not obligated to do so, Goldman Sachs is making, and intends
to continue to make, a market in the Exchange Notes. Any such market-making
activity may be discontinued at any time, for any reason, without notice at the
sole discretion of Goldman Sachs. No assurance can be given as to the liquidity
of or the trading market for the Exchange Notes.
Goldman Sachs may be deemed to be an affiliate of the Company and, as such,
may be required to deliver a prospectus in connection with its market-making
activities in the Exchange Notes. Pursuant to a registration rights agreement
entered into in connection with the Acquisition, the Company agreed to file and
maintain a registration statement that would allow Goldman Sachs to engage in
market-making transactions in the Exchange Notes. Subject to certain exceptions
set forth in this registration rights agreement, the registration statement will
remain effective for as long as Goldman Sachs may be required to deliver a
prospectus in connection with market-making transactions in the Exchange Notes.
The Company has agreed to bear substantially all the costs and expenses related
to such registration statement.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Exchange Senior Subordinated Discount Notes were issued at a
substantial discount from their principal amount. Consequently, the purchasers
of the Exchange Senior Subordinated Discount Notes generally will be required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. Further, the
acquisition of an Exchange Note in a subsequent resale may give rise to market
discount on acquisition premium. See "Description of Certain Federal Income Tax
Consequences of an Investment in the Exchange Notes" for a more detailed
discussion of the federal income tax consequences to the holders of the Exchange
Senior Subordinated Discount Notes of the purchase, ownership and disposition of
the Exchange Senior Subordinated Discount Notes.
The initial payment of interest on the Exchange Senior Subordinated
Discount Notes is required to be made on September 15, 2001. The Exchange Senior
Subordinated Discount Notes, therefore, are not a suitable investment for
investors seeking current income prior to that date.
FRAUDULENT CONVEYANCE
Management of the Company believes that the indebtedness represented by the
Exchange Notes and the Guarantees was incurred for proper purposes and in good
faith, and that, based on then-current forecasts, asset valuations and other
financial information, after the issuance of the Exchange Notes, the Company
would be solvent, would have sufficient capital for carrying on its business and
would be able to pay its debts as they mature. See "-- Substantial Leverage;
Ability to Service Indebtedness." Notwithstanding management's belief, however,
if a court of competent jurisdiction in a suit by an unpaid creditor or a
representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time of the incurrence of such
indebtedness, the Company or the Guarantors were insolvent, were rendered
insolvent by reason of such incurrence, were engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that they would incur, debts beyond
their ability to pay such debts as they matured, or intended to hinder, delay or
defraud their creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things, (a) void
all or a portion of the Company's or the Guarantors' obligations to the Holders
of the Exchange Notes, the effect of which would be that the Holders of the
Exchange Notes may not be repaid in full or at all and/or (b) subordinate the
Company's or the Guarantors' obligations to the Holders of the Exchange Notes to
other existing and future indebtedness of the Company to a greater extent than
would otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Exchange
Notes or the Senior Subordinated Guarantees.
23
<PAGE> 24
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the Exchange
Notes by Goldman Sachs in market-making transactions. The Company will not
receive any of the proceeds from such transactions.
24
<PAGE> 25
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma statement of income of Holdings, which includes the
Company, is presented for the twelve months ended December 31, 1996, as if the
Acquisition had occurred on January 1, 1996. Holdings' pro forma statement of
income for the twelve months ended December 31, 1996, is based on the
Predecessor Company's statement of operations for the four-month period ending
April 30, 1996, which appears elsewhere herein, Holdings' statement of income
for the period ended December 31, 1996, and adjustments giving effect to the
Acquisition under the purchase method of accounting.
The Pro Forma Statement of Income and the accompanying notes should be read
in conjunction with the Consolidated Financial Statements of Holdings as of
December 31, 1996, and accompanying notes, which appear elsewhere in this
Prospectus.
The Pro Forma Statement of Income does not purport to be indicative of
Holdings' results that actually would have been obtained had the Acquisition
been consummated as of January 1, 1996 and for the period presented, nor are
they indicative of Holdings' results of operations or financial condition for
any future period or date.
PRO FORMA STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
AMF GROUP PREDECESSOR AMF GROUP
HOLDINGS COMPANY HOLDINGS INC.
INC. FOUR MONTHS TWELVE MONTHS
PERIOD ENDED ENDED PRO FORMA ENDED
12/31/96(A) 4/30/96 ADJUSTMENTS 12/31/96
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Operating revenue:.......................... $384.8 $ 164.9 $ (0.8)(b) $ 548.9
------ ------ ------ ------
Operating expenses:
Cost of goods sold........................ 130.5 43.1 -- 173.6
Bowling center operating expenses......... 123.7 80.2 (25.1)(b)(c) 178.8
Selling, general and administrative
expenses............................... 35.1 35.5 (19.6)(b)(c) 51.0
Depreciation and amortization............. 49.4 15.1 9.0(d) 73.5
------ ------ ------ ------
Total operating expenses............. 338.7 173.9 (35.7) 476.9
------ ------ ------ ------
Operating income (loss).............. 46.1 (9.0) 34.9 72.0
Nonoperating expenses:
Interest expense.......................... 78.0 4.5 23.7(e) 106.2
Other expenses, net....................... 1.9 0.7 -- 2.6
Interest income........................... (5.6) (0.6) -- (6.2)
------ ------ ------ ------
Income (loss) before income taxes........... (28.2) (13.6) 11.2 (30.6)
Provision (benefit) for income taxes........ (8.6) (1.7) 1.3(f) (9.0)
------ ------ ------ ------
Net income (loss).................... $(19.6) $ (11.9) $ 9.9 $ (21.6)
====== ====== ====== ======
</TABLE>
- ---------------
(a) For the period from the inception date of January 12, 1996 through December
31, 1996, which includes the results of operations of the acquired business
from May 1, 1996 through December 31, 1996.
(b) To reflect the impact of Holdings not acquiring in the Acquisition the
operations of one bowling center in Switzerland and one bowling center in
Spain.
(c) To eliminate a one-time charge of $44.0 million for special bonuses and
payments made by the owners of the Predecessor Company in April 1996.
(d) To reflect the increase in depreciation and amortization expense resulting
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.
(e) To reflect the incremental interest expense associated with the issuance of
debt which partially funded the Acquisition.
(f) To give effect to the change in status of the U.S. and international
subsidiaries of Holdings from S corporations to taxable corporations under
the U.S. federal tax laws upon consummation of the Acquisition.
25
<PAGE> 26
SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years indicated
were derived from Holdings' audited consolidated financial statements for the
period ended December 31, 1996, and the Predecessor Company's audited combined
financial statements for the four months ended April 30, 1996, and the years
ended December 31, 1995, 1994, 1993, and unaudited combined financial statements
for the year ended December 31, 1992. The selected financial data include
results for the six months ended June 30, 1997, compared to pro forma results
for the six months ended June 30, 1996. The consolidated pro forma results set
forth below are presented as if the Acquisition had occurred on January 1, 1996,
and are based on the Predecessor Company's statement of operations for the
period ending April 30, 1996, Holdings' statement of income from its inception
through the relevant reporting date and adjustments giving effect to the
Acquisition under the purchase method of accounting. See "Note 3. Pro Forma
Results of Operations" in the Notes to Consolidated Financial Statements and the
Notes to Condensed Consolidated Financial Statements of Holdings. The data
should be read in conjunction with Holdings' Consolidated Financial Statements
and Condensed Consolidated Financial Statements, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that appear
elsewhere herein.
The selected financial data include operating results expressed in terms of
EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, and other income and expenses. EBITDA information
is included because the Company understands that such information is a standard
measure commonly reported and widely used by certain investors and analysts.
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 GAAP.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, ---------------------- FOUR MONTHS
---------------------------------------------------------------- ENDED
PRO FORMA PRO FORMA APRIL 30,
AMF AMF AMF AMF -----------
GROUP GROUP GROUP GROUP
HOLDINGS HOLDINGS HOLDINGS HOLDINGS PREDECESSOR
PREDECESSOR COMPANY INC. INC. INC. INC. COMPANY
---------------------------------------- --------- --------- --------- --------- -----------
1992 1993 1994(a) 1995 1996(b) 1996(c) 1996(e) 1997 1996(d)
------- ------- ------- ------- --------- --------- --------- --------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue....... $ 391.2 $ 427.6 $517.8 $ 564.9 $ 548.9 $ 384.8 $ 237.5 $ 318.1 $ 164.9
----- ----- ----- ----- ------ ----- ----- ----- -----
Cost of goods sold...... 132.1 153.2 196.0 184.1 173.6 130.5 66.5 86.1 43.1
Bowling center operating
expenses............... 103.1 108.5 115.2 166.5 178.8 123.7 82.5 116.0 80.2
Selling, general and
administrative
expenses............... 43.2 41.9 57.1 50.8 51.0 35.1 22.7 30.2 35.5
Depreciation and
amortization........... 25.5 21.4 24.8 39.1 73.5 49.4 34.9 43.4 15.1
----- ----- ----- ----- ------ ----- ----- ----- -----
Operating income
(loss)................. 87.3 102.6 124.7 124.4 72.0 46.1 30.9 42.4 (9.0)
Interest expense,
gross.................. 7.9 5.0 7.4 15.7 106.2 78.0 52.2 57.5 4.5
Other income (expense),
net.................... 0.1 (0.1) (1.5) 0.2 3.6 3.7 3.4 (1.3) (0.1)
----- ----- ----- ----- ------ ----- ----- ----- -----
Income (loss) before
income taxes........... 79.5 97.5 115.8 108.9 (30.6) (28.2) (17.9) (16.4) (13.6)
Provision (benefit) for
income taxes........... 15.4 15.1 16.5 12.1 (9.0) (8.6) (4.4) (4.2) (1.7)
----- ----- ----- ----- ------ ----- ----- ----- -----
Net income (loss)....... $ 64.1 $ 82.4 $ 99.3 $ 96.8 $ (21.6) $ (19.6) $ (13.5) $ (12.2) $ (11.9)
===== ===== ===== ===== ====== ===== ===== ===== =====
Ratio of earnings to
fixed charges(f)....... 7.1x 11.0x 10.3x 6.1x -- -- -- -- --
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
FOUR MONTHS
SIX MONTHS ENDED JUNE 30, ENDED APRIL
YEAR ENDED DECEMBER 31, ------------------------- 30,
------------------------------------------------------------------- -----------
PRO FORMA PRO FORMA AMF GROUP
AMF GROUP AMF GROUP AMF GROUP HOLDINGS PREDECESSOR
PREDECESSOR COMPANY HOLDINGS INC. HOLDINGS INC. HOLDINGS INC. INC. COMPANY
---------------------------------- -------------- -------------- -------------- --------- -----------
1992 1993 1994(a) 1995 1996(b) 1996(c) 1996(e) 1997 1996(d)
------ ------ ------- ------ -------------- -------------- -------------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA:
EBITDA............... $112.8 $124.0 $149.5 $163.5 $ 145.5 $ 95.5 $ 65.8 $ 85.8 $ 6.1
EBITDA margin........ 28.8% 29.0% 28.9 % 28.9% 26.5% 24.8% 27.7% 27.0% 3.7%
Revenue: (g)
Bowling Centers..... $204.5 $192.6 $225.4 $292.3 $ 307.3 $147.2 $ 201.1
Bowling Products.... 195.4 243.6 301.7 286.5 252.1 96.8 124.7
EBITDA: (h)
Bowling Centers..... $ 65.2 $ 54.5 $ 65.8 $ 86.8 $ 95.6 $ 48.3 $ 63.0
Bowling Products.... 48.7 71.1 84.6 79.3 62.6 22.9 31.3
New Center Packages
sold................ 2,210 3,577 4,941 4,437 3,029 1,152 1,933
New Center Packages
backlog, end of
period(i)........... N/A N/A 2,078 940 1,426 1,144 2,182
Number of centers,
end of period....... 197 190 293 286 341 284 408
Number of lanes, end
of period........... 5,988 5,896 9,586 9,430 11,782 9,386 14,206
Capital Expenditures:
Routine moderni-
zation and
maintenance(j).... $ 8.3 $ 9.0 $ 11.4 $ 13.1 $ 14.5 $ 6.9 $ 12.2
Expansion and
acquisition
capital(k)........ 3.8 5.7 6.4 16.9 117.4 3.3 135.6
----- ----- ----- ----- ------ ----- -----
Total............... $ 12.1 $ 14.7 $ 17.8 $ 30.0 $ 131.9 $ 10.2 $ 147.8
===== ===== ===== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30,
DECEMBER 31, ------------
----------------------------------------------------
AMF AMF
GROUP GROUP
HOLDINGS HOLDINGS
PREDECESSOR COMPANY INC. INC.
------------------------------------ ------------ ------------
1992 1993 1994(a) 1995 1996 1997
------ ------ ------ ------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(l)................................... $ 15.6 $ 18.9 $ 16.9 $ 29.2 $ 7.9 $ (23.2)
Goodwill, net........................................ -- -- -- -- 771.1 766.7
Total assets......................................... 231.1 228.2 410.2 400.4 1,593.9 1,715.4
Total debt........................................... 98.0 75.7 186.1 167.4 1,091.3 1,221.3
Stockholder's equity................................. 75.8 88.6 132.4 161.5 408.7 391.0
Total capitalization................................. 173.8 164.3 318.5 328.9 1,500.0 1,612.3
</TABLE>
- ---------------
(a) Includes results of Fair Lanes, which operated 106 centers and was acquired
on September 29, 1994.
(b) Represents results of operations from January 1, 1996 through December 31,
1996 on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in
the Notes to Consolidated Financial Statements of Holdings as of December
31, 1996.
(c) For the period from the inception date of January 12, 1996 through December
31, 1996, which includes results of operations of the acquired business from
May 1, 1996 through December 31, 1996.
(d) Represents results of operations from January 1, 1996 through April 30,
1996.
(e) Represents results of operations from January 1, 1996 through June 30, 1996,
on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Condensed Consolidated Financial Statements of Holdings as of June
30, 1997.
(f) The ratios of earnings to fixed charges are computed by dividing earnings by
fixed charges. Earnings consist of net income to which has been added fixed
charges and income taxes. Fixed charges consist of interest expense,
amortization of debt issuance costs, and the portion of rent expense
considered to represent interest. For the year ended December 31, 1996, on a
pro forma basis, Holdings had a deficiency of earning to fixed charges of
$30.6 million.
(g) Before intersegment eliminations.
27
<PAGE> 28
(h) Before intersegment eliminations and corporate, general and administrative
expenses.
(i) Orders of New Center Packages included in the backlog are subject to
cancellation by customers in the normal course of business. Accordingly, the
Company has experienced, and expects to continue to experience, the
cancellation of a portion of such orders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Backlog; Recent
NCP Sales." Data is not provided for 1992 and 1993 because the Company does
not maintain this data for such periods.
(j) Defined as capital expenditures for existing product lines and manufacturing
operations and capital expenditures for modernizing and refurbishing bowling
centers.
(k) Includes (i) the construction of centers and (ii) the acquisition of centers
since May 1, 1996. Excludes the acquisition of Fair Lanes and all other
acquisitions prior to May 1, 1996.
(l) Predecessor Company amounts reflect elimination of affiliates receivables
and payables.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and in Holdings' Consolidated
Financial Statements and Condensed Consolidated Financial Statements included
elsewhere herein.
Management believes that a comparison of the results of operations for the
six months ended June 30, 1997 and 1996, and the years ended December 31, 1996
and 1995, on a pro forma basis, is more meaningful than a comparison on an
historical basis. This is due primarily to significant changes in depreciation
and amortization that result from the application of the purchase method of
accounting for the Acquisition and from the increased interest expense due to
the debt incurred related to the Acquisition. Discussion of the results of
Predecessor Company operations for the years ended December 31, 1995 and 1994,
are on an historical basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Consolidated Financial Statements of Holdings as of December 31, 1996
and the Notes to Condensed Consolidated Financial Statements as of June 30,
1997.
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of Holdings, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations discuss
results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
of companies are set forth below. The two European centers that were not
acquired by the Company as part of the Acquisition, as discussed in "Note 1.
Organization" in the Notes to Consolidated Financial Statements of Holdings as
of December 31, 1996, are included in the 1996 actual Predecessor Company
results and excluded from 1996 pro forma results. The two centers have no
material impact on Holdings' financial statements or on the information
presented in this section.
For 1995, Bowling Centers adopted a calendar year end; accordingly, the
Bowling Centers results of operations for the year ended December 31, 1995
include the results of U.S. operations for the period from December 26, 1994
through December 31, 1995. Total revenue for the period from December 26, 1994
through December 31, 1994 was approximately $2.0 million.
The business segment results presented below are before intersegment
eliminations since the Company's management believes that this will provide a
more accurate comparison of performance by segment from year to year. The
intersegment eliminations are not material. Interest expense is presented on a
gross basis.
RECENT DEVELOPMENTS
Holdings' revenue increased 42.3% to $187.5 million for the third quarter
of 1997 as compared to $131.8 million for the third quarter of 1996. EBITDA
increased 27.0% to $40.9 million for the third quarter of 1997 as compared to
$32.2 million for the third quarter of 1996. Net loss was $10.3 million for the
third quarter of 1997 as compared to a net loss of $5.3 million for the third
quarter of 1996.
Revenue increased 36.9% to $505.6 million for the first nine months of 1997
as compared to $369.3 million for the first nine months of 1996. EBITDA
increased 29.3% to $126.7 million for the first nine months of 1997 as compared
to $98.0 million for the first nine months of 1996. Net loss for the first nine
months of 1997 was $22.5 million as compared to a net loss of $18.8 million for
the first nine months of 1996.
29
<PAGE> 30
Both revenue and EBITDA for the third quarter of 1997 reflect the inclusion
of results of 160 bowling centers acquired and one new bowling center built
since May 1996 through September 30, 1997, and increased levels of NCP shipments
to several international regions. Net loss for the third quarter of 1997
reflects incremental depreciation and interest expense related to increased
levels of assets and indebtedness under the Credit Agreement as a result of
bowling center acquisitions.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996(1)
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues................................... $187.5 $131.8 $505.6 $369.3
Net loss............................................. (10.3) (5.3) (22.5) (18.8)
Selected Data:
EBITDA.......................................... $ 40.9 $ 32.2 $126.7 $ 98.0
</TABLE>
- ---------------
(1) The information presented with respect to the nine months ended September
30, 1996 is presented on a pro forma basis.
On October 20, 1997, AMF acquired Michael Jordan Golf Company, Inc., a
company formed to build and operate golf practice ranges in select U.S.
locations. In addition, Michael Jordan agreed to become a spokesperson for and
endorser of AMF bowling centers and bowling products under a personal services
contract which grants AMF rights to use Mr. Jordan's image and name in
advertising and marketing campaigns.
On November 7, 1997, the Parent completed an initial public offering of the
Parent Common Stock. See "Prospectus Summary -- Recent Developments."
PERFORMANCE BY BUSINESS SEGMENT
BOWLING CENTERS
Bowling Centers derives its revenue and profits from three principal
sources: (i) bowling, (ii) food and beverage and (iii) other sources, such as
shoe rental, amusement games, billiards and pro shops. In 1996, bowling, food
and beverage and other revenue represented 62%, 24% and 14% of total Bowling
Centers revenue, respectively.
30
<PAGE> 31
The results shown below reflect both U.S. and international Bowling Centers
operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, ---------------------------
---------------------------------
PRO FORMA PRO FORMA
AMF GROUP AMF GROUP AMF GROUP
PREDECESSOR HOLDINGS HOLDINGS HOLDINGS
COMPANY INC. INC. INC.
------------------ ------------ ------------ ------------
1994 1995 1996(a) 1996(b) 1997
------ ------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BOWLING CENTERS (before
intersegment eliminations):
Operating revenue............... $225.4 $292.3 $ 307.3 $ 147.2 $ 201.1
Cost of goods sold.............. 22.3 26.3 27.5 12.6 18.3
Bowling center operating
expenses...................... 120.3 168.7 177.2 83.3 116.6
Selling, general and
administrative expenses....... 17.0 10.5 7.0 3.0 3.2
Depreciation and amortization... 21.8 36.6 56.2 26.1 34.3
------ ------ ------ ------ ------
Operating income................ $ 44.0 $ 50.2 $ 39.4 $ 22.2 $ 28.7
====== ====== ====== ====== ======
SELECTED DATA:
EBITDA.......................... $ 65.8 $ 86.8 $ 95.6 $ 48.3 $ 63.0
EBITDA margin................... 29.2% 29.7% 31.1% 32.8% 31.3%
Number of centers, end of
period........................ 293 286 341 284 408
Number of lanes, end of
period........................ 9,586 9,430 11,782 9,386 14,206
</TABLE>
- ---------------
(a) Represents pro forma results of operations from January 1, 1996 through
December 31, 1996. See "Note 3. Pro Forma Results of Operations" in the
Notes to Consolidated Financial Statements of Holdings as of December 31,
1996. The pro forma 1996 amount of selling, general and administrative
expenses has been adjusted to reflect a reallocation to corporate of certain
general and administrative expenses previously allocated to the Bowling
Centers segment. The 1995 and 1994 amounts have not been restated to reflect
this change.
(b) Represents results of operations from January 1, 1996 through June 30, 1996,
on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Condensed Consolidated Financial Statements of Holdings as of June
30, 1997.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996. Of the $53.9 million, or 36.6%, increase in operating revenue, $52.5
million was attributable to new centers, of which $48.8 million was from U.S.
centers, and $3.7 million was from international centers. An increase of $2.8
million, or 1.9%, in constant centers (centers in operation for at least one
full fiscal year) revenue was primarily a result of an increase in revenue in
the Northeast region of the U.S., a region in which the Company has a large
number of centers and which experienced severe weather conditions during the
first quarter of 1996. The increase in constant centers revenue in the first six
months of 1997 compared to the same period in 1996 was net of $1.0 million
additional revenue in 1996 due to leap year, and a $1.6 million decrease in
revenue from the Japanese centers in 1997 which was primarily caused by recent
poor economic conditions in Japan. The overall increase was also offset in part
by a $1.4 million decrease attributable to seven U.S. centers which were closed
since May 1996.
Cost of goods sold increased $5.7 million, or 45.2%, primarily as a result
of new centers, partially offset by savings associated with closed centers.
Of the increase of $33.3 million, or 40.0%, in operating expenses,
approximately $31.4 million was attributable to new centers, of which $29.4
million was attributable to U.S. centers and $2.0 million was attributable to
international centers. As a percentage of its revenue, Bowling Centers operating
expenses were 56.6% for the six months ended June 30, 1996, on a pro forma
basis, versus 58.0% for the six months ended June 30, 1997.
31
<PAGE> 32
The increase of $0.2 million, or 6.7%, in selling, general and
administrative expenses was attributable to new centers, partially offset by
savings associated with closed centers.
The increase of $14.7 million, or 30.4%, in EBITDA was attributable to new
centers. EBITDA margin decreased from 32.8% for the six months ended June 30,
1996, on a pro forma basis, to 31.3% for the six months ended June 30, 1997.
EBITDA margin for the six-month period ended June 30, 1997 was affected, as
expected, by the increasing proportion of U.S. centers purchased. U.S. centers
typically have lower margins in the second quarter compared with international
centers and compared with U.S. margins in the first and fourth quarters of the
year, primarily because revenue declines in the second quarter as fall leagues
finish the season. See" -- Seasonality and Market Development Cycles."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995. Operating revenue increased $15.0 million, or 5.1%. Increases of $19.0
million attributable to the addition of 57 new centers purchased during the last
two quarters of 1996 and $0.5 million attributable to increases at constant
centers were offset by decreases of $2.2 million attributable to the two bowling
centers which were not acquired as part of the Acquisition and $2.3 million
attributable to the closure of seven of the 106 bowling centers originally
purchased by the Predecessor Company from Fair Lanes. The constant center
revenue increase was attributable to an increase in international revenue of
$2.4 million, offset by a decrease in U.S. constant centers revenue of $1.9
million. The decrease in U.S. constant centers revenue was largely a result of a
decrease in revenue due to the severe weather conditions in the Northeast, a
region in which the Company has a large number of centers, during the first
quarter of 1996. An increase in bowling prices in the U.S. during 1996 was
partially offset by a decrease in U.S. lineage. The increase in international
revenue was primarily a result of an increase in average price per game and
increased food and beverage revenue.
Cost of goods sold increased $1.2 million, or 4.6%, primarily as a result
of new centers.
Bowling Centers operating expenses increased by $8.5 million, or 5.0%. An
increase of $10.0 million attributable to new centers and a net increase of $2.2
million attributable to constant centers were offset by a decrease of $3.7
million primarily attributable to the two centers not acquired in the
Acquisition and the closure of seven Fair Lanes centers. The net increase in
constant centers operating expenses was a result of an increase of $4.1 million
in international centers due to increased rents and payroll expenses, and a
decrease of $1.9 million in U.S. centers resulting from the implementation of
cost reduction plans developed by management after assessing the impact of the
severe weather conditions during the first quarter of 1996. As a percentage of
total revenue, Bowling Centers operating expenses remained constant at 57.7%
during 1996 and 1995.
Of the $3.5 million decrease in selling, general and administrative
expenses, $3.6 million is due to a reallocation to corporate of certain selling,
general and administrative expenses previously allocated to the Bowling Centers
segment.
An increase of $8.8 million, or 10.1%, in EBITDA was attributable to new
centers. EBITDA margin in 1996 was 31.1% compared to 29.7% in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994. Operating revenue increased by $66.9 million, or 29.7%. U.S. centers
revenue (excluding centers purchased from Fair Lanes) increased $3.6 million, or
3.7%, over 1994 revenue of $96.2 million, primarily as a result of an increase
in average price per game and lineage, and an increase of $67.2 million was
attributable to the Fair Lanes centers. These increases were offset by a
decrease of $3.9 million in international revenue which resulted primarily from
a weakening of the Mexican peso.
The increase of $4.0 million, or 17.9%, in cost of goods sold was primarily
attributable to the acquisition of the Fair Lanes centers in September, 1994.
Bowling Centers total operating expenses increased by $48.4 million, or
40.2%, of which an increase of $44.0 million was attributable to Fair Lanes
centers operations, an increase of $2.3
32
<PAGE> 33
million was attributable to non-recurring costs which resulted from integrating
Fair Lanes centers into the Company's risk management program and the closure of
seven centers, and an increase of $2.1 million was primarily attributable to
non-recurring costs related to changes in management personnel implemented in
1995. As a percent of Bowling Centers operating revenue, operating expenses
increased from 53.4% in 1994, to 57.7% in 1995, primarily as a result of the
non-recurring costs described above.
The decrease of $6.5 million, or 38.2%, in Bowling Centers selling, general
and administrative expenses was primarily attributable to the Fair Lanes centers
integration into Bowling Centers operations.
EBITDA increased $21.0 million, or 31.9%. An increase of $22.6 million
attributable to the Fair Lanes centers was offset by a decrease of $1.6 million
which was primarily attributable to centers in Mexico impacted by the weakening
of the peso. EBITDA margin increased from 29.2% in 1994 to 29.7% in 1995
primarily because the Fair Lanes centers EBITDA margin improved from 12.6% for
the fourth quarter in 1994 to 27.8% for the full year in 1995.
BOWLING PRODUCTS
The results shown below reflect Bowling Products operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, -------------------------------
-----------------------------------
PRO FORMA PRO FORMA
PREDECESSOR AMF GROUP AMF GROUP AMF GROUP
COMPANY HOLDINGS INC. HOLDINGS INC. HOLDINGS INC.
----------------- ------------- ------------- -------------
1994 1995 1996(a) 1996(b) 1997
------ ------ ------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BOWLING PRODUCTS (before
intersegment eliminations):
Operating revenue............... $301.7 $286.5 $ 252.1 $96.8 $ 124.7
Cost of goods sold.............. 178.9 166.9 153.3 58.2 74.7
------ ------ ------ ------ ------
Gross profit.................... 122.8 119.6 98.8 38.6 50.0
Selling, general and
administrative expenses....... 38.2 40.3 36.2 15.7 18.7
Depreciation and amortization... 3.7 3.6 18.5 9.4 9.9
------ ------ ------ ------ ------
Operating income................ $ 80.9 $ 75.7 $ 44.1 $13.5 $ 21.4
====== ====== ====== ====== ======
SELECTED DATA:
Gross profit margin............. 40.7% 41.7% 39.2% 39.9% 40.1%
EBITDA.......................... $ 84.6 $ 79.3 $ 62.6 $22.9 $ 31.3
EBITDA margin................... 28.0% 27.7% 24.8% 23.7% 25.1%
New Center Packages sold........ 4,941 4,437 3,029 1,152 1,933
New Center Packages backlog,
end of period(c).............. 2,078 940 1,426 1,144 2,182
</TABLE>
- ---------------
(a) Represents results of operations from January 1, 1996 through December 31,
1996 on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in
the Notes to Consolidated Financial Statements of Holdings as of December
31, 1996. The pro forma 1996 amount of selling, general and administrative
expenses has been adjusted to reflect a reallocation to corporate of certain
overhead expenses previously allocated to the Bowling Products segment. The
1995 and 1994 amounts have not been restated to reflect this change.
(b) Represents results of operations from January 1, 1996 through June 30, 1996,
on a pro forma basis. See "Note 3. Pro Forma Results of Operations" in the
Notes to Condensed Consolidated Financial Statements of Holdings as of June
30, 1997.
(c) Orders of NCPs included in the backlog are subject to cancellation by
customers in the normal course of business. Accordingly, the Company has
experienced, and expects to continue to experience, the cancellation of a
portion of such orders. See "-- Backlog; Recent NCP Sales." Data is not
provided for 1992 and 1993 because the Company does not maintain this data
for such periods.
33
<PAGE> 34
Bowling Products' long-standing customer relationships, Bowling Centers'
and third-party centers' predictable demand for Modernization and Consumer
Products, a steadily increasing installed base of NCPs and Bowling Products'
ability to supply a full product line have historically made the Modernization
and Consumer Products category a stable and recurring base of revenue and
EBITDA. Revenue growth from 1991 to 1994 for the NCP category resulted primarily
from increased unit sales to Taiwan and Korea, and since 1995 to China and to
emerging bowling markets, where the popularity of bowling and consequent demand
for new bowling centers increased dramatically. During 1995 and 1996, NCP
revenue declined primarily because the markets in Taiwan and Korea had matured.
The decline was partially offset by continued demand in China and in certain
emerging bowling markets. During the first six months of 1997, NCP revenue
increased due to continued demand in China and other international markets, such
as Japan and Malaysia.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996. Bowling Products total operating revenue increased $27.9 million, or
28.8%, primarily due to an increase of $25.3 million, or 67.5%, in NCP revenue,
and an increase of $2.0 million, or 3.4%, in Modernization and Consumer Products
revenue. The increase in NCP revenue was due to an overall increase in NCP sales
of 781 units which occurred primarily in China, Malaysia, the Americas and
Japan. See "Risk Factors -- Seasonality and Market Development Cycles" and
"-- Seasonality and Market Development Cycles."
Total gross profit from Bowling Products increased by $11.4 million, or
29.5%, primarily as a result of increased NCP sales. Gross profit margin was
39.9% and 40.1% for the six months ended June 30, 1996 and 1997, respectively.
Bowling Products selling, general and administrative expenses increased by
$3.0 million, or 19.1%, primarily as a result of a $2.4 million increase
attributable to payroll and facilities expenses related to staffing the
Company's international sales and service offices, and an increase of $1.5
million attributable to advertising and promotion expenses in the U.S.
locations. These increases were offset by a decrease of $0.9 million in payroll,
facilities and related expenses at the U.S. locations.
EBITDA increased from $22.9 million to $31.3 million, resulting in an
increase in EBITDA margin from 23.7% to 25.1%, primarily due to the increased
NCP revenue, offset in part by the increased expenses discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995. Operating
revenue decreased by $34.4 million, or 12.0%, primarily due to a decrease of
$35.3 million, or 22.7%, in NCP revenue offset by an increase of $0.9 million,
or 0.7%, in Modernization and Consumer Products revenue. The drop in NCP revenue
was due to an overall decrease in NCP sales by 1,408 units in 1996 compared to
1995, particularly for maturing markets including Korea and Taiwan, offset by an
increase in NCP revenue from sales to China. From 1995 to 1996, total NCP sales
to Korea decreased by 1,165 units and to Taiwan decreased by 1,323 units.
Additionally, there was a moderate increase in NCP units sold in the Americas
and southern Europe during 1996. The increase in sales to China occurred during
the last six months of 1996. See "Risk Factors -- Seasonality and Market
Development Cycles" and "-- Seasonality and Market Development Cycles." The
increase in Modernization and Consumer Products revenue was due in part to
increased sales of synthetic lanes and automatic scoring in the United States.
Gross profit decreased by $20.8 million, or 17.4%. Gross profit margin was
41.7% in 1995 and 39.2% in 1996. Of this 2.5% decrease, 0.8% was attributable to
an increase in certain inventory and warranty reserves in the Modernization and
Consumer Products categories of $2.1 million, and 1.7% was attributable to the
lower margins on decreased revenues, particularly in Japan, due to price cuts
implemented by the Company's management in response to stiffer competition in
the Modernization and Consumer Products category.
34
<PAGE> 35
Of the $4.1 million decrease in selling, general and administrative
expenses, $4.2 million was due to a reallocation to corporate of certain
overhead expenses previously allocated to the Bowling Products segment.
EBITDA decreased $16.7 million, or 21.1%, and EBITDA margin decreased from
27.7% in 1995, to 24.8% in 1996, primarily due to the decreased NCP revenue and
gross profit discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994. Operating
revenue decreased $15.2 million, or 5.0%, as a result of a decrease of $15.1
million, or 8.8%, in NCP revenue, and a less than 1.0% decrease of $0.1 million
in Modernization and Consumer Products revenue.
A significant portion of the decrease in NCP revenue was attributable to a
decrease in sales to Taiwan and Korea during November and December 1995, which
had significantly lower sales than the comparable period in 1994. Management
believes that the sales to Taiwan and Korea peaked during 1994. Additionally,
NCP sales in Japan were significantly affected by uncertain economic conditions
following the Kobe earthquake and the subway gas attacks, which resulted in
delayed investments in recreational activities.
Gross profit decreased by $3.2 million, or 2.6%, and the gross profit
margin of 40.7% in 1994 increased to 41.7% in 1995. Decreases of $3.8 million
caused by the decrease in NCPs sold and $1.7 million primarily attributable to
start up expenses incurred in pool cue, bumper, and automatic scoring systems
manufacturing were offset by a $2.3 million increase which resulted from
decreased warranty costs.
The increase of $2.1 million, or 5.5%, in selling, general and
administrative expenses was primarily attributable to non-recurring costs of
$2.9 million in 1995, offset by $0.8 million which was primarily due to net
reversals of reserves.
EBITDA decreased $5.3 million, or 6.3%, and EBITDA margin decreased from
28.0% in 1994 to 27.7% in 1995, primarily due to the decreased revenue and
increased selling, general and administrative expenses discussed above. The 1995
EBITDA was depressed by the non-recurring selling, general and administrative
costs of $2.9 million described above.
CONSOLIDATED ITEMS
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $8.5 million, or 24.4%, in the
six months ended June 30, 1997 compared with the same period in 1996, primarily
due to depreciation of property and equipment of centers acquired since May 1996
and incremental depreciation expense incurred as a result of capital
expenditures.
For the year ended December 31, 1996, depreciation and amortization
increased by $34.4 million, or 88.0%, over the same period in 1995, primarily as
a result of recording fixed assets at fair market value and goodwill in
accordance with the purchase accounting method applied to the Acquisition.
For the year ended December 31, 1995, depreciation and amortization
increased by $14.3 million, or 57.7%, over the same period in 1994, primarily
due to the inclusion of Fair Lanes centers for the entire 12 months of 1995, as
compared with three months during 1994.
INTEREST EXPENSE
Gross interest expense increased by $5.3 million, or 10.2%, in the six
months ended June 30, 1997 compared with the same period in 1996, primarily due
to interest paid on increased levels of bank debt as a result of the center
acquisitions described under "Business -- AMF Bowling Centers -- Recent
Acquisitions and Joint Ventures." See "-- Liquidity" and "-- Capital Resources."
Cash interest paid by Holdings for the six months ended June 30, 1997 totaled
$39.8 million, while non-cash bond interest amortization totaled $16.8 million.
35
<PAGE> 36
For the year ended December 31, 1996, gross interest expense increased by
$90.5 million, or 576.4%, compared with the same period in 1995 due to interest
paid on debt incurred to finance the Acquisition and interest on the Acquisition
Facility that existed under the Credit Agreement as in effect before the most
recent amendment and restatement. Cash interest paid by Holdings for the year
ended December 31, 1996 totaled $44.5 million, while non-cash bond interest
amortization totaled $24.7 million.
Gross interest expense increased by $8.3 million, or 112.2%, for the year
ended December 31, 1995, compared with the same period in 1994 as a result of
additional debt incurred in connection with the acquisition of the Fair Lanes
centers on September 29, 1994. This debt was paid in full by the prior owners of
the Predecessor Company before the Acquisition.
NET INCOME (LOSS)
Net loss decreased $1.3 million, or 9.6%, for the six months ended June 30,
1997 compared with the same period in 1996, as a result of the increases in
EBITDA discussed above on a segment basis, offset by increases in depreciation
and amortization expense, interest expense and the current tax provision for
Holdings.
The decline of $118.3 million, or 122.2%, in net income from $96.8 million
in 1995 to a net loss of $(21.5) million in 1996, on a pro forma basis, was
primarily attributable to a decrease in Bowling Products EBITDA resulting from
the decline in NCP revenue and higher depreciation and amortization and interest
expense resulting from the Acquisition after allowing for an $8.9 million tax
benefit.
Net income decreased $2.5 million, or 2.5%, for the year ended December 31,
1995, compared with the same period in 1994 as a result of higher depreciation
and amortization and interest expense incurred in 1995 as a result of the
full-year impact of the acquisition of the Fair Lanes centers which occurred in
the fourth quarter of 1994.
Holdings will incur after-tax extraordinary charges totalling $22.7 million
in the fourth quarter of 1997 arising from the amendment and restatement of the
Credit Agreement that became effective on November 7, 1997 and the resulting
write-off of costs previously incurred to obtain bank financing for the
Acquisition, the premium associated with the portion of the Exchange Senior
Subordinated Discount Notes expected to be redeemed with the proceeds of the
Parent Offering and the write-off of the portion of deferred financing costs
attributable to the Exchange Senior Subordinated Discount Notes expected to be
so redeemed. See "Description of Senior Debt -- Credit Agreement."
INCOME TAXES
Prior to the Acquisition, certain of the companies within the Predecessor
Company elected S corporation status under the Internal Revenue Code of 1986, as
amended (the "Code"). Upon consummation of the Acquisition, those companies
became taxable corporations under the Code.
Pursuant to the Stock Purchase Agreement, the two principal companies
within the affiliated group elected under Section 338(h)(10) of the Code, to
treat the stock purchase as a deemed asset acquisition for the purposes of U.S.
income taxes. These elections permitted both of the affiliated companies to
revalue their assets to fair market value and to treat any amortizable goodwill
as tax deductible over fifteen years.
As of June 30, 1997, Holdings had net operating losses of approximately
$38.0 million and foreign tax credits of $9.6 million which will carry over to
future years to offset U.S. taxes. The foreign tax credits will begin to expire
in the year 2001 and the net operating losses will begin to expire in the year
2010. Holdings has not booked a valuation reserve as of June 30, 1997 because
Holdings expects to utilize these net operating losses prior to expiration.
36
<PAGE> 37
LIQUIDITY
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
The following discussion compares Holdings' results for the period ended
June 30, 1997 with the period ended June 30, 1996, on an historical basis.
Holdings' 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 with a negative $23.2 million as of June 30, 1997, a
decrease of $31.1 million. Cash decreased $27.0 million primarily as a result of
payments on debt under the Credit Agreement and internal funding of certain
bowling center acquisitions, and the note payable under the Credit Agreement
increased $30.0 million as a result of borrowings under the Working Capital
Facility under the Credit Agreement, as in effect before its most recent
amendment and restatement, which was used to fund increases in working capital.
Accounts receivable increased $14.5 million primarily as a result of increased
NCP revenue, and inventory increased $15.5 million in advance of future
shipments. These increases in working capital were partially offset by a
decrease of $4.1 million caused by changes in other current assets and
liabilities.
Net cash flows used in operating activities were $28.0 million for the six
months ended June 30, 1996 compared with net cash provided of $8.2 million for
the six months ended June 30, 1997, a difference of $36.2 million. Net cash
provided resulted from a decrease of $0.1 million in net loss, an increase of
$31.7 million in depreciation and amortization primarily as a result of
application of the purchase method of accounting for the Acquisition, an
increase of $8.0 million in amortization of the discount related to the bonds
used to partially fund the Acquisition, a net loss of $0.1 million on the sale
of property and equipment, a net change of $3.3 million in deferred taxes and
income taxes payable, and a change of $19.8 million in other assets and
liabilities. Net cash used resulted from an increase of $14.3 million in
accounts receivable primarily resulting from the increased levels of NCP sales
compared with the same period in 1996, and an increase of $12.5 million in
inventory primarily reflecting the increased backlog of NCP orders to be shipped
after June 30, 1997.
Net cash flows used in investing activities were $1,336.3 million for the
six months ended June 30, 1996 compared with net cash flows used of $147.5
million for the six months ended June 30, 1997. During the six months ended June
30, 1996, cash flows used for the Acquisition totaled $1,333.1 million, capital
spending was $3.3 million and other investing cash flows provided were $0.1
million. During the six months ended June 30, 1997, acquisitions of bowling
centers totaled $122.2 million, capital spending was $25.6 million, and other
cash flows provided by investing activities were $0.3 million. See "Note 9.
Acquisitions" in the Notes to Condensed Consolidated Financial Statements of
Holdings as of June 30, 1997 and "-- Capital Expenditures."
Net cash provided by financing activities was $1,409.8 million for the six
months ended June 30, 1996 compared with net cash provided of $112.4 million for
the six months ended June 30, 1997. During the six months ended June 30, 1996,
cash flows were primarily provided by $1,029.9 million of proceeds of long-term
debt and $380.3 million from a capital contribution, both of which were used to
fund the Acquisition. During the six months ended June 30, 1997, cash flows were
primarily provided by drawing down $103.5 million and $30.0 million from
available borrowings under the Acquisition Facility and the Working Capital
Facility, respectively, to fund the acquisitions of centers and increases in
working capital. During 1997, funds were used primarily for the payment of long-
term debt totaling $20.3 million, and $0.5 million was paid as a dividend to the
Parent for the repurchase of an officer's shares in connection with the
termination of his employment with the Company. See "Note 12. Employee Benefit
Plans" in the Notes to Consolidated Financial Statements of Holdings as of
December 31, 1996.
As a result of the aforementioned, cash increased by $45.1 million for the
six months ended June 30, 1996 compared to a decrease of $26.9 million for the
six months ended June 30, 1997.
37
<PAGE> 38
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
The following discussion compares Holdings' results for the period ended
December 31, 1996, with the Predecessor Company's results for the year ended
December 31, 1995, on an historical basis.
Net cash flows from operating activities decreased $51.0 million from
$124.8 million for the year ended December 31, 1995 to $73.8 million for the
period ended December 31, 1996. This decrease was primarily due to the decrease
in net income from $96.8 million for the year ended December 31, 1995 to a net
loss of $(19.5) million for the period ended December 31, 1996 and higher
depreciation, amortization and interest expenses as a result of the Acquisition.
Net cash flows used in investing activities were $28.3 million for the year
ended December 31, 1995 compared with net cash flows used of $1,467.1 million
for the period ended December 31, 1996. The change was due primarily to the
Acquisition. During the year ended December 31, 1995, capital spending was $30.0
million and other investing cash flows provided were $1.7 million. During the
period ended December 31, 1996, acquisitions of operating units, net of cash
acquired, including the Acquisition, totaled $1,450.9 million, capital spending
was $16.9 million, and other cash flows provided by investing activities were
$0.7 million.
Net cash used for financing activities was $94.7 million for the year ended
December 31, 1995 compared with net cash provided of $1,438.3 million for the
period ended December 31, 1996. This change primarily resulted from the issuance
of debt and capital contributions related to the Acquisition. During 1995, the
Predecessor Company made distributions to its owners of $71.9 million, net
payments on notes payable to its owners of $3.8 million, net payments on credit
note agreements and long-term debt of $21.3 million and a payment for redemption
of stock of $4.0 million. Additionally, cash of $8.3 million was received as
capital contributions by stockholders.
During the period ended December 31, 1996, Holdings had borrowings, net of
deferred financing costs, of $1,059.3 million from debt incurred to finance the
Acquisition and from the Acquisition Facility, and made payments of $38.9
million on this debt. Additionally, a total of $420.8 million was received as
capital contributions by the institutional stockholders of the Parent and
certain of its officers and directors. Of the total capital contributed, $380.8
was for the initial capitalization of the Parent and the Acquisition, and $40.0
million was received as additional capital contributions in connection with the
acquisition of centers from Charan Industries, Inc. ("Charan"). See
"Business -- AMF Bowling Centers -- Recent Acquisitions and Joint Ventures."
As a result of the aforementioned, cash increased by $1.6 million for the
year ended December 31, 1995 compared with an increase of $43.6 million for the
period ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Net cash flow from operating activities increased from $119.7 million for
the year ended December 31, 1994 to $124.8 million for the year ended December
31, 1995. This increase was primarily a result of the fact that although net
income decreased from $99.3 million to $96.8 million and assets and liabilities
changes occurred which reflected a net use of cash of $5.3 million and $10.9
million for the year ended December 31, 1994 and for the year ended December 31,
1995, respectively, depreciation and amortization increased by $14.3 million,
from $24.8 million for the year ended December 31, 1994 to $39.1 million for the
fiscal year ended December 31, 1995.
Net cash used for investing activities decreased from $32.6 million for the
year ended December 31, 1994 to $28.3 million for the year ended December 31,
1995. During 1994, cash of $17.3 million was used for the acquisition of
centers, primarily Fair Lanes centers. Capital spending was $17.8 million for
the year ended December 31, 1994 compared with $30.0 million for the year ended
December 31, 1995.
Net cash used for financing activities increased from $89.6 million for the
year ended December 31, 1994 to $94.7 million for the year ended December 31,
1995. During 1994, the Predecessor Company made distributions to its owners of
$78.2 million, net payments on notes payable to its
38
<PAGE> 39
owners of $8.6 million and net payments on credit note agreements and long-term
debt of $4.8 million. Additionally, cash of $2.1 million was received as capital
contributions by its owners. During 1995, the Predecessor Company made
distributions to its owners of $71.9 million, net payments on notes payable to
its owners of $3.8 million, net payments on credit note agreements and long-term
debt of $21.3 million and a payment for redemption of stock of $4.0 million.
Additionally, cash of $8.3 million was received as capital contributions by its
owners.
As a result of the aforementioned, cash increased by $0.2 million for the
year ended December 31, 1994 compared to an increase of $1.6 million for the
year ended December 31, 1995.
CAPITAL RESOURCES
As a result of the Acquisition, Holdings' total indebtedness has increased
substantially. At June 30, 1997, Holdings' debt structure consisted of Senior
Debt of $679.9 million, senior subordinated notes of $250.0 million and senior
subordinated discount notes of $291.4 million. At June 30, 1997, Holdings was
also capitalized with equity of $391.0 million. Under the Credit Agreement, as
amended and restated effective November 7, 1997, Holdings also has the ability
to borrow for general corporate purposes pursuant to the $355.0 million Working
Capital Facility, subject to certain conditions. At June 30, 1997, $112.0
million and $30.0 million was outstanding under the Acquisition Facility and the
Working Capital Facility, respectively, as then in effect. Between June 30, 1997
and October 31, 1997, additional borrowings under the Acquisition Facility
totaled $59.0 million and were used to fund the acquisitions of centers. See
"Business -- AMF Bowling Centers -- Recent Acquisitions and Joint Ventures." In
addition, the Company borrowed an additional $17.5 million under the Working
Capital Facility to fund increases in working capital. At October 31, 1997,
$171.0 million and $47.5 million was outstanding under the Acquisition Facility
and the Working Capital Facility, respectively. Available borrowings under the
Credit Agreement have been increased pursuant to the most recent amendment and
restatement, as described below.
In September 1997, certain current stockholders of the Parent purchased an
aggregate of 1,780,000 shares of Parent Common Stock from the Parent for $20.00
per share pursuant to the "overcall" provisions of the Stockholders Agreement.
The aggregate $35.6 million capital contribution was used to fund acquisitions,
including 15 centers from Conbow Corporation ("Conbow"), and for other permitted
purposes. See "Business -- AMF Bowling Centers -- Recent Acquisitions and Joint
Ventures" and "Principal Stockholders -- Stockholders Agreement."
Holdings funds its cash needs through cash flow from operations, existing
cash balances and the Working Capital Facility. A substantial portion of
Holdings' available cash will be applied to service outstanding indebtedness.
For the period beginning January 12, 1996 and ending December 31, 1996, Holdings
incurred cash interest expense of $53.0 million, representing 55.5% of EBITDA of
$95.5 million for the period. For the six months ended June 30, 1997, Holdings
incurred cash interest expense of $39.8 million, representing 46.4% of EBITDA of
$85.8 million for the six month period.
The Indentures and the Credit Agreement contain financial and operating
covenants and significant restrictions on the ability of the Company to pay
dividends, incur indebtedness, make investments and take certain other corporate
actions. See "Risk Factors -- Substantial Leverage; Ability to Service
Indebtedness," "Risk Factors -- Holding Company Structure," "Risk Factors -- Net
Losses," "Description of Senior Debt" and "Note 9. Long-Term Debt" in the Notes
to Consolidated Financial Statements of Holdings as of December 31, 1996.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness (including the Exchange Notes)
depends on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control. Based upon the current level of operations and
anticipated growth, management believes that available cash flow, together with
available borrowings under the Credit Agreement and other sources of liquidity,
will be adequate to meet the Company's anticipated future requirements for
working capital, capital expenditures, scheduled
39
<PAGE> 40
payments of principal of, and interest on, its senior debt, and interest on the
Exchange 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 (including the Exchange Notes) or that any refinancing would be
available on commercially reasonable terms or at all. See "Risk
Factors -- Substantial Leverage; Ability to Service Indebtedness" and "Risk
Factors -- Net Losses."
Pursuant to the amendment and restatement of the Credit Agreement that
became effective on November 7, 1997, the Acquisition Facility and a portion of
the Term Facilities that existed under the Credit Agreement, as previously in
effect, were converted into a non-amortizing revolving Working Capital Facility
(the "Working Capital Facility") with an aggregate size of $355.0 million, and a
portion of such facility will be repaid with proceeds of the Parent Offerings.
Borrowings under the amended Working Capital Facility will provide the Company
the ability to finance acquisitions or new center construction. At October 31,
1997, $59.0 million remained available under the Acquisition Facility, as then
in effect. Pursuant to the Credit Agreement, as amended and restated effective
November 7, 1997, $161.5 million is available under the Working Capital
Facility, assuming $100.0 million of the proceeds of the Parent Offerings were
to be used to repay indebtedness under the Credit Agreement. See "Description of
Senior Debt."
CAPITAL EXPENDITURES
For the six months ended June 30, 1997, Holdings' actual capital
expenditures were $25.6 million compared with $10.2 million for the six months
ended June 30, 1996, on a pro forma basis (capital expenditures of the acquired
business from January 1, 1996 through June 30, 1996). The increase was primarily
due to an ongoing modernization program in Bowling Centers, a new point-of-sale
information system in U.S. Bowling Centers, new Company-wide information
systems, and construction of a new 40 lane, state-of-the-art bowling and family
entertainment center at Chelsea Piers in New York City.
For the period ended December 31, 1996, Holdings' capital expenditures were
$16.9 million. For the year ended December 31, 1997, Holdings' capital
expenditures are expected to be approximately $50.0 million. For the year ended
December 31, 1995, Holdings' capital expenditures were $30.0 million, including
$9.7 million for the construction of three new centers. In 1994, Holdings'
capital expenditures were $17.8 million. The 1996 expenditures level was lower
than the 1995 level in part because in 1995 three new bowling centers were
constructed at a cost of approximately $9.7 million.
The Company conducts an ongoing modernization and maintenance program that
results in its centers having upgraded physical plants and generally attractive
appearances. Management believes that its historical spending level of 3.7% of
Bowling Centers revenue is fully adequate to cover all modernization and
maintenance capital expenditures. Management estimates that approximately 2.0%
of Bowling Centers revenue is required for maintenance capital expenditures
alone.
Bowling Products has relatively modest capital investment requirements, and
the Company has followed a relatively conservative approach to capital
investment. Maintenance and replacement investments have been made when clearly
needed, but as close to the end of the useful lives of assets as possible.
Investment in production machinery and equipment has received the highest
investment priority and has focused on projects with projected payback periods
of one to three years. Management is not planning significant changes in the
policy for non-strategic projects.
The Company has the opportunity to acquire and build additional bowling
centers, both in the U.S. and internationally. The Company is prepared to
acquire or build additional bowling centers as appropriate opportunities arise
and is engaged in ongoing evaluations of and discussions with third parties
regarding possible acquisitions. See "Business -- Business Strategy." Management
plans to acquire centers with funding provided under the Credit Agreement to the
extent available. As of October 31, 1997, $59.0 million remained available under
the Acquisition Facility, as then in effect. Pursuant to the Credit Agreement,
as amended and restated effective November 7, 1997,
40
<PAGE> 41
$161.5 million is available under the Working Capital Facility, assuming that
$100.0 million of the proceeds of the Parent Offerings were to be used to repay
indebtedness under the Credit Agreement. Management's plans to expand the
Bowling Centers operations are subject to the continuation of favorable economic
and financial conditions, which are generally not within the Company's control.
Currently, the Company has entered into purchase agreements to acquire eighteen
centers, including the Pin Boys Centers (as defined below), from several
unrelated sellers. The aggregate purchase price for such centers is expected to
be approximately $38.5 million and is expected to be funded with borrowings
under the new Working Capital Facility and cash generated from operations.
The Company has funded its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new centers,
internally generated cash, the Acquisition Facility, and issuances of common
equity. See "Note 9. Acquisitions" in the Notes to Condensed Consolidated
Financial Statements of Holdings as of June 30, 1997, "-- Liquidity" and
"-- Capital Resources."
SEASONALITY AND MARKET DEVELOPMENT CYCLES
The following table sets forth AMF's U.S. constant centers revenue for the
last four quarters:
<TABLE>
<CAPTION>
QUARTER ENDING
---------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
------------- ------------ --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Total Revenue............ $38.7 $ 50.5 $58.1 $ 41.1
% of Total............... 20.6% 26.8% 30.8% 21.8%
</TABLE>
On a consolidated basis, revenue and EBITDA of the Company's businesses are
neither highly seasonal nor highly cyclical. The geographic diversity of the
Company's bowling centers, which operate across different regions of the U.S.
and across nine other countries, along with the bowling industry's historic
relative insulation from recessions, has provided stability to Holdings' annual
cash flows. Although financial performance of Bowling Centers operations is
seasonal in nature in many countries, with cash flows typically peaking in the
winter months and reaching their lows in the summer months, the geographic
diversity of the Company's bowling centers has helped reduce this seasonality as
bowling centers in certain countries in which AMF operates exhibit different
seasonal sales patterns. As a result of the growing number of U.S. centers
attributable to the Company's acquisition program, the seasonality described
above may be accentuated. In Australia, where AMF has its largest number of
international centers, the reversal of seasons relative to the U.S. helps
mitigate the seasonality in worldwide operations. AMF's cash flows are further
stabilized by the location of many centers in regions where the climates have
high average temperatures and high humidity. In the U.S., during the summer
months when league bowling is generally less active, bowling centers in the
southern U.S. continue to show strong performance. Similarly, in regions with
warm summer climates such as Hong Kong and Mexico, where bowling in
air-conditioned centers may be more attractive than outdoor activities, bowling
centers show strong performance. See "Business -- Business Strategy" and "Note
10. Business Segments" in the Notes to Condensed Consolidated Financial
Statements of Holdings as of June 30, 1997.
Modernization and Consumer Products sales display significant seasonality.
The U.S. market, which is the largest market for Modernization and Consumer
Products, is driven by the beginning of leagues in the fall of each year.
Operators typically sign purchase orders, particularly for replacement
equipment, during the first four months of the year, after they receive winter
league revenue indications. Equipment is shipped and installed during the summer
months, when leagues are generally less active. Sales of modernization
equipment, such as automatic scoring and synthetic 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.
41
<PAGE> 42
The NCP category of bowling products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
Korea and Taiwan) which, in the Company's experience, last five years or more.
These growth patterns do not seem to be closely tied to general economic cycles.
INTERNATIONAL OPERATIONS
For the six months ended June 30, 1997, 26.1% of Bowling Centers revenue
was generated by its international centers. For the year ended December 31,
1996, 33.8% of the Bowling Centers revenue was generated by international
centers. Historically, the Company has not engaged in any significant currency
hedging activities.
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments (such
as restrictions on transfer of funds, import and export duties and quotas,
foreign customs, tariffs and VATs and unexpected changes in regulatory
environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
For the six months ended June 30, 1997, 59.2% of Bowling Products sales
were international sales. For the year ended December 31, 1996, approximately
62.7% of Bowling Products sales were made in international markets. To minimize
credit and international exchange risk, equipment is sold primarily using
letters of credit denominated in U.S. dollars. Letters of credit are usually
received before shipments leave U.S. ports. International sales offices sell
some products in local currency, but adjust pricing, to the extent that market
conditions permit, with changes in exchange rates. This policy enables the
Bowling Products operations generally to avoid any material adverse effect from
exchange rate fluctuations. Management believes that this policy should continue
to protect the Company from material adverse consequences of exchange rate
fluctuations, except in the event of severe international exchange rate
volatility. See "Risk Factors -- International Operations."
BACKLOG; RECENT NCP SALES
The total backlog of NCPs (which include all of the equipment necessary to
outfit one new bowling lane) as of October 26, 1997 was 2,085 units, which is an
approximately 46% increase over the December 31, 1996 backlog of 1,426 units.
The increased backlog was directly attributable to strong NCP orders generated
throughout the world as a result of an aggressive program to increase sales in
early stage and developed markets. The backlog as of October 26, 1997 reflects a
significant number of orders from customers in China, Malaysia, North and South
America, Japan and Europe. Orders of NCPs included in the backlog are subject to
cancellation by customers from time to time in the normal course of business.
Accordingly, the Company has experienced, and expects to continue to experience,
the cancellation of a portion of such orders.
NCP sales for the first six months of 1997 totaled $62.8 million, a 67.5%
increase over the same period in 1996. The significant increase was attributable
to the market development and sales programs implemented in mid-1996 which were
designed to maximize NCP sales activity in a variety of marketplaces of the
world. While China currently represents the largest market for the Company's NCP
sales and backlog, other markets such as South America, India, Poland, Russia
and the Middle East are being developed.
The total NCP backlog of approximately 1,426 units as of December 31, 1996
represented an increase of 486 units from the backlog of 940 units at December
31, 1995. This increase was primarily composed of increases in the backlogs in
China, the United States and Malaysia, partially offset by decreases in the
backlogs in Korea and Taiwan.
42
<PAGE> 43
Reflecting the decline in orders in the fourth quarter of 1995,
manufacturing revenue from NCP sales declined very substantially during the
first six months of 1996 representing a decrease of over 59.0% compared with NCP
sales during the first six months of 1995. Overall NCP sales in the second half
of 1996 exceeded NCP sales for the first half of 1996, reflecting continued
progress in establishing a direct sales presence in China. The drop in NCP
revenue for the year ended December 31, 1996 was due to a decrease in NCP unit
sales, particularly in Korea and Taiwan. For the full year 1996, total NCP sales
to Korea decreased by 1,165 units and to Taiwan decreased by 1,323 units
compared with the full year 1995. The decrease in sales to Korea and Taiwan
during 1996 was offset in part by an increase in NCP sales to China of 825
units. Management believes that the initial expansion period in both Korea and
Taiwan peaked during 1994. Management believes that the decreased sales to Korea
were also partially attributable to the effect of the Company's decreased
presence in Korea while it was in the process of establishing a direct sales
office to replace its former distributor. As a result of the maturing state of
the markets in Korea and Taiwan, management does not expect NCP sales to these
markets to return to the levels realized in 1994.
IMPACT OF INFLATION
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have an
adverse effect on the Company to the extent that increased borrowing costs for
floating rate debt may not be offset by increases in revenue.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. It is the opinion of management that the various asserted claims in
which the Company currently is involved are not likely to have a material
adverse effect on its financial position or results of operations. However, no
assurance can be given as to the ultimate outcome with respect to such claims.
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services. See "Business -- Environmental Matters."
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the fiscal year ended December 31, 1997, Holdings is required
to adopt Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" and SFAS No. 129 "Disclosure of Information About Capital Structure."
Effective for the fiscal year ended December 31, 1998, Holdings is required to
adopt SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information."
Holdings does not expect that adoption of these standards will have a
material impact on Holdings' financial position or results of operations. The
adoption of SFAS No. 130 will require reporting comprehensive income, which
includes the foreign currency translation adjustment, in an alternative format
prescribed by the standard.
43
<PAGE> 44
BUSINESS
GENERAL
AMF is the largest bowling company in the world. The Company operates 447
bowling centers worldwide which generate over 60 million customer visits per
year. AMF is the U.S. market leader with 361 bowling centers, and is also the
largest operator internationally, with 86 bowling centers in nine countries. In
addition, AMF has been a leader in the bowling equipment industry for over 50
years, having revolutionized ten pin bowling with the introduction of the first
automatic pinspotter in 1946. AMF is one of only two bowling equipment
manufacturers that compete on a global basis. Management believes that AMF
bowling equipment accounts for approximately 41% of the world's installed base
of bowling equipment.
The worldwide bowling center and bowling equipment industry generates
approximately $9 billion in annual revenue and includes approximately 13,000
bowling centers in over 80 countries. The U.S. bowling center and bowling
equipment industry generates in excess of $4 billion of revenue annually and
includes approximately 5,900 centers. Over 100 million people participate
annually in bowling worldwide, according to the FIQ, the official organization
of the worldwide bowling industry. The bowling center industry in both the U.S.
and abroad is highly fragmented. In the U.S., the next closest competitor to
AMF's 361 centers has approximately 111 centers. The next three largest
operators collectively account for only approximately 55 of the total 5,900
centers.
An investor group led by GSCP, an affiliate of Goldman Sachs, acquired AMF
in May 1996 for a total purchase price of approximately $1.37 billion. The
investor group appointed a new management team that has aggressively pursued a
three-part strategy:
- consolidate the U.S. bowling center industry,
- build a nationally recognized brand of superior bowling and
entertainment centers, and
- capitalize on the demand for bowling products and centers in certain
international markets.
Management is utilizing the well-recognized AMF name to build the only
national branded network of bowling and entertainment centers in the U.S.
through a series of initiatives. These include introducing innovative new
products, such as bumper bowling and Xtreme(TM) Bowling, upgrading the physical
appearance of centers, and improving the food and beverage offerings. Since May
1996, AMF's management team has grown the number of AMF's U.S. centers from 207
to 361, an increase of approximately 74%, principally through acquisitions.
AMF is also capitalizing on the strong international growth in the demand
for Bowling Products through direct sales of equipment and the building of new
bowling centers abroad. Strong demand for AMF's New Center Packages of bowling
equipment drove AMF's backlog from 1,426 NCP units at December 31, 1996 to 2,085
NCP units at October 26, 1997, an increase of approximately 46%. Over 90% of the
Company's NCP backlog is to international markets such as China, Japan and
Germany. Further, AMF is acting to accelerate the development of bowling in key
potential markets. During 1997, AMF entered into joint ventures to build and
operate bowling centers equipped with AMF bowling products in China and selected
Southeast Asian countries, and in Brazil and Argentina.
INDUSTRY OVERVIEW
BOWLING CENTERS
Bowlers represent a broad cross-section of the population. Several key
reasons for bowling's popularity in the U.S. and abroad are that it is (i) an
indoor, all-weather sport with year-round appeal, (ii) a lifetime sport suitable
for all age groups, and (iii) low in cost relative to other forms of
entertainment, requiring minimal expenditure on equipment to participate.
Approximately 50% of U.S. bowling revenue is derived from league bowlers, who
register in leagues and commit to
44
<PAGE> 45
participate on a scheduled basis generally once a week for a period of up to 40
weeks. Management believes that outside the U.S., league revenue generally
comprises a smaller percentage of bowling revenue.
The bowling center industry is highly fragmented, and consists of two
relatively large bowling center operators, AMF (which has 361 U.S. centers as of
October 31, 1997) and Brunswick Corporation ("Brunswick") (which has
approximately 111 U.S. centers), three medium-sized chains, which together
account for 55 bowling centers, and over 5,300 bowling centers owned by
single-center and small-chain operators, which typically own four or fewer
centers. The top five operators (including AMF) account for less than 9% of the
total number of U.S. bowling centers.
The international bowling center industry is also highly fragmented. There
are typically few chain operators in any one country and a large number of
single-center operators. AMF generally enjoys a relative size advantage (i.e., a
larger number of lanes per center), and is competitively well positioned in
markets such as the United Kingdom and Australia.
In the United States, the operation of bowling centers is a mature industry
characterized by slightly decreasing lineage (games per lane per day) offset by
increasing average price per game and creating additional sources of income.
Management believes that AMF's U.S. lineage has remained relatively stable in
recent years due to AMF's ability to better maintain existing league bowlers and
attract new recreational bowlers.
U.S. BOWLING CENTER INDUSTRY(a)
<TABLE>
<CAPTION>
NUMBER OF
OPERATOR LOCATIONS % OF TOTAL
- ---------------------------------------------------------------------- --------- ----------
<S> <C> <C>
AMF................................................................... 361 6.1%
Brunswick............................................................. 111 1.9
Bowl America.......................................................... 23 0.4
Active West........................................................... 17 0.3
Bowl New England...................................................... 15 0.2
----- -----
Subtotal............................................................ 527 8.9
----- -----
Single-center and small-chain operators............................... 5,373 91.1
----- -----
Total....................................................... 5,900 100.0%
===== =====
</TABLE>
- ---------------
(a) AMF estimate at October 31, 1997.
BOWLING PRODUCTS
The Bowling Products business consists of two categories: (i) New Center
Packages (all of the equipment necessary to outfit a new bowling center or
expand an existing bowling center); and (ii) Modernization and Consumer Products
(which includes modernization equipment which upgrades an existing center, spare
parts, supplies and consumable products). AMF and Brunswick are the only bowling
center equipment manufacturers that compete on a global basis. Management
believes that AMF's bowling equipment accounts for approximately 41% of the
world's installed base of bowling equipment. Other competitors are typically
smaller companies that tend to offer a narrower range of products and are often
regionally focused. See "-- AMF Bowling Products -- Competition (Bowling
Products)."
New Center Package sales follow the trends in the growth of bowling. As
bowling is introduced and becomes popular in new markets, the economics of
constructing and operating bowling centers become attractive to local market
developers and entrepreneurs. Consequently, they build new bowling centers,
which need to be outfitted with equipment, driving demand for NCPs. For at least
the last 15 years, the vast majority of NCP sales have been to international
markets. This
45
<PAGE> 46
international trend has been fueled by the growth of bowling in several
countries, particularly China, Taiwan and Korea.
Sales of Modernization and Consumer Products to bowling center operators
who manage the growing installed base of bowling equipment provide a stable base
of recurring revenue. These products include both proprietary and standard spare
parts for existing equipment and other products including pins, shoes, supplies
and modernization equipment. Some of these products, such as bowling pins,
should be replaced on approximately an annual basis to maintain a center, while
certain less frequent investments in other equipment are necessary to modernize
a center and are often required to maintain a customer base.
In the U.S. and Korea, which are mature bowling markets, the population per
lane in 1996 was approximately 2,000 and 3,600, respectively. (These figures are
calculated by dividing total population by number of lanes: total population is
obtained from the Population Reference Bureau; lane numbers are estimates
received from AMF regional sales representatives.) In developing markets, the
population per lane is significantly higher, suggesting the opportunity for
additional growth, although there can be no assurance that these markets will
develop to the same extent as the U.S. or Korea, as only a small number of
markets have achieved this level of development. For example, India has over 25
million people per lane of installed bowling equipment, Poland has over 2
million people per lane, Indonesia has over 650,000 people per lane and Brazil
has over 450,000 people per lane.
BUSINESS STRATEGY
AMF believes that its future growth will depend on the continued success of
its three-part strategy to consolidate the U.S. bowling center industry, build a
nationally recognized AMF brand of superior bowling and entertainment centers,
and capitalize on the demand for bowling products and centers in certain
international markets. The key elements of the strategy are:
CONSOLIDATE THE FRAGMENTED U.S. BOWLING CENTER INDUSTRY
In addition to the 160 centers that AMF has acquired since May 1996, the
Company's dedicated acquisition team has identified approximately 2,000
potential center acquisition candidates in the United States. The Company
employs a regional clustering strategy for its U.S. centers and focuses on
acquiring centers that either fit into existing geographic clusters or could be
the base for forming new clusters. Management believes that none of the
Company's competitors in the U.S. bowling industry is pursuing such an active
acquisition strategy.
IMPROVE ACQUIRED CENTERS' PROFITABILITY
The Company believes that its EBITDA margins are among the highest of
operators of U.S. bowling center chains. This belief is based on publicly
available information and on the Company's knowledge of the industry, due to the
Company's experience in operating the largest U.S. bowling center chain, in
participating in various industry trade associations and in evaluating many U.S.
bowling centers and chains for possible acquisition. Following an acquisition,
management acts to increase profitability by cutting costs and introducing
programs to increase revenue. Specifically, the Company improves marketing
programs, reduces overhead, optimizes staffing, implements improved financial
controls, centralizes management and maintenance of equipment, and centralizes
purchasing. The Company often makes immediate capital and other improvements to
upgrade the centers it acquires which are designed to generate increased revenue
and to further AMF's goal of creating a nationally recognized brand of superior
bowling and entertainment centers.
BUILD A NATIONALLY RECOGNIZED BRAND OF SUPERIOR BOWLING AND ENTERTAINMENT
CENTERS
AMF believes it offers a superior bowling and entertainment experience
utilizing innovative products such as Xtreme(TM) Bowling, which uses
glow-in-the-dark pins and equipment, black lighting
46
<PAGE> 47
and music; bumper bowling for children, in which bumpers prevent balls from
rolling into the gutter; computerized, automatic and color scoring; and time
period discounts for certain groups, such as seniors and children. The Company
is also increasing concourse space in certain of its centers for amusement
games, billiards and other activities. AMF is selectively introducing the
"Family Fun Fest" bowling center, which offers expanded state-of-the-art arcade
and video games. The Company also seeks to increase its profile through the
sponsorship of Special Olympics International and by hosting professional
bowling tournaments.
BUILD NEW CENTERS
The Company has built new bowling centers in attractive markets to enhance
its Bowling Centers business and also to serve as a showcase for the products
manufactured by its Bowling Products business. These centers utilize
state-of-the-art equipment and present bowling as part of a family entertainment
experience and are an integral part of AMF's efforts to build a nationally
branded network of superior bowling and entertainment centers. For instance, in
August 1997, the Company opened a new 40-lane bowling center at Chelsea Piers in
New York, the first new bowling center in Manhattan in 30 years.
IMPROVE FOOD AND BEVERAGE REVENUES
The Company estimates that it has over 60 million customer visits per year
in its bowling centers. The Company is expanding and improving the food and
beverage product offerings at many of its centers to take better advantage of
its significant customer traffic. AMF also capitalizes on purchasing economies
of scale. The Company is one of the nation's leading on-premise accounts for
both Anheuser Busch Companies, Inc. and The Coca-Cola Company.
CAPITALIZE ON GROWING GLOBAL DEMAND FOR BOWLING PRODUCTS
Management believes that AMF's well-established global brand name, the
quality of its products, and its comprehensive service and strong direct sales
force and distribution network will enable it to take advantage of growing NCP
demand worldwide. The Company is focused on sales of NCPs (which comprised 48%
of AMF's Bowling Products sales in 1996) into selected countries with
demonstrated strong demand for bowling products. AMF's backlog of NCPs increased
by approximately 46% from 1,426 units at December 31, 1996 to 2,085 units at
October 26, 1997. Customers outside the U.S. comprise over 90% of the current
NCP backlog total, with the largest portion going to markets such as China,
Japan and Germany. In addition, AMF will continue to acquire and to build
international bowling centers on a selective basis, either to enhance the growth
of bowling in countries which present attractive opportunities for the sale of
bowling products or to enhance AMF's competitive position in a particular
country's bowling center industry.
ACCELERATE THE DEVELOPMENT OF BOWLING IN SELECTED INTERNATIONAL MARKETS
In addition to the international markets that currently have a high demand
for bowling products, management believes that selected international markets
which are in the early development stage have the potential for high growth.
Examples of such early stage markets are India which has over 25 million people
per lane of installed bowling equipment, Poland which has over 2 million people
per lane, Indonesia which has over 650,000 people per lane, and Brazil which has
450,000 people per lane. By contrast, mature markets, such as the U.S. and
Korea, have populations per lane of 2,000 and 3,600, respectively. There can be
no assurance that early stage markets will develop to the same extent as the
United States or Korea, as only a small number of markets have achieved this
level of development. AMF seeks to accelerate the industry's growth in early
stage markets by building showcase centers and conducting promotional programs.
As bowling becomes more popular, local developers and entrepreneurs build new
bowling centers, which are outfitted with equipment, and drive demand for NCPs.
To capitalize on this development cycle, AMF has entered into joint ventures to
build, own and operate up to 20 bowling centers in China and Southeast Asia
47
<PAGE> 48
and 39 bowling centers in Brazil and Argentina. The Company is also developing a
center in India and pursuing opportunities in Russia and Poland.
PROVIDE INNOVATIVE AND QUALITY PRODUCTS
AMF expects to continue to maintain its leadership position in
manufacturing by setting industry standards for quality and innovation.
Management believes that AMF has the fastest pinspotters, the highest scoring
lanes and the most durable pins. Since the development of the first automatic
pinspotter over fifty years ago, AMF has been an innovator in the advancement of
such products as automatic scoring, bumpers, and Xtreme(TM) Bowling. AMF
positions its products as high quality and technologically advanced, allowing it
generally to command premium prices. Management believes that AMF uses its
position as an integrated bowling centers operator and bowling products
manufacturer to AMF's advantage in testing and developing product innovations.
INCREASE MODERNIZATION AND CONSUMER PRODUCT SALES
Management expects AMF to benefit as the worldwide base of bowling centers
grows due to the increased popularity of bowling. AMF's brand name, the large
installed base of AMF bowling equipment, AMF's established direct sales force
and distribution network and its quality products will position AMF to increase
sales of Modernization and Consumer Products. These products, which include
modernization equipment, supplies, spare parts and consumable products,
comprised 52% of AMF's Bowling Products sales in 1996. Furthermore, when AMF
acquires or constructs a center and installs state-of-the-art equipment in that
center, management believes that competing centers may purchase Modernization
and Consumer Products, often from AMF, to remain viable competitors to the AMF
center.
RECENT FINANCIAL PERFORMANCE
AMF's management has significantly improved financial results since the May
1996 acquisition. Holdings' revenue and EBITDA increased by 33.9% to $318.1
million and by 30.4% to $85.8 million, respectively, for the first six months of
1997 as compared to the pro forma results for the first six months of 1996. For
the year ended December 31, 1996, on a consolidated basis, Holdings had pro
forma revenue and pro forma EBITDA of $548.9 million and $145.5 million,
respectively, for an EBITDA margin of 26.5%.
For the six months ended June 30, 1997, Holdings had a net loss of $12.2
million, a deficiency of earnings to fixed charges of $16.4 million, an interest
coverage ratio of 1.49x, and a percentage of revenues represented by interest
expense of 18.1%. For the year ended December 31, 1996, on a pro forma basis,
Holdings had a net loss of $21.6 million, a deficiency of earnings to fixed
charges of $30.6 million, an interest coverage ratio of 1.37x, and a percentage
of revenues represented by interest expense of 19.3%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Consolidated Items -- Net
Income (Loss)." Management believes that AMF's Bowling Centers and Bowling
Products businesses have been characterized by high EBITDA margins and
attractive returns on investment. Management believes that the Company is
well-positioned, due to its long established industry leadership position, the
AMF brand, the Company's large installed base and its strategy, to develop and
capitalize on the growth potential of bowling worldwide.
AMF BOWLING CENTERS
In the United States, AMF is the largest operator of bowling centers, with
(as of October 31, 1997) 361 bowling centers in 36 states and Puerto Rico.
Outside the United States, AMF is also the largest operator of bowling centers,
with (as of October 31, 1997) 86 bowling centers in nine countries: Australia
(38), the United Kingdom (22), Mexico (9), Japan (4), China (including Hong
Kong) (6), France (3), Spain (2), Switzerland (1), and Canada (1). Of the U.S.
centers, 207 were acquired as part of the Acquisition (seven of which were
subsequently closed), 160 were acquired
48
<PAGE> 49
thereafter and one was constructed. Of the international centers, 78 were
acquired as part of the Acquisition, nine were acquired thereafter, including
seven in the United Kingdom and two in Australia, and one in Japan was closed.
The Company's number of U.S. centers, regional clustering for U.S. centers
(54 clusters) and average size (an average of 38 lanes per U.S. center versus an
industry average of 21 lanes per U.S. center) provide both additional revenue
opportunities and economies of scale. These revenue opportunities include (i)
scheduling flexibility, which improves lane utilization, (ii) the ability to
support an expanded food and beverage operation and (iii) more concourse space
for food and beverage offerings, amusement games, billiards and pro shops. Cost
savings resulting from the economies of scale include (a) the ability to
distribute operating and corporate overhead costs (including marketing and
advertising costs) over a larger revenue base and (b) attractive terms from
certain of the Company's suppliers.
Internationally, AMF's centers also are, on average, larger than those of
its competitors. As with its U.S. operations, the number of centers, geographic
clustering and size result in additional revenue opportunities and economies of
scale. The Company is particularly well positioned in the United Kingdom and
Australia.
The geographic diversity of AMF's Bowling Centers operations across
different regions of the U.S. and across nine other countries, along with the
bowling centers industry's historic relative insulation from recessions, has
provided stability to AMF's annual cash flows. See "Risk Factors -- Seasonality
and Market Development Cycles" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality and Market
Development Cycles."
The Company has an ongoing modernization program that results in its
bowling centers having more upgraded physical plants and attractive appearances
than those of other operators. Management believes that its historical spending
level of approximately 3.7% of Bowling Centers revenue is adequate to cover
routine capital expenditures. Management estimates that only 2% of Bowling
Centers revenue is required for nondiscretionary capital expenditures alone. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Expenditures."
The Bowling Centers business derives its revenue and profits from three
principal sources: (i) bowling, (ii) food and beverage and (iii) other sources,
such as shoe rental, amusement games, billiards and pro shops. In 1996, bowling,
food and beverage and other revenue represented 62%, 24% and 14% of total
Bowling Centers revenue, respectively.
Bowling revenue, the largest portion of a bowling center's revenue and
profitability, is derived from league play, tournament play and recreational
play. Food and beverage sales occur primarily through snack bars that offer
snack foods, soft drinks and, at many centers, alcoholic beverages. AMF has
acquired several centers with large sports bars that provide a large portion of
such centers' revenue. Other revenue is derived from shoe rental and the
operation of amusement games, billiards and pro shops. The shoe rental business
is driven primarily by recreational bowlers who usually do not own a pair of
bowling shoes. Recreational bowlers and non-bowling customers are also the
primary users of amusement games and billiards tables.
RECENT ACQUISITIONS AND JOINT VENTURES
On October 10, 1996, AMF completed the acquisition of 50 bowling centers
and certain related assets and liabilities from Charan. The purchase price of
the Charan acquisition was approximately $106.5 million, subject to certain
adjustments. The Charan acquisition was funded with approximately $40 million
from the sale of equity by the Parent to its existing institutional stockholders
and one of its directors, and with approximately $66.5 million under the
Acquisition Facility.
On April 24, 1997, AMF 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 $70.0 million,
including repayment of certain debt and the purchase of related joint venture
interests, and was funded with borrowings under the Acquisition Facility.
49
<PAGE> 50
Commencing October 31, 1997, AMF is leasing and operating a chain of eight
bowling centers (the "Pin Boys Centers") for a period ending January 6, 1998, at
which time AMF will purchase the personal property of the eight centers and real
estate relating to six of such centers for approximately $18.8 million. AMF will
continue to lease and operate the two centers with respect to which real
property is not acquired.
In addition, between May 1, 1996 and October 31, 1997, the Company acquired
44 centers in the United States, seven centers in the U.K. and two centers in
Australia from various single-center and small chain operators, and one chain of
15 bowling centers from Conbow. The aggregate purchase price for such
acquisitions was approximately $130.3 million, and was funded with borrowings
under the Acquisition Facility.
As a result of the foregoing acquisitions and after giving effect to the
construction of one center and the closing of eight centers since the
Acquisition, the Company operated 361 U.S. bowling centers and 86 international
bowling centers as of October 31, 1997.
As of October 31, 1997, after giving effect to such acquisitions, $59.0
million remained available under the Acquisition Facility, as then in effect, of
which a portion was expected to partially fund acquisitions that are scheduled
to close by the end of January 1998. Available borrowings under the Credit
Agreement have been increased pursuant to the most recent amendment and
restatement of the Credit Agreement, such that $161.5 million is available
assuming $100.0 million of the proceeds of the Parent Offerings were to be used
to repay indebtedness under the Credit Agreement.
The Company has entered into purchase agreements to acquire eighteen U.S.
centers, including the Pin Boys Centers, from several unrelated sellers. The
aggregate purchase price for such centers is expected to be approximately $38.5
million and is expected to be funded with borrowings under the Working Capital
Facility and internally generated cash. See "Management's Discussion and
Analysis of Financial Statements and Results of Operation -- Capital Resources."
In April 1997, the Company entered into a joint venture arrangement with
Hong Leong Corporation Limited, a Singapore based conglomerate ("Hong Leong").
Pursuant to the arrangement, the joint venture, to be owned 50% by the Company
and 50% by Hong Leong, is expected to build and operate up to 20 bowling centers
during the next three years. These bowling centers, the first of which is
expected to open during 1997 in Tianjin, China, will be located in China,
Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
In August 1997, the Company entered into a joint venture arrangement of
with Playcenter S.A., a Sao Paulo based amusement and entertainment company
("Playcenter"). Pursuant to the arrangement, the joint venture, owned 50% by the
Company and 50% by Playcenter, is expected to build or assume ownership of, and
operate, up to 39 bowling centers in Brazil and Argentina during the next four
years.
The Company expects its total investments in the joint ventures with Hong
Leong and Playcenter to be approximately $12 million and $14 million,
respectively, and expects each joint venture to finance the construction and
acquisition of bowling centers with financing that is non-recourse to the
Company.
On October 20, 1997, AMF acquired Michael Jordan Golf Company, Inc., a
company formed to build and operate golf practice ranges in select U.S.
locations. In connection with such acquisition, AMF agreed to build two golf
practice ranges by the end of 1999.
COMPETITION (BOWLING CENTERS)
Bowling, both as a competitive sport and a recreational activity, faces
competition from numerous alternative activities. The ongoing success of the
Company's Bowling Centers operations is subject to the level of interest in
bowling, the availability and relative cost of other sport, recreational and
entertainment alternatives, the amount of leisure time enjoyed by potential
players, as well as various other social and economic factors over which AMF has
no control. There can be no assurance that bowling will continue to be popular
or that the Company will continue to compete
50
<PAGE> 51
effectively in the industry. See "Risk Factors -- Bowling Industry
Characteristics," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Performance by Business Segment -- Bowling Centers"
and "-- Business Strategy."
The Company's centers also compete with other bowling centers. See
"-- Industry Overview." The Company competes primarily through the quality,
appearance and location of its facilities and through the range of amenities and
service level offered.
FACILITIES (BOWLING CENTERS)
As of October 31, 1997, AMF operated 361 centers in the United States and
86 centers in nine other countries. A regional list of these facilities is set
forth below:
U.S. CENTERS*
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF OWNED/
REGION CLUSTERS CENTERS LEASED
----------------------------------------------------- --------- ------------ ------
<S> <C> <C> <C>
Pacific.............................................. 8 54 24/30
Great Lakes.......................................... 7 51 39/12
Baltimore/Washington................................. 3 24 15/9
Northeast............................................ 7 52 28/24
Southern............................................. 10 58 42/16
Mid-Atlantic......................................... 7 48 25/23
Midwest.............................................. 6 37 27/10
Texas................................................ 6 35 28/7
--
--- -------
Total...................................... 54 359 228/131
== === =======
</TABLE>
- ---------------
* AMF operates two centers for an unrelated party. The two managed centers are
neither owned nor leased by AMF and, therefore, are not included in the
foregoing table.
INTERNATIONAL CENTERS
<TABLE>
<CAPTION>
NUMBER OF OWNED/
COUNTRY LOCATIONS LEASED
----------------------------------------------------------------- --------- -------
<S> <C> <C>
Australia........................................................ 38 23/15
United Kingdom................................................... 22 3/19
Mexico........................................................... 9 5/4
China (including Hong Kong)...................................... 6 0/6
Japan............................................................ 4 0/4
France........................................................... 3 0/3
Spain............................................................ 2 0/2
Switzerland...................................................... 1 0/1
Canada........................................................... 1 1/0
--
-----
Total.................................................. 86 32/54
== =====
</TABLE>
AMF's leases are subject to periodic renewal. Thirty-five of the U.S.
Bowling Centers have leases which expire during the next three years. Twenty-two
of such leases have renewal options. Nineteen of the international Bowling
Centers have leases which expire during the next three years. Twelve of such
leases have renewal options. AMF generally does not have difficulty renewing
leases.
51
<PAGE> 52
EMPLOYEES (BOWLING CENTERS)
As of July 31, 1997, Bowling Centers operations had approximately 12,882
full- and part-time employees. The Company believes that its relations with its
Bowling Centers employees are satisfactory.
NUMBER OF EMPLOYEES
<TABLE>
<CAPTION>
NUMBER OF
COUNTRY EMPLOYEES
- ------------------------------------------------------------------------------- -------------
<S> <C>
United States.................................................................. 10,624
-----
International:
Australia.................................................................... 1,144
United Kingdom............................................................... 550
Mexico....................................................................... 220
China, (including Hong Kong)................................................. 122
Japan........................................................................ 48
France....................................................................... 77
Spain........................................................................ 33
Switzerland.................................................................. 13
Canada....................................................................... 51
-----
Total International.................................................. 2,258
-----
Total Worldwide...................................................... 12,882
=====
</TABLE>
AMF BOWLING PRODUCTS
AMF is one of only two bowling center equipment manufacturers that compete
on a global basis. Management believes that AMF bowling equipment accounts for
approximately 41% of the world's installed base of bowling center equipment and
has supplied or is supplying equipment to an estimated 10,000 bowling centers in
over 50 countries. The Company manufactures and sells bowling center equipment,
including automatic pinspotters, automatic scoring equipment, bowling pins,
lanes, ball returns, and certain spare and modernization parts, and resale
products, such as bowling balls, bags, shoes and other bowlers' aids sold
primarily through pro shops.
The bowling products business consists of two categories: (i) New Centers
Packages (all of the equipment necessary to outfit a new bowling center or to
expand an existing bowling center); and (ii) Modernization and Consumer Products
(which includes modernization equipment, spare parts, supplies and consumable
products).
AMF positions its products as high quality, technologically advanced
products, allowing AMF generally to command premium prices. AMF's long history
of bowling equipment innovation began over 50 years ago when AMF revolutionized
ten pin bowling with the introduction of the automatic pinspotter. Today, AMF
manufactures 8800 Gold (the fastest pinspotter for play conducted under
conditions specified by the American Bowling Congress) and 8290 pinspotters,
and, management believes, the highest-scoring lanes and the most durable pins.
The superior speed of AMF's pinspotter directly influences the amount of bowling
revenue a bowling center can generate, and the reliability and ease of repair is
an important marketing tool against sellers of refurbished equipment. AMF's HPL
synthetic lanes, introduced in 1988, are the performance leaders. In the annual
American Bowling Congress tournament, where AMF and Brunswick supply the
equipment in alternating years, every major scoring record has been set on AMF's
synthetic lanes. Internal tests demonstrate that AMF pins are more durable under
stress conditions and less likely to break. In general, AMF's products are
developed through internal research and development efforts. AMF holds over 40
U.S. patents for its various proprietary products and technologies.
52
<PAGE> 53
MODERNIZATION AND CONSUMER PRODUCTS
The potential customers for Modernization and Consumer Products include all
bowling centers in operation today, and the number of these potential customers
will continue to grow as the number of centers increases. In order for a bowling
center to remain competitive and to satisfy its customers, the center operator
must make certain periodic investments in the center's equipment. Some of these
investments, such as replacing pins, must be made on approximately an annual
basis. These annual investments represent relatively modest expenditures
necessary to maintain the center. Other equipment, such as automatic scoring
systems, replacement lanes and upgraded automated lane maintenance equipment,
require less frequent but more significant investments by center operators.
Management believes that many of these modernizations are necessary for a center
to maintain its existing customer base.
NEW CENTER PACKAGES
New Center Packages include the equipment necessary to outfit new or expand
existing bowling centers, such as lanes, pinspotters, automatic scoring, bowler
seating, ball returns, masking units and bumpers. AMF is focused on sales of
NCPs into selected countries with demonstrated strong demand for bowling
products, such as China, Japan and Germany. In addition, AMF believes that
markets, such as Argentina, Brazil, Indonesia, India, Poland and other selected
markets in Asia, Eastern Europe and South America, hold the potential for high
growth over the next several years, but are currently in the early stages of the
industry's development. As bowling is introduced in a market and becomes more
popular, local developers and entrepreneurs build new bowling centers, which are
outfitted with equipment, and drive demand for NCPs. To capitalize on this
development cycle, AMF has entered into the joint ventures with Hong Leong and
Playcenter described under "-- AMF Bowling Centers -- Recent Acquisitions and
Joint Ventures." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Backlog; Recent NCP Sales."
BILLIARDS
In addition to bowling equipment and supplies, AMF manufactures and sells
PlayMaster billiards tables. PlayMaster sells an extensive line of home
billiards tables and a limited line of commercial billiards tables. For the six
months ended June 30, 1997, PlayMaster had revenue of $3.8 million.
COMPETITION (BOWLING PRODUCTS)
AMF is one of the largest manufacturers of bowling center equipment in the
world. Management estimates that AMF accounts for approximately 41% of the
worldwide installed base of bowling center equipment.
AMF and Brunswick are the two largest manufacturers of bowling center
equipment, and are the only full-line manufacturers of NCPs and Modernization
and Consumer Products that compete on a global basis. The Company also compete
with smaller, often regionally focused companies in certain product lines. For
example, DACOS, a Korean-based manufacturer, competes with the Company in the
Asia-Pacific region, primarily in China and Korea.
Because of bowling equipment's relatively long useful life, used equipment
can be refurbished and sold, often to builders of new centers. The Company
actively purchases and resells used equipment in new, high growth markets in
order to compete with refurbishers who often are U.S. based.
53
<PAGE> 54
PROPERTIES (BOWLING PRODUCTS)
As of October 31, 1997, AMF owned or leased facilities at five locations in
the U.S., four of which are used for its Bowling Products business and one of
which is used for its billiards business. AMF also leased facilities at 28
international locations, which are used as offices or warehouses. These
facilities are listed below.
U.S. FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION PRODUCTS SQUARE FOOTAGE LEASED
- ------------------ -------------------------------------- -------------- ------
<S> <C> <C> <C>
Richmond, VA...... World headquarters, pinspotters,
automatic scoring, synthetic lanes,
other capital equipment, 360,000 Owned
consumer products, used pinspotters 54,000 Leased
Lowville, NY...... Pins and wood lanes 121,000 Owned
50,000 Owned
Golden, CO........ Lane maintenance equipment (Century) 50,000 Leased
Bland, MO......... Billiard tables (PlayMaster) 37,210 Owned
33,373 Leased
32,000 Owned
24,000 Owned
16,000 Owned
11,000 Leased
Miami, FL......... Office 200 Leased
</TABLE>
INTERNATIONAL FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION FUNCTIONS SQUARE FOOTAGE LEASED
----------------------------------------- --------------- -------------- ------
<S> <C> <C> <C>
Emu Plains, Australia.................... Office 400 Leased
Warehouse 10,100 Leased
Brussels, Belgium........................ Office 1,000 Leased
Ontario, Canada.......................... Office 400 Leased
Beijing, China........................... Office 390 Leased
Guangzhou, China......................... Office 380 Leased
Warehouse 1,650 Leased
Hong Kong................................ Office 2,500 Leased
Office 1,125 Leased
Shanghai, China.......................... Office 400 Leased
Levallois-Perret, France................. Office 984 Leased
Warehouse 1,470 Leased
Mainz-Kastel, Germany.................... Office 656 Leased
Warehouse 1,650 Leased
Bangalore, India......................... Office 1,050 Leased
New Delhi, India......................... Office 2,000 Leased
Yokohama, Japan.......................... Office 4,626 Leased
Warehouse 8,880 Leased
Service Center 1,634 Leased
Seoul, Korea............................. Office 5,119 Leased
Warehouse 7,472 Leased
Mexico City, Mexico...................... Office 1,300 Leased
Warehouse 11,431 Leased
Warsaw, Poland........................... Office 209 Leased
Granna, Sweden........................... Office 4,515 Leased
Warehouse 12,705 Leased
Hemel Hempstead, United Kingdom.......... Office 11,500 Leased
Warehouse 11,770 Leased
</TABLE>
54
<PAGE> 55
EMPLOYEES (BOWLING PRODUCTS)
As of July 31, 1997, the Bowling Products business had approximately 995
full-time employees. The Company believes that its relations with its Bowling
Products employees are satisfactory. Employees are divided along functional
lines as shown in the table below.
EMPLOYEES
<TABLE>
<CAPTION>
SEGMENT NUMBER OF EMPLOYEES
----------------------------------------------------------------- -------------------
<S> <C>
Manufacturing.................................................... 653
---
Sales
Australia...................................................... 8
Americas....................................................... 48
Europe......................................................... 53
Asia-Pacific................................................... 192
Japan.......................................................... 41
---
Total Sales................................................. 342
---
Total Worldwide........................................ 995
===
</TABLE>
EMPLOYEES (CORPORATE)
As of July 31, 1997, the Company had approximately 142 full-time corporate
employees. The Company believes that its relations with its corporate employees
are satisfactory.
LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of its business, including employment
discrimination claims, workers' compensation claims, and personal injury claims
from customers of Bowling Centers. In certain such actions, plaintiffs request
punitive or other damages that may not be covered by insurance. In the opinion
of management, the various asserted claims and litigation in which the Company
currently is involved will not have a material adverse effect on its financial
position or results of operations. However, no assurance can be given as to the
ultimate outcome with respect to such claims and litigation.
On March 5, 1996, the defendant in an action entitled Northland Bowl and
Sports Center, Inc. and Recreation Association, II v. Golden Giant, Inc., d/b/a
Golden Giant Building Systems, Court of Common Pleas, Centre County,
Pennsylvania, asserted a third-party claim against AMF Bowling Products, Inc.
(formerly named AMF Bowling, Inc.), a wholly owned, indirect subsidiary of the
Company ("AMF Bowling Products"), and other parties. Defendant, Golden Giant,
Inc. ("Golden Giant"), a construction company, was originally named as the sole
defendant by a bowling center (not owned or operated by the Company) in
connection with the collapse of such center's roof in early 1994. Golden Giant
named AMF Bowling Products as an additional defendant, charging it with
negligence and breach of implied warranty for installing scoring monitors (four
years before the roof collapsed) on a portion of the building that allegedly
could not adequately support the additional weight of the equipment. The bowling
center plaintiff claims total damages in amounts exceeding $3.5 million, and
Golden Giant asserts that, if the plaintiff is entitled to any recovery, it
should be in whole or part against AMF Bowling Products. The matter was
scheduled to go to trial during September 1997. On March 25, 1997, an order was
entered dismissing AMF Bowling Products from the lawsuit, which continues
against the other defendants. The plaintiff has appealed the order dismissing
AMF Bowling Products, and in October 1997, the appellate court denied the
plaintiff permission to appeal.
55
<PAGE> 56
REGULATORY MATTERS
There are no unique federal or state regulations applicable to bowling
center operations or equipment manufacturing. State and local governments
require establishments to hold permits to sell alcoholic beverages and, although
regulations vary from state to state, once permits are issued, they generally
remain in place indefinitely (except for routine renewals) without burdensome
reporting or supervision other than revenue tax reports. See "Risk
Factors -- International Operations."
ENVIRONMENTAL MATTERS
AMF's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes. AMF believes that its operations are in material compliance with the
terms of all applicable environmental laws and regulations as currently
interpreted.
The Company currently and from time to time is subject to environmental
claims. It is the opinion of management that the various asserted claims in
which the Company currently is involved are not likely to have a material
adverse effect on its financial position or results of operations. However, no
assurance can be given as to the ultimate outcome with respect to such claims.
AMF has received notices of potential liability under CERCLA or analogous
state statutes at eight off-site disposal facilities. AMF believes that the
entity involved was a de minimis contributor of waste at each of these sites. In
addition, in connection with the Acquisition, AMF Reece Inc., which is owned by
certain of the prior owners of AMF, will be required to indemnify AMF for the
liability at three of these sites under an indemnity agreement which certain of
the prior owners of AMF were required by such agreement to procure. AMF does not
believe that CERCLA liabilities for these eight sites in the aggregate will have
a material adverse effect on AMF's business or financial condition taken as a
whole.
AMF cannot predict with any certainty whether existing conditions or future
events, such as changes in existing laws and regulations, may give rise to
additional environmental costs. Furthermore, actions by federal, state, local
and foreign governments concerning environmental matters could result in laws or
regulations that could increase the cost of producing AMF's products, or
providing its services, or otherwise adversely affect the demand for its
products or services. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental Matters."
56
<PAGE> 57
MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth information concerning the individuals who
are the executive officers and directors of the Company and certain other
officers of AMF:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -------------------------------------------------
<S> <C> <C>
Richard A. Friedman................ 39 Director and Chairman
Douglas J. Stanard................. 50 Director; President and Chief Executive Officer
Stephen E. Hare.................... 44 Director; Executive Vice President; Chief
Financial Officer and Treasurer
Michael P. Bardaro................. 46 Vice President; Secretary and Corporate
Controller
Paul D. Barkley.................... 41 Vice President, U.S. Operations of AMF Bowling
Centers
Stephen C. Mackie.................. 48 Vice President, International Operations of AMF
Bowling Centers
Steven H. Buckley.................. 48 Vice President, Food and Beverage of AMF Bowling
Centers
Lawrence C. Kind................... 45 Vice President of AMF Bowling Products
J. Randolph V. Daniel, IV.......... 37 Vice President, New Center/Modernization Products
of AMF Bowling Products
J. Simon Shearer................... 41 Vice President, Worldwide Quality Management of
AMF Bowling Products
Merrell C. Wreden.................. 48 Vice President, Marketing
Charles G. Moss.................... 36 Director of Corporate Development
Daniel M. McCormack................ 52 Vice President and General Counsel
Terence M. O'Toole................. 39 Director
Peter M. Sacerdote................. 59 Director
Charles M. Diker................... 62 Director
Paul B. Edgerley................... 41 Director
Howard A. Lipson................... 33 Director
Thomas R. Wall IV.................. 39 Director
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF AMF BOWLING
RICHARD A. FRIEDMAN is a Managing Director of Goldman Sachs where he is the
head of the Principal Investment Area. He joined Goldman Sachs in 1981. Mr.
Friedman is on the Advisory Committees or Boards of Directors of Diamond Cable
Communications PLC, Marcus Cable Company, L.P., and Polo Ralph Lauren
Corporation. He received an A.B. from Brown University and an M.B.A. from The
University of Chicago.
DOUGLAS J. STANARD is the President and Chief Executive Officer of the
Company and the Parent. He served as President of AMF Worldwide Bowling Centers
from 1993 to 1995 and President of AMF U.S. Bowling Centers in 1992. He joined
AMF in 1992 after having been President of Stewart Foods, Inc. from 1989 to 1992
and President of Beatrice International Food (Europe) S.A. from 1984 to 1988.
Mr. Stanard received a B.S. from Northern Illinois University and a J.D. from
The College of William and Mary.
STEPHEN E. HARE is the Executive Vice President and Chief Financial Officer
of the Parent and has been Executive Vice President and Chief Financial Officer
of the Company since he joined AMF in May 1996. Prior to joining AMF, Mr. Hare
was Senior Vice President and Chief Financial Officer of James River Corporation
of Virginia, beginning in 1992. Before joining James River Corporation, he was
Senior Vice President of Investment Banking at Kidder, Peabody & Co. in New
York. Mr. Hare
57
<PAGE> 58
holds a Certified Public Accountant license. He received a B.B.A. from the
University of Notre Dame and an M.B.A. from the Harvard Graduate School of
Business Administration.
MICHAEL P. BARDARO is a Vice President, Secretary and Corporate Controller
of the Company and the Parent. He joined AMF in 1994 after having been
Controller at General Medical Manufacturing Co. in Richmond, Virginia between
1989 and 1994 and Vice President/Controller at Virginia Linen Service, Inc.
between 1986 and 1989. Mr. Bardaro holds a Certified Public Accountant License
in Virginia. He received a B.S. in Accounting from the University of Cincinnati.
TERENCE M. O'TOOLE is a Managing Director of Goldman Sachs in the Principal
Investment Area. He joined Goldman Sachs in 1983. Mr. O'Toole serves on the
Boards of Directors of Concentric Network Corporation, Insilco Corporation,
21(st) Century Newspapers, Inc. and Western Wireless Corporation. He holds a
B.S. degree from Villanova University and an M.B.A. from the Stanford University
Graduate School of Business.
PETER M. SACERDOTE is a limited partner in The Goldman Sachs Group. He
joined Goldman Sachs in 1964 and served as a general partner from 1973 to 1990.
Mr. Sacerdote is Chairman of Goldman, Sachs & Co. Principal Investment
Committee. Mr. Sacerdote serves on the Boards of Directors of Franklin
Resources, Inc. and QUALCOMM Incorporated. Mr. Sacerdote has a B.E.E. from
Cornell University and an M.B.A. from the Harvard Graduate School of Business
Administration.
CHARLES M. DIKER has been a non-managing partner of Weiss, Peck & Greer, an
investment management firm, since 1975. He has been Chairman of the Board of
Cantel Industries since 1986. Mr. Diker serves as a director of BeautiControl
Cosmetics, International Specialty Products, Data Broadcasting and Chyron
Corporation. He received an A.B. from Harvard College and an M.B.A. from the
Harvard Graduate School of Business Administration.
PAUL B. EDGERLEY has been Managing Director of Bain Capital, Inc., an
investment firm, since 1993. From 1990 to 1993 he was a General Partner of Bain
Venture Capital, and from 1988 to 1990 he was a principal of Bain Capital
Partners. He serves on the Boards of Directors of Steel Dynamics, Inc. and GS
Industries, Inc. Mr. Edgerley received a B.S. from Kansas State University and
an M.B.A. with distinction from the Harvard Graduate School of Business
Administration.
HOWARD A. LIPSON is Senior Managing Director of The Blackstone Group, and
has been involved in the firm's principal activities since 1988. He serves on
the Boards of Directors of Allied Waste Industries, Inc., Rose Hills Company,
Prime Succession, Inc., Volume Services, Inc. and Ritvik Holdings, Inc. Mr.
Lipson received a B.S. in Economics from the Wharton School of The University of
Pennsylvania.
THOMAS R. WALL IV joined Kelso in 1983 and has served as a Managing
Director since 1990. Mr. Wall is a director of CCA Holdings Corp., CCT Holdings
Corp., Charter Communications Long Beach, Inc., Consolidated Vision Group, Inc.,
Cygnus Publishing, Inc., IXL Holdings, Inc., Mitchell Supreme Fuel Company,
Mosler Inc., Peebles, Inc., TransDigm Inc., 21(st) Century Newspapers, Inc.,
Hillside Broadcasting of North Carolina, Inc. and Tyler Refrigeration
Corporation.
OTHER OFFICERS OF AMF
PAUL D. BARKLEY has served as Vice President, U.S. Operations of AMF
Bowling Centers since February 1997. Mr. Barkley served as Vice President of
U.S. Operations, Western U.S. of AMF Bowling Centers in 1996 and as a region
manager in 1995. In 1993 and 1994, Mr. Barkley served as a Region Manager for
Fair Lanes. Mr. Barkley has a degree in accounting from Arizona State
University.
STEPHEN C. MACKIE has served as Vice President, International Operations of
AMF Bowling Centers since May 1996. Mr. Mackie has served AMF Bowling Centers in
various other capacities since 1980.
58
<PAGE> 59
STEVEN H. BUCKLEY has served as Vice President, Food and Beverage of AMF
Bowling Centers since February 1997. Prior to joining AMF, Mr. Buckley was a
Vice President at Chock Full O' Nuts Corp. Mr. Buckley received a B.B.A. in
finance from Hofstra University.
LAWRENCE C. KIND has served as Vice President, Bowling Products since
February 1997. Mr. Kind had served as Region Manager of AMF Bowling Centers from
1993 to February 1997. Mr. Kind received a B.A. in Business from Long Island
University.
J. RANDOLPH V. DANIEL, IV was named Vice President, New
Center/Modernization Products for AMF Bowling Products in February 1997. Mr.
Daniel served as General Manager, Capital Equipment Division from 1995 to
February 1997 and as Director of Operations, Capital Equipment Division from
1993 to 1994 for AMF Bowling Products. Mr. Daniel received a B.S. and an M.B.A.
from the University of Virginia.
J. SIMON SHEARER has served as Vice President Worldwide Quality at AMF
Bowling Products since February 1997. Mr. Shearer has served AMF in various
other capacities since 1981. Mr. Shearer attended the University of South
Australia.
MERRELL C. WREDEN has served as Vice President, Marketing since October
1996. Prior to joining AMF, Mr. Wreden was Group Manager Advertising, Promotion
at The Remington Arms Company, Inc. since 1993. Mr. Wreden has a B.A. from the
University of Virginia.
CHARLES G. MOSS has served as Director of Center Development since May
1996. Mr. Moss has served AMF in various other capacities since 1991. Mr. Moss
received a B.A. and an M.B.A. from the University of Virginia.
DANIEL M. MCCORMACK has been a Vice President and General Counsel of AMF
since May 1996. Prior to that time, Mr. McCormack was an attorney with CCA
Industries, Inc., where he had been employed since 1990. Mr. McCormack has a
B.A. and J.D. from University of Richmond.
59
<PAGE> 60
EXECUTIVE COMPENSATION
The following table shows for each of the three years ended December 31,
1994, 1995, and 1996, all annual compensation paid or accrued by AMF and the
Predecessor Company, as applicable, to AMF's Chief Executive Officer and its
three executive officers (collectively, the "Named Executive Officers").
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
SALARY BONUS STOCK OPTIONS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)(a) ($) ($)(b)
- ---------------------------- ----- ------- -------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas J. Stanard.......... 1994 180,000 112,500 -- -- --
President/Chief 1995 225,000 204,750 -- -- --
Executive Officer 1996 308,333 229,167 130,000 -- 7,500
Richard A. Friedman(c)...... 1996 -- -- -- -- --
Chairman
Stephen E. Hare............. 1994 N/A N/A N/A N/A N/A
Executive Vice President/ 1995 N/A N/A N/A N/A N/A
Chief Financial Officer/ 1996 178,333(d) 266,667(e) 105,000 N/A --
Treasurer
Robert L. Morin(f).......... 1994 103,000 59,950 -- -- --
Executive Vice President/ 1995 180,286 60,125 -- -- --
Director of Worldwide 1996 228,341 83,325 110,000 860,100(g) 7,500
Market Development
Michael P. Bardaro.......... 1994 44,371(h) 4,500 -- -- --
Vice President/Secretary 1995 95,833 29,958 -- -- 2,327
and Corporate Controller 1996 120,958 40,076 25,000 -- 168,338(i)
</TABLE>
- ---------------
(a) Options to purchase shares of Parent Common Stock.
(b) Unless otherwise indicated, all other compensation represents 401(k) plan
and profit-sharing contributions made by the Company.
(c) Mr. Friedman ceased to hold the positions of Chief Executive Officer and
President of the Company and the Parent on July 31, 1997, at which time Mr.
Stanard, who had been and continues to be President of AMF's principal
subsidiaries, assumed the additional titles of President and Chief Executive
Officer of the Parent and Chief Executive Officer of the Company.
(d) Mr. Hare's employment with the Company began on May 28, 1996.
(e) Mr. Hare received two bonuses with respect to 1996, one for $166,667 and one
for $100,000. Mr. Hare used the proceeds of the $166,667 bonus to pay a
portion of the purchase price for 150,000 shares of Parent Common Stock.
Further, the Parent loaned Mr. Hare $62,614 to be used to pay taxes
associated with such bonus. In exchange, Mr. Hare gave the Parent a full
recourse promissory note secured by the 150,000 shares of Parent Common
Stock. See "-- Employment Agreements."
(f) Mr. Morin's employment terminated, and he resigned all positions with AMF
and its affiliates as of February 28, 1997.
(g) Prior to the Acquisition, Mr. Morin held 10,000 shares of phantom stock in
the Capital Equipment Division ("CED") of the Predecessor Company under a
phantom stock plan (the "Phantom Stock Plan"). Under the Phantom Stock Plan,
the phantom stock was valued at five times the average earnings of CED for
the current and two preceding fiscal years. In connection with the
Acquisition, the shares of phantom stock issued under the Phantom Stock Plan
were exchanged for $86.01 per share and the Phantom Stock Plan was
terminated.
(h) Mr. Bardaro's employment with AMF began on July 5, 1994. On July 31, 1997,
Mr. Bardaro was elected Vice President, Secretary and Corporate Controller
of the Company and the Parent.
(i) Includes a "special one-time bonus" in the amount of $161,388 paid by the
Predecessor Company in connection with the Acquisition.
60
<PAGE> 61
OPTION GRANTS
The following table provides information on grants of Stock Options (as
defined below) in 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF TOTAL
SECURITIES STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
STOCK OPTIONS EMPLOYEES PRICE GRANT DATE
GRANTED IN FISCAL PER PRESENT
NAME (SHARES)(1)(2)(3) 1996 SHARE EXPIRATION DATE VALUE(4)
- ----------------------- ----------------- ------------- -------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Douglas J. Stanard..... 130,000 10.6% $ 10.00 May 1, 2006 $ 3.05
Stephen E. Hare........ 105,000 8.6% $ 10.00 May 28, 2006 $ 3.05
Robert L. Morin(5)..... 110,000 9.0% $ 10.00 May 1, 2006 $ 3.05
Michael P. Bardaro..... 25,000 2.0% $ 10.00 August 28, 2006 $ 3.08
</TABLE>
- ---------------
(1) Subsequent to January 1, 1997, Mr. Stanard, Mr. Hare and Mr. Bardaro were
granted Stock Options to purchase 25,000, 15,000, 10,000 shares of Parent
Common Stock, respectively. These options are exercisable at $10 per share
and for a 10-year period expiring on June 11, 2007. All such Stock Options
were granted under the Parent's Stock Incentive Plan (as defined below).
(2) All Stock Options listed in this table other than Mr. Stanard's Stock
Options to purchase 130,000 shares of Parent Common Stock were granted under
the Stock Incentive Plan.
(3) Of the Stock Options granted to each Named Executive Officer listed in this
table and that will remain outstanding, 20% vest on each anniversary of
their grant until all have vested. The first anniversary of Mr. Stanard's
grant was May 1, 1997; the first anniversary of Mr. Hare's grant was May 28,
1997; and the first anniversary of Mr. Bardaro's grant was August 28, 1997.
(4) The present value of the grant at the date of grant is estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for these grants: risk-free rate of return of 6.5%;
expected dividend yield of zero; expected time of exercise of ten years;
expected volatility of zero, due to the lack of a public trading market for
the securities underlying the options at the time of grant, based on the
minimum value method. No adjustments were made to reflect forfeiture risk or
non-transferability.
(5) In connection with the termination of his employment with AMF, Mr. Morin's
Stock Options were cancelled.
OPTION EXERCISES AND YEAR-END VALUES
The following table provides information for the Named Executive Officers
regarding the number and value of all their unexercised Stock Options at
December 31, 1996. No such officers exercised any Stock Options in fiscal year
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED STOCK OPTIONS AT IN-THE-MONEY STOCK OPTIONS AT
DECEMBER 31, 1996 (SHARES) DECEMBER 31, 1996($)(1)
------------------------------- -----------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------- ------------------------------- -----------------------------
<S> <C> <C>
Douglas J. Stanard................... 0 / 130,000 $ 0 / 0
Stephen E. Hare...................... 0 / 105,000 $ 0 / 0
Robert L. Morin...................... 0 / 110,000 $ 0 / 0
Michael P. Bardaro................... 0 / 25,000 $ 0 / 0
</TABLE>
- ---------------
(1) The fair market value of Stock Options as of December 31, 1996 was assumed
to be $10.00 per share, equal to the grant price, due to the lack of a
public trading market for the securities underlying the Stock Options.
EMPLOYMENT AGREEMENTS
Mr. Stanard and Mr. Hare each have an employment agreement (collectively,
the "Executive Employment Agreements") with the Parent and the Company. Mr.
Stanard's Executive Employment
61
<PAGE> 62
Agreement is for an employment period ending on May 1, 1999, and Mr. Hare's is
for an employment period ending on May 28, 1999. Each executive receives
compensation consisting of salary and an incentive bonus if certain operational
and financial targets are met. Mr. Stanard's annual base salary is $400,000 and
Mr. Hare's annual base salary is $300,000. Both Executive Employment Agreements
provide for the payment of an annual bonus if certain operational and financial
targets determined by the Board of Directors of the Company (the "Targets") are
attained, and that the executive will earn a smaller annual bonus if less than
100% but more than 90% of the Targets are attained. Notwithstanding this
provision, Mr. Hare's Executive Employment Agreement additionally states that
his annual bonus would not be less than $100,000 for the fiscal year ending
December 31, 1996 and will not be less than $50,000 for the fiscal year ending
December 31, 1997.
Under their respective Executive Employment Agreements, Mr. Stanard holds
the position of Chief Operating Officer of the Company and Mr. Hare holds the
position of Chief Financial Officer of the Company. In addition, Mr. Stanard was
elected President and Chief Executive Officer of the Parent on July 31, 1997 and
is currently serving as President of AMF Bowling Centers Inc., AMF Bowling
Products and certain other related entities. Mr. Hare also serves as Executive
Vice President, Chief Financial Officer and Treasurer of the Parent.
The Executive Employment Agreements provide for payment of accrued
compensation, continuation of certain benefits and payment of a portion of the
executive's bonus (if the applicable Targets are later met) following
termination of employment by the Company under certain circumstances. The
Executive Employment Agreements further provide for a severance payment equal to
the executive's annual base salary if termination by the Company is not due to
death or disability. The executive's employment will be deemed to have been
terminated by the Company if all or substantially all of the stock or assets of
the Company are sold or disposed of to an unaffiliated third party and the
executive is not thereafter employed by the Parent or one of its continuing
affiliates; however, neither the Parent nor the Company will have any
obligations with respect to accrued salary, continuation of benefits, allocated
portion of bonus and, if applicable, severance payments to either Mr. Stanard or
Mr. Hare upon termination of his employment if he is hired by the purchaser of
the Company's stock or assets, or if his employment is continued by the Company.
Mr. Stanard purchased, pursuant to his Executive Employment Agreement,
150,000 shares of Parent Common Stock (his "Purchased Stock") for $500,000 in
cash plus a non-recourse promissory note for $1,000,000, payable to the Parent
and secured by the Purchased Stock, which has been pledged pursuant to a stock
pledge agreement between Mr. Stanard and the Parent. Mr. Hare purchased 150,000
shares of Parent Common Stock for $500,000 in cash plus a non-recourse
promissory note for $1,000,000, payable to the Parent and secured by the
Purchased Stock, which has been pledged pursuant to a stock pledge agreement
between Mr. Hare and the Parent. Mr. Hare received a bonus of $166,667 in
connection with his employment with AMF. Mr. Hare used the proceeds of such
bonus to pay a portion of the purchase price for his Purchased Stock. Further,
the Parent loaned Mr. Hare $62,614 to be used to pay taxes associated with such
bonus. In exchange, Mr. Hare gave the Parent a full recourse promissory note
secured by his Purchased Stock. In addition, Mr. Stanard and Mr. Hare were
granted Stock Options to purchase 130,000 and 105,000 shares of Parent Common
Stock, respectively. Unless sooner exercised or forfeited as provided, such
Stock Options expire on May 1, 2006, and May 28, 2006, respectively. To the
extent not inconsistent with the Executive Employment Agreements, such Stock
Options are governed by the Stock Incentive Plan. Twenty percent of Mr.
Stanard's Stock Options vested on May 1, 1997 and another twenty percent will
vest on each May 1 thereafter through the year 2001; and twenty percent of Mr.
Hare's Stock Options vested on May 28, 1997 and another twenty percent will vest
on each May 28 thereafter through the year 2001.
The Executive Employment Agreements further provide that, prior to the
consummation of a public offering or offerings by the Parent with gross proceeds
in the aggregate of at least $100 million (an "IPO"), the Parent may, upon
termination of the executive's employment for any reason (including death),
repurchase all of the shares of Purchased Stock and any shares of Parent
62
<PAGE> 63
Common Stock issued upon exercise of the Stock Options (together, "Restricted
Stock") held by him for fair market value as of a specified date. The executive
or his legal representative may, prior to such an IPO, require the Parent to
repurchase all of his Restricted Stock at fair market value (in the case of
death or disability) or otherwise at the original price paid for the shares, if
the Company terminates his employment for any reason. The consummation of the
Parent Offerings will constitute an IPO for purposes of the Executive Employment
Agreements and, accordingly, the foregoing rights will terminate upon
consummation of the Parent Offerings. Immediately prior to certain change in
control transactions any unvested Stock Options will vest.
If any successor to the Parent or the Company acquires all or substantially
all of the business and/or assets of the Parent or the Company, the Parent may
purchase all of the Restricted Stock held by the executive for its fair market
value, and any Stock Options then held by him for the fair market value of the
underlying Parent Common Stock less the exercise price of the Stock Options.
Prior to February 28, 1997, Mr. Morin was employed by the Parent and a
subsidiary thereof pursuant to an employment agreement (the "Morin Employment
Agreement") on terms substantially similar to those of Mr. Stanard's Executive
Employment Agreement as described above. Mr. Morin's annual base salary was
$250,000. Pursuant to the Morin Employment Agreement, Mr. Morin purchased
150,000 shares of Parent Common Stock ("Morin Purchased Stock") for $500,000 in
cash plus a non-recourse promissory note for $1,000,000 (the "Morin Note"),
payable to the Parent and secured by the Morin Purchased Stock. In addition, Mr.
Morin was awarded Stock Options to purchase 110,000 shares of Parent Common
Stock.
As of February 28, 1997, Mr. Morin's employment terminated, and he resigned
all positions with AMF and its related entities. Pursuant to the terms of the
Morin Employment Agreement, Mr. Morin received a cash payment of $270,000,
representing severance pay equal to his annual base salary and an allocable
bonus in the amount of $20,000. Mr. Morin is also entitled to receive an amount
equal to the full balance of his 401(k) plan as of the close of business on
February 28, 1997. In addition, AMF Bowling repurchased the Morin Purchased
Stock for $500,000 in cash plus the cancellation of the Morin Note, including
interest thereon. The Stock Options granted to Mr. Morin were cancelled.
AMF BOWLING, INC. 1996 STOCK INCENTIVE PLAN
In connection with the Acquisition, the Parent adopted the AMF Bowling,
Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan"), under which the
Parent may grant incentive awards in the form of shares of Parent Common Stock
("Restricted Stock Awards"), options to purchase shares of Parent Common Stock
("Stock Options") and stock appreciation rights ("Stock Appreciation Rights") to
certain officers, employees, consultants and non-employee directors
("Participants") of the Parent and its affiliates. The total number of shares of
Parent Common Stock initially reserved and available for grant under the Stock
Incentive Plan is 1,767,151. As of October 31, 1997, Stock Options to purchase
1,668,000 shares of Parent Common Stock were outstanding, at an exercise price
of $10.00 per share. The Compensation Committee (the "Compensation Committee")
of the Board of Directors of the Parent (the "Parent Board of Directors") is
authorized to make grants and various other decisions under the Stock Incentive
Plan and to make determinations as to a number of the terms of awards granted
under the Stock Incentive Plan. Unless otherwise determined by the Compensation
Committee, any Participant granted an award under the Stock Incentive Plan must
become a party to, and agree to be bound by, the Stockholders Agreement.
Stock Option awards under the Stock Incentive Plan may include incentive
Stock Options, non-qualified Stock Options, or both types of Stock Options, in
each case with or without Stock Appreciation Rights. Stock Options are
nontransferable (except under certain limited circumstances) and, unless
otherwise determined by the Compensation Committee, have a term of ten years.
Upon a Participant's death or when the Participant's employment with the Parent
or the
63
<PAGE> 64
applicable affiliate of the Parent is terminated for any reason, such
Participant's previously unvested Stock Options are forfeited and the
Participant or his legal representative may, within three months (if termination
of employment is for any reason other than death) or one year (in the case of
the Participant's death), exercise any previously vested Stock Options.
Stock Appreciation Rights may be granted in conjunction with all or part of
any Stock Option award, and are exercisable, subject to certain limitations,
only in connection with the exercise of the related Stock Option. Upon the
termination or exercise of the related Stock Option, Stock Appreciation Rights
terminate and are no longer exercisable. Stock Appreciation Rights are
transferable only with the related Stock Options.
Unless otherwise provided in the related award agreement or, if applicable,
the Stockholders Agreement, immediately prior to certain change of control
transactions described in the Stock Incentive Plan, all outstanding Stock
Options and Stock Appreciation Rights will, subject to certain limitations,
become fully exercisable and vested and any restrictions and deferral
limitations applicable to any Restricted Stock Awards will lapse.
The Stock Incentive Plan will terminate ten years after its effective date
of May 1, 1996; however, awards outstanding as of such date will not be affected
or impaired by such termination. The Parent Board of Directors and the
Compensation Committee have authority to amend the Stock Incentive Plan and
awards granted thereunder, subject to the terms of the Stock Incentive Plan.
Through October 31, 1997, Stock Options to purchase 1,798,000 shares of
Parent Common Stock were granted (of which Stock Options to purchase 1,668,000
shares of Parent Common Stock were granted under the Stock Incentive Plan) and
remain outstanding. The exercise price for all such Stock Options is $10.00 per
share.
Pursuant to an Option Agreement (the "Diker Option Agreement"), dated May
1, 1996, Charles M. Diker, a director of the Parent, Holdings and the Company,
was granted, pursuant to the Stock Incentive Plan, non-qualified Stock Options
to purchase 100,000 shares of Parent Common Stock at an exercise price of $10.00
per share. One third of such Stock Options vested on May 1, 1996, one third
vested on May 1, 1997 and the remaining Stock Options vest on May 1, 1998. The
Diker Option Agreement provides that, prior to an IPO, the Parent may, upon
termination of Mr. Diker's service as a director of the Parent for any reason
(including death but excluding disability), repurchase of all of the shares of
Restricted Stock held by him for fair market value as of a specified date. Mr.
Diker or his legal representative may, prior to an IPO, require the Parent to
repurchase all of his Restricted Stock at fair market value (in the case of
death or disability) or otherwise at the original price paid for the shares if
the Parent terminates his service as a director of the Parent for any reason. If
any successor to the Parent acquires all or substantially all of the business
and/or assets of the Parent, the Parent may purchase all of the Stock Options
then held by Mr. Diker for the fair market value of the underlying Parent Common
Stock less the exercise price of the Stock Options. Mr. Diker is a party to the
Stockholders Agreement and any shares of Parent Common Stock held by Mr. Diker
will be subject to the terms of the Stockholders Agreement in addition to the
terms of his Option Agreement.
64
<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Parent Common Stock, as of October 31, 1997 and as adjusted to
reflect the sale of the shares of Parent Common Stock offered by the Parent in
the Parent Offerings, by (i) each stockholder who is known by the Parent to own
beneficially more than 5% of the outstanding Parent Common Stock prior to the
Parent Offerings, (ii) each director of the Parent, (iii) each Named Executive
Officer of the Parent and (iv) all directors and executive officers of the
Parent as a group. Except as set forth in the footnotes to the table, each
stockholder listed below has informed AMF that such stockholder has (a) sole
voting and investment power with respect to such stockholder's shares of Parent
Common Stock and (b) record and beneficial ownership with respect to such
stockholder's shares of Parent Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE PARENT AFTER THE
OFFERINGS(1)(2) PARENT OFFERINGS(1)(2)
NAME AND ADDRESS OF BENEFICIAL ------------------------- ------------------------------
OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
The Goldman Sachs Group(3)......... 30,836,593 68.6% 30,836,593 51.0%
Blackstone Group (as defined
below)(4)........................ 5,762,805 13.1% 5,762,805 9.7%
Kelso (as defined below)(5)........ 5,762,805 13.1% 5,762,805 9.7%
Richard A. Friedman(6)............. -- -- -- --
Terence M. O'Toole(7).............. -- -- -- --
Peter M. Sacerdote(8).............. -- -- -- --
Charles M. Diker................... 204,850(9) * 204,850(9) *
Paul B. Edgerley(10)............... -- -- -- --
Howard A. Lipson(11)............... -- -- -- --
Thomas R. Wall, IV(12)............. -- -- -- --
Douglas J. Stanard................. 176,000(13) * 176,000(13) *
Stephen E. Hare.................... 171,000(14) * 171,000(14) *
Michael P. Bardaro................. 5,000(15) * 5,000(15) *
All directors and executive
officers as a group (10
persons)......................... 556,850 1.3% 556,850 *
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Parent Common
Stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of the date of this
Prospectus are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any
other person.
(2) Based on 44,105,000 shares of Parent Common Stock outstanding prior to the
Parent Offerings, 59,630,000 shares of Parent Common Stock outstanding
after the Parent Offerings, and Warrants (as defined below) to purchase
870,000 shares of Parent Common Stock outstanding prior to and after the
Parent Offerings.
(3) Of the total number of shares beneficially owned by The Goldman Sachs
Group, 870,000 shares are owned by The Goldman Sachs Group, 19,317,476 are
owned by GS Capital Partners II, L.P., 7,679,488 shares are owned by GS
Capital Partners II Offshore, L.P., 712,530 shares are owned by Goldman,
Sachs & Co. Verwaltungs GmbH, as nominee for GS Capital Partners II
(Germany) Civil Limited Partnership, 451,922 shares are owned by Stone
Street Fund 1995, L.P., 772,645 shares are owned by Stone Street Fund 1996,
L.P., 508,546 shares are owned by Bridge Street Fund 1995, L.P. and 523,986
shares are owned by Bridge Street Fund 1996, L.P. The 870,000 shares
beneficially owned by The Goldman Sachs Group represent warrants to
purchase 870,000 shares of Parent Common Stock (the "Warrants"), which were
issued upon the closing of the Acquisition. GS Capital Partners II, L.P.,
GS Capital Partners II
65
<PAGE> 66
Offshore, L.P., GS Capital Partners II Germany, C.L.P., Stone Street Fund
1995, L.P., Stone Street Fund 1996, L.P., Bridge Street Fund 1995, L.P. and
Bridge Street Fund 1996, L.P., are investment partnerships. Affiliates of
The Goldman Sachs Group are the general, managing general or managing
partners of all of such partnerships and have full voting and investment
power with respect to the holdings of such partnerships. The address of The
Goldman Sachs Group is 85 Broad Street, New York, New York 10004.
(4) Of the total number of shares beneficially owned by Blackstone Group,
4,141,761 shares are owned by Blackstone Capital Partners II Merchant
Banking Fund L.P., 1,210,342 shares are owned by Blackstone Offshore
Capital Partners II L.P. and 410,702 shares are owned by Blackstone Family
Investment Partnership II L.P. The address of Blackstone Group is 345 Park
Avenue, New York, New York 10154.
(5) Of the total number of shares beneficially owned by Kelso Investment
Associates V, L.P. ("KIA V") and Kelso Equity Partners V, L.P. ("KEP V,"
and together with KIA V, "Kelso"), 5,409,974 shares are owned by KIA V and
352,831 are owned by KEP V. The address of each such stockholder is c/o
Kelso & Company, 320 Park Avenue, 24th Floor, New York, New York 10022. Due
to their common control, KIA V and KEP V could be deemed to beneficially
own each other's shares, but each disclaims such beneficial ownership.
Frank T. Nickell, Thomas R. Wall, IV, George E. Matelich, Michael B.
Goldberg, David I. Wahrhaftig and Frank K. Bynum, Jr. may be deemed to
share beneficial ownership of shares beneficially owned of record by KIA V
and KEP V, by virtue of their status as general partners of the general
partner of KIA V and as general partners of KEP V. Messrs. Nickell, Wall,
Matelich, Goldberg, Wahrhaftig and Bynum share investment and voting power
with respect to securities owned by KIA V and KEP V, but disclaim
beneficial ownership of such securities.
(6) Mr. Friedman, who is a managing director of Goldman Sachs, disclaims
beneficial ownership of the shares owned by The Goldman Sachs Group and its
affiliates, except to the extent of his pecuniary interest therein.
(7) Mr. O'Toole, who is a managing director of Goldman Sachs, disclaims
beneficial ownership of the shares owned by The Goldman Sachs Group and its
affiliates, except to the extent of his pecuniary interest therein.
(8) Mr. Sacerdote, who is a limited partner of The Goldman Sachs Group,
disclaims beneficial ownership of the shares owned by The Goldman Sachs
Group and its affiliates, except to the extent of his pecuniary interest
therein.
(9) Includes 66,666 shares which may be acquired upon exercise of Stock Options
within 60 days.
(10) Mr. Edgerley, who is (i) a managing director of the general partner of the
general partner of Bain Capital Fund V, L.P. and Bain Capital Fund V-B,
L.P. and (ii) a general partner of BCIP Associates and BCIP Trust
Associates, L.P., disclaims beneficial ownership of the shares owned by
those entities (collectively, "Bain"). Bain Capital Fund V, L.P. owns
402,002 shares, Bain Capital Fund V-B, L.P. owns 1,055,469 shares, BCIP
Associates owns 193,031 shares and BCIP Trust Associates, L.P. owns 78,340
shares.
(11) Mr. Lipson, who is a member of the limited liability company which acts as
the general partner of Blackstone Capital Partners II Merchant Banking Fund
L.P., Blackstone Offshore Capital Partners II L.P. and Blackstone Family
Investment Partnership II L.P. (collectively, "Blackstone Group"),
disclaims beneficial ownership of the shares owned by Blackstone Group.
(12) Mr. Wall, who is (i) a general partner of Kelso Partners V, L.P., the
general partner of KIA V and (ii) a general partner of KEP V, disclaims
beneficial ownership of the shares owned by KIA V and KEP V.
(13) Includes 26,000 shares which may be acquired upon exercise of Stock Options
within 60 days.
(14) Includes 21,000 shares which may be acquired upon exercise of Stock Options
within 60 days.
(15) Includes 5,000 shares which may be acquired upon exercise of Stock Options
within 60 days.
STOCKHOLDERS AGREEMENT
On April 30, 1996, the Parent, GSCP, Blackstone Group, Kelso, Bain (Bain,
together with Blackstone Group and Kelso, the "Governance Investors"), Citicorp
North America, Inc. ("Citicorp"), Mr. Diker (Mr. Diker, together with Blackstone
Group, Kelso, Bain and Citicorp, the "Investors"), Mr. Morin and Mr. Stanard
(together with Mr. Morin, the "Management Investors", and, with GSCP and the
Investors, the "Stockholders") entered into a stockholders agreement (the
"Stockholders Agreement"), which regulates the relationship among the Parent and
the Stockholders. Subsequently, Mr. Hare and other members of management who
have received Stock Option
66
<PAGE> 67
awards under the Stock Incentive Plan have become parties to the Stockholders
Agreement as additional Management Investors and Stockholders. The following
discussion summarizes the terms of the Stockholders Agreement that the Company
believes are material to holders of the Company's securities. This summary is
qualified in its entirety by reference to the full text of the Stockholders
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The Stockholders Agreement confers on GSCP the right to increase or
decrease the Parent Board of Directors from its initial size of nine members.
GSCP has the right to nominate five directors and to nominate a majority (not
limited to a simple majority) of the members of the Parent Board of Directors,
so long as GSCP and its Permitted Transferees (as defined below) hold a majority
of the outstanding shares of Parent Common Stock. Each Governance Investor has
the right to nominate, subject to GSCP consent, one member of the Parent Board
of Directors, so long as the number of shares of Parent Common Stock held by it
and certain of its permitted transferees under the Stockholders Agreement is
equal to at least one-half of the sum of (i) the number of shares initially
purchased by it and its Permitted Transferees plus (ii) the number of additional
shares that the Governance Investor was required to purchase pursuant to the
"overcall" provisions of the Stockholders Agreement described below (in each
case, subject to appropriate adjustments). If a Governance Investor is no longer
entitled to nominate a director, the director is required to resign or be
subject to removal by the Stockholders. Each of GSCP and each Governance
Investor has the right to recommend removal, with or without cause, of any
director nominated by it, in which case such director must resign immediately or
be subject to removal by the Stockholders. In the event of death, removal or
resignation of a director nominated by a Governance Investor, so long as the
Governance Investor continues to have the right to nominate a director for such
position, the Governance Investor has the right to nominate (subject to GSCP
consent) a director to fill the vacancy created. A quorum may be constituted by
a majority of the number of directors then in office, but not less than
one-third of the whole Parent Board of Directors, including at least one GSCP
director.
Pursuant to the "overcall" provisions of the Stockholders Agreement, each
of GSCP and the Investors (other than Mr. Diker) agreed, for a period of two
years from April 30, 1996, to purchase additional shares of Parent Common Stock
having an aggregate purchase price of up to 20% of the amount initially invested
by such Investor (i.e., collectively up to a total of $75.6 million) upon the
request of the Parent Board of Directors. Any such additional investments were
required to be made pro rata by the funding Investors. Funds raised through such
additional investments could be used only to finance acquisitions of businesses
or assets, capital expenditures, investments in partnerships or joint ventures
or other investments in the business of the Parent and its subsidiaries, or any
similar transactions or expenditures. In October 1996, in connection with the
acquisition of the Charan centers, GSCP and the funding Investors purchased an
aggregate of 4,000,000 additional shares of Parent Common Stock for $10.00 per
share. In September 1997, GSCP and the funding Investors of the Parent purchased
an aggregate of 1,780,000 shares of Parent Common Stock for $20.00 per share
pursuant to the overcall provisions of the Stockholders Agreement, and the
aggregate proceeds of $35.6 million were used in part to fund acquisitions,
including that of 15 centers from Conbow, and for other corporate purposes. The
stockholders party to the Stockholders Agreement have no further rights or
obligations to make capital contributions under the overcall provisions of the
Stockholders Agreement. See "Business -- AMF Bowling Centers -- Recent
Acquisitions and Joint Ventures" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity."
The Stockholders Agreement provides for the continual existence of an
Executive Committee of the Parent Board of Directors (the "Executive
Committee"), consisting of two directors designated by GSCP. The Executive
Committee may exercise all the powers and authority of the Parent Board of
Directors (subject to any restrictions under Delaware law) except with respect
to those actions requiring a Special Vote and, in the case of matters which
under the Stockholders Agreement
67
<PAGE> 68
require a prior meeting of the Parent Board of Directors, only after such
meeting has occurred. A "Special Vote" is required for (i) the issuance of
capital stock below fair market value, (ii) the grant or issuance of options or
warrants exercisable or exchangeable for more than 2,877,151 shares, (iii)
entering into certain transactions with affiliates of GSCP and (iv) amendments
to the Stockholders Agreement, the Parent's Certificate of Incorporation or
By-Laws which amendments would adversely affect the rights and obligations of
Blackstone Group or Kelso; provided, that any amendment affecting a Stockholder
differently from any other Stockholder requires such Stockholder's approval.
Matters requiring a Special Vote must be approved by a majority of the GSCP
directors who are partners or employees of Goldman Sachs and who are not
employees of the Parent and its subsidiaries, and at least one investor director
nominated by Blackstone Group or Kelso (if there is one serving at such time).
Pursuant to the Stockholders Agreement, each of the Stockholders has agreed
(i) to appear in person or by proxy at any stockholder meeting for the purpose
of obtaining a quorum, (ii) to vote its shares of Parent Common Stock at any
stockholder meeting called for the purpose of voting on the election or removal
of directors in favor of the election or removal of directors, as applicable, in
accordance with the provisions described in the third preceding paragraph, (iii)
otherwise to vote its shares of Parent Common Stock at stockholder meetings in a
manner consistent with the Stockholders Agreement, (iv) not to grant any proxy
or enter into any voting trust with respect to the Parent Common Stock it holds
or enter into any stockholder agreement or arrangement inconsistent with the
provisions of the Stockholders Agreement and (v) not to act as a member of a
group or in concert with others in connection with the acquisition, disposition
or voting of shares of Parent Common Stock in any manner inconsistent with the
Stockholders Agreement.
Under the Stockholders Agreement, Goldman Sachs have the exclusive right to
perform all consulting, financing, investment banking and similar services for
the Parent and its subsidiaries, for customary compensation and on terms
customary for similar engagements with unaffiliated third parties. Neither the
Parent nor its subsidiaries are allowed to engage any person to perform such
services during the term of the Stockholders Agreement, except to the extent
Goldman Sachs consent thereto or decline, at their sole election, to perform
such services. Pursuant to the terms of the Stockholders Agreement, the
provisions relating to services performed by Goldman Sachs will terminate and be
of no further effect upon consummation of the Parent Offerings.
The Stockholders Agreement provides that in the event a Stockholder
determines to sell its shares of Parent Common Stock (subject to certain
exceptions), such Stockholder must give the other Stockholders notice thereof
and such other Stockholders must have the opportunity to sell a pro rata share
of their Parent Common Stock in such a sale. Moreover, in the event Stockholders
owning 51% or more of the outstanding Parent Common Stock propose to sell all of
the Parent Common Stock held by such Stockholders pursuant to a stock sale,
merger, business combination, recapitalization, consolidation, reorganization,
restructuring or similar transaction, such Stockholders will have the right,
under certain circumstances, to require the other Stockholders to sell the
equity securities of the Parent held by such other Stockholders in such sale on
the same terms and conditions and at the same price as the Stockholders
proposing to sell.
The foregoing rights and obligations (other than those described in the
second preceding paragraph which will terminate upon consummation of the Parent
Offerings) will terminate after consummation of the Parent Offerings upon the
first to occur of: (i) GSCP, the Investors and their permitted transferees under
the Stockholders Agreement (the "Permitted Transferees") holding in the
aggregate less than 50% of the sum of (a) the number of shares of Parent Common
Stock outstanding, on a fully diluted basis, immediately after giving effect to
the transactions contemplated by the subscription agreement (the "Subscription
Agreement") entered into on the same date and by the same parties as the
Stockholders Agreement, except for the Management Investors, and (b) the number
of additional shares of Parent Common Stock, if any, issued pursuant to the
"overcall" provisions of the Stockholders Agreement and (ii) GSCP, the Investors
and their Permitted Transferees holding in the aggregate less than 40% of the
fully diluted shares of Parent
68
<PAGE> 69
Common Stock then outstanding. Notwithstanding these provisions, in the event of
any merger, recapitalization, consolidation, reorganization or other
restructuring of the Parent as a result of which the Stockholders and their
Permitted Transferees own less than a majority of the outstanding voting power
of the entity surviving such transaction, the Stockholders Agreement will
terminate.
REGISTRATION RIGHTS AGREEMENT
The Parent and the Stockholders entered into a Registration Rights
Agreement on April 30, 1996 (the "Registration Rights Agreement"). Pursuant to
the Registration Rights Agreement, following consummation of the Parent
Offerings, (i) each of Blackstone Group (as a group), Kelso (as a group) and
Bain (as a group) may make one demand (subject to certain exceptions) of the
Parent to register shares of Parent Common Stock held by such group and (ii)
GSCP may make up to five demands (subject to certain exceptions) of the Parent
to register shares of Parent Common Stock held by it, in each case, so long as
(a) the aggregate offering price for the shares to be sold is at least $50
million and (b) shares representing at least 5% of the sum of (1) the number of
shares of Parent Common Stock purchased by GSCP prior to execution of the
Subscription Agreement, (2) the number of shares of Parent Common Stock issued
pursuant to the Subscription Agreement and (3) the number of shares (subject to
adjustment) of Parent Common Stock purchased by the Stockholders pursuant to the
"overcall" provisions of the Stockholders Agreement are being registered. Upon a
demand for registration by any of GSCP, Blackstone Group, Kelso or Bain, each of
the other Stockholders is to be given the opportunity to participate on a pro
rata basis in the registration demanded. The Registration Rights Agreement also
provides the Stockholders with piggyback registration rights which allow each of
them to include all or a portion of their shares of Parent Common Stock under a
registration statement filed by the Parent, subject to certain exceptions and
limitations. The Stockholders have agreed not to exercise their piggyback rights
with respect to the Parent Offerings. The foregoing summary is qualified in its
entirety by reference to the full text of the Registration Rights Agreement, a
copy of which has been filed with the Commission.
CERTAIN TRANSACTIONS
Messrs. Friedman and O'Toole, each of whom is a Managing Director of
Goldman Sachs, and Mr. Sacerdote, who is a limited partner of The Goldman Sachs
Group, are directors of the Parent, AMF Group Holdings and the Company. Mr.
Friedman is also Chairman of the Parent and the Company. Goldman Sachs and its
affiliates together currently beneficially own and will, following consummation
of the Parent Offerings, continue to own a majority of the outstanding Parent
Common Stock. See "Principal Stockholders." Goldman Sachs and its affiliates
were the initial purchasers of the debt issued by the Company in connection with
the Acquisition and received an underwriting discount of approximately $19.0
million in connection with the purchase and resale of the 10 7/8% Senior
Subordinated Notes due 2006 and 12 1/4% Senior Subordinated Discount Notes due
2006, each issued in March 1996, which were subsequently exchanged by the
holders thereof for the Exchange Senior Subordinated Notes and the Exchange
Senior Subordinated Discount Notes. Goldman Sachs also served as financial
advisor to the owners of the Predecessor Company in connection with the
Acquisition and received a fee in the form of the 10-year Warrants to purchase
870,000 shares of Parent Common Stock, on a fully diluted basis, at a purchase
price of $0.01 per share. The Warrants were valued for accounting purposes at
approximately $8.7 million.
In connection with the Credit Agreement and the amendments thereto, Goldman
Sachs Credit Partners, L.P., an affiliate of Goldman Sachs, acted as Syndication
Agent, Goldman Sachs Credit Partners, L.P. and Citicorp Securities, Inc. acted
as Arrangers, and Citibank, N.A. is acting as Administrative Agent. Total fees
payable to Goldman Sachs Credit Partners, L.P. aggregate approximately $10.0
million, and such entity is reimbursed for expenses in connection with such
services. Goldman Sachs Credit Partners, L.P. is also a Lender under the Credit
Agreement. See "Description of Senior Debt -- Credit Agreement." Goldman Sachs
also received a cash fee of $5.0
69
<PAGE> 70
million from AMF in connection with the Acquisition and was reimbursed for
related expenses. Blackstone Management Partners L.P., an affiliate of
Blackstone Group, and Kelso & Company, L.P., an affiliate of Kelso, each
received an investment banking fee of $1.0 million, and Bain Capital, Inc., an
affiliate of Bain, received a fee of $300,000, each in connection with the
Acquisition.
The Company and Goldman Sachs are parties to an engagement letter pursuant
to which Goldman Sachs are retained as the Company's financial advisor to
provide investment banking and financial advisory services, including in
connection with any acquisitions, dispositions or financings. Pursuant to the
engagement, the Company has agreed to reimburse Goldman Sachs for their out-
of-pocket expenses and indemnify Goldman Sachs in connection with their services
arising under the engagement.
The Company has also entered into two interest rate cap agreements with
Goldman Sachs Capital Markets, L.P. ("GSCM"), an affiliate of Goldman Sachs,
both of which were executed to hedge the Company's exposure to fluctuations in
the interest rates applicable to borrowings under the Credit Agreement. The
Parent paid a fee of $3.6 million to GSCM in 1996 in connection with the
execution of the first of these transactions, which "caps" the interest rate on
$500 million principal amount of debt at 6.5% until April 1998 and at 7.5% from
May 1998 through October 1998. The Company paid a fee of $15,000 to GSCM in
respect of the second transaction executed on July 2, 1997, which caps the rate
applicable to $100 million in debt at 7.0% until March 31, 1998. See "Note 9.
Long-Term Debt" in the Consolidated Financial Statements of Holdings as of
December 31, 1996 and "Note 6. Long-Term Debt" in the Condensed Consolidated
Financial Statements of Holdings as of June 30, 1997.
The Company retained Michael Stanard Design, Inc. ("MSD"), a market
consultant, to provide marketing and related services in 1996 for an aggregate
of $114,000 and in 1997 for an aggregate of $446,000 to date. A majority owner
of MSD is H. Michael Stanard, who is Mr. Stanard's brother. A substantial
portion of such amounts were reimbursement of costs for materials, travel,
printing and other out-of-pocket expenses.
The Company has agreed to pay a fee of $300,000 to Goldman Sachs for their
representation of the Company in connection with the Company's lease of its new
bowling center at Chelsea Piers in New York.
AMF and the Stockholders have entered into the Stockholders Agreement and
the Registration Rights Agreement. See "Principal Stockholders -- Stockholders
Agreement" and "Principal Stockholders -- Registration Rights Agreement."
70
<PAGE> 71
DESCRIPTION OF SENIOR DEBT
CREDIT AGREEMENT
The Company is party to a Credit Agreement amended and restated as of
November 7, 1997 (and as further amended, modified, renewed, refunded, replaced
or refinanced, in whole or in part, from time to time, the "Credit Agreement")
with Goldman Sachs, their affiliate Goldman Sachs Credit Partners L.P.,
Citibank, N.A. ("Citibank") and its affiliates Citicorp and Citicorp USA, Inc.
and certain other banks, financial institutions and institutional lenders
(collectively, the "Lenders") providing for (i) senior secured term loan
facilities aggregating $455.3 million (the "Term Facilities"), and (ii) a senior
secured revolving credit facility of up to $355.0 million (the "Working Capital
Facility", and together with the Term Facilities, the "Senior Facilities"). In
connection with such financing, Goldman Sachs Credit Partners, L.P. acted as
Syndication Agent, Goldman Sachs Credit Partners, L.P. and Citicorp Securities,
Inc. acted as Arrangers, and Citibank is acting as Administrative Agent. The
initial borrowings under the Credit Agreement were used to partially fund the
Acquisition.
The following summary of the material provisions of the Credit Agreement is
qualified in its entirety by reference to the full text of the Credit Agreement.
A copy of the Credit Agreement has been filed with the Commission.
THE FACILITIES
The Term Facilities consist of the following three tranches: (i) a Term
Loan Facility of $130.0 million, (ii) an Amortization Extended Loan
("AXELs(SM)") Series A Facility of $187.5 million and (iii) an AXELs(SM) Series
B Facility of $137.8 million. The Term Facilities bear interest, at the
Company's option, at Citibank's customary base rate or at Citibank's Eurodollar
rate, in each case plus a margin which varies in accordance with a performance
pricing grid which is based on the Total Debt/EBITDA Ratio (as defined in the
Credit Agreement) for the Rolling Period (as defined below) then most recently
ended. Until November 7, 1998, (i) the margin applicable to loans bearing
interest based on the base rate will range from 0.750% to 0.875%, for advances
under the Term Loan Facility, 1.000% to 1.125%, for advances under the AXELs(SM)
Series A Facility, and 1.250% to 1.375%, for advances under the AXELs(SM) Series
B Facility, and (ii) the margin applicable to loans bearing interest based on
the Eurodollar rate will range from 1.750% to 1.875%, for advances under the
Term Loan Facility, 2.000% to 2.125%, for advances under the AXELs(SM) Series A
Facility, and 2.250% to 2.375%, for advances under the AXELs(SM) Series B
Facility. Thereafter, (i) the margin applicable to loans bearing interest based
on the base rate will range from 0.000% to 0.875%, for advances under the Term
Loan Facility, 0.875% to 1.125%, for advances under the AXELs(SM) Series A
Facility, and 1.125% to 1.375%, for advances under the AXELs(SM) Series B
Facility, and (ii) the margin applicable to loans bearing interest based on the
Eurodollar rate will range from 0.750% to 1.875%, for advances under the Term
Loan Facility, 1.875% to 2.125%, for advances under the AXELs(SM) Series A
Facility, and 2.125% to 2.375%, for advances under the AXELs(SM) Series B
Facility.
The final maturity of the Term Loan Facility will occur on March 31, 2002,
the final maturity of the AXELs(SM) Series A Facility will be March 31, 2003 and
the final maturity of the AXELs(SM) Series B Facility will be March 31, 2004.
71
<PAGE> 72
Average amounts outstanding and average borrowing rates for the period
ended June 30, 1997 under the Credit Agreement as then in effect, were as
follows (dollars in millions):
<TABLE>
<CAPTION>
OUTSTANDING
AT AVERAGE AVERAGE
JUNE 30, AMOUNTS BORROWING
DESCRIPTION MATURITY DATES 1997 OUTSTANDING RATES
- ----------------------------------- --------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Term Loan Facility................. March 31, 2001 $210,000 $ 232,620 8.15%
AXELs(SM) Series A Facility........ March 31, 2003 $187,750 $ 189,007 8.54%
AXELs(SM) Series B Facility........ March 31, 2004 $138,125 $ 104,759 8.77%
</TABLE>
The Working Capital Facility has an aggregate amount of $355.0 million,
will mature on March 31, 2002, is fully revolving until its final maturity and
bears interest, at the Company's option, at Citibank's customary base rate or at
Citibank's Eurodollar rate, in each case, plus a margin which varies in
accordance with a performance pricing grid which is based on the Total
Debt/EBITDA Ratio for the Rolling Period then most recently ended. Until
November 7, 1998, the margin applicable to advances under the Working Capital
Facility bearing interest based on the base rate will range from 0.750% to
0.875% and the margin applicable to advances under the Working Capital Facility
bearing interest based on the Eurodollar rate will range from 1.750% to 1.875%.
Thereafter, the margin applicable to advances under the Working Capital Facility
bearing interest based on the base rate will range from 0.000% to 0.875% and the
margin applicable to advances under the Working Capital Facility bearing
interest based on the Eurodollar rate will range from 0.750% to 1.875%.
As most recently amended and restated, the Credit Agreement will require
the Company to make scheduled amortization payments on the Term Facilities as
follows (dollars in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS TERM AXELS(SM) AXELS(SM)
ENDING LOAN SERIES A SERIES B
DECEMBER 31, FACILITY FACILITY FACILITY TOTAL
----------------------------------------- -------- -------- -------- ------
<S> <C> <C> <C> <C>
1997.................................. $ 7.5 $ 0.7 $ 0.8 $ 9.0
1998.................................. 23.1 2.0 2.3 27.4
1999.................................. 28.1 2.0 2.2 32.3
2000.................................. 30.0 2.0 2.3 34.3
2001.................................. 30.0 50.8 2.2 83.0
2002.................................. 11.3 92.5 2.3 106.1
2003.................................. -- 37.5 78.9 116.4
2004.................................. -- -- 46.8 46.8
------ ------ ------ ------
$130.0 $187.5 $137.8 $455.3
====== ====== ====== ======
</TABLE>
In addition, the Company will be required to make prepayments that
permanently reduce the availability under the Senior Facilities under certain
circumstances, including upon certain asset sales, issuances of debt and public
issuance of equity securities of the Parent. The Company will also be required
to make prepayments that permanently reduce the availability under the Term
Facilities in an amount equal to up to 50% of Excess Cash Flow for any fiscal
year of the Company if the Total Debt/EBITDA Ratio for that fiscal year is
greater than or equal to 5.50 to 1.0. If the Total Debt/EBITDA Ratio for a
fiscal year is less than 5.50 to 1.0, then the Company is required to prepay the
Working Capital Facility in an amount equal to up to 50% of the Excess Cash Flow
for such fiscal year, but the Company would be permitted to reborrow such
amounts, subject to the conditions of the Credit Agreement.
The Credit Agreement also provides that at least $100 million of the net
cash proceeds of the Parent Offerings are to be used to repay borrowings under
the Working Capital Facility (and thus would be available for reborrowing), and
the remaining net cash proceeds anticipated from the Parent Offerings may be
used, at the Company's option, to redeem a portion of the Exchange Senior
72
<PAGE> 73
Subordinated Notes and/or the Exchange Senior Subordinated Discount Notes and/or
to repay borrowings under the Working Capital Facility.
The Senior Facilities are guaranteed by Holdings and by each of the
Company's present and future domestic Subsidiaries (as defined in the Credit
Agreement) and are secured by all of the stock of the Company and the Company's
present and future domestic Subsidiaries and Second-Tier Subsidiaries (each as
defined in the Credit Agreement), by 66% of the stock of the Company's present
and future international subsidiaries and by substantially all of the Company's
and its present and future domestic Subsidiaries' present and future property
and assets.
In accordance with GAAP, the Company will incur after-tax extraordinary
charges totalling $22.7 million arising from the most recent amendment and
restatement of the Credit Agreement and the resulting write-off of costs
previously incurred to obtain bank financing for the Acquisition, the premium
associated with the portion of the Exchange Senior Subordinated Discount Notes
expected to be redeemed with the proceeds of the Parent Offerings and the
write-off of the portion of deferred financing costs attributable to the
Exchange Senior Subordinated Discount Notes expected to be so redeemed. Costs
incurred with respect to the amendment and restatement of the Credit Agreement
will be amortized over seven years.
COVENANTS
The Credit Agreement contains certain financial covenants, as well as
additional affirmative and negative covenants, constraining the Company. Under
the terms currently in effect, the Company must maintain a minimum Modified
Consolidated EBITDA (as defined below) of not less than the sum of (i) an amount
ranging from $150 million for the "Rolling Period" (defined as a calendar
quarter together with the three consecutive immediately preceding calendar
quarters) ending June 30, 1997, to $200 million for the Rolling Period ending
September 30, 2003 and thereafter, and (ii) the EBITDA Adjustment Amount (as
defined in the Credit Agreement) for such Rolling Period, which is equal to 80%
of the aggregate amount of the EBITDA of each bowling center acquired or
constructed by the Company or any of its Subsidiaries after May 1, 1996 and
acquired or constructed at least 15 months prior to such time of determination.
The Company must also maintain a Cash Interest Coverage Ratio (defined in
the Credit Agreement as the ratio of (i) consolidated EBITDA of the Company and
its Subsidiaries during a Rolling Period, as modified with respect to certain
bowling centers acquired or constructed after May 1, 1996 ("Modified
Consolidated EBITDA") to (ii) cash interest payable on all Debt (as defined in
the Credit Agreement) of the Company and its Subsidiaries) at an amount ranging
from not less than 2.00 for the Rolling Period ending June 30, 1997, to not less
than 2.75 for the Rolling Period ending September 30, 2002 and thereafter. The
Company is required to maintain a Fixed Charge Coverage Ratio (defined in the
Credit Agreement as the ratio of (i) Modified Consolidated EBITDA less the sum
of (a) cash taxes paid plus (b) Capital Expenditures (as defined in the Credit
Agreement) made by the Company and its Subsidiaries during such Rolling Period
to (ii) the sum of (a) cash interest payable on all Debt plus (b) principal
amounts of all Debt payable by the Company and its Subsidiaries during such
Rolling Period) at an amount ranging from not less than 1.05 for the Rolling
Period ending June 30, 1997, to not less than 1.20 for the Rolling Period ending
June 30, 2001 and declining to 1.00 for the Rolling Period ending March 31, 2002
and thereafter. A Senior Debt to EBITDA Ratio (defined in the Credit Agreement
as the ratio of Consolidated Debt, as defined in the Credit Agreement (other
than Subordinated Debt and Hedge Agreements, as defined in the Credit
Agreement), of the Company and its Subsidiaries to Modified Consolidated EBITDA
for that Rolling Period) must be maintained at levels ranging from not more than
3.75 for the Rolling Period ending June 30, 1997 to not more than 2.50 for the
Rolling Period ending March 31, 2002 and thereafter. A Total Debt/EBITDA Ratio
(defined in the Credit Agreement as the ratio of consolidated total Debt (other
than Hedge Agreements) of the Company and its Subsidiaries to Modified
Consolidated EBITDA) must be maintained at levels ranging from not more than
6.50 for the Rolling
73
<PAGE> 74
Period ending June 30, 1997 to not more than 4.50 for the Rolling Period ending
March 31, 2002 and thereafter. In each case, the above-mentioned ratios are
calculated on a quarterly basis.
The following chart summarizes the financial covenants described in the
preceding paragraph.
<TABLE>
<CAPTION>
ROLLING 12-MONTH PERIOD ENDING:(1)
------------------------------------------------------------------------------------------
3/31/97 6/30/97 6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 6/30/04
THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH AND
FINANCIAL ESTIMATIONS 6/30/97 6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 6/30/04 THEREAFTER
- --------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MODIFIED CONSOLIDATED EBITDA(2)
Not less than the following
amounts (in $ millions) plus
the then applicable EBITDA
Adjustment Amount(3)......... 150 150 155 165 175 185 195 200 200
CASH INTEREST COVERAGE RATIO(4)
Not less than:................. 2.00 2.25 2.35 2.75 2.75 2.50 2.75 2.75 2.75
FIXED CHARGE COVERAGE RATIO(5)
Not less than:................. 1.05 1.10 1.15 1.20 1.20 1.00 1.00 1.00 1.00
SENIOR DEBT TO EBITDA RATIO(6)
Not less than:................. 3.75 3.60 3.60 3.25 3.00 2.50 2.50 2.50 2.50
TOTAL DEBT TO EBITDA RATIO(7)
Not less than:................. 6.50 6.00 6.00 5.50 5.00 4.50 4.50 4.50 4.50
</TABLE>
- ---------------
(1) The levels specified with respect to each covenant may vary within the
periods specified below. When the level varies within a period, the level as
in effect at the end of the period is specified in the table.
(2) Defined as, for any Rolling Period, Consolidated EBITDA (as defined in the
Credit Agreement) of the Company and its Subsidiaries in such Rolling
Period, provided, however, that at any time of determination, (i) solely
with respect to any constructed New Center (as defined below), Modified
Consolidated EBITDA shall be calculated using Adjusted EBITDA (as defined
below) of such New Center and (ii) solely with respect to any New Center
acquired within the immediately preceding 15 months, Modified Consolidated
EBITDA shall be calculated using the actual EBITDA of such New Center for
such Rolling Period (as defined below). "Adjusted EBITDA" means, at any
time, in the case of a New Center, the product of (a) the Average EBITDA
Margin calculated as of the end of the fiscal quarter immediately preceding
the fiscal quarter in which the acquisition or the construction of the New
Center occurs and (b) the Specified Revenues (as defined below) of such new
center. "Average EBITDA Margin" means, at any time of determination, an
amount equal to (a) the sum of Consolidated EBITDA of AMF Bowling Centers,
Inc. and its subsidiaries and Consolidated EBITDA of AMF Worldwide Bowling
Centers Holdings Inc. and its subsidiaries ("AMF Worldwide") divided by (b)
the sum of consolidated revenues of AMF Bowling Centers and its subsidiaries
and consolidated revenues of AMF Worldwide and its subsidiaries, in each
case for the 12-month period reflected in the most recent financial
statements. "Specified Revenues" means at any time (a) in the case of any
acquisition of a New Center, aggregate revenues of such New Center for the
immediately preceding 12-month period, and (b) in the case of any
construction of a New Center, an amount equal to (i) at any time during its
first 12 full months of operations, the aggregate revenues of such New
Center for each full month it has operated times twelve divided by the
number of full months such New Center has operated and (ii) at any time
thereafter, aggregate revenues of such New Center for the immediately
preceding 12-month period. "New Center" means, at any time of determination,
any bowling center acquired (whether by means of a stock or asset
acquisition) or constructed by the Company or any of its subsidiaries after
the closing date of the Credit Agreement and less than 15 months prior to
such date of determination, provided that the time of any such acquisition
shall be the date of consummation of such acquisition and the time of any
such construction shall be the date of the opening of such bowling center
for business.
(3) Defined as 80% of the aggregate amount of EBITDA of each bowling center
acquired or constructed by the Company or any of its Subsidiaries after May
1, 1996 and acquired or constructed at least 15 months prior to such time of
determination.
(4) The ratio of Modified Consolidated EBITDA to cash interest payable on all
debt of the Company and its Subsidiaries on a consolidated basis.
(5) Ratio of (A) Modified Consolidated EBITDA during the Rolling Period less the
sum of (1) cash taxes paid plus (2) Capital Expenditures made, in each case,
by the Company and its Subsidiaries during such Rolling Period to (B) the
sum of (i) cash interest payable on all debt plus (ii) principal amounts of
all debt payable (other than the principal amount of debt to the extent it
has been refinanced), in each case, by the Company and its Subsidiaries
during such Rolling Period.
(6) Ratio of Consolidated debt (other than Subordinated Debt and Hedge
Agreements) of the Company and its Subsidiaries to Modified Consolidated
EBITDA.
74
<PAGE> 75
(7) Ratio of Consolidated total debt (other than Hedge Agreements) of the
Company and its Subsidiaries to Modified Consolidated EBITDA.
Affirmative covenants under the Credit Agreement oblige the Company and its
Subsidiaries to comply with all laws and regulations, as well as to pay all
taxes not being contested in good faith, to comply with environmental laws and
permits, to maintain insurance coverage, preserve its corporate existence,
permit the examination of its records and books of account by the agents or any
of the Lenders, to prepare environmental reports upon the reasonable request of
the administrative agent (in the case of a Default under (and as defined in) the
Credit Agreement or based on the belief that hazardous materials contamination
not otherwise disclosed may be present on any property described in the
mortgages), to keep proper books of record and account, to maintain its
properties in good working condition, to comply with the terms of leaseholds and
to perform and observe all terms and provisions of each Related Document
(defined as the Stock Purchase Agreement, the Indentures and any related
agreements, a tax agreement, the Stockholders Agreement and a support agreement
relating to the Acquisition). The Company is also required to conduct, and cause
each of its Subsidiaries to conduct, all transactions permitted under the loan
documents with any affiliates on fair and reasonable terms, to maintain cash
concentration accounts with Citibank into which substantially all proceeds of
collateral are to be paid, and to guarantee obligations and give security (upon
the request of Citicorp USA, Inc. (together with any successor appointed
pursuant to the Credit Agreement, the "Collateral Agent"), at such time as any
new direct or indirect Subsidiary of the Company is formed or acquired by the
Company and the Guarantors (each, a "Loan Party"), or when any property is
acquired by any Loan Party). The Company has entered into, and must maintain
until the aggregate outstanding amount under the Term Facilities is less than
$400 million, interest rate hedge agreements, covering a notional amount of not
less than 50% of the commitments under all the facilities and the other floating
rate debt of the Loan Parties.
Negative covenants under the Senior Facilities prohibit the Company and its
Subsidiaries from incurring any liens (except for those created under the loan
documents or otherwise permitted under the Credit Agreement, including those
securing the Company's obligations as borrower on other indebtedness not to
exceed $5 million at any time outstanding). The Company and its Subsidiaries are
also prohibited from incurring any debt, other than (in the case of the Company)
debt owed to its Subsidiaries or in respect of hedge agreements not entered into
for speculative purposes or (in the case of any Subsidiary) debt owed to the
Company or any of its wholly owned Subsidiaries, to the extent permitted under
the Credit Agreement or (in the case of either the Company or its Subsidiaries)
debt secured by permitted liens, capitalized leases not to exceed $10 million at
any time outstanding and any debt existing at the time of the Acquisition, among
other things. The Company and its Subsidiaries may not incur any obligations
under leases having a term of one year or more that would cause their direct and
contingent liabilities for any 12 months to exceed the sum of (i) $25 million,
(ii) the product of (x) $200,000 and (y) the number of leased bowling centers
acquired by the Company or any Subsidiaries after May 1, 1996 and (iii) in each
calendar year after 1996, an amount equal to 4% of the amount permitted by this
provision in the immediately preceding calendar year. The Company is also
prohibited from entering into a merger of which it is not the survivor or to
sell, lease, or otherwise transfer its assets other than in the ordinary course
of business, except as otherwise permitted by the Credit Agreement. Investments
by the Company or its Subsidiaries in any other person are also limited by
formulas set forth in the Credit Agreement. The negative covenants also relate
to the payment of dividends, prepayments of, and amendments of the terms of,
other debt (including the Exchange Notes), amendment of the Related Documents,
ownership changes, negative pledges, partnerships, speculative transactions,
capital expenditures and payment restrictions affecting subsidiaries. The
Company is also subject to certain financial and other reporting requirements.
The Company is also prohibited from making a material change in the nature
of its existing business, except that it may have up to $50 million invested at
any one time in golf driving ranges and other golf-related activities.
75
<PAGE> 76
So long as the Company is not in default of the covenants contained in the
Credit Agreement, it may (i) declare and pay dividends in its common stock, (ii)
declare and pay cash dividends to the extent necessary to make payments under
certain noncompete agreements with owners of the Predecessor Company, (iii)
declare and pay cash dividends for general administrative expenses not to exceed
$0.25 million and (iv) declare and pay cash dividends not to exceed $2.0 million
for the repurchase of Parent Common Stock. As of June 30, 1997, the Company is
in compliance with all of its covenants.
EVENTS OF DEFAULT
The Credit Agreement contains customary Events of Default for
highly-leveraged financings. These include:
(a) the failure of the Company to pay the principal of, interest on,
or other amounts payable in connection with, any advance under the Senior
Facilities when they become due (in the case of principal) or within three
days after they become due;
(b) the incorrectness in any material respect of any representation or
warranty of a Loan Party under or in connection with any loan document;
(c) the failure of any Loan Party to perform or observe any term,
covenant or agreement with regard to the use of proceeds covenant, certain
affirmative covenants, any negative covenants, the obligation of the
Company to give notice to the administrative agent and the Lenders of any
default or any event likely to have a materially adverse effect and any
financial covenants under the Credit Agreement;
(d) the failure of any Loan Party to perform any other term, covenant
or agreement in any loan document, if such failure remains unremedied for
15 days after knowledge by an officer of any Loan Party or its Subsidiaries
or notice by the administrative agent or any Lender;
(e) the failure by any Loan Party or any material subsidiary to pay
any principal of, premium or interest on or any other amount payable in
respect of any debt outstanding in a principal amount of at least $25
million or any other event shall occur that would permit the acceleration
of any such debt or such debt is accelerated;
(f) the failure of any Loan Party or any material subsidiaries to
generally pay debts as they become due, or its seeking of liquidation,
reorganization, relief or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization, or such a proceeding
instituted against it remains undismissed and unstayed for a period of 30
days;
(g) the rendering of any judgment or order for the payment of money in
excess of $25 million against any Loan Party or any material subsidiary and
either any enforcement proceedings shall have commenced or 15 days shall
have passed during which no stay shall be in place;
(h) the rendering of any non-monetary judgment or order against any
Loan Party or any of material subsidiary that could reasonably be likely to
have a material adverse effect, and there is a period of 15 days during
which no stay of such judgment or order is in effect;
(i) any provision of any loan document after delivery for any reason
ceases to be valid and binding on or enforceable against any Loan Party
which is a party to it;
(j) any provision relating to the subordination of the debt under the
Exchange Notes and any other debt of any Loan Party or any material
subsidiary that is subordinated to the obligations of such Loan Party to
the Lenders or the agents for any reason ceases to be valid and binding on
or enforceable against any Loan Party which is a party to it;
(k) any collateral document (excluding mortgages covering collateral
which, in the aggregate, is immaterial) after delivery ceases to create a
valid and perfected first priority lien
76
<PAGE> 77
on and security interest in the collateral purported to be protected
thereby;
(l) The Parent ceases to own and control legally and beneficially all
of the outstanding shares of capital stock of Holdings;
(m) Holdings ceases to own and control legally and beneficially all of
the outstanding shares of capital stock of the Company;
(n) a change of control (as defined in the Credit Agreement) occurs;
(o) an ERISA event (as defined in the Credit Agreement) occurs with
respect to a single or multiple employer plan, and the sum of insufficiency
as to such plan, aggregated with the insufficiency of any other plans as to
which an ERISA event occurred, exceeds $25 million;
(p) any Loan Party or any ERISA affiliate is notified by the sponsor
of a multiemployer plan that it has incurred withdrawal liability with
respect to such plan, which, aggregated with other amounts required to be
paid to multiemployer plans by the Loan Parties and ERISA affiliates,
exceeds $25 million (or requires payments exceeding $7.5 million per
annum); or
(q) any Loan Party or ERISA affiliate is notified by the sponsor of a
multiemployer plan that such plan is in reorganization or being terminated,
within the meaning of Title IV of ERISA, resulting in an increase of
aggregate annual contributions in specified amounts.
Upon the occurrence of an Event of Default, the administrative agent may
declare the commitment of the Lenders terminated and may declare the Senior
Facilities and all interest thereon and all other amounts payable under the
Credit Agreement and the other loan documents due, and may also take certain
actions in respect of any outstanding letters of credit. In the event of an
actual or deemed entry of an order of relief with respect to any Loan Party or
any of its subsidiaries under the federal bankruptcy code, the commitment of the
Lenders will automatically terminate, and the Senior Facilities and all interest
thereon will automatically become due and payable.
OTHER SENIOR DEBT
A mortgage having a principal amount of approximately $2.0 million as of
June 30, 1997, secured by a bowling center in Independence, Missouri, remains
outstanding as an obligation of AMF. The original obligation was for
approximately $1.7 million, with interest at a rate of 8.81% through October 1,
2013.
AMF is obligated to make future payments under a noncompetition agreement
that provides that such obligation will be secured by AMF's bowling center in
Hickory, North Carolina. The amount remaining to be paid as of June 30, 1997 was
$0.2 million, and the final payment is due in 1999. This obligation is reflected
in other liabilities on the balance sheet of Holdings.
77
<PAGE> 78
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Senior Subordinated Notes and the Exchange Senior Subordinated
Discount Notes were offered in exchange for the Company's then-outstanding
10 7/8% Series A Senior Subordinated Notes due 2006 and the Company's
then-outstanding 12 1/4% Series A Senior Subordinated Discount Notes due 2006,
respectively (collectively, the "Original Notes").
The Exchange Senior Subordinated Notes were issued by the Company pursuant
to the same Indenture (the "Senior Subordinated Note Indenture") among the
Company, the Guarantors and IBJ Schroder Bank & Trust Company, as trustee (the
"Senior Subordinated Note Trustee"), under which the 10 7/8% Senior Subordinated
Notes due 2006 were issued. The Exchange Senior Subordinated Discount Notes were
issued by the Company pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and, together with the Senior Subordinated Note
Indenture, the "Indentures") among the Company, the Guarantors and Firstar Bank
of Minnesota, N.A., as successor to American Bank National Association, as
trustee (the "Senior Subordinated Discount Note Trustee" and, together with the
Senior Subordinated Note Trustee, the "Trustees"), under which the 12 1/4%
Senior Subordinated Discount Notes due 2006 were issued. The terms of the
Exchange Notes include those stated in the Indentures and those made part of the
Indentures by reference to the Trust Indenture Act of 1939 (the "Trust Indenture
Act"). The Exchange Notes are subject to all such terms, and Holders of Exchange
Notes are referred to the Indentures and the Trust Indenture Act for a statement
thereof. The discussion below summarizes the terms of the Exchange Notes that
the Company believes are material to an investor in the Exchange Notes. This
summary is qualified in its entirety by reference to the full text of the
agreements underlying this discussion, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus is a part, and are
incorporated by reference herein. The definitions of certain terms used in the
following summary are set forth below under the caption "-- Certain
Definitions."
As of June 30, 1997, all of the Company's Subsidiaries were Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indentures.
SUBORDINATION
The payment of principal of, premium, if any, and interest, including
Liquidated Damages, if any, on the Exchange Notes will be subordinated in right
of payment, in certain circumstances as set forth in the Indentures, to the
prior payment in full of all Senior Debt, whether outstanding on the date of the
Indentures or thereafter incurred.
The Indentures provide that, upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the documents relating to the applicable
Senior Debt, whether or not the claim for such interest is allowed as a claim in
such proceeding) before the Holders of Exchange Notes will be entitled to
receive any payment with respect to the Exchange Notes, and until all
Obligations with respect to Senior Debt are paid in full, any distribution to
which the Holders of Exchange Notes would be entitled will be made to the
holders of Senior Debt (except that Holders of Exchange Notes may receive
payments made from the trust described under "-- Legal Defeasance and Covenant
Defeasance").
The Indentures also provide that the Company may not make any payment upon
or in respect of the Exchange Notes (except from the trust described under
"-- Legal Defeasance and Covenant
78
<PAGE> 79
Defeasance") if (i) a default in the payment of the principal of, premium, if
any, or interest on Designated Senior Debt occurs and is continuing, or any
judicial proceeding is pending to determine whether any such default has
occurred, or (ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits, or would permit, with the passage of time
or the giving of notice or both, holders of the Designated Senior Debt as to
which such default relates to accelerate its maturity and the relevant Trustee
receives a notice of such default (a "Payment Blockage Notice") from the Company
or the holders of any Designated Senior Debt. Payments on the Exchange Notes may
and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived or shall have ceased to exist, unless
another default, event of default or other event that would prohibit such
payment shall have occurred and be continuing, or all Obligations in respect of
such Designated Senior Debt shall have been discharged or paid in full and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received by the relevant Trustee. No new
period of payment blockage may be commenced unless and until 360 days have
elapsed since the first day of effectiveness of the immediately prior Payment
Blockage Notice. No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the relevant Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice unless such
default shall have been subsequently cured or waived for a period of not less
than 180 days.
The Indentures further require that the Company promptly notify holders of
Senior Debt if payment of the Exchange Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Exchange Notes may recover less
ratably than creditors of the Company who are holders of Senior Debt. See "Risk
Factors." The principal amount of Senior Debt outstanding at June 30, 1997 was
approximately $679.9 million. The Indentures limit, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Debt, that the
Company and its Restricted Subsidiaries can incur. See "--Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock."
"Designated Senior Debt" means (i) so long as the Senior Bank Debt is
outstanding, the Senior Bank Debt, (ii) the Senior Bank Hedging Obligations and
(iii) any other Senior Debt permitted under the Indentures the principal amount
of which is $25.0 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Senior Bank Debt" means all Obligations in respect of the Indebtedness
outstanding under the Credit Agreement, together with any refunding, refinancing
or replacement (in whole or part) of such Indebtedness.
"Senior Bank Hedging Obligations" means all present and future Hedging
Obligations of the Company, whether existing now or in the future, that are
secured by the Credit Agreement or any of the collateral documents executed from
time to time in connection therewith.
"Senior Debt" means (i) the Senior Bank Debt, (ii) the Senior Bank Hedging
Obligations and (iii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Indentures, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Exchange Notes. Notwithstanding anything
to the contrary in the foregoing, Senior Debt does not include (1) any liability
for federal, state, local or other taxes owed or owing by the Company, (2) any
Indebtedness of the Company to any of its Restricted Subsidiaries or other
Affiliates (other than Goldman Sachs and its Affiliates, including Pearl Street
L.P.), (3) any trade payables, (4) that portion of any Indebtedness that is
incurred in violation of the Indentures, (5) Indebtedness which, when incurred
and without respect to any election under Section 1111(b) of Title 11, United
States Code, is without recourse to the Company, (6) any Indebtedness, Guarantee
or obligation of the Company which is contractually subordinate in right of
payment to any other Indebtedness, Guarantee or obligation of the Company;
79
<PAGE> 80
provided, however, that this clause (6) does not apply to the subordination of
liens or security interests covering particular properties or types of assets
securing Senior Debt, (7) Indebtedness evidenced by the Exchange Notes and (8)
Capital Stock.
The Exchange Notes rank pari passu or senior in right of payment to all
Subordinated Indebtedness of the Company. The Exchange Senior Subordinated Notes
and the Exchange Senior Subordinated Discount Notes rank pari passu with each
other.
SENIOR SUBORDINATED GUARANTEES
The Company's payment obligations under the Exchange Notes are jointly and
severally guaranteed on a senior subordinated basis (the "Senior Subordinated
Guarantees") by Holdings and each of the Company's direct and indirect domestic
subsidiaries. The obligations of each Guarantor under its Senior Subordinated
Guarantee is subordinated to its Guarantee of all Obligations under the Credit
Agreement (the "Senior Guarantees") and is limited so as not to constitute a
fraudulent conveyance under applicable law. See, however, "Risk
Factors -- Fraudulent Conveyance."
The Indentures provide that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustees, under the Exchange Notes and the Indentures; (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists; and
(iii) except in the case of a merger of such Guarantor with or into the Company
or another Guarantor, the Company would be permitted by virtue of the Company's
pro forma Fixed Charge Coverage Ratio to incur, immediately after giving effect
to such transaction, at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described below under
the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Disqualified Stock."
The Indentures provide that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor (other than Holdings),
by way of merger, consolidation or otherwise, or a sale or other disposition
(including, without limitation, by foreclosure) of all of the Capital Stock of
any Guarantor (other than Holdings), then such Guarantor (in the event of a sale
or other disposition, by way of such a merger, consolidation or otherwise
(including, without limitation, by foreclosure), of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all or substantially all of the assets of such
Guarantor) will be automatically released and relieved of any obligations under
its Senior Subordinated Guarantee; provided that the Net Proceeds of such sale
or other disposition are applied in accordance with the applicable provisions of
the Indentures. See "-- Repurchase at the Option of Holders -- Asset Sales." The
Indentures also provide that upon the merger, consolidation, sale or other
disposition (including, without limitation, by foreclosure) of all or
substantially all of the assets of the Company, then Holdings will be
automatically released and relieved of any obligations under its Senior
Subordinated Guarantee; provided that such merger, consolidation or sale
complies with the applicable provisions of the Indentures. See "-- Certain
Covenants -- Merger, Consolidation or Sale of All or Substantially All Assets."
Certain of the operations of the Company are conducted through Subsidiaries
that are not Guarantors and the Company is dependent upon the cash flow of those
Subsidiaries to meet its obligations, including its obligations under the
Exchange Notes. The Exchange Notes are effectively subordinated to all
indebtedness and other liabilities (including trade payables and capital lease
obligations) of the Company's Subsidiaries that are not Guarantors. Such
indebtedness and liabilities aggregated approximately $9.1 million (excluding
inter-company payables to the Com-
80
<PAGE> 81
pany) at June 30, 1997. Any right of the Company to receive assets of any of
such Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the Exchange Notes to participate in those
assets) are effectively subordinated to the claims of such Subsidiaries'
creditors, except to the extent that the Company or a Guarantor is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company or a Guarantor. See "Risk Factors -- Holding Company Structure" and Note
11 to the Condensed Consolidated Balance Sheet of Holdings.
PRINCIPAL, MATURITY AND INTEREST OF THE EXCHANGE SENIOR SUBORDINATED NOTES
The Exchange Senior Subordinated Notes are general unsecured obligations of
the Company, limited in aggregate principal amount to $250.0 million, and will
mature on March 15, 2006. Interest on the Exchange Senior Subordinated Notes
accrues at the rate of 10 7/8% per annum and is payable in cash semi-annually in
arrears on March 15 and September 15, to Holders of record on the immediately
preceding March 1 and September 1. Interest on the Exchange Senior Subordinated
Notes accrues from the most recent date to which interest has been paid or, if
no interest has been paid, from March 21, 1996. Interest is computed on the
basis of a 360-day year consisting of twelve 30-day months. Principal, premium,
if any, and interest, including Liquidated Damages, if any, on the Exchange
Senior Subordinated Notes is payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest, including Liquidated Damages, if
any, may be made by check mailed to the Holders of the Exchange Senior
Subordinated Notes at their respective addresses set forth in the register of
Holders of Exchange Senior Subordinated Notes; provided, however, that all
payments with respect to Global Notes and definitive Notes the Holders of which
have given wire transfer instructions to the Company at least ten Business Days
prior to the applicable payment date are required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Senior Subordinated Note Trustee maintained for
such purpose. The Exchange Senior Subordinated Notes will be issued in minimum
denominations of $1,000 and integral multiples thereof.
PRINCIPAL, MATURITY AND INTEREST OF THE EXCHANGE SENIOR SUBORDINATED DISCOUNT
NOTES
The Exchange Senior Subordinated Discount Notes are general unsecured
obligations of the Company, limited in aggregate principal amount at maturity to
$452.0 million and will mature on March 15, 2006. Until March 15, 2001 (the
"Full Accretion Date"), no interest (other than Liquidated Damages, if
applicable) will be paid in cash on the Exchange Senior Subordinated Discount
Notes, but the Accreted Value will accrete (representing the amortization of
original issue discount) between the Issuance Date and the Full Accretion Date,
on a semi-annual bond equivalent basis using a 360-day year comprised of twelve
30-day months such that the Accreted Value shall be equal to the full principal
amount at maturity of the Exchange Senior Subordinated Discount Notes on the
Full Accretion Date. Beginning on the Full Accretion Date, interest on the
Exchange Senior Subordinated Discount Notes will accrue at the rate of 12 1/4%
per annum and will be payable in cash semi-annually in arrears on March 15 and
September 15, commencing on September 15, 2001, to Holders of record on the
immediately preceding March 1 and September 1. Interest on the Exchange Senior
Subordinated Discount Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the Full Accretion
Date. Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Principal, premium, if any, and interest, including
Liquidated Damages, if any, on the Exchange Senior Subordinated Discount Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest, including Liquidated Damages, if any, may be made by check
mailed to the Holders of the Exchange Senior Subordinated Discount Notes at
their respective addresses set forth in the register of
81
<PAGE> 82
Holders of Exchange Senior Subordinated Discount Notes; provided, however, that
all payments with respect to Global Notes and definitive Notes the Holders of
which have given wire transfer instructions to the Company at least ten Business
Days prior to the applicable payment date will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Exchange Senior Subordinated
Discount Note Trustee maintained for such purpose. The Exchange Senior
Subordinated Discount Notes will be issued in minimum denominations of $1,000
and integral multiples thereof.
SETTLEMENT AND PAYMENT
Payments by the Company in respect of the Exchange Notes (including
principal, premium, if any, interest and Liquidated Damages, if any) will be
made in immediately available funds as provided above. The Exchange Notes trade
in the Same-Day Funds Settlement System of the Depository (as defined below),
and any secondary market trading activity in the Exchange Notes will, therefore,
be required by the Depository to be settled in immediately available funds. No
assurance can be given as to the effect, if any, of such settlement arrangements
on trading activity in the Exchange Notes.
Because of time-zone differences, the securities account of Euroclear or
Cedel Bank, societe anonyme ("Cedel Bank") participants (each, a "Member
Organization") purchasing an interest in a Global Note from a Participant (as
defined below) that is not a Member Organization will be credited during the
securities settlement processing day (which must be a business day for Euroclear
or Cedel Bank, as the case may be) immediately following the Depository
settlement date. Transactions in interests in a Global Note settled during any
securities settlement processing day will be reported to the relevant Member
Organization on the same day. Cash received in Euroclear or Cedel Bank as a
result of sales of interests in a Global Note by or through a Member
Organization to a Participant that is not a Member Organization will be received
with value on the Depository settlement date, but will not be available in the
relevant Euroclear or Cedel Bank cash account until the business day following
settlement in the Depository.
OPTIONAL REDEMPTION
EXCHANGE SENIOR SUBORDINATED NOTES
Except as described below, the Exchange Senior Subordinated Notes are not
redeemable at the Company's option prior to March 15, 2001. From and after March
15, 2001, the Exchange Senior Subordinated Notes will be subject to redemption
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' written notice, at the Exchange Senior Subordinated Note
Redemption Prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest, including Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on March 15 of each of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
--------------------------------------------------------------- -------------
<S> <C>
2001........................................................... 105.438%
2002........................................................... 103.625%
2003........................................................... 101.813%
2004 and thereafter............................................ 100.000%
</TABLE>
Prior to March 15, 1999, the Company may, at its option, on any one or more
occasions, redeem up to $100.0 million in aggregate principal amount of Exchange
Senior Subordinated Notes at a redemption price equal to 110.875% of the
principal amount thereof, plus accrued and unpaid interest, including Liquidated
Damages, if any, thereon to the redemption date, with the net proceeds of public
or private sales of common stock of, or contributions to the common equity
capital of, the Company; provided that at least $150.0 million in aggregate
principal amount of
82
<PAGE> 83
Exchange Senior Subordinated Notes remains outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption shall
occur within 60 days of the date of the closing of the related sale of common
stock of, or capital contribution to, the Company.
EXCHANGE SENIOR SUBORDINATED DISCOUNT NOTES
Except as described below, the Exchange Senior Subordinated Discount Notes
are not redeemable at the Company's option prior to March 15, 2001. From and
after March 15, 2001, the Exchange Senior Subordinated Discount Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' written notice, at the Exchange Senior
Subordinated Discount Note Redemption Prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest, including
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on March 15 of each of the
years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
--------------------------------------------------------------- -------------
<S> <C>
2001........................................................... 106.125%
2002........................................................... 104.083%
2003........................................................... 102.042%
2004 and thereafter............................................ 100.000%
</TABLE>
Prior to March 15, 1999, the Company may, at its option, on any one or more
occasions, redeem the Exchange Senior Subordinated Discount Notes at a
redemption price equal to 112.250% of the Accreted Value thereof, plus accrued
and unpaid Liquidated Damages, if any, thereon to the redemption date, with the
net proceeds of public or private sales of common stock of, or contributions to
the common equity capital of, the Company; provided that at least $150.0 million
in aggregate Accreted Value of Exchange Senior Subordinated Discount Notes
remains outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 60 days of the date
of the closing of the related sale of common stock of, or capital contribution
to, the Company.
SELECTION AND NOTICE
If less than all of the Exchange Senior Subordinated Notes and/or Exchange
Senior Subordinated Discount Notes, as the case may be, are to be redeemed at
any time, selection of such Exchange Notes for redemption will be made by the
applicable Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Exchange Notes are listed, or, if the
Exchange Notes are not so listed, on a pro rata basis, by lot or by such method
as the applicable Trustee shall deem fair and appropriate; provided that,
subject to the limitations described above, the Company may, at its option,
elect to redeem either Exchange Senior Subordinated Notes, Exchange Senior
Subordinated Discount Notes, or both Exchange Senior Subordinated Notes and
Exchange Senior Subordinated Discount Notes; and provided further, that no
Exchange Notes of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Exchange
Notes to be redeemed at such Holder's registered address. If any Exchange Note
is to be redeemed in part only, the notice of redemption that relates to such
Exchange Note shall state the portion of the principal amount thereof to be
redeemed. A new Exchange Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Exchange Note. On and after the redemption date,
unless the Company defaults in payment of the redemption price, interest ceases
to accrue on Exchange Notes or portions of them called for redemption.
83
<PAGE> 84
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined below), each Holder
of Exchange Notes will have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Exchange Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash (the "Change of Control Payment") equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest,
including Liquidated Damages, if any, thereon to the date of repurchase (or if
such Change of Control Offer is with respect to the Exchange Senior Subordinated
Discount Notes prior to the Full Accretion Date, 101% of the Accreted Value
thereof on the date of repurchase plus accrued and unpaid Liquidated Damages, if
any). Within 30 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase Exchange Notes pursuant to the
procedures required by the Indentures and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Exchange
Notes as a result of a Change of Control.
The Indentures provide that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding amounts under the Credit Agreement or
offer to repay in full all outstanding amounts under the Credit Agreement and
repay the Obligations held by each Lender who has accepted such offer or obtain
the requisite consents, if any, under the Credit Agreement to permit the
repurchase of the Exchange Notes required by this covenant. There can be no
assurance that the Company will have sufficient funds, or will obtain the
requisite consent of the Lenders under the Credit Agreement, to satisfy the
Change of Control repurchase requirement if such requirement arises.
The definition of a Change of Control includes transfers of "substantially
all" of the assets of the Company and its Restricted Subsidiaries. There is no
definitive quantitative test under New York law (the governing law of the
Indentures) as to what portion of the assets would constitute "substantially
all." Accordingly, there may be transactions that result in uncertainty as to
whether the Company is obligated to make a Change of Control Offer.
On a date that is no earlier than 30 days nor later than 60 days from the
date that the Company mails notice of the Change of Control to the Holders (the
"Change of Control Payment Date"), the Company will, to the extent lawful, (1)
accept for payment all Exchange Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agents an
amount equal to the Change of Control Payment in respect of all Exchange Notes
or portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustees for cancellation the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Exchange Notes
or portions thereof being purchased by the Company. The Paying Agents will
promptly mail to each Holder of Exchange Notes so tendered the Change of Control
Payment for such Exchange Notes, and the Trustees will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Exchange
Note equal in principal amount to any unpurchased portion of the Exchange Notes
surrendered, if any; provided that each such new Exchange Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
84
<PAGE> 85
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indentures are applicable. Except as
described above with respect to a Change of Control, the Indentures do not
contain provisions that permit the Holders of the Exchange Notes to require that
the Company repurchase or redeem the Exchange Notes in the event of a takeover,
recapitalization or similar transaction. Such a transaction could occur, and
could have an effect on the Exchange Notes, without constituting a Change of
Control.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indentures applicable to a Change of Control Offer made by the Company
and purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
The existence of a Holder's right to require the Company to repurchase such
Holder's Exchange Notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
ASSET SALES
The Indentures provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, cause, make or suffer to exist an Asset Sale
unless (i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustees) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) except in the case of
a Permitted Asset Swap, at least 80% of the consideration therefor received by
the Company or such Restricted Subsidiary is in the form of cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet) of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Exchange Notes or any
guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option, (i) to
permanently reduce Obligations under the Credit Agreement (and to
correspondingly reduce commitments with respect thereto) or other Senior Debt or
Pari Passu Indebtedness, (ii) to secure Letter of Credit Obligations to the
extent related letters of credit have not been drawn upon or returned undrawn,
(iii) to an investment in any one or more businesses, capital expenditures or
acquisitions of other assets, in each case, used or useful in a Principal
Business, (iv) to an investment in properties or assets that replace the
properties and assets that are the subject of such Asset Sale and/or (v) in the
case of a sale of a bowling center or bowling centers, deem such Net Proceeds to
have been applied pursuant to the immediately preceding clause (iv) to the
extent of any expenditures made to acquire or construct one or more bowling
centers in the general vicinity of the bowling center(s) sold within 365 days
preceding the date of the Asset Sale. Pending the final application of any such
Net Proceeds, the Company or such Restricted Subsidiary may temporarily reduce
Indebtedness under a revolving credit facility, if any, or otherwise invest such
Net Proceeds in Cash Equivalents. The Indentures will provide that any Net
Proceeds from the Asset Sale that are not invested as provided and within the
time period set forth in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $25.0 million, the Company will be required to make an offer to all
Holders of Exchange Notes (an "Asset Sale Offer") to purchase the maximum
85
<PAGE> 86
principal amount of Notes that is an integral multiple of $1,000 that may be
purchased out of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid
interest, including Liquidated Damages, if any (or, if such Asset Sale Offer is
with respect to the Exchange Senior Subordinated Discount Notes prior to the
Full Accretion Date, 100% of the Accreted Value thereof on the date of purchase,
plus accrued and unpaid Liquidated Damages, if any), to the date fixed for the
closing of such offer, in accordance with the procedures set forth in the
Indentures. The Company will commence an Asset Sale Offer with respect to Excess
Proceeds within ten Business Days after the date that the aggregate amount of
Excess Proceeds exceeds $25.0 million by mailing the notice required pursuant to
the terms of the Indentures, with a copy to the Trustees. To the extent that the
aggregate amount of Exchange Notes tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, the Company may use any remaining Excess Proceeds
(x) to offer to redeem Subordinated Indebtedness (a "Subordinated Asset Sale
Offer") in accordance with the provisions of the indenture or other agreement
governing such Subordinated Indebtedness or (y) for any purpose not prohibited
by the Indentures. If the aggregate principal amount of Exchange Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustees shall select the Exchange Notes to be purchased on a pro rata basis,
based upon the Accreted Value of Exchange Senior Subordinated Discount Notes and
the principal amount of Exchange Senior Subordinated Notes tendered. Upon
completion of any such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Exchange Notes as a result of an Asset Sale.
The Credit Agreement permits a portion of the proceeds of the Parent
Offerings to be applied to the repayment of Exchange Notes, and also provides
that certain change of control events with respect to the Company will
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs or an Asset Sale Offer is required to be made at a time when the Company
is prohibited from purchasing Exchange Notes, the Company could seek the consent
of its lenders to the purchase of Exchange Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company will remain prohibited from
purchasing Exchange Notes. In such case, the Company's failure to purchase
tendered Exchange Notes would constitute an Event of Default under the
Indentures. See "-- Events of Default and Remedies." In such circumstances, the
subordination provisions in the Indentures would likely restrict payments to the
Holders of Exchange Notes.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indentures provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or dividends or distributions payable to the Company or
any Restricted Subsidiary of the Company); (ii) purchase, redeem, defease or
otherwise acquire or retire for value any Equity Interests of the Company or any
direct or indirect parent of the Company; (iii) make any principal payment on,
or purchase, redeem, defease or otherwise acquire or retire for value any
Subordinated Indebtedness, except at final maturity; or (iv) make any Restricted
Investment (all such payments
86
<PAGE> 87
and other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
immediately after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described below under the caption
"-- Incurrence of Indebtedness and Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indentures (including Restricted Payments permitted
by clause (i) of the next succeeding paragraph, but excluding all other
Restricted Payments permitted by the next succeeding paragraph), is less
than the sum of (i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indentures to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
and the fair market value, as determined in good faith by the Board of
Directors, of marketable securities received by the Company from the issue
or sale since the date of the Indentures of Equity Interests (including
Retired Capital Stock) of the Company (except in connection with the
Acquisition) or of debt securities of the Company that have been converted
into such Equity Interests (other than Refunding Capital Stock or Equity
Interests or convertible debt securities of the Company sold to a
Restricted Subsidiary of the Company and other than Disqualified Stock or
debt securities that have been converted into Disqualified Stock), plus
(iii) 100% of the aggregate amounts contributed to the common equity
capital of the Company since the date of the Indentures (except amounts
contributed to finance the Acquisition), plus (iv) 100% of the aggregate
amounts received in cash and the fair market value of marketable securities
(other than Restricted Investments) received from (x) the sale or other
disposition of Restricted Investments made by the Company and its
Restricted Subsidiaries since the date of the Indentures or (y) the sale of
the stock of an Unrestricted Subsidiary or the sale of all or substantially
all of the assets of an Unrestricted Subsidiary to the extent that a
liquidating dividend is paid to the Company or any Subsidiary from the
proceeds of such sale, plus (v) 100% of any dividends received by the
Company or a Wholly Owned Restricted Subsidiary of the Company after the
date of the Indentures from an Unrestricted Subsidiary of the Company, plus
(vi) $10.0 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would
have complied with the provisions of the Indentures;
(ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary (the
"Retired Capital Stock") or any Subordinated Indebtedness, in each case,
in exchange for, or out of the proceeds of, the substantially concurrent
sale (other than to a Restricted Subsidiary of the Company) of Equity
Interests of the Company (other than any Disqualified Stock) (the
"Refunding Capital Stock"); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of
the immediately preceding paragraph;
87
<PAGE> 88
(iii) the defeasance, redemption or repurchase of Subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(iv) the redemption, repurchase or other acquisition or retirement
for value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any member of the Company's (or any of
its Restricted Subsidiaries') management pursuant to any management
equity subscription agreement or stock option or similar agreement;
provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed the sum
of $5.0 million in any twelve-month period plus the aggregate cash
proceeds received by the Company during such twelve-month period from
any issuance of Equity Interests by the Company to members of management
of the Company and its Restricted Subsidiaries; provided that the amount
of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from
clause (c)(ii) of the immediately preceding paragraph;
(v) Investments in Unrestricted Subsidiaries or in Joint Ventures
having an aggregate fair market value, taken together with all other
Investments made pursuant to this clause (v) that are at that time
outstanding, not to exceed 5% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured
at the time made and without giving effect to subsequent changes in
value);
(vi) repurchases of Equity Interests deemed to occur upon exercise
or conversion of stock options, warrants, convertible securities or
other similar Equity Interests if such Equity Interests represent a
portion of the exercise or conversion price of such options, warrants,
convertible securities or other similar Equity Interests;
(vii) the making and consummation of a Subordinated Asset Sale
Offer in accordance with the provisions described under the caption
entitled "-- Repurchase at the Option of Holders -- Asset Sales;" and
(viii) any dividend or distribution payable on or in respect of any
class of Equity Interests issued by a Restricted Subsidiary of the
Company; provided that such dividend or distribution is paid on a pro
rata basis to all of the holders of such Equity Interests in accordance
with their respective holdings of such Equity Interests;
provided, further, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iv) or (v) above, no Default or
Event of Default shall have occurred and be continuing or would occur as a
consequence thereof.
As of June 30, 1997, all of the Company's Subsidiaries are Restricted
Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the last sentence of the definition
of "Unrestricted Subsidiary." For purposes of designating any Restricted
Subsidiary as an Unrestricted Subsidiary, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid) in the
Subsidiary so designated will be deemed to be Restricted Payments in an amount
equal to the book value of such Investment at the time of such designation. Such
designation will only be permitted if a Restricted Payment in such amount would
be permitted at such time and if such Subsidiary otherwise meets the definition
of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be subject to
any of the restrictive covenants set forth in the Indentures.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustees) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company or
such Restricted Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustees an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were
88
<PAGE> 89
computed, which calculations may be based upon the Company's latest available
financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Indentures provide that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur" and correlatively, an
"incurrence" of) any Indebtedness (including Acquired Debt) and that the Company
will not issue any Disqualified Stock; provided, however, that the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for the Company for the most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such incurrence would have been at
least 2.00 to 1.0 if such date is on or prior to September 15, 1997, 2.25 to 1.0
if such date is after September 15, 1997 and on or prior to March 15, 1999 and
2.50 to 1.0 thereafter, in each case, determined on a pro forma basis (including
a pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred or the Disqualified Stock had been issued, as the
case may be, and the application of the proceeds therefrom had occurred at the
beginning of such four-quarter period.
The foregoing provisions will not apply to:
(a) the incurrence by the Company (and the Guarantee thereof by the
Guarantors) of (i) Indebtedness under the Credit Agreement and the issuance
of letters of credit thereunder (with letters of credit being deemed to
have a principal amount equal to the aggregate maximum amount then
available to be drawn thereunder, assuming compliance with all conditions
for drawing) up to an aggregate principal amount of $715.0 million
outstanding at any one time, less principal repayments of term loans and
permanent commitment reductions with respect to revolving loans and letters
of credit under the Credit Agreement made after the date of the Indentures
and (ii) additional Indebtedness under the Credit Agreement and the
issuance of additional letters of credit thereunder (with letters of credit
being deemed to have a principal amount equal to the aggregate maximum
amount then available to be drawn thereunder, assuming compliance with all
conditions for drawing) up to an aggregate principal amount of $75.0
million outstanding at any one time (reduced by the aggregate principal
amount (or accreted value, as applicable) of Indebtedness outstanding
pursuant to clause (l) below);
(b) the incurrence by the Company or any of its Restricted
Subsidiaries of any Existing Indebtedness;
(c) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by the Exchange Notes;
(d) Indebtedness (including Capital Lease Obligations) incurred by the
Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal), assets or equipment
(whether through the direct purchase of assets or the Capital Stock of any
Person owning such assets), in an aggregate principal amount not to exceed
5% of Total Assets at any time outstanding;
(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims;
(f) intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries and Guarantees by a Restricted Subsidiary of
the Company of Indebtedness of any other Restricted Subsidiary of the
Company or the Company;
(g) Hedging Obligations that are incurred (1) for the purpose of
fixing or hedging interest rate risk with respect to any Indebtedness that
is permitted by the terms of the Indentures to be
89
<PAGE> 90
outstanding or (2) for the purpose of fixing or hedging currency exchange
rate risk with respect to any currency exchanges;
(h) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(i) the incurrence by the Company or any of the Guarantors of
Indebtedness in connection with the acquisition of assets or a new
Restricted Subsidiary; provided that such Indebtedness was incurred by the
prior owner of such assets or such new Restricted Subsidiary prior to such
acquisition by the Company or such Restricted Subsidiary and was not
incurred in connection with, or in contemplation of, such acquisition; and
provided further that the Fixed Charge Coverage Ratio for the Company for
the most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date of such
transaction would have been at least 2.00 to 1.0 if such date is on or
prior to September 15, 1997, 2.25 to 1.0 if such date is after September
15, 1997 and on or prior to March 15, 1999 and 2.50 to 1.0 thereafter, in
each case, determined on a pro forma basis, as if such transaction had
occurred at the beginning of such four-quarter period and such Indebtedness
or Disqualified Stock and the Consolidated Cash Flow of such merged or
acquired Person had been included for all purposes in such pro forma
calculation;
(j) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted by the Indentures to be
incurred;
(k) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company; and
(l) the incurrence by the Company of additional Indebtedness not
otherwise permitted hereunder in an amount under this clause (l) not to
exceed $75.0 million in aggregate principal amount (or accreted value, as
applicable) outstanding at any one time (reduced by the aggregate principal
amount of Indebtedness outstanding pursuant to clause (a)(ii) above).
NO SENIOR SUBORDINATED DEBT
The Indentures provide that (i) the Company will not directly or indirectly
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Exchange Notes and
(ii) no Guarantor will directly or indirectly incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to the Senior Guarantees and senior in any respect in
right of payment to the Senior Subordinated Guarantees.
Except for the limitations on the incurrence of debt described above under
the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock,"
the Indentures do not limit the amount of debt that is pari passu with the
Exchange Notes.
LIENS
The Indentures provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien that secures obligations under any Pari Passu
Indebtedness or Subordinated Indebtedness on any asset or property now owned or
hereafter acquired by the Company or any of its Restricted Subsidiaries, or on
any income or profits therefrom, or assign or convey any right to receive income
therefrom to secure any Pari Passu Indebtedness or Subordinated Indebtedness,
unless the Exchange Notes are equally and ratably secured with the obligations
so secured or until such time as such obligations
90
<PAGE> 91
are no longer secured by a Lien; provided, that in any case involving a Lien
securing Subordinated Indebtedness, such Lien is subordinated to the Lien
securing the Exchange Notes to the same extent that such Subordinated
Indebtedness is subordinated to the Exchange Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indentures provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) sell, lease or transfer any of
its properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness as in effect on the date of the Indentures, (b) the Credit
Agreement and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that the
Credit Agreement and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings thereof are no
more restrictive taken as a whole with respect to such dividend and other
payment restrictions than those terms described in an exhibit to the Indentures,
(c) the Indentures and the Exchange Notes, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indentures to be incurred, (f) by reason of customary
non-assignment or net worth provisions in leases and other agreements entered
into in the ordinary course of business and consistent with past practices, (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, (h) Permitted Refinancing Indebtedness, provided
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced, (i) other Indebtedness
permitted to be incurred subsequent to the date of the Indentures pursuant to
the provisions of the covenant described under "-- Incurrence of Indebtedness
and Issuance of Disqualified Stock," provided that any such restrictions are
customary with respect to the type of Indebtedness being incurred (under the
relevant circumstances), (j) any Mortgage Financing or Mortgage Refinancing that
imposes restrictions on the real property securing such Indebtedness, (k) any
Permitted Investment, (l) contracts for the sale of assets, including, without
limitation customary restrictions with respect to a Restricted Subsidiary of the
Company pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary or (m) customary provisions in joint venture agreements
and other similar agreements.
MERGER, CONSOLIDATION OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The Indentures provide that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the
91
<PAGE> 92
United States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Exchange Notes, the Indentures and the
Pledge and Escrow Agreements (as defined in the Indentures) pursuant to
supplemental indentures in form reasonably satisfactory to the applicable
Trustee; (iii) immediately after such transaction no Default or Event of Default
exists; and (iv) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock."
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another jurisdiction.
TRANSACTIONS WITH AFFILIATES
The Indentures provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Trustees (a) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $5.0 million, a resolution of the
Company's Board of Directors set forth in an Officers' Certificate certifying
that such Affiliate Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors (if there are any disinterested members of the
Board of Directors) and (b) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, or with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million as to which there are no disinterested members of the Board of
Directors, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments or Permitted Investments permitted by the provisions of the
Indentures described above under "-- Restricted Payments;" (iii) the payment of
all fees, expenses and other amounts relating to the Acquisition; (iv) the
payment of reasonable and customary regular fees to, and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or any
Restricted Subsidiary of the Company; (v) the transfer or provision of
inventory, goods or services by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business to any Restricted Subsidiary of the
Company on terms that are customary in the industry or consistent with past
practices; (vi) the execution of, or the performance by the Company or any of
its Restricted Subsidiaries of its obligations under the terms of, any financial
advisory, financing, underwriting or placement agreement or any other agreement
relating to investment banking or financing activities with Goldman Sachs or any
of its Affiliates including, without limitation, in connection with
92
<PAGE> 93
acquisitions or divestitures, in each case to the extent that such agreement was
approved by a majority of the disinterested members of the Board of Directors in
good faith; (vii) payments, advances or loans to employees that are approved by
a majority of the disinterested members of the Board of Directors of the Company
in good faith; (viii) the performance of any agreement as in effect as of the
date of the Indentures or any amendment thereto or any transaction contemplated
thereby (including pursuant to any amendment thereto so long as any such
amendment is not disadvantageous to the Holders of the Exchange Notes in any
material respect); (ix) the existence of, or the performance by the Company or
any of its Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or purchase
agreement related thereto) to which it is a party as of the date of the
Indentures and any similar agreements which it may enter into thereafter,
provided, however, that the existence of, or the performance by the Company or
any of its Restricted Subsidiaries of obligations under, any future amendment to
any such existing agreement or under any similar agreement entered into after
the date of the Indentures shall only be permitted by this clause (ix) to the
extent that the terms of any such amendment or new agreement are not otherwise
disadvantageous to the Holders of the Exchange Notes in any material respect;
(x) transactions permitted by, and complying with, the provisions of the
covenant described under "-- Merger, Consolidation or Sale of All or
Substantially All Assets;" and (xi) transactions with suppliers or other
purchases or sales of goods or services, in each case in the ordinary course of
business (including, without limitation, pursuant to joint venture agreements)
and otherwise in compliance with the terms of the Indentures which are fair to
the Company or its Restricted Subsidiaries, in the reasonable determination of a
majority of the disinterested members of the Board of Directors of the Company
or an executive officer thereof, or are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated party.
ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indentures provide that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure
the payment of any other Indebtedness unless such Restricted Subsidiary either
(i) is a Guarantor, or (ii) simultaneously executes and delivers supplemental
indentures to the Indentures providing for the Guarantee of the payment of all
Obligations with respect to the Exchange Notes by such Restricted Subsidiary,
which Guarantee shall be senior to such Restricted Subsidiary's Guarantee of or
pledge to secure any other Indebtedness that constitutes Subordinated
Indebtedness and subordinated to such Restricted Subsidiary's Guarantee of or
pledge to secure any other Indebtedness that constitutes Senior Debt to the same
extent as the Notes are subordinated to Senior Debt. In addition, the Indentures
provide that (x) if the Company shall, after the date of the Indentures, create
or acquire any new First-Tier Subsidiary, then such newly created or acquired
First-Tier Subsidiary shall execute a Senior Subordinated Guarantee and deliver
an opinion of counsel in accordance with the terms of the Indentures, (y) if any
First-Tier Subsidiary shall, after the date of the Indentures, create or acquire
any new Second-Tier Subsidiary, then such newly created or acquired Second-Tier
Subsidiary shall execute a Senior Subordinated Guarantee and deliver an opinion
of counsel in accordance with the terms of the Indentures and (z) if the Company
shall (whether before or after the date of the Indentures) create or acquire any
new Subsidiary (other than a First-Tier Subsidiary or Second-Tier Subsidiary)
that becomes a guarantor under the Credit Agreement, then such newly created or
acquired Subsidiary shall execute a Senior Subordinated Guarantee and deliver an
opinion of counsel in accordance with the terms of the Indentures.
Notwithstanding the foregoing, any such Senior Subordinated Guarantee shall
provide by its terms that it shall be automatically and unconditionally released
and discharged upon certain mergers, consolidations, sales and other
dispositions (including, without limitation, by foreclosure) pursuant to the
terms of the Indentures. See "-- Senior Subordinated Guarantees." The form of
such Senior Subordinated Guarantee is attached as an exhibit to each of the
Indentures.
93
<PAGE> 94
ACTIVITIES OF HOLDINGS
In addition to the restrictions set forth above, the Indentures provide
that Holdings may not (i) hold any assets or incur any Indebtedness or (ii)
engage in any business activities; except that Holdings may (x) hold all, but
not less than all, of the Capital Stock of the Company and (y) be a co-obligor
and/or guarantor with respect to Indebtedness if the Company is a primary
obligor or guarantor of such Indebtedness and the net proceeds of such
Indebtedness are lent to the Company or one or more of its Restricted
Subsidiaries.
REPORTS
The Indentures provide that, whether or not required by the rules and
regulations of the Commission, so long as any Exchange Notes are outstanding,
the Company will furnish to the Holders of Exchange Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all current reports that would be required to be filed with the Commission
on Form 8-K if the Company were required to file such reports. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and the Guarantors have agreed
that, for so long as any Exchange Notes remain outstanding, they will furnish to
the Holders of the Exchange Notes and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indentures provide that each of the following constitutes an Event of
Default with respect to the Exchange Senior Subordinated Notes or the Exchange
Senior Subordinated Discount Notes, as the case may be: (i) default for 30 days
in the payment when due of interest, including Liquidated Damages, if any, on
the Exchange Notes (whether or not prohibited by the subordination provisions of
the Indentures); (ii) default in payment when due of the principal of or
premium, if any, on the Exchange Notes (whether or not prohibited by the
subordination provisions of the Indentures); (iii) failure by the Company for 30
days after notice from either Trustee or the Holders of at least 25% in
principal amount of the then outstanding Exchange Senior Subordinated Notes or
Exchange Senior Subordinated Discount Notes, as the case may be, to comply with
the provisions described under "-- Repurchase at the Option of Holders -- Change
of Control," "-- Certain Covenants -- Restricted Payments," "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock" or
"-- Certain Covenants -- Merger, Consolidation or Sale of All or Substantially
All Assets;" (iv) failure by the Company for 60 days after notice from either
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Exchange Senior Subordinated Notes or Exchange Senior Subordinated
Discount Notes, as the case may be, to comply with any of its other agreements
in the Indentures or the Exchange Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indentures, which
default results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness the maturity
of which has been so accelerated, aggregates $25.0 million or more; (vi) failure
by the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $25.0 million, which judgments are not paid,
94
<PAGE> 95
discharged or stayed for a period of 60 days; (vii) certain events of bankruptcy
or insolvency with respect to the Company or any of its Restricted Subsidiaries;
(viii) failure by the Company to comply with the provisions of the Pledge and
Escrow Agreements; and (ix) except as permitted by the Indentures, any Senior
Subordinated Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect (except by its terms) or any Guarantor, or any Person acting on behalf of
any Guarantor, shall deny or disaffirm its obligations under its Senior
Subordinated Guarantee.
If any Event of Default occurs and is continuing, any Trustee or the
Holders of at least 25% in principal amount of the then outstanding Exchange
Senior Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the
case may be, may declare all the Exchange Senior Subordinated Notes or Exchange
Senior Subordinated Discount Notes, as the case may be, to be due and payable
immediately. Upon such declaration the principal, interest, premium, if any, and
Liquidated Damages, if any, shall be due and payable immediately; provided,
however, that so long as Senior Debt or any commitment therefor is outstanding
under the Credit Agreement, any such notice or declaration shall not be
effective until the earlier of (a) five Business Days after such notice is
delivered to the Representative for the Senior Bank Debt or (b) the acceleration
of any Indebtedness under the Credit Agreement. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Restricted Subsidiary
or any group of Restricted Subsidiaries that, taken together, would constitute a
Significant Restricted Subsidiary, all outstanding Exchange Notes will become
due and payable without further action or notice. Holders of the Exchange Notes
may not enforce the Indentures or the Exchange Notes except as provided in the
Indentures. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Exchange Notes may direct the applicable Trustee
in its exercise of any trust or power. Either Trustee may withhold from Holders
of the Exchange Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest, including Liquidated Damages, if any) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Exchange Notes pursuant to
the optional redemption provisions of the applicable Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Exchange Notes. If an Event of
Default occurs prior to March 15, 2001 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Exchange Notes prior to March
15, 2001, then the premium specified in the applicable Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the Exchange Notes.
The Holders of a majority in aggregate principal amount of the Exchange
Senior Subordinated Notes or the Exchange Senior Subordinated Discount Notes, as
the case may be, then outstanding by notice to the applicable Trustee may on
behalf of the Holders of all of the Exchange Senior Subordinated Notes or the
Exchange Senior Subordinated Discount Notes, as the case may be, waive any
existing Default or Event of Default and its consequences under the applicable
Indenture except a continuing Default or Event of Default in the payment of
interest, including Liquidated Damages, if any, on, or the principal and
premium, if any, of, the Exchange Senior Subordinated Notes or the Exchange
Senior Subordinated Discount Notes, as the case may be.
The Company is required to deliver to each Trustee annually a statement
regarding compliance with the respective Indentures, and the Company is required
upon becoming aware of any Default or Event of Default, to deliver to each
Trustee a statement specifying such Default or Event of Default.
95
<PAGE> 96
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Notes, the Indentures or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Exchange Notes by
accepting an Exchange Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Exchange Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all
obligations of the Company and the Guarantors discharged with respect to the
outstanding Exchange Senior Subordinated Notes and/or the outstanding Exchange
Senior Subordinated Discount Notes, as the case may be, and the Senior
Subordinated Guarantees ("Legal Defeasance") except for (i) the rights of
Holders of outstanding Exchange Notes to receive payments in respect of the
principal of, premium, if any, and interest, including Liquidated Damages, if
any, on such Exchange Notes when such payments are due from the trust referred
to below, (ii) the Company's obligations with respect to the Exchange Notes
concerning issuing temporary Exchange Notes, registration of Exchange Notes,
mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the applicable
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the applicable Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company and the Guarantors released with respect to certain covenants that are
described in the Senior Subordinated Note Indenture or the Senior Subordinated
Discount Note Indenture, and the Senior Subordinated Guarantees ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Exchange Senior
Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the case
may be, and the Senior Subordinated Guarantees. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "-- Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the
Exchange Senior Subordinated Notes or Exchange Senior Subordinated Discount
Notes, as the case may be, and the Senior Subordinated Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company or the Guarantors must irrevocably deposit with the appropriate
Trustee, in trust, for the benefit of the Holders of the Exchange Senior
Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the case
may be, cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest, including Liquidated Damages, if
any, on the outstanding Exchange Senior Subordinated Notes or Exchange Senior
Subordinated Discount Notes, as the case may be, on the stated maturity or on
the applicable redemption date, as the case may be, and the Company or the
Guarantors must specify whether the Exchange Senior Subordinated Notes or
Exchange Senior Subordinated Discount Notes, as the case may be, are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company or the Guarantors shall have delivered to the
appropriate Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that (A) the Company or the Guarantors
have received from, or there has been published by, the Internal Revenue Service
a ruling or (B) since the date of the applicable Indenture, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the Holders
of the outstanding Exchange Senior Subordinated Notes or Exchange Senior
Subordinated Discount Notes, as the case may be, will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same
96
<PAGE> 97
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company or the Guarantors shall have delivered to the appropriate Trustee an
opinion of counsel in the United States reasonably acceptable to such Trustee
confirming that the Holders of the outstanding, Exchange Senior Subordinated
Notes or Exchange Senior Subordinated Discount Notes, as the case may be, will
not recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit (other
than a Default or Event of Default resulting from the borrowing of funds to be
applied to such deposit) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than the applicable Indenture) to which
the Company or any of its Restricted Subsidiaries is a party or by which the
Company or any of its Restricted Subsidiaries is bound; (vi) the Company or the
Guarantors must have delivered to the appropriate Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company or the Guarantors must deliver to the appropriate Trustee an Officers'
Certificate stating that the deposit was not made by the Company or the
Guarantors, as applicable, with the intent of preferring the Holders of Exchange
Senior Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the
case may be, over the other creditors of the Company or the Guarantors, as
applicable, with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or the Guarantors, as applicable, or others; and (viii)
the Company or the Guarantors must deliver to the appropriate Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Notes in accordance with the
Indentures. The Registrars and the Trustees may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indentures. The Company is not required to transfer or exchange
any Exchange Note selected for redemption. Also, the Company is not required to
transfer or exchange any Exchange Note for a period of 15 days before a
selection of Exchange Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of
it for all purposes.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes initially issued in exchange for the Original Notes
generally were represented by one or more fully-registered global notes
(collectively, the "Global Note"). Notwithstanding the foregoing, Original Notes
held in certificated form were exchanged solely for Exchange Notes in
certificated form, as discussed below. The Global Note was deposited, upon
issuance, with The Depository Trust Company (the "Depository") and registered in
the name of the Depository or a nominee of the Depository (the "Global Note
Registered Owner"). Except as set forth below, the Global Note may be
transferred, in whole and not in part, only to another nominee of the Depository
or to a successor of the Depository or its nominee.
The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depository's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants
97
<PAGE> 98
through electronic book-entry changes in accounts of its Participants. The
Depository's Participants include securities brokers and dealers, banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect Participants"
or the "Depository's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depository only through the Depository's Participants or the
Depository's Indirect Participants. The ownership interest and transfer of
ownership interest of each actual purchaser of each security held by or on
behalf of the Depository are recorded on the records of the Participants and
Indirect Participants.
The Depository has also advised the Issuers that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depository credited
the accounts of Participants designated by the Exchange Agent with portions of
the principal amount of the Global Note and (ii) ownership of such interests in
the Global Note is shown on, and the transfer of ownership thereof may be
effected only through, records maintained by the Depository (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Note). The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Exchange Notes
is limited to that extent.
Except as described below, owners of interests in the Global Note do not
have Exchange Notes registered in their names, do not receive physical delivery
of Exchange Notes in definitive form and are not considered the registered
owners or holders thereof under the Indentures for any purpose.
Payments in respect of the principal of and premium, if any, and interest
on any Exchange Notes registered in the name of the Global Note Registered Owner
is payable by the Trustees to the Global Note Registered Owner in its capacity
as the registered Holder under the Indentures. Under the terms of the
Indentures, the Company and the Trustees treat the persons in whose names the
Exchange Notes, including the Global Note, are registered for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustees nor any agent of the Company or
the Trustees has or will have any responsibility or liability for (i) any aspect
of the Depository's records or any Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Note, or for
maintaining, supervising or reviewing any of the Depository's records or any
Participant's records relating to the beneficial ownership interests in the
Global Note or (ii) any other matter relating to the actions and practices of
the Depository or any of its Participants. The Depository has advised the
Issuers that its current practice, upon receipt of any payment in respect of
securities such as the Exchange Notes (including principal and interest), is to
credit the accounts of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in principal amount
of beneficial interests in the relevant security as shown on the records of the
Depository unless the Depository has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of Exchange Notes are governed by standing
instructions and customary practices and are the responsibility of the
Participants or the Indirect Participants and not the responsibility of the
Depository, the Trustees or the Company. Neither the Company nor the Trustees is
liable for any delay by the Depository or any of its Participants in identifying
the beneficial owners of the Exchange Notes, and the Company and the Trustees
may conclusively rely on and will be protected in relying on instructions from
the Global Note Registered Owner for all purposes.
The Global Note is exchangeable for definitive Exchange Notes if (i) the
Depository notifies the Company that it is unwilling or unable to continue as
Depository of the Global Note and the Company thereupon fails to appoint a
successor Depository, (ii) the Company, at its option, notifies the Trustees in
writing that it elects to cause the issuance of the Exchange Notes in definitive
registered form, (iii) there shall have occurred and be continuing an Event of
Default or any event
98
<PAGE> 99
which after notice or lapse of time or both would be an Event of Default with
respect to the Exchange Notes or (iv) as provided in the following paragraph.
Such definitive Exchange Notes shall be registered in the names of the owners of
the beneficial interests in the Global Note as provided by the Participants.
Exchange Notes issued in definitive form will be in fully registered form,
without coupons, in minimum denominations of $1,000 and integral multiples
thereof. Upon issuance of Exchange Notes in definitive form, the Trustees are
required to register the Exchange Notes in the name of, and cause the Exchange
Notes to be delivered to, the person or persons (or the nominee thereof)
identified as the beneficial owners as the Depository shall direct.
An Exchange Note in definitive form will be issued upon the resale, pledge
or other transfer of any Exchange Note or interest therein to any person or
entity that does not participate in the Depository. Transfers of certificated
Exchange Notes may be made only by presentation of Exchange Notes, duly
endorsed, to the Trustees for registration of transfer on the Note Register
maintained by the Trustees for such purposes.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the appropriate Trustee, exchange such
beneficial interest for Exchange Notes evidenced by registered, definitive
certificates ("Certificated Securities"). Upon any such issuance, the
appropriate Trustee is required to register such Certificated Securities in the
name of, and cause the same to be delivered to, such person or persons (or the
nominee of any thereof). In addition, if (i) the Company notifies the
appropriate Trustee in writing that the Depository is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the appropriate
Trustee in writing that it elects to cause the issuance of Exchange Notes in the
form of Certificated Securities under the applicable Indenture, then, upon
surrender by the Global Note Registered Owner of its Global Notes, Exchange
Notes in such form will be issued to each person that the Global Note Registered
Owner and the Depository identify as being the beneficial owner of the related
Exchange Notes.
Neither the Company nor the Trustees will be liable for any delay by the
Global Note Registered Owner or the Depository in identifying the beneficial
owners of Exchange Notes and the Company and the Trustees may conclusively rely
on, and will be protected in relying on, instructions from the Global Note
Registered Owner or the Depository for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indentures
and the Exchange Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Exchange Senior
Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the case
may be, then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, such
Exchange Notes), and any existing default or compliance with any provision of
the Indentures or the Exchange Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Exchange
Senior Subordinated Notes or Exchange Senior Subordinated Discount Notes, as the
case may be (including consents obtained in connection with a tender offer or
exchange offer for such Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a non-consenting Holder): (i) reduce
the principal amount of Exchange Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Exchange Note or alter the provisions with
99
<PAGE> 100
respect to the redemption of the Exchange Notes (other than provisions relating
to the covenants described above under "-- Certain Covenants -- Repurchase at
the Option of Holders"), (iii) reduce the rate of or change the time for payment
of interest, including Liquidated Damages, if any, on any Exchange Note, (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest, including Liquidated Damages, if any, on the Exchange Notes
(except a rescission of acceleration of the Exchange Senior Subordinated Notes
or Exchange Senior Subordinated Discount Notes, as the case may be, by the
Holders of at least a majority in aggregate principal amount thereof and a
waiver of the payment default that resulted from such acceleration), (v) make
any Exchange Note payable in money other than that stated in the Exchange Notes,
(vi) make any change in the provisions of the Indentures relating to waivers of
past Defaults or the rights of Holders of Exchange Notes to receive payments of
principal of or premium, if any, or interest, including Liquidated Damages, if
any, on the Exchange Notes, (vii) waive a redemption payment with respect to any
Exchange Note (other than a payment required by one of the covenants described
above under "-- Certain Covenants -- Repurchase at the Option of Holders") or
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Exchange Notes, the Company and the appropriate Trustee may amend or supplement
the Indentures or the Exchange Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Exchange Notes in addition to or in
place of certificated Exchange Notes, to provide for the assumption of the
Company's obligations to Holders of Exchange Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Exchange Notes or that does not adversely affect the
legal rights under the Indentures of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indentures under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indentures contain certain limitations on the rights of the Trustees,
should either Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustees will be permitted to
engage in other transactions; however, if either Trustee acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Senior Subordinated Notes or Exchange Senior Subordinated Discount
Notes, as the case may be, will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
applicable Trustee, subject to certain exceptions. The Indentures provide that
in case an Event of Default shall occur (which shall not be cured), the Trustees
will be required, in the exercise of their power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions,
neither Trustee will be under any obligation to exercise any of its rights or
powers under the Indentures at the request of any Holder, unless such Holder
shall have offered to the appropriate Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination prior to the Full
Accretion Date, the sum of (a) the initial offering price of each Exchange
Senior Subordinated Discount Note and (b) the portion of the excess of the
principal amount of each Exchange Senior Subordinated
100
<PAGE> 101
Discount Note over such initial offering price which shall have been accreted
thereon through such date, such amount to be so accreted on a daily basis at
12 1/4% per annum of the initial offering price of the Exchange Senior
Subordinated Discount Notes, compounded semi-annually on each March 15 and
September 15 from the date of issuance of the Exchange Senior Subordinated
Discount Notes through the date of determination; provided that on and after the
Full Accretion Date the Accreted Value shall be equal to the principal amount of
the outstanding Exchange Senior Subordinated Discount Note.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"AMF" means the AMF worldwide bowling businesses, including AMF Bowling
Products, Inc., AMF Bowling Centers Inc., the AMF worldwide bowling centers and
their subsidiaries.
"Asset Sale" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or assets
(including by way of a sale and leaseback) of the Company or any Restricted
Subsidiary (each referred to in this definition as a "disposition") or
(ii) the issuance or sale of Equity Interests of any Restricted Subsidiary
(whether in a single transaction or a series of related transactions),
in each case, other than:
(a) a disposition of Cash Equivalents or goods held for sale in the
ordinary course of business or obsolete equipment in the ordinary course of
business consistent with past practices of the Company;
(b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above under
the covenant entitled "-- Certain Covenants -- Merger, Consolidation or Sale of
All or Substantially All Assets" or any disposition that constitutes a Change of
Control pursuant to the Indentures;
(c) any disposition that is a Restricted Payment or Permitted Investment
that is permitted under the covenant described above under "-- Certain
Covenants -- Restricted Payments;"
(d) any disposition, or related series of dispositions, of assets with an
aggregate fair market value of less than $2.5 million;
(e) any sale of Equity Interest in, or Indebtedness or other securities of,
an Unrestricted Subsidiary; and
(f) foreclosures on assets.
"Credit Agreement" means the credit agreement to be entered into by and
among the Company and the financial institutions party thereto providing a
portion of the financing for the Acquisition,
101
<PAGE> 102
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced (in whole or in part) from
time to time.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any domestic bank having capital and
surplus in excess of $500.0 million and a Keefe Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above and (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation
and in each case maturing within one year after the date of acquisition.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries, taken as a whole, to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Permitted Holders and their Related
Parties;
(ii) the Company becomes aware (by way of a report or any other filing
pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice or
otherwise) of the acquisition by any Person or group (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor
provision), including any group acting for the purpose of acquiring, holding or
disposing of securities (within the meaning of Rule 13d-5(b)(1) under the
Exchange Act), other than the Permitted Holders or any of their Related Parties,
in a single transaction or in a related series of transactions, by way of
merger, consolidation or other business combination or purchase of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any
successor provision) of 50% or more of the Voting Stock of the Company or
Holdings, and beneficially owns more of such Voting Stock than the Permitted
Holders and their Related Parties; or
(iii) a majority of the members of the Board of Directors of the Company
cease to be Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of original issue
discount,
102
<PAGE> 103
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) for such period of any Person
that is not a Restricted Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a Wholly Owned
Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors who (i) was a member of such Board of Directors on the
date of the Indentures or (ii) was nominated for election or elected to such
Board of Directors with, or whose election to such Board of Directors was
approved by, the affirmative vote of a majority of the Continuing Directors who
were members of such Board of Directors at the time of such nomination or
election or (iii) is any designee of the Permitted Holders or their Affiliates
or was nominated by the Permitted Holders or their Affiliates or any designees
of the Permitted Holders or their Affiliates on the Board of Directors.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
on which the Exchange Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Agent" means the exchange agent that acted in connection with the
exchange of the Original Notes for the Exchange Notes.
103
<PAGE> 104
"Existing Indebtedness" means Indebtedness of AMF and its Restricted
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indentures, until such amounts are repaid.
"First-Tier Subsidiaries" means each of the Subsidiaries directly owned by
the Company.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues Preferred Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of Preferred Stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated (A) without giving
effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income and (B) subject to clause (ii) of the definition of
"Consolidated Net Income," by treating a portion of the consolidated revenue for
such period of any acquired entity that derives at least 90% of its revenues
from the ownership and operation of bowling centers as Consolidated Cash Flow of
such entity, regardless of the actual operating results of such entity, such
portion being the percentage of the consolidated revenues of the Company's
domestic bowling center operations that constituted Consolidated Cash Flow for
the most recently ended four full fiscal quarters for which internal financial
statements are available and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) paid to any Person other than the Company or a
Restricted Subsidiary on any series of Preferred Stock of such Person, times (b)
a fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person paying the dividend, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
104
<PAGE> 105
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indentures.
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Security
or a specific payment of principal of or interest on any such Government
Security held by such custodian for the account of the holder of such depository
receipt; provided that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
Government Security or the specific payment of principal of or interest on the
Government Security evidenced by such depository receipt.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each of (i) Holdings, (ii) each of the First-Tier
Subsidiaries, (iii) each of the Second-Tier Subsidiaries and (iv) any other
Restricted Subsidiary of the Company that executes a Senior Subordinated
Guarantee in accordance with the provisions of the Indentures, and, in each
case, their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Holder" means a holder of any of the Exchange Notes.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance
105
<PAGE> 106
with GAAP; provided that an acquisition of Equity Interests or other securities
by the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, the Company no longer owns, directly or
indirectly, greater than 50% of the outstanding Equity Interests of such
Subsidiary, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Joint Ventures" means all corporations, partnerships, associations or
other business entities (i) that are engaged in a Principal Business and (ii) of
which 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company or one or more Restricted Subsidiaries
(or a combination thereof).
"Letter of Credit Obligations" means all Obligations in respect of
Indebtedness of the Company or any of its Restricted Subsidiaries with respect
to letters of credit issued pursuant to the Credit Agreement which Indebtedness
shall be deemed to consist of (a) the aggregate maximum amount then available to
be drawn under all such letters of credit (the determination of such maximum
amount to assume compliance with all conditions for drawing), and (b) the
aggregate amount that has then been paid by, and not reimbursed to, the issuers
under such letters of credit.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquidated Damages" means all liquidated damages then owing pursuant to
the registration rights agreement, dated as of March 21, 1996, by and among the
Company and the other parties named on the signature pages thereof, as the same
may be amended, modified or supplemented from time to time.
"Mortgage Financing" means the incurrence by the Company or a Restricted
Subsidiary of the Company of any Indebtedness secured by a mortgage or other
Lien on real property acquired or improved by the Company or any Restricted
Subsidiary of the Company after the date of the Indentures.
"Mortgage Refinancing" means the incurrence by the Company or a Restricted
Subsidiary of the Company of any Indebtedness secured by a mortgage or other
Lien on real property subject to a mortgage or other Lien existing on the date
of the Indentures or created or incurred subsequent to the date of the
Indentures as permitted by the terms of the Indentures and owned by the Company
or any Restricted Subsidiary of the Company.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received
106
<PAGE> 107
upon the sale or other disposition of any non-cash consideration received in any
Asset Sale), net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and brokerage
and sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
required to be applied to the repayment of Indebtedness (other than Senior Bank
Debt) secured by a Lien on the asset or assets that were the subject of such
Asset Sale and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness of an Unrestricted Subsidiary (i) as
to which neither the Company nor any of its Restricted Subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender; and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed on behalf of the
Company, by two officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements set
forth in the Indentures.
"Pari Passu Indebtedness" means indebtedness which ranks pari passu in
right of payment to the Exchange Notes.
"Permitted Asset Swap" means any one or more transactions in which the
Company or any of its Restricted Subsidiaries exchanges assets for consideration
consisting of cash and/or assets that are used or useful in a Principal Business
and/or a controlling equity interest in a Person engaged in a Principal
Business.
"Permitted Holders" means Goldman, Sachs & Co. and any of its Affiliates.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in cash and Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (A) such Person
becomes a Restricted Subsidiary of the Company or (B) such Person, in one
transaction or a series of related transactions, is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (d) any Investment made as a result of the receipt of consideration not
constituting cash or Cash Equivalents from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under "-- Repurchase at
the Option of Holders -- Asset Sales;" (e) any Investment existing on the date
of the Indentures; (f) Permitted Asset Swaps; (g) any Investment by Restricted
Subsidiaries in other Restricted Subsidiaries and Investments by Subsidiaries
that are not Restricted Subsidiaries in other Subsidiaries that are not
Restricted Subsidiaries; (h) advances to employees not in excess of $5.0 million
outstanding at any one time; (i) any Investment acquired by the Company or any
of its Restricted Subsidiaries (A) in exchange for any other Investment or
accounts receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts receivable
or (B) as a result of a
107
<PAGE> 108
foreclosure by the Company or any of its Restricted Subsidiaries with respect to
any secured Investment or other transfer of title with respect to any secured
Investment in default; (j) Hedging Obligations; (k) loans and advances to
officers, directors and employees for business-related travel expenses, moving
expenses and other similar expenses, in each case incurred in the ordinary
course of business; (l) Investments the payment for which consists exclusively
of Equity Interests (exclusive of Disqualified Stock) of the Company; and (m)
additional Investments having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (m) that are at that
time outstanding, not to exceed 5% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value).
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
in whole or in part; provided that: (i) the principal amount (or accreted value,
if applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Exchange Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the Exchange Notes on terms
at least as favorable to the Holders of Exchange Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding-up.
"Principal Business" means (i) the design, manufacture and sale of bowling
and bowling center equipment and allied products, including without limitation,
pinspotters, scoring equipment, masking panels, seating, lane maintenance
machines, bumper bowling systems, electronic foul detectors, back office support
systems, bowling pins, wood and synthetic lanes, ball returns, ball lifts, ball
cleaners, other equipment used to equip or outfit a bowling center, spare and
replacement parts, maintenance equipment and supplies, bowling balls, bags,
shoes, shirts, pool and billiard tables and cues, shuffleboard and other gaming
tables, and any other equipment and products used or useful in the operation of
bowling centers, (ii) the ownership and operation of bowling centers, in the
United States and throughout the world, including without limitation bowling
operations, shoe rental, food and beverage sales and services, operation of
lounges and bars at or within a bowling center (including without limitation
sales and service of alcoholic beverages and provision of music and cabaret
activities), operation of pro shops (including without limitation sales and
service of merchandise), billiards and other table games, video and arcade
games, play centers, movie viewing, gaming activities, such as Pull-Tab,
lottery, video poker and keno, and any other activities which are or may become
associated with bowling centers, and (iii) any activity or business incidental,
directly related or similar to those set forth in clauses (i) or (ii) of this
definition, or any business or activity that is a reasonable extension,
development or expansion thereof or ancillary thereto.
108
<PAGE> 109
"Related Parties" means any Person controlled by the Permitted Holders,
including any partnership of which any of the Permitted Holders or their
Affiliates is a general partner.
"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not (i) an Unrestricted Subsidiary or (ii) a direct or indirect
Subsidiary of an Unrestricted Subsidiary; provided, however, that upon the
occurrence of any Unrestricted Subsidiary ceasing to be an Unrestricted
Subsidiary, such Subsidiary shall be included in the definition of Restricted
Subsidiary.
"Second-Tier Subsidiaries" means each of the Subsidiaries directly owned by
the First-Tier Subsidiaries.
"Senior Guarantees" means the Guarantees by the Guarantors of Obligations
under the Credit Agreement.
"Senior Subordinated Guarantees" means the Guarantees by the Guarantors of
the Obligations under the Indentures and the Exchange Notes.
"Significant Restricted Subsidiary" means any Restricted Subsidiary that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect
on the date of the Indentures.
"Subordinated Indebtedness" means any Indebtedness of the Company or any of
its Restricted Subsidiaries which is expressly by its terms subordinated in
right of payment to any other Indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"Total Assets" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than the
Guarantors or any successor to any of them) that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only
to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; and (e) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall
109
<PAGE> 110
be evidenced to the Trustees by filing with the Trustees a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indentures and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under "-- Certain Covenants -- Incurrence of Indebtedness and Issuance
of Disqualified Stock," the Company shall be in default of such covenant). The
Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Disqualified Stock," and (ii) no Default or Event of Default
would be in existence following such designation.
"Voting Stock" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES
The following summary describes certain material United States ("U.S.")
federal income tax consequences relevant to the purchase, ownership and
disposition of Exchange Notes as of the date hereof. Unless otherwise indicated,
this summary deals only with United States Holders who hold such Exchange Notes
as capital assets. The following discussion does not purport to deal with all
aspects of U.S. federal income taxation that may be relevant to such holders,
nor does it address U.S. federal income tax consequences which may be relevant
to certain types of holders, such as dealers in securities or currencies,
financial institutions, life insurance companies, persons holding Exchange Notes
as a part of a hedging or conversion transaction or a straddle or United States
Holders whose "functional currency" is not the U.S. dollar, that are subject to
special treatment under the Internal Revenue Code of 1986, as amended (the
"Code"). Furthermore, the discussion below is based upon the provisions of the
Code, and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in U.S. federal income tax consequences different from those discussed
below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME
TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR
110
<PAGE> 111
SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR INTERNATIONAL TAXING JURISDICTION.
As used herein, a "United States Holder" of an Exchange Note means a holder
that is a citizen or resident of the United States, a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, an estate the income of which is subject
to United States federal income taxation regardless of its source or a trust if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. A "Non-United
States Holder" is any holder that is not a United States Holder.
UNITED STATES HOLDERS
PAYMENTS OF INTEREST AND ORIGINAL ISSUE DISCOUNT
Exchange Senior Subordinated Notes. Interest on an Exchange Senior
Subordinated Note generally will be taxable to a United States Holder as
ordinary income at the time it is paid or accrued in accordance with the United
States Holder's method of accounting for tax purposes.
Exchange Senior Subordinated Discount Notes. For federal income tax
purposes, the exchange of Senior Subordinated Discount Notes for Exchange Senior
Subordinated Discount Notes will not be considered to have altered the tax
consequences of ownership of Senior Subordinated Discount Notes. Therefore, the
Exchange Senior Subordinated Discount Notes will be considered to have been
issued with original issue discount ("OID") within the meaning of Section
1273(a) of the Code. The amount of such OID equaled the difference between (i)
the sum of all amounts payable on the Senior Subordinated Discount Notes
(including the interest payable on such debentures) and (ii) the "issue price"
of the Senior Subordinated Discount Notes. The "issue price" of the Senior
Subordinated Discount Notes was the first price at which a substantial amount of
the Senior Subordinated Discount Notes was sold (excluding sales to bond houses,
brokers or similar persons acting in the capacity of underwriter, placement
agent or wholesaler).
A United States Holder of the Exchange Senior Subordinated Discount Notes
must include such OID in income on an economic accrual basis (using the constant
yield method of accrual described in Section 1272(a) of the Code) and in advance
of the receipt of the cash to which such OID is attributable, regardless of such
holder's method of tax accounting. Under that method, a United States Holder
generally will have to include in income increasingly greater amounts of OID in
successive accrual periods. The Company is required to provide information
returns stating the amount of OID accrued on Exchange Senior Subordinated
Discount Notes held of record by persons other than corporations and other
exempt holders.
Since the yield-to-maturity on the Exchange Senior Subordinated Discount
Notes exceeds the sum of (x) the "applicable federal rate" (as determined under
Section 1274(d) of the Code) in effect for the month in which the Senior
Subordinated Discount Notes were issued (the "AFR") and (y) 5%, the Exchange
Senior Subordinated Discount Notes are considered "applicable high yield
discount obligations" under Section 163(i) of the Code. As a result, the Company
will not be allowed to take a deduction for interest (including OID) accrued on
the Exchange Senior Subordinated Discount Notes for U.S. federal income tax
purposes until such time as the Company actually pays such interest (including
OID) in cash or in other property (other than stock or debt of the Company or a
person deemed to be related to the Company under Section 453(f)(1) of the Code).
Since the yield-to-maturity on the Exchange Senior Subordinated Discount
Notes exceeds the sum of (x) the AFR and (y) 6% (such excess shall be referred
to hereinafter as the "Disqualified Yield"), the deduction for interest
(including OID) accrued on the Exchange Senior Subordinated Discount Notes will
be permanently disallowed (regardless of whether the Company actually pays such
interest or OID in cash or in other property) for U.S. federal income tax
purposes to the extent (approximately 0.27%) such interest or OID is
attributable to the Disqualified Yield on the Exchange Senior Subordinated
Discount Notes ("Dividend-Equivalent Interest"). For purposes of the
dividends-received deduction, such Dividend-Equivalent Interest will be treated
as a dividend to the
111
<PAGE> 112
extent it is deemed to have been paid out of the Company's current or
accumulated earnings and profits. Accordingly, a United States Holder of an
Exchange Senior Subordinated Discount Note that is a corporation may be entitled
to take a dividends-received deduction with respect to any Dividend-Equivalent
Interest received by such corporate holder on such Exchange Senior Subordinated
Discount Note.
ACQUISITION PREMIUM
Exchange Senior Subordinated Notes. If a United States Holder acquires an
Exchange Senior Subordinated Note for an amount more than its redemption price,
the Holder may elect to amortize such bond premium on a yield to maturity basis.
Exchange Senior Subordinated Discount Notes. A United States Holder who
acquires an Exchange Senior Subordinated Discount Note for an amount less than
the sum of all amounts payable after the purchase date but greater than its
"adjusted issue price" immediately before such purchase will be considered to
have purchased such Exchange Senior Subordinated Discount Note at an
"acquisition premium." The "adjusted issue price" is equal to the instrument's
issue price increased by all previously accrued OID and reduced by the amount of
all previous payments. Under the acquisition premium rules of the Code, the
amount of OID which such United States Holder must include in its gross income
with respect to such Exchange Senior Subordinated Discount Note for any taxable
year will be reduced by the portion of such acquisition premium properly
allocable to such year.
MARKET DISCOUNT
A purchase of an Exchange Note in a subsequent resale may be affected by
the market discount provisions of the Code. These rules generally provide that
subject to a statutorily defined de minimis exception, if a United States Holder
purchases an Exchange Note (or purchased a Note) at a "market discount," as
defined below, and thereafter recognizes gain upon a disposition of the Exchange
Note (including dispositions by gift or redemption), the lesser of such gain (or
appreciation, in the case of gift) or the portion of the market discount that
has accrued ("accrued market discount") while the Exchange Note (and its
predecessor Note, if any) was held by such United States Holder will be treated
as ordinary interest income at the time of disposition rather than as capital
gain. For an Exchange Senior Subordinated Note or a Senior Subordinated Note,
"market discount" is the excess of the stated redemption price at maturity over
the tax basis immediately after its acquisition by a United States Holder. For
an Exchange Senior Subordinated Discount Note or a Senior Subordinated Discount
Note, "market discount" is the excess of the adjusted issue price of the
Exchange Senior Subordinated Discount Note or the Senior Subordinated Discount
Note over its tax basis immediately after its acquisition by a United States
Holder. Market discount generally will accrue ratably during the period from the
date of acquisition to the maturity date of the Exchange Note, unless the United
States Holder elects to accrue such discount on the basis of the constant yield
method.
In lieu of including the accrued market discount in income at the time of
disposition, a United States Holder of an Exchange Note acquired at a market
discount (or acquired in exchange for a Note acquired at a market discount) may
elect to include the accrued market discount in income currently either ratably
or using the constant yield method. Once made, such an election applies to all
other obligations that the United States Holder purchases at a market discount
during the taxable year for which the election is made and in all subsequent
taxable years of the United States Holder, unless the Internal Revenue Service
consents to a revocation of the election. If an election is made to include
accrued market discount in income currently, the basis of an Exchange Note in
the hands of the United States Holder will be increased by the accrued market
discount thereon as it is includible in income.
112
<PAGE> 113
TOTAL ACCRUAL ELECTION
Pursuant to Treasury Regulations, certain Holders of Exchange Notes may
elect (a "Total Accrual Election") to treat all interest associated with an
Exchange Note, including, but not limited to, stated interest, OID, and market
discount, as adjusted for acquisition premium, as OID and accrue it under a
modified constant yield method. This election may offer Holders a simplified tax
accounting treatment for Exchange Notes acquired in a subsequent resale. The
election may not be revoked without Internal Revenue Service consent and may
result in deemed elections regarding market discount and bond premium that are
binding on all debt instruments acquired by a Holder during the year of the
Total Accrual Election.
SALE, RETIREMENT OR OTHER TAXABLE DISPOSITION OF EXCHANGE NOTES
A United States Holder will recognize gain or loss on the sale, retirement
or other taxable disposition of an Exchange Note equal to the difference between
the amount realized by the United States Holder upon such sale, retirement or
disposition (less any portion of such amount that is allocable to accrued
interest or OID, which amount generally will be taxable to a Holder as ordinary
income) and the United States Holder's adjusted tax basis in such Exchange Note.
Such gain or loss will be capital gain or loss. Under current law, net capital
gains of individuals are, under certain circumstances, taxed at lower rates than
items of ordinary income. The deductibility of capital losses is subject to
limitations.
NON-UNITED STATES HOLDERS
U.S. WITHHOLDING TAXES
Subject to the discussion of backup withholding set forth below, payments
of principal, premium, if any, and interest (including OID) on the Exchange
Notes to a Non-United States Holder who is the beneficial owner of an Exchange
Note will not be subject to the 30% U.S. withholding tax; provided, in the case
of a payment of premium, if any, and interest (including OID) and Liquidated
Damages, if any, that (i) the beneficial owner of the Exchange Note does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) such
beneficial owner is not a controlled foreign corporation that is related to the
Company through stock ownership, (iii) such beneficial owner is not a bank whose
receipt of interest on an Exchange Note is described in section 881(c)(3)(A) of
the Code and (iv) such beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) (in the case of
individuals) or section 881(c) (in the case of foreign corporations) of the Code
and the regulations thereunder.
To satisfy the statement requirement referred to in (iv) above, the
beneficial owner of an Exchange Note, or a financial institution holding the
Exchange Note on behalf of such owner, must provide, in accordance with
specified procedures, the Company or its paying agent, as the case may be, with
a statement to the effect that the beneficial owner is not a U.S. person.
Pursuant to current Temporary Treasury regulations, those requirements will be
met if (1) the beneficial owner provides his name and address, signs under
penalties of perjury and certifies, that he is not a U.S. person (which
certification may be made on an Internal Revenue Service Form W-8 (or successor
form)) or (2) a financial institution holding the Exchange Note on behalf of the
beneficial owner certifies, under penalties of perjury, that such statement has
been received by it and furnishes the Company or its paying agent, as the case
may be, with a copy thereof. Recently issued Treasury regulations (the
"Withholding Regulations") that will be effective with respect to payments made
after December 31, 1998, will provide alternative methods for satisfying the
statement requirement described in clause (iv) above. The Withholding
Regulations also will require, in the case of an Exchange Note held by a foreign
partnership, that (x) the certification described in clause (iv) above be
provided by the partners and (y) the partnership provide certain information,
including its taxpayer identification number. A look-through rule will apply in
the case of tiered partnerships.
113
<PAGE> 114
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described above, payments of premium, if any, and
interest (including OID) made to Non-United States Holders by the Company (or
its paying agent) with respect to the Exchange Notes will be subject to a 30%
U.S. withholding tax unless the beneficial owner of the Exchange Note provides
the Company or its paying agent, as the case may be, with, and keeps current,
(i) a properly executed Internal Revenue Service Form 1001 (or successor form)
claiming an exemption from U.S. withholding tax under a U.S. income tax treaty
or (ii) a properly executed Internal Revenue Service Form 4224 (or successor
form) claiming such premium and/or interest is exempt from U.S. withholding tax
because such premium and/or interest is effectively connected with the conduct
of a U.S. trade or business by the Non-United States Holder.
No U.S. withholding taxes will be imposed on any gain realized by a
Non-United States Holder upon the sale, retirement or other taxable disposition
of its Exchange Notes.
OTHER U.S. FEDERAL INCOME TAXES
If a Non-United States Holder of an Exchange Note is engaged in a trade or
business in the United States and premium, if any, or interest (including OID)
paid on such Exchange Note is effectively connected with the conduct of such
U.S. trade or business, the Non-United States Holder, although exempt from the
U.S. withholding tax discussed above, will be subject to U.S. federal income tax
on such effectively connected income on a net income basis in the same manner as
if such Holder were a United States Holder. See "United States Holders" above.
In addition, if such Non-United States Holder is a foreign corporation, it may
be subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, subject to adjustments. For this
purpose, such premium, if any, and interest (including OID) will be included in
such foreign corporation's effectively connected earnings and profits.
Any gain realized by a Non-United States Holder on the sale, retirement or
other taxable disposition of an Exchange Note generally will not be subject to
U.S. federal income tax unless (i) such gain is effectively connected with a
trade or business carried on in the U.S. by such Non-United States Holder, or
(ii) in the case of a Non-United States Holder who is an individual, such
individual is present in the United States for 183 days or more in the taxable
year of such sale, retirement or disposition, and certain other conditions are
met.
U.S. ESTATE TAXES
An Exchange Note beneficially owned by an individual who is a Non-United
States Holder at the time of his or her death generally will not be subject to
U.S. federal estate tax as a result of such individual's death, provided that
(i) such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h)(3) of the Code, and (ii) interest
payments (including payments of OID) with respect to such Exchange Note would
not have been, if received at the time of such individual's death, effectively
connected with the conduct of a U.S. trade or business by such individual.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest, OID and premium paid on the Exchange Notes and
to the proceeds of the sale of an Exchange Note made to United States Holders
other than certain exempt recipients (such as corporations). A 31% backup
withholding tax will apply to such payments if the United States Holder fails to
provide a taxpayer identification number or certification of exempt status or
fails to report its full dividend and interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-United States
Holders if a statement described in (iv) under "-- Non-United States
Holders -- U.S. Withholding Taxes" has been received and the payor does not have
actual knowledge that the beneficial owner is a United States person.
114
<PAGE> 115
In addition, Temporary Treasury regulations provide that backup withholding
and information reporting will not apply if payments of principal, interest, OID
or premium on an Exchange Note are paid or collected by a foreign office of a
custodian, nominee or other foreign agent on behalf of the beneficial owner of
such Exchange Note, or if a foreign office of a foreign broker (as defined in
applicable Treasury regulations) pays the proceeds of the sale of an Exchange
Note to the owner thereof. If, however, such nominee, custodian, agent or broker
is, for United States federal income tax purposes, a U.S. person, a controlled
foreign corporation or a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States (or in the case of payments made after December 31, 1998, certain other
persons), such payments will not be subject to backup withholding but will be
subject to information reporting, unless (1) such custodian, nominee, agent or
broker has documentary evidence in its records that the beneficial owner is not
a U.S. person and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption.
Payments of principal, interest, OID and premium on an Exchange Note to the
beneficial owner of an Exchange Note by a United States office of a custodian,
nominee or agent, or the payment by the United States office of a broker of the
proceeds of sale of an Exchange Note, will be subject to both backup withholding
and information reporting unless the beneficial owner provides the statement
referred to in (iv) above and the payor does not have actual knowledge that the
beneficial owner is a United States person or otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such Holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
PLAN OF DISTRIBUTION
This Prospectus is to be used by Goldman Sachs in connection with offers
and sales of the Exchange Notes in market-making transactions effected from time
to time. Goldman Sachs may act as a principal or agent in such transactions,
including as agent for the counterparty when acting as principal or as agent for
both counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices.
Affiliates of Goldman Sachs currently own 51.0% of the Parent Common Stock.
See "Principal Stockholders." Goldman Sachs has informed the Company that it
does not intend to confirm sales of the Exchange Notes to any accounts over
which it exercises discretionary authority without the prior specific written
approval of such transactions by the customer.
The Company has been advised by Goldman Sachs that, subject to applicable
laws and regulations, Goldman Sachs currently makes and intends to continue to
make, a market in the Exchange Notes. However, Goldman Sachs is not obligated to
do so and any such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will develop or be sustained. See "Risk
Factors -- Trading Market for the Exchange Notes."
Goldman Sachs has provided investment banking services to the Company in
the past and may provide such services and financial advisory services to the
Company in the future. See "Certain Transactions."
Goldman Sachs and the Company have entered into a registration rights
agreement with respect to the use by Goldman Sachs of this Prospectus. Pursuant
to such agreement, the Company agreed to bear all registration expenses incurred
under such agreement, and the Company agreed to indemnify Goldman Sachs against
certain liabilities, including liabilities under the Securities Act.
115
<PAGE> 116
EXPERTS
The consolidated balance sheet of AMF Group Holdings and subsidiaries as of
December 31, 1996 and the related consolidated statements of income,
stockholder's equity, and cash flows for the period from inception (January 12,
1996) through December 31, 1996 included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein, in reliance upon the
authority of said firm as experts in giving said report.
The combined financial statements of AMF Bowling Group as of April 30, 1996
and December 31, 1995 and for the period from January 1, 1996 through April 30,
1996 and for each of the two years in the period ended December 31, 1995,
included in this Prospectus, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The Parent has agreed to indemnify Price Waterhouse LLP for the payment of
all legal costs and expenses incurred in Price Waterhouse LLP's successful
defense of any legal action or proceeding that arises as a result of inclusion
of Price Waterhouse LLP's audit reports on the combined financial statements of
AMF Bowling Group in this Registration Statement.
VALIDITY OF EXCHANGE NOTES
The validity of the Exchange Notes has been passed upon for the Company by
Wachtell, Lipton, Rosen & Katz, New York, New York, counsel to the Company.
116
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES -- AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheet as of December 31, 1996................................ F-3
Consolidated Statement of Income for the Period Ended December 31, 1996........... F-4
Consolidated Statement of Cash Flows for the Period Ended December 31, 1996....... F-5
Consolidated Statement of Stockholder's Equity for the Period Ended December 31,
1996........................................................................... F-6
Notes to Consolidated Financial Statements........................................ F-7
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES -- INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30, 1997......................... F-31
Condensed Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 1997, and 1996 and, as to AMF Bowling Group (Predecessor
Company), a Combined Statement of Income for the One Month and Four Months
Ended April 30, 1996........................................................... F-32
Condensed Consolidated Statements of Cash Flows for the Three Months and Six
Months Ended June 30, 1997 and 1996 and, as to the Predecessor Company, a
Combined Statement of Cash Flows for the Four Months Ended April 30, 1996...... F-33
Notes to Condensed Consolidated Financial Statements.............................. F-34
AMF BOWLING GROUP (PREDECESSOR COMPANY)
Report of Independent Accountants................................................. F-46
Combined Balance Sheets as of April 30, 1996, and December 31, 1995............... F-47
Combined Statements of Operations for the Four Months Ended April 30, 1996, and
the Years Ended December 31, 1995 and 1994..................................... F-48
Combined Statements of Cash Flows for the Four Months Ended April 30, 1996, and
the Years Ended December 31, 1995 and 1994..................................... F-49
Combined Statement of Changes in Stockholders' Equity for the Four Months Ended
April 30, 1996, and the Years Ended December 31, 1995 and 1994................. F-50
Notes to Combined Financial Statements............................................ F-51
SELECTED QUARTERLY DATA (UNAUDITED)................................................. F-85
</TABLE>
F-1
<PAGE> 118
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
AMF Group Holdings Inc.:
We have audited the accompanying consolidated balance sheet of AMF Group
Holdings Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996,
and the related consolidated statements of income, stockholder's equity, and
cash flows for the period from inception (January 12, 1996) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AMF Group Holdings Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the period from inception (January 12, 1996) through
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
February 28, 1997
F-2
<PAGE> 119
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 43,568
Accounts and notes receivable, net of allowance for doubtful accounts
of $4,492................................................................ 42,625
Inventories................................................................. 41,001
Deferred taxes and other.................................................... 11,178
----------
Total current assets................................................ 138,372
Property and equipment, net................................................... 630,796
Deferred financing costs, net................................................. 40,595
Goodwill, net................................................................. 771,146
Other assets.................................................................. 12,964
----------
Total assets........................................................ $1,593,873
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................ $ 31,563
Accrued expenses............................................................ 54,357
Income taxes payable........................................................ 2,220
Long-term debt, current portion............................................. 42,376
----------
Total current liabilities........................................... 130,516
Long-term debt................................................................ 1,048,877
Other long-term liabilities................................................... 1,851
Deferred income taxes......................................................... 3,895
----------
Total liabilities........................................................... 1,185,139
----------
Commitments and contingencies
Stockholder's equity:
Common stock (par value $.01, 100 shares issued and outstanding)............ --
Paid-in capital............................................................. 429,450
Retained deficit............................................................ (19,565)
Equity adjustment from foreign currency translation......................... (1,151)
----------
Total stockholder's equity.......................................... 408,734
----------
Total liabilities and stockholder's equity.......................... $1,593,873
==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 120
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD ENDED DECEMBER 31, 1996 (NOTE 2)
(IN THOUSANDS)
<TABLE>
<S> <C>
Operating revenues............................................................... $384,809
--------
Operating expenses:
Cost of goods sold............................................................. 130,542
Bowling center operating expenses.............................................. 123,673
Selling, general, and administrative expenses.................................. 35,070
Depreciation and amortization.................................................. 49,386
--------
Total operating expenses............................................... 338,671
--------
Operating income....................................................... 46,138
Nonoperating expenses:
Interest expense............................................................... 77,990
Other expenses, net............................................................ 1,912
Interest income................................................................ (5,611)
--------
Total nonoperating expenses............................................ 74,291
--------
Loss before income taxes............................................... (28,153)
Benefit for income taxes............................................... (8,588)
--------
Net loss............................................................... $(19,565)
========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE> 121
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED DECEMBER 31, 1996 (NOTE 2)
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (19,565)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................ 49,386
Deferred taxes........................................................... (14,040)
Amortization of bond discount............................................ 24,731
Loss on the sale of property and equipment, net.......................... 408
Changes in assets and liabilities:
Accounts and notes receivable.......................................... (6,504)
Inventories............................................................ 1,862
Other assets........................................................... (3,873)
Accounts payable and accrued expenses.................................. 21,930
Income taxes payable................................................... 361
Other long-term liabilities............................................ 19,135
-----------
Net cash provided by operating activities................................ 73,831
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired....................... (1,450,928)
Purchases of property and equipment......................................... (16,941)
Proceeds from sales of property and equipment............................... 754
-----------
Net cash used in investing activities.................................... (1,467,115)
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs............... 1,059,277
Payments on long-term debt.................................................. (38,875)
Capital contributions....................................................... 420,750
Payment of noncompete obligations........................................... (2,892)
-----------
Net cash provided by financing activities................................ 1,438,260
-----------
Effect of exchange rates on cash......................................... (1,408)
-----------
Net increase in cash..................................................... 43,568
Cash and cash equivalents at beginning of period......................... --
-----------
Cash and cash equivalents at end of period............................... $ 43,568
===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
<PAGE> 122
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD ENDED DECEMBER 31, 1996 (NOTE 2)
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM FOREIGN TOTAL
COMMON PAID-IN RETAINED CURRENCY STOCKHOLDER'S
STOCK CAPITAL DEFICIT TRANSLATION EQUITY
-------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance January 12, 1996............ $ -- $ -- $ -- $ -- $ --
Initial capitalization............ -- 389,450 -- -- 389,450
Capital contribution by
stockholder.................... -- 40,000 -- -- 40,000
Net loss.......................... -- -- (19,565) -- (19,565)
Equity adjustment from foreign
currency translation........... -- -- -- (1,151) (1,151)
-------- -------- -------- -------- --------
Balance December 31, 1996........... $ -- $429,450 $(19,565) $ (1,151) $ 408,734
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE> 123
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
AMF Bowling Worldwide, Inc. (formerly AMF Group Inc.) (the "Company") is
principally engaged in two business segments: (i) the ownership or operation of
bowling centers, consisting of 263 U.S. bowling centers and 78 international
bowling centers ("Bowling Centers") as of December 31, 1996, 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
independent bowling center operators.
The Company is a wholly owned subsidiary of AMF Group Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of AMF Bowling, Inc.
(formerly AMF Holdings Inc.) (the "Parent"). Holdings and the Company are newly
formed 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 subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between
Holdings and the stockholders (the "Sellers") of AMF Bowling Group (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 $1.37 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.
The purchase included the payment of $1.32 billion to the Sellers. The
Acquisition was funded with $380.8 million of contributed capital, and $1.015
billion of debt, including bank debt and exchange senior subordinated notes and
discount notes. The purchase included $8.7 million which represents 870,000
warrants to purchase shares of Parent Common Stock, which were issued on the
Closing Date to Goldman Sachs. See "Note 9. Long-Term Debt". See also "Note 13.
Supplemental Disclosures to the Consolidated Statement of Cash Flows" which
presents the components of the purchase price allocation.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The results of operations for the period ended December 31, 1996, reflect
the results of Holdings since the inception date of January 12, 1996, and the
subsidiaries acquired as of May 1, 1996, from the Predecessor Company. 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.
F-7
<PAGE> 124
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 more significant 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.
Revenue Recognition
For sales to customers in the United States, revenue is generally
recognized at the time the products are shipped. For larger contract orders,
Bowling Products generally requires that customers submit a deposit as a
condition of accepting the order. Internationally, revenue is generally
recognized when products arrive at the customer's port of entry. For
nonaffiliate international sales, Bowling Products generally requires the
customer to obtain a letter of credit prior to shipment.
Warranty Costs
Bowling Products warrants all new products for certain periods up to one
year. Major products are warranted for one year. Bowling Products charges to
income an estimated amount for future warranty obligations, and offers customers
the option to purchase extended warranties on certain products. Warranty expense
aggregated $4,471 for the period ended December 31, 1996, and is included in
cost of sales in the accompanying consolidated statement of income.
Cash and Cash Equivalents
The Company classifies all highly liquid fixed-income investments purchased
with an original maturity of three months or less as cash equivalents.
Inventories
Bowling Products' inventory is valued at the lower of cost or market, cost
being determined using the first-in, first-out ("FIFO") method for U.S. and
international inventories. Bowling Centers' inventory is valued at the lower of
cost or market, with the cost being determined using the actual or average cost
method.
Long-Lived Assets
The carrying value of long-lived assets and certain identifiable
intangibles, including goodwill, is reviewed by the Company for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, and an estimate of future undiscounted cash
flows is less than the carrying amount of the asset.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs which do not improve or extend the life of an asset are charged to
expense as incurred; major renewals or betterments are capitalized. Upon
retirement or sale of an asset, its cost and related accumulated depreciation
are removed from property, and any gain or loss is recognized.
F-8
<PAGE> 125
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Acquisition, the carrying value of property and
equipment was adjusted to fair market value in accordance with the purchase
method of accounting. Property and equipment are depreciated over their
estimated useful lives using the straight-line method. Estimated useful lives of
property and equipment for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Buildings and improvements.... 5 - 40 years
Leasehold improvements........ lesser of the estimated useful life or term of the lease
Bowling and related 5 - 10 years
equipment...................
Manufacturing equipment....... 2 - 7 years
Furniture and fixtures........ 3 - 8 years
</TABLE>
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 Closing
Date. Goodwill is being amortized over 40 years. Amortization expense was
$13,070 for the period ended December 31, 1996.
Income Taxes
Upon consummation of the Acquisition, the U.S. and international
subsidiaries of Holdings became taxable corporations under the Internal Revenue
Code ("IRC"). Income taxes are accounted for using the asset and liability
method under which deferred income taxes are recognized for the tax consequences
on future years of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.
Research and Development Costs
Expenditures relating to the development of new products, including
significant improvements and refinements to existing products, are expensed as
incurred. The amount charged against income was approximately $1,312 for the
period ended December 31, 1996, and is included in cost of sales in the
accompanying consolidated statement of income.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed
when incurred. The amount charged against income was approximately $9,299 for
the period ended December 31, 1996, with $5,932 included in bowling center
operating expenses for Bowling Centers, and $3,367 included in selling, general,
and administrative expenses for Bowling Products and Corporate in the
accompanying consolidated statement of income.
Foreign Currency Translation
All assets and liabilities of Holdings' international operations are
translated from foreign currencies into U.S. dollars at year-end exchange rates.
Adjustments resulting from the translation of financial statements of
international operations into U.S. dollars are included in the equity adjustment
from foreign currency translation on the accompanying consolidated balance
sheet. Revenues and expenses of international operations are translated using
average exchange rates that existed during the year and reflect currency
exchange gains and losses resulting from transactions conducted in other than
local currencies. The net loss from transactions in foreign
F-9
<PAGE> 126
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currencies of $488 is included in other expenses in the accompanying
consolidated statement of income.
Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash
equivalents and short-term debt approximated fair value at December 31, 1996,
because of the short maturity of these instruments. At December 31, 1996, the
fair value of interest rate cap agreements (to reduce the interest rate risk of
its floating rate debt) was approximately $577. The interest rate cap agreement
is valued using the estimated amount that the Company would receive to terminate
the cap agreement as of December 31, 1996, based on a quote from the
counterparty, taking into account current interest rates and the credit
worthiness of the counterparty. The Company has no intention of terminating the
cap agreement. The fair value of the Senior Debt, as defined in "Note 9. Long-
Term Debt," at December 31, 1996, was approximately $623,520 based on the market
value of debt with similar maturities and covenants. The fair value of the
Exchange Notes, as defined in "Note 9. Long-Term Debt", at December 31, 1996,
was approximately $560,315 based on the trading value at December 31, 1996.
Noncompete Agreements
Holdings, through its subsidiaries, has noncompete agreements with various
individuals. The assets are recorded at cost or at the present value of payments
to be made under these agreements, discounted at annual rates ranging from 8
percent to 10 percent. The assets are included in other assets on the
accompanying consolidated balance sheet and are amortized on a straight-line
basis over the terms of the agreements. Noncompete obligations at December 31,
1996, net of accumulated amortization, totaled approximately $2,498.
Annual maturities on noncompete obligations as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
----------------------------------------------------
<S> <C>
1997................................................ $ 724
1998................................................ 666
1999................................................ 362
2000................................................ 164
2001................................................ 146
Thereafter.......................................... 436
-------
$ 2,498
======
</TABLE>
Self-Insurance Programs
The Company is self-insured up to certain levels for general and product
liability, workers' compensation, certain health care coverage, and property
damage. The cost of these self-insurance programs is accrued based upon
estimated settlements for known and anticipated claims. The Company has recorded
an estimated amount to cover known claims and claims incurred but not reported
as of December 31, 1996, which is included in accrued expenses in the
accompanying consolidated balance sheet.
F-10
<PAGE> 127
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PRO FORMA RESULTS OF OPERATIONS
Pro forma statements of income are presented on the following pages for the
years ended December 31, 1996 and 1995, as if the Acquisition of the Predecessor
Company had occurred on January 1, 1996 and 1995, respectively. Holdings' pro
forma statement of income for the twelve months ended December 31, 1996, is
based on the Predecessor Company's statement of income for the four-month period
ending April 30, 1996, reported elsewhere in this Prospectus, Holdings'
statement of income for the period ended December 31, 1996, and adjustments
giving effect to the Acquisition under the purchase method of accounting as
described in the notes below. Holdings' pro forma statement of income for the
twelve months ended December 31, 1995, is based on the Predecessor Company's
results of operations reported elsewhere in this Prospectus 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>
HISTORICAL PRO FORMA
AMF GROUP PREDECESSOR AMF GROUP
HOLDINGS COMPANY HOLDINGS INC.
INC. FOUR MONTHS TWELVE MONTHS
PERIOD ENDED ENDED PRO FORMA ENDED
12/31/96(a) 4/30/96 ADJUSTMENTS 12/31/96
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Operating revenues:.................... $384.8 $ 164.9 $ (0.8)(b) $ 548.9
------ ------ ------ ------
Operating expenses:
Cost of goods sold................... 130.5 43.1 -- 173.6
Bowling center operating expenses.... 123.7 80.2 (25.1)(b)(c) 178.8
Selling, general, and administrative
expenses.......................... 35.1 35.5 (19.6)(b)(c) 51.0
Depreciation and amortization........ 49.4 15.1 9.0(d) 73.5
------ ------ ------ ------
Total operating expenses..... 338.7 173.9 (35.7) 476.9
------ ------ ------ ------
Operating income (loss)...... 46.1 (9.0) 34.9 72.0
Nonoperating expenses:
Interest expense..................... 78.0 4.5 23.7(e) 106.2
Other expenses, net.................. 1.9 0.7 -- 2.6
Interest income...................... (5.6) (0.6) -- (6.2)
------ ------ ------ ------
Income (loss) before income taxes...... (28.2) (13.6) 11.2 (30.6)
Provision (benefit) for income taxes... (8.6) (1.7) 1.3(f) (9.0)
------ ------ ------ ------
Net income (loss)............ $(19.6) $ (11.9) $ 9.9 $ (21.6)
====== ====== ====== ======
</TABLE>
- ---------------
(a) For the period from the inception date of January 12, 1996 through December
31, 1996, which includes the results of operations of the acquired business
from May 1, 1996, through December 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 eliminate a one-time charge of $44.0 million for special bonuses and
payments made by the Sellers in April 1996.
F-11
<PAGE> 128
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) To reflect the increase in depreciation and amortization expense resulting
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.
(e) To reflect the incremental interest expense associated with the issuance of
debt which partially funded the Acquisition.
(f) To give effect to the change in status of the U.S. and international
subsidiaries of Holdings from S corporations to taxable corporations under
the IRC upon consummation of the Acquisition.
PRO FORMA RESULTS OF OPERATIONS (IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
PREDECESSOR AMF GROUP
COMPANY HOLDINGS INC.
TWELVE MONTHS TWELVE MONTHS
ENDED PRO FORMA ENDED
12/31/95 ADJUSTMENTS 12/31/95
------------- ----------- -------------
<S> <C> <C> <C>
Operating revenues:................................ $ 564.9 $ (2.3)(h) $ 562.6
------ ------- ------
Operating expenses:
Cost of goods sold............................... 184.1 (0.3)(h) 183.8
Bowling center operating expenses................ 166.5 (1.5)(h) 165.0
Selling, general, and administrative expenses.... 50.8 (0.3)(i) 50.5
Depreciation and amortization.................... 39.1 27.9(j) 67.0
------ ------- ------
Total operating expenses................. 440.5 25.8 466.3
------ ------- ------
Operating income (loss).................. 124.4 (28.1) 96.3
Nonoperating expenses:
Interest expense................................. 15.7 88.6(k) 104.3
Other expenses, net.............................. 1.0 -- 1.0
Interest income.................................. (2.2) -- (2.2)
Foreign currency transaction loss................ 1.0 -- 1.0
------ ------- ------
Income (loss) before income taxes.................. 108.9 (116.7) (7.8)
Provision (benefit) for income taxes............... 40.6(g) (30.6)(l) 10.0
------ ------- ------
Net income (loss)........................ $ 68.3 $ (86.1) $ (17.8)
====== ======= ======
</TABLE>
- ---------------
(g) Reflects the pro forma income tax provision that would have been provided
had the Predecessor Company consisted of taxable C corporations, rather than
S corporations.
(h) To reflect the net reduction in revenues and expenses related to the
following:
i. Certain assets of the Predecessor Company not purchased by Holdings.
ii. Impact of Holdings not acquiring one bowling center in Switzerland
and one bowling center in Spain.
iii. Concurrent with the Acquisition, amounts due from and payable to
shareholders and other related parties were canceled.
(i) To reflect the termination of management fees charged to Holdings by an
affiliate of the prior owners of the Predecessor Company.
F-12
<PAGE> 129
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) To reflect the increase in depreciation and amortization expense resulting
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.
(k) To reflect the incremental interest expense associated with the issuance of
debt which partially funded the Acquisition.
(l) To reflect the pro forma income tax benefit associated with the pro forma
adjustments.
NOTE 4. INVENTORIES
Inventories at December 31, 1996, consist of the following:
<TABLE>
<S> <C>
Bowling Products, at FIFO:
Raw materials................................... $ 11,683
Work in progress................................ 2,335
Finished goods and spare parts.................. 23,195
Bowling Centers, at average cost:
Merchandise inventory........................... 3,788
-------
$ 41,001
=======
</TABLE>
NOTE 5. DEFERRED TAXES AND OTHER CURRENT ASSETS
The components of deferred taxes and other current assets at December 31,
1996, are summarized below:
<TABLE>
<S> <C>
Deferred income taxes............................. $ 4,847
Advances or deposits.............................. 2,018
Other............................................. 4,313
-------
$ 11,178
=======
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996, consists of the following:
<TABLE>
<S> <C>
Land............................................. $ 90,512
Buildings and improvements....................... 265,461
Equipment, furniture, and fixtures............... 304,067
Other............................................ 2,631
--------
662,671
Less: accumulated depreciation and
amortization................................... (31,875)
--------
$ 630,796
========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$31,875 for the period ended December 31, 1996.
F-13
<PAGE> 130
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. OTHER LONG-TERM ASSETS
Other long-term assets at December 31, 1996, total $12,964 and are
primarily composed of long-term rent deposits, long-term portion of non-compete
obligations, and notes receivable.
NOTE 8. ACCRUED EXPENSES
Accrued expenses at December 31, 1996, consist of the following:
<TABLE>
<S> <C>
Accrued compensation.............................. $ 9,141
Accrued interest.................................. 8,640
League bowling accounts........................... 7,676
Accrued installation costs........................ 4,451
Other............................................. 24,449
-------
$ 54,357
=======
</TABLE>
NOTE 9. LONG-TERM DEBT
Long-term debt at December 31, 1996, consists of the following:
<TABLE>
<S> <C>
Bank debt....................................... $ 564,625
Exchange senior subordinated notes.............. 250,000
Exchange senior subordinated discount notes..... 274,663
Mortgage and equipment notes.................... 1,965
----------
Total debt............................ 1,091,253
Current maturities.............................. (42,376)
----------
Total long-term debt.................. $1,048,877
==========
</TABLE>
BANK DEBT
The bank debt (the "Senior Debt") is a result of a credit agreement (the
"Bank Credit Agreement") dated as of May 1, 1996, and amended and restated as of
December 20, 1996, between the Company and its lenders. The Bank Credit
Agreement provides for (i) syndicated senior secured term loan facilities
aggregating $580.0 million (the "Term Facilities"), (ii) a senior secured
multiple-draw term facility of $150.0 million (the "Acquisition Facility), and
(iii) a senior secured revolving credit facility of up to $50.0 million (the
"Working Capital Facility").
The Term Facilities consist of the following three tranches: (i) a Term
Loan Facility of $250.0 million, (ii) an Amortization Extended Loans ("AXELs")
Series A facility of $190.0 million, and (iii) an AXELs Series B Facility of
$140.0 million. Maturity dates of the three tranches and scheduled amortization
payments are included in tables below. The Term Loan Facility will bear
interest, at the Company's option, at Citibank's customary base rate plus 1.5
percent or at Citibank's Eurodollar rate plus 2.5 percent. At December 31, 1996,
the interest rate was 8.125 percent. The AXELs Series A Facility will bear
interest, at the Company's option, at Citibank's customary base rate plus 1.875
percent or at Citibank's Eurodollar rate plus 2.875 percent. At December 31,
1996, the interest rate was 8.5 percent. The AXELs Series B Facility will bear
interest, at the Company's option, at Citibank's customary base rate plus 2.125
percent or at Citibank's Eurodollar rate plus 3.125 percent. At December 31,
1996, the interest rate was 10.375 percent. On January 10, 1997, the interest
rate was adjusted to 8.69 percent when the amounts under the Bank Credit
Agreement were refinanced.
F-14
<PAGE> 131
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Acquisition Facility has a term of five years. The Acquisition Facility
will begin to amortize in December 1999, with final maturity at March 31, 2001.
The Acquisition Facility will bear interest, at the Company's option, at
Citibank's customary base rate plus 1.5 percent or at Citibank's Eurodollar rate
plus 2.5 percent. At December 31, 1996, $65.0 million of the Acquisition
Facility bore interest at 9.75 percent, while $8.5 million bore interest at
8.125 percent. On January 10, 1997, $65.0 million was refinanced as part of the
AXELs Series B Facility and the interest rate was adjusted to 8.69 percent as
stated above.
The Working Capital Facility has a term of five years and will be fully
revolving until final maturity. The Working Capital Facility will bear interest,
at the Company's option, at Citibank's customary base rate plus 1.5 percent or
at Citibank's Eurodollar rate plus 2.5 percent.
Beginning May 1, 1997, the margins above Citibank's customary base rate and
Citibank's Eurodollar rate, at which the Term Loan Facility, the Working Capital
Facility, and the Acquisition Facility will bear interest, may be reduced
pursuant to a floating performance pricing grid which is based on the Total
Debt/EBITDA ratio for the four fiscal quarter rolling period then most recently
ended.
The Bank Credit Agreement contains certain covenants, including, but not
limited to, covenants related to cash interest coverage, fixed charge coverage,
payments on other debt, mergers and acquisitions, sales of assets, guarantees
and investments. The Bank Credit Agreement also contains certain provisions
which limit the amount of funds available for transfer from the Company to
Holdings, and from Holdings to the Parent. Limits exist on, among other things,
the declaration or payment of dividends, distributions of assets, and issuance
or sale of capital stock.
So long as the Company is not in default of the covenants contained in the
Bank Credit Agreement, it may i) declare and pay dividends in common stock; ii)
declare and pay cash dividends to Holdings to the extent necessary to make
payments of approximately $0.15 million due in May 1997 under certain noncompete
agreements with the Sellers; iii) declare and pay cash dividends to the Parent
for general administrative expenses of the Parent not to exceed $0.25 million;
and iv) declare and pay cash dividends not to exceed $2.0 million to the Parent
for the repurchase of Parent Common Stock. As of December 31, 1996, the Company
is in compliance with all of its covenants.
MORTGAGE AND EQUIPMENT NOTES
At December 31, 1996, mortgage and equipment notes related to one U.S.
bowling center bore interest at 9.175 percent.
EXCHANGE NOTES
The exchange senior subordinated notes will mature on March 15, 2006.
Interest accrues from the date of issuance at an annual rate of 10 7/8 percent
and is payable in cash semiannually in arrears on March 15 and September 15 of
each year which commenced on September 15, 1996.
The exchange senior subordinated discount notes will mature on March 15,
2006 at a fully-accreted value of $452,000. The exchange senior subordinated
discount notes will result in an effective yield of 12 1/4 percent per annum,
computed on a semiannual bond equivalent basis. No interest will be payable
prior to March 15, 2001. Commencing March 15, 2001, interest will accrue and be
payable in cash semiannually in arrears on March 15 and September 15 of each
year beginning with September 15, 2001.
F-15
<PAGE> 132
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's payment obligations under the exchange senior subordinated
notes and the exchange senior subordinated discount notes (together, the
"Exchange Notes") are jointly and severally guaranteed on a senior subordinated
basis by Holdings and each of the Company's subsidiaries identified below in
"Note 19. Consolidating Financial Statements" (collectively, the "Guarantors").
The guarantees of the Exchange Notes are subordinated to the guarantees of
the Senior Debt and the mortgage and equipment notes outstanding at December 31,
1996, referred to in the table above which have been issued by the Guarantors.
The Exchange Notes are general, unsecured obligations of the Company, are
subordinated in right of payment to all Senior Debt of the Company, and rank
pari passu with all existing and future subordinated debt of the Company. The
claims of the holders of the Exchange Notes will be effectively subordinated to
all other indebtedness and other liabilities (including trade payables and
capital lease obligations) of the Company's subsidiaries that are not Guarantors
and through which the Company will conduct a portion of its operations. See
"Note 19. Consolidating Financial Statements".
Prior to March 15, 1999, up to $100 million in aggregate principal amount
of senior subordinated notes will be redeemable at the option of the Company, on
one or more occasions, from the net proceeds of public or private sales of
common stock of, or contributions to the common equity capital of, the Company,
at a price of 110.875 percent of the principal amount of the senior subordinated
notes, together with accrued and unpaid interest, if any, to the date of
redemption; provided that at least $150 million in aggregate principal amount of
senior subordinated notes remains outstanding after such redemption. In
addition, prior to March 15, 1999, the senior subordinated discount notes will
be redeemable at the option of the Company, on one or more occasions, from the
net proceeds of public or private sales of common stock of, or contributions to
the common equity capital of, the Company, at a price of 112.25 percent of the
accreted value of the senior subordinated discount notes; provided that at least
$150 million in accreted value of senior subordinated discount notes remains
outstanding after such redemption.
The indenture governing the exchange senior subordinated notes and the
indenture governing the exchange senior subordinated discount notes (the
"Exchange Note Indentures") contain certain covenants that, among other things,
limit the ability of the Company and its Restricted Subsidiaries, as defined
therein, to incur additional indebtedness and issue Disqualified Stock, as
defined therein, pay dividends or distributions or make investments or make
certain other Restricted Payments, as defined therein, enter into certain
transactions with affiliates, dispose of certain assets, incur liens securing
pari passu and subordinated indebtedness of the Company and engage in mergers
and consolidations. As of December 31, 1996, the Company is in compliance with
all of its covenants.
Annual maturities of long-term debt, including accretion of the exchange
senior subordinated discount notes, as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------------------------------------
<S> <C>
1997............................................ $ 42,376
1998............................................ 47,375
1999............................................ 55,500
2000............................................ 71,750
2001............................................ 81,125
Thereafter...................................... 970,464
----------
$ 1,268,590
==========
</TABLE>
F-16
<PAGE> 133
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE CAP AGREEMENTS
During 1996, the Company entered into an interest rate cap agreement to
reduce the interest rate risk of its Senior Debt. The notional amount of this
cap was $500 million at December 31, 1996. Under the terms of this agreement,
the Company receives payment if the three-month LIBOR rises above 5.75 percent
through April, 1997, above 6.50 percent from May, 1997 through April, 1998 and
above 7.5 percent from May, 1998 through October, 1998. No amounts were received
under this agreement during 1996.
The Company is exposed to credit-related loss in the event of
non-performance by the counterparty. The Company believes its exposure to
potential loss due to counterparty non-performance is minimized primarily due to
the relatively strong credit rating of the counterparty.
Average amounts outstanding and average borrowing rates for the period
ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
AT AVERAGE AVERAGE
DECEMBER 31, AMOUNTS BORROWING
DESCRIPTION MATURITY DATES 1996 OUTSTANDING RATES
- ----------------------------------------- ---------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Term Loan................................ March 31, 2001 $228,125 $ 243,074 8.20%
AXEL A................................... March 31, 2003 188,750 $ 188,164 8.58
AXEL B................................... March 31, 2004 74,250 $ 74,218 8.84
Acquisition Facility..................... March 31, 2001 73,500 $ 25,426 8.41
Working Capital Facility................. March 31, 2001 -- $ 11,434 9.09
Mortgage and Equipment Notes............. October 1, 2013 1,965 $ 1,967 9.18
</TABLE>
Deferred Financing Costs
Costs incurred to obtain bank financing and issue bond financing for the
Acquisition, as discussed above, 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 $3,252 for the
period ended December 31, 1996. Interest expense for the interest rate cap
agreement was $304 for the period ended December 31, 1996.
Other
The Company is highly leveraged as a result of this indebtedness incurred
in connection with the Acquisition and subsequent acquisitions. Although the
Company believes it will be able to meet its debt obligations, there is no
assurance that the Company will generate sufficient cash flow in a timely manner
to satisfy scheduled principal and interest payments.
NOTE 10. INCOME TAXES
Income (loss) before income taxes at December 31, 1996, consists of the
following:
<TABLE>
<S> <C>
U.S.............................................................. $ (28,564)
International.................................................... 411
--------
$ (28,153)
========
</TABLE>
F-17
<PAGE> 134
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision (benefit) at December 31, 1996, consists of the
following:
<TABLE>
<S> <C>
CURRENT INCOME TAX EXPENSE
U.S. Federal..................................................... $ --
State and local.................................................. --
International.................................................... 5,452
--------
Total current provision................................ 5,452
--------
DEFERRED TAX BENEFIT
U.S. Federal..................................................... (12,274)
State and local.................................................. (1,766)
International.................................................... --
--------
Total deferred benefit................................. (14,040)
--------
Total benefit.......................................... $ (8,588)
========
</TABLE>
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1996, are as follows:
<TABLE>
<S> <C>
DEFERRED INCOME TAX ASSETS
Current assets
Reserve provisions not deductible for tax purposes.............. $ 4,847
-------
Noncurrent assets
Net operating losses............................................ 8,225
Foreign tax credits............................................. 5,452
Interest expense on high yield debt............................. 8,533
-------
Total noncurrent deferred tax assets.................... 22,210
-------
Total deferred tax assets......................................... 27,057
DEFERRED INCOME TAX LIABILITIES
Noncurrent liabilities
Goodwill amortization............................................. 5,840
Depreciation on property and equipment............................ 20,265
-------
Total deferred tax liabilities.................................... 26,105
-------
Net deferred tax assets........................................... $ 952
=======
</TABLE>
In connection with the Acquisition, the Company has made a joint tax
election with the Seller for certain entities under Section 338(h)(10) of the
IRC. The effect of this election is the revaluation of the assets of the
electing entities with any residual purchase price allocated to goodwill. The
nonelecting entities were acquired by both stock and asset purchases.
The gross amount of net operating losses ("NOLs") the Company may utilize
on future tax returns is $22,986. The NOLs may be carried forward for fifteen
years until expiration. Foreign tax credits eligible for carry forward total
$5,452, and expire in five years. The Company had no valuation allowance related
to income tax assets as of December 31, 1996, and there was no change in the
valuation allowance during the year.
F-18
<PAGE> 135
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory rate of 35 percent for the period ended December 31, 1996, to
income before taxes. The principal reasons for this difference are as follows:
<TABLE>
<S> <C>
Tax at Federal statutory rate..................................... $ (9,854)
Increase resulting from:
Meals and entertainment......................................... 159
Goodwill related to acquisition of international bowling
centers...................................................... 1,093
Disallowance of certain high yield debt......................... 192
Other, net...................................................... (178)
-------
Total............................................................. $ (8,588)
=======
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
Bowling Centers and Bowling Products lease certain facilities and equipment
under operating leases which expire at various dates through 2026. Bowling
Centers has certain ground leases, associated with several centers, which expire
at various dates through 2058. These leases generally contain renewal options
and require payments of taxes, insurance, maintenance, and other expenses in
addition to the minimum annual rentals. Certain leases require contingent
payments based on usage of equipment above certain specified levels. Such
contingent rentals amounted to $912 for the period ended December 31, 1996.
Total rent expense under operating leases aggregated approximately $13,737 for
the period ended December 31, 1996.
Future minimum rental payments under the operating lease agreements as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------------------------------------------
<S> <C>
1997............................................. $ 19,712
1998............................................. 16,192
1999............................................. 14,055
2000............................................. 12,274
2001............................................. 17,039
Thereafter....................................... 58,624
-------
$ 137,896
=======
</TABLE>
Litigation and Claims
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at the 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.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan to which U.S. employees
may make voluntary contributions based on their compensation. Under the
provisions of the plan, the Company can, at its option, match a discretionary
percentage of employee contributions and make an
F-19
<PAGE> 136
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional profit-sharing contribution as determined by the Board of Directors.
Employer contributions vest 100 percent after a five-year period. The amount
charged to expense under this plan was $1,060 for the period ended December 31,
1996.
Certain of the Company's international operations have employee benefit
plans covering selected employees. These plans vary as to the funding, including
local government, employee, and employer funding. Each international operation
has provided for pension expense and made contributions to these plans in
accordance with the requirements of the plans and local country practices. The
amounts charged to expense under these plans aggregated $506 for the period
ended December 31, 1996.
The Parent has entered into three employment agreements with executives of
the Company, each for a term ending in May 1999. Each agreement calls for
compensation consisting of a salary and an incentive bonus of up to 50 percent
of the executive's annual salary if the Company meets certain operational and
financial targets. Each employment agreement also calls for a continuation of
certain benefits, under specified circumstances, following termination of
employment.
These three executives were also granted options to purchase a total of
345,000 shares of common stock of the Parent, par value $.01 per share ("Parent
Common Stock"). Unless sooner exercised or forfeited, as provided, the options
expire in May 2006. Twenty percent of the options vest on each of the first five
anniversaries of the Closing Date. The exercise price of the options is $10.00
per share, which approximates the fair value of the Parent Common Stock at the
date of the grants.
One executive, Robert L. Morin, resigned from all positions with the
Company and its related entities as of February 28, 1997. As part of Mr. Morin's
severance arrangement, Parent repurchased all of the shares of Parent Common
Stock owned by Mr. Morin and all options held by Mr. Morin were canceled.
In connection with the Acquisition, the Parent adopted the 1996 Stock
Incentive Plan (the "Stock Incentive Plan") under which Parent may grant
incentive awards in the form of shares of Parent Common Stock, options to
purchase shares of Parent Common Stock ("Stock Options") and stock appreciation
rights to certain officers, employees, consultants, and nonemployee directors
("Participants") of Parent and its affiliates. The total number of shares of
Parent Common Stock initially reserved and available for grant under the Stock
Incentive Plan is 1,767,151. A committee of the Parent's board of directors (the
"Committee") is authorized to make grants and various other decisions under the
Stock Incentive Plan and to make determinations as to a number of the terms of
awards granted under the Stock Incentive Plan. In August 1996, the Committee
granted Stock Options to Participants to purchase a total of 713,000 shares of
Parent Common Stock at an exercise price of $10.00 per share. Twenty percent of
the options vest on each of the first five anniversaries of the grant date.
Stock Options are nontransferable (except under certain limited circumstances)
and, unless otherwise determined by the Committee, have a term of ten years.
The Committee granted an additional 91,000 in Stock Options to several
individuals who began employment with the Company between August 1996 and
December 31, 1996. The number of Stock Options outstanding to senior management,
other employees, and directors at December 31, 1996, after including forfeited
Stock Options, total 1,096,500. In addition to Stock Options outstanding under
the Stock Incentive Plan, 130,000 Stock Options granted to Douglas J. Stanard on
May 1, 1996 were outstanding at December 31, 1996. No Stock Options awarded were
exercisable during the period ended December 31, 1996.
The Stock Incentive Plan will terminate ten years after its effective date;
however, awards outstanding as of such date will not be affected or impaired by
such termination. Parent's board of
F-20
<PAGE> 137
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directors and the Committee have authority to amend the Stock Incentive Plan and
awards granted thereunder, subject to the terms of the Stock Incentive Plan.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", and elected to account for its stock options under APB Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these stock options been determined consistent with SFAS No. 123, the
Company's net loss for 1996 would have been increased to $23,308.
The weighted-average fair value of options granted during 1996 is $3.05 per
option. The 1,226,500 options outstanding at December 31, 1996, have a
weighted-average exercise price of $10 and a weighted-average remaining
contractual life of 9.6 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free rate of 6.5 percent; expected
dividend yield of zero; expected lives of ten years; expected volatility of zero
based on the minimum value method.
NOTE 13. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
Cash paid for the period ended December 31, 1996:
Interest................................ $ 44,465
Income taxes............................ $ 7,990
</TABLE>
<TABLE>
<CAPTION>
CHARAN OTHER
ACQUISITION ACQUISITION ACQUISITIONS TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Business acquisitions, net of cash
acquired
Working capital, other than cash
acquired............................. $ (17,385) $ (5,028) $ -- $ (22,413)
Plant and equipment..................... (537,827) (97,857) (5,182) (640,866)
Purchase price in excess of the net
assets acquired...................... (784,217) -- -- (784,217)
Other assets............................ (18,330) -- -- (18,330)
Noncurrent liabilities.................. 6,198 -- -- 6,198
Warrants to purchase shares of Parent
Common Stock......................... 8,700 -- -- 8,700
------------ ---------- ------------ ------------
Net cash used for business
acquisitions......................... $ (1,342,861) $ (102,885) $ (5,182) $ (1,450,928)
============ ========== ========== ============
Non-cash financing activities:
Warrants to purchase shares of Parent
Common Stock......................... $ 8,700
</TABLE>
NOTE 14. ACQUISITIONS
On October 10, 1996, AMF Bowling Centers, Inc. ("AMF Bowling Centers"), a
Virginia corporation and an indirect, wholly owned subsidiary of the Company,
completed the acquisition (the "Charan Acquisition") of 50 bowling centers and
certain related assets and liabilities from Charan Industries, Inc. ("Charan"),
a Delaware corporation, pursuant to an Asset Purchase Agreement (the "Asset
Purchase Agreement"), dated as of September 10, 1996, by and between AMF Bowling
Centers and Charan.
The purchase price of the Charan Acquisition was approximately $106.5
million, subject to certain adjustments. The Charan Acquisition was funded with
approximately $40 million from the
F-21
<PAGE> 138
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sale of equity by the Parent to its institutional stockholders and one of its
directors, and with approximately $66.5 million from available borrowings under
the Company's existing Acquisition Facility.
The following unaudited pro forma information has been prepared assuming
the Charan Acquisition had occurred as of January 1, 1996 and 1995, respectively
and are based on pro forma AMF Group Holdings Inc. results of operations
presented in "Note 3. Pro Forma Results of Operations". The pro forma
information is presented for information purposes only and is not necessarily
indicative of what would have occurred if the acquisition had occurred as of
those dates. In addition, the pro forma information is not intended to be a
projection of future results of operations.
PRO FORMA CONSOLIDATED DATA (UNAUDITED):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Operating revenue........................................ $595.5 $622.7
Operating income......................................... 80.0 105.2
Loss before income taxes................................. (27.1) (4.9)
Net loss................................................. (19.6) (16.1)
</TABLE>
Since the Acquisition and prior to December 31, 1996, AMF Bowling Centers
purchased an aggregate of 57 bowling centers and certain related assets and
liabilities from five unrelated sellers including Charan. The combined purchase
price was approximately $113.5 million, including certain adjustments and
transaction costs, and was funded with approximately $40.0 million from the sale
of equity by the Parent to its institutional stockholders and one of its
directors, and with $73.5 million from available borrowing under the Company's
Acquisition Facility. The results of operations for purchases of bowling centers
and certain related assets and liabilities additional to the Charan Acquisition
were not material in relation to the Company's consolidated results of
operations.
Other Acquisitions
On January 17, 1997, the Company, through AMF Bowling Centers, entered into
an Agreement and Plan of Merger with American Recreation Centers, Inc. ("ARC")
pursuant to which a wholly owned subsidiary of AMF Bowling Centers will merge
with and into ARC (the "ARC Merger"). As a result of the ARC Merger, the
outstanding shares of ARC's common stock, no par value per share (the "ARC
Common Stock"), will be converted into the right to receive $8.50 per share, in
cash. The purchase price, after reflecting the assumption of ARC's outstanding
debt and the purchase of certain joint venture interests, represents a
transaction with a total value of approximately $70 million, which will be
funded from available borrowing under the Company's Acquisition Facility. The
ARC Merger is conditioned upon, among other things, approval by holders of a
majority of the outstanding shares of ARC Common Stock and upon receipt of
certain regulatory and governmental approvals. ARC operates 43 bowling centers
in six states.
Subsequent to December 31, 1996, the Company had acquired an additional
eight 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 $28.3
million, including certain adjustments and transaction costs, and was funded
with $16.5 million from available borrowing under the Company's Acquisition
Facility.
F-22
<PAGE> 139
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. 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 business segments for the period ended December
31, 1996, is presented below:
<TABLE>
<S> <C>
Revenue from unaffiliated customers
Bowling Centers
U.S........................................................ $ 132,300
International.............................................. 67,400
---------
199,700
Bowling Products
U.S........................................................ 69,100
International.............................................. 116,000
---------
185,100
---------
$ 384,800
=========
Intersegment sales
Bowling Products.............................................. $ 6,000
=========
Operating income (loss)
Bowling Centers
U.S........................................................ $ 8,300
International.............................................. 6,800
---------
15,100
Bowling Products
U.S........................................................ 23,200
International.............................................. 10,900
---------
34,100
Corporate..................................................... (3,200)
Eliminations.................................................. 100
---------
$ 46,100
=========
Identifiable assets
Bowling Centers
U.S........................................................ $ 612,800
International.............................................. 302,700
---------
915,500
Bowling Products
U.S........................................................ 606,700
International.............................................. 44,500
---------
651,200
Corporate..................................................... 27,100
Eliminations.................................................. 100
---------
$1,593,900
=========
Depreciation and amortization
Bowling Centers
U.S........................................................ $ 25,600
International.............................................. 12,100
---------
37,700
</TABLE>
F-23
<PAGE> 140
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Bowling Products
U.S........................................................ 12,100
International.............................................. 500
---------
12,600
Eliminations.................................................. (900)
---------
$ 49,400
=========
Capital expenditures
Bowling Centers
U.S........................................................ $ 8,100
International.............................................. 5,000
---------
13,100
Bowling Products
U.S........................................................ 1,500
International.............................................. 1,700
---------
3,200
Corporate..................................................... 1,300
Eliminations.................................................. (700)
---------
$ 16,900
=========
Research and development expense
Bowling Products.............................................. $ 1,300
=========
</TABLE>
NOTE 16. GEOGRAPHIC SEGMENTS
Information about the Company's operations in different geographic areas
for the period ended December 31, 1996, and identifiable assets at December 31,
1996, are presented below:
<TABLE>
<S> <C>
Net operating revenue
United States.................................................. $205,800
Hong Kong...................................................... 59,700
Japan.......................................................... 36,800
Australia...................................................... 33,500
United Kingdom................................................. 15,900
Sweden......................................................... 7,400
Mexico......................................................... 5,400
Korea.......................................................... 14,300
Spain.......................................................... 900
China.......................................................... 1,000
Canada......................................................... 200
Other European countries....................................... 9,900
Eliminations................................................... (6,000)
--------
$384,800
========
</TABLE>
Net operating revenue for the U.S. Bowling Products operation has been
reduced by $63,400 for the period ended December 31, 1996, to reflect the
elimination of intracompany sales between the U.S. Bowling Products operation
and the Bowling Products international sales and service branches.
F-24
<PAGE> 141
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Operating income (loss)
United States.................................................. $ 28,200
Hong Kong...................................................... 7,700
Japan.......................................................... 4,000
Australia...................................................... 4,900
United Kingdom................................................. 600
Sweden......................................................... 1,000
Mexico......................................................... 500
Korea.......................................................... 100
Spain.......................................................... (100)
Canada......................................................... (100)
China.......................................................... (100)
Other European countries....................................... (700)
Eliminations................................................... 100
--------
$ 46,100
========
</TABLE>
Operating income for the U.S. Bowling Products operation has been reduced
by $1,000 for the period ended December 31, 1996, to reflect the elimination of
intracompany gross profit between the U.S. Bowling Products operation and the
Bowling Products international sales and service branches.
<TABLE>
<S> <C>
Identifiable assets
United States................................................. $1,246,600
Hong Kong..................................................... 26,700
Japan......................................................... 40,200
Australia..................................................... 138,000
United Kingdom................................................ 72,300
Sweden........................................................ 3,000
Mexico........................................................ 15,200
Korea......................................................... 4,600
Spain......................................................... 7,300
Canada........................................................ 3,700
China......................................................... 6,000
Other European countries...................................... 30,200
Eliminations.................................................. 100
----------
$1,593,900
==========
</TABLE>
Identifiable assets for the international sales and service branches have
been reduced by $5,500 to reflect the elimination of intracompany gross profit
in inventory between the U.S. Bowling Products operations and the Bowling
Products international sales and service branches.
NOTE 17. RELATED PARTIES
Goldman Sachs and its affiliates have certain interests in the Company in
addition to being the initial purchasers of the registered debt securities of
the Company in connection with the Acquisition. Richard A. Friedman and Terence
M. O'Toole, each of whom is a managing Director of Goldman, Sachs & Co., and
Peter M. Sacerdote, who is a limited partner of the Goldman Sachs Group, are
directors of the Company. Goldman Sachs and its affiliates together currently
beneficially
F-25
<PAGE> 142
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
own a majority of the outstanding voting equity of the Parent; thus Goldman
Sachs will be deemed to be an "affiliate" of the Company. Goldman Sachs received
an underwriting discount of approximately $19.0 million in connection with the
purchase and resale of the notes. Goldman Sachs also served as financial advisor
to the Sellers in connection with the Acquisition and received a fee in the form
of 10-year warrants to purchase 870,000 shares of the Parent Common Stock. The
warrants are valued for accounting purposes at approximately $8.7 million. In
addition, Goldman Sachs is entitled to the reimbursement of its expenses and is
indemnified in connection with its services.
In connection with the Bank Credit Agreement, Goldman Sachs Credit Partners
L.P. acted as Syndication Agent, Goldman Sachs Credit Partners L.P. and Citicorp
Securities, Inc. acted as Arrangers, and Citibank, N.A. is acting as
Administrative Agent. Goldman Sachs Credit Partners L.P. is also a lender under
the Bank Credit Agreement. Goldman Sachs received a fee of approximately $9.5
million and was reimbursed for expenses in connection with such services.
Goldman Sachs also received a cash fee of $5.0 million from the Parent in
connection with the Acquisition and was reimbursed for related expenses.
Pursuant to the three employment agreements with executives of the Company
discussed in "Note 12. Employee Benefit Plans," the Parent issued to each
executive 150,000 shares of Parent Common Stock, at a purchase price of $10.00
per share. One executive was granted an initial employment bonus of $166,667
which he used to partially fund his purchase of shares of Parent Common Stock.
Each executive has borrowed $1.0 million from the Parent in order to fund the
portion of his purchase of Parent Common Stock. These notes are due in May 2003
and accrue interest, compounded annually, on the unpaid principal amount at 7
percent per annum.
Pursuant to the Stock Subscription Agreement dated April 30, 1996, Charles
M. Diker, a director of the Parent, Holdings, and the Company, purchased 125,000
shares of Parent Common Stock, at a purchase price of $10.00 per share. Pursuant
to an Option Agreement (the "Diker Option Agreement") dated May 1, 1996, Mr.
Diker was granted, pursuant to the Stock Incentive Plan, non-qualified Stock
Options to purchase 100,000 shares of Parent Common Stock at an exercise price
of $10.00 per share. One third of such options vested on May 1, 1996, one third
vest on May 1, 1997, and the remaining options vest on May 1, 1998. The Diker
Option Agreement also provides, among other things, for repurchase of all of the
shares held by him for fair market value as of a specified date upon certain
conditions. Mr. Diker is a party to the Stockholders Agreement and any shares of
Parent Common Stock held by Mr. Diker will be subject to the terms of that
agreement.
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the fiscal year ended December 31, 1997, Holdings is required
to adopt Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" and No. 129 "Disclosure of Information About Capital Structure."
Holdings does not expect that adoption of these standards will have a material
impact on Holdings' financial position or results of operations.
NOTE 19. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating information presents:
- Consolidating balance sheet as of December 31, 1996, and consolidating
statements of income and cash flows for the period ended December 31,
1996.
- Elimination entries necessary to combine the entities comprising
Holdings.
F-26
<PAGE> 143
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, as follows (together with Holdings, the "Guarantors"):
AMF Bowling Centers Holdings Inc.
AMF Bowling Holdings Inc.
AMF Bowling Products, Inc.
AMF Bowling Centers, Inc.
Bush River Corporation
King Louie Lenexa, Inc.
AMF Beverage Company of Oregon, Inc.
AMF Beverage Company of W. VA., Inc.
AMF Worldwide Bowling Centers Holdings Inc.
AMF Bowling Centers (Aust) International Inc.
AMF Bowling Centers (Canada) International Inc.
AMF BCO-France One, Inc.
AMF BCO-France Two, Inc.
AMF Bowling Centers Spain Inc.
AMF Bowling Centers (Hong Kong) International Inc.
AMF Bowling International Inc.
AMF Bowling Mexico Holding, Inc.
Boliches AMF, Inc.
AMF BCO - UK One, Inc.
AMF BCO - UK Two, Inc.
AMF Bowling Centers China, Inc.
AMF BCO - China, Inc.
AMF Bowling Centers Switzerland Inc.
The following third-tier subsidiaries of the Company, all of which are
wholly owned subsidiaries of AMF Worldwide Bowling Centers Holdings Inc., have
not provided guarantees (collectively, the "Non-Guarantors"):
AMF Bowling
Worthing North Properties Limited
AMF Bowling France SNC
AMF Bowling de Paris SNC
AMF Bowling de Lyon La Part Dieu SNC
Boliches y Compania
Operadora Mexicana de Boliches, S.A.
Promotora de Boliches, S.A. de C.V.
Immeubles Obispado, S.A.
Immeubles Minerva, S.A.
Boliches Mexicano, S.A.
AMF Bowling Centers (China) Company
AMF Garden Hotel Bowling Center Company
F-27
<PAGE> 144
AMF GROUP HOLDINGS INC.
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents.............. $ 39,660 $ 3,908 $ -- $ 43,568
Accounts and notes receivable, net of
allowance for doubtful accounts..... 41,266 1,359 -- 42,625
Accounts receivable -- intercompany.... 3,365 1,259 (4,624) --
Inventories............................ 39,609 1,392 -- 41,001
Deferred taxes and other............... 9,491 1,687 -- 11,178
----------- -------- -------- -----------
Total current assets........... 133,391 9,605 (4,624) 138,372
Notes receivable -- intercompany......... 1,998 1,663 (3,661) --
Property and equipment, net.............. 599,706 30,139 951 630,796
Investment in subsidiaries............... 59,559 -- (59,559) --
Goodwill and other assets................ 823,762 943 -- 824,705
----------- -------- -------- -----------
Total assets................... $ 1,618,416 $42,350 $(66,893) $ 1,593,873
=========== ======== ======== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable....................... $ 30,198 $ 1,365 $ -- $ 31,563
Accounts payable -- intercompany....... 773 3,851 (4,624) --
Accrued expenses....................... 50,460 3,897 -- 54,357
Income taxes payable................... 1,676 544 -- 2,220
Long-term debt, current portion........ 42,376 -- -- 42,376
----------- -------- -------- -----------
Total current liabilities...... 125,483 9,657 (4,624) 130,516
Long-term debt........................... 1,048,877 -- -- 1,048,877
Notes payable -- intercompany............ 1,663 1,998 (3,661) --
Other long-term liabilities.............. 1,851 -- -- 1,851
Deferred income taxes.................... 2,828 1,067 -- 3,895
----------- -------- -------- -----------
Total liabilities.............. 1,180,702 12,722 (8,285) 1,185,139
----------- -------- -------- -----------
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)............ (11,184) 4,745 (13,126) (19,565)
Equity adjustment from foreign
currency translation................ (5,897) (3,579) 8,325 (1,151)
----------- -------- -------- -----------
Total stockholder's equity..... 437,714 29,628 (58,608) 408,734
----------- -------- -------- -----------
Total liabilities and
stockholder's equity......... $ 1,618,416 $42,350 $(66,893) $ 1,593,873
=========== ======== ======== ===========
</TABLE>
F-28
<PAGE> 145
AMF GROUP HOLDINGS INC.
CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues....................... $364,095 $21,768 $ (1,054) $384,809
-------- ------- ------- --------
Operating expenses:
Cost of goods sold..................... 127,623 3,566 (647) 130,542
Bowling center operating expenses...... 112,318 11,780 (425) 123,673
Selling, general, and administrative
expenses............................ 33,444 1,626 -- 35,070
Depreciation and amortization.......... 46,198 3,260 (72) 49,386
-------- ------- ------- --------
Total operating expenses............ 319,583 20,232 (1,144) 338,671
-------- ------- ------- --------
Operating income.................... 44,512 1,536 90 46,138
Nonoperating expenses:
Interest expense....................... 77,968 22 -- 77,990
Other (income) expense, net............ (39) 1,029 922 1,912
Interest income........................ (5,480) (131) -- (5,611)
Equity in loss of subsidiaries......... 499 -- (499) --
-------- ------- ------- --------
Total nonoperating expenses......... 72,948 920 423 74,291
-------- ------- ------- --------
Income (loss) before income taxes... (28,436) 616 (333) (28,153)
Provision (benefit) for income
taxes............................. (9,703) 1,115 -- (8,588)
-------- ------- ------- --------
Net income (loss)................... $(18,733) $ (499) $ (333) $(19,565)
======== ======= ======= ========
</TABLE>
F-29
<PAGE> 146
AMF GROUP HOLDINGS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $ (18,733) $ (499) $ (333) $ (19,565)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 46,198 3,260 (72) 49,386
Deferred taxes.......................... (14,040) -- -- (14,040)
Amortization of bond discount........... 24,731 -- -- 24,731
Equity in loss of subsidiaries.......... (499) -- 499 --
Dividends from non-guarantor
companies............................. 922 (922) -- --
Loss on the sale of property and
equipment, net........................ 390 18 -- 408
Changes in assets and liabilities:
Accounts and notes receivable......... (6,663) 159 -- (6,504)
Receivables and
payables -- affiliates............. 399 (399) -- --
Inventories........................... 1,830 32 -- 1,862
Other assets.......................... (3,334) (445) (94) (3,873)
Accounts payable and accrued
expenses........................... 21,631 299 -- 21,930
Income taxes payable.................. 662 (301) -- 361
Other long-term liabilities........... 18,918 217 -- 19,135
---------- -------- ------ -----------
Net cash provided by operating
activities............................ 72,412 1,419 -- 73,831
Cash flows from investing activities:
Acquisitions of operating units, net of
cash acquired........................... (1,454,213) 3,285 -- (1,450,928)
Purchases of property and equipment........ (15,930) (1,011) -- (16,941)
Proceeds from sales of property and
equipment............................... 584 170 -- 754
---------- -------- ------ -----------
Net cash provided by (used in) investing
activities............................ (1,469,559) 2,444 -- (1,467,115)
Cash flows from financing activities:
Proceeds from long-term debt, net of
deferred financing costs................ 1,059,277 -- -- 1,059,277
Payments on long-term debt................. (38,875) -- -- (38,875)
Capital contribution....................... 420,750 -- -- 420,750
Payment of noncompete obligations.......... (2,892) -- -- (2,892)
---------- -------- ------ -----------
Net cash provided by financing
activities............................ 1,438,260 -- -- 1,438,260
---------- -------- ------ -----------
Effect of exchange rates on cash........ (1,453) 45 -- (1,408)
---------- -------- ------ -----------
Net increase in cash.................... 39,660 3,908 -- 43,568
Cash and cash equivalents at beginning
of period............................. -- -- -- --
---------- -------- ------ -----------
Cash and cash equivalents at end of
period................................ $ 39,660 $ 3,908 $ -- $ 43,568
========== ======== ====== ===========
</TABLE>
F-30
<PAGE> 147
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 16,640 $ 43,568
Accounts and notes receivable, net of allowance for doubtful
accounts of $4,086 and $4,492, respectively............... 57,120 42,625
Inventories.................................................. 56,488 41,001
Deferred taxes and other..................................... 13,210 11,178
----------- ------------
Total current assets...................................... 143,458 138,372
Property and equipment, net.................................... 743,675 630,796
Deferred financing costs, net.................................. 40,151 40,595
Goodwill, net.................................................. 766,661 771,146
Other assets................................................... 21,487 12,964
----------- ------------
Total assets................................................. $ 1,715,432 $1,593,873
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................. $ 32,757 $ 31,563
Accrued expenses............................................. 54,550 54,357
Income taxes payable......................................... 4,488 2,220
Note payable................................................. 30,000 --
Long-term debt, current portion.............................. 44,876 42,376
----------- ------------
Total current liabilities................................. 166,671 130,516
Long-term debt................................................. 1,146,415 1,048,877
Other long-term liabilities.................................... 6,383 1,851
Deferred income taxes.......................................... 4,922 3,895
----------- ------------
Total liabilities............................................ 1,324,391 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............................................. (32,243) (19,565)
Equity adjustment from foreign currency translation.......... (6,166) (1,151)
----------- ------------
Total stockholder's equity................................... 391,041 408,734
----------- ------------
Total liabilities and stockholder's equity................... $ 1,715,432 $1,593,873
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-31
<PAGE> 148
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
-------------------------------------------
PREDECESSOR COMPANY
THREE MONTHS ENDED SIX MONTHS ENDED JUNE -------------------------------
JUNE 30, 30, ONE MONTH FOUR MONTHS
------------------- --------------------- ENDED APRIL ENDED APRIL
1997 1996(a) 1997 1996(a)(b) 30, 1996 30, 1996
-------- -------- -------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue................ $160,479 $ 73,423 $318,068 $ 73,423 $ 41,601 $164,944
-------- -------- -------- -------- -------- --------
Operating expenses:
Cost of goods sold............. 48,034 23,513 86,084 23,513 12,418 43,118
Bowling center operating
expenses.................... 60,698 26,747 116,038 26,747 37,980 80,156
Selling, general, and
administrative expenses..... 16,170 7,518 30,172 7,518 23,949 35,357
Depreciation and
amortization................ 22,924 11,650 43,424 11,650 4,128 15,097
-------- -------- -------- -------- -------- --------
Total operating
expenses............. 147,826 69,428 275,718 69,428 78,475 173,928
-------- -------- -------- -------- -------- --------
Operating income
(loss)............... 12,653 3,995 42,350 3,995 (36,874) (8,984)
Nonoperating expenses (income):
Interest expense............... 29,782 22,273 57,454 23,873 702 4,504
Other expenses, net............ 859 323 2,320 323 535 721
Interest income................ (406) (2,752) (1,055) (3,752) (217) (611)
-------- -------- -------- -------- -------- --------
Total nonoperating
expenses............. 30,235 19,844 58,719 20,444 1,020 4,614
-------- -------- -------- -------- -------- --------
Loss before income taxes.... (17,582) (15,849) (16,369) (16,449) (37,894) (13,598)
Benefit for income taxes.... (5,311) (3,971) (4,191) (4,205) (4,451) (1,731)
-------- -------- -------- -------- -------- --------
Net loss............... $(12,271) $(11,878) $(12,178) $(12,244) $(33,443) $(11,867)
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Includes results of operations of the acquired business from May 1, 1996
through June 30, 1996.
(b) For the period from the inception date of January 12, 1996 through June 30,
1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 149
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC. PREDECESSOR
SIX MONTHS ENDED JUNE COMPANY
30 FOUR MONTHS
----------------------- ENDED
1997 1996* APRIL 30, 1996
--------- ----------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (12,178) $ (12,244) $ (11,867)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 43,424 11,650 15,097
Deferred income taxes............................. (1,775) 5,871 414
Amortization of bond discount..................... 16,788 8,826 --
Loss (gain) on the sale of property and equipment,
net............................................. 94 (31) --
Changes in assets and liabilities:
Accounts and notes receivable, net.............. (17,942) (3,678) 6,319
Inventories..................................... (15,877) (3,396) (3,631)
Other assets.................................... (21,394) (47,342) (1,068)
Accounts payable and accrued expenses........... 1,432 21,418 8,713
Income taxes payable............................ 2,248 (8,602) (5,745)
Other long-term liabilities..................... 13,345 (517) (1,605)
--------- ----------- ---------
Net cash provided by (used in) operating
activities...................................... 8,165 (28,045) 6,627
--------- ----------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash
acquired.......................................... (122,165) (1,333,048) --
Purchases of property and equipment.................. (25,639) (3,318) (6,874)
Proceeds from the sale of property and equipment..... 268 86 2,989
--------- ----------- ---------
Net cash used in investing activities............. (147,536) (1,336,280) (3,885)
--------- ----------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred
financing costs................................... 133,500 1,029,930 --
Payment on long-term debt............................ (20,250) (233) (3,812)
Payments on notes payable -- stockholders, net..... -- -- 24,668
Capital contribution................................. -- 380,250 24,805
Dividend to Parent................................... (500) -- --
Distributions to stockholders........................ -- -- (36,721)
Noncompete obligations............................... (322) (190) (36)
--------- ----------- ---------
Net cash provided by financing activities......... 112,428 1,409,757 8,904
--------- ----------- ---------
Effect of exchange rates on cash.................. 15 (338) 535
--------- ----------- ---------
Net (decrease) increase in cash................... (26,928) 45,094 12,181
Cash and cash equivalents at beginning of
period.......................................... 43,568 -- 9,732
--------- ----------- ---------
Cash and cash equivalents at end of period........ $ 16,640 $ 45,094 $ 21,913
========= =========== =========
</TABLE>
- ---------------
* For the period from the inception date of January 12, 1996 through June 30,
1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 150
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 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 AMF Group Holdings Inc. and subsidiaries ("Holdings") 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 and
six months ended June 30, 1997, respectively, are not necessarily indicative of
results to be expected for the entire year.
AMF Bowling Worldwide, Inc. (formerly AMF Group Inc.) (the "Company") is
principally engaged in two business segments: (i) the ownership or operation of
bowling centers, consisting of 321 U.S. centers and 87 international centers
("Bowling Centers") as of June 30, 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 Holdings. Holdings is a wholly
owned subsidiary of AMF Bowling Inc. (formerly 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 $1.37 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.
NOTE 2. SIGNIFICANT ACCOUNT POLICIES
Basis of Presentation
The condensed consolidated results of operations of Holdings have been
presented for the three months and six months ended June 30, 1997, respectively,
the three months ended June 30, 1996, and the period from the inception date of
January 12, 1996 through June 30, 1996. Additionally, the combined results of
operations of the Predecessor Company for the one month and four months ended
April 30, 1996, have been presented. All significant intercompany balances and
F-34
<PAGE> 151
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 subsequent purchases of bowling centers
discussed in "Note 9. Acquisitions", 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 dates
of acquisition. Goodwill is being amortized over 40 years. Amortization expense
was $4,960 and $9,860 for the three months and six months ended June 30, 1997,
respectively. Accumulated amortization at June 30, 1997 was $22,930.
NOTE 3. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) (IN MILLIONS)
Pro forma statements of income for Holdings are presented on the following
pages for the three months and six months ended June 30, 1996, as if the
acquisition of the Predecessor Company had occurred on January 1, 1996.
Holdings' pro forma statement of income for the three months ended June 30,
1996, is based on the Predecessor Company's statement of income for the one
month ended April 30, 1996, Holdings' statement of income for the three months
ended June 30, 1996, and adjustments giving effect to the Acquisition under the
purchase method of accounting as described in the notes below. Holdings' pro
forma statement of income for the six months ended June 30, 1996, is based on
the Predecessor Company's statement of income for the four months ended April
30, 1996, Holdings' statement of income for the period from the inception date
of January 12, 1996 through June 30, 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, do not purport
to be indicative of the actual results which occurred, and are not indicative of
future results of operations.
F-35
<PAGE> 152
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR AMF GROUP
AMF GROUP COMPANY HOLDINGS INC.
HOLDINGS INC. ONE MONTH THREE MONTHS
THREE MONTHS ENDED PRO FORMA ENDED
JUNE 30, 1996(a) APRIL 30, 1996 ADJUSTMENTS JUNE 30, 1996
---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Operating revenue............... $ 73.4 $ 41.6 $ (0.2)(b) $ 114.8
------ ------ ------ ------
Operating expenses:
Cost of goods sold............ 23.5 12.4 -- 35.9
Bowling center operating
expenses................... 26.7 38.0 (23.9)(b)(c) 40.8
Selling, general, and
administrative expenses.... 7.5 24.0 (20.3)(b)(c) 11.2
Depreciation and
amortization............... 11.7 4.1 5.8(d) 21.6
------ ------ ------ ------
Total operating
expenses.............. 69.4 78.5 (38.4) 109.5
------ ------ ------ ------
Operating income
(loss)................ 4.0 (36.9) 38.2 5.3
Nonoperating expenses:
Interest expense.............. 22.3 0.7 2.6(e) 25.6
Other expenses, net........... 0.3 0.5 -- 0.8
Interest income............... (2.8) (0.2) -- (3.0)
------ ------ ------ ------
Income (loss) before income
taxes......................... (15.8) (37.9) 35.6 (18.1)
Provision (benefit) for income
taxes......................... (4.0) (4.5) 4.0(f) (4.5)
------ ------ ------ ------
Net income (loss)..... $(11.8) $(33.4) $ 31.6 $ (13.6)
====== ====== ====== ======
</TABLE>
- ---------------
(a) Includes the results of operations of the acquired business from May 1,
1996 through June 30, 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 eliminate a one-time charge of $44.0 million for special bonuses and
payments made by the Sellers in April 1996.
(d) 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.
(e) To reflect the incremental interest expense associated with the issuance of
debt which partially funded the Acquisition.
(f) To give effect to the change in status of certain U.S. and international
subsidiaries of Holdings from S corporations to taxable corporations under
the Internal Revenue Code upon consummation of the Acquisition.
F-36
<PAGE> 153
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR AMF GROUP
AMF GROUP COMPANY HOLDINGS INC.
HOLDINGS INC. FOUR MONTHS SIX MONTHS
PERIOD ENDED ENDED PRO FORMA ENDED
JUNE 30, 1996(g) APRIL 30, 1996 ADJUSTMENTS JUNE 30, 1996
---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Operating revenue............... $ 73.4 $164.9 $ (0.8)(h) $ 237.5
------ ------ ------ ------
Operating expenses:
Cost of goods sold............ 23.5 43.1 (0.1)(h) 66.5
Bowling center operating
expenses................... 26.7 80.2 (24.4)(h)(i) 82.5
Selling, general, and
administrative expenses.... 7.5 35.5 (20.3)(h)(i) 22.7
Depreciation and
amortization............... 11.7 15.1 8.1(j) 34.9
------ ------ ------ ------
Total operating
expenses.............. 69.4 173.9 (36.7) 206.6
------ ------ ------ ------
Operating income
(loss)................ 4.0 (9.0) 35.9 30.9
Nonoperating expenses:
Interest expense.............. 23.9 4.5 23.8(k) 52.2
Other expenses, net........... 0.3 0.7 -- 1.0
Interest income............... (3.8) (0.6) -- (4.4)
------ ------ ------ ------
Income (loss) before income
taxes......................... (16.4) (13.6) 12.1 (17.9)
Provision (benefit) for income
taxes......................... (4.2) (1.7) 1.5(l) (4.4)
------ ------ ------ ------
Net income (loss)..... $(12.2) $(11.9) $ 10.6 $ (13.5)
====== ====== ====== ======
</TABLE>
- ---------------
(g) Represents the results of Holdings for the period from the inception date of
January 12, 1996 through June 30, 1996; which includes results of operations
of the acquired business from May 1, 1996 through June 30, 1996..
(h) To reflect the impact of Holdings not acquiring the operations of one
bowling center in Switzerland and one bowling center in Spain.
(i) To eliminate a one-time charge of $44.0 million for special bonuses and
payments made by the Sellers in April 1996.
(j) 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.
(k) To reflect the incremental interest expense associated with the issuance of
debt which partially funded the Acquisition.
(l) To give effect to the change in status of certain U.S. and international
subsidiaries of Holdings from S corporations to taxable corporations under
the Internal Revenue Code upon consummation of the Acquisition.
F-37
<PAGE> 154
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INVENTORIES
Inventories at June 30, 1997, and December 31, 1996, consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Bowling Products, at FIFO:
Raw materials.......................................... $13,603 $11,683
Work in progress....................................... 2,493 2,335
Finished goods and spare parts......................... 35,365 23,195
Bowling Centers, at average cost:
Merchandise inventory.................................. 5,027 3,788
------- -------
$56,488 $41,001
======= =======
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997, and December 31, 1996, consists of
the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Land...................................................... $ 103,004 $ 90,512
Buildings and improvements................................ 306,848 265,461
Equipment, furniture, and fixtures........................ 386,580 304,067
Other..................................................... 9,993 2,631
-------- --------
806,425 662,671
Less: accumulated depreciation and amortization........... (62,750) (31,875)
-------- --------
$ 743,675 $630,796
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$30,875 and $7,445 for the six months ended June 30, 1997 and 1996,
respectively.
NOTE 6. LONG-TERM DEBT
Long-term debt at June 30, 1997 and December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Bank debt................................................. $ 677,875 $ 564,625
Exchange senior subordinated notes........................ 250,000 250,000
Exchange senior subordinated discount notes............... 291,446 274,663
Mortgage and equipment notes.............................. 1,970 1,965
---------- ----------
Total debt...................................... 1,221,291 1,091,253
Current maturities........................................ (74,876) (42,376)
---------- ----------
Total long-term debt............................ $1,146,415 $1,048,877
========== ==========
</TABLE>
In May 1997, the Company amended to the Bank Credit Agreement to increase
the flexibility and borrowing capacity of its ongoing acquisition program. As a
result, the Company increased the availability under the Acquisition Facility to
$230.0 million. As of July 31, 1997, $144.0 million was outstanding under the
Acquisition Facility.
F-38
<PAGE> 155
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Company entered into an interest rate cap agreement to
reduce the interest rate risk of its Senior Debt. The notional amount of this
cap is $100.0 million. Under the terms of this agreement, the Company receives
payment if the three month LIBOR rises above 7.00 percent through March 31,
1998.
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 $1,401 and $2,530 for the three
months and six months ended June 30, 1997, respectively. Interest expense for
the interest rate cap agreement was $456 and $911 for the three months and six
months ended June 30, 1997, respectively.
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.
NOTE 8. EMPLOYEE BENEFIT PLANS
The total number of options to purchase shares of Parent Common Stock
("Stock Options") currently reserved and available for grant under the 1996
Stock Incentive Plan (the "Stock Incentive Plan") is 1,767,151. On June 11,
1997, the Executive Committee of the Parent's Board of Directors approved the
grant of Stock Options to participants of the Stock Incentive Plan to purchase a
total of 366,000 shares of Parent Common Stock at an exercise price of $10.00
per share. The number of Stock Options outstanding to senior management, other
employees, and directors at June 30, 1997, after giving effect to the grant and
to forfeited Stock Options, total 1,418,000 at an exercise price of $10.00 per
share. In addition to Stock Options outstanding under the Stock Incentive Plan,
130,000 Stock Options granted to Douglas J. Stanard on May 1, 1996 were
outstanding at June 30, 1997.
NOTE 9. ACQUISITIONS
On April 24, 1997, the Company completed the acquisition of American
Recreation Centers, Inc. ("ARC"), which operated 43 bowling centers in six
states. The aggregate price of the ARC acquisition was approximately $70
million, including repayment of certain debt and the purchase of related joint
venture interests, and was funded from available borrowing under the Acquisition
Facility. Between January 1, 1997 and June 30, 1997, the Company purchased an
aggregate of 64 centers in the United States, seven centers in the United
Kingdom, two centers in Australia, and certain related assets and liabilities
from several unrelated sellers including ARC. The total purchase price was
approximately $122.2 million, including certain adjustments and transaction
costs, and was funded with $103.5 million from available borrowing under the
Company's Acquisition Facility and the remainder from internally generated cash.
F-39
<PAGE> 156
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, between July 1, 1997, and July 31, 1997, the Company acquired
six centers in the United States from two unrelated sellers. The aggregate
purchase price was approximately $13.9 million, and was entirely funded from
available borrowing under the Acquisition Facility. As a result of the
acquisitions, and after giving effect to the closing of six centers in 1997, the
Company owned or operated 327 U.S. centers and 87 international centers as of
July 31, 1997.
The Company has signed letters of intent and/or entered into purchase
agreements in July 1997 regarding the acquisition of 25 additional U.S. centers
from several unrelated sellers. The aggregate purchase price is expected to be
approximately $49.2 million, and will be funded primarily with available
borrowing under the Acquisition Facility.
In April 1997, the Company entered into a joint venture arrangement with
Hong Leong Corporation Limited, a Singapore based conglomerate. Pursuant to the
arrangement, the joint venture, to be owned 50% by the Company and 50% by Hong
Leong, is expected to build and operate up to 20 bowling centers, during the
next three years. These bowling centers, the first of which is expected to open
during 1997 in Tianjin, China, will be located in the Philippines, Malaysia,
Vietnam, Indonesia, Thailand and China.
In June 1997, the Company signed an agreement to enter into a joint venture
arrangement with Playcenter S.A., a Sao Paulo based amusement and entertainment
company. Pursuant to the arrangement, the joint venture, to be owned 50% by the
Company and 50% by Playcenter is expected to build or assume ownership of, and
operate, up to 39 bowling centers, in Brazil and Argentina during the next four
years.
The Company expects its total investments in the joint ventures with Hong
Leong and Playcenter to be approximately $12 million and $14 million,
respectively, and expects each joint venture to finance the construction of
bowling centers with financing that is non-recourse to the Company.
F-40
<PAGE> 157
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. 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,
1997 and 1996, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
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> <C> <C> <C> <C> <C> <C> <C> <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)........... (0.3) 3.1 2.8 9.4 4.8 14.2 (4.8) 0.4 12.6
Depreciation and amortization..... 13.6 4.7 18.3 4.8 0.3 5.1 -- (0.4) 23.0
Capital expenditures.............. 15.0 1.5 16.5 1.0 0.2 1.2 1.1 (0.1) 18.7
Research and development
expense......................... -- -- -- 0.7 -- 0.7 -- -- 0.7
</TABLE>
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
THREE MONTHS ENDED JUNE 30, 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....................... $ 23.3 $ 16.2 $ 39.5 $ 15.7 $ 18.2 $ 33.9 $ -- $ -- $ 73.4
Intersegment sales................ -- -- -- 0.6 1.3 1.9 -- -- 1.9
Operating income (loss)........... (3.6) 2.3 (1.3) 4.5 1.2 5.7 (0.2) (0.2) 4.0
Depreciation and amortization..... 6.2 2.6 8.8 3.0 0.1 3.1 -- (0.2) 11.7
Capital expenditures.............. 1.5 1.7 3.2 0.2 0.2 0.4 -- (0.3) 3.3
Research and development
expense......................... -- -- -- 1.1 -- 1.1 -- -- 1.1
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
ONE MONTH ENDED APRIL 30, 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....................... $ 16.9 $ 8.5 $ 25.4 $ 9.4 $ 6.8 $ 16.2 $ -- $ -- $ 41.6
Intersegment sales................ -- -- -- 0.4 1.3 1.7 -- -- 1.7
Operating loss.................... (11.7) (8.2) (19.9) (13.4) (3.4) (16.8) -- (0.2) (36.9)
Depreciation and amortization..... 3.5 0.5 4.0 0.3 -- 0.3 -- (0.2) 4.1
Capital expenditures.............. 1.6 1.1 2.7 0.1 -- 0.1 -- (0.3) 2.5
Research and development
expense......................... -- -- -- 0.4 -- 0.4 -- -- 0.4
</TABLE>
F-41
<PAGE> 158
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning operation of bowling centers and manufacturing of
bowling and related products for the six months ended June 30, 1997 and 1996,
respectively, is presented below (in millions):
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
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> <C> <C> <C> <C> <C> <C> <C> <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>
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
SIX MONTHS ENDED JUNE 30, 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.................... $ 23.3 $ 16.2 $ 39.5 $ 15.7 $ 18.2 $ 33.9 $ -- $ -- 73.4
Intersegment sales............. -- -- -- 0.6 1.3 1.9 -- -- 1.9
Operating income (loss)........ (3.6) 2.3 (1.3) 4.5 1.2 5.7 (0.2) (0.2) 4.0
Depreciation and
amortization................. 6.2 2.6 8.8 3.0 0.1 3.1 -- (0.2) 11.7
Capital expenditures........... 1.5 1.7 3.2 0.2 0.2 0.4 -- (0.3) 3.3
Research and development
expense...................... -- -- -- 1.1 -- 1.1 -- -- 1.1
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
FOUR MONTHS ENDED APRIL 30, 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.................... $ 75.0 $ 33.5 $ 108.5 $ 27.7 $ 28.7 $ 56.4 $ -- $ -- $ 164.9
Intersegment sales............. -- -- -- 3.4 1.2 4.6 -- -- 4.6
Operating income (loss)........ 3.6 (2.5) 1.1 (6.5) (3.1) (9.6) -- (0.5) (9.0)
Depreciation and
amortization................. 11.8 2.5 14.3 1.0 0.2 1.2 -- (0.4) 15.1
Capital expenditures........... 5.1 2.3 7.4 0.4 -- 0.4 -- (0.9) 6.9
Research and development
expense...................... -- -- -- 0.8 -- 0.8 -- -- 0.8
</TABLE>
NOTE 11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial information presents:
- Condensed consolidating balance sheet as of June 30, 1997, and
consolidating statements of income and cash flows for the six months
ended June 30, 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.
F-42
<PAGE> 159
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, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 15,651 $ 989 $ -- $ 16,640
Accounts and notes receivable, net of
allowance for doubtful accounts........... 55,738 1,382 -- 57,120
Accounts receivable -- intercompany.......... 2,889 4,609 (7,498) --
Inventories.................................. 54,535 1,953 -- 56,488
Deferred taxes and other..................... 11,343 1,867 -- 13,210
---------- ------- -------- ----------
Total current assets...................... 140,156 10,800 (7,498) 143,458
Notes receivable -- intercompany............... 15,771 10,663 (26,434) --
Property and equipment, net.................... 702,932 39,712 1,031 743,675
Investment in subsidiaries..................... 26,099 -- (26,099) --
Goodwill and other assets...................... 821,781 6,518 -- 828,299
---------- ------- -------- ----------
Total assets.............................. $1,706,739 $67,693 $(59,000) $1,715,432
========== ======= ======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................. $ 30,786 $ 1,971 $ -- $ 32,757
Accounts payable -- intercompany............. 74 7,424 (7,498) --
Accrued expenses............................. 49,769 4,781 -- 54,550
Income taxes payable......................... 3,218 1,270 -- 4,488
Note payable................................. 30,000 -- -- 30,000
Long-term debt, current portion.............. 44,876 -- -- 44,876
---------- ------- -------- ----------
Total current liabilities................. 158,723 15,446 (7,498) 166,671
Long-term debt................................. 1,146,415 -- -- 1,146,415
Notes payable -- intercompany.................. 1,327 25,107 (26,434) --
Other long-term liabilities.................... 6,383 -- -- 6,383
Deferred income taxes.......................... 3,881 1,041 -- 4,922
---------- ------- -------- ----------
Total liabilities......................... 1,316,729 41,594 (33,932) 1,324,391
---------- ------- -------- ----------
Commitments and contingencies
Stockholder's equity:
Common stock................................. -- 3,940 (3,940) --
Paid-in capital.............................. 427,446 24,522 (22,518) 429,450
Retained earnings (deficit).................. (31,270) 3,174 (4,147) (32,243)
Equity adjustment from foreign currency
translation............................... (6,166) (5,537) 5,537 (6,166)
---------- ------- -------- ----------
Total stockholder's equity................ 390,010 26,099 (25,068) 391,041
---------- ------- -------- ----------
Total liabilities and stockholder's
equity.................................. $1,706,739 $67,693 $(59,000) $1,715,432
========== ======= ======== ==========
</TABLE>
F-43
<PAGE> 160
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, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues........................... $ 298,354 $20,625 $ (911) $318,068
-------- ------- ----- --------
Operating expenses:
Cost of goods sold......................... 83,875 2,818 (609) 86,084
Bowling center operating expenses.......... 105,290 10,938 (190) 116,038
Selling, general, and administrative
expenses................................ 28,714 1,458 -- 30,172
Depreciation and amortization.............. 40,632 2,985 (193) 43,424
-------- ------- ----- --------
Total operating expenses........... 258,511 18,199 (992) 275,718
-------- ------- ----- --------
Operating income........................ 39,843 2,426 81 42,350
Nonoperating expenses (income):
Interest expense........................... 57,180 274 -- 57,454
Other (income) expense, net................ (86) 1,079 1,327 2,320
Interest income............................ (948) (107) -- (1,055)
Equity in earnings of subsidiaries......... 246 -- (246) --
-------- ------- ----- --------
Total nonoperating expenses........ $ 56,392 1,246 1,081 58,719
-------- ------- ----- --------
Income (loss) before income taxes....... (16,549) 1,180 (1,000) (16,369)
Provision (benefit) for income taxes.... (5,617) 1,426 -- (4,191)
-------- ------- ----- --------
Net loss........................... $ (10,932) $ (246) $ (1,000) $(12,178)
======== ======= ===== ========
</TABLE>
F-44
<PAGE> 161
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, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (10,932) $ (246) $ (1,000) $ (12,178)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.......... 40,632 2,985 (193) 43,424
Deferred income taxes.................. (1,775) -- -- (1,775)
Amortization of bond discount.......... 16,788 -- -- 16,788
Equity in earnings of subsidiaries..... (246) -- 246 --
Loss on the sale of property and
equipment, net....................... 94 -- -- 94
Changes in assets and liabilities:
Accounts and notes receivable........ (17,750) (192) -- (17,942)
Receivables and
payables -- affiliates............ (13,502) 13,502 -- --
Inventories.......................... (15,383) (494) -- (15,877)
Other assets......................... (20,128) (774) (492) (21,394)
Accounts payable and accrued
expenses.......................... (50) 1,482 -- 1,432
Income taxes payable................. 1,745 503 -- 2,248
Other long-term liabilities.......... 13,345 -- -- 13,345
--------- -------- ------- ---------
Net cash provided by (used in)
operating activities............ 7,162 16,766 (1,439) 8,165
--------- -------- ------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of
cash acquired.......................... (105,444) (16,721) -- (122,165)
Purchases of property and equipment....... (24,228) (1,523) 112 (25,639)
Proceeds from sale of property and
equipment.............................. 268 -- -- 268
--------- -------- ------- ---------
Net cash provided by (used in)
investing activities............ (129,404) (18,244) 112 (147,536)
--------- -------- ------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of
deferred financing costs............... 133,500 -- -- 133,500
Payment on long-term debt................. (20,250) -- -- (20,250)
Dividend to Parent........................ (500) (1,327) 1,327 (500)
Noncompete obligations.................... (322) -- -- (322)
--------- -------- ------- ---------
Net cash provided by financing
activities...................... 112,428 (1,327) 1,327 112,428
--------- -------- ------- ---------
Effect of exchange rates on cash....... 112 (97) -- 15
--------- -------- ------- ---------
Net decrease in cash................... (24,026) (2,902) -- (26,928)
Cash and cash equivalents at beginning
of period............................ 39,677 3,891 -- 43,568
--------- -------- ------- ---------
Cash and cash equivalents at end of
period............................... $ 15,651 $ 989 $ -- $ 16,640
========= ======== ======= =========
</TABLE>
F-45
<PAGE> 162
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors
and the Stockholders
AMF Bowling Group
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of AMF
Bowling Group at April 30, 1996 and December 31, 1995, and the results of its
operations and its cash flows for the period ended April 30, 1996 and for each
of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Norfolk, Virginia
June 28, 1996
F-46
<PAGE> 163
AMF BOWLING GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 21,913 $ 9,732
Accounts and notes receivable, net of allowance for doubtful
accounts of $3,110 and $3,373, respectively.................. 33,887 39,026
Accounts and notes receivable -- affiliates..................... 166 3,979
Inventories..................................................... 43,296 39,821
Prepaid expenses and other...................................... 6,113 5,182
-------- --------
Total current assets.................................... 105,375 97,740
Notes receivable -- affiliates.................................... -- 22,941
Property and equipment, net....................................... 251,544 259,724
Other assets...................................................... 18,330 19,973
-------- --------
Total assets............................................ $ 375,249 $400,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 23,670 $ 23,641
Book overdrafts................................................. 5,724 2,362
Accrued expenses and deposits................................... 34,916 30,328
Accounts and notes payable -- affiliates........................ -- 1,989
Long-term debt, current portion................................. 10 1,084
Income taxes payable............................................ 1,757 7,129
-------- --------
Total current liabilities............................... 66,077 66,533
Long-term debt.................................................... 1,958 19,550
Notes payable -- affiliates....................................... -- 146,727
Other liabilities................................................. 2,811 5,856
Deferred income taxes............................................. 1,429 174
-------- --------
Total liabilities....................................... 72,275 238,840
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock.................................................... 454 1,538
Paid-in capital................................................. 251,770 63,781
Retained earnings............................................... 52,302 101,080
Equity adjustment from foreign currency translation............. (1,552) (3,400)
Notes receivable stock subscription............................. -- (1,461)
-------- --------
Total stockholders' equity.............................. 302,974 161,538
-------- --------
Total liabilities and stockholders' equity.............. $ 375,249 $400,378
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 164
AMF BOWLING GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Operating revenues:
Sales of products and services....................... $ 164,371 $563,998 $515,426
Revenue from operating lease activities.............. 573 926 2,360
-------- -------- --------
Total operating revenues..................... 164,944 564,924 517,786
-------- -------- --------
Operating expenses:
Cost of sales, excluding depreciation of $791,
$2,531, and $1,691, respectively.................. 43,118 184,129 196,043
Bowling center operations............................ 80,156 166,465 115,147
Selling, general and administrative.................. 35,557 50,778 57,142
Depreciation and amortization........................ 15,097 39,139 24,776
-------- -------- --------
Total operating expenses..................... 173,928 440,511 393,108
-------- -------- --------
Operating (loss) income...................... (8,984) 124,413 124,678
Nonoperating income (expenses):
Interest expense..................................... (4,504) (15,711) (7,394)
Other expenses, net.................................. (692) (1,043) (1,188)
Interest income...................................... 611 2,184 526
Foreign currency transaction loss.................... (29) (979) (867)
-------- -------- --------
(Loss) income before income taxes...................... (13,598) 108,864 115,755
Income tax benefit (expense)........................... 1,731 (12,098) (16,452)
-------- -------- --------
Net (loss) income............................ $ (11,867) $ 96,766 $ 99,303
======== ======== ========
</TABLE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Net (loss) income before income taxes and pro forma
adjustments.......................................... $ (13,598) $108,864 $115,755
Pro forma C Corporation -- tax benefit (provision)..... 5,065 (40,616) (42,972)
-------- -------- --------
Pro forma net (loss) income............................ $ (8,533) $ 68,248 $ 72,783
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 165
AMF BOWLING GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................... $ (11,867) $ 96,766 $ 99,303
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization..................... 15,097 39,139 24,776
Deferred income taxes............................. 414 (830) (19)
Loss on sale of property and equipment, net....... -- 567 911
Changes in assets and liabilities, net of effects
from companies acquired:
Accounts and notes receivable, net.............. 4,784 10,630 (9,014)
Receivables and payables -- affiliates.......... 1,535 6,147 4,725
Inventories..................................... (3,631) (5,996) (1,411)
Other assets and liabilities.................... (2,673) (101) (1,000)
Accounts payable and accrued expenses........... 8,713 (18,741) 3,838
Income taxes payable............................ (5,745) (2,830) (2,390)
-------- -------- --------
Net cash provided by operating activities....... 6,627 124,751 119,719
-------- -------- --------
Cash flows from investing activities:
Acquisitions of operating units, net of cash
acquired.......................................... -- -- (17,307)
Purchase of property and equipment................... (6,874) (29,965) (17,788)
Proceeds from sales of property and equipment........ -- 1,410 1,535
Other................................................ 2,989 229 941
-------- -------- --------
Net cash used for investing activities.......... (3,885) (28,326) (32,619)
-------- -------- --------
Cash flows from financing activities:
Payments on credit note agreements, net.............. -- (11,057) (3,689)
Distributions to stockholders........................ (36,721) (71,851) (78,170)
Payment of long-term debt............................ (3,812) (10,285) (1,104)
Payment for redemption of stock...................... -- (3,960) --
Proceeds (payments) on notes payable -- stockholders,
net............................................... 1,236 (3,793) (8,560)
Capital contributions by stockholders................ 24,805 8,329 2,109
Collection of notes receivable -- affiliates......... 19,408 -- --
Other................................................ 3,988 (2,056) (212)
-------- -------- --------
Net cash provided by (used for) financing
activities................................... 8,904 (94,673) (89,626)
Effect of exchange rates on cash................ 535 (194) 2,759
-------- -------- --------
Net increase in cash................................... 12,181 1,558 233
Cash at beginning of period............................ 9,732 8,174 7,941
-------- -------- --------
Cash at end of period.................................. $ 21,913 $ 9,732 $ 8,174
======== ======== ========
</TABLE>
See Note 11 for supplemental disclosures to the Combined Statements of Cash
Flows.
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 166
AMF BOWLING GROUP
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM FOREIGN TOTAL
COMMON PAID-IN RETAINED CURRENCY STOCKHOLDERS'
STOCK CAPITAL EARNINGS TRANSLATION OTHER EQUITY
------- -------- -------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1993......... $ 1,536 $ 46,714 $ 45,573 $ (5,389) $ -- $ 88,434
Net income................ -- -- 99,303 -- -- 99,303
Distribution to
stockholders........... -- -- (78,170) -- -- (78,170)
Increase in equity
adjustment from foreign
currency translation... -- -- -- 2,087 -- 2,087
Capital contributions..... -- 2,109 -- -- -- 2,109
The Reece Corporation
merger................. -- 9,184 9,459 -- -- 18,643
Other..................... -- (32) -- -- -- (32)
------- -------- -------- ------- ------- --------
Balance,
December 31, 1994......... 1,536 57,975 76,165 (3,302) -- 132,374
Net income................ -- -- 96,766 -- -- 96,766
Distribution to
stockholders........... -- -- (71,851) -- -- (71,851)
Redemption of stock....... -- (3,960) -- -- -- (3,960)
Decrease in equity
adjustment from foreign
currency translation... -- -- -- (98) -- (98)
Sale of stock............. 2 1,479 -- -- (1,479) 2
Capital contributions..... -- 8,329 -- -- -- 8,329
Other..................... -- (42) -- -- 18 (24)
------- -------- -------- ------- ------- --------
Balance,
December 31, 1995......... 1,538 63,781 101,080 (3,400) (1,461) 161,538
Net loss.................. -- -- (11,867) -- -- (11,867)
Distribution to
stockholders........... -- -- (36,721) -- -- (36,721)
Increase in equity
adjustment from foreign
currency translation... -- -- -- 1,665 -- 1,665
Payment of notes
receivable
officer/stockholder.... -- -- -- -- 1,461 1,461
Capital contributions..... 102 187,989 -- -- -- 188,091
Other..................... (1,186) -- (190) 183 -- (1,193)
------- -------- -------- ------- ------- --------
Balance, April 30, 1996..... $ 454 $251,770 $ 52,302 $ (1,552) $ -- $ 302,974
======= ======== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 167
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 1 -- ORGANIZATION
AMF Bowling Group ("the Combined Companies") consisted of the following
entities:
S CORPORATIONS
- - AMF Bowling, Inc. ("AMF Bowling")
- - AMF Bowling Centers, Inc. ("AMF Bowling Centers")
- - AMF Beverage Company of Oregon, Inc.
- - King Louis Lenexa, Inc.
- - AMF Bowling Centers (Aust) International Inc.
- - AMF Bowling Centers (Canada) International Inc.
- - AMF BCO - France One, Inc.
- - AMF BCO - France Two, Inc.
- - AMF Bowling Centers (Hong Kong) International Inc.
- - AMF Bowling Centers International Inc. - Japan
- - AMF Bowling Mexico Holding, Inc.
- - Boliches AMF, Inc.
- - AMF Bowling Centers II Inc. - Switzerland
- - AMF BCO - U.K. One, Inc.
- - AMF BCO - U.K. Two, Inc.
- - AMF BCO - China, Inc.
- - AMF Bowling Centers China, Inc.
OTHER
- - AMF Catering Services Pty, Ltd.
- - Bush River Corporation
Pursuant to a Stock Purchase Agreement dated February 16, 1996 between AMF
Group Holdings, Inc. and the stockholders of AMF Bowling Group (the "Combined
Companies"), on May 1, 1996, AMF Group Holdings, Inc. (the "Company"), through
its subsidiaries, acquired the Combined Companies in a stock purchase of all the
outstanding stock of the separate domestic and foreign corporations that
constitute substantially all of the Combined Companies and through the purchase
of certain assets of the Combined Companies' bowling center operations in Spain
and Switzerland. Prior to the acquisition, the Combined Companies were
controlled by the Virginia Investment Trust.
The Combined Companies operated bowling centers in the United States and in
9 foreign countries and manufactured and distributed a full line of bowling and
leisure related products. The principal markets for bowling and leisure related
equipment are domestic and foreign independent bowling center operators. The
accompanying combined financial statements have been prepared for the purpose of
presenting the financial position and results of operations of the bowling
related operations of the various entities.
The Company did not acquire the assets of two bowling centers located in
Madrid, Spain and Geneva, Switzerland (both of which were retained by the
sellers) and, accordingly, the April 30, 1996 combined financial statements
exclude the assets of these centers. As a result of the acquisition, the
Company, at May 1, 1996, owns or operates 205 of the Combined Companies'
domestic bowling centers and 78 international bowling centers (205 domestic
bowling centers and 80 international bowling centers at December 31, 1995). The
purchase price for the acquisition was approximately $1,300,000, subject to
certain postclosing adjustments, less approximately $2,000
F-51
<PAGE> 168
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
representing debt of the Combined Companies which remained in place following
the closing of the acquisition (the "Closing").
The revaluation, in accordance with Accounting Principles Board Opinion No.
16, of the Combined Companies' assets and liabilities as a result of the Stock
Purchase Agreement has not been reflected in the accompanying combined financial
statements. In addition, no adjustments have been recorded to reflect any tax
liability resulting from the stock purchase and the related Section 338(h)(10)
election.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting and conform in all material respects to accounting
principles generally accepted in the United States. The accompanying combined
financial statements are stated in U.S. dollars. All significant intercompany
and intracompany balances and transactions have been eliminated in the
accompanying combined financial statements.
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, the
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 more significant estimates made by management include
allowances for obsolete inventory, uncollectible accounts receivable, product
warranty costs and litigation and claims. Actual results could differ from those
estimates.
Fiscal year
The entities included in the accompanying combined financial statements
operate on fiscal years ending on December 31, except for AMF Bowling Centers,
which operated on a 52-week period ended on the last Sunday in December during
1994, and the Fair Lanes operation which operated on a fiscal period ended on
December 29, 1994. For 1995, AMF Bowling Centers, including the acquired Fair
Lanes operation, adopted a calendar month-end; accordingly, the results of
operations for the period ended December 31, 1995 include AMF Bowling Centers'
operations for the period December 26, 1994 (December 30, 1994 with respect to
Fair Lanes operations) through December 31, 1995.
Revenue recognition
Revenue is generally recognized from the sale of products at the time the
products are shipped. For larger contract orders, the Combined Companies
generally require that customers submit a deposit as a condition of accepting
the order. For nonaffiliate international sales, the Combined Companies
generally require the customer to obtain a letter of credit prior to shipment.
Warranty costs
AMF Bowling offers warranties for its various products and provides, by a
current charge to income, an amount it estimates will be needed to cover future
warranty obligations for products
F-52
<PAGE> 169
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
sold. Warranty expense aggregated approximately $1,313 for the four months ended
April 30, 1996 and $2,748 and $4,963 for the years ended December 31, 1995 and
1994, respectively.
Cash and cash equivalents
For the purpose of the statement of cash flows, the Combined Companies
consider all highly liquid debt instruments purchased with an original maturity
of three months or less at the date of purchase to be cash equivalents.
Inventories
Manufacturing inventory is valued at the lower of cost or market, cost
being determined using the last-in, first-out ("LIFO") method for domestic
inventories and the first-in, first-out ("FIFO") method for foreign inventories.
Bowling center inventory is valued at the lower of cost or market with the
cost being determined using the actual or average cost method.
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs which do not improve or extend the life of an asset are charged to
expense as incurred; major renewals or betterments are capitalized to the
property accounts. Upon retirement or sale of an asset, its cost and related
accumulated depreciation are removed from the property accounts, and any gain or
loss is recognized.
Property and equipment are depreciated over their estimated useful lives
using straight-line and accelerated methods. Estimated useful lives of property
and equipment for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................... 5 - 40 years
Bowling and related equipment................. 5 - 10 years
Manufacturing equipment....................... 2 - 7 years
Furniture and fixtures........................ 3 - 8 years
</TABLE>
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," ("SFAS No.
121"). SFAS No. 121 is effective for fiscal year 1996 for the Company. This
Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets.
The adoption of SFAS No. 121 did not have a material effect on the financial
position or results of operations of the Company.
Income taxes
Certain of the Combined Companies included in the accompanying combined
financial statements have elected S Corporation status under the Internal
Revenue Code (see Note 1). As an S Corporation, the companies may be liable for
U.S. federal income taxes under certain circumstances and liable for state
income taxes in certain jurisdictions; all other domestic income taxes are the
responsibility of the Combined Companies' stockholders.
F-53
<PAGE> 170
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The foreign branches of the S Corporations and other foreign entities file
income tax returns and pay taxes in their respective countries. The stockholders
receive a tax credit, subject to certain limitations, in their U.S. federal
income tax returns for foreign taxes paid by the foreign branches of the U.S.
Corporation and certain other foreign entities.
The Combined Companies account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109"). SFAS No. 109 mandates the liability method for
computing deferred income taxes. Because the Combined Companies have elected S
Corporation status, deferred income taxes are only provided with respect to
state and foreign income taxes.
Research and development costs
Expenditures relating to the development of new products, including
significant improvements and refinements to existing products, are expensed as
incurred. The amounts charged against income were approximately $875 for the
four months ended April 30, 1996 and $3,600 and $3,075 for the years ended
December 31, 1995 and 1994, respectively.
Advertising costs
Costs incurred for producing and communicating advertising are expensed
when incurred. The amounts charged against income were approximately $3,575 for
the four months ended April 30, 1996 and $12,250 and $10,400 for the years ended
December 31, 1995 and 1994, respectively.
Foreign currency
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," all assets and liabilities of the Combined
Companies' foreign operations are translated from foreign currencies into U.S.
dollars at year-end exchange rates. Revenues and expenses of foreign operations
are translated using average exchange rates that existed during the year and
reflect currency exchange gains and losses resulting from transactions conducted
in nonlocal currencies. Adjustments resulting from the translation of financial
statements of foreign operations into U.S. dollars are included in the equity
adjustment from foreign currency translation on the accompanying combined
balance sheets. Gains and losses arising from transactions in foreign currencies
are included as a separate item in the accompanying combined statement of
operations.
Fair value of financial instruments
The carrying value of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximated fair value at April 30, 1996 and December 31, 1995 because of the
short maturity of these instruments. The carrying value of long-term receivables
and payables approximated fair value as of April 30, 1996 and December 31, 1995
based upon market rates for similar instruments.
Noncompete agreements
The Combined Companies have certain noncompete agreements with individuals.
The assets are recorded at cost or at the present value of payments to be made
under these agreements, discounted at annual rates ranging from 8%-10%. The
assets are included in other current and noncurrent assets and are amortized on
a straight-line basis over the terms of the agreements. Noncompete obligations
were $3,095 at April 30, 1996 and $3,300 at December 31, 1995.
F-54
<PAGE> 171
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Common stock
The common stock account represents the aggregate number of shares
outstanding for all the Combined Companies multiplied by the respective par
value at each of the Combined Companies.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Combined Companies had related party transactions with several
companies which are affiliated through common ownership and with certain of its
officers, directors and stockholders. The majority of balances with affiliated
companies were liquidated on or prior to April 30, 1996. Interest income and
expense during the four months ended April 30, 1996 were not significant to the
operating results of the Combined Companies. A summary of the significant
balances and transactions with related parties follows.
Accounts and notes receivable -- affiliates, including accrued interest, at
April 30, 1996 and December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- -------------
<S> <C> <C>
Accounts receivable -- affiliates................... $ 166 $ 2,084
=== =======
Notes receivable -- AMF Reece....................... $ -- $ 12,910
Notes receivable -- stockholders.................... -- 11,130
Note receivable -- AMF Machinery Systems
("AMS")........................................... -- 796
--- -------
-- 24,836
Current maturities.................................. -- (1,895)
--- -------
$ -- $ 22,941
=== =======
</TABLE>
Notes receivable -- AMF Reece represented various notes, plus accrued and
unpaid interest income, between AMF Bowling and AMF Reece, an affiliated
company. The notes earned interest monthly based on the LIBOR rate plus .75%,
which was 6.48% at December 31, 1995. Interest income was $762 for the year
ended December 31, 1995.
Notes receivable -- stockholders represented notes of $9,394 plus accrued
and unpaid interest income, between the Combined Companies and its stockholders.
Interest on the notes was at the LIBOR plus .75% rate, which was 6.48% at
December 31, 1995. Interest income for the years ended December 31, 1995 and
1994 was $602 and $70, respectively.
F-55
<PAGE> 172
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Accounts and notes payable -- affiliates at April 30, 1996 and December 31,
1995 consisted of the following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- -------------
<S> <C> <C>
Accounts payable -- stockholders.................... $-- $ 322
Accounts payable -- AMS............................. -- 1,619
Accounts payable -- CCA Industries.................. -- 48
--- -------
$-- $ 1,989
=== =======
Notes payable -- stockholders....................... $-- $ 117,022
Note payable -- Fair Lanes, Inc..................... -- 24,096
Notes payable -- AMS................................ -- 5,609
Capital lease obligations -- Commonwealth
Leasing Corporation ("CLC")....................... -- --
--- -------
-- 146,727
Current maturities.................................. -- --
--- -------
Long-term portion................................... $-- $ 146,727
=== =======
</TABLE>
Notes payable -- stockholders included $88,323, plus accrued and unpaid
interest, at December 31, 1995 of 9.5% of Fair Lanes, Inc. ("Fair Lanes") notes
which were acquired by certain stockholders in conjunction with the acquisition
of Fair Lanes. A portion of the notes were acquired by the stockholders as a
result of the plan of reorganization (Note 14). The note balance included
interest from the period July 15, 1994 through January 15, 1995 which was paid
through the issuance of additional notes. The notes were assumed by AMF Bowling
Centers in connection with the acquisition of the assets of Fair Lanes on July
2, 1995. The notes, originally payable in 2001, were paid prior to April 30,
1996, pursuant to the purchase of the Combined Companies. Interest expense for
the years ended December 31, 1995 and 1994 was approximately $8,053 and $1,900,
respectively.
Notes payable -- stockholders included $16,773, plus accrued and unpaid
interest, on a $60,000 revolving line of credit between AMF Bowling Centers and
its stockholders which originally matured on December 31, 1998. The notes were
repaid on or prior to April 30, 1996, pursuant to the purchase of the Combined
Companies. Interest on the notes was at the lesser of the prime rate or the
LIBOR rate plus 0.50% (6.23% at December 31, 1995). The note was repaid on or
prior to April 30, 1996, pursuant to the purchase of the Combined Companies.
Interest expense on these notes was $562 and $1,922 for the years ended December
31, 1995 and 1994, respectively.
Also, included in notes payable -- stockholders was a $1,943 note, plus
accrued and unpaid interest, which represented the balance outstanding on a
$16,000 revolving line of credit between AMF Bowling and its stockholders.
Interest on the note was at the prime rate (8.50% at December 31, 1995). The
note was repaid on or prior to April 30, 1996, pursuant to the purchase of the
Combined Companies. Interest expense on this note was $179 for the year ended
December 31, 1995.
The average amount outstanding under the various lines of credit was $7,865
during fiscal 1995 and $34,733 during fiscal 1994. The maximum amount
outstanding under these agreements was $21,246 during fiscal 1995 and $43,403
during fiscal 1994. The average interest rate on the outstanding debt was 7.5%
during fiscal 1995 and 5.56% during fiscal 1994.
F-56
<PAGE> 173
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Note payable -- Fair Lanes related to the acquisition of Fair Lanes net
assets by AMF Bowling Centers from the AMF stockholders. Interest on the note
was at prime (8.50% at December 31, 1995). The note, originally payable on
December 31, 1998, was repaid on or prior to April 30, 1996, pursuant to the
purchase of the Combined Companies. Interest expense for the year ended December
31, 1995 was $1,187.
The notes payable of $5,609 to AMS consisted of various notes plus accrued
and unpaid interest (at 8.5%-11%) and were payable on demand. The notes were
repaid on or prior to April 30, 1996, pursuant to the purchase of the Combined
Companies. Interest expense on these notes was $417 and $380 for the years ended
December 31, 1995 and 1994, respectively.
Other related party transactions
The Combined Companies were charged $512 for the four months ended April
30, 1996 and $1,622 and $1,198 for the years ended December 31, 1995 and 1994,
respectively, in management fees for certain consulting and administrative
services performed by affiliated companies.
In May 1995, the Combined Companies began purchasing health insurance from
CCA Industries, an affiliated company, on a fully insured basis. Total premiums
for the four months ended April 30, 1996 were $411 and for the period from May
1995 to December 31, 1995 aggregated $889.
During the year ended December 31, 1995, Fair Lanes acquired equipment
which was leased from Commonwealth Leasing Corporation ("CLC"), an affiliated
company, for $1,367. The difference between the capitalized lease obligation and
the purchase price was treated as an adjustment of the notes payable -- Fair
Lanes.
The Combined Companies purchased used bowling equipment from CLC for $1,429
and $984 during the years ended 1995 and 1994, respectively.
The Combined Companies charged service fees and sales commissions of $53
and $126 for the years ended December 31, 1995 and 1994, respectively, to
Commonwealth Leasing Corporation, an affiliated company. These charges have been
treated as reductions in selling, general and administrative expenses.
The Combined Companies lease equipment from CCA Financial, an affiliated
company. Rent expense was $203 for the four months ended April 30, 1996 and $444
and $550 for the years ended December 31, 1995 and 1994, respectively.
NOTE 4 -- INVENTORIES
Inventories at April 30, 1996 and December 31, 1995 consist of the
following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Raw materials....................................... $ 10,325 $ 10,590
Work-in-progress.................................... 2,084 1,522
Finished goods and spare parts...................... 28,661 24,920
Merchandise inventory............................... 3,033 4,045
------- -------
44,103 41,077
Inventory valuation reserves........................ (807) (1,256)
------- -------
$ 43,296 $ 39,821
======= =======
</TABLE>
F-57
<PAGE> 174
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Inventories were determined using the following methods at April 30, 1996
and December 31, 1995:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
LIFO (Domestic manufacturing)....................... $ 27,128 $ 24,389
FIFO (Foreign manufacturing)........................ 13,135 11,387
Other (Merchandise inventory)....................... 3,033 4,045
------- -------
$ 43,296 $ 39,821
======= =======
</TABLE>
If LIFO inventories had been valued at current costs, they would have been
greater by $2,527 at April 30, 1996 and $2,496 at December 31, 1995.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment at April 30, 1996 and December 31, 1995 consist of
the following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Land............................................ $ 25,891 $ 25,692
Buildings and improvements...................... 143,147 138,448
Equipment, furniture and fixtures............... 256,308 251,936
Construction in progress........................ 110 1,925
--------- ---------
425,456 418,001
Less: accumulated depreciation and
amortization.................................. (173,912) (158,277)
--------- ---------
$ 251,544 $ 259,724
========= =========
</TABLE>
Depreciation expense was $14,523 for the four months ended April 30, 1996
and $37,889 and $23,184 for the years ended December 31, 1995 and 1994,
respectively.
NOTE 6 -- ACCRUED EXPENSES AND DEPOSITS
Accrued expenses and deposits at April 30, 1996 and December 31, 1995
consist of the following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Accrued compensation................................ $ 9,714 $ 7,152
League bowling accounts............................. 3,776 6,368
Other............................................... 21,426 16,808
--------- ---------
$ 34,916 $ 30,328
========= =========
</TABLE>
F-58
<PAGE> 175
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 7 -- LONG-TERM DEBT
Long-term debt at April 30, 1996 and December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Notes payable to bank -- guaranteed.................. $ -- $ 3,764
Mortgage and equipment notes......................... 1,968 14,469
Industrial development bond.......................... -- 1,354
Other................................................ -- 1,047
------- -------
1,968 20,634
Current maturities................................... (10) (1,084)
------- -------
Long-term portion.................................... $ 1,958 $ 19,550
======= =======
</TABLE>
Notes payable to bank -- guaranteed represented a credit agreement entered
into between AMF Bowling Centers and a bank under which up to $32,750 could be
borrowed. An additional $25,000 could be borrowed from one or more additional
financial institutions. Interest was payable at a rate equal to the lesser of
the prime rate or the LIBOR rate plus .50% (6.23% at December 31, 1995). The
notes were secured by certain tangible personal property of AMF Bowling Centers
and were guaranteed by certain stockholders. The agreement also required AMF
Bowling Centers to meet certain financial covenants, including maximum debt to
equity ratios, minimum tangible net worth requirements and minimum earnings to
charge ratios. At December 31, 1995, AMF Bowling Centers was in violation of
certain requirements which were subsequently waived by the bank through March
31, 1997. The notes payable were repaid on or prior to April 30, 1996, pursuant
to the purchase of the Combined Companies.
The mortgage and equipment notes were secured by first deeds of trust on
various bowling centers. The notes generally required monthly payments and
matured at various times through October 2008. Interest rates on these notes
were generally fixed and ranged from 3% to 12%. The notes were repaid on or
prior to April 30, 1996, except for one.
The Industrial Development Bond was secured by a first deed of trust on one
of the bowling centers. Interest on the bond was at a fluctuating rate based on
the prime rate of the lending bank (6.947% at December 31, 1995). Monthly
principal and interest payments were originally due through August 2001. The
bond was repaid on or prior to April 30, 1996, pursuant to the purchase of the
Combined Companies.
AMF Bowling had an agreement with a bank under which up to $15,000 could be
borrowed. This arrangement expired on April 30, 1996. There were no borrowings
at December 31, 1995 under the agreement. Interest was payable monthly at the
lower of the bank's prime rate or the adjusted LIBOR plus 0.50% (6.23% at
December 31, 1995). This agreement required certain financial covenants to be
met, including maximum debt to equity ratios, minimum tangible net worth
requirements and minimum earnings to charge ratios.
AMF Bowling had a $3,500 revolving credit line with a bank which was due to
expire on June 30, 1996. No balance was outstanding at December 31, 1995.
Interest on outstanding borrowings was payable quarterly at the lower of the
bank's prime interest rate or the adjusted LIBOR rate plus 0.50% (6.23% at
December 31, 1995). Under this line were two standby letters of credit with
amounts outstanding at December 31, 1995 of $1,138, expiring on December 1,
1996, and of $12 expiring on August 19, 1996.
F-59
<PAGE> 176
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The average amount outstanding under the various lines of credit was
$21,807 during fiscal 1995 and $4,801 during fiscal 1994. The maximum amount
outstanding under these credit arrangements was $39,454 during fiscal 1995 and
$27,334 during fiscal 1994. The average interest rate on these credit
arrangements was 6.43% during fiscal 1995 and 6.06% during fiscal 1994.
AMF Bowling had available a foreign exchange line of $5,000 and a letter of
credit line of $1,000. No balances were outstanding at December 31, 1995. One
standby letter of credit with an amount at December 31, 1995 of $535, which
expired on January 18, 1996, and four import letters of credit totaling $142
were outstanding under these lines.
NOTE 8 -- INCOME TAXES
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
United States.......................... $ (7,757) $ 77,931 $ 75,807
Foreign................................ (5,841) 30,933 39,948
-------- -------- --------
$ (13,598) $108,864 $115,755
======== ======== ========
</TABLE>
The income tax benefit (provision) consists of the following:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
CURRENT TAX BENEFIT (PROVISION)
U.S. federal........................... $ -- $ -- $ --
State and local........................ 205 (1,065) (481)
Foreign................................ 1,940 (11,961) (15,450)
-------- -------- --------
Total current.......................... 2,145 (13,026) (15,931)
-------- -------- --------
DEFERRED TAX BENEFIT (PROVISION)
U.S. federal........................... -- -- --
State and local........................ -- 32 --
Foreign................................ (414) 896 (521)
-------- -------- --------
Total deferred......................... (414) 928 (521)
-------- -------- --------
Total benefit (provision).............. $ 1,731 $(12,098) $(16,452)
======== ======== ========
</TABLE>
F-60
<PAGE> 177
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Current assets...................................... $ 815 $ 1,198
Noncurrent assets................................... 799 799
------- -------
Total deferred tax assets........................... 1,614 1,997
------- -------
DEFERRED TAX LIABILITIES
Noncurrent liabilities.............................. (1,429) (1,998)
------- -------
Total deferred tax liabilities...................... (1,429) (1,998)
------- -------
Net deferred tax assets (liabilities)............... $ 185 $ (1)
======= =======
</TABLE>
The primary determination of the deferred tax assets are book accruals not
deductible for tax purposes, such as the allowance for bad debts, inventory
reserves and various other accruals. Deferred tax liabilities are a result of
accelerated depreciation methods used for tax purposes.
The benefit (provision) for income taxes differs from the amount computed
by applying the statutory rate of 35% for the four months ended April 30, 1996
and the years ended December 31, 1995 and 1994 to income (loss) before income
taxes. The principal reasons for this difference are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Tax benefit (provision) at
federal statutory rate................ $ 4,759 $(38,102) $(40,514)
(Increase) decrease in rates resulting
from:
S Corporation election for U.S.
federal tax purposes............... (4,759) 38,102 40,514
State and local taxes................. 205 (1,033) (481)
Foreign income taxes.................. 1,526 (11,065) (15,971)
-------- -------- --------
Total................................. $ 1,731 $(12,098) $(16,452)
======== ======== ========
</TABLE>
Pro forma provision for income taxes (unaudited)
As a result of the Stock Purchase Agreement, the Combined Companies will no
longer be treated as an S Corporation for income tax purposes in the United
States and in certain state jurisdictions.
Accordingly, the combined statements of operations include a pro forma
adjustment for income taxes which would have been recorded if the Combined
Companies had not been an S Corporation, based on tax laws in effect during
these periods. The pro forma adjustment was computed separately for each entity
and then combined, except for purposes of computing the utilization of foreign
tax credits related to the worldwide bowling center operations, the domestic and
worldwide bowling center operations were considered in the aggregate.
F-61
<PAGE> 178
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Pro forma income tax benefit (provision) is as follows:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT
U.S. federal......................... $ 3,222 $(26,404) $(24,368)
State and local...................... 329 (3,491) (3,730)
Foreign.............................. 1,940 (11,961) (15,450)
------ -------- --------
Total current........................ 5,491 (41,856) (43,548)
------ -------- --------
DEFERRED
U.S. federal......................... (85) 317 979
State and local...................... 73 27 118
Foreign.............................. (414) 896 (521)
------ -------- --------
Total deferred....................... (426) 1,240 576
------ -------- --------
Total provision (benefit)............ $ 5,065 $(40,616) $(42,972)
====== ======== ========
</TABLE>
Temporary differences and carryforwards which give rise to pro forma
deferred tax assets and liabilities at April 30, 1996 and December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
DEFERRED TAX ASSETS
Current assets.................................. $ 3,851 $ 6,178
Noncurrent assets............................... 192 7,124
------- -------
Total deferred tax assets....................... 4,043 13,302
------- -------
DEFERRED TAX LIABILITIES
Noncurrent liabilities.......................... (6,170) (2,707)
------- -------
Total deferred tax liabilities.................. (6,170) (2,707)
------- -------
Net deferred tax liabilities.................... $(2,127) $ 10,595
======= =======
</TABLE>
Pro forma deferred income taxes relate primarily to timing differences
between financial and income tax reporting for depreciation and certain accruals
which are not currently deductible for income tax purposes.
F-62
<PAGE> 179
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
A reconciliation of the Combined Companies' pro forma United States income
tax benefit (provision) computed by applying the statutory United States federal
income tax rate of 35% to the Combined Companies' income (loss) before income
taxes is presented in the following table:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax benefit (provision) at federal
statutory rate..................... $ 4,759 $(38,102) $(40,514)
(Increase) decrease in rates
resulting from:
State and local taxes, net......... 402 (2,272) (2,304)
Foreign income taxes............... 1,526 (11,065) (15,971)
Foreign tax credits................ (1,526) 11,065 15,971
Other business credits............. -- -- 79
Nondeductible items................ (91) (171) (134)
Environmental tax.................. -- (102) (103)
Other.............................. (5) 31 4
------- -------- --------
$ 5,065 $(40,616) $(42,972)
======= ======== ========
</TABLE>
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Leases
The Combined Companies lease certain facilities and equipment under
operating leases which expire at various dates through 2011. These leases
generally contain renewal options and require the Combined Companies to pay
taxes, insurance, maintenance and other expenses in addition to the minimum
annual rentals. Certain leases require contingent payments based on usage of
equipment above certain specified levels. Such contingent rentals amounted to
$293 for the four months ended April 30, 1996 and $1,517 and $1,275 for the
years ended December 31, 1995 and 1994, respectively.
Future minimum rental payments under the operating lease agreements are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31,
-----------------------------------------------
<S> <C>
1996 (eight months)............................ $ 15,200
1997........................................... 14,900
1998........................................... 12,800
1999........................................... 10,900
2000........................................... 8,900
Thereafter..................................... 49,600
--------
$112,300
========
</TABLE>
Total rent expense under operating leases aggregated approximately $7,487
for the four months ended April 30, 1996 and $19,250 and $15,650 for the years
ended December 31, 1995 and 1994, respectively.
F-63
<PAGE> 180
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Litigation and claims
AMF Bowling's Pins and Lanes division was the defendant in an
administrative proceeding related to a labor dispute. This claim was resolved in
favor of the division during 1995 and the related reserve of approximately
$1,100 was reversed.
AMF Bowling terminated its Korean distributorship agreement. The Korean
distributor filed suit against the company in Korea seeking an injunction
against AMF Bowling's Seoul Korea branch to prevent AMF Bowling from selling
bowling and bowling related products in Korea. The Korean Court dismissed the
suit on jurisdiction grounds subsequent to year-end. Such a decision is subject
to an appeal.
On January 10, 1996, the Korean distributor filed a second suit in the
Supreme Court of the State of New York against AMF Bowling and AMF Bowling
Centers. The suit alleges a number of complaints related to the conduct and
termination of the Korean distributorship agreement and alleges that the
defendants caused the Korean distributor's insolvency. The Korean distributor is
seeking compensatory damages of at least $41,759 and punitive damages of at
least $100,000 or ten times the amount of compensatory damages awarded,
whichever is greater, under each of seven causes of action set forth in the
suit.
Management believes that the Korean distributorship agreement was properly
terminated. Management intends to vigorously defend against this claim and
believes the resolution of such claim will not have a significant effect on the
Combined Companies' combined financial position or results of operations. Under
terms of the sale agreement (Note 1), the current AMF shareholders have agreed
to indemnify the buyers for any loss related to this 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 System, Court of Common Pleas, Centre County, Pa. (Index
No. 96-75), asserted a third-party claim against AMF Bowling and other parties.
Defendant, Golden Giant, a construction company, was previously named as
defendant by a bowling center (not owned or operated by the Combined Companies)
in connection with the collapse of the center's roof in early 1994. Golden Giant
has now named AMF Bowling, 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 $3,500, and Golden Giant asserts that, if plaintiff
is entitled to any recovery, it should be in whole or part against AMF Bowling.
AMF Bowling is involved in two patent infringement suits. The plaintiff in
the first case, a competitor of AMF Bowling's Century division, obtained a
summary judgment on the issue of liability in December 1994. The court recently
issued an order which will permit AMF to appeal. The plaintiff claims damages in
the range of $3,000 to $9,000. A trial on damages will not occur unless and
until the liability issue is resolved against AMF Bowling. Management intends to
vigorously contest the claim and believes the resolution of such claim will not
have a significant effect on the Combined Companies' combined financial position
or results of operations.
The second patent infringement suit relates to AMF Bowling's Pins and Lanes
division. Management has settled this claim for $250 during the four months
ended April 30, 1996.
AMF Bowling Centers and AMF Bowling are defendants in a wrongful death suit
related to an employee. The employee's estate is seeking compensatory damages up
to $3,000 plus $3,000 in punitive damages. However, the plaintiff's counsel has
verbally offered to settle the case for $350.
F-64
<PAGE> 181
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Management expects to vigorously contest the claim and believes the resolution
of such claim will not have a significant effect on the Combined Companies'
combined financial position or results of operations.
In addition, the Combined Companies are involved in certain other lawsuits
and claims arising out of normal business operations. The majority of these
relate to accidents at the Combined Companies' bowling centers. Management
believes that the ultimate resolution of such matters will not materially affect
the Combined Companies' results of operations or financial position.
While the ultimate outcome of the litigation and claims against the
Combined Companies cannot presently be determined, management believes the
Combined Companies have made adequate provision for possible losses. At April
30, 1996 and December 31, 1995, the Combined Companies had recorded reserves
aggregating approximately $2,900 and $2,800, respectively, for litigation and
claims.
NOTE 10 -- EMPLOYEE BENEFIT PLANS AND BONUS
The Combined Companies have a defined contribution 401(k) plan to which
domestic employees may make voluntary contributions based on their compensation.
Under the provisions of the plan, the Combined Companies can, at their option,
match a discretionary percentage of employee contributions and make an
additional contribution as determined by their Board of Directors. Contributions
vest 100% after a five-year period. The amounts charged to expense under this
plan were approximately $410 for the four months ended April 30, 1996 and $1,122
and $901 for the years ended December 31, 1995 and 1994, respectively.
One of the Combined Companies has a Stock Performance Plan (the "Plan") for
certain key employees. Under the terms of the Plan, eligible employees earn
Stock Performance Units as a result of the Company meeting certain operating
performance conditions, as defined by the Plan, relating to (1) sales, (2) cash
flow and (3) operating results. Benefits under the Plan vest over a five-year
period and will be paid in installments over a ten-year period without interest
(or less if specified by the Company's Board of Directors) upon the termination
of an eligible employee. The Plan can be terminated or amended at any time by
the Company's Board of Directors. The amount charged to expense under this plan
was approximately $1,479 for the four months ended April 30, 1996 and $622 and
$311 for the years ended December 31, 1995 and 1994, respectively. The agreement
contains a provision which would accelerate the payout of the benefits from ten
years to five years upon a change-of-control event and would require that
interest be paid on the unpaid balance. On April 30, 1996, the Combined
Companies made payments of $3,085 related to these plans and the plans were
terminated.
Certain of the Combined Companies' foreign operations have employee benefit
plans covering selected employees. These plans vary as to the funding, including
local government, employee and employer funding. Each company has provided
pension expense and made contributions to these plans in accordance with the
requirements of the plans and local country practices. The amounts charged to
expense under these plans aggregated $291 for the four months ended April 30,
1996 and $806 and $701 for the years ended December 31, 1995 and 1994.
On April 30, 1996, the Combined Companies paid bonuses and special payments
to employees, former employees and former directors of $43,760 in recognition of
their services.
F-65
<PAGE> 182
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 11 -- SUPPLEMENTAL DISCLOSURES TO THE COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, -------------------
1996 1995 1994
----------- ------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest....................................... $ 12,862 $ 5,909 $ 4,306
Income taxes................................... $ 5,359 $16,922 $17,593
Noncash capital contribution by the stockholders:
Debt forgiveness............................... $ 163,184 $ -- $ --
</TABLE>
NOTE 12 -- BUSINESS SEGMENTS
The Combined Companies operate in two major lines of business: operation of
bowling centers and manufacturing of bowling and related products. Information
concerning operations in these business segments for the four months ended April
30, 1996 and the years ended December 31, 1995 and 1994 and identifiable assets
at April 30, 1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers
Bowling centers
Domestic.................................. $ 75,000 $192,400 $121,600
International............................. 33,500 99,900 103,800
Manufacturing................................ 56,400 272,600 292,400
-------- -------- --------
$ 164,900 $564,900 $517,800
======== ======== ========
Intersegment sales
Bowling centers
Domestic.................................. $ -- $ -- $ --
International............................. -- -- --
Manufacturing................................ 4,600 13,900 9,300
-------- -------- --------
$ 4,600 $ 13,900 $ 9,300
======== ======== ========
Operating (loss) income
Bowling centers
Domestic.................................. $ 3,600 $ 26,500 $ 17,600
International............................. (2,500) 23,700 26,400
Manufacturing................................ (9,600) 75,700 80,900
Eliminations................................. (500) (1,500) (200)
-------- -------- --------
$ (9,000) $124,400 $124,700
======== ======== ========
</TABLE>
F-66
<PAGE> 183
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets
Bowling centers
Domestic.................................. $ 218,300 $224,500
International............................. 65,400 64,600
Manufacturing................................ 101,500 119,800
Eliminations................................. (10,000) (8,500)
-------- --------
$ 375,200 $400,400
======== ========
Depreciation and amortization expense
Bowling centers
Domestic.................................. $ 11,800 $ 29,100 $ 14,700
International............................. 2,500 7,500 7,100
Manufacturing................................ 1,200 3,600 3,700
Eliminations................................. (400) (1,000) (700)
-------- -------- --------
$ 15,100 $ 39,200 $ 24,800
======== ======== ========
Capital expenditures
Bowling centers
Domestic.................................. $ 5,100 $ 17,800 $ 10,400
International............................. 2,300 10,200 4,300
Manufacturing................................ 400 4,500 4,100
Eliminations................................. (900) (2,500) (1,000)
-------- -------- --------
$ 6,900 $ 30,000 $ 17,800
======== ======== ========
</TABLE>
F-67
<PAGE> 184
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 13 -- GEOGRAPHIC SEGMENTS
Information about the Combined Companies' operations in different
geographic areas for the four months ended April 30, 1996 and the years ended
December 31, 1995 and 1994 and identifiable assets at April 30, 1996 and
December 31, 1995 are presented below:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Net operating revenue:
United States................................ $ 103,800 $371,400 $296,300
Japan........................................ 13,700 50,300 58,200
Hong Kong.................................... 14,000 40,800 55,100
Korea........................................ 5,800 6,000 --
Australia.................................... 14,700 47,100 43,900
United Kingdom............................... 7,300 26,100 27,600
Mexico....................................... 2,100 7,800 15,300
Sweden....................................... 1,200 10,000 9,700
Canada....................................... 300 600 700
Spain........................................ 1,000 2,700 2,600
Other European countries..................... 5,200 16,000 17,700
China........................................ 400 -- --
Eliminations................................. (4,600) (13,900) (9,300)
--------- --------- ---------
$ 164,900 $564,900 $517,800
========= ========= =========
</TABLE>
Net operating revenues for the United States manufacturing operation has
been reduced by approximately $21,500 for the four months ended April 30, 1996
and $61,000 and $69,200 for the years ended December 31, 1995 and 1994,
respectively, to reflect the elimination of intercompany sales between the
domestic manufacturing operation and the manufacturing foreign sales and service
branches.
F-68
<PAGE> 185
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED DECEMBER 31,
APRIL 30, ---------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Operating (loss) income
United States................................ $ (2,900) $ 92,200 $ 83,300
Japan........................................ (1,400) 8,800 13,300
Hong Kong.................................... 800 6,200 5,200
Korea........................................ (300) (1,200) --
Australia.................................... (1,300) 13,300 12,000
United Kingdom............................... (1,100) 2,400 3,700
Mexico....................................... (200) 1,500 4,300
Sweden....................................... (500) 1,500 1,700
Canada....................................... -- -- --
Spain........................................ (100) (100) 300
Other European countries..................... (1,300) 1,300 1,100
China........................................ (200) -- --
Eliminations................................. (500) (1,500) (200)
--------- --------- ---------
$ (9,000) $124,400 $124,700
========= ========= =========
</TABLE>
Operating (loss) income for the United States manufacturing operation has
been reduced by approximately $1,300 for the four months ended April 30, 1996
and $900 and $1,600 for the years ended December 31, 1995 and 1994,
respectively, to reflect the elimination of intercompany gross profit between
the domestic manufacturing operation and the manufacturing foreign sales and
service branches.
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Identifiable assets
United States........................................... $ 290,400 $311,300
Japan................................................... 17,200 22,100
Hong Kong............................................... 7,700 8,500
Korea................................................... 4,500 2,900
Australia............................................... 34,800 31,600
United Kingdom.......................................... 12,200 11,800
Mexico.................................................. 5,100 4,500
Sweden.................................................. 2,200 2,600
Canada.................................................. 900 1,200
Spain................................................... 200 2,000
Other European countries................................ 7,700 8,400
China................................................... 2,300 2,000
Eliminations............................................ (10,000) (8,500)
--------- ---------
$ 375,200 $400,400
========= =========
</TABLE>
Identifiable assets for the foreign sales and service branches have been
reduced by approximately $5,700 at April 30, 1996 and $4,400 at December 31,
1995 to reflect the elimination of
F-69
<PAGE> 186
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
intercompany gross profit in inventory between the domestic manufacturing
operations and the manufacturing foreign sales and service branches.
NOTE 14 -- BUSINESS COMBINATIONS
Effective December 31, 1994, The Reece Corporation, a related company, was
merged into AMF Bowling. The merger was accounted for at historical cost as a
capital contribution. The Reece Corporation activities for 1995 and 1994 were
not material to the combined financial statements.
Effective August 31, 1994, AMF Bowling acquired certain assets and
liabilities of Legendary Billiards, Inc. ("Legendary") for $215. Legendary is a
manufacturer of billiard cues. The acquisition was accounted for under the
purchase method, and the results of operations are included in the financial
statements from the date of acquisition.
Pro forma results of operations for the Legendary acquisition have not been
presented because the effects of this acquisition were not material.
Fair Lanes, Inc. ("Fair Lanes") operated 106 bowling centers in the United
States and Puerto Rico. On June 22, 1994, Fair Lanes and its parent Fair Lanes
Entertainment, Inc. ("FLE"), each filed voluntary petitions for relief under
Chapter 11 of Title 11 of the United States Code ("Chapter 11"). Fair Lanes'
operating subsidiaries did not file for Chapter 11 protection. At the time of
filing, liabilities subject to compromise consisted of Fair Lanes' $138,000
senior secured notes, which were publicly traded, and FLE's debt in the form of
$48,000 variable rate and zero coupon notes (these notes were also publicly
traded). The Bankruptcy Court approved the plan of reorganization effective
September 29, 1994 whereby the holders of FLE's $48,000 of notes received
approximately 6% of Fair Lanes' equity and the holders of Fair Lanes' $138,000
of notes received approximately 94% of Fair Lanes' equity and $90,350 of new
9.5% notes. The former Fair Lanes' equityholders' interests were eliminated as a
result of the reorganization. Through September 29, 1994, AMF's shareholders had
purchased old Fair Lanes' and FLE's notes which resulted in the AMF shareholders
obtaining approximately 56% of the voting shares of Fair Lanes. One other
shareholder held approximately 35% of the new stock and the remaining 9% was
held by other shareholders. The AMF shareholders were able to acquire the shares
held by the 35% shareholder on January 7, 1996 and an additional 2% of the
shares from other shareholders in open market purchases. On February 7, 1996,
the AMF shareholders affected a cash merger and bought out the remaining
shareholders.
The Fair Lanes' acquisition was accounted for as a purchase. As a result of
the relatively short acquisition period and the fact that the minority
shareholders' interest was not affected for losses during the acquisition
period, the combined financial statements include the results of operations for
periods subsequent to September 29, 1994.
The assets acquired and liabilities assumed were recorded at their
estimated fair value as follows:
<TABLE>
<S> <C>
Current assets.................................. $ 3,059
Property and equipment.......................... 141,785
Other assets.................................... 12,643
Current liabilities............................. (22,672)
Long-term liabilities........................... (116,174)
----------
Purchase price.................................. $ 18,641
==========
</TABLE>
F-70
<PAGE> 187
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The following summary presents unaudited pro forma combined results of
operations as if the acquisition of Fair Lanes occurred at the beginning of
1994, and includes adjustments related to depreciation of fixed assets and
interest expense on debt assuming the initial purchase price allocation occurred
as of January 1, 1994. In addition, expenses related to the Chapter 11
reorganization have been eliminated. The pro forma results are for illustrative
purposes only, and do not purport to be indicative of the actual results which
would have occurred had the transaction been consummated as of January 1, 1994,
nor are they indicative of future results of operations. The pro forma results
do not reflect changes in the business which have occurred subsequent to the
date of acquisition.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Operating revenue............................ $590,459
Operating income............................. 113,411
Income before income taxes................... 94,949
</TABLE>
F-71
<PAGE> 188
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 15 -- STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
APRIL 30, 1996
------------------------------------------------------------------------------------------------
EQUITY
ADJUSTMENT
FROM FOREIGN TOTAL
ISSUED AND COMMON PAID IN RETAINED CURRENCY STOCKHOLDERS'
AUTHORIZED OUTSTANDING STOCK CAPITAL EARNINGS TRANSLATION OTHER EQUITY
---------- ------------ ------ -------- -------- ------------ ----- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMF Bowling, Inc. ...... 10,000 950.6689 $ 1 $ 51,778 $15,639 $ 593 $-- $ 68,011
AMF Bowling Centers,
Inc. ................. 15,000 9,485.1000 9 183,780 8,825 -- -- 192,614
AMF Beverage Company of
Oregon, Inc........... 10,000 94.8510 -- -- -- -- -- --
King Louie Lenexa,
Inc. ................. 30,000 94.8510 -- -- -- -- -- --
AMF Catering Services
Pty Ltd. ............. 100,000 100,000.0000 82 -- -- -- -- 82
AMF Bowling Centers
(Aust) International,
Inc. ................. 10,000 948.5100 1 492 24,327 1,645 -- 26,465
AMF Bowling Centers
(Canada)
International,
Inc. ................. 10,000 948.5100 1 2,109 (1,238) 85 -- 957
AMF BCO - France One,
Inc. ................. 10,000 1,000.0000 1 220 533 (93) -- 661
AMF BCO - France Two,
Inc. ................. 10,000 1,000,0000 1 595 1,440 (250) -- 1,786
AMF Bowling Centers
(Hong Kong)
International,
Inc. ................. 10,000 948.5100 1 532 2,175 -- -- 2,708
AMF Bowling Centers
International, Inc. -
Japan................. 10,000 9,485.1000 10 1,210 4,446 505 -- 6,171
AMF Bowling Mexico
Holding, Inc. ........ 1,000 75.6972 322 1,856 2,563 (3,056) -- 1,685
Boliches AMF, Inc. ..... 10,000 100.0000 1 493 682 (814) -- 362
AMF Bowling Centers II
Inc. - Switzerland.... -- -- 205 171 -- 376
AMF BCO - U.K.
One, Inc. ............ 10,000 100.0000 1 1,597 (350) (86) -- 1,162
AMF BCO - U.K.
Two, Inc. ............ 10,000 100.0000 1 4,357 (956) (235) -- 3,167
AMF BCO - China,
Inc. ................. 10,000 1,000.0000 1 577 (159) (4) -- 415
AMF Bowling Centers
China, Inc. .......... 10,000 1,000.0000 1 2,174 (600) (13) -- 1,562
Bush River Corporation.. 100,000 18,895.1919 20 -- -- -- -- 20
Eliminations............ -- -- -- -- (5,230) -- -- (5,230)
--
---- -------- ------- ------- --------
Totals............................................. $454 $251,770 $52,302 $ (1,552) $-- $302,974
==== ======== ======= ======= == ========
</TABLE>
F-72
<PAGE> 189
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------------------------------------------------
NOTES
RECEIVABLE TOTAL
ISSUED AND COMMON PAID IN RETAINED DEFERRED STOCK STOCKHOLDERS'
AUTHORIZED OUTSTANDING STOCK CAPITAL EARNINGS TRANSLATION SUBSCRIPTION EQUITY
---------- ----------- ------ ------- -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMF Bowling, Inc. ... 10,000 950.6689 $ 1 $28,213 $ 54,463 $ 593 $ -- $ 83,270
AMF Bowling Centers,
Inc. .............. 15,000 9,485.1000 9 29,122 13,436 -- (726) 41,841
AMF Beverage Company
of Oregon, Inc. ... 10,000 94.8510 -- -- 382 -- -- 382
King Louie Lenexa,
Inc. .............. 30,000 94.8510 -- -- 859 -- -- 859
AMF Bowling Centers
(Aust)
International,
Inc. .............. 10,000 948.5100 1 492 25,251 (74) (503) 25,167
AMF Bowling Centers
(Canada)
International,
Inc. .............. 10,000 948.5100 1 2,109 (1,286) 85 -- 909
AMF BCO - France One,
Inc. .............. 10,000 1,000.0000 1 31 681 (44) -- 669
AMF BCO - France Two,
Inc. .............. 10,000 1,000,0000 1 83 1,842 (119) -- 1,807
AMF Bowling Centers
(Hong Kong)
International,
Inc. .............. 10,000 948.5100 1 57 2,420 -- (62) 2,416
AMF Bowling Centers
International,
Inc. - Japan....... 10,000 9,485.1000 10 156 4,285 611 (170) 4,892
AMF Bowling Mexico
Holding, Inc. ..... 1,000 75.6972 1,507 226 2,753 (3,258) -- 1,228
Boliches AMF,
Inc. .............. 10,000 100.0000 1 60 814 (815) -- 60
AMF Bowling Centers
II Inc. -
Switzerland........ 1,000 100.0000 1 -- 617 61 -- 679
AMF BCO - U.K. One,
Inc. .............. 10,000 100.0000 1 129 (186) (113) -- (169)
AMF BCO - U.K. Two,
Inc. .............. 10,000 100.0000 1 352 (509) (310) -- (466)
AMF BCO - China,
Inc. .............. 10,000 1,000.0000 1 577 (97) (4) -- 477
AMF Bowling Centers
China, Inc. ....... 10,000 1,000.0000 1 2,174 (367) (13) -- 1,795
Bush River
Corporation........ 100,000 18,895.1919 -- -- 230 -- -- 230
Eliminations......... -- -- -- -- (4,508) -- -- (4,508)
---- -------- ------- ------- ------- --------
Totals......................................... $1,538 $63,781 $101,080 $(3,400) $ (1,461) $161,538
==== ======== ======= ======= ======= ========
</TABLE>
F-73
<PAGE> 190
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 16 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On February 16, 1996, the stockholders of the Combined Companies executed a
Stock Purchase Agreement, subject to certain closing conditions, to sell the
stock and certain assets of the individual companies to AMF Group Holdings,
Inc., through its subsidiaries. On May 1, 1996, the sale transaction was
completed.
In conjunction with the acquisition of the Combined Companies, AMF Bowling
Worldwide, Inc. (formerly AMF Group Inc.), a subsidiary of AMF Group Holdings,
Inc., issued Senior Subordinated Notes and Senior Subordinated Discount Notes on
March 21, 1996. On May 1, 1996, AMF Bowling Worldwide, Inc. executed a bank
credit agreement and certain additional subsidiaries of AMF Bowling Worldwide,
Inc. became guarantors of the Senior Subordinated Notes and the Senior
Subordinated Discount Notes. These financing arrangements provide for guarantees
by the following companies which became indirect subsidiaries of AMF Bowling
Worldwide, Inc., which is the borrower and issuer of the notes evidencing such
indebtedness. Guarantor companies include the following:
- AMF Bowling Centers, Inc.
- Bush River Corporation
- King Louie Lenexa, Inc.
- AMF Beverage Company of Oregon, Inc.
- AMF Bowling, Inc.
- AMF Bowling Centers (Aust) International Inc.
- AMF Bowling Centers (Canada) International Inc.
- AMF BCO - France One, Inc.
- AMF BCO - France Two, Inc.
- AMF Bowling Centers (Hong Kong) International Inc.
- AMF Bowling Centers International Inc. (Japan)
- AMF Bowling Mexico Holding, Inc.
- Boliches AMF, Inc.
- AMF BCO - U.K. One, Inc.
- AMF BCO - U.K. Two, Inc.
- AMF BCO - China, Inc.
- AMF Bowling Centers China, Inc.
Included with the guarantor companies at April 30, 1996 are AMF Bowling
Centers Switzerland Inc. and AMF Bowling Centers Spain Inc., newly formed
subsidiaries of AMF Bowling Worldwide, Inc., which, respectively, purchased
assets of one bowling center and two bowling centers from AMF Bowling Centers
II, Inc. (Switzerland) and AMF Bowling S.A., former subsidiary of AMF Bowling
Mexico Holding, Inc.
Included with the guarantor companies at December 31, 1995 and 1994 is AMF
Bowling Centers II, Inc. (Switzerland) which sold assets of one bowling center,
as discussed above, to a newly formed subsidiary of AMF Bowling Worldwide, Inc.,
which became a guarantor.
F-74
<PAGE> 191
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Non-guarantor companies at April 30, 1996 include the following foreign
subsidiaries of certain guarantor companies:
- AMF Bowling (Unlimited)
- Worthington North Properties Limited
- AMF Bowling France SNC
- AMF Bowling de Paris SNC
- AMF Bowling de Lyon La Part Dieu SNC
- Boliches y Compania
- Operadora Mexicana de Boliches, S.A.
- Promotora de Boliches, S.A. de C.V.
- Immeubles Obispado, S.A.
- Immeubles Minerva, S.A.
- Boliches Mexicano, S.A.
- AMF Bowling Centers (China) Company
- AMF Garden Hotel Bowling Center Company
Included in the non-guarantor companies at December 31, 1995 and 1994 is
AMF Bowling S.A. which sold assets of two bowling centers in Spain to a newly
formed subsidiary of AMF Bowling Worldwide, Inc., which became a guarantor
company.
The following condensed combining information presents:
- Condensed combining balance sheets as of April 30, 1996 and December 31,
1995 and the related condensed combining statements of operations and of
cash flows for the four months ended April 30, 1996 and the years ended
December 31, 1995 and 1994.
- Elimination entries necessary to combine the entities comprising the
Combined Companies.
F-75
<PAGE> 192
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING BALANCE SHEETS
FOURS MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 18,628 $ 3,285 $ -- $ 21,913
Accounts and notes receivable, net of allowance
for doubtful accounts....................... 32,316 1,571 -- 33,887
Accounts and notes receivable -- affiliates.... 2,463 380 (2,677) 166
Inventories.................................... 41,831 1,465 -- 43,296
Prepaid expenses and other..................... 4,856 1,257 -- 6,113
-------- ------- ------- --------
Total current assets................... 100,094 7,958 (2,677) 105,375
Property and equipment, net...................... 241,968 10,518 (942) 251,544
Investment in subsidiaries....................... 10,643 -- (10,643) --
Other assets..................................... 17,399 931 -- 18,330
-------- ------- ------- --------
Total assets........................... $370,104 $19,407 $(14,262) $375,249
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 21,760 $ 1,910 $ -- $ 23,670
Book overdrafts................................ 5,724 -- -- 5,724
Accrued expenses and deposits.................. 32,185 2,731 -- 34,916
Accounts and notes payable -- affiliates....... 14 2,663 (2,677) --
Long-term debt, current portion................ 10 -- -- 10
Income taxes payable........................... 1,078 679 -- 1,757
-------- ------- ------- --------
Total current liabilities.............. 60,771 7,983 (2,677) 66,077
Long-term debt................................... 1,958 -- -- 1,958
Other liabilities................................ 2,811 -- -- 2,811
Deferred income taxes............................ 648 781 -- 1,429
-------- ------- ------- --------
Total liabilities...................... 66,188 8,764 (2,677) 72,275
-------- ------- ------- --------
Commitments and contingencies
Stockholders' equity:
Common stock................................... 454 3,940 (3,940) 454
Paid-in capital................................ 251,770 5,003 (5,003) 251,770
Retained earnings.............................. 53,244 6,247 (7,189) 52,302
Equity adjustment from foreign currency
translation................................. (1,552) (4,547) 4,547 (1,552)
-------- ------- ------- --------
Total stockholders' equity............. 303,916 10,643 (11,585) 302,974
-------- ------- ------- --------
Total liabilities and stockholders'
equity............................... $370,104 $19,407 $(14,262) $375,249
======== ======= ======= ========
</TABLE>
F-76
<PAGE> 193
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING BALANCE SHEETS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 8,843 $ 889 $ -- $ 9,732
Accounts and notes receivable, net of
allowance for doubtful accounts........... 37,499 1,527 -- 39,026
Accounts and notes
receivable -- affiliates.................. 4,477 7,465 (7,963) 3,979
Inventories.................................. 38,042 1,779 -- 39,821
Prepaid expenses and other................... 3,944 1,238 -- 5,182
-------- ------- -------- --------
Total current assets................. 92,805 12,898 (7,963) 97,740
Notes receivable -- affiliates................. 22,941 -- -- 22,941
Property and equipment, net.................... 250,637 10,582 (1,495) 259,724
Other assets................................... 29,869 822 (10,718) 19,973
-------- ------- -------- --------
Total assets......................... $396,252 $24,302 $(20,176) $400,378
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 22,313 $ 1,403 $ (75) $ 23,641
Book overdrafts.............................. 2,362 -- -- 2,362
Accrued expenses and deposits................ 28,203 2,125 -- 30,328
Accounts and notes payable -- affiliates..... 1,821 7,033 (6,865) 1,989
Long-term debt, current portion.............. 1,084 -- -- 1,084
Income taxes payable......................... 5,930 1,199 -- 7,129
-------- ------- -------- --------
Total current liabilities............ 61,713 11,760 (6,940) 66,533
Long-term debt................................. 19,550 -- -- 19,550
Notes payable -- affiliates.................... 146,639 1,076 (988) 146,727
Other liabilities.............................. 5,282 748 -- 6,030
-------- ------- -------- --------
Total liabilities.................... 233,184 13,584 (7,928) 238,840
-------- ------- -------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock................................. 1,538 3,941 (3,941) 1,538
Paid-in capital.............................. 63,781 4,153 (4,153) 63,781
Retained earnings............................ 102,610 7,300 (8,830) 101,080
Equity adjustment from foreign currency
translation............................... (3,400) (4,676) 4,676 (3,400)
Notes receivable stock subscription.......... (1,461) -- -- (1,461)
-------- ------- -------- --------
Total stockholders' equity........... 163,068 10,718 (12,248) 161,538
-------- ------- -------- --------
Total liabilities and stockholders'
equity............................. $396,252 $24,302 $(20,176) $400,378
======== ======= ======== ========
</TABLE>
F-77
<PAGE> 194
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF OPERATIONS
FOURS MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Operating revenue:
Sales of products and services............... $154,500 $10,731 $ (860) $164,371
Revenue from operating lease activities...... 323 250 -- 573
-------- ------- ----- --------
Total operating revenues............. 154,823 10,981 (860) 164,944
-------- ------- ----- --------
Operating expenses:
Cost of goods sold, excluding depreciation of
$791...................................... 42,242 1,445 (569) 43,118
Bowling center operations.................... 71,289 8,985 (118) 80,156
Selling, general and administrative.......... 34,875 682 -- 35,557
Depreciation and amortization................ 14,380 802 (85) 15,097
-------- ------- ----- --------
Total operating expenses............. 162,786 11,914 (772) 173,928
-------- ------- ----- --------
Operating loss....................... (7,963) (933) (88) (8,984)
Nonoperating income (expenses):
Interest expense............................. (4,501) (3) -- (4,504)
Other expenses, net.......................... (634) (58) -- (692)
Interest income.............................. 574 37 -- 611
Equity in earnings of subsidiaries........... (707) -- 707 --
Foreign currency transaction gain (loss)..... (179) 150 -- (29)
-------- ------- ----- --------
Loss before income taxes....................... (13,410) (807) 619 (13,598)
Income tax benefit............................. 1,631 100 -- 1,731
-------- ------- ----- --------
Net loss............................. $(11,779) $ (707) $ 619 $(11,867)
======== ======= ===== ========
</TABLE>
F-78
<PAGE> 195
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Operating revenues:
Sales of products and services............ $ 532,349 $ 34,197 $ (2,548) $563,998
Revenue from operating lease activities... 926 -- -- 926
-------- ------- ------- --------
Total operating revenues.......... 533,275 34,197 (2,548) 564,924
-------- ------- ------- --------
Operating expenses:
Cost of sales, excluding depreciation of
$2,531................................. 180,980 4,730 (1,581) 184,129
Bowling center operations................. 149,535 16,930 -- 166,465
Selling, general and administrative....... 47,218 4,046 (486) 50,778
Depreciation and amortization............. 36,723 2,650 (234) 39,139
-------- ------- ------- --------
Total operating expenses.......... 414,456 28,356 (2,301) 440,511
-------- ------- ------- --------
Operating income.................. 118,819 5,841 (247) 124,413
Nonoperating income (expenses):
Interest expense.......................... (15,569) (142) -- (15,711)
Other expenses, net....................... (600) (443) -- (1,043)
Interest income........................... 1,837 347 -- 2,184
Equity in earnings of subsidiaries........ 3,444 -- (3,444) --
Foreign currency transaction loss......... (465) (514) -- (979)
-------- ------- ------- --------
Income before income taxes.................. 107,466 5,089 (3,691) 108,864
Income tax expense.......................... 10,453 1,645 -- 12,098
-------- ------- ------- --------
Net income........................ $ 97,013 $ 3,444 $ (3,691) $ 96,766
======== ======= ======= ========
</TABLE>
F-79
<PAGE> 196
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Operating revenues:
Sales of products and services............ $ 478,056 $ 40,930 $ (3,560) $515,426
Revenue from operating lease activities... 969 1,391 -- 2,360
-------- ------- ------- --------
Total operating revenues.......... 479,025 42,321 (3,560) 517,786
-------- ------- ------- --------
Operating expenses:
Cost of sales, excluding depreciation of
$1,691................................. 191,250 6,694 (1,901) 196,043
Bowling center operations................. 97,898 18,718 (1,469) 115,147
Selling, general and administrative....... 52,392 4,750 -- 57,142
Depreciation and amortization............. 21,606 3,343 (173) 24,776
-------- ------- ------- --------
Total operating expenses.......... 363,146 33,505 (3,543) 393,108
-------- ------- ------- --------
Operating income.................. 115,879 8,816 (17) 124,678
Nonoperating income (expenses):
Interest expense.......................... (7,164) (230) -- (7,394)
Other expenses, net....................... (1,188) -- -- (1,188)
Interest income........................... 231 295 -- 526
Equity in earnings of subsidiaries........ 5,179 -- (5,179) --
Foreign currency transaction loss......... (654) (213) -- (867)
-------- ------- ------- --------
Income before income taxes.................. 112,283 8,668 (5,196) 115,755
Income tax expense.......................... 12,963 3,489 -- 16,452
-------- ------- ------- --------
Net income........................ $ 99,320 $ 5,179 $ (5,196) $ 99,303
======== ======= ======= ========
</TABLE>
F-80
<PAGE> 197
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF CASH FLOWS
FOURS MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(11,072) $ (707) $ (88) $(11,867)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............ 14,380 802 (85) 15,097
Deferred income taxes.................... 435 (21) -- 414
Equity in earnings of subsidiaries....... (707) -- 707 --
Changes in assets and liabilities:
Accounts and notes receivable, net..... 4,821 (37) -- 4,784
Receivables and
payables -- affiliates.............. 593 942 -- 1,535
Inventories............................ (3,655) 24 -- (3,631)
Other assets and liabilities........... (3,476) (34) 837 (2,673)
Accounts payable and accrued
expenses............................ 7,634 1,079 -- 8,713
Income taxes payable................... (5,442) (303) -- (5,745)
-------- ------- ------- --------
Net cash provided by operating
activities.......................... 3,511 1,745 1,371 6,627
-------- ------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment.......... (6,046) (1,001) 173 (6,874)
Other....................................... 2,989 -- -- 2,989
-------- ------- ------- --------
Net cash used for investing
activities.......................... (3,057) (1,001) 173 (3,885)
-------- ------- ------- --------
Cash flows from financing activities:
Distributions to stockholders............... (36,721) (622) 622 (36,721)
Payment of long-term debt................... (3,812) -- -- (3,812)
Proceeds from notes payable -- stockholders,
net...................................... 1,236 -- -- 1,236
Capital contributions by stockholders....... 24,805 2,252 (2,252) 24,805
Collection of notes
receivable -- affiliates................. 19,408 -- -- 19,408
Other....................................... 3,902 -- 86 3,988
-------- ------- ------- --------
Net cash provided by financing
activities.......................... 8,818 1,630 (1,544) 8,904
Effect of exchange rates on cash and
cash equivalents.................... 330 205 -- 535
-------- ------- ------- --------
Net increase in cash and cash equivalents..... 9,602 2,579 -- 12,181
Cash and cash equivalents at beginning of
period...................................... 9,026 706 -- 9,732
-------- ------- ------- --------
Cash and cash equivalents at end of period.... $ 18,628 $ 3,285 $ -- $ 21,913
======== ======= ======= ========
</TABLE>
F-81
<PAGE> 198
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 97,013 $ 3,444 $ (3,691) $ 96,766
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of subsidiaries....... (3,444) -- 3,444 --
Dividends from non-guarantor companies... 3,133 -- (3,133) --
Depreciation and amortization............ 36,661 2,682 (204) 39,139
Deferred income taxes.................. 215 (1,045) -- (830)
Loss on sale of property and equipment,
net................................. 567 -- -- 567
Changes in assets and liabilities, net
of effects from companies acquired:
Accounts and notes receivable,
net............................... 11,864 (1,234) -- 10,630
Receivables and
payables -- affiliates............ 7,262 (1,115) -- 6,147
Inventories......................... (5,596) (400) -- (5,996)
Other assets and liabilities........ (2,484) (369) 2,752 (101)
Accounts payable and accrued
expenses.......................... (19,187) 446 -- (18,741)
Income taxes payable................ (2,039) (791) -- (2,830)
-------- ------- ------- --------
Net cash provided by operating
activities........................ 123,965 1,618 (832) 124,751
-------- ------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment.......... (26,411) (4,005) 451 (29,965)
Proceeds from sales of property and
equipment................................ 494 916 -- 1,410
Other....................................... 229 -- -- 229
-------- ------- ------- --------
Net cash used for investing
activities........................ (25,688) (3,089) 451 (28,326)
-------- ------- ------- --------
Cash flows from financing activities:
Dividends to guarantor companies............ -- (3,133) 3,133 --
Payments on credit note agreements, net..... (11,057) -- -- (11,057)
Distributions to stockholders............... (71,851) -- -- (71,851)
Payment of long-term debt................... (10,605) 320 -- (10,285)
Payment for redemption of stock --.......... (3,960) -- -- (3,960)
stockholders, net........................ (4,882) 1,089 -- (3,793)
Capital contributions by stockholders....... 8,329 -- -- 8,329
Capital contributions from guarantor........ -- 2,752 (2,752) --
Other....................................... (2,056) -- -- (2,056)
-------- ------- ------- --------
Net cash (used for) provided by
financing activities.............. (96,082) 1,028 381 (94,673)
Effect of exchange rates on cash.... (5) (189) -- (194)
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 2,190 (632) -- 1,558
Cash at beginning of year..................... 6,653 1,521 -- 8,174
-------- ------- ------- --------
Cash at end of year........................... $ 8,843 $ 889 $ -- $ 9,732
======== ======= ======= ========
</TABLE>
F-82
<PAGE> 199
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
-------- --------- ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 99,320 $ 5,179 $ (5,196) $ 99,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of subsidiaries............ (5,179) -- 5,179 --
Dividends from non-guarantor companies........ 5,084 -- (5,084) --
Depreciation and amortization................. 21,606 3,343 (173) 24,776
Deferred income taxes...................... (104) 85 -- (19)
Loss on sale of property and equipment,
net...................................... 911 -- -- 911
Changes in assets and liabilities, net of
effects from companies acquired:
Accounts and notes receivable, net....... (9,325) 311 -- (9,014)
Receivables and payables -- affiliates... 3,692 1,033 -- 4,725
Inventories.............................. (1,369) (42) -- (1,411)
Other assets............................. (864) (136) -- (1,000)
Accounts payable and accrued expenses.... 3,929 (91) -- 3,838
Income taxes payable..................... (3,207) 817 -- (2,390)
-------- ------- ------- --------
Net cash provided by operating
activities............................ 114,494 10,499 (5,274) 119,719
-------- ------- ------- --------
Cash flows from investing activities:
Acquisitions of operating units, net of cash
acquired................................... (17,307) -- -- (17,307)
Purchase of property and equipment............ (16,692) (1,286) 190 (17,788)
Proceeds from sales of property and
equipment.................................. 1,494 41 -- 1,535
Other......................................... 941 -- -- 941
-------- ------- ------- --------
Net cash used for investing
activities.......................... (31,564) (1,245) 190 (32,619)
-------- ------- ------- --------
Cash flows from financing activities:
Dividends to guarantor companies.............. -- (5,084) 5,084 --
Payments on credit note agreements, net....... (3,689) -- -- (3,689)
Distributions to stockholders................. (78,170) -- -- (78,170)
Payment of long-term debt..................... (740) (364) -- (1,104)
Proceeds (payments) on notes payable --
stockholders, net.......................... (4,989) (3,571) -- (8,560)
Capital contributions by stockholders......... 2,109 -- -- 2,109
Other......................................... (212) -- -- (212)
-------- ------- ------- --------
Net cash used for financing
activities.......................... (85,691) (9,019) 5,084 (89,626)
Effect of exchange rates on cash...... 2,488 271 -- 2,759
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... (273) 506 -- 233
Cash at beginning of year....................... 6,926 1,015 -- 7,941
-------- ------- ------- --------
Cash at end of year............................. $ 6,653 $ 1,521 -- $ 8,174
======== ======= ======= ========
</TABLE>
F-83
<PAGE> 200
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 17 -- SUBSEQUENT EVENT (UNAUDITED)
On October 10, 1996, AMF Bowling Centers, Inc., completed the acquisition
of 50 bowling centers and certain related assets and liabilities from Charan
Industries, Inc. pursuant to an Asset Purchase Agreement, dated as of September
10, 1996.
The purchase was approximately $106,500, including certain adjustments and
transaction costs. It was funded with approximately $40,000 from the sale of
equity by AMF Group Holdings Inc., a wholly-owned subsidiary of AMF Holdings
Inc., to its institutional stockholders and one of its directors and with
$66,500 from available borrowing under the Company's Acquisition Facility.
The April 30, 1996 combined financial statements do not reflect any
adjustments or cost associated with the acquisition.
F-84
<PAGE> 201
AMF GROUP HOLDINGS INC.
SELECTED QUARTERLY DATA (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
-------------------------
1997 QUARTERS ENDED MARCH 31 JUNE 30
- ---------------------------- ------------- -------
<S> <C> <C>
Net sales................... $ 157.6 $ 160.5
Gross profit................ 119.5 112.4
Operating income............ 29.7 12.7
Income before income taxes
(loss).................... 1.2 (17.6)
Net income (loss)........... 0.1 (12.3)
</TABLE>
<TABLE>
<CAPTION>
AMF GROUP HOLDINGS INC.
PREDECESSOR COMPANY ---------------------------------------------------------
---------------------- PRO FORMA
ONE MONTH TWO MONTHS QUARTER
1996 QUARTERS ENDED MARCH 31 APRIL 30 JUNE 30 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------- -------- --------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $123.3 $ 41.6 $ 73.4 $ 114.8 $131.8 $ 179.6
Gross profit................ 92.6 29.2 49.9 78.9 86.8 117.6
Operating income (loss)..... 27.9 (36.9) 4.0 5.3 14.3 27.8
Income (loss) before income
taxes..................... 24.3 (37.9) (15.8) (18.1) (12.3) 0.6
Net income (loss)........... 21.6 (33.4) (11.9) (13.6) (5.3) (2.1)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------------
1995 QUARTERS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales................... $156.9 $ 138.3 $130.4 $ 139.3
Gross profit................ 109.4 90.6 84.6 96.2
Operating income............ 41.7 26.8 22.1 33.8
Income before income
taxes..................... 37.5 23.5 17.8 30.2
Net income.................. 34.2 19.7 14.9 27.9
</TABLE>
Depreciation expense previously reported in cost of goods sold is currently
presented as a separate component of operating income in the consolidated
statement of income. The amounts reclassified from cost of goods sold to
depreciation expense are as follows:
<TABLE>
<CAPTION>
ONE MONTH TWO MONTHS
MARCH 31 APRIL 30 JUNE 30
-------- --------- ----------
<S> <C> <C> <C>
1996..................................... $0.6 $ 0.2 $0.4
</TABLE>
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
-------- ---------
<S> <C> <C> <C>
1995..................................... $0.4 $ 0.6
</TABLE>
F-85
<PAGE> 202
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Forward-Looking Statements............ 4
Prospectus Summary.................... 5
Risk Factors.......................... 17
Use of Proceeds....................... 24
Pro Forma Consolidated Financial
Statements.......................... 25
Selected Financial Data............... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 44
Management............................ 57
Principal Stockholders................ 65
Certain Transactions.................. 69
Description of Senior Debt............ 71
Description of Exchange Notes......... 78
Description of Certain Federal Income
Tax Consequences of an Investment in
the Exchange Notes.................. 110
Plan of Distribution.................. 115
Experts............................... 116
Validity of Exchange Notes............ 116
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
AMF BOWLING WORLDWIDE, INC.
------------------
GOLDMAN, SACHS & CO.
======================================================
[AMF LOGO]
