UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10 - Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 001-12131
---------------------
AMF BOWLING WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3873272
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8100 AMF DRIVE
RICHMOND, VIRGINIA 23111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
--------------------
(804) 730-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No _____.
At August 9, 1999, 100 shares of common stock, par value of $.01, of the
Registrant were outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- --------------
(unaudited)
<S> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 14,842 $ 21,847
Accounts and notes receivable, net of allowance for
doubtful accounts of $7,147 and $6,492, respectively 88,541 82,435
Inventories 65,822 64,735
Deferred taxes and other current assets 28,345 22,539
------------- --------------
Total current assets 197,550 191,556
Property and equipment, net 847,125 873,985
Other assets 96,841 100,295
Goodwill, net 762,331 772,744
Investments in and advances to joint ventures 11,117 17,436
------------- --------------
Total assets $ 1,914,964 $ 1,956,016
============= ==============
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Accounts payable $ 35,666 $ 33,900
Accrued expenses 60,445 60,512
Income taxes payable 6,536 5,316
Long-term debt, current portion 34,250 32,375
------------- --------------
Total current liabilities 136,897 132,103
Long-term debt, less current portion 1,023,524 1,014,716
Other long-term liabilities 4,261 5,265
------------- --------------
Total liabilities 1,164,682 1,152,084
------------- --------------
Commitments and contingencies
Stockholder's equity:
Common stock (par value $.01, 100 shares authorized,
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively) - -
Paid-in capital 1,010,059 1,005,798
Retained deficit (241,112) (182,541)
Foreign currency translation adjustment (18,665) (19,325)
------------- --------------
Total stockholders' equity 750,282 803,932
------------- --------------
Total liabilities and stockholders' equity $ 1,914,964 $ 1,956,016
============= ==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
2
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
Operating revenue $ 161,095 $ 161,757 $ 363,662 $ 349,041
---------- ---------- ---------- -----------
Operating expenses:
Cost of goods sold 37,826 46,164 77,408 85,021
Bowling center operating expenses 90,716 81,931 183,937 160,402
Selling, general, and administrative expenses 13,302 15,383 26,714 32,284
Depreciation and amortization 32,716 29,967 65,827 56,757
---------- ---------- ---------- -----------
Total operating expenses 174,560 173,445 353,886 334,464
---------- ---------- ---------- -----------
Operating income (loss) (13,465) (11,688) 9,776 14,577
---------- ---------- ---------- -----------
Nonoperating expenses (income):
Interest expense 28,204 24,982 54,059 50,956
Other expenses, net 3,458 1,982 6,432 2,555
Interest income (474) (496) (1,049) (986)
---------- ---------- ---------- -----------
Total nonoperating expenses 31,188 26,468 59,442 52,525
---------- ---------- ---------- -----------
Loss before income taxes (44,653) (38,156) (49,666) (37,948)
Provision (benefit) for income taxes 1,665 (7,123) 3,204 (6,687)
---------- ---------- ---------- -----------
Net loss before equity in loss of joint ventures (46,318) (31,033) (52,870) (31,261)
Equity in loss of joint ventures (178) (1,211) (5,701) (1,563)
---------- ---------- ---------- -----------
Net loss $ (46,496) $ (32,244) $ (58,571) $ (32,824)
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
---- ----
<S> <C>
Cash flows from operating activities:
Net loss $ (58,571) $ (32,824)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 65,827 56,757
Equity in loss of joint ventures 5,701 1,563
Amortization of bond discount 12,934 11,543
Loss on the sale of property and equipment, net 2,145 267
Changes in assets and liabilities:
Accounts and notes receivable, net (3,415) 8,726
Inventories (1,838) (13,908)
Other assets (6,505) (18,743)
Accounts payable and accrued expenses (1,407) (29,181)
Income taxes payable 1,267 314
Other long-term liabilities (460) (126)
----------- -----------
Net cash provided by (used in) operating activities 15,678 (15,612)
----------- -----------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,374) (152,791)
Investments in and advances to joint ventures - (5,377)
Purchases of property and equipment (21,336) (27,685)
Proceeds from the sale of property and equipment 206 193
----------- -----------
Net cash used in investing activities (22,504) (185,660)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 20,000 204,500
Payments on long-term debt (22,250) (262,358)
Contribution from Parent 3,731 255,823
Payments of noncompete obligations (264) (423)
----------- -----------
Net cash provided by financing activities 1,217 197,542
----------- -----------
Effect of exchange rates on cash (1,396) (26)
----------- -----------
Net decrease in cash (7,005) (3,756)
Cash and cash equivalents at beginning of period 21,847 35,790
----------- -----------
Cash and cash equivalents at end of period $ 14,842 $ 32,034
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations for the interim periods. The interim financial information and notes
thereto should be read in conjunction with the December 31, 1998, 1997 and 1996
audited consolidated financial statements of AMF Group Holdings Inc. ("AMF Group
Holdings") and its subsidiaries (collectively, the "Company") presented in the
Form 10-K Annual Report of AMF Bowling Worldwide, Inc. ("Bowling Worldwide") for
the fiscal year ended December 31, 1998 filed with the U.S. Securities and
Exchange Commission. The results of operations for the six months ended June 30,
1999 are not necessarily indicative of results to be expected for the entire
year.
The Company is principally engaged in two business segments: (i) the
ownership and operation of bowling centers, consisting of 418 U.S. bowling
centers and 123 international bowling centers in 10 countries ("Bowling
Centers"), including fifteen joint venture centers, as of June 30, 1999, and
(ii) the manufacture and sale of bowling equipment such as automatic
pinspotters, automatic scoring equipment, bowling pins, lanes, ball returns,
certain spare parts, and the resale of allied products such as bowling balls,
bags, shoes, and certain other spare parts ("Bowling Products"). The principal
markets for bowling equipment are U.S. and international bowling center
operators.
Bowling Worldwide is a wholly owned, direct subsidiary of AMF Group
Holdings. AMF Group Holdings is a wholly owned, direct subsidiary of AMF
Bowling, Inc. ("AMF Bowling"). AMF Group Holdings and AMF Bowling are holding
companies only. The principal assets in each are comprised of investments in
subsidiaries. The Company was acquired in 1996 by an investor group led by an
affiliate of Goldman, Sachs & Co. (the "Acquisition").
As of June 30, 1999, the Company has acquired 263 bowling centers and
constructed two bowling centers since the Acquisition for a combined purchase
price of $498.9 million. The Company has funded its acquisitions and center
construction from internally generated cash, borrowings under the senior secured
revolving credit facility (the "Bank Facility") under the Credit Agreement (as
defined in Note 5), and issuances of AMF Bowling common stock (the "Common
Stock"). See "Note 8. Acquisitions."
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated results of operations of the Company have been
presented for the three months and six months ended June 30, 1999 and 1998,
respectively. All significant intercompany balances and transactions have been
eliminated in the accompanying condensed consolidated financial statements.
Certain amounts in the prior year's financial statements have been reclassified
to conform to the current year presentation. All dollar amounts are in
thousands, except where otherwise indicated.
GOODWILL
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 8. Acquisitions", and in accordance with the purchase method
of accounting used in all acquisitions, the Company recorded goodwill
representing the excess of the purchase price over the allocation among the
acquired assets and liabilities in accordance with estimates of fair market
value on the dates of acquisition. Goodwill is being amortized over 40 years.
Amortization expense was $5,133 and $10,274 for the three months and six months
ended June 30, 1999, and $5,017 and $ 10,054 for the three months and six months
ended June 30, 1998, respectively.
5
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COMPREHENSIVE LOSS
Comprehensive loss was $44,919 and $57,911 for the three months and six
months ended June 30, 1999, and $35,845 and $35,026 for the three months and six
months ended June 30, 1998, respectively. Accumulated other comprehensive loss
consists of the foreign currency translation adjustment on the accompanying
condensed consolidated balance sheets.
RECENT ACCOUNTING PRONOUNCEMENT
Effective for the quarter ended March 31, 2000, the Company will be
required to adopt SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect that adoption of this standard
will have a material adverse impact on the Company's financial position or
results of operations.
NOTE 3. INVENTORIES
Inventories at June 30, 1999, and December 31, 1998, consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------------------
(unaudited)
<S> <C>
Bowling Products, at FIFO:
Raw materials $12,235 $11,471
Work in progress 1,252 1,548
Finished goods and spare parts 43,534 42,980
Bowling Centers, at average cost:
Merchandise and spare parts 8,801 8,736
-------------------------------
$65,822 $64,735
===============================
</TABLE>
6
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999, and December 31, 1998, consisted
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------
(unaudited)
<S> <C>
Land $ 132,253 $ 131,906
Buildings and improvements 364,264 362,297
Equipment, furniture and fixtures 566,957 553,203
Other 10,358 7,476
----------- -----------
1,073,832 1,054,882
Less: accumulated depreciation and amortization (226,707) (180,897)
------------- -----------
$ 847,125 $ 873,985
============= ===========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$24,791 and $48,698 for the three months and six months ended June 30, 1999, and
$21,976 and $42,495 for the three months and six months ended June 30, 1998,
respectively.
NOTE 5. LONG-TERM DEBT AND RECAPITALIZATION PLAN
Long-term debt at June 30, 1999, and December 31, 1998, consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C>
Bank debt $ 579,627 $ 581,877
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 226,156 213,226
Mortgage and equipment notes 1,991 1,988
----------- -----------
Total debt 1,057,774 1,047,091
Current maturities (34,250) (32,375)
----------- -----------
Total long-term debt $ 1,023,524 $ 1,014,716
=========== ===========
</TABLE>
The Company's bank debt (the "Senior Debt") was incurred pursuant to
Bowling Worldwide's credit agreement, dated as of May 1, 1996, which was amended
and restated, as of November 3, 1997, in connection with AMF Bowling's initial
public offering (the "Initial Public Offering") of Common Stock in November 1997
and which has since been amended (the "Credit Agreement"). The Credit Agreement
provides for (i) three senior secured term loan facilities aggregating $455.3
million (the "Term Facilities") and (ii) the Bank Facility which provides for
borrowings up to $355.0 million on a revolving basis. At June 30, 1999, amounts
outstanding under the Term Facilities and Bank Facility were $403.6 million and
$176.0 million, respectively.
7
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Credit Agreement contains certain financial covenants, as well as
affirmative and negative covenants, constraining Bowling Worldwide. In 1998, the
Company entered into Amendment No. 1 and Waiver to the Credit Agreement that
amended certain and waived certain financial covenants of the Credit Agreement
and imposed certain restrictions on the Company's operations through December
31, 1999. In addition, for 1999, borrowings to finance acquisitions were
substantially restricted and limits were placed on the Company's ability to make
capital expenditures, investments and acquisitions.
In connection with the Company's recapitalization plan discussed below, the
lenders under the Credit Agreement approved Amendment No. 2 and Waiver to the
Credit Agreement (as amended by Amendment No. 1 and Waiver) and entered into the
Fourth Amended and Restated Credit Agreement. The key provisions of the Fourth
Amended and Restated Credit Agreement (i) waive mandatory prepayment provisions
previously existing under the Credit Agreement to allow for the Company's
recapitalization plan, (ii) require AMF Bowling to contribute as equity $30.0
million to Bowling Worldwide to repay amounts borrowed under the Bank Facility
and consider such prepayment as pre-funding of new bowling center acquisitions,
(iii) allow the Company to resume acquisitions so long as the aggregate purchase
price satisfies certain financial tests and Bowling Worldwide maintains minimum
availability under the Bank Facility of $65.0 million through 2000 and $40.0
million through 2001, (iv) allow AMF Bowling to cure through equity contribution
to Bowling Worldwide shortfalls in minimum EBITDA requirements under the Credit
Agreement up to an aggregate of $10.0 million during any four consecutive
quarters through June 30, 2000, (v) modify or waive certain financial covenants
and (vi) allow Bowling Worldwide to exclude from covenant EBITDA calculations
certain restructuring and other special charges.
The Company is in compliance with the amended covenants as of June 30, 1999
and believes that it will be in compliance throughout the remainder of 1999, but
any downturn in the current performance of the Company could result in
non-compliance with these financial covenants. Failure by the Company to comply
with its Credit Agreement covenants could result in an event of default which,
if not cured or waived, would have a material adverse effect on the Company.
RECAPITALIZATION PLAN
As part of a recapitalization plan and in addition to the Amendment and
Waiver, AMF Bowling completed on July 28, 1999 a rights offering and a tender
offer for a portion of its outstanding zero coupon convertible debentures due
2018 (the "Debentures") at a discount.
In the rights offering, AMF Bowling raised $120.0 million in equity capital
and issued 24.0 million additional shares of Common Stock at the subscription
price of $5.00 per share. As a result of the rights offering, AMF Bowling has
83,597,550 shares of common stock outstanding as of July 28, 1999.
AMF Bowling purchased $514,286,000 in aggregate principal amount at
maturity of the Debentures in the tender offer at a price of $140 per $1,000
principal amount at maturity. As a result of consummation of the tender offer,
$610,714,000 in aggregate principal amount at maturity of Debentures remain
outstanding. AMF Bowling will record in the third quarter of 1999 an
extraordinary gain of approximately $68.7 million representing the difference
between the accreted value of the Debentures purchased and the purchase price.
The proceeds of the rights offering were used, in part, to pay for
Debentures purchased by AMF Bowling in the tender offer. AMF Bowling contributed
$30.0 million of the proceeds of the rights offering as equity to Bowling
Worldwide to repay amounts borrowed under the Bank Facility. The prepayment
amount was considered prefunding of future bowling center acquisitions. AMF
Bowling will use the remainder of the proceeds to pay expenses of the rights
offering and the tender offer and for general corporate purposes. On a pro forma
basis reflecting the recapitalization plan, total debt of the Company would be
reduced to $1,027.8 million as of June 30, 1999.
8
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at bowling centers.
Management believes that the ultimate resolution of such matters will not have a
material adverse effect on the Company's results of operations or financial
position. While the ultimate outcome of the litigation and claims against the
Company cannot presently be determined, management believes the Company has made
adequate provision for possible losses.
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation ("Vulcan") against AMF Bowling and the Company, The Goldman Sachs
Group, L.P., Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Cowen &
Company, Schroder & Co. Inc., Richard A. Friedman and Douglas J. Stanard.
Vulcan, as putative class representative for itself and all persons who
purchased the Common Stock in the Initial Public Offering, seeks, among other
things, damages and/or rescission against all defendants jointly and severally
pursuant to Sections 11, 12 and/or 15 of the Securities Act of 1933 based on
allegedly inaccurate and misleading disclosures in connection with and following
the Initial Public Offering. Management believes that the litigation is without
merit and intends to defend it vigorously.
NOTE 7. EMPLOYEE BENEFIT PLANS
CHIEF EXECUTIVE STOCK OPTION
On April 28, 1999, AMF Bowling and the Company granted to Roland Smith a
nonqualified stock option (the "Smith Option") to purchase one million
(1,000,000) shares of Common Stock at an exercise price of $5.2813 per share of
Common Stock in connection with Mr. Smith's employment as president and chief
executive officer of AMF Bowling and the Company. The exercise price of the
Smith Option was equal to the fair market value of the Common Stock on the date
the Smith Option was granted. The Smith Option was not granted pursuant to
either the 1996 Plan or the 1998 Plan. However, the Smith Option is subject to
the terms of the 1998 Plan and such terms are incorporated into the option
agreement. The Smith Option will vest and become exercisable in 20% increments
beginning on the date of grant and on each of the next four anniversaries
thereof, and becomes vested and fully exercisable upon a Change of Control (as
defined in the 1998 Plan).
NOTE 8. ACQUISITIONS
From May 1, 1996 through December 31, 1998, AMF Bowling Centers, a direct
subsidiary of Bowling Worldwide, purchased an aggregate of 262 bowling centers
from various unrelated sellers. From January 1, 1999 through June 30, 1999, the
Company acquired one center in the United States. The combined net purchase
price for all acquisitions was approximately $498.9 million, and was funded with
approximately $76.6 million from the sale of equity by AMF Bowling, $421.1
million from available borrowing under Bowling Worldwide's then existing
Acquisition Facility and current Bank Facility, and with $1.2 million from the
issuance of Common Stock.
As a result of these acquisitions, and after giving effect to the
construction of two new U.S. centers, the closing of 21 U.S. centers and two
international centers and the sale of a center in Switzerland since the
Acquisition, the Company owned and operated 418 U.S. bowling centers and 123
international bowling centers as of June 30, 1999. As of July 31, 1999, the
Company had no commitments regarding the acquisition of additional bowling
centers.
9
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. BUSINESS SEGMENTS
The Company operates in two major lines of business: operating bowling
centers and manufacturing bowling and related products. Information concerning
operations in these businesses for the three months ended June 30, 1999 and
1998, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
-----------------------------------------------------------------------------------------
Bowling Centers Bowling Products
-------------------------- ---------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
<S> <C>
Revenue from unaffiliated customers $ 97.8 $ 31.5 $ 129.3 $ 14.8 $ 17.0 $ 31.8 $ - $ - $ 161.1
Intersegment sales - - - 6.3 0.8 7.1 - (7.1) -
Operating income (loss) (6.8) 2.8 (4.0) (4.1) (1.7) (5.8) (4.0) 0.3 (13.5)
Identifiable assets 853.8 331.2 1,185.0 642.5 72.9 715.4 11.8 2.8 1,915.0
Depreciation and amortization 20.8 6.2 27.0 5.5 0.3 5.8 0.3 (0.4) 32.7
Capital expenditures 13.7 1.5 15.2 1.4 - 1.4 - - 16.6
Research and development expense - - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
-----------------------------------------------------------------------------------------
Bowling Centers Bowling Products
-------------------------- ---------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
<S> <C>
Revenue from unaffiliated customers (a) $ 86.5 $ 29.1 $ 115.6 $ 23.2 $ 23.0 $ 46.2 $ - $ - $ 161.8
Intersegment sales - - - 3.9 1.5 5.4 - (5.4) -
Operating income (loss) (b) (9.4) 3.3 (6.1) 0.2 (2.0) (1.8) (3.9) 0.1 (11.7)
Identifiable assets 897.3 352.1 1,249.4 637.1 71.3 708.4 19.5 1.9 1,979.2
Depreciation and amortization 19.5 4.9 24.4 5.2 0.4 5.6 0.3 (0.3) 30.0
Capital expenditures 10.6 3.2 13.8 2.0 0.2 2.2 0.1 - 16.1
Research and development expense - - - - - - - - -
</TABLE>
(a) To provide comparability to 1999 results, $0.4 million of 1998 U.S.
Bowling Centers food and beverage discounts has been reclassified from
operating expense to revenue.
(b) To provide comparability to 1999 results, $1.8 million of selling,
general and administrative expenses have been reclassified from
corporate to U.S. Bowling Centers expense.
10
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information concerning operations in these businesses for the six months
ended June 30, 1999 and 1998, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-----------------------------------------------------------------------------------------
Bowling Centers Bowling Products
-------------------------- ---------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
<S> <C>
Revenue from unaffiliated customers $ 238.7 $ 63.2 $ 301.9 $ 28.2 $ 33.6 $ 61.8 $ - $ - $ 363.7
Intersegment sales - - - 7.4 1.7 9.1 - (9.1) -
Operating income (loss) 22.9 6.5 29.4 (7.3) (5.0) (12.3) (8.0) 0.7 9.8
Identifiable assets 853.8 331.2 1,185.0 642.5 72.9 715.4 11.8 2.8 1,915.0
Depreciation and amortization 42.4 11.7 54.1 11.0 0.7 11.7 0.8 (0.8) 65.8
Capital expenditures 15.7 2.6 18.3 2.8 0.2 3.0 - - 21.3
Research and development expense - - - - - - 0.1 - 0.1
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
-----------------------------------------------------------------------------------------
Bowling Centers Bowling Products
-------------------------- ---------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
<S> <C>
Revenue from unaffiliated customers (a) $ 211.5 $ 54.3 $ 265.8 $ 36.8 $ 46.5 $ 83.3 $ - $ - $ 349.1
Intersegment sales - - - 7.6 1.8 9.4 - (9.4) -
Operating income (loss) (b) 23.2 5.6 28.8 (3.7) (3.4) (7.1) (7.9) 0.8 14.6
Identifiable assets 897.3 352.1 1,249.4 637.1 71.3 708.4 19.5 1.9 1,979.2
Depreciation and amortization 36.9 9.4 46.3 10.3 0.7 11.0 0.5 (1.0) 56.8
Capital expenditures 17.6 4.1 21.7 5.2 0.7 5.9 0.1 - 27.7
Research and development expense - - - 0.2 - 0.2 - - 0.2
</TABLE>
(a) To provide comparability to 1999 results, $0.7 million of 1998 U.S.
Bowling Centers food and beverage discounts has been reclassified from
operating expense to revenue.
(b) To provide comparability to 1999 results, $1.8 million of selling,
general and administrative expenses have been reclassified from
corporate to U.S. Bowling Centers expense.
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of June 30, 1999, and condensed
consolidating statements of income and cash flows for the six months ended June
30, 1999 and (ii) elimination entries necessary to combine the entities
comprising the Company.
Bowling Worldwide's subsidiary senior subordinated notes and subsidiary
senior subordinated discount notes are jointly and severally guaranteed on a
full and unconditional basis by AMF Group Holdings and the first and second-tier
subsidiaries of Bowling Worldwide. AMF Bowling and the third-tier and lower-tier
subsidiaries of Bowling Worldwide have not provided guarantees of such
indebtedness.
11
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 14,400 $ 442 $ - $ 14,842
Accounts and notes receivable, net
of allowance for doubtful accounts 88,123 418 - 88,541
Accounts receivable - intercompany 7,254 13,044 (20,298) -
Inventories 64,767 1,055 - 65,822
Deferred taxes and other current assets 22,284 6,061 - 28,345
----------- ----------- ----------- -----------
Total current assets 196,828 21,020 (20,298) 197,550
Notes receivable - intercompany 47,215 5,663 (52,878) -
Property and equipment, net 773,347 72,538 1,240 847,125
Investment in subsidiaries 19,489 - (19,489) -
Goodwill and other assets 859,574 10,715 - 870,289
----------- ----------- ----------- -----------
Total assets $ 1,896,453 $ 109,936 $ (91,425) $ 1,914,964
=========== =========== =========== ===========
Liabilities and Stockholder's Equity
-------------------------------------
Current liabilities:
Accounts payable $ 29,940 $ 5,726 $ - $ 35,666
Accounts payable - intercompany 13,044 7,254 (20,298) -
Accrued expenses 53,356 7,089 - 60,445
Income taxes payable 1,375 5,161 - 6,536
Long-term debt, current portion 34,250 - - 34,250
----------- ----------- ----------- -----------
Total current liabilities 131,965 25,230 (20,298) 136,897
Long-term debt, less current portion 1,006,521 17,003 - 1,023,524
Notes payable - intercompany 5,663 47,215 (52,878) -
Other long-term liabilities 3,262 999 - 4,261
----------- ----------- ----------- -----------
Total liabilities 1,147,411 90,447 (73,176) 1,164,682
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock - - - -
Paid-in capital 1,008,055 27,629 (25,625) 1,010,059
Retained deficit (240,348) 3,323 (4,087) (241,112)
Foreign currency translation adjustment (18,665) (11,463) 11,463 (18,665)
----------- ----------- ----------- -----------
Total stockholder's equity 749,042 19,489 (18,249) 750,282
----------- ----------- ----------- -----------
Total liabilities and stockholder's equity $ 1,896,453 $ 109,936 $ (91,425) $ 1,914,964
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------- ----------- ------------ ------------
<S> <C>
Operating revenue $ 332,556 $ 31,308 $ (202) $ 363,662
--------- --------- --------- ---------
Operating expenses:
Cost of goods sold 74,096 3,447 (135) 77,408
Bowling center operating expenses 167,286 16,718 (67) 183,937
Selling, general, and administrative expenses 24,767 1,947 - 26,714
Depreciation and amortization 61,989 3,898 (60) 65,827
--------- --------- --------- ---------
Total operating expenses 328,138 26,010 (262) 353,886
--------- --------- --------- ---------
Operating income 4,418 5,298 60 9,776
--------- --------- --------- ---------
Nonoperating expenses (income):
Interest expense 53,426 633 - 54,059
Other expenses, net 4,675 1,757 - 6,432
Interest income (1,042) (7) - (1,049)
Equity in loss (income) of subsidiaries (565) - 565 -
--------- --------- --------- ---------
Total nonoperating expenses 56,494 2,383 565 59,442
--------- --------- --------- ---------
Loss before income taxes (52,076) 2,915 (505) (49,666)
Provision for income taxes 854 2,350 - 3,204
--------- --------- --------- ---------
Net loss before equity in loss of
joint ventures (52,930) 565 (505) (52,870)
Equity in loss of joint ventures (5,701) - - (5,701)
--------- --------- --------- ---------
Net loss $ (58,631) $ 565 $ (505) $ (58,571)
========= ========= ========= =========
</TABLE>
13
<PAGE>
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------- ----------- ------------ ------------
<S> <C>
Cash flows from operating activities:
Net loss $(58,631) $ 565 $ (505) $(58,571)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 61,989 3,898 (60) 65,827
Equity in loss of joint ventures 5,701 - - 5,701
Amortization of bond discount 12,934 - - 12,934
Equity in earnings of subsidiaries (565) - 565 -
Loss on the sale of property and equipment, net 2,145 - - 2,145
Changes in assets and liabilities:
Accounts and notes receivable (3,397) (18) - (3,415)
Receivables and payables - affiliates 2,181 (2,181) - -
Inventories (1,763) (75) - (1,838)
Other assets (4,565) (1,940) - (6,505)
Accounts payable and accrued expenses (1,710) 303 - (1,407)
Income taxes payable (183) 1,450 - 1,267
Other long-term liabilities (460) - - (460)
-------- -------- -------- --------
Net cash provided by operating activities 13,676 2,002 - 15,678
-------- -------- -------- --------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,374) - - (1,374)
Purchases of property and equipment (20,114) (1,222) - (21,336)
Proceeds from sale of property and equipment 206 - - 206
-------- -------- -------- --------
Net cash used in investing activities (21,282) (1,222) - (22,504)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 20,000 - 20,000
Payments on long-term debt (22,250) - - (22,250)
Capital contribution from parent 3,731 - - 3,731
Noncompete obligations (264) - - (264)
-------- -------- -------- --------
Net cash provided by financing activities 1,217 - - 1,217
-------- -------- -------- --------
Effect of exchange rates on cash 946 (2,342) - (1,396)
-------- -------- -------- --------
Net decrease increase in cash (5,443) (1,562) - (7,005)
Cash and cash equivalents at beginning of period 19,843 2,004 - 21,847
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 14,400 $ 442 $ - $ 14,842
======== ======== ======== ========
</TABLE>
14
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed in this report contain forward-looking
statements, which are statements other than historical information or statements
of current condition. Statements set forth in this report or statements
incorporated by reference from documents filed with the Commission are or may be
forward-looking statements, including possible or assumed future results of the
operations of AMF Group Holdings Inc. ("AMF Group Holdings") and its
subsidiaries (collectively, the "Company"), including AMF Bowling Worldwide,
Inc. ("Bowling Worldwide") and including but not limited to any statements
contained in this report concerning: (i) the expected results of AMF Bowling,
Inc.'s ("AMF Bowling") recapitalization plan and related activities and charges,
(ii) the expected success of the Company's plans to improve its bowling centers
operations, including revenue enhancement and cost management programs, (iii)
the ability of the Company's new management to execute its strategies, (iv) the
success of the recent management reorganization of the Company's bowling centers
and bowling products businesses, (v) the ability to increase the pace of the
Company's bowling center acquisition program, (vi) the expected success of
changes contemplated in the Company's bowling products business, (vii) the
Company's expectations concerning the Asia Pacific region and the joint
distribution and related arrangements with Shanghai Zhonglu Industrial
Corporation ("Zhonglu"), (viii) the success of the Company's employee incentive
efforts, (ix) the outcome of existing or potential litigation, (x) the timing or
amount of any changes in the interest expense of the Company's indebtedness,
(xi) the Company's ability to generate cash flow to service its indebtedness and
meet its debt payment obligations, (xii) the amounts of capital expenditures
needed to maintain or improve the Company's bowling centers, (xiii) any
statements preceded by, followed by or including the words "believes,"
"expects," "predicts," "anticipates," "intends," estimates," "should," "may" or
similar expressions and (xiv) other statements contained in this report
regarding matters that are not historical facts.
These forward-looking statements relate to the plans and objectives of the
Company or future operations. In light of the risks and uncertainties inherent
in all future projections, the inclusion of forward-looking statements in this
report should not be regarded as a representation by the Company that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the
forward-looking statements, including: (i) the Company's ability, and the
ability of its new management team, to carry out the Company's long-term
business strategies, including increasing the pace of the Company's acquisition
program, (ii) the Company's ability to integrate acquired operations into its
business, (iii) the Company's ability to identify and develop new bowling
markets to assist its growth, (iv) the continuation of adverse financial results
and substantial competition in the company's bowling products business, (v) the
Company's ability to retain and attract experienced bowling center management,
(vi) the continuation or worsening of economic difficulties in overseas markets,
including the Asia Pacific region, (vii) the risk of adverse political acts or
developments in the Company's existing and proposed international markets,
(viii) the fluctuations in foreign currency exchange rates affecting the
Company's translation of operating results, (ix) continued or increased
competition, (x) the popularity of bowling, (xi) the decline in general economic
conditions, (xii) the status or effectiveness of the Company's Year 2000
efforts, (xiii) adverse judgments in pending or future litigation, (xiv) the
Company's ability to effectively implement the joint distribution and related
arrangements with Zhonglu and (xv) changes in interest and exchange rates.
The foregoing review of important factors should not be construed as
exhaustive and should read in conjunction with other cautionary statements that
are included elsewhere in this report. 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.
15
<PAGE>
BACKGROUND
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and AMF Group Holdings' Condensed
Consolidated Financial Statements (unaudited) included elsewhere herein.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
a company's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
GENERAL
The Company principally operates in two business segments in the United
States and international markets: (i) the ownership and operation of 418 U.S.
bowling centers and 123 international bowling centers ("Bowling Centers"),
including 15 joint venture centers operated with third parties, as of June 30,
1999; and (ii) the manufacture and sale of bowling equipment and bowling
products ("Bowling Products").
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations discuss
results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
are set forth below. The business segment results presented below are before
intersegment eliminations since the Company's management believes that this will
provide a more accurate comparison of performance by segment from year to year.
The intersegment eliminations are not material. Interest expense is presented on
a gross basis. The comparative results of Bowling Centers for the first six
months of 1999 versus 1998 reflect the inclusion of 18 centers acquired and one
center constructed and the closing of 11 centers since June 30, 1998.
CURRENT DEVELOPMENTS
RECAPITALIZATION PLAN COMPLETED
As part of a recapitalization plan, AMF Bowling completed a rights
offering and a tender offer for a portion of its outstanding zero coupon
convertible debentures due 2018 (the "Debentures"), and the lenders under
Bowling Worldwide's third amended and restated credit agreement dated November
3, 1997, as amended (the "Credit Agreement") amended the Credit Agreement to
enable the Company to resume its bowling center acquisition program and provide
greater financial flexibility under the covenants contained in the Credit
Agreement.
In the rights offering, AMF Bowling raised $120.0 million in equity capital
and issued 24.0 million additional shares of common stock at the subscription
price of $5.00 per share. As a result of the rights offering, AMF Bowling has
83,597,550 shares of Common Stock outstanding as of July 28, 1999. AMF Bowling
purchased $514,286,000 in aggregate principal amount at maturity of the
Debentures in the tender offer at a price of $140 per $1000 principal amount at
maturity, and $72.0 million of the proceeds of the rights offering were used to
fund this purchase. On a pro forma basis reflecting the recapitalization plan,
total debt of the Company would be reduced to $1,027.8 million as of June 30,
1999.
See "Note 5. Long-Term Debt and Recapitalization Plan" in the Notes to
Condensed Consolidated Financial Statements for a discussion of the rights
offering, tender offer, and amendment to the Credit Agreement.
16
<PAGE>
NEW DISTRIBUTION ARRANGEMENT
On June 13, 1999, AMF Bowling Products, Inc. ("AMF Bowling Products")
signed joint distribution agreements, a trademark license agreement and an
option agreement with Zhonglu. Under the distribution agreements, the Company
will add to its product mix and exclusively distribute certain Zhonglu products
and parts outside of China and Zhonglu will add to its product mix and
exclusively distribute AMF products and parts inside of China. With this
distribution arrangement, the Company will close all but one of its
company-owned offices in China and will be exclusively represented in China by
Zhonglu. Additionally, the Company will have an option under certain
circumstances to acquire Zhonglu's bowling products business during the
three-year term of the agreements.
ACQUISITION
From January 1, 1999 through June 30, 1999, the Company acquired one
bowling center in the United States.
17
<PAGE>
AMF GROUP HOLDINGS INC.
SELECTED FINANCIAL DATA
(unaudited)
(in millions of dollars)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
Bowling Centers (before intersegment eliminations)
Operating revenue (a) $ 129.3 $ 115.6 $ 301.9 $ 265.8
Cost of goods sold 13.7 12.5 30.6 25.9
Bowling center operating expenses (b) 90.9 83.2 184.4 161.7
Selling, general, and administrative expenses 1.7 1.6 3.4 3.1
Depreciation and amortization 27.0 24.4 54.1 46.3
--------- --------- -------- ---------
Operating income (loss) (b) $ (4.0) $ (6.1) $ 29.4 $ 28.8
========= ========= ======== =========
Bowling Products (before intersegment eliminations)
Operating revenue $ 38.9 $ 51.6 $ 70.9 $ 92.7
Cost of goods sold 30.9 37.8 55.3 67.1
--------- --------- -------- ---------
Gross profit 8.0 13.8 15.6 25.6
Selling, general, and administrative expenses 8.0 10.0 16.2 21.7
Depreciation and amortization 5.8 5.6 11.7 11.0
--------- --------- -------- ---------
Operating loss $ (5.8) $ (1.8) $ (12.3) $ (7.1)
========= ========= ======== =========
Consolidated
Operating revenue (a) $ 161.1 $ 161.8 $ 363.7 $ 349.1
--------- --------- -------- ---------
Cost of goods sold 37.8 46.1 77.4 85.0
Bowling center operating expenses (b) 90.7 82.1 183.9 160.5
Selling, general, and administrative expenses (b) 13.4 15.3 26.8 32.2
Depreciation and amortization 32.7 30.0 65.8 56.8
--------- --------- -------- ---------
Operating income (loss) (13.5) (11.7) 9.8 14.6
Interest expense, gross 28.2 24.8 54.1 50.8
Other expense, net 2.9 1.5 5.4 1.7
--------- --------- -------- ---------
Loss before income taxes (44.6) (38.0) (49.7) (37.9)
Provision (benefit) for income taxes 1.7 (7.1) 3.2 (6.7)
--------- --------- -------- ---------
Net loss before equity in loss of joint ventures (46.3) (30.9) (52.9) (31.2)
Equity in loss of joint ventures (0.2) (1.3) (5.7) (1.6)
--------- --------- -------- ---------
Net loss $ (46.5) $ (32.2) $ (58.6) $ (32.8)
========= ========= ======== =========
Selected Data:
EBITDA
Bowling Centers $ 23.0 $ 18.3 $ 83.5 $ 75.1
Bowling Products $ 0.0 $ 3.8 $ (0.6) $ 3.9
EBITDA margin
Bowling Centers 17.8% 15.8% 27.7% 28.3%
Bowling Products 0.0% 7.4% -0.8% 4.2%
</TABLE>
(a) To provide comparability to 1999 results, $0.4 million and $0.7 million
for the three months and six months ended June 30, 1998, respectively,of
U.S. Bowling Centers food and beverage discounts has been reclassified
from operating expense to revenue.
(b) To provide comparability to 1999 results, $1.8 million for the three
months and six months ended June 30, 1998 of selling, general and
administrative expenses have been reclassified from corporate to U.S.
Bowling Centers expense.
18
<PAGE>
BOWLING CENTERS
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. Bowling Centers derives its
revenue and cash flows from three principal sources: (i) bowling, (ii) food and
beverage and (iii) other sources, such as shoe rental, amusement games,
billiards and pro shops. For the six months ended June 30, 1999, bowling, food
and beverage and other revenue represented 58.8%, 27.2% and 14.0% of total
Bowling Centers revenue, respectively. For the six months ended June 30, 1998,
bowling, food and beverage and other revenue represented 59.5%, 26.9% and 13.6%
of total Bowling Centers revenue, respectively.
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
Bowling Centers operating revenue increased $13.7 million, or 11.9%. An
increase of $11.1 million is attributable to new centers, of which $8.8 million
is from U.S. centers and $2.3 million is from international centers. Eighteen
new centers were acquired and one new center was constructed between July 1,
1998 and June 30, 1999. Constant centers operating revenue increased $3.8
million, or 3.8%. U.S. constant centers operating revenue increased $3.4
million, or 4.5%, primarily as a result of increases in open play revenue, food
and beverage and ancillary revenue associated with open play traffic.
International constant centers operating revenue increased $0.4 million, or
1.7%. A decrease of $1.2 million in total operating revenue was attributable to
11 centers that were closed since June 30, 1998.
Cost of goods sold increased $1.2 million, or 9.6%. Of the total increase
in cost of goods sold, $1.4 million is attributable to the new centers. Constant
centers cost of goods sold decreased $0.1 million, or 0.1%. A decrease of $0.1
million was attributable to closed centers.
Operating expenses increased $7.7 million, or 9.3%. An increase of $6.9
million was attributable to the increase in the number of centers and an
increase of $2.4 million was primarily attributable to constant centers. A
decrease of $1.2 million was attributable to closed centers and a decrease of
$0.4 million was attributable to lower regional and district operations
expenses. As a percentage of its revenue, Bowling Centers operating expenses
were 70.3% for the second quarter of 1999 compared to 72.0% for the second
quarter of 1998. The 1.7% decrease was primarily attributable to lower expenses
resulting from certain cost management initiatives which reduced operating
expenses as a percentage of revenue. Generally, Bowling Centers operating
expenses are a higher percentage of revenue in the second and third quarters as
compared to the first and fourth quarters in which league play is significantly
greater than in the second and third quarters.
Selling, general and administrative expenses increased $0.1 million, or
6.2%, due to an increase in costs associated with growth experienced in
Australia and the United Kingdom.
EBITDA increased $4.7 million, or 25.7%. The increase is primarily
attributable to contributions by new and constant centers. EBITDA margin for the
second quarter of 1999 was 17.8% compared to 15.8% for the second quarter of
1998. The higher EBITDA margin in 1999 was attributable to the increases in
revenue which resulted in part from AMF's marketing and operating initiatives to
improve customer traffic and certain cost management initiatives which reduced
cost of sales and operating expenses as a percentage of revenue.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Bowling Centers operating revenue increased $36.1 million, or 13.6%. An
increase of $36.7 million is attributable to new centers, of which $27.4 million
is from U.S. centers and $9.3 million is from international centers. Eighteen
new centers were acquired and one new center was constructed between July 1,
1998 and June 30, 1999. Constant centers operating revenue increased $2.3
million, or 1.0%. U.S. constant centers operating revenue increased $2.2
million, or 1.1%, primarily as a result of increases in open play revenue, food
and beverage and ancillary revenue associated with open play traffic.
International constant centers operating revenue increased $0.1 million, or
0.2%. A decrease of $2.8 million in total operating revenue was attributable to
11 centers that were closed since June 30, 1998.
19
<PAGE>
Cost of goods sold increased $4.7 million, or 18.1%. Of the total increase
in cost of goods sold, $4.3 million is attributable to the new centers. Constant
centers cost of goods sold increased $0.7 million, or 3.0%, as a result of
higher food costs. A decrease of $0.3 million is attributable to closed centers.
Operating expenses increased $22.7 million, or 14.0%. An increase of $20.8
million was attributable to the increase in the number of centers and an
increase of $5.3 million was primarily attributable to constant centers. A
decrease of $2.4 million was attributable to closed centers and a decrease of
$1.0 million was attributable to lower regional and district operations
expenses. As a percentage of its revenue, Bowling Centers operating expenses
were 61.1% for the first six months of 1999 compared to 60.8% for the first six
months of 1998, an increase of 0.3% primarily attributable to higher expenses
related to maintenance and supplies, advertising and payroll experienced in the
first quarter of 1999.
Selling, general and administrative expenses increased $0.3 million, or
9.7%, due to an increase in costs associated with growth experienced in
Australia and the United Kingdom.
EBITDA increased $8.4 million, or 11.2%. The EBITDA contribution of new
centers was partially offset by the increased expenses discussed above. EBITDA
margin for the first six months of 1999 was 27.7% compared to 28.3% for the
first six months of 1998.
BOWLING PRODUCTS
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
Bowling Products operating revenue decreased $12.7 million, or 24.6%.
Revenue from sales of New Center Packages ("NCPs" which include all the
equipment necessary to outfit a new bowling center or expand an existing bowling
center) decreased $13.4 million, or 60.6%, and Modernization and Consumer
Products (which include modernization equipment, supplies, spare parts and
consumable products) revenue increased $0.7 million, or 2.4%. Operating results
have been and continue to be adversely impacted by economic difficulties in
certain markets of the Asia Pacific region and increased competition thereby
reducing the level of shipments for NCPs. The strong U.S. dollar also
unfavorably affected pricing and financial statement translation. During the
second quarter of 1999, Bowling Products recorded NCP shipments of 153 units
compared to shipments of 659 units for the second quarter of 1998.
Gross profit decreased $5.8 million, or 42.0%, primarily as a result of the
decreased levels of NCP shipments, lower pricing and unabsorbed fixed overhead
resulting from low production levels.
Selling, general and administrative expenses decreased $2.0 million, or
20.0%, primarily as a result of an ongoing cost reduction program in which the
Bowling Products organization has been streamlined to reduce expenses. Such cost
reduction has served to partially offset the impact of lower sales volume and
unit pricing on EBITDA.
EBITDA decreased from $3.8 million in the second quarter of 1998 to zero in
the second quarter of 1999, and the EBITDA margin decreased from 7.4% in the
second quarter of 1998 to zero in the second quarter of 1999 primarily as a
result of lower revenue and gross profit which exceeded the effect of savings
achieved through cost reductions.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Bowling Products operating revenue decreased $21.8 million, or 23.5%.
Revenue from sales of NCPs decreased $22.1 million, or 55.5%, and Modernization
and Consumer Products revenue increased $0.3 million, or 0.5%. Operating results
have been adversely impacted by economic difficulties and increased competition
in certain markets of the Asia Pacific region which have reduced the level of
shipments for NCPs and Modernization and Consumer Products. The strong U.S.
dollar also unfavorably affected pricing and financial statement translation.
During the first six months of 1999, Bowling Products recorded NCP shipments of
422 units compared to shipments of 1,163 units for the first six months of 1998.
20
<PAGE>
Gross profit decreased $10.0 million, or 39.1%, primarily as a result of
the decreased levels of NCP shipments, lower pricing and unabsorbed fixed
overhead resulting from low production levels.
Selling, general and administrative expenses decreased $5.5 million, or 25.3%,
primarily as a result of an ongoing cost reduction program in which the Bowling
Products organization has been streamlined in order to reduce expenses. Such
cost reduction has served to partially offset the impact of lower sales volume
and unit pricing on EBITDA.
Bowling Products EBITDA decreased from $3.9 million in the first six months
of 1998 to $(0.6) million in the first six months of 1999, and the Bowling
Products EBITDA margin decreased from 4.2% in the first six months of 1998 to
(0.8)% in the first six months of 1999 primarily as a result of lower revenue
and gross profit which exceeded the effect of savings achieved through cost
reductions.
CONSOLIDATED
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2.7 million, or 9.0%, in the
second quarter of 1999, and $9.0 million, or 15.8%, in the six months ended June
30, 1999 compared to the comparable periods in 1998. The increase was
attributable to depreciation of property and equipment of centers acquired since
June 30, 1998, amortization of the excess of the Company's investment over its
equity in its Brazilian joint venture's net assets, and incremental depreciation
expense incurred as a result of capital expenditures.
INTEREST EXPENSE
Gross interest expense increased $3.4 million, or 13.7%, in the second
quarter of 1999, and $3.3 million, or 6.5%, in the six months ended June 30,
1999 compared to the comparable periods in 1998. Deferred finance costs totaling
$1.8 million associated with a prior amendment to the Credit Agreement was
expensed in the second quarter of 1999. See "--Liquidity" and "--Capital
Resources" for further discussion of the bank debt and the Debentures. Non-cash
bond interest amortization totaled $6.6 million and $12.9 million for the
quarter and six months ended June 30, 1999, respectively, compared to $5.8
million and $11.5 million for the quarter and six months ended June 30, 1998,
respectively.
INCOME TAXES
As of December 31, 1998, the Company had net operating losses of
approximately $175.5 million and foreign tax credits of $19.7 million that will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company has recorded a valuation reserve, as of
June 30, 1999, for $45.6 million related to net operating losses and foreign tax
credits that the Company may not utilize prior to their expirations. As a
result, the tax provision recorded for the six months ended June 30, 1999 only
reflects international taxes.
NET LOSS
Net losses in the second quarter and six months ended June 30, 1999 totaled
$46.5 million and $58.6 million, respectively, compared to net losses of $32.2
million and $32.8 million in the second quarter and six months ended June 30,
1998, respectively. The increased loss of $14.3 million in the second quarter
was primarily a result of decreases in Bowling Products revenue and EBITDA
discussed above and the increase in depreciation and interest expenses. The
increased loss of $25.8 million in the first six months of 1999 was primarily a
result of decreases in Bowling Products revenue and EBITDA discussed above and
the increase in depreciation and interest expenses. The Company recorded $0.2
million and $5.7 million in equity in loss of joint ventures in the second
quarter and six months ended June 30, 1999, respectively, compared to equity in
loss of joint ventures of $1.3 million and $1.6 million in the second quarter
and six months ended June 30, 1998. Additionally, the Company has not recorded a
tax benefit in the second quarter and six months ended June 30, 1999 (see
"--Income Taxes").
21
<PAGE>
LIQUIDITY
The Company's primary source of liquidity is cash provided by operations
and funds available under credit facilities, as described below. Working capital
on June 30, 1999 was $60.7 million compared to $59.5 million as of December 31,
1998, an increase of $1.2 million. Decreases in working capital were primarily
attributable to a decrease of $7.0 million in cash attributable to reimbursement
of prize funds held on behalf of leagues, an increase of $1.9 million in the
current portion of long-term debt, an increase of $1.7 million in accounts
payable and accrued expenses and an increase of $1.2 million in income taxes
payable. These decreases in working capital were offset by an increase in
working capital caused by an increase of $6.1 million in accounts receivable due
to fall dating (sales made during the second and third quarters with payment
terms calling for payments in the fourth quarter), an increase of $5.8 million
in deferred taxes and other current assets and an increase of $1.1 million in
inventories.
Net cash flows provided by operating activities were $15.7 million for the
six months ended June 30, 1999 compared to net cash flows used of $15.6 million
for the six months ended June 30, 1998, a difference of $31.3 million. An
increase of $27.8 million was attributable to increased levels of accounts
payable and accrued expenses; an increase of $12.1 million was attributable to
decreased levels of other assets; an increase of $12.1 million was attributable
to lower inventory balances resulting from lower Bowling Products sales volumes
in 1999; an increase of $9.0 million was due to higher amounts of depreciation
and amortization; an increase of $1.4 million was attributable to higher levels
of bond amortization attributable to the Debentures; an increase of $4.1 million
was due to the increased loss in equity of joint ventures caused by the
Company's Brazilian joint venture results which were adversely impacted by a
currency devaluation and a net increase of $2.7 million was attributable to
changes in other operating activities. These increases were partially offset by
a decrease of $25.8 million attributable to a net loss of $58.6 million recorded
in the first six months of 1999 compared to a net loss of $32.8 million in the
same period in 1998 and a decrease of $12.1 million attributable to lower levels
of accounts receivable.
Net cash flows used in investing activities were $22.5 million for the six
months ended June 30, 1999 compared to net cash flows used of $185.7 million for
the six months ended June 30, 1998, a decrease of $163.2 million. Bowling Center
acquisition spending decreased by $151.4 million and purchases of property and
equipment decreased by $6.4 million in the first six months of 1999 compared to
the same period in 1998. In the first six months of 1999, one center was
purchased compared to 66 centers in the same period in 1998. Investments in and
advances to joint ventures were zero in the first six months of 1999 compared to
$5.4 million in the same period in 1998. See "Note 8. Acquisitions" in the Notes
to Condensed Consolidated Financial Statements and "--Capital Expenditures" for
additional discussion of these investing activities.
Net cash provided by financing activities was $1.2 million for the six
months ended June 30, 1999 compared to net cash provided of $197.5 million for
the six months ended June 30, 1998, a decrease of $196.3 million. Proceeds from
long term debt decreased $184.5 million as a result of the curtailment of the
pace of acquisitions. Payments on long-term debt decreased $240.1 million
primarily because $249.6 million of the proceeds of the Debentures was used in
1998 to pay down the Bank Facility under the Credit Agreement. In accordance
with the terms of the Credit Agreement, scheduled principal payments in the
first six months of 1999 were $2.5 million higher than payments made in the same
period in 1998. Additionally, $7.0 million was paid in the second quarter of
1999 against amounts outstanding under the Bank Facility. In the first six
months of 1998, AMF Bowling contributed $255.8 million in equity to Bowling
Worldwide composed primarily of proceeds of the Debentures. In the first six
months of 1999, AMF Bowling contributed $3.7 million in equity to Bowling
Worldwide to pay expenses related to the recapitalization plan and the Fourth
Amended and Restated Credit Agreement. Cash flows from other financing
activities increased $0.2 million. See "Note 5. Long-Term Debt", "Note 7.
Employee Benefit Plans", and "Note 8. Acquisitions" in the Notes to Condensed
Consolidated Financial Statements and "--Capital Resources".
22
<PAGE>
As a result of the aforementioned, cash decreased by $7.0 million for the
six months ended June 30, 1999 compared to a decrease of $3.8 million for the
six months ended June 30, 1998.
23
<PAGE>
CAPITAL RESOURCES
The Company's total indebtedness is primarily a result of the financing of
the acquisition of the Company in 1996 by an investor group led by an affiliate
of Goldman, Sachs & Co. (the "Acquisition") and the Company's bowling center
acquisition program. At June 30, 1999, the Company's debt consisted of $581.6
million of borrowings under the Credit Agreement and a mortgage (collectively,
the "Senior Debt"), $250.0 million of Bowling Worldwide's senior subordinated
notes ("Subsidiary Senior Subordinated Notes") and $226.2 million of Bowling
Worldwide's senior subordinated discount notes ("Subsidiary Senior Subordinated
Discount Notes"). The Company's Senior Debt consisted of $403.6 million
outstanding under term loan facilities under the Credit Agreement (the "Term
Facilities"), $176.0 million outstanding under a non-amortizing revolving credit
facility under the Credit Agreement (the "Bank Facility") and $2.0 million
represented by one mortgage note. At June 30, 1999, the Company was also
capitalized with equity of $457.3 million.
The Company has the ability to borrow for general corporate purposes and,
to a limited extent, for acquisitions pursuant to the $355.0 million Bank
Facility, subject to certain conditions. At June 30, 1999, $176.0 million was
outstanding and $179.0 million was available for borrowing under the Bank
Facility. Between June 30, 1999 and July 31, 1999, there were $10.0 million in
additional borrowings and $30.0 million in payments resulting in a balance, as
of July 31, 1999, of $156.0 million under the Bank Facility.
In connection with AMF Bowling's recapitalization plan, the lenders under
the Credit Agreement amended the terms of the Credit Agreement, as of June 14,
1999, to provide the Company with (i) the ability to increase the pace of its
bowling center acquisition program, (ii) greater financial flexibility under the
covenants contained in the Credit Agreement and (iii) certain other
modifications. See "Note 5. Long-Term Debt" in the Notes to Condensed
Consolidated Financial Statements. The Company is in compliance with the amended
covenants as of June 30, 1999. Management believes that it will remain in
compliance throughout 1999, but any downturn in the current performance of the
Company could result in non-compliance with these financial covenants. Failure
by the Company to comply with its Credit Agreement covenants could result in an
event of default which, if not cured or waived, would have a material adverse
effect on the Company.
During the first six months of 1999, the Company funded its cash needs
through the Bank Facility as well as cash flow from operations and cash
balances. A substantial portion of the Company's available cash will be applied
to service outstanding indebtedness. For the six months ended June 30, 1999, the
Company incurred cash interest expense of $41.1 million, representing 54.4% of
EBITDA for the period. For the six months ended June 30, 1998, the Company
incurred cash interest expense of $38.5 million, representing 53.9% of EBITDA
for the period.
The indentures governing the Subsidiary Senior Subordinated Notes and the
Subsidiary Senior Subordinated Discount Notes (together with the Subsidiary
Senior Subordinated Notes, the "Subsidiary Notes") and certain provisions of the
Credit Agreement contain financial and operating covenants and significant
restrictions on the ability of the Company to pay dividends, incur indebtedness,
make investments and take certain other corporate actions. As of June 30, 1999,
the Company is in compliance with all of its covenants.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control,
including the conditions of the debt and equity markets. Based upon the current
level of operations, management believes that cash flow from operations,
together with available borrowings under the Credit Agreement and other sources
of liquidity, will be adequate to meet the Company's requirements for working
capital, capital expenditures, scheduled payments of principal of, and interest
on, its Senior Debt, and interest on the Subsidiary Notes. There can be no
assurance, however, that the Company's business will generate sufficient cash
flow from operations or that future borrowings will be available in an amount
sufficient to enable the Company to service its indebtedness, or make necessary
capital expenditures, or that any refinancing would be available on commercially
reasonable terms or at all.
24
<PAGE>
CAPITAL EXPENDITURES
For the six months ended June 30, 1999, the Company's capital expenditures
were $21.3 million compared to $27.7 million for the six months ended June 30,
1998, a decrease of $6.4 million. Bowling Centers maintenance and modernization
expenditures decreased $2.3 million. Bowling Products expenditures decreased
$2.7 million. Company-wide information systems expenditures decreased $1.1
million. Investments in extreme bowling equipment at various AMF bowling centers
increased by $0.6 million. Capital expenditures for new centers increased $0.4
million due to the opening of a Michael Jordan Golf Center and other
expenditures decreased $1.3 million.
While the Company's intention is to continue consolidating the U.S. bowling
center industry by acquiring additional bowling centers, the Company will
evaluate acquisitions on a more selective basis and will consider acquisition
targets which meet specific operating and valuation parameters. At the same
time, management will continue its focus on improving financial performance of
its current centers. As of July 31, 1999, the Company had no formal commitments
to build or acquire bowling centers. The Company has committed to build one
Michael Jordan Golf Center in 1999.
The Company has funded its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new centers,
internally-generated cash, the Bank Facility and issuances of Common Stock. See
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources."
In connection with AMF Bowling's recapitalization plan, the lenders under
the Credit Agreement amended the terms of the Credit Agreement, as of June 14,
1999, to provide the Company with (i) the ability to increase the pace of its
bowling center acquisition program on a selective basis, (ii) greater financial
flexibility under the covenants contained in the Credit Agreement and (iii)
certain other modifications. See "Note 5. Long-Term Debt" in the Notes to
Condensed Consolidated Financial Statements.
SEASONALITY AND CYCLICALITY
The financial performance of Bowling Centers' operations is seasonal. Cash
flows typically peak in the winter and reach their lows in the summer. While the
geographic diversity of the Company's Bowling Centers operations has helped
reduce this seasonality in the past, the increase in U.S. centers resulting from
acquisitions has increased the seasonality of that business.
Modernization and Consumer Products sales also display seasonality. The
U.S. market, which is the largest market for Modernization and Consumer
Products, is driven by the beginning of league play in the fall of each year.
While operators purchase consumer products throughout the year, they often place
larger orders during the summer in preparation for the start of league play in
the fall. Summer is also generally the peak period for installation of
modernization equipment. Operators typically sign purchase orders for
modernization equipment during the first four months of the year after they
received winter league revenue indications. Equipment is then shipped and
installed during the summer when leagues are generally less active. However,
sales of some modernization equipment such as automatic scoring and synthetic
lanes are less predictable and fluctuate from year to year because of the longer
life cycle of these major products.
Sales of NCPs can fluctuate dramatically as a result of economic
fluctuations in international markets, as seen in the reduction of sales of NCPs
to markets in the Asia Pacific region following economic difficulties in that
region.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the risks inherent in
operating abroad, including, but not limited to, currency exchange rate
fluctuations, economic and political fluctuations and destabilization, other
disruption of markets, restrictive laws, tariffs and other actions by foreign
governments (such as restrictions on transfer of funds, import and export duties
and quotas, foreign customs, tariffs and value added taxes and unexpected
changes in regulatory environments), difficulty in obtaining distribution and
support for products, the risk of nationalization, the laws and policies of the
United States affecting trade, international investment and loans, and foreign
tax law changes.
25
<PAGE>
The Company has a history of operating in a number of international
markets, in some cases, for over 30 years. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate adversely impacts sales volume and profit margins
during such periods.
The continuing economic difficulties in the Asia Pacific region have had
and will continue to have an adverse impact on NCP sales. One of the reasons for
the decline in NCP sales is the limited availability of financing for customers
desiring to build new bowling centers, especially in the Asia Pacific region. In
addition, Zhonglu became a significant competitor in China. On June 13, 1999,
AMF Bowling Products signed a 3-year joint distribution agreement with Zhonglu.
Under the terms of the agreement, Zhonglu will become the exclusive distributor
of AMF products and parts in China, and Bowling Products will be the exclusive
distributor of Zhonglu bowling products and parts outside China. These
agreements are intended to improve Bowling Products' competitive position in
both China and other developing markets. However, there is no assurance that
such an improvement will occur.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 55.5% of total NCP unit sales for the six months ended June
30, 1999 compared to 52.8% for the year ended December 31, 1998
China has strengthened its import restrictions by requiring the payment of
full customs duties and value added taxes on the importation of new and used
capital goods. The Chinese government has also begun to prohibit importation of
used capital equipment without permits. Permits for the importation of used
bowling equipment are very difficult to obtain. Local Chinese companies,
however, are not subject to the same restrictions. For example, Zhonglu recently
began producing locally and selling bowling equipment that is not subject to the
customs duties or permit requirements that affect the Company's imported
equipment. Zhonglu has experienced significant acceptance by local customers.
These Chinese import restrictions have had, and for the foreseeable future
management believes will continue to have, an adverse effect on the Bowling
Products business.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the six months ended June 30,
1999, revenue and EBITDA of international bowling centers represented 17.4% and
24.1% of consolidated results, respectively. For the six months ended June 30,
1998, revenue and EBITDA of international bowling centers represented 15.6% and
21.0% of consolidated results, respectively. For the year ended December 31,
1998, revenue and EBITDA of international bowling centers represented 15.7% and
24.3% of consolidated results, respectively.
IMPACT OF INFLATION
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have a
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
26
<PAGE>
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the quarter ended March 31, 2000, the Company will be
required to adopt SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect that adoption of this standard
will have a material adverse impact on the Company's financial position or
results of operations.
YEAR 2000
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the Year 2000 as "00" and may assume that the year is 1900 rather
than 2000. This could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures, and is in the process of preparing for the Year
2000.
The Company has evaluated its Year 2000 risk in three separate
categories: information technology systems ("IT"), non-IT systems ("Non-IT") and
material third party relationships ("Third Party Risk"). The Company has
developed a plan in which the risks in each of these categories are being
reviewed and addressed by the appropriate level of management as follows:
IT. The Company has a number of financial, retail and operational
systems worldwide. The retail systems in many of its bowling centers
are already Year 2000 compliant. The Company is in the process of
installing corrective measures for those bowling centers that are not
compliant and expects this effort to be complete by the third quarter
of 1999. The Company is installing new financial and operational
systems at several locations. In connection with this effort, system
programs have been designed so that the Year 2000 will be recognized as
a valid date and will not affect the processing of date-sensitive
information. The financial and operational systems have already been
installed for U.S. Bowling Centers and at the corporate level. The
effort will be complete for Bowling Products locations before year-end.
Several locations have existing systems that are being upgraded for
Year 2000 compliance, which will be completed by the end of the third
quarter of 1999. In 1997, 1998 and for the six months ended June 30,
1999, the Company spent approximately $12.6 million, $4.1 million and
$4.1 million, respectively, on systems that are designed to be Year
2000 compliant. The Company expects to spend an additional $3.5 million
to complete the installation. These costs include normal system
software and equipment upgrades or replacements that the Company
anticipated incurring and budgeted in the normal course of business,
separate from the Year 2000 issue.
Non-IT. Non-IT systems involve embedded technologies, such as
microcontrollers or microprocessors. Examples of Non-IT systems include
telephones, security systems and computer-controlled manufacturing
equipment. The Company sells automatic scoring that is computerized and
has developed a software program for a cost to the Company of
approximately $50,000 that will address the Year 2000 issue in its
automatic scoring. This software will be made available to customers
with service contracts at no cost and will be sold to customers without
service contracts. To date, management believes the Company's Non-IT
risks are minimal. For the most part, costs of addressing Non-IT risks
are included in normal upgrade and replacement expenditures that were
planned outside of the Company's Year 2000 review.
27
<PAGE>
Third Party Risk. The Company's review of its Third Party Risk includes
detailed reviews of critical relationships with vendors and certain
business partners. The Company is monitoring and assessing the progress
of its vendors and certain business partners to determine whether they
will be able to successfully interact with the Company in the Year
2000. The Company has contacted and received oral or written responses
from at least half of its critical vendors, all of which are in various
stages of addressing the Year 2000 issue, and is currently awaiting
response from the remainder of its critical vendors.
If the steps taken by the Company and its vendors and certain business
partners to be Year 2000 compliant are not successful, the Company could
experience various operational difficulties. These could include, among other
things, processing transactions to an incorrect accounting period, difficulties
in posting general ledger interfaces and lapse of certain services by vendors to
the Bowling Centers operations. If the Company's plan to install new systems
which effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed through the implementation of these new systems
and software development and by its critical vendors and certain business
partners and does not expect the Year 2000 issue to have a material adverse
impact on the financial position, results of operations or cash flows of the
Company in future periods. However, should the remaining review of the Company's
Year 2000 risks reveal potentially non-compliant computer systems or material
third parties, contingency plans will be developed at that time.
PART II
ITEM 1. LEGAL
The Company currently and from time to time is subject to claims and
actions arising in the ordinary course of its business, including environmental
claims, discrimination claims, workers' compensation claims, and personal injury
claims from customers of Bowling Centers. In some actions, plaintiffs request
punitive or other damages that may not be covered by insurance. In management's
opinion, the claims and actions in which the Company is involved will not have a
material adverse impact on its financial position or results of operations.
However, it is not possible to predict the outcome of such claims and actions.
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation ("Vulcan") against the Company, The Goldman Sachs Group, L.P.,
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Cowen & Company,
Schroder & Co. Inc., Richard A. Friedman and Douglas J. Stanard. Vulcan, as
putative class representative for itself and all persons who purchased the
Common Stock in the Initial Public Offering, seeks, among other things, damages
and/or rescission against all defendants jointly and severally pursuant to
Sections 11, 12 and/or 15 of the Securities Act of 1933 based on allegedly
inaccurate and misleading disclosures in connection with and following the
Initial Public Offering. Management believes that the litigation is without
merit and intends to defend it vigorously.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement, dated as of April 28, 1999, between AMF
Bowling, Inc. and Roland Smith. (1)
10.2 Stock Option Agreement, dated as of April 28, 1999, between AMF
Bowling, Inc. and Roland Smith. (2)
10.3 Amendment No. 2 and Waiver to the Third Amended and Restated
Credit Agreement, and the Fourth Amended and Restated Credit
Agreement, dated as of June 14, 1999 among AMF Bowling
Worldwide, Inc., the Initial Lenders, the Initial Issuing
Banks, Goldman Sachs Credit Partners L.P., as Syndication
Agent, Citibank, N.A., as Administrative Agent and Citicorp
USA, Inc., as Collateral Agent. (3)
27.1 Financial Data Schedule for the six months ended June 30, 1999.
NOTES TO EXHIBITS
(1) Incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of AMF Bowling, Inc. for the quarterly
period ended March 31, 1999 (File No. 001-13539).
(2) Incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of AMF Bowling, Inc. for the quarterly
period ended March 31, 1999 (File No. 001-13539).
(3) Incorporated by reference to Exhibit 99.1 AMF Bowling, Inc.'s
Current Report on Form 8-K dated June 28, 1999
(File No. 001-13539).
(b) REPORTS ON FORM 8-K:
1. A current report was filed on May 5, 1999, with respect to the
announcement of certain financial results for the three months ended
March 31, 1999, and the announcement of a recapitalization plan by AMF
Bowling, Inc.
2. A current report was filed on June 28, 1999, announcing that AMF
Bowling Worldwide, Inc. amended the terms of its credit agreement with
its lenders.
3. A current report was filed on June 29, 1999, with respect to the
June 28, 1999 announcement by AMF Bowling, Inc. of the terms of a
rights offering and simultaneous tender offer for a portion of its
outstanding zero coupon convertible debentures.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMF Bowling Worldwide, Inc.
(Registrant)
/s/ Stephen E. Hare August 16, 1999
- ----------------------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Michael P. Bardaro August 16, 1999
- ---------------------------------
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,842
<SECURITIES> 0
<RECEIVABLES> 88,541
<ALLOWANCES> 7,147
<INVENTORY> 65,822
<CURRENT-ASSETS> 197,550
<PP&E> 847,125
<DEPRECIATION> 48,698
<TOTAL-ASSETS> 1,914,964
<CURRENT-LIABILITIES> 136,897
<BONDS> 1,023,524
0
0
<COMMON> 1,010,059
<OTHER-SE> (241,112)
<TOTAL-LIABILITY-AND-EQUITY> 1,914,964
<SALES> 363,662
<TOTAL-REVENUES> 363,662
<CGS> 77,408
<TOTAL-COSTS> 353,886
<OTHER-EXPENSES> 5,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,059
<INCOME-PRETAX> (49,666)
<INCOME-TAX> 3,204
<INCOME-CONTINUING> (52,870)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,701)
<CHANGES> 0
<NET-INCOME> (58,571)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
