<PAGE>
Filed Pursuant to Rule 424B3
Registration No. 333-60959
PROSPECTUS SUPPLEMENT NO. 2
TO
PROSPECTUS DATED NOVEMBER 6, 1998
AMF BOWLING, INC.
$1,125,000,000
AGGREGATE PRINCIPAL AMOUNT OF
ZERO COUPON CONVERTIBLE DEBENTURES DUE 2018
AND
SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION, REDEMPTION OR REPURCHASE THEREOF
----------------
The following information supplements, and must be read in connection with,
the information contained in the Prospectus, dated November 6, 1998 as
supplemented by Prospectus Supplement No. 1 dated November 23, 1998 (the
"Prospectus"), of AMF Bowling, Inc., a Delaware corporation. This Prospectus
Supplement must be delivered with a copy of the Prospectus. All capitalized
terms not otherwise defined herein have the respective meanings ascribed to
them in the Prospectus.
1. UPDATE TO LEGAL PROCEEDINGS
The following information supplements the information provided in the
Prospectus under the caption "Business--Legal Proceedings".
On November 6, 1998, the Harbin Intermediate People's Court awarded Hai Heng
approximately $3.5 million. The Company intends to continue its vigorous
defense of Hai Heng's claims and intends to appeal such judgement. Management
does not believe that the ultimate outcome of the action will have a material
adverse impact on the financial position of the Company.
2. UPDATE TO SELLING SECURITYHOLDERS
The following information replaces in its entirety the information provided
in the Prospectus under the caption "Selling Securityholders".
----------------
SELLING SECURITYHOLDERS
The Selling Securityholders may from time to time offer and sell pursuant to
this Prospectus (or an amendment or supplement thereto) any or all of the
Debentures and the Common Stock issued upon conversion, redemption or
repurchase thereof. The term Selling Securityholder includes the holders
listed below and the beneficial owners of the Debentures and their respective
transferees, pledgees, donees or their successors.
Each of the Selling Securityholders listed below is either an Initial
Purchaser or a transferee of an Initial Purchaser and has agreed to be bound
by the terms applicable to the transferor under the Debenture Registration
Rights Agreement. Pursuant to the Debenture Registration Rights Agreement, the
Company has filed the Registration Statement of which this Prospectus forms a
part and has also agreed to bear certain expenses related thereto and to
indemnify each Selling Securityholder against certain liabilities, including
certain liabilities arising under the federal securities laws. See "Plan of
Distribution".
The Company has filed with the Commission the Registration Statement of
which this Prospectus forms a part with respect to the sale by the Selling
Securityholders of the Securities from time to time through the facilities of
any national securities exchange or U.S. inter-dealer quotation system of a
registered national securities association on which the Securities may be
listed or quoted at the time of such sale, in the over-the-counter market, in
transactions otherwise than on such exchanges or systems or in the over-the-
counter market, or through the writing of options, in privately negotiated
transactions or otherwise, as more fully described under "Plan of
Distribution".
----------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 7, 1998.
<PAGE>
The table below sets forth information with respect to the Selling
Securityholders and the respective principal amounts of the Debentures and
Common Stock into which such Debentures are convertible beneficially owned by
each Selling Securityholder at or prior to December 3, 1998. Such information
has been obtained from the Selling Securityholders. To the Company's
knowledge, none of the Selling Securityholders has, or within the past three
years has had, any position, office or other material relationship with the
Company (or its predecessors) or any of its affiliates. Although the Selling
Securityholders may offer for sale from time to time all or a portion of the
Securities pursuant to this Prospectus (or an amendment or supplement
thereto), the table below assumes that all of the Securities will be offered
and sold by the Selling Securityholders. In addition, the Selling
Securityholders identified below may have sold, transferred or otherwise
disposed of all or a portion of their Securities since the date on which they
provided the Company with information regarding their Securities in
transactions exempt from the registration requirements of the Securities Act.
Information concerning Selling Securityholders may change from time to time
and, to the extent required, will be set forth in supplements or amendments to
this Prospectus. The Securities are being registered hereby to permit
secondary trading of the Securities without restriction under the Securities
Act. See "Plan of Distribution".
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
DECEMBER 3, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
American High-Income
Trust.................. $ 21,900,000 1.9 189,947 $ 21,900,000
American Investors Life
Insurance Company,
Inc.(3)................ 3,000,000 * 26,020 3,000,000
Arkansas Public
Employees Retirement
System(4).............. 3,000,000 * 26,020 3,000,000
Baker Nye Securities,
LP..................... 5,000,000 * 43,367 5,000,000
Baltimore Gas & Electric
Pension Plan(4)........ 5,200,000 * 45,101 5,200,000
Blue Cross Blue Shield
of Michigan Retirement
Income Plan(4)......... 800,000 * 6,938 800,000
Boston Edison NDT Non-
Qualified
Corporate(4)........... 375,000 * 3,252 375,000
Boston Edison NDT
Qualified(4)........... 5,965,000 * 51,736 5,965,000
Boston Edison VEBA(4)... 275,000 * 2,385 275,000
Brompton Partners L.P... 1,000,000 * 8,673 1,000,000
BT Equities Strategies
Fund of the BT Pyramid
Trust.................. 3,000,000 * 26,020 3,000,000
Caywood Capital Fund
L.P.................... 400,000 * 3,469 400,000
Central Pension Fund of
the IUOE and
Participating
Employers(4)........... 15,750,000 1.4 136,606 15,750,000
Century National
Insurance Company...... 2,730,000 * 23,678 2,730,000
Chapman University...... 50,000 * 433 50,000
Chrysler Insurance
Company--Total Return.. 120,000 * 1,040 120,000
City of New Bedford
Retirement System(4)... 500,000 * 4,336 500,000
City of Richmond
Retirement System(4)... 1,100,000 * 9,540 1,100,000
City of Worcester
Retirement System(4)... 2,050,000 * 17,780 2,050,000
Columbia/HCA............ 700,000 * 6,071 700,000
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
DECEMBER 3, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Community Investment
Group Convertible
Bond(4)................ 50,000 * 433 50,000
Credit Research &
Trading, LLC........... 875,000 * 7,589 875,000
Credit Suisse First
Boston Corporation..... 5,000,000 * 43,367 5,000,000
Curtiss-Wright
Retirement Plan(4)..... 750,000 * 6,505 750,000
Dallas Police & Fire
Pension System(4)...... 9,000,000 * 78,060 9,000,000
Data General
Corporation(4)......... 1,825,000 * 15,828 1,825,000
De Moss Foundation...... 500,000 * 4,336 500,000
Delaware Public
Employees' Retirement
System(4).............. 7,500,000 * 65,050 7,500,000
Detroit Edison
Employees' Retirement
Trust(4)............... 5,750,000 * 49,872 5,750,000
Detroit Medical Center
Endowment/Depreciation
Fund(4)................ 3,000,000 * 26,020 3,000,000
Detroit Medical Center
Pension Plan(4)........ 3,550,000 * 30,790 3,550,000
Deutsche Bank A.G....... 123,750,000 11.0 1,073,333 123,750,000
Dow Corning Retirement
Plan(4)................ 4,550,000 * 39,463 4,550,000
Employees' Retirement
System of the City of
Milwaukee(4)........... 10,000,000 * 86,734 10,000,000
Employers Reinsurance
Corp.(3)............... 2,500,000 * 21,683 2,500,000
Enterprise Accumulation
Trust High Yield....... 1,550,000 * 13,443 1,550,000
Enterprise High Yield
Bond Fund.............. 1,950,000 * 16,913 1,950,000
Eos Partners, L.P. ..... 7,500,000 * 65,050 7,500,000
F. R. Bigelow Foundation
Convertible Bond(4).... 70,000 * 607 70,000
Fede Corporation........ 50,000 * 433 50,000
Fort Dearborn Life
Insurance Company...... 600,000 * 5,204 600,000
Franklin Investor
Securities Trust--
Franklin Convertible
Securities Fund........ 6,000,000 * 52,040 6,000,000
Franklin Strategic
Series--Franklin Small
Cap Growth Fund........ 12,900,000 1.1 111,886 12,900,000
Gencorp(4).............. 7,750,000 * 67,218 7,750,000
General Motors
Investment Management
Corp.(3)............... 15,000,000 1.3 130,101 15,000,000
General Motors MetLife
High Yield Pension(4).. 7,820,000 * 67,825 7,820,000
General Motors Pension
Fund--High Yield
Sector(4).............. 10,500,000 * 91,070 10,500,000
Golden Rule Insurance
High Yield............. 700,000 * 6,071 700,000
Guardian Life Insurance
Company of America..... 28,500,000 2.5 247,191 28,500,000
Guardian Master Pension
Trust.................. 1,500,000 * 13,010 1,500,000
Halliburton High
Yield(4)............... 1,350,000 * 11,709 1,350,000
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
DECEMBER 3, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Hamilton Global
Investors Limited...... 20,000,000 1.7 173,468 20,000,000
HBK Cayman L.P. ........ 60,773,000 5.4 527,108 60,773,000
HBK Offshore Fund
Ltd. .................. 141,377,000 12.6 1,226,219 141,377,000
Health Services
Retirement Plan(4)..... 1,000,000 * 8,673 1,000,000
Houston Firemen's Relief
and Pension Fund
"B"(4)................. 2,750,000 * 23,851 2,750,000
Houston Municipal
Employees Pension
System(4).............. 7,300,000 * 63,315 7,300,000
IBM Pension Plan(4)..... 11,500,000 * 99,744 11,500,000
IL Annuity & Insurance.. 250,000 * 2,168 250,000
International Union
Operating Engineers
Local #4(4)............ 450,000 * 3,903 450,000
Ironworkers District
Council of New
England(4)............. 1,500,000 * 13,010 1,500,000
J.P. Morgan & Co. Inc... 98,000,000 8.7 849,993 98,000,000
KA Management Ltd....... 19,005,000 1.7 164,837 19,005,000
KA Trading L.P.......... 8,145,000 * 70,644 8,145,000
Loomis Sayles Bond
Fund(4)................ 18,700,000 1.6 162,192 18,700,000
Loomis Sayles Fixed
Income Fund(4)......... 3,000,000 * 26,020 3,000,000
Loomis Sayles High Yield
Fixed Income Fund(4)... 3,275,000 * 28,405 3,275,000
Loomis Sayles High Yield
Fund(4)................ 1,250,000 * 10,841 1,250,000
Loomis Sayles
International Fund--
High Yield(4).......... 2,125,000 * 18,430 2,125,000
Loomis Sayles Managed
Bond Fund(4)........... 2,000,000 * 17,346 2,000,000
Loomis Sayles Worldwide
Fund--Domestic Fixed
Income Sector(4)....... 750,000 * 6,505 750,000
Lord Abbett Bond
Debenture Fund......... 25,000,000 2.2 216,835 25,000,000
LS International Fund
(Offshore Bond
Fund)(4)............... 2,500,000 * 21,683 2,500,000
Maine State Retirement
System(4).............. 3,475,000 * 30,140 3,475,000
Maxim Corporate Bond
Fund(4)................ 4,250,000 * 36,861 4,250,000
Merrill Lynch
International Ltd...... 5,000,000 * 43,367 5,000,000
MetLife Separate Account
235(4)................. 1,000,000 * 8,673 1,000,000
Metropolitan Life Loomis
Sayles High Yield Bond
Portfolio(4)........... 4,200,000 * 36,428 4,200,000
Milwaukee County
"B"(4)................. 11,200,000 * 97,142 11,200,000
Minneapolis Teachers
Retirement Fund(4)..... 1,950,000 * 16,913 1,950,000
Morgan Guaranty Trust
Company of New York as
Investment Manager and
Agent for a private
client(5).............. 6,000,000 * 52,040 6,000,000
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
DECEMBER 3, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Morgan Guaranty Trust
Company of New York as
Trustee of the
Commingled Pension
Trust Fund (Multi-
Market Special
Investment Fund I) of
Morgan Guaranty Trust
Company of New
York(6)................ 16,000,000 1.4 138,774 16,000,000
Morgan Guaranty Trust
Company of New York as
Trustee of the
Commingled Pension
Trust Fund (Multi-
Market Special
Investment Fund II) of
Morgan Guaranty Trust
Company of New
York(7)................ 32,000,000 2.8 277,548 32,000,000
Morgan Guaranty Trust
Company of New York as
Trustee of the Multi-
Market Special
Investment Trust Fund
of Morgan Guaranty
Trust Company of New
York(8)................ 6,000,000 * 52,040 6,000,000
Motors Insurance
Corp.(3)............... 500,000 * 4,336 500,000
National Geographic
Society(4)............. 250,000 * 2,168 250,000
National Union Fire
Insurance Co. of
Pittsburgh............. 4,000,000 * 34,693 4,000,000
New York City Board of
Education Retirement
System(4).............. 1,000,000 * 8,673 1,000,000
New York City Employees'
Retirement System(4)... 6,750,000 * 58,545 6,750,000
New York City Fire
Department Pension
Fund(4)................ 3,750,000 * 32,525 3,750,000
New York City Police
Department Pension
Fund(4)................ 4,000,000 * 34,693 4,000,000
New York City Teachers
Retirement System(4)... 22,900,000 1.8 198,620 22,900,000
New York State Electric
& Gas Corp. Retirement
Benefit Plan(4)........ 3,000,000 * 26,020 3,000,000
New York State Nurses
Assn. Pension Plan &
Benefits Fund(4)....... 2,250,000 * 19,515 2,250,000
Nike, Inc. Profit
Sharing Plan(4)........ 300,000 * 2,602 300,000
Oppenheimer Millennuim
Funds plc for the
Oppenheimer Millennium
Income & Growth Fund... 200,000 * 1,734 200,000
Orange County Employees
Retirement System(4)... 1,500,000 * 13,010 1,500,000
Pacific Life Insurance
Company................ 2,000,000 * 17,346 2,000,000
Partner Reinsurance
Co.(4)................. 600,000 * 5,204 600,000
Partners Healthcare(4).. 1,250,000 * 10,841 1,250,000
Peter & Elizabeth Tower
Foundation(4).......... 1,050,000 * 9,107 1,050,000
Phoenix Convertible
Fund................... 3,300,000 * 28,622 3,300,000
Phoenix Home Life
Convertible Fund....... 1,500,000 * 13,010 1,500,000
PHS Pension(4).......... 2,250,000 * 19,515 2,250,000
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
DECEMBER 3, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Presbyterian
Intercommunity
Hospital............... 150,000 * 1,301 150,000
Presbyterian
Intercommunity Hospital
Defined Benefit Plan... 50,000 * 433 50,000
Raytheon Master
Trust(4)............... 2,550,000 * 22,117 2,550,000
Regence Blue Cross/Blue
Shield of Idaho(3)..... 86,000 * 745 86,000
Regence Blue Cross/Blue
Shield of Oregon(3).... 141,000 * 1,222 141,000
Regence Blue Cross/Blue
Shield of Utah(3)...... 43,000 * 372 43,000
Regence Blue Cross/Blue
Shield of
Washington(3).......... 230,000 * 1,994 230,000
Rohm & Haas Company
Convertible Fund(4).... 240,000 * 2,081 240,000
Rose Hills Endowment
Care Fund.............. 250,000 * 2,168 250,000
Sloane Overseas Fund
Ltd.................... 500,000 * 4,336 500,000
SoundShore Holdings
Ltd. .................. 30,075,000 2.6 260,852 30,075,000
SoundShore Opportunity
Holding Fund Ltd....... 1,000,000 * 8,673 1,000,000
State of Connecticut
Fund "F"(4)............ 4,350,000 * 37,729 4,350,000
State of Oregon/SAIF
Corporation............ 20,000,000 1.7 173,468 20,000,000
State of Rhode Island
Employees Retirement
System(4).............. 11,995,000 * 104,037 11,995,000
Susan H. Roeder......... 500,000 * 4,336 500,000
Teachers Insurance and
Annuity Association of
America................ 12,000,000 1.0 104,080 12,000,000
Teamsters Affiliates
Pension Plan(4)........ 2,000,000 * 17,346 2,000,000
Teamsters Retirement &
Family Protection
Plan(4)................ 400,000 * 3,469 400,000
The Bond Fund of
America, Inc........... 23,100,000 2.0 200,355 23,100,000
The Income Fund of
America, Inc. ......... 90,000,000 8.0 780,606 90,000,000
The Salser Partnership
No. 1 + 3.............. 50,000 * 433 50,000
TPW Investments, Ltd.... 100,000 * 867 100,000
Tredegar Industries,
Inc.(4)................ 750,000 * 6,505 750,000
Tribeca Investments
L.L.C.................. 12,500,000 1.1 108,417 12,500,000
Trust FBO Wm. M. Keck
Jr. Fdn................ 50,000 * 433 50,000
UA General Officers
Retirement Plan(4)..... 275,000 * 2,385 275,000
UA Local Union Officers
& Employees
Pension(4)............. 2,455,000 * 21,293 2,455,000
UA Office Employees
Retirement Plan(4)..... 130,000 * 1,127 130,000
UFCW Tri-State Pension
Fund(4)................ 500,000 * 4,336 500,000
United Mine Workers of
America Health and
Retirement Fund(4)..... 5,000,000 * 43,367 5,000,000
USF Convertible Fund.... 700,000 * 6,071 700,000
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
DECEMBER 3, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Wilson East L.P. ....... 100,000 * 867 100,000
Wm. M. Keck Jr. Fdn..... 200,000 * 1,734 200,000
World Bank "B"(4)....... 2,500,000 * 21,683 2,500,000
World Bank "RSBP"(4).... 3,650,000 * 31,657 3,650,000
Zazove Convertible Fund,
L.P.................... 7,350,000 * 63,749 7,350,000
</TABLE>
- --------
* Less than one percent.
(1) The information contained in this table reflects "beneficial" ownership of
the Debentures within the meaning of Rule 13d-3 under the Exchange Act.
With respect to all holders listed in the table above, the Company has not
conducted any independent inquiry or investigation to ascertain such
information and has relied exclusively on written questionnaires furnished
to the Company by the Selling Securityholders on or prior to December 3,
1998 for the express purpose of including the information set forth
therein in this Prospectus.
(2) Includes shares of Common Stock issuable upon conversion of the Debentures
only. Represents the number of shares of Common Stock into which the
Debentures listed for such Selling Securityholder in this table are
convertible on an "as converted" basis using the conversion rate described
on the cover page of this Prospectus.
(3) Salomon Brothers Asset Management Inc. ("SBAM") acts as discretionary
investment adviser with respect to the noted accounts that hold the
Debentures. Accordingly, SBAM may be deemed to be the beneficial owner of
the Debentures.
(4) Loomis, Sayles & Company, L.P. acts as discretionary investment adviser
with respect to the noted accounts that hold the Debentures.
(5) The Selling Securityholder is the beneficial owner of $956,000 face value
of the Subsidiary Senior Subordinated Discount Notes.
(6) The Selling Securityholder is the beneficial owner of $4,692,000 face
value of the Subsidiary Senior Subordinated Discount Notes.
(7) The Selling Securityholder is the beneficial owner of $5,514,000 face
value of the Subsidiary Senior Subordinated Discount Notes.
(8) The Selling Securityholder is the beneficial owner of $878,000 face value
of the Subsidiary Senior Subordinated Discount Notes.
The Conversion Rate and, therefore, the number of shares of Common Stock
issuable upon conversion, redemption or repurchase of the Debentures is
subject to adjustment in certain events. Accordingly, the number of shares of
Common Stock issuable upon conversion, redemption or repurchase of the
Debentures may increase or decrease. In addition, the Selling Securityholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of their Debentures since the date on which they provided the
information regarding their Debentures, in transactions exempt from the
registration requirements of the Securities Act.
Because the Selling Securityholders may, pursuant to this Prospectus (or an
amendment or supplement hereto), offer all or some portion of the Debentures
or Common Stock issuable upon conversion, redemption or repurchase of the
Debentures, no estimate can be given as to the amount of the Debentures or
shares of Common Stock that will be held by the Selling Securityholders upon
termination of any such sales.
S-7
<PAGE>
Generally, only Selling Securityholders identified in the foregoing table
who beneficially own the Debentures set forth opposite their respective names,
may sell such Debentures pursuant to the Registration Statement. The Company
may from time to time, in accordance with the Debenture Registration Rights
Agreement, include additional Selling Securityholders in supplements or
amendments to this Prospectus.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 7, 1998.
<PAGE>
PROSPECTUS
[AMF LOGO] AMF BOWLING, INC.
$1,125,000,000
AGGREGATE PRINCIPAL AMOUNT OF
ZERO COUPON CONVERTIBLE DEBENTURES DUE 2018
AND
SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION, REDEMPTION OR REPURCHASE THEREOF
This Prospectus relates to the resale from time to time by certain holders
identified in this Prospectus (the "Selling Securityholders") of up to
$1,125,000,000 aggregate principal amount at maturity of Zero Coupon
Convertible Debentures due 2018 (the "Debentures") of AMF Bowling, Inc., a
Delaware corporation ("AMF Bowling" or the "Company"), and an indeterminate
number of shares of Common Stock, par value $0.01 per share, of the Company
(the "Common Stock" and, together with the Debentures, the "Securities")
issuable upon the conversion, redemption or repurchase of the Debentures. The
Debentures were originally issued by the Company in a private placement (the
"Private Placement") on May 12, 1998 to the Initial Purchasers (as hereinafter
defined) at an offering price of 25.257% plus accrued Original Issue Discount
(as hereinafter defined) from May 12, 1998, and were subsequently sold by the
Initial Purchasers to "qualified institutional buyers" in transactions exempt
from registration pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Securities Act"). The Company has filed the Registration
Statement (as hereinafter defined) of which this Prospectus is a part to
satisfy its obligations under the Registration Rights Agreement, dated as of
May 12, 1998, between the Company, the Designated Subsidiaries listed therein
and the Initial Purchasers (the "Debenture Registration Rights Agreement") to
permit secondary trading of the Debentures and the underlying Common Stock
without restrictions under the Securities Act. See "Description of
Debentures--Registration Rights".
The Debentures will be convertible at any time prior to maturity, unless
previously redeemed or otherwise purchased by the Company, into shares of AMF
Bowling's Common Stock, at a conversion rate of 8.6734 shares per $1,000
principal amount at maturity. The Conversion Rate (as hereinafter defined)
will not be adjusted for accrued Original Issue Discount, but will be subject
to adjustment in certain events. See "Description of Debentures--Conversion of
Debentures".
Prior to May 12, 2003, the Debentures will not be redeemable at the option
of AMF Bowling. Thereafter, the Debentures will be redeemable for cash at the
option of AMF Bowling at Redemption Prices (as hereinafter defined) equal to
the Issue Price plus accrued Original Issue Discount to the date of
redemption. See "Description of Debentures--Redemption of Debentures at the
Option of the Company". The Debentures are not entitled to any sinking fund
and will mature on May 12, 2018.
The Debentures will be purchased by AMF Bowling, at the option of the Holder
(as hereinafter defined), as of May 12, 2003, May 12, 2008 and May 12, 2013
for Purchase Prices (as hereinafter defined) equal to the Issue Price plus
accrued Original Issue Discount to such dates. See "Description of
Debentures--Purchase of Debentures at the Option of the Holder". The
Debentures may be redeemed at the option of the Holder if there is a Debenture
Change of Control (as hereinafter defined) at a Debenture Change of Control
Redemption Price (as hereinafter defined) equal to the Issue Price plus
accrued Original Issue Discount to the date of such redemption. See
"Description of Debentures--Redemption at the Option of the Holder Upon a
Debenture Change of Control". AMF Bowling may elect to pay any such Purchase
Price or the Debenture Change of Control Redemption Price in cash or Common
Stock, or any combination thereof.
The Securities may be sold from time to time directly by the Selling
Securityholders or, alternatively, through underwriters, broker-dealers or
agents. The Securities may be sold in one or more transactions at fixed
prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale, or at negotiated prices. Such sales may be
effected on any national securities exchanges or U.S. inter-dealer quotation
system of a registered national securities association on which the Securities
may be listed or quoted at the time of sale, in the over-the-counter market,
in transactions otherwise than on such exchanges or systems or in the over-
the-counter market, or through the writing of options. To the extent required,
the names of any underwriters, broker-dealers or agents, the amount and nature
of any commission, concession, allowances or discounts paid in connection with
such sales, and any other required information with respect to any particular
offer of the Securities by the Selling Securityholders, will be set forth in a
Prospectus Supplement. See "Selling Securityholders" and "Plan of
Distribution".
The Selling Securityholders and any underwriters, broker-dealers or agents
which participate in the distribution of the Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit realized on the resale of the Securities
purchased by them may be deemed to constitute underwriting commissions,
concessions, allowances or discounts under the Securities Act. See "Plan of
Distribution".
The Debentures have been designated for trading in the Portal(SM) Market
("PORTAL"), a subsidiary of The Nasdaq Stock Market, Inc. The Company has not
applied and does not intend to apply for listing of the Debentures on any
securities exchange or for inclusion of the Debentures on any automated inter-
dealer quotation system. The Common Stock is listed on The New York Stock
Exchange, Inc. (the "NYSE") under the symbol "PIN". The reported closing price
of the Common Stock on the NYSE Composite Tape on November 2, 1998 was $4 1/16
per share. The Common Stock issuable upon conversion, redemption or repurchase
of the Debentures will be listed, upon notice of issuance, on the NYSE.
The Company will not receive any of the proceeds from the sale by the
Selling Securityholders of any Debentures or the Common Stock issuable upon
conversion, redemption or repurchase thereof. The Selling Securityholders will
pay all underwriting discounts and selling commissions, if any, applicable to
the sale of the Debentures and the Common Stock issuable upon conversion,
redemption or repurchase of the Debentures. The Company has agreed to bear
certain expenses incident to the registration of the Securities under federal
and state securities laws and to indemnify the Selling Securityholders against
certain liabilities, including liabilities under the Securities Act.
---------------
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS IN EVALUATING AN INVESTMENT IN THE DEBENTURES AND THE COMMON STOCK,
SEE "RISK FACTORS" BEGINNING ON PAGE 13.
---------------
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.
---------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 6, 1998.
<PAGE>
AVAILABLE INFORMATION
AMF Bowling is subject to the informational reporting 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 Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's Regional Offices in New York (Seven World Trade Center, 13th
Floor, New York, New York 10048), and Chicago (Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661). Copies of these
materials may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Commission maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Reports, proxy statements and other information concerning AMF
Bowling may also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005, where AMF Bowling's Common Stock is listed. Any such
request and requests for the agreements summarized herein should be directed
to: Renee D. Antolik, Director of Investor Relations and Financial Reporting,
AMF Bowling, Inc., 8100 AMF Drive, Richmond, Virginia 23111, telephone number
(804) 730-4000.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Securities offered
hereby. This Prospectus (as hereinafter defined) constitutes a part of the
Registration Statement and does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete and, with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement is deemed qualified in its entirety by such reference.
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus (the "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 "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: (i) the Company's
ability to integrate acquired operations into its business, (ii) the Company's
ability to execute its long term strategies, including to identify, finance
and execute further acquisitions, (iii) the development and growth of new
bowling markets and the Company's ability to identify those markets and to
generate sales of products in those markets, (iv) 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, (v) the
Company's ability to hire and retain experienced senior management, (vi) the
ability of AMF Bowling and its subsidiaries to generate sufficient cash flow
in a timely manner to satisfy principal and interest payments on their
indebtedness, (vii) the popularity of bowling as an activity in the United
States and abroad, (viii) the continuation or worsening of economic
difficulties currently being experienced by certain countries in the Asia
Pacific and other regions and (ix) fluctuations in currency exchange rates
which affect translation of operating results. In addition, actual results may
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, of which this Prospectus constitutes a
part, and the Company's periodic reports filed under the Exchange Act. 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.
3
<PAGE>
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 hereinafter used in this Prospectus, except as otherwise
specifically set forth, "AMF Bowling" refers to AMF Bowling, Inc., and the
"Company" or "AMF" refers to AMF Bowling and its subsidiaries. Except as
otherwise indicated herein, all pro forma information has been prepared to give
effect to the Acquisition (as hereinafter defined) 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 U.S. 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. Unless otherwise indicated, all information in
this Prospectus assumes the discount to the Initial Purchasers and expenses
payable by the Company in connection with the Private Placement and the
subsequent offering by the Initial Purchasers aggregate approximately $11.0
million.
THE COMPANY
AMF is the largest bowling company in the world. The Company owns or operates
539 bowling centers worldwide which generate over 60 million customer visits
per year. AMF is the U.S. market leader with 416 bowling centers, and is also
the largest operator internationally, with an additional 123 bowling centers in
eleven other 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 416 centers has
approximately 123 centers. The next three largest operators collectively
account for only approximately 54 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.
("Goldman Sachs"), acquired AMF in May 1996 for a total purchase price of
approximately $1.37 billion (the "Acquisition"). Following the Acquisition,
management began to implement a long term strategy to consolidate the U.S.
bowling center industry, to build a nationally recognized brand of bowling-
based family recreation centers and to capitalize on long term demand for
bowling products and centers in global markets.
Since May 1996, the Company has acquired 225 centers in the U.S. and owns or
operates 416 U.S. centers as of September 30, 1998. In addition, the Company
has acquired 31 centers in selected international markets and owns or operates
123 international centers as of September 30, 1998.
Recently, the Company has had to slow the pace of acquisitions. This slowdown
reflects a need to focus on improving the performance of existing bowling
centers, as well as financing constraints resulting from depressed results in
the Company's bowling equipment segment.
4
<PAGE>
Recent operating results for U.S. bowling centers have declined in comparison
with historical performance. In connection with curtailing its acquisition
efforts over the near term, management will focus its attention on the
improvement of constant-center (centers in operation for at least one full
fiscal year) revenue growth and profitability. As part of its efforts to
improve revenue growth and profitability, the Company has established a new
senior management team to lead U.S. bowling centers, including the appointment
of a President, U.S. Bowling Centers in September 1998. This new management
team will concentrate on increasing customer satisfaction, improving training
for center managers and staff, more effectively marketing and promoting bowling
to increase bowling center traffic and continue to develop a nationally
recognized brand of bowling-based family recreation centers.
AMF has historically participated in the international demand for bowling
products primarily through the sale of its New Center Packages ("NCPs"), which
include all of the equipment necessary to outfit one new bowling lane.
Beginning in the fourth quarter of 1997, the Company has seen a decline in the
demand for NCPs primarily in Asia Pacific markets as a result of the region's
economic difficulties which has led to reduced construction of new bowling
centers. In response to this decline, management is implementing a significant
cost reduction program, which should be completed by the end of 1998, designed
to align more effectively the bowling products operations with existing and
projected demand. Over the long term the Company continues to believe that
international markets, including Asia Pacific, will represent attractive
opportunities for the sale of bowling products.
BACKGROUND
AMF Bowling is a Delaware corporation which was incorporated in 1996 by GSCP
to effect the Acquisition. AMF Bowling was initially incorporated under the
name "AMF Holdings Inc." and was subsequently renamed "AMF Bowling, Inc."
After the incorporation of AMF Bowling, GSCP sold certain equity interests in
AMF Bowling 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 AMF Bowling.
AMF Group Holdings Inc. ("AMF Group Holdings"), a direct, wholly owned
subsidiary of AMF Bowling, 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.
In connection with the Acquisition, AMF Bowling Worldwide, Inc. ("Bowling
Worldwide"), a subsidiary of AMF Bowling, issued 10 7/8% Senior Subordinated
Notes Due 2006 (the "Subsidiary Senior Subordinated Notes") and 12 1/4% Senior
Subordinated Discount Notes Due 2006 (the "Subsidiary Senior Subordinated
Discount Notes" and, collectively with the Subsidiary Senior Subordinated
Notes, the "Subsidiary Notes") pursuant to certain indentures (collectively,
the "Subsidiary Indentures"), and incurred substantial bank debt.
On November 7, 1997, AMF Bowling completed an initial public offering (the
"Initial Public Offering") of 15,525,000 shares of Common Stock, which trades
on the NYSE under the symbol "PIN". The net proceeds of $279.1 million from the
Initial Public Offering were contributed by AMF Bowling to Bowling Worldwide
and used by Bowling Worldwide to reduce and refinance its bank debt pursuant to
Bowling Worldwide's Third Amended and Restated Credit Agreement (as amended by
Amendment No. 1 and Waiver to the Third Amended and Restated Credit Agreement,
dated as of September 30, 1998, the "Credit Agreement") and to redeem a portion
of the Subsidiary Senior Subordinated Discount Notes.
5
<PAGE>
On May 12, 1998, AMF Bowling completed the Private Placement of the
Debentures to Goldman, Sachs & Co., Cowen & Company, Morgan Stanley & Co.
Incorporated and Schroder & Co. Inc. (collectively, the "Initial Purchasers")
in a private placement. The Initial Purchasers subsequently sold the Debentures
in transactions exempt from registration to "qualified institutional buyers"
pursuant to Rule 144A under the Securities Act.
AMF Bowling's principal executive offices are located at 8100 AMF Drive,
Richmond, Virginia, and the telephone number of AMF Bowling is (804) 730-4000.
RISK FACTORS
Prospective purchasers of the Debentures should carefully consider the
factors set forth under "Risk Factors" starting on page 13 as well as the other
information set forth in this Prospectus. The risks of investing in the
Debentures include the following factors: AMF Bowling's holding company
structure, its substantial leverage and ability to service its indebtedness,
its ability to execute its business strategies, net losses, the existence of
encumbrances on assets, management and dependence on key personnel, control by
GSCP, risks with respect to a Debenture Change of Control or a Change of
Control (as defined in the Subsidiary Indentures), characteristics of the
bowling industry, seasonality and market development cycles, the Company's
international operations, the lack of a public market for the Debentures and
restrictions on resale, possible volatility of stock price and Debentures,
fraudulent conveyance, anti-takeover effects of certain certificate of
incorporation and by-laws provisions, shares eligible for future sale, original
issue discount consequences and risks arising from the terms of the Debentures.
USE OF PROCEEDS
The Securities are being offered hereby solely for the accounts of the
Selling Securityholders listed herein pursuant to the Debenture Registration
Rights Agreement. The Company will not receive any of the proceeds from the
sales by the Selling Securityholders of the Debentures or the Common Stock
issuable upon conversion, redemption or repurchase thereof.
RECENT DEVELOPMENTS
On November 2, 1998, Douglas J. Stanard resigned, effective as of January 1,
1999, from his positions as President, Chief Executive Officer and a director
of AMF Bowling, and from all other positions with AMF Bowling and its
subsidiaries. Stephen E. Hare, Executive Vice President, Chief Financial
Officer and Treasurer of AMF Bowling, was named Acting Chief Executive Officer
of AMF Bowling on November 2, 1998 following the resignation of Mr. Stanard and
until a successor to Mr. Stanard is named. See "Management".
6
<PAGE>
THE OFFERING
SECURITIES.......................... $1,125,000,000 aggregate principal amount
at maturity of Zero Coupon Convertible
Debentures due 2018 and such
indeterminate number of shares of Common
Stock issuable upon conversion,
redemption or repurchase of the
Debentures. There are not and will not be
any periodic interest payments on the
Debentures. See "Description of
Debentures--General".
YIELD TO MATURITY OF DEBENTURES..... 7% per annum (computed on a semi-annual
bond equivalent basis) calculated from
May 12, 1998.
CONVERSION RIGHTS................... The Debentures are convertible, at the
option of the Holder, at any time prior
to maturity unless previously redeemed or
otherwise purchased by AMF Bowling, into
Common Stock at the rate of 8.6734 shares
per $1,000 principal amount at maturity
of Debentures (the "Conversion Rate").
The Conversion Rate is not adjusted for
accrued Original Issue Discount, but is
subject to adjustment upon the occurrence
of certain events. Upon conversion, the
Holder will not receive any cash payment
representing accrued Original Issue
Discount; such accrued Original Issue
Discount will be deemed paid by the
delivery of the Common Stock received
upon conversion. See "Description of
Debentures--Conversion of Debentures".
GLOBAL DEBENTURES; BOOK-ENTRY The Debentures are issued in fully
SYSTEM.............................. registered form without coupons and in
minimum denominations of $1,000. The
Debentures are evidenced by Global
Debentures (as hereinafter defined), in
fully registered form and without
coupons, deposited with the Trustee (as
hereinafter defined), as custodian for
DTC (as hereinafter defined). Beneficial
interests in the Global Debentures are
shown on, and transfers thereof may be
effected only through, records maintained
by DTC and its Participants (as
hereinafter defined) and Indirect
Participants (as hereinafter defined).
See "Description of Debentures--Global
Debentures; Book-Entry Form".
ORIGINAL ISSUE DISCOUNT............. The Debentures were originally offered at
an original issue discount for federal
income tax purposes equal to the excess
of the principal amount at maturity of
the Debentures over their Issue Price.
Prospective purchasers of Debentures
should be aware that, although there are
no periodic payments of interest on the
Debentures, accrued Original Issue
Discount is included periodically in the
gross income of a holder of Debentures
(the "Holder") for federal income tax
purposes prior to conversion, redemption,
other disposition or
7
<PAGE>
maturity of such Holder's Debentures,
whether or not such Debentures are
ultimately converted, redeemed, sold (to
AMF Bowling or otherwise) or paid at
maturity. See "Certain Federal Income Tax
Considerations".
SINKING FUND........................ None.
REDEMPTION.......................... The Debentures are not redeemable by AMF
Bowling prior to May 12, 2003. Beginning
on May 12, 2003, the Debentures are
redeemable for cash at any time at the
option of AMF Bowling, in whole or in
part, at Redemption Prices equal to the
Issue Price plus accrued Original Issue
Discount to the date of redemption. See
"Description of Debentures--Redemption of
Debentures at the Option of the Company".
DEBENTURE CHANGE OF CONTROL......... If there is a Debenture Change of
Control, the Debentures may be redeemed
at the option of the Holder at a
Debenture Change of Control Redemption
Price equal to the Issue Price plus
accrued Original Issue Discount to the
date of redemption. AMF Bowling may, at
its option, elect to pay any such
Debenture Change of Control Redemption
Price in cash or Common Stock, or any
combination thereof. See "Description of
Debentures--Redemption at the Option of
the Holder Upon a Debenture Change of
Control".
PURCHASE AT THE OPTION OF THE AMF Bowling will purchase Debentures at
HOLDER.............................. the option of the Holder as of May 12,
2003, May 12, 2008 and May 12, 2013 at
Purchase Prices equal to the Issue Price
plus accrued Original Issue Discount to
the date of purchase. AMF Bowling may, at
its option, elect to pay any such
Purchase Price in cash or Common Stock,
or any combination thereof. See
"Description of Debentures--Purchase of
Debentures at the Option of the Holder".
EVENTS OF DEFAULT................... Events of default include: (i) default in
payment of the principal amount at
maturity, accrued Liquidated Damages (as
hereinafter defined), if any, interest,
if any, Redemption Price, Purchase Price
or Debenture Change of Control Redemption
Price with respect to any Debenture when
such becomes due and payable, provided
that in the case of any failure to pay
Liquidated Damages, such failure
continues for a period of 30 days; (ii)
failure by AMF Bowling to comply with any
of its other agreements in the Debentures
or the Indenture (as hereinafter defined)
upon the receipt by AMF Bowling of notice
of such default by the Trustee or by
Holders of not less than 25% in aggregate
principal amount at maturity of the De-
8
<PAGE>
bentures then outstanding and AMF
Bowling's failure to cure such default
within 60 days after receipt by it of
such notice (plus an additional 60 days
in the case of defaults subject to cure,
provided AMF Bowling commences such cure
within the initial 60 days, and is
diligently pursuing such cure); (iii)
default which results in acceleration of
any indebtedness for money borrowed by
AMF Bowling or any of its subsidiaries in
an aggregate principal amount of $25
million or more; or (iv) certain events
of bankruptcy or insolvency. See
"Description of Debentures--Events of
Default; Notice and Waiver".
REGISTRATION RIGHTS................. AMF Bowling has filed the Registration
Statement in respect of the Debentures
and the Common Stock issuable upon the
conversion, redemption or repurchase
thereof, pursuant to the Debenture
Registration Rights Agreement. Under the
Debenture Registration Rights Agreement,
AMF Bowling has agreed to use its best
efforts to keep the Registration
Statement effective until the earlier of
(i) the sale pursuant to the Registration
Statement of all the securities
registered thereunder or (ii) the
expiration of the holding period
applicable to such securities held by
non-affiliates of AMF Bowling under Rule
144(k) of the Securities Act, or any
successor provision. See "Description of
Debentures--Registration Rights".
LISTING............................. The Debentures have been designated for
trading in PORTAL. The Common Stock is
listed on the NYSE under the symbol
"PIN". The Common Stock issuable upon
conversion, redemption or repurchase of
the Debentures will be listed, upon
notice of issuance, on the NYSE. The
Company has not applied and does not
intend to apply for listing of the
Debentures on any securities exchange or
for inclusion of the Debentures on any
automated inter-dealer quotation system.
GOVERNING LAW....................... The Indenture and the Debentures are
governed by the laws of the State of New
York.
9
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data set forth below for the fiscal years indicated
were derived from AMF Bowling's audited consolidated financial statements for
the year ended December 31, 1997 and the period ended December 31, 1996, and
the Predecessor Company's audited combined financial statements for the years
ended December 31, 1995, 1994 and 1993. The summary financial data include the
unaudited consolidated results of AMF Bowling for the nine months ended
September 30, 1998 and 1997. 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 income for the period ending
April 30, 1996, AMF Bowling's statement of income from its inception through
December 31, 1996 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 of AMF Bowling. The data should
be read in conjunction with AMF Bowling's 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.
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- --------------
PRO FORMA
AMF
BOWLING, AMF BOWLING AMF BOWLING
PRODECESSOR COMPANY INC. INC. INC.
----------------------- --------- --------------- --------------
1993 1994(A) 1995 1996(B) 1996(C) 1997 1997 1998
------ ------- ------ --------- ------- ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue........................................ $427.6 $517.8 $564.9 $548.9 $384.8 $713.7 $505.6 $522.3
------ ------ ------ ------ ------ ------ ------ ------
Cost of goods sold....................................... 153.2 196.0 184.1 173.6 130.5 212.6 150.5 139.1
Bowling center operating expenses........................ 108.5 115.2 166.5 178.8 123.7 251.2 181.2 242.8
Selling, general and administrative expenses............. 41.9 57.1 50.8 51.0 35.1 64.5 47.2 52.0
Depreciation and amortization............................ 21.4 24.8 39.1 73.5 49.4 102.5 66.8 87.8
------ ------ ------ ------ ------ ------ ------ ------
Operating income......................................... 102.6 124.7 124.4 72.0 46.1 82.9 59.9 0.6
Interest expense, gross.................................. 5.0 7.4 15.7 106.2 78.0 118.4 89.2 84.5
Other income (expense), net.............................. (0.1) (1.5) 0.2 3.8 3.9 (8.1) 2.0 6.3
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes........................ 97.5 115.8 108.9 (30.4) (28.0) (43.6) (31.3) (90.2)
Provision (benefit) for income taxes..................... 15.1 16.5 12.1 (8.9) (8.5) (12.8) (8.9) (21.1)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before equity in loss of joint ventures
and extraordinary items................................. 82.4 99.3 96.8 (21.5) (19.5) (30.8) (22.4) (69.1)
Equity in loss of joint ventures......................... -- -- -- -- -- (1.4) -- (2.9)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before extraordinary items............. 82.4 99.3 96.8 (21.5) (19.5) (32.2) (22.4) (72.0)
Extraordinary items, net of tax.......................... -- -- -- -- -- (23.4) -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)........................................ $ 82.4 $ 99.3 $ 96.8 $(21.5) $(19.5) $(55.6) $(22.4) $(72.0)
====== ====== ====== ====== ====== ====== ====== ======
Net loss per share before extraordinary items (basic and
diluted)................................................ $(0.55) $(0.49) $(0.71) $(0.53) $(1.21)
Per share effect of extraordinary items.................. -- -- (0.52) -- --
------ ------ ------ ------ ------
Net loss per share (basic and diluted)................... $(0.55) $(0.49) $(1.23) $(0.53) $(1.21)
====== ====== ====== ====== ======
Ratio of earnings to fixed charges(d).................... 11.0 10.3 6.1 -- -- -- -- --
SELECTED DATA:
EBITDA................................................... $124.0 $149.5 $163.5 $145.5 $185.4 $126.7 $ 88.4
EBITDA margin............................................ 29.0% 28.9% 28.9% 26.5% 26.0% 25.1% 16.9%
Revenue:(e)
Bowling Centers......................................... $192.6 $225.4 $292.3 $307.3 $429.1 $297.9 $383.8
Bowling Products........................................ 243.6 301.7 286.5 252.1 299.3 218.9 152.7
EBITDA: (f)
Bowling Centers......................................... $ 54.5 $ 65.8 $ 86.8 $ 95.6 $130.4 $ 84.0 $ 95.8
Bowling Products........................................ 71.1 84.6 79.3 62.6 70.8 55.1 8.5
New Center Packages sold................................. 3,577 4,941 4,437 3,029 4,576 3,324 1,846
New Center Packages backlog, end of period(g)............ N/A 2,078 940 1,426 1,725 2,005 1,329
Number of centers, end of period......................... 190 293 286 341 470 439 539
Number of lanes, end of period........................... 5,896 9,586 9,430 11,782 16,315 15,525 18,532
CAPITAL EXPENDITURES:
Routine modernization and maintenance(h)................ $ 9.0 $ 11.4 $ 13.1 $ 14.5 $ 49.9 $ 20.2 $ 25.4
Expansion and acquisition capital(i).................... 5.7 6.4 16.9 117.4 221.6 214.8 173.3
------ ------ ------ ------ ------ ------ ------ ------
Total................................................... $ 14.7 $ 17.8 $ 30.0 $131.9 $271.5 $235.0 $198.7
- --------------------------------------------------
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AMF BOWLING, INC.
---------------------------------------
AS OF DECEMBER 31,
------------------- AS OF SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 7.8 $ 43.9 $ 111.4
Goodwill, net........................... 771.1 772.3 773.0
Total assets............................ 1,594.0 1,832.1 2,037.5
Total debt.............................. 1,091.3 1,060.6 1,368.4
Stockholders' equity.................... 408.8 654.0 579.9
Total capitalization.................... 1,500.1 1,714.6 1,948.3
</TABLE>
- --------
(a) Includes results of Fair Lanes, Inc., a bowling center operator ("Fair
Lanes"), which operated 106 centers and was acquired by the Predecessor
Company 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 AMF Bowling.
(c) 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.
(d) For the nine months ended September 30, 1998 and 1997, the year ended
December 31, 1997 and the period ended December 31, 1996, on a historical
basis, and the year ended December 31, 1996, on a pro forma basis, the
Company had a deficiency of earnings to fixed charges of $90.2 million,
$31.3 million, $43.6 million, $28.0 million, and $30.4 million,
respectively.
(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 1993 because the Company does not
maintain this data for this period.
(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.
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RISK FACTORS
HOLDING COMPANY STRUCTURE
The Company conducts all of its business through subsidiaries. AMF Bowling's
operations are limited to the provision of certain management and overhead
services and related to its holding company operations. AMF Bowling is
dependent on the cash flow of its subsidiaries and distributions of such cash
flow from its subsidiaries to AMF Bowling in order to meet its debt service
obligations, including any obligation to redeem or repurchase Debentures. AMF
Bowling's subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to make funds available to AMF Bowling,
whether in the form of loans, dividends or otherwise. Moreover, Bowling
Worldwide is prohibited under both the Credit Agreement and the Subsidiary
Indentures from upstreaming funds by dividends, loans or otherwise, to redeem
or repurchase the Debentures. See "Description of Certain Indebtedness".
In addition, as a result of the holding company structure of AMF Bowling,
the Holders are structurally subordinate to all creditors of AMF Bowling's
subsidiaries, except to the extent that AMF Bowling is itself recognized as a
creditor of any such subsidiary, in which case the claims of AMF Bowling would
still be subordinate to any security in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by AMF Bowling. See "--
Substantial Leverage; Ability to Service Indebtedness" and "--Asset
Encumbrances" below. AMF Bowling is not currently a creditor of any of its
subsidiaries, except for payment of the services referred to above. In the
event of the insolvency, liquidation, reorganization, dissolution or other
winding-up of the subsidiaries, AMF Bowling will not receive funds available
to pay to the Holders in respect of the Debentures from the subsidiaries until
after the payment in full of the claims of the creditors of the subsidiaries.
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 has incurred in connection with the
Acquisition, its recent aggressive bowling center acquisition program and the
Private Placement and that it may incur to finance any future expansion of
operations. As of September 30, 1998, the Company had total indebtedness of
$1,368.4 million and stockholders' equity of $579.9 million, resulting in a
ratio of debt to total capitalization of approximately 70.2%. The obligors for
all of such indebtedness other than the Debentures are subsidiaries of AMF
Bowling, and, thus, the Debentures are structurally subordinate to all of such
indebtedness. Further, the Indenture does not impose any limitations on the
ability of AMF Bowling's subsidiaries to incur additional indebtedness. The
Company had deficiencies of earnings to fixed charges of $90.2 million, $43.6
million and $30.4 million for the nine months ended September 30, 1998, the
year ended December 31, 1997, on a historical basis, and the year ended
December 31, 1996, on a pro forma basis, respectively. See "Ratio of Earnings
to Fixed Charges". 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 nine months ended September 30, 1998, the
year ended December 31, 1997 and the period ended December 31, 1996 was $84.5
million, $118.4 million and $78.0 million, respectively, of which $57.9
million, $83.0 million and $53.0 million, respectively, was cash interest
expense. In addition to the indebtedness incurred in connection with the
Private Placement and the prior acquisitions, the Company may incur additional
indebtedness in the future, particularly to fund future bowling center
acquisitions. See "Business--Business Strategy".
The Company's ability to make scheduled payments on its indebtedness and to
make payments to Holders in the event of a redemption or repurchase depends on
the Company's future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond its control, including conditions of the debt and
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<PAGE>
equity markets. In September 1998, the Company renegotiated certain financial
covenants under the Credit Agreement with respect to the third and fourth
quarters of 1998 and the year 1999. Depending upon the Company's performance
in 1999, further renegotiation may be required to allow the Company to make
additional borrowings under the Credit Agreement. See "Description of Certain
Indebtedness". Based upon the current level of operations, the Company's
management believes that available cash flow, together with available
borrowings under the Credit Agreement and other sources of liquidity, will be
adequate to meet the Company's requirements for working capital, capital
expenditures, scheduled payments of interest on its Subsidiary Notes and debt
outstanding under the Credit Agreement. However, a portion of the principal
payments at maturity on the Subsidiary Notes and depending on the Company's
performance, payments on indebtedness under the Credit Agreement may require
refinancing. There can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will
be available in an amount sufficient to enable the Company to service its
indebtedness, redeem or repurchase the Debentures or make necessary capital
expenditures, or that any future financing or refinancing would be available
on commercially reasonable terms or at all.
The degree to which the Company is now leveraged could have important
consequences, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations is 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; and (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.
The Credit Agreement requires the maintenance of certain financial ratios
and imposes certain operating and financial restrictions on Bowling Worldwide
which restrict, among other things, its ability to declare dividends, redeem
stock, incur indebtedness, incur obligations under leases, create liens,
consummate mergers, sell assets, and make capital expenditures, investments
and acquisitions. On September 30, 1998, the Third Amended and Restated Credit
Agreement was amended by Amendment No. 1 and Waiver (the "Amendment and
Waiver") in which certain financial covenants were adjusted, and certain
restrictions on the Company's operations were imposed, for the remainder of
1998 and 1999. The financial covenants existing prior to the Amendment and
Waiver will be reinstated at the beginning of 2000. However, based on current
performance, the Company will not meet the requirements that will be
reinstated. In addition, for the remainder of 1998 and 1999, borrowings to
finance acquisitions are substantially restricted and limits have been placed
on the Company's ability to make capital expenditures, investments and
acquisitions. Failure by Bowling Worldwide to comply with its Credit Agreement
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on the Company. Actual borrowing under
the Credit Agreement must meet certain financial tests under the Credit
Agreement and the Subsidiary Indentures. The Company's leverage may adversely
affect its ability to meet these tests, and, as a result, to obtain such
financing. See "--Ability to Implement Growth Strategies" and "Description of
Certain Indebtedness".
ABILITY TO EXECUTE BUSINESS STRATEGIES
The Company's Bowling Centers business has grown through acquisitions of
centers and, to a lesser extent, improvements at existing centers. However, as
announced after the end of the third quarter of 1998, the Company will curtail
its acquisitions and therefore the number of centers acquired will be
substantially reduced over the next 12 months. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Capital
Expenditures". There can be no assurance that the Company will be in a
position to make any significant acquisitions of centers after 1999 or will
have sufficient capital available to make planned improvements of operations
of acquired and existing centers.
Although the Company's principal long term strategy for future growth is the
acquisition of additional bowling centers, the Company's recent performance
has resulted in significant restrictions
14
<PAGE>
on its acquisition program. The Company financed its acquisition program with
borrowings under the Credit Agreement, with cash generated by operations, and
with various other financing sources, which included additional incurrences of
debt by AMF Bowling and/or Bowling Worldwide and issuances of equity of AMF
Bowling. The Company used $249.6 million of net proceeds of the Private
Placement to repay amounts outstanding under the non-amortizing revolving
working capital facility under the Credit Agreement (the "Bank Facility"), the
aggregate size of which is $355.0 million. There can be no assurance that the
Company will be able to obtain financing or refinancing on commercially
reasonable terms or at all to return to its aggressive acquisition program. At
the present time, the restrictive covenants in the Subsidiary Indentures would
prohibit Bowling Worldwide from incurring additional indebtedness other than
borrowings under the Credit Agreement and the restrictive covenants in the
Credit Agreement substantially restrict the Company's ability to incur
additional indebtedness to finance acquisitions, as well as its ability to
make capital expenditures, investments and acquisitions.
The Company's long term strategies also include growth through increased
sales of NCPs and Modernization and Consumer Products. Integral to such
increased sales is the Company's strategy of exploiting demand for bowling
products in developed as well as in emerging bowling markets. Recent overseas
economic difficulties, particularly in the Asia Pacific region, has materially
adversely affected operating results of the bowling products segment and has
resulted in the Company's implementing significant cost reductions in the
bowling products segment of its operations, which should be substantially
completed by the end of 1998. There can be no assurance that demand for
bowling products will improve or that the Company will be able to successfully
exploit such demand. See "--International Operations", "--Seasonality and
Market Development Cycles" and "Business--Business Strategy".
NET LOSSES
The Company recorded a net loss of $32.2 million before extraordinary items
in 1997 and a net loss of $21.5 million, on a pro forma basis, in 1996. The
Company incurred after-tax extraordinary charges totaling $23.4 million in the
fourth quarter of 1997 arising from the third amendment and restatement of the
Credit Agreement that became effective on November 7, 1997, the premium paid
to redeem a portion of the Subsidiary Notes with the proceeds of the Initial
Public Offering and the write-off of the portion of deferred financing costs
attributable to the Subsidiary Notes redeemed. The Company recorded a net loss
of $72.0 million in the first nine months of 1998 compared to a net loss of
$22.4 million in the first nine months of 1997. Net losses are expected to
continue. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ASSET ENCUMBRANCES
The lenders (the "Lenders") under the Credit Agreement have been granted
security interests in all of Bowling Worldwide's capital stock and
substantially all of Bowling Worldwide's current and future assets, including
a pledge of all of the issued and outstanding shares of capital stock of
certain of its subsidiaries. In addition, certain of such subsidiaries have
granted to the Lenders security interests in all of the current and future
assets of such subsidiaries (other than 35% of the outstanding capital stock
of any foreign subsidiary of any such subsidiary). In the event of a default
under the Credit Agreement (whether as a result of the failure to comply with
a payment or other covenant, a cross-default, or otherwise), the Lenders will
have a prior secured claim on the capital stock and the assets of Bowling
Worldwide and such subsidiaries. If the Lenders should attempt to foreclose on
their collateral, the Company's financial condition and the value of the
Debentures will be materially adversely affected. In the event of a
foreclosure on the collateral consisting of the Bowling Worldwide stock,
unless the purchaser of such stock were an affiliate of Goldman Sachs, a
Debenture Change of Control and a Change of Control (under the Subsidiary
Indentures) would
15
<PAGE>
occur, with the consequences set forth below under "--Risks with respect to a
Debenture Change of Control or Change of Control". See "Description of Certain
Indebtedness".
MANAGEMENT; DEPENDENCE ON KEY PERSONNEL
On November 2, 1998, Douglas J. Stanard, President and Chief Executive
Officer and a director of AMF Bowling, resigned all of his positions with AMF
Bowling and its subsidiaries, effective January 1, 1999. Stephen E. Hare, the
Executive Vice President, Chief Financial Officer and Treasurer of AMF
Bowling, has been named as acting Chief Executive Officer until a successor to
Mr. Stanard is named. See "Management--Settlement Agreement". AMF Bowling has
announced that it has retained the executive search firm Spencer Stuart &
Associates to identify candidates to succeed Mr. Stanard. There can be no
assurance that an acceptable replacement for Mr. Stanard will be found. In
addition, the Company's business is managed by certain other key executive
officers, including a new president of U.S. Bowling Center Operations. The
loss of the services of certain of these executives could have a material
adverse impact on the Company. 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
GSCP and The Goldman Sachs Group, L.P. ("The Goldman Sachs Group"), which
has a 99% interest in Goldman Sachs, together beneficially own 50.9% of the
Common Stock of AMF Bowling. Richard A. Friedman and Terence M. O'Toole, each
of whom is a Managing Director of Goldman Sachs, and Peter M. Sacerdote, who
is a limited partner of The Goldman Sachs Group, are directors of AMF Bowling.
Mr. Friedman is Chairman of AMF Bowling. Messrs. Friedman, O'Toole and
Sacerdote are also directors of Bowling Worldwide.
On April 30, 1996, AMF Bowling, GSCP, the Blackstone Group, Kelso & Company,
Bain Capital, Inc., Citicorp North America, Inc., Charles M. Diker, Robert L.
Morin and Douglas J. Stanard entered into a Stockholders Agreement, which
regulates the relationship among the Company and certain of its stockholders
(the "Stockholders Agreement"). As a result of its ownership of a majority of
the outstanding Common Stock and the terms of the Stockholders Agreement, GSCP
controls the Company and has the ability to control the election of a majority
of the Board of Directors of AMF Bowling (the "Board"), appoint new management
and approve or block any action requiring the approval of the Company's
stockholders, including adoption of amendments to AMF Bowling's Certificate of
Incorporation (the "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 AMF Bowling each to nominate a director of AMF Bowling,
subject to GSCP's consent, and for the formation of the Executive Committee of
AMF Bowling's Board, which consists of two directors nominated by GSCP and the
President and Chief Executive Officer of AMF Bowling. There can be no
assurance that the interests of GSCP or The Goldman Sachs Group will not
conflict with the interests of the Holders of the Debentures. See "Description
of Capital Stock" and "Securities Owned by Management and Certain Beneficial
Owners--Stockholders Agreement".
RISKS WITH RESPECT TO A DEBENTURE CHANGE OF CONTROL OR CHANGE OF CONTROL
Upon the occurrence of a Debenture Change of Control, the Debentures may be
redeemed at the option of the Holder at a Debenture Change of Control
Redemption Price equal to the Issue Price plus accrued Original Issue Discount
to the date of redemption. AMF Bowling may, at its option, elect to pay any
such Debenture Change of Control Redemption Price in cash or Common Stock. If
a Debenture Change of Control (which may also constitute a Change of Control
under the Subsidiary Indentures and an event of default under the Credit
Agreement) were to occur, Bowling Worldwide may not have the financial
resources to repay all of its obligations which may then
16
<PAGE>
become due under the Credit Agreement, the Subsidiary Indentures and other
indebtedness that may become payable upon the occurrence of such Debenture
Change of Control, and AMF Bowling may not have the financial resources to pay
in cash its obligations which would then become due under the Debentures. In
this regard, Bowling Worldwide is prohibited under both the Credit Agreement
and the Subsidiary Indentures from upstreaming funds by dividends, loans or
otherwise, to redeem the Debentures. See "--Holding Company Structure" and
"Description of Debentures--Redemption at the Option of the Holder Upon a
Debenture Change of Control".
In addition, upon the occurrence of a Change of Control, each holder of a
Subsidiary Note may require that all or a portion of such holder's Subsidiary
Notes be repurchased at 101% of the principal amount of the Subsidiary Senior
Subordinated Notes and 101% of the Accreted Value (as defined in the indenture
governing the Senior Subsidiary Discount Notes) of the Subsidiary Senior
Subordinated Discount Notes (or, following the Full Accretion Date (as defined
in the indenture governing the Senior Subsidiary Subordinated Discount Notes),
101% of the principal amount thereof), as applicable, together with accrued
and unpaid interest, if any, and Liquidated Damages (as defined in the
Subsidiary Indentures), if any, to the date of repurchase. The Subsidiary
Indentures require that prior to such a repurchase or shortly thereafter, 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 (which may also constitute a Debenture Change of Control
and an event of default under the Credit Agreement) were to occur, Bowling
Worldwide may not have the financial resources to repay all of its obligations
which would then become due under the Credit Agreement, the Subsidiary
Indentures and any other indebtedness that would become payable upon the
occurrence of such Change of Control, and AMF Bowling may not have the
financial resources to pay in cash its obligations which may then become due
under the Debentures. See "Description of Certain Indebtedness--Subsidiary
Notes".
BOWLING INDUSTRY CHARACTERISTICS
BOWLING CENTERS
In the United States, the operation of bowling centers generally has been
historically 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 sought to
offset the decrease in overall lineage by increasing prices and creating
additional sources of income. Although AMF's lineage has declined
substantially in the first nine months of 1998, in prior periods AMF's U.S.
lineage remained relatively stable 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. In the first nine
months of 1998, the Company experienced a larger decline in lineage which it
was unable to offset with price increases on a comparable basis with recent
years. While the Company has initiated a strategy to focus management
attention on the improvement of constant center revenue growth and
profitability, there can be no assurance that such strategy will be
successful. 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 sought to 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 maintain lineage or increase prices in the U.S. or internationally
in the future. See "Business--AMF Bowling Centers".
In addition, bowling, as both a competitive sport and a recreational
activity, faces competition from numerous alternative activities. The
continued success of AMF's bowling operations is subject to consumers'
continued interest in bowling, the availability and cost of other sport,
recreational and entertainment alternatives and the amount of leisure time, as
well as various other social and
17
<PAGE>
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
AMF and Brunswick Corporation ("Brunswick") are the two largest
manufacturers of bowling center equipment, and are the only full-line
manufacturers of bowling equipment and supplies that compete on a global
basis. The Company also competes with smaller, often regionally focused
companies in certain product lines. Management estimates that AMF accounts for
approximately 41% of the worldwide installed base of bowling center equipment.
NCP sales follow the trends in the growth of bowling. Traditionally, bowling
has been introduced and becomes popular in new markets, the economics of
constructing and operating bowling centers become attractive to local market
developers and entrepreneurs. Consequently, new bowling center construction
drives demand for NCPs. For at least the last 15 years, the majority of NCP
sales has been to international markets. Until recently, this trend was fueled
by the growth of bowling in several countries, such as China, Taiwan and South
Korea. However, because of recent economic difficulties in these markets,
primary developers and entrepreneurs have had difficulties in obtaining
financing for new bowling centers, resulting in a substantial decline in NCP
sales in that region. 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.
Reflecting the reduction in the level of shipments for NCPs in Asia Pacific
markets, revenue for Bowling Products decreased by 30.2% to $152.7 million for
the first nine months of 1998 as compared to $218.9 million for the first nine
months of 1997 and EBITDA decreased to $8.5 million in the first nine months
of 1998 as compared to $55.1 million in the first nine months of 1997. See "--
International Operations", "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Backlog; Recent NCP Sales" and
"Business--AMF Bowling Products".
SEASONALITY AND MARKET DEVELOPMENT CYCLES
Financial performance of Bowling Centers is seasonal in nature, with cash
flows typically peaking in the winter months and reaching their lows in the
summer months. The geographic diversity of Bowling Centers operations has
helped 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 increased number of U.S. centers attributable to the Company's
recent aggressive acquisition program, the seasonality of financial
performance of Bowling Centers business has been accentuated.
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. 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.
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. Current
economic difficulties in certain markets of the Asia Pacific region have
resulted in the reduction in the order rate, level of shipments
18
<PAGE>
and backlog for NCPs. 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 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.
AMF has a history of operating in a number of international markets, in some
cases, for over thirty 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 may adversely impact sales volume and profit margins
during such periods.
Current economic difficulties in certain markets in the Asia Pacific region
have resulted in a reduction in the level of shipments for NCPs. Management
believes that many Asia Pacific customers have eliminated or delayed purchases
of NCP and Modernization equipment as they await the return of economic
stability to their regions. Contributing to such delays is the continuing
limited availability of financing for customers to construct new centers and
purchase AMF bowling equipment. As of September 30, 1998, the NCP backlog was
1,329 which is a reduction of 23.0% compared to December 31, 1997. It is
expected that NCP backlog will continue for the foreseeable future at levels
which are substantially lower than those experienced in 1997.
NCP unit sales to China, Japan and other Asia Pacific markets represented
49.9% for the nine months ended September 30, 1998 compared to 72.7% for the
year ended December 31, 1997. NCP unit backlog related to China, Japan and
other Asia Pacific markets represented 67.6% of total NCP unit backlog at
September 30, 1998 compared to 70.4% at December 31, 1997.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the year ended December 31,
1997, revenue and EBITDA of international bowling centers represented 14.6%
and 16.0% of consolidated results, respectively.
LACK OF PUBLIC MARKET FOR THE DEBENTURES; RESTRICTIONS ON RESALE
Certain of the Initial Purchasers currently make a market in the Debentures.
Such Initial Purchasers are not obligated to do so, however, and any market-
making with respect to the Debentures may be interrupted or discontinued at
any time without notice. There can be no assurance as to the liquidity of any
trading market of the Debentures or that an active public market for the
Debentures will develop or, if one does develop, that it will be maintained.
If an active market for the Debentures fails to develop or be sustained, the
trading price of the Debentures could be adversely affected. AMF Bowling has
not applied and does not intend to apply for listing or quotation of the
Debentures on any securities exchange or stock market, although the Common
Stock issuable upon conversion, redemption or repurchase of the Debentures
will be listed, upon notice of issuance, on the NYSE.
POSSIBLE VOLATILITY OF COMMON STOCK AND DEBENTURES
The market price of the Common Stock has been and may continue to be
volatile. See "Price Range of Common Stock and Debentures". The market price
of the Debentures and the shares of
19
<PAGE>
Common Stock into which the Debentures are convertible have been, and may
continue to be materially adversely affected by factors such as actual or
anticipated fluctuations in the Company's operating results, the Company's
program for integrating newly acquired centers and improving operations of
constant centers, impact of international markets, changes in financial
estimates by securities analysts, general market conditions and other factors.
Broad market fluctuations may adversely affect the market price of the
Debentures and the Common Stock issuable upon conversion, redemption or
repurchase of the Debentures, and there can be no assurance that the market
price of the Debentures and the Common Stock issuable upon conversion,
redemption or repurchase of the Debentures will not decline.
FRAUDULENT CONVEYANCE
Management of the Company believes that the indebtedness represented by the
Debentures 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 Debentures, AMF Bowling was solvent, had sufficient
capital for carrying on its business and was able to pay its debts as they
matured. 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, AMF Bowling was insolvent,
was rendered insolvent by reason of such incurrence, was engaged in a business
or transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, or intended to hinder, delay or
defraud its 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 AMF Bowling's obligations to the Holders, the effect
of which would be that the Holders may not be repaid in full or at all and/or
(b) subordinate AMF Bowling's obligations to the Holders to other existing and
future indebtedness of AMF Bowling 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 payment could be made on the Debentures.
ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAWS
PROVISIONS
Certain provisions of the Certificate of Incorporation and the By-Laws of
AMF Bowling (the "By-Laws") may have the effect of delaying, deterring or
preventing a sale or change in control of the Company. Such provisions may
also render the removal of directors and management more difficult.
Specifically, the By-Laws provide for restrictions on who may call a special
meeting of stockholders. In addition, the Certificate of Incorporation
authorizes the issuance of preferred stock, par value $.01 per share
("Preferred Stock"), and of rights or options entitling holders thereof to
purchase from AMF Bowling securities of AMF Bowling or any other corporation
("Purchase Rights"), in any case without stockholder approval and upon such
terms as the Board may determine. The issuance of Preferred Stock or Purchase
Rights may have the effect of delaying, deterring or preventing a sale or
change in control of the Company. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
Preferred Stock that may be issued in the future. See "--Control by GSCP" and
"Description of Capital Stock".
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 ("Rule
144") of the Securities Act or otherwise could have an adverse effect on the
price of the Debentures and the Common Stock issuable upon conversion or
repurchase thereof. Of the 59,747,550 shares of Common Stock outstanding as of
October 23, 1998, 15,642,350 are eligible for immediate resale, except to the
extent owned by "affiliates" of AMF Bowling (as such term is defined in Rule
144).
20
<PAGE>
Additionally, 44,105,200 shares of Common Stock will be eligible for sale in
the public market pursuant to Rule 144. Sales of such shares in the public
market, or the perception that such sales may occur, could adversely affect
the market price of the Debentures or the Common Stock issuable upon
conversion or repurchase thereof or impair AMF Bowling's ability to raise
additional capital in the future. See "Shares Eligible for Future Sale".
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Debentures were originally issued at a substantial discount from the
stated Redemption Price payable at maturity. As a result, for U.S. federal
income tax purposes, Holders generally are required to include amounts in
their gross income in advance of their receipt of the cash payments to which
such income is attributable. Furthermore, the acquisition of a Debenture from
a prior Holder may give rise to market discount or acquisition premium. See
"Certain Federal Income Tax Considerations".
RISKS ARISING FROM THE TERMS OF THE DEBENTURES
The rate at which the Debentures are convertible into Common Stock is not
adjusted for accrued Original Issue Discount. Such accrued Original Issue
Discount will be deemed paid by the delivery of the Common Stock received upon
conversion, and, thus, a converting Holder will not receive any cash payment
representing accrued Original Issue Discount. Because the number of shares of
Common Stock issuable upon conversion of each Debenture is not increased even
though the accreted value of the Debentures (i.e., the Issue Price plus
accrued Original Issue Discount) increases over time, the implied effective
conversion price increases over time.
21
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The financial data contained herein were derived from the Company's
unaudited condensed consolidated financial statements for the nine months
ended September 30, 1998 and 1997, audited consolidated financial statements
for the year ended December 31, 1997 and 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ------------------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1998 1998(A) 1997 1997(A) 1997 1996(B) 1996 1995 1994 1993
---- ------- ---- ------- ---- ------- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(c)....... -- -- -- -- -- -- -- 6.1x 10.3x 11.0x
</TABLE>
- --------
(a) The pro forma ratios of earnings to fixed charges for the year ended
December 31, 1997, and for the nine months ended September 30, 1998, have
been calculated based on the historical results of operations for the
periods presented and adjusting the interest expense as a result of using
the proceeds of the Private Placement to repay senior bank debt, with
weighted average borrowing rates of 8.75% and 7.62% for the year ended
December 31, 1997 and the nine months ended September 30, 1998,
respectively, as if the Private Placement had occurred as of the
beginning of the periods presented.
(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 AMF
Bowling.
(c) 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
expenses considered to represent interest. For the nine months ended
September 30, 1998 and 1997, respectively, the year ended December 31,
1997 and the period ended December 31, 1996, on a historical basis, the
year ended December 31, 1996, on a pro forma basis, the nine months ended
September 30, 1998 and the year ended December 31, 1997, on a pro forma
basis for the Private Placement, the Company had a deficiency of earnings
to fixed charges of $90.2 million, $31.3 million, $43.6 million, $28.0
million, $30.4 million, $90.2 million and $43.6 million, respectively.
USE OF PROCEEDS
The Securities are being offered hereby solely for the accounts of the
Selling Securityholders listed herein pursuant to the Debenture Registration
Rights Agreement. The Company will not receive any of the proceeds from the
sales by the Selling Securityholders of the Debentures or the Common Stock
issuable upon the conversion, redemption or repurchase thereof.
22
<PAGE>
PRICE RANGE OF COMMON STOCK AND DEBENTURES
The Common Stock is listed on the NYSE under the symbol "PIN". The following
table sets forth, for the periods indicated, the high and low sales prices of
the Common Stock as reported on the NYSE Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1997
Fourth Quarter(1)....................................... $25 1/8 $21 1/2
1998
First Quarter........................................... $27 3/8 $20 1/2
Second Quarter.......................................... $ 31 $22 5/8
Third Quarter........................................... $28 3/8 $ 7 1/2
Fourth Quarter (through November 2, 1998)............... $ 9 $ 3 7/8
</TABLE>
- --------
(1) The Common Stock was offered to the public at $19.50 per share and
commenced trading on November 4, 1997.
On November 2, 1998, the reported last sale price of the Common Stock on the
NYSE Composite Tape was $4 1/16. The approximate number of holders of record
of the Common Stock as of November 2, 1998 was 3,658.
The Debentures are designated for trading in PORTAL. The following table
sets forth, for the period indicated, the high and low closing bid quotations
per $1,000 principal amount for the Debentures as reported by Morgan Stanley &
Co. Incorporated, a market maker for the Debentures.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
Second Quarter (beginning May 12, 1998)................. $266.25 $235.00
Third Quarter........................................... $258.75 $ 97.50
Fourth Quarter (through November 2, 1998)............... $102.50 $ 72.50
</TABLE>
Such reported quotations may not reflect actual transactions.
DIVIDEND POLICY
AMF Bowling has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. As a holding
company, the ability of AMF Bowling to pay dividends is dependent upon the
ability of its subsidiaries to pay cash dividends or to make other
distributions. See "Risk Factors--Holding Company Structure". The Credit
Agreement effectively prohibits Bowling Worldwide from paying, and the
Subsidiary Indentures restrict the ability of Bowling Worldwide to pay,
dividends, and, accordingly, will limit the ability of AMF Bowling to pay cash
dividends to its stockholders. See "Description of Certain Indebtedness". Any
determination to pay cash dividends in the future will be at the discretion of
the Board and will depend upon the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant at that
time by the Board.
23
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years indicated
were derived from AMF Bowling's audited consolidated financial statements for
the year ended December 31, 1997 and 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. The selected financial data include the unaudited consolidated results
of AMF Bowling for the nine months ended September 30, 1998 and 1997. 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 income for the period ending April 30, 1996, AMF
Bowling's statement of income from its inception through December 31, 1996,
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 of AMF Bowling. The data should be read in
conjunction with AMF Bowling's Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere herein.
The comparability of the selected financial data is affected by the
Company's bowling center acquisition program. In 1996, the Company acquired 57
bowling centers from unrelated sellers. The combined purchase price was $108.0
million. In 1997, the Company acquired 122 bowling centers from a number of
unrelated sellers. The combined purchase price was $232.7 million (including
amounts paid in 1998 for certain bowling centers included in the 1997 total).
For the nine months ended September 30, 1998, the Company acquired 77 bowling
centers from unrelated sellers. The combined purchase price was $151.0
million. See "Business--General".
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>
NINE MONTHS FOUR MONTHS
ENDED ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30, APRIL 30,
------------------------------------------------- -------------- -----------
PRO FORMA
AMF
PREDECESSOR BOWLING, AMF BOWLING, AMF BOWLING, PREDECESSOR
COMPANY INC. INC. INC. COMPANY
----------------------- --------- --------------- -------------- -----------
1993 1994(A) 1995 1996(B) 1996(C) 1997 1997 1998 1996(D)
------ ------- ------ --------- ------- ------ ------ ------ -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenue....... $427.6 $517.8 $564.9 $548.9 $384.8 $713.7 $505.6 $522.3 $164.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of goods sold...... 153.2 196.0 184.1 173.6 130.5 212.6 150.5 139.1 43.1
Bowling center operating
expenses............... 108.5 115.2 166.5 178.8 123.7 251.2 181.2 242.8 80.2
Selling, general and
administrative
expenses............... 41.9 57.1 50.8 51.0 35.1 64.5 47.2 52.0 35.5
Depreciation and
amortization........... 21.4 24.8 39.1 73.5 49.4 102.5 66.8 87.8 15.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. 102.6 124.7 124.4 72.0 46.1 82.9 59.9 0.6 (9.0)
Interest expense,
gross.................. 5.0 7.4 15.7 106.2 78.0 118.4 89.2 84.5 4.5
Other income (expense),
net.................... (0.1) (1.5) 0.2 3.8 3.9 (8.1) 2.0 6.3 (0.1)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... 97.5 115.8 108.9 (30.4) (28.0) (43.6) (31.3) (90.2) (13.6)
Provision (benefit) for
income taxes........... 15.1 16.5 12.1 (8.9) (8.5) (12.8) (8.9) (21.1) (1.7)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before
equity in loss of joint
ventures and
extraordinary items.... 82.4 99.3 96.8 (21.5) (19.5) (30.8) (22.4) (69.1) (11.9)
Equity in loss of joint
ventures............... -- -- -- -- -- (1.4) -- (2.9) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before
extraordinary items.... 82.4 99.3 96.8 (21.5) (19.5) (32.2) (22.4) (72.0) (11.9)
Extraordinary items, net
of tax................. -- -- -- -- -- (23.4) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 82.4 $ 99.3 $ 96.8 $(21.5) $(19.5) $(55.6) $(22.4) $(72.0) $(11.9)
====== ====== ====== ====== ====== ====== ====== ====== ======
Net loss per share
before extraordinary
items (basic and
diluted)............... $(0.55) $(0.49) $(0.71) $(0.53) $(1.21)
Per share effect of
extraordinary items.... -- -- (0.52) -- --
Net loss per share
(basic and diluted).... $(0.55) $(0.49) $(1.23) $(0.53) $(1.21)
------ ------ ------ ------ ------
Ratio of earnings to
fixed charges(e)....... 11.0 10.3 6.1 -- -- -- -- -- --
====== ====== ====== ====== ======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS FOUR MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, APRIL 30,
----------------------------------------------------- ---------------- -----------
PRO FORMA
AMF
BOWLING, AMF BOWLING, PREDECESSOR
PREDECESSOR COMPANY INC. AMF BOWLING, INC. INC. COMPANY
----------------------- --------- ------------------ ---------------- -----------
1993 1994(A) 1995 1996(B) 1996(C) 1997 1997 1998 1996(D)
------ ------- ------ --------- ------------------ ------- ------- -----------
(DOLLARS IN MILLIONS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA:
EBITDA................................. $124.0 $149.5 $163.5 $ 145.5 $ 185.4 $ 126.7 $ 88.4 $6.1
EBITDA margin.......................... 29.0% 28.9% 28.9% 26.5% 26.0% 25.1% 16.9% 3.7%
Revenue: (f)
Bowling Centers....................... $192.6 $225.4 $292.3 $ 307.3 $ 429.1 $ 297.9 $ 383.8
Bowling Products...................... 243.6 301.7 286.5 252.1 299.3 218.9 152.7
EBITDA: (g)
Bowling Centers....................... $ 54.5 $ 65.8 $ 86.8 $ 95.6 $ 130.4 $ 84.0 $ 95.8
Bowling Products...................... 71.1 84.6 79.3 62.6 70.8 55.1 8.5
New Center Packages sold............... 3,577 4,941 4,437 3,029 4,576 3,324 1,846
New Center Packages backlog, end of
period(h)............................. N/A 2,078 940 1,426 1,725 2,005 1,329
Number of centers, end of period....... 190 293 286 341 470 439 539
Number of lanes, end of period......... 5,896 9,586 9,430 11,782 16,315 15,525 18,532
Capital Expenditures:
Routine modernization and
maintenance(i)....................... $ 9.0 $ 11.4 $ 13.1 $ 14.5 $ 49.9 $ 20.2 $ 25.4
Expansion and acquisition capital(j).. 5.7 6.4 16.9 117.4 221.6 214.8 173.3
------ ------ ------ ------- --------- ------- -------
Total................................. $ 14.7 $ 17.8 $ 30.0 $ 131.9 $ 271.5 $ 235.0 $ 198.7
====== ====== ====== ======= ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------- AS OF
PREDECESSOR COMPANY AMF BOWLING, INC. SEPTEMBER 30,
--------------------- ----------------- -------------
1993 1994(A) 1995 1996 1997 1998
------ ------- ------ -------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(k).............................. $ 18.9 $ 16.9 $ 29.2 $ 7.8 $ 43.9 $ 111.4
Goodwill, net................................... -- -- -- 771.1 772.3 773.0
Total assets.................................... 228.2 410.2 400.4 1,594.0 1,832.1 2,039.5
Total debt...................................... 75.7 186.1 167.4 1,091.3 1,060.6 1,368.4
Stockholders' equity............................ 88.6 132.4 161.5 408.8 654.0 579.9
Total capitalization............................ 164.3 318.5 328.9 1,500.1 1,714.6 1,948.3
</TABLE>
- -------
(a) Includes results of Fair Lanes, which operated 106 centers and was
acquired by the Predecessor Company 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 AMF Bowling.
(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) For nine months ended September 30, 1998 and 1997, the year ended December
31, 1997 and the period ended December 31, 1996, on a historical basis,
and the year ended December 31, 1996, on a pro forma basis, the Company
had a deficiency of earnings to fixed charges of $90.2 million, $31.3
million, $43.6 million, $28.0 million and $30.4 million, respectively. For
the four months ended April 30, 1996, the Predecessor Company had a
deficiency of earnings to fixed charges of $13.6 million.
(f) Before intersegment eliminations.
(g) Before intersegment eliminations and corporate, general and administrative
expenses.
(h) 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 1993 because the Company does not
maintain this data for this period.
(i) Defined as capital expenditures for existing product lines and
manufacturing operations and capital expenditures for modernizing and
refurbishing bowling centers.
(j) 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.
(k) Predecessor Company amounts reflect elimination of affiliates receivables
and payables.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
This discussion should be read in conjunction with the information contained
under "Selected Financial Data" and in AMF Bowling's Consolidated Financial
Statements included elsewhere herein.
Management believes that comparisons of the results of operations for the
years ended December 31, 1997, on a historical basis, and 1996, on a pro forma
basis, and December 31, 1996, on a pro forma basis, and 1995, on a historical
basis, are more meaningful than comparisons on a 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. See "Note 3. Pro Forma Results of Operations" in the Notes to
Consolidated Financial Statements.
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company's operations, 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 operations 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,
are included in the 1996 actual Predecessor Company results and excluded from
1996 pro forma results. The two centers have no material impact on the
Company's financial statements or on the information presented in this
section.
For 1995, Bowling Centers adopted a calendar year end; accordingly, the
Bowling Centers results of operations for the year ended December 31, 1995
includes 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 provides 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.
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 1997, bowling, food
and beverage and other revenue represented 60.6%, 25.4% and 14.0% of total
Bowling Centers revenue, respectively.
26
<PAGE>
The results shown below reflect both U.S. and international Bowling Centers
operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------
PRO FORMA
AMF AMF
PREDECESSOR BOWLING, BOWLING, AMF BOWLING,
COMPANY INC. INC. INC.
------------ ---------- ---------- ------------------
1995 1996(A) 1997 1997 1998
------------ ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BOWLING CENTERS (before
intersegment
eliminations):
Operating revenue....... $ 292.3 $ 307.3 $ 429.1 $ 297.9 $ 383.8
---------- ---------- ---------- -------- --------
Cost of goods sold...... 26.3 27.5 39.9 27.2 38.1
Bowling center operating
expenses............... 168.7 177.2 252.5 182.1 245.5
Selling, general and
administrative
expenses............... 10.5 7.0 6.3 4.6 4.4
Depreciation and
amortization........... 36.6 56.2 82.8 53.3 71.6
---------- ---------- ---------- -------- --------
Operating income........ $ 50.2 $ 39.4 $ 47.6 $ 30.7 $ 24.2
========== ========== ========== ======== ========
SELECTED DATA:
EBITDA.................. $ 86.8 $ 95.6 $ 130.4 $ 84.0 $ 95.8
EBITDA margin........... 29.7% 31.1% 30.4% 28.2% 25.0%
Number of centers, end
of period.............. 286 341 470 439 539
Number of lanes, end of
period................. 9,430 11,782 16,315 15,525 18,532
</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. 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 amounts have
not been restated to reflect this change.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997. Bowling Centers operating revenue increased $85.9 million, or 28.8%.
An increase of $105.0 million is attributable to 199 new centers which were
acquired and one new center which was constructed after December 31, 1996, of
which $91.6 million is from U.S. centers, and $13.4 million is from
international centers. Constant centers operating revenue decreased $15.3
million, or 6.1%. U.S. constant centers revenue decreased $8.2 million, or
4.5%, primarily as a result of lower lineage, orienting and integrating newly
acquired centers, nationally branded chain development activities, record-
setting hot weather which adversely affected customer visits and the later
start of league play in 1998, which accounted for 0.5% of the decline.
International constant carriers operating revenue decreased $7.1 million
primarily due to unfavorable currency translation of results and the World Cup
which adversely impacted revenue throughout Europe in the second quarter of
1998. On a constant exchange rate basis, international operating revenue would
have increased $2.1 million, or 2.9%, in the first nine months of 1998
compared to the first nine months of 1997. A decrease of $3.8 million in total
operating revenue was also attributable to 11 centers which were closed since
September 30, 1997.
Cost of goods sold increased $10.9 million, or 40.1%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $63.4 million, or 34.8%. An increase of $66.0
million was attributable to the net increase in the number of centers and an
increase of $0.1 million was primarily attributable to increased regional
staffing costs and expenses associated with nationally branded chain
development activities. A decrease of $2.7 million was attributable to closed
centers. As a percentage of its revenue, Bowling Centers operating expenses
were 64.0% for the first nine months of 1998 compared to 61.1% for the first
nine months of 1997, which increase was primarily attributable to the lag in
achieving cost reductions in newly acquired centers, expenses associated
27
<PAGE>
with nationally branded chain development activities and the higher fixed
operating costs as a percentage of constant centers revenue which decreased in
the second and third quarters of 1998.
Selling, general and administrative expenses decreased $0.2 million, or
4.3%, primarily due to expense management.
EBITDA increased $11.8 million, or 14.0%, primarily as a result of the net
increase in the number of centers. Additionally, Bowling Centers EBITDA was
impacted by the late start of league play, the lag in achieving cost
reductions in newly acquired centers, increased advertising and staffing and,
internationally, by the unfavorable currency translation which decreased
international constant centers EBITDA by $2.8 million. EBITDA margin for the
first nine months of 1998 was 25.0% compared to 28.2% in the first nine months
of 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996. Bowling Centers operating revenue increased $121.8 million, or 39.6%. An
increase of $125.8 million was attributable to new centers, of which $116.5
million was from U.S. centers, and $9.3 million was from international
centers. An increase of $1.1 million, or 0.4%, in constant centers revenue was
primarily a result of an increase in revenue in the Northeast region of the
United States, 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 for the year ended December 31, 1997
compared to the same period in 1996 was net of $1.0 million additional revenue
in 1996 due to leap year, a $3.0 million decrease in revenue from the Japanese
centers in 1997, which was primarily caused by recent poor economic conditions
in Japan, and a decrease of $1.0 million in operating revenue in the third
quarter of 1997 compared to the same period in 1996 which resulted from
pricing specials used in the U.S. and international centers to overcome lower
lineage which resulted from the hot, dry weather in these regions. Excluding
these special items, constant center revenue would have increased $6.1
million, or 2.2%, in the year ended December 31, 1997 compared to the same
period in 1996. A decrease in operating revenue of $5.1 million was primarily
attributable to the closing of a total of eight U.S. centers in May 1996, and
February, May and December 1997.
Cost of goods sold increased $12.4 million, or 45.1%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $75.3 million, or 42.5%, of which approximately
$74.6 million was attributable to new centers, including $69.6 million
attributable to U.S. centers and $5.0 million attributable to international
centers. As a percentage of its revenue, Bowling Centers operating expenses
were 57.7% for the year ended December 31, 1996, on a pro forma basis, versus
58.8% for the year ended December 31, 1997.
A decrease of $0.7 million, or 10.0%, in selling, general and administrative
expenses was attributable to cost controls implemented in international
centers in response to lower lineage discussed above and savings associated
with closed centers, partially offset by additional expenses due to new
centers.
An increase of $34.8 million, or 36.4%, in EBITDA was attributable to new
centers. EBITDA margin in 1997 was 30.4% compared to 31.1% in 1996, on a pro
forma basis.
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
28
<PAGE>
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.
The $3.5 million decrease in selling, general and administrative expenses
was primarily 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.
29
<PAGE>
BOWLING PRODUCTS
The results shown below reflect Bowling Products operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------
PRO FORMA
AMF AMF
PREDECESSOR BOWLING, BOWLING, AMF
COMPANY INC. INC. BOWLING, INC.
------------ ---------- ---------- ------------------
1995 1996(A) 1997 1997 1998
------------ ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BOWLING PRODUCTS (before
intersegment
eliminations):
Operating revenue....... $ 286.5 $ 252.1 $ 299.3 $ 218.9 $ 152.7
Cost of goods sold...... 166.9 153.3 185.7 133.1 112.2
---------- ---------- ---------- -------- --------
Gross profit............ 119.6 98.8 113.6 85.8 40.5
Selling, general and
administrative
expenses............... 40.3 36.2 42.8 30.7 32.0
Depreciation and
amortization........... 3.6 18.5 19.8 14.6 16.5
---------- ---------- ---------- -------- --------
Operating income........ $ 75.7 $ 44.1 $ 51.0 $ 40.5 $ (8.0)
========== ========== ========== ======== ========
SELECTED DATA:
Gross profit margin..... 41.7% 39.2% 38.0% 39.2% 26.5%
EBITDA.................. $ 79.3 $ 62.6 $ 70.8 $ 55.1 $ 8.5
EBITDA margin........... 27.7% 24.8% 23.7% 25.2% 5.6%
New Center Packages
sold................... 4,437 3,029 4,576 3,324 1,846
New Center Packages
backlog end of
period(b).............. 940 1,426 1,725 2,005 1,329
</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. 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 amounts
have not been restated to reflect this change.
(b) NCP orders included in the backlog are sometimes cancelled by customers in
the normal course of business. Accordingly, the Company has experienced,
and expects to continue to experience, the cancellation of a portion of
such orders. The backlog as of September 30, 1998 was 1,329 units, which
represents a reduction of 33.7% compared to a backlog of 2,005 units as of
September 30, 1997. See "--Backlog; Recent NCP Sales".
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997. Bowling Products operating revenue decreased $66.2 million, or
30.2%. NCP revenue decreased $53.2 million, or 46.3%, and Modernization and
Consumer Products revenue decreased $13.0 million, or 12.5%. Operating results
have been adversely impacted by current economic difficulties in certain
markets of the Asia Pacific region, the strong U.S. dollar and lower prices as
discussed above. During the first nine months of 1998, Bowling Products
recorded NCP shipments of 1,846 units compared to shipments of 3,324 units for
the first nine months of 1997. The decrease in Modernization and Consumer
Products revenue is primarily due to decreased Consumer Product sales to
Japanese and Korean customers due to economic conditions and to U.S. customers
who delayed their purchases of pins and balls during the summer months.
Gross profit decreased $45.3 million, or 52.8%, primarily as a result of the
decreased levels of NCP shipments, the strong U.S. dollar and competitive
pricing as discussed above, the lower margin Modernization product mix in 1998
compared to 1997 and unabsorbed fixed overhead resulting from low production
levels.
Bowling Products selling, general and administrative expenses increased $1.3
million, or 4.2%, primarily as a result of increases of $0.9 million in
advertising expenses and $0.4 million related to staffing. Increased
investment in international markets with long term potential in earlier
quarters
30
<PAGE>
was partially offset by reductions in selling, general and administrative
expenses in the third quarter of 1998 as a result of the cost reduction
program discussed above.
Bowling Products EBITDA decreased $46.6 million, or 84.6%, and the Bowling
Products EBITDA margin decreased from 25.2% in the first nine months of 1997
to 5.6% in the first nine months of 1998 as a result of the lower revenue and
gross profit and increased selling, general and administrative expense
discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996. Bowling Products operating revenue increased $47.2 million, or 18.7%,
primarily due to an increase of $44.7 million, or 37.1%, in NCP revenue, and
an increase of $1.5 million, or 1.1%, in Modernization and Consumer Products
revenue. The increase in NCP revenue was due to an overall increase in NCP
sales of 1,547 units which occurred primarily in Asia Pacific, Europe, South
America and the Middle East. See "--Seasonality and Market Development
Cycles".
Gross profit increased by $14.8 million, or 15.0%. Gross profit margin was
39.2% in 1996, on a pro forma basis, and 38.0% in 1997. Competitive pricing
pressure in certain markets and higher cost of sales, both experienced in the
third and fourth quarter, and unfavorable exchange rates experienced in
certain markets in the fourth quarter, resulted in lower year-to-date margins
in 1997. See "--International Operations".
Bowling Products selling, general and administrative expenses increased by
$6.6 million, or 18.2%, primarily as a result of a $4.3 million increase
attributable to payroll and facilities expenses related to opening and
staffing certain of the Company's international sales and service offices, and
an increase of $3.7 million attributable to advertising and promotion
expenses. These increases were offset by a $1.4 million decrease in payroll,
facilities and related expenses at U.S. locations.
EBITDA increased $8.2 million, or 13.1%, and EBITDA margin decreased from
24.8% in 1996, to 23.7% in 1997. The margin decline was impacted by the
pricing pressure and unfavorable exchange rates discussed above.
Year Ended December 31, 1996 Compared to Year Ended 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
decrease 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
South Korea and Taiwan, offset in part by an increase in NCP revenue from
sales to China. From 1995 to 1996, total NCP sales to South 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 "--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.
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.
31
<PAGE>
CONSOLIDATED ITEMS
Depreciation and Amortization
Depreciation and amortization increased $21.0 million or 31.4% in the nine
months ended September 30, 1998 compared to the nine months ended September
30, 1997. The increase is primarily attributable to depreciation of property
and equipment of centers acquired since September 30, 1997. Incremental
depreciation expense was also incurred as a result of capital expenditures.
For the year ended December 31, 1997, depreciation and amortization
increased by $29.0 million, or 39.5%, over the same period in 1996, primarily
due to depreciation of property and equipment of centers acquired since May,
1996 and incremental depreciation expense 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 for the Acquisition.
Interest Expense
Gross interest expense decreased $0.8 million, or 2.5%, in the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
Interest savings associated with the reduction of indebtedness under the
Credit Agreement and the redemption of a portion of the Subsidiary Senior
Subordinated Discount Notes with proceeds of the Initial Public Offering were
partially offset by interest incurred on increased levels of indebtedness
under the Credit Agreement as a result of borrowings to fund center
acquisitions and the issuance by AMF Bowling of the Debentures. See "--
Liquidity" and "--Capital Resources". Non-cash bond interest amortization
totaled $25.2 million and $25.5 million for the nine months ended September
30, 1998 and 1997, respectively.
Gross interest expense increased by $12.2 million, or 11.5%, in the year
ended December 31, 1997 compared with the same period in 1996, primarily due
to interest paid on increased levels of bank debt as a result of center
acquisitions. See "--Liquidity" and "--Capital Resources". Cash interest paid
by the Company for the year ended December 1997 totaled $83.2 million, while
non-cash bond interest amortization totaled $33.6 million.
For the year ended December 31, 1996, gross interest expense increased by
$90.5 million, or 576.4%, compared with the same period in 1995 due to
interest paid on debt incurred to finance the Acquisition and interest on an
acquisition facility that existed under the Credit Agreement prior to the
third amendment and restatement of the Credit Agreement in November 1997 (the
"Acquisition Facility"). Cash interest paid by the Company for the year ended
December 31, 1996 totaled $44.5 million, while non-cash bond interest
amortization totaled $24.7 million.
Net Income (Loss)
Net loss in the nine months ended September 30, 1998 was $72.0 million
compared to a net loss of $22.4 million in the nine months ended September 30,
1997. The decrease of $49.6 million was primarily a result of decreases in
Bowling Products revenue and EBITDA discussed above and the increase in
depreciation expense. Additionally, the Company recorded $2.9 million in
equity in loss of joint ventures in the nine months ended September 30, 1998.
The Company accounts for its investments in Hong Leong Joint Venture (as
hereinafter defined) and Playcenter Joint Venture (as hereinafter defined) by
the equity method.
Net loss increased $34.1 million, or 158.6%, for the year ended December 31,
1997 compared with the same period in 1996. Increases of $39.9 million in
EBITDA discussed above on a segment
32
<PAGE>
basis and income tax benefit of $3.9 million were offset by increases of $29.0
million in depreciation and amortization expense, $12.2 million in interest
expense, $23.4 million of extraordinary charges recorded in the fourth quarter
as described below, $11.9 million in other expenses and $1.4 million of equity
in loss of joint ventures.
The Company incurred after-tax extraordinary charges totaling $23.4 million
in the fourth quarter of 1997 as a result of entering into the third amendment
and restatement of the Credit Agreement, the premium paid to redeem a portion
of the Subsidiary Senior Subordinated Discount Notes with the proceeds of the
Initial Public Offering and the write-off of the portion of deferred financing
costs attributable to the redeemed Subsidiary Senior Subordinated Discount
Notes. See "Note 9. Long-Term Debt" in the Notes to Consolidated Financial
Statements and "Selected Quarterly Data" included elsewhere herein.
Of the $11.9 million increase in other expenses, $3.6 million was
attributable to the write down of seven U.S. centers closed in 1997 and three
U.S. centers which the Company will close in 1998, $1.6 million was
attributable to an increase in losses recorded on sales of property and
equipment and $3.0 million represented an increase in losses on foreign
exchange transactions. In addition to the increases in these expenses,
interest income decreased $3.7 million. Proceeds from the issuance of
Subsidiary Senior Subordinated Notes and Subsidiary Senior Subordinated
Discount Notes which were used to partially fund the Acquisition were received
by the Company in March 1996, and earned interest income until May 1, 1996,
the date of Acquisition. For the year ended December 31, 1997, the Company
incurred a loss of $1.4 million as equity in loss of joint ventures. See "Note
16. Joint Ventures" in the Notes to Consolidated Financial Statements.
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.
INCOME TAXES
Prior to the Acquisition, certain of the companies within the Predecessor
Company elected S corporation status under the Internal Revenue Code of 1986,
as amended (the "Code"). Upon consummation of the Acquisition, those companies
became taxable corporations under the Code.
In connection with the Acquisition, the two principal subsidiaries of the
Company elected under Section 338(h)(10) of the Code to treat the stock
purchase as a deemed asset acquisition for the purposes of U.S. federal income
taxes. These elections permitted both of the affiliated companies to revalue
their assets to fair market value and to treat any amortizable goodwill as tax
deductible over 15 years.
As of December 31, 1997, the Company had net operating losses of
approximately $110.0 million and foreign tax credits of $12.4 million which
will carry over to future years to offset U.S. taxes. The foreign tax credits
will begin to expire in the year 2001 and the net operating losses will begin
to expire in the year 2011. The Company has recorded a valuation reserve as of
September 30, 1998 for $20.1 million related to net operating losses and
foreign tax credits that the Company does not expect will be utilized prior to
their expirations.
LIQUIDITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
The following discussion compares AMF Bowling's results for the nine months
ended September 30, 1998 with the nine months ended September 30, 1997, on a
historical basis.
The Company's primary source of liquidity is cash provided by operations and
credit facilities as described below. Working capital on September 30, 1998
was $111.4 million compared to $43.9 mil-
33
<PAGE>
lion as of December 31, 1997, an increase of $67.5 million. This increase in
working capital was primarily attributable to an increase of $18.4 million in
cash resulting from cash balances held for general corporate purposes, an
increase of $15.2 million in inventory balances primarily due to new product
introductions, an increase in $4.5 million in accounts receivable primarily as
a result of use of fall dating (sales made during the summer with payment
terms calling for payments in the fourth quarter) for Modernization and
Consumer Products sales in the United States, a decrease of $7.5 million in
accounts payable, a decrease of $17.4 million in accrued expenses and a net
increase of $7.6 million in other current assets and liabilities. These
increases in working capital were offset by a decrease in working capital
caused by an increase of $3.1 million in the current portion of long term
debt.
Net cash flows used in operating activities were $49.7 million for the nine
months ended September 30, 1998 compared to net cash flows provided of $1.5
million for the nine months ended September 30, 1997, a decrease of $51.2
million. A decrease of $49.6 million was attributable to the net loss of $72.0
million recorded in the first nine months of 1998 compared to a net loss of
$22.4 million in the same period of 1997; a decrease of $28.1 million was
caused by decreased levels of accounts payable and accrued expenses; a
decrease of $24.1 million was attributable to an increase in the level of
deferred taxes; a decrease of $11.5 million was attributable to the increase
in other assets; a decrease of $6.6 million was attributable to the decrease
in income taxes payable; and a decrease of $0.3 million was attributable to
lower levels of bond amortization resulting from the redemption of a portion
of Bowling Worldwide's senior subordinated discount notes in connection with
the Initial Public Offering partially offset by bond amortization attributable
to the Debentures. These decreases were offset by an increase of $30.5 million
attributable to lower levels of accounts receivable, an increase of $20.9
million in depreciation and amortization, loss on the sale of property and
equipment, net of $5.8 million attributable to the closure of nine bowling
centers in 1998, an increase of $5.7 million attributable to lower inventory
balances resulting from lower Bowling Products sales volumes in 1998 and a net
increase of $6.0 million attributable to changes in other operating
activities.
Net cash flows used in investing activities were $219.2 million for the nine
months ended September 30, 1998 compared to net cash flows used of $231.3
million for the nine months ended September 30, 1997, a decrease of $12.1
million. Bowling Center acquisition spending decreased by $23.5 million and
purchases of property and equipment increased by $5.1 million in the first
nine months of 1998, compared to the same period in 1997. A total of $17.9
million was paid in the first half of 1998 for eight centers which were
acquired in 1997. In the first nine months of 1998, 77 centers were purchased
compared to 103 centers in the same period in 1997. Investments in and
advances to joint ventures totaled $2.6 million in the first nine months of
1998 compared to no investments in or advances to joint ventures in the first
nine months of 1997. Other cash flows provided from investing activities
decreased $3.7 million. See "Note 8. Acquisitions" in the Notes to Condensed
Consolidated Financial Statements and "--Capital Expenditures" for additional
discussion of these investing activities.
Net cash provided by financing activities was $283.3 million for the nine
months ended September 30, 1998 compared to the net cash provided of $218.8
million for the nine months ended September 30, 1997, an increase of $64.5
million. Proceeds from long term debt increased $338.6 million primarily as a
result of the issuance of the Debentures on May 12, 1998 for gross proceeds of
approximately $284.1 million. In addition, borrowings under the Credit
Agreement increased $54.5 million primarily as a result of funding center
acquisitions and working capital. Payments on long-term debt were higher by
$240.2 million in 1998 compared to 1997 primarily because $249.6 million of
the proceeds from the Debentures, contributed as capital to Bowling Worldwide
from AMF Bowling, was used to pay down the Bank Facility under the Credit
Agreement, and such repaid indebtedness is available for reborrowing. In
accordance with the terms of the Credit Agreement, scheduled principal
payments in the first nine months in 1998 were $9.4 million lower than
payments made in the same period in 1997. In the first nine months of 1998,
$1.9 million
34
<PAGE>
of Common Stock was issued, of which $1.2 million was attributable to shares
issued in the Active West acquisition and $0.7 million was attributable to
shares issued upon exercise of employee stock options. Expenses of the Initial
Public Offering totaling $0.6 million were paid in the first half of 1998. In
the first nine months of 1997, $35.6 million was provided as a capital
contribution by the Parent's institutional stockholders to be used in part to
fund acquisitions and for other corporate purposes. Net cash flows provided by
other financing activities increased $0.4 million. See "Note 5. Long-Term
Debt", "Note 7. Employee Benefit Plans", and "Note 8. Acquisitions" in the
Notes to Condensed Consolidated Financial Statements and "--Capital
Resources".
As a result of the aforementioned, cash increased by $18.4 million for the
nine months ended September 30, 1998 compared to a decrease of $11.7 million
for the nine months ended September 30, 1997.
The net proceeds of the sale of the Debentures discussed above were
approximately $273.6 million, of which $249.6 million was used to repay senior
bank indebtedness under the Credit Agreement and $23.5 million was used for
general corporate purposes. As of September 30, 1998, $188.0 million was
outstanding under the Bank Facility and $167.0 was available for borrowing
thereunder, primarily for working capital purposes. Effective September 30,
1998, the Company renegotiated certain financial covenants under the Credit
Agreement with respect to the third and fourth quarters of 1998 and the year
1999. Such covenants are contained in the Amendment and Waiver, which also
substantially restricts the Company's ability to borrow to finance
acquisitions, and places limits on the Company's ability to make capital
expenditures, investments and acquisitions. The financial covenants existing
prior to the Amendment and Waiver will be reinstated commencing the beginning
of 2000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following discussion compares AMF Bowling's results for the year ended
December 31, 1997 with the period ended December 31, 1996, on a historical
basis.
Net cash flows provided by operating activities were $73.8 million for the
period ended December 31, 1996 compared with net cash provided of $47.7
million for the year ended December 31, 1997, a decrease of $26.1 million. Net
cash was provided from an increase of $53.1 million in depreciation and
amortization as a result of incremental depreciation recorded on bowling
center acquisitions and capital expenditures of the Company, an increase of
$8.8 million which resulted from amortization of the discount related to the
bonds used to partially fund the Acquisition and an increase of $4.0 million
attributable to loss recorded on the sale of property and equipment. In 1997,
net cash of $1.4 million was provided by the equity in loss of joint ventures
and $23.4 million was provided by the after-tax extraordinary charges
discussed above. Net cash used resulted from an increase of $36.1 million in
net loss, an increase of $19.6 million in the change in accounts receivable
primarily resulting from the increased levels of NCP sales compared with the
same period in 1996, an increase of $18.8 million in the change in inventory
primarily reflecting the increased backlog of NCP orders to be shipped after
December 31, 1997, an increase in the change in other assets of $8.9 million,
an increase in the change in net deferred income tax assets of $6.2 million
and a decrease of $27.2 million in the change in accounts payable and other
liabilities.
Net cash flows used in investing activities were $1,467.1 million for the
period ended December 31, 1996 compared with net cash flows used of $288.6
million for the year ended December 31, 1997. During the period ended December
31, 1996, cash flows used for acquisitions of operating units, net of cash
acquired, including the Acquisition, totaled $1,450.9 million, capital
spending was $16.9 million and other investing cash flows provided were $0.7
million. During the year ended December 31, 1997, acquisitions of bowling
centers totaled $214.8 million, capital spending was $56.7 million,
investments in and advances to the Hong Leong Joint Venture and Playcenter
Joint Venture totaled $21.3 million, and other cash flows provided by
investing activities were $4.2 million attributable to proceeds from the sale
of property. See "Note 15. Acquisitions" in the Notes to Consolidated
Financial Statements and "--Capital Expenditures".
35
<PAGE>
Net cash provided by financing activities was $1,438.3 million for the
period ended December 31, 1996 compared with net cash provided of $235.7
million for the year ended December 31, 1997. During the period ended December
31, 1996, the Company had borrowings, net of deferred financing costs, of
$1,059.3 million from debt incurred to finance the Acquisition and from the
Acquisition Facility, and made payments of $38.9 million on this debt.
Additionally, a total of $420.8 million was received as capital contributions
by the institutional stockholders of AMF Bowling and certain of its officers
and directors. Of the total capital contributed, $380.8 million was for the
initial capitalization of the Company and the Acquisition, and $40.0 million
was received as additional capital contributions in connection with the
acquisition of centers from Charan Industries, Inc. ("Charan"). During 1997,
funds were used primarily for the payment of long-term debt totaling $304.6
million, $14.6 million was attributable to the premium paid in connection with
the redemption of a portion of the Subsidiary Senior Subordinated Discount
Notes discussed above, $0.7 million was attributable to payments on non-
compete obligations and $0.5 million was used for the repurchase of an
officer's shares in connection with the termination of his employment with the
Company. Funds were provided in 1997 by borrowings of long-term debt totaling
$240.4 million, $36.6 million of additional capital contributions used in part
to fund acquisitions and for other corporate purposes, and $279.1 million of
net proceeds from the Initial Public Offering. See "Note 12. Stockholders'
Equity" and "Note 13. Employee Benefit Plans" in the Notes to Consolidated
Financial Statements.
As a result of the aforementioned, cash increased by $43.6 million for the
period ended December 31, 1996 compared to a decrease of $7.8 million for the
year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following discussion compares AMF Bowling's results for the period ended
December 31, 1996, with the Predecessor Company's results for the year ended
December 31, 1995, on a 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 of the
Predecessor Company.
During the period ended December 31, 1996, the Company had borrowings, net
of deferred financing costs, of $1,059.3 million from debt incurred to finance
the Acquisition and from the Acquisition Facility, and made payments of $38.9
million on this debt. Additionally, a total of $420.8 million was received as
capital contributions by the institutional stockholders of AMF Bowling and
certain of its officers and directors. Of the total capital contributed,
$380.8 million was for the initial capitalization of the Company and the
Acquisition, and $40.0 million was received as additional
36
<PAGE>
capital contributions in connection with the acquisition of centers from
Charan. See "Business--General".
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.
CAPITAL RESOURCES
The Company's total indebtedness increased substantially as a result of the
Acquisition and the Company's recent aggressive bowling center acquisition
program. At September 30, 1998, the Company's debt structure consisted of
$619.8 million of senior debt, $250.0 million of Subsidiary Senior
Subordinated Notes, $206.8 million of Subsidiary Senior Subordinated Discount
Notes, and $291.8 million of Debentures. The Company's senior debt consisted
of $429.8 million of term loans, $188.0 million of revolving credit advances
under the Bank Facility and $2.0 million represented by one mortgage note. At
September 30, 1998, the Company was capitalized with equity of $579.9 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. The Amendment and Waiver restricts to
a much greater extent than before the Company's ability to borrow to finance
acquisitions. Between December 31, 1997 and September 30, 1998, additional
borrowings under the Bank Facility totaled $264.5 million and were used to
fund the acquisitions of centers and increases in working capital and for
general corporate purposes.
On May 12, 1998, AMF Bowling completed the Private Placement of the
Debentures to the Initial Purchasers for net proceeds of $273.6 million. The
Company used $249.6 million of net proceeds of the Private Placement to repay
amounts outstanding under the Bank Facility. As of September 30, 1998, $188.0
million was outstanding and $167.0 was available for borrowing under the Bank
Facility.
In September 1997, certain stockholders of AMF Bowling purchased an
aggregate of 1,780,000 shares of Common Stock for $20.00 per share. The
aggregate $35.6 million capital contribution was used to fund acquisitions.
In November 1997, AMF Bowling issued 15,525,000 shares of Common Stock at
$19.50 per share pursuant to the Initial Public Offering. The net proceeds of
the Initial Public Offering were approximately $279.1 million, after deducting
the underwriting discount and expenses payable by AMF Bowling, and were used
to repay $150.8 million of indebtedness under the Credit Agreement and to
redeem $118.9 million in principal of the Subsidiary Senior Subordinated
Discount Notes. See "Note 9. Long-Term Debt" and "Note 12. Stockholders'
Equity" in the Notes to Consolidated Financial Statements.
The Company has funded its cash needs through the Bank Facility as well as
cash flow from operations and existing cash balances. A substantial portion of
the Company's available cash will be applied to service outstanding
indebtedness. For the nine months ended September 30, 1998, the Company
incurred cash interest expense of $57.9 million, representing 65.5% of EBITDA
for the nine months. For the nine months ended September 30, 1997, the Company
incurred cash interest expense of $62.3 million, representing 49.2% of EBITDA
for the nine months. For the year ended December 31, 1997, the Company
incurred cash interest expense of $83.0 million, representing 44.8% of EBITDA
of $185.4 million for the year. For the period from the inception date of
January 12, 1996 through December 31, 1996, the Company incurred cash interest
expense of $53.0 million, representing 55.5% of EBITDA of $95.5 million for
the period.
The Subsidiary 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 "Note 9. Long-Term Debt" in the Notes to Consolidated
Financial Statements.
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
37
<PAGE>
to general economic, financial, competitive, legislative, regulatory and other
factors beyond its control, including the conditions of the debt and equity
markets.
On November 3, 1997, the Company entered into the Third Amended and Restated
Credit Agreement, under which the previously existing Acquisition Facility and
a portion of the term facilities under the Credit Agreement were converted
into a non-amortizing revolving Bank Facility, the aggregate size of which was
increased to $355.0 million, and a portion of such revolving credit
indebtedness was repaid with proceeds of the Initial Public Offering. See
"Risk Factors--Ability to Implement Growth Strategies". On September 30, 1998,
the Third Amended and Restated Credit Agreement was amended by the Amendment
and Waiver in which certain financial covenants were adjusted and certain
restrictions on the Company's operations were imposed for the third and fourth
quarters of 1998 and the year 1999. The financial covenants existing prior to
the Amendment and Waiver will be reinstated at the beginning of 2000. However,
based on current performance, the Company will not meet the requirements that
will be reinstated. See "Description of Certain Indebtedness".
CAPITAL EXPENDITURES
For the nine months ended September 30, 1998, the Company's capital
expenditures were $47.7 million compared to $42.6 million for the nine months
ended September 30, 1997, an increase of $5.1 million. Bowling Centers
maintenance and modernization expenditures increased $5.2 million, which was
attributable to the higher number of the Company's centers as a result of the
Company's acquisition program; Bowling Products expenditures increased $3.2
million as a result of expenditures on production equipment for certain new
products and equipment for international sales offices; and other expenditures
increased $3.5 million. Expenditures on Company-wide information systems
decreased $5.5 million. Expenditures for the construction of the Chelsea Piers
center totaled $5.1 million in 1997. Expenditures for the construction of the
Marina City bowling center in Chicago and Michael Jordan golf center in
Charlotte, North Carolina totaled $3.1 million and $0.9 million, respectively,
in 1998.
For the year ended December 31, 1997, the Company's actual capital
expenditures were $56.7 million (excluding acquisitions) compared with $23.8
million for the year ended December 31, 1996, on a pro forma basis (capital
expenditures of the acquired business from January 1, 1996 through December
31, 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 the new 40
lane, state-of-the-art bowling and family entertainment center at Chelsea
Piers in New York City.
For the year ended December 31, 1996, the Company's capital expenditures
were $23.8 million. For the year ended December 31, 1995, the Company's
capital expenditures were $30.0 million, including $9.7 million for the
construction of three new centers. The 1996 expenditures level was lower than
the 1995 level in part because in 1995 three new bowling centers were
constructed.
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 approximately 3.7% of Bowling Centers revenue is adequate to cover all
modernization and maintenance capital expenditures. Management estimates that
approximately 2.0% of Bowling Centers revenue is required for nondiscretionary
capital expenditures.
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 new product development has received the highest
investment priority and has focused on projects with projected payback periods
of one to three years.
38
<PAGE>
As of October 23, 1998, the Company has no formal commitments to acquire
centers. The Company is scheduled to open a new bowling center in Chicago's
Marina City Development in November 1998 and to open the Michael Jordan Golf
Center in Charlotte, North Carolina in the fourth quarter of 1998.
Management has announced a curtailment of the Company's acquisition
activities.
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
equity. See "Note 15. Acquisitions" in the Notes to Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources".
SEASONALITY AND MARKET DEVELOPMENT CYCLES
The U.S. bowling center operations are seasonal. The following table sets
forth AMF's U.S. constant centers revenue for the last four quarters:
<TABLE>
<CAPTION>
QUARTER ENDING (DOLLARS IN MILLIONS)
-----------------------------------------------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total Revenue........... $58.1 $41.1 $38.4 $50.6
% of Total.............. 30.9% 21.8% 20.4% 26.9%
</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 11 other countries, has historically decreased the seasonality of
the Company's annual cash flows. Although financial performance of Bowling
Centers operations is seasonal in nature in many countries, with cash flows
typically peaking in the winter months and reaching their lows in the summer
months, the geographic diversity of the Company's bowling centers has helped
reduce this seasonality as bowling centers in certain countries in which AMF
operates exhibit different seasonal sales patterns. As a result of the
increased number of U.S. centers attributable to the Company's recent
aggressive acquisition program, however, the seasonality described above has
been 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 "Note 17. Business Segments" in the Notes
to Consolidated Financial Statements.
Modernization and Consumer Products sales display seasonality. The U.S.
market, which is the largest market for Modernization and Consumer Products,
is driven by the beginning of league play in the fall of each year. Operators
typically sign purchase orders, particularly for replacement equipment, during
the first four months of the year, after they receive winter league revenue
indications. Equipment is shipped and installed during the summer months, when
leagues are generally less active. Sales of modernization equipment, such as
automatic scoring and synthetic lane overlays, are less predictable and
fluctuate more than the replacement equipment because of the four to ten year
life cycles of these major products.
The NCP category of bowling products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
South Korea and Taiwan) which, in the Company's experience, last five years or
more. Current economic difficulties in certain markets of the Asia Pacific and
other regions have resulted in the reduction in the order rate, level of
shipments and backlog for NCPs. See "--Backlog; Recent NCP Sales".
39
<PAGE>
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with
respect to currency exchange rates, economic and political destabilization,
other disruption of markets, restrictive laws and actions by foreign
governments (such as restrictions on transfer of funds, import and export
duties and quotas, foreign customs, tariffs and value added taxes and
unexpected changes in regulatory environments), difficulty in obtaining
distribution and support, nationalization, the laws and policies of the United
States affecting trade, international investment and loans, and foreign tax
laws.
AMF has a history of operating in a number of international markets, in some
cases, for over thirty 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 may adversely impact sales volume and profit margins
during such periods.
Current economic difficulties in certain markets of the Asia Pacific and
other regions have resulted in a reduction in the order rate, level of
shipments and backlog for NCPs. Management believes that many Asia Pacific
customers will delay purchases of NCP and Modernization equipment until the
return of economic stability to their regions. Contributing to such delays is
the continuing limited availability of financing for Asia Pacific customers to
construct new centers and purchase AMF bowling equipment. As of September 30,
1998, the NCP backlog was 1,329 units, which represents a reduction of 33.7%
compared to a backlog of 2,005 units as of September 30, 1997, and a reduction
of 23.0% compared to a backlog of 1,725 units as of December 31, 1997. See "--
Backlog; Recent NCP Sales". It is expected that NCP backlog will continue for
the foreseeable future at levels which are substantially lower than those
experienced in 1997.
NCP unit sales to China, Japan and other Asia Pacific markets represented
49.9% for the nine months ended September 30, 1998 compared to 72.7% for the
year ended December 31, 1997. NCP unit backlog related to China, Japan and
other Asia Pacific markets represented 67.6% of total NCP unit backlog at
September 30, 1998 compared to 70.4% at December 31, 1997.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the nine months ended
September 30, 1998, revenue and EBITDA of international bowling centers
represented 16.1% and 26.6% of consolidated results, respectively. For the
nine months ended September 30, 1997, revenue and EBITDA of international
bowling centers represented 15.8% and 18.3% of consolidated results,
respectively. For the year ended December 31, 1997, revenue and EBITDA of
international bowling centers represented 14.6% and 16.0% of consolidated
results, respectively.
BACKLOG; RECENT NCP SALES
The total backlog of NCPs was 1,329 units as of September 30, 1998,
representing a reduction of 23.0% compared to 1,725 units as of December 31,
1997, and a reduction of 33.7% compared to 2,005 units as of September 30,
1997. It is expected that NCP backlog will continue for the foreseeable future
at levels which are substantially lower than those experienced in 1997. NCP
orders included in the backlog are sometimes cancelled by customers in the
normal course of business. Accordingly, the Company has experienced, and
expects to continue to experience, the cancellation of a portion of its NCP
orders. NCP shipments were 1,846 units for the nine months ended September 30,
1998, representing a reduction of 44.5% compared to shipments of 3,324 units
for the nine months ended September 30, 1997, which was largely attributable
to the recent economic difficulties in the Asia Pacific region. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--International Operations".
NCP sales for the year ended December 31, 1997 totaled $165.1 million, a
37.1% increase over the same period in 1996. Management believes that the
significant increase was attributable to the
40
<PAGE>
market development and sales programs implemented in mid-1996 which were
designed to increase NCP sales activity in certain markets around the world.
While China currently represents the largest market for NCP sales and backlog,
other markets in North and South America, Asia, Europe and the Middle East are
being developed.
The 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.
IMPACT OF INFLATION
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have a
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge
of, and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances
and wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions or
future events, such as changes in existing laws and regulations, may give rise
to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the fiscal year ended December 31, 1998, the Company is
required to adopt Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information". Effective for the quarter ended
March 31, 2000, the Company is required to adopt SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." The Company does not expect
that adoption of these standards will have a material impact on the Company's
financial position or results of operations. See "Note 2. Significant
Accounting Policies--Comprehensive Income" in the Notes to Condensed
Consolidated Financial Statements.
YEAR 2000 ISSUE
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.
41
<PAGE>
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 is actively engaged in developing and installing new
worldwide financial, information, retail and operational systems which are
expected to be completed and installed by December 31, 1999. In connection
with this implementation, system programs have been designed so that the
Year 2000 will be recognized as a valid date and will not affect the
processing of date-sensitive information. Certain systems have already been
installed in the U.S. Bowling Centers operations and at the corporate
level. By June 30, 1999, systems in the U.S. Bowling Centers operations
will be completed. Systems will be installed in the international locations
of Bowling Centers and Bowling Products by December 31, 1999. In 1997 and
for the nine months ended September 30, 1998, the Company spent
approximately $12.6 million and $3.5 million, respectively, on systems that
are designed to be Year 2000 compliant. The Company expects to spend an
additional $8.2 million to complete the installation. These costs include
normal system software and equipment upgrades or replacements which 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 which were planned outside of the Company's Year
2000 review.
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.
42
<PAGE>
BUSINESS
GENERAL
AMF is the largest bowling company in the world. The Company owns or
operates 539 bowling centers worldwide which generate over 60 million customer
visits per year. AMF is the U.S. market leader with 416 bowling centers, and
is also the largest operator internationally, with an additional 123 bowling
centers in eleven other 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 416 centers has approximately 119 centers. The next three largest
operators collectively account for only approximately 54 of the total 5,900
centers.
AMF Bowling conducts all of its business through subsidiaries and has only
limited management service operations of its own.
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.
Following the Acquisition, management began to implement a long term strategy
to consolidate the U.S. bowling center industry, to build a nationally
recognized brand of bowling-based family recreation centers and to capitalize
on long term demand for bowling products and centers in global markets.
Since May 1996, the Company has acquired 225 centers in the U.S. and owns or
operates 416 U.S. centers as of September 30, 1998. In addition, the Company
has acquired 31 centers in selected international markets and owns or operates
123 international centers as of September 30, 1998.
Recently, the Company has had to slow the pace of acquisitions. This
slowdown reflects a need to focus on improving the performance of existing
bowling centers, as well as financing constraints resulting from depressed
results in the Company's bowling equipment segment.
Recent operating results for U.S. bowling centers have declined in
comparison with historical performance. In connection with curtailing its
acquisition efforts over the near term, management will focus its attention on
the improvement of constant-center (centers in operation for at least one full
fiscal year) revenue growth and profitability. As part of its efforts to
improve revenue growth and profitability, the Company has established a new
senior management team to lead U.S. bowling centers, including the appointment
of a President, U.S. Bowling Centers in September 1998. This new management
team will concentrate on increasing customer satisfaction, improving training
for center managers and staff, more effectively marketing and promoting
bowling to increase bowling center traffic and continue to develop a
nationally recognized brand of bowling-based family recreation centers.
AMF has historically participated in the international demand for bowling
products primarily through the sale of its New Center Packages ("NCPs"), which
include all of the equipment necessary to outfit one new bowling lane.
Beginning in the fourth quarter of 1997, the Company has seen a decline in the
demand for NCPs primarily in Asia Pacific markets as a result of the region's
economic difficulties which has led to reduced construction of new bowling
centers. In response to
43
<PAGE>
this decline, management is implementing a significant cost reduction program,
which should be substantially completed by the end of 1998, designed to align
more effectively the bowling products operations with existing and projected
demand. Over the long-term the Company continues to believe that international
markets, including Asia Pacific, will represent attractive opportunities for
the sale of bowling products.
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 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 U.S. bowling center industry is highly fragmented, and consists of two
relatively large bowling center operators, AMF (which had 416 U.S. centers as
of September 30, 1998) and Brunswick (which has approximately 119 U.S.
centers), three medium-sized chains, which together account for 54 bowling
centers, and approximately 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 10.1% 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).
In the United States, the operation of bowling centers is a mature industry
characterized by decreasing lineage (games per lane per day) offset by
increasing average price per game and revenue from food and beverage and other
ancillary sources. Management believes that until 1998 AMF's U.S. lineage was
relatively stable due to AMF's ability to better maintain existing league
bowlers and attract new recreational bowlers. However, during the first nine
months of 1998, AMF has experienced a substantial decline in lineage.
U.S. BOWLING CENTER INDUSTRY(a)
<TABLE>
<CAPTION>
NUMBER OF
OPERATOR LOCATIONS % OF TOTAL
-------- --------- ----------
<S> <C> <C>
AMF.................................................................... 146 7.1%
Brunswick.............................................................. 123 2.1
Bowl America........................................................... 23 0.4
Mark Voight............................................................ 16 0.3
Bowl New England....................................................... 15 0.2
----- -----
Subtotal............................................................. 593 10.1
Single-center and small-chain operators................................ 5,260 89.9
----- -----
Total.............................................................. 5,853 100.0%
===== =====
</TABLE>
- --------
(a) AMF estimate at September 30, 1998.
BOWLING PRODUCTS
The Bowling Products business consists of two categories: (i) NCPs (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 necessary to maintain
44
<PAGE>
operations of an existing center). 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".
NCP sales generally follow the trends in the growth of bowling.
Traditionally, as bowling has been 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 majority of NCP sales
have been to international markets. Until recently, this international trend
was fueled by the growth of bowling in several countries, particularly China
and Taiwan. Current economic difficulties in certain markets of the Asia
Pacific and other regions have adversely affected NCP order rate, level of
shipments and backlog. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Sales of Modernization and Consumer Products to bowling center operators who
manage the installed base of bowling equipment have traditionally provided a
somewhat more stable base of recurring revenue. These products include
modernization equipment, both proprietary and standard spare parts for
existing equipment and other products including pins, shoes and supplies. 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.) Since 1996,
however, the number of lanes in Korea has decreased and is expected to
continue to decrease, thereby adversely affecting the population per lane
statistics. In developing markets, the population per lane is significantly
higher, suggesting the opportunity for additional possible long term growth
once recent international economic difficulties subside, although there can be
no assurance that these markets will develop to the same extent as the U.S. or
Korea. Relatively few markets have achieved the level of development reached
by the U.S. and Korea.
BUSINESS STRATEGY
AMF believes that its growth depends on implementation of its long term
strategy, to build a nationally recognized AMF brand of bowling-based family
recreation centers, to consolidate the U.S. bowling center industry and to
capitalize on long term demand for bowling products and centers in certain
global markets. The key elements of the strategy are:
IMPROVE ACQUIRED CENTERS' PROFITABILITY
Despite declining margins in 1998, which may continue for the foreseeable
future, the Company believes that its EBITDA margins remain 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.
BUILD A NATIONALLY RECOGNIZED BRAND OF BOWLING-BASED FAMILY RECREATION
CENTERS
The Company will continue its efforts to develop a nationally recognized
brand of bowling-based family recreation centers. These centers generally will
offer state-of-the-art bowling equipment including many of the products
manufactured by AMF's Bowling Products business.
45
<PAGE>
IMPROVE FOOD AND BEVERAGE REVENUE
The Company estimates that it has over 60 million customer visits per year
in its bowling centers. The Company has expanded and improved 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.
CONSOLIDATE THE FRAGMENTED U.S. BOWLING CENTER INDUSTRY
The Company has acquired 225 centers in the U.S. since May 1996 and owns or
operates 416 as of September 30, 1998. The U.S. bowling center industry is
highly fragmented with AMF representing the largest chain with 7.1% of total
centers. The largest five chains, including AMF, represent 10.1% of total
centers. Management believes that none of its competitors is pursuing an
active acquisition program.
BUILD NEW CENTERS
The Company has selectively 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 part of AMF's efforts to build a nationally
branded network of bowling-based family recreation 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. The
Company is scheduled to open a new center in the Marina City Development in
Chicago during November 1998.
CAPITALIZE ON LONG TERM OPPORTUNITIES FOR THE SALE OF BOWLING PRODUCTS
Management believes that AMF's well-established global brand name, the
quality of its products, its comprehensive service and strong direct sales
force and distribution network enable it to participate in sales of NCPs
worldwide. The Company focuses on sales of NCPs (which comprised approximately
55% of AMF's Bowling Products sales in 1997) into those global markets where
new centers are being constructed and targets sales of Modernization and
Consumer Products into markets with larger installed basis of bowling centers.
ACCELERATE THE DEVELOPMENT OF BOWLING IN SELECTED INTERNATIONAL MARKETS
Management believes that selected international markets, such as India,
Russia, Poland and Brazil, which are in the early development stage, have the
potential for future growth. There can be no assurance that early stage
markets will develop to the same extent as the United States, the Company's
most mature market, as only a small number of markets have achieved such level
of development. As bowling becomes more popular, local developers and
entrepreneurs, who can obtain financing, may build new bowling centers, which
are outfitted with equipment, and could drive demand for NCPs.
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
Durabowl(TM) bumpers, Xtreme(TM) Bowling and the BOSS NT automatic scoring and
control operating system. AMF positions its products as high quality and
technologically advanced. 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.
46
<PAGE>
AMF BOWLING CENTERS
In the United States, AMF is the largest operator of bowling centers, with
(as of September 30, 1998) 416 bowling centers in 40 states and Puerto Rico.
Outside the United States, AMF is also the largest operator of bowling
centers, with (as of September 30, 1998) 123 bowling centers in eleven
countries: Australia (44), the United Kingdom (37), Mexico (9), Japan (4),
China (including Hong Kong) (7), Argentina (2), Brazil (12), France (4), Spain
(2), Switzerland (1), and Canada (1). Of the U.S. centers, 207 were acquired
as part of the Acquisition (eleven of which were subsequently closed), 225
were acquired thereafter and one was constructed. Of the international
centers, 78 were acquired as part of the Acquisition, 31 were acquired
thereafter, including 22 in the United Kingdom and eight in Australia, and one
was closed in Japan. The foregoing numbers include one center in China and two
centers in Argentina and 12 centers in Brazil which are operated as part of
Hong Leong Joint Venture and Playcenter Joint Venture, respectively.
The Company's number of U.S. centers, regional clustering for U.S. centers
(33 districts) 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. The Company intends to focus
management's attention fully on the improvement of constant center revenue
growth and profitability and has established a new senior management team to
lead U.S. bowling centers.
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 geographic diversity of AMF's Bowling Centers operations across
different regions of the U.S. and across eleven other countries has
historically 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 has been adequate to
cover routine capital expenditures. Management estimates that only 2% of
Bowling Centers revenue has been required for nondiscretionary capital
expenditures. In connection with the Company's focus on improvement of
constant center revenues and profitability, management may re-evaluate the
overall levels of capital expenditures. 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
1997, bowling, food and beverage and other revenue represented 60.6%, 25.4%
and 14.0% of total Bowling Centers revenue, respectively.
Bowling revenue, the largest portion of a bowling center's revenue and
profitability, is derived from league, tournament 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
47
<PAGE>
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
In 1996, AMF acquired 57 bowling centers from five unrelated sellers. The
combined purchase price, net of cash acquired, was approximately $108.0
million, and was funded with approximately $40.0 million from the sale of
equity by AMF to its institutional stockholders and one of its directors and
approximately $68.0 million from available borrowings under the Acquisition
Facility under the Credit Agreement in effect from the closing of the
Acquisition prior to the third amendment and restatement of the Credit
Agreement.
In 1997, the Company acquired 122 bowling centers from a number of unrelated
sellers. The 1997 acquisitions included seven centers in the United Kingdom
and two centers in Australia. The combined purchase price for the 1997
acquisitions, net of cash acquired, was approximately $232.7 million
(including amounts paid in 1998 for certain bowling centers included in the
1997 total), and was funded with borrowings under the Acquisition Facility and
the Bank Facility under the Credit Agreement, from the sale of equity by AMF
Bowling to its institutional stockholders and a portion of the proceeds of the
Initial Public Offering.
From January 1, 1998 through September 30, 1998, the Company acquired 55
centers in the U.S., including 15 bowling centers in the U.S. from Active
West, 15 centers in the United Kingdom, six centers in Australia and one
center in France from unrelated sellers. The aggregate purchase price for
these acquisitions was approximately $151.0 million, including $130.1 million
funded with borrowings under the Bank Facility and, with respect to the Active
West acquisition, the issuance of 50,000 shares of Common Stock.
In April 1997, the Company entered into a joint venture with Hong Leong
Corporation Limited, a Singapore-based conglomerate ("Hong Leong"), to build
and operate bowling centers in the Asia Pacific region. The joint venture
("Hong Leong Joint Venture") is owned 50% by the Company and 50% by Hong
Leong. The Hong Leong Joint Venture opened its first bowling center during
November 1997 in Tianjin, China. Due to the recent economic difficulties in
the Asia Pacific region, future development of bowling centers in that region
through the Hong Leong Joint Venture will not be pursued.
In August 1997, the Company entered into a joint venture with Playcenter
S.A., a Sao Paulo-based amusement and entertainment company ("Playcenter") to
build and operate bowling centers in Brazil and Argentina. The joint venture
("Playcenter Joint Venture") is owned 50% by the Company and 50% by
Playcenter. As of December 31, 1997, the Playcenter Joint Venture operated
eleven centers in Brazil and two centers in Argentina. No additional sites for
the Playcenter Joint Venture are being evaluated.
On October 20, 1997, the Company acquired Michael Jordan Golf Company, Inc.,
a company formed to build and operate golf practice ranges in the U.S.
("Michael Jordan Golf Company"). Michael Jordan Golf Company currently
operates one golf practice range. The Company agreed to build or acquire two
additional golf practice ranges by the end of 1999. In this regard, the
Company has committed to build the Michael Jordan Golf Center in Charlotte,
North Carolina which is expected to open during the fourth quarter of 1998.
Management has announced a curtailment of the Company's acquisition
activities. See "--Business Strategy--Consolidate the Fragmented U.S. Bowling
Center Industry".
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
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<PAGE>
no assurance that bowling will continue to be popular or that the Company will
continue to compete effectively in the industry. See "Risk Factors--Bowling
Industry Characteristics" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Performance by Business
Segment--Bowling Centers".
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 September 30, 1998, AMF operated 416 centers and related facilities in
the United States and 123 centers in eleven other countries. A regional list
of these facilities is set forth below:
U.S. CENTERS*
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
REGION DISTRICTS LOCATIONS OWNED LEASED
------ --------- --------- ----- ------
<S> <C> <C> <C> <C>
Northeast................................... 5 66 40 26
Mid-Atlantic................................ 6 66 42 24
Southeast................................... 5 65 45 20
Southwest................................... 6 73 58 15
Midwest..................................... 5 65 45 20
West........................................ 6 79 33 46
--- --- ---
414 263 151
=== === ===
</TABLE>
- --------
* AMF operates two centers for an unrelated party. These centers are neither
owned nor leased by AMF and, therefore, are not included in the foregoing
table. In addition, the Company operates a golf practice range in Aurora,
Illinois.
INTERNATIONAL CENTERS*
<TABLE>
<CAPTION>
NUMBER OF
COUNTRY LOCATIONS OWNED LEASED
------- --------- ----- ------
<S> <C> <C> <C>
Australia............................................. 44 24 20
United Kingdom........................................ 37 16 21
Mexico................................................ 9 5 4
China, including Hong Kong............................ 6 0 6
Japan................................................. 4 0 4
France................................................ 4 1 3
Spain................................................. 2 0 2
Switzerland**......................................... 1 0 1
Canada................................................ 1 1 0
--- --- ---
Total............................................... 108 47 61
=== === ===
</TABLE>
- --------
* The table excludes one bowling center operated by the Hong Leong Joint
Venture and fourteen bowling centers operated by the Playcenter Joint
Venture. See "Business--General".
** This location was sold in October 1998.
AMF's leases are subject to periodic renewal. Sixty of the U.S. centers have
leases which expire during the next three years. Forty-one of such leases have
renewal options. Twenty-two of the international centers have leases which
expire during the next three years. Six of such leases have renewal options.
AMF generally does not have difficulty renewing leases.
EMPLOYEES (BOWLING CENTERS)
As of December 31, 1997, Bowling Centers operations had approximately 18,415
full- and part-time employees worldwide. The Company believes that its
relations with its Bowling Centers employees are satisfactory.
49
<PAGE>
NUMBER OF EMPLOYEES
<TABLE>
<CAPTION>
NUMBER OF
COUNTRY EMPLOYEES(a)
------- ------------
<S> <C>
United States................................................... 16,226
------
International:
Australia....................................................... 1,202
United Kingdom.................................................. 440
Mexico.......................................................... 240
China (including Hong Kong)..................................... 120
Japan........................................................... 47
France.......................................................... 75
Spain........................................................... 32
Switzerland..................................................... 9
Canada.......................................................... 24
------
Total International........................................... 2,189
------
Total Worldwide............................................... 18,415
======
</TABLE>
- --------
(a) Numbers vary depending on the time of year.
AMF BOWLING PRODUCTS
AMF is one of only two bowling center equipment manufacturers that compete
on a global basis. Management believes that AMF bowling equipment accounts for
approximately 41% of the world's installed base of bowling center equipment
and has supplied or is supplying equipment to an estimated 10,000 bowling
centers in over 50 countries. The Company manufactures and sells bowling
center equipment, including automatic pinspotters, automatic scoring
equipment, bowling pins, lanes, ball returns, and certain spare and
modernization parts, and resale products, such as bowling balls, bags, shoes
and other bowlers' aids, sold primarily through pro shops.
The bowling products business consists of two categories: (i) New Center
Packages (all of the equipment necessary to outfit a new bowling center or
expand an existing bowling center); and (ii) Modernization and Consumer
Products (which includes modernization equipment, spare parts, supplies and
consumable products).
AMF positions its products as high quality, technologically advanced
products, allowing AMF generally to command premium prices. AMF's long history
of bowling equipment innovation began over 50 years ago when AMF
revolutionized ten pin bowling with the introduction of the automatic
pinspotter. Today, AMF manufactures 8800 Gold (the fastest pinspotter for play
conducted under conditions specified by the American Bowling Congress), 8290
pinspotters and the BOSS NT automatic scoring and operating control system,
and, management believes, the highest-scoring lanes and the most durable pins.
The superior speed of AMF's pinspotter directly influences the amount of
bowling revenue a bowling center can generate, and the reliability and ease of
repair is an important marketing tool against sellers of refurbished
equipment. AMF's HPL synthetic lanes, introduced in 1988, are the performance
leaders. In the annual American Bowling Congress tournament, where AMF and
Brunswick supply the equipment in alternating years, every major scoring
record has been set on AMF's synthetic lanes. Internal tests demonstrate that
AMF pins are more durable under stress conditions and are less likely to
break. In general, AMF's products are developed through internal research and
development efforts. AMF holds over 40 U.S. patents for its various
proprietary products and technologies.
MODERNIZATION AND CONSUMER PRODUCTS
The potential customers for Modernization and Consumer Products include all
bowling centers in operation today. The number of potential customers will
continue to grow if the number of centers continues to increase. In order for
a bowling center to remain competitive and to satisfy its
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<PAGE>
customers, the center operator must periodically make 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 bowling 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 focuses
on sales of NCPs into those global markets where new centers are being built.
In addition, AMF believes that certain markets in Asia Pacific, Eastern Europe
and South America, hold the potential for future growth, but are currently in
the early stages of the industry's development. As bowling is introduced into
a market and becomes more popular, local developers and entrepreneurs who can
obtain financing typically build new bowling centers which could drive demand
for NCPs. Current economic difficulties in certain markets of the Asia Pacific
and other regions here resulted in a reduction in the backlog and the level of
shipments for NCPs. It is expected that NCP backlog and level of shipments
will continue for the foreseeable future at levels which are substantially
lower than those experienced in 1997. 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 under the Renaissance and PlayMaster brand names.
COMPETITION (BOWLING PRODUCTS)
AMF is one of the largest manufacturers of bowling center equipment in the
world. Management estimates that AMF accounts for approximately 41% of the
worldwide installed base of bowling center equipment.
AMF and Brunswick are the two largest manufacturers of bowling center
equipment, and are the only full-line manufacturers of NCPs and Modernization
and Consumer Products that compete on a global basis. The Company also
competes with smaller, often regionally focused companies in certain product
lines.
Because of bowling equipment's relatively long useful life, used equipment
can be refurbished and sold, often to builders of new centers. The Company
actively purchases and resells used equipment in new, high growth markets in
order to compete with refurbishers who often are U.S. based.
PROPERTIES (BOWLING PRODUCTS)
As of September 30, 1998, 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 29
international locations, which are used as offices or warehouses.
On October 21, 1998, AMF announced plans to relocate its lane maintenance
equipment business from Golden, Colorado to its headquarters plant in
Richmond, Virginia. The move will be effective on or about February 1, 1999.
51
<PAGE>
U.S. FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION PRODUCTS SQUARE FOOTAGE LEASED
-------- -------- -------------- ------
<C> <S> <C> <C>
Richmond, VA.. World headquarters, pinspotters,
automatic scoring, synthetic lanes, 360,000 Owned
other capital equipment, consumer 54,000 Leased
products, used pinspotters
Lowville, NY.. Pins and wood lanes 121,000 Owned
50,000 Owned
Golden, CO.... Lane maintenance equipment (Century)(1) 50,000 Leased
Bland, MO..... Billiard tables (AMF Billiards and 37,210 Owned
Games)
33,373 Leased
32,000 Owned
24,000 Owned
16,000 Owned
11,000 Leased
Miami, FL..... Office 200 Leased
</TABLE>
- --------
(1) To be relocated to Richmond, Virginia facility effective on or about
February 1, 1999.
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
Toronto, Canada............................ Office 400 Leased
Warehouse 2,100 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, South 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
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION FUNCTIONS SQUARE FOOTAGE LEASED
-------- --------- -------------- ------
<S> <C> <C> <C>
Granna, Sweden.................................. Office 4,515 Leased
Warehouse 12,705 Leased
Hemel Hempstead, United Kingdom................. Office 11,500 Leased
Warehouse 11,770 Leased
</TABLE>
EMPLOYEES (BOWLING PRODUCTS)
As of December 31, 1997, the Bowling Products business had approximately
1,125 full-time employees. The Company has announced a significant reduction
in its Bowling Products workforce, which should be substantially completed by
the end of 1998. 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............................................ 760
-----
Sales
Australia.............................................. 8
Americas............................................... 48
Europe................................................. 89
Asia-Pacific........................................... 123
Japan.................................................. 97
-----
Total Sales............................................ 365
-----
Total Worldwide...................................... 1,125
=====
</TABLE>
EMPLOYEES (CORPORATE)
As of December 31, 1997, the Company had approximately 170 full-time
corporate employees. The Company believes that its relations with its
corporate employees are satisfactory.
LEGAL PROCEEDINGS
AMF Bowling Products, Inc., an indirect subsidiary of AMF Bowling ("AMF
Bowling Products"), is a defendant in an action pending in the Harbin
Intermediate People's Court in Heilongiiang, China. Harbin Hai Heng Bowling
Entertainment Co. Ltd. ("Hai Heng") filed the action in June 1998 to recover
$1,748,000 from AMF Bowling Products. Hai Heng purchased 38 NCPs and asserts
that the poor quality of 38 NCPs entitles it to recover the purchase price
thereof. Although Hai Heng has not amended its initial complaint, in a recent
hearing before the Court, Hai Heng stated that its damages could be in the
range of approximately $3,000,000 to $4,000,000 and noted lost profits and the
cost of storage for the NCPs as the basis for such damages. The Company
believes Hai Heng's claim is a warranty issue and that Hai Heng is not
entitled to recover the purchase price, lost profits or the cost of storage.
The Court attached $871,000 of cash and inventory in AMF Bowling Products'
warehouses and bank account in Beijing. AMF Bowling Products may not dispose
of these assets until the action is concluded. Management does not believe
that this attachment has interfered with the Company's operations in China.
AMF Bowling Products is vigorously defending the claim. Management of the
Company does not expect a decision to be rendered by the Court until 1999. If
an adverse decision is rendered, AMF Bowling Products has the right to appeal
to a higher court for a new trial. Management does not believe that the
outcome of the action will have a material adverse impact on the financial
position of the Company.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
employment discrimination claims, workers'
53
<PAGE>
compensation claims and personal injury claims from customers of Bowling
Centers. In some actions, plaintiffs request punitive or other damages that
may not be covered by insurance. In management's opinion, the claims and
actions in which the Company is involved will not have a material adverse
impact on its financial position or results of operations. However, it is not
possible to assure the outcome of such claims and actions.
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 impact 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".
54
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth information concerning the individuals who
are the executive officers and directors of AMF Bowling and certain other
officers of AMF:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Richard A. Friedman........ 40 Director and Chairman
Douglas J. Stanard......... 51 Director; President and Chief Executive
Officer(1)
Stephen E. Hare............ 45 Director; Acting Chief Executive Officer,
Executive Vice President, Chief Financial
Officer and Treasurer
John P. Watkins............ 43 Executive Vice President; President of U.S.
Bowling Centers
Michael P. Bardaro......... 48 Senior Vice President; Corporate Controller
and Assistant Secretary
J. Simon Shearer........... 41 Senior Vice President, U.S. Bowling Center
Services of AMF Bowling Centers
Steven H. Buckley.......... 48 Vice President, Food and Beverage of AMF
Bowling Centers
Lawrence C. Kind........... 45 Senior Vice President of AMF Bowling Products
J. Randolph V. Daniel, IV.. 37 Vice President, Manufacturing of AMF Bowling
Products
Merrell C. Wreden.......... 48 Vice President, Marketing and Corporate
Relations
Charles G. Moss............ 36 Senior Vice President, U.S. Bowling Center
Development
Daniel M. McCormack........ 52 Vice President and General Counsel
Suzanne B. Roski........... 36 Vice President, Budgeting and Strategic
Planning and Corporate Secretary
Terence M. O'Toole......... 40 Director
Peter M. Sacerdote......... 61 Director
Charles M. Diker........... 63 Director
Paul B. Edgerley........... 42 Director
Howard A. Lipson........... 34 Director
Thomas R. Wall IV.......... 39 Director
</TABLE>
- --------
(1) Mr. Stanard has resigned, effective as of January 1, 1999, from his
positions as President, Chief Executive Officer and a director of AMF
Bowling, and from all other positions with AMF Bowling and its
subsidiaries. See "--Settlement Agreement".
DIRECTORS AND EXECUTIVE OFFICERS OF AMF BOWLING
RICHARD A. FRIEDMAN is a Managing Director of Goldman Sachs and is the co-
head of the Merchant Banking Division. He joined Goldman Sachs in 1981. Mr.
Friedman is on the Boards of Directors of Diamond Cable Communications PLC and
Polo Ralph Lauren Corporation.
DOUGLAS J. STANARD is the President and Chief Executive Officer of AMF
Bowling. He has served as President of certain of the Company's predecessors
and subsidiaries since 1992. Pursuant to the Settlement Agreement (as defined
below), Mr. Stanard has resigned all of his positions with AMF Bowling and its
subsidiaries, including his positions as Chief Executive Officer, President
and a director of AMF Bowling, effective January 1, 1999. See "--Settlement
Agreement".
STEPHEN E. HARE was named Acting Chief Executive Officer of AMF Bowling on
November 2, 1998 following the resignation of Mr. Stanard and until a
successor to Mr. Stanard is named.
55
<PAGE>
Mr. Hare is also the Executive Vice President and Chief Financial Officer of
AMF Bowling and has served in that capacity for the Company's subsidiaries
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.
JOHN P. WATKINS is the Executive Vice President of AMF Bowling, Inc. and
President of U.S. Bowling Centers since joining AMF in September 1998. Prior
to joining AMF, Mr. Watkins was President of Source Company since 1996. Mr.
Watkins was Senior Vice President and Chief Operating Officer of Food Lion
since 1991.
MICHAEL P. BARDARO is a Senior Vice President, Corporate Controller and
Assistant Secretary of AMF Bowling. Mr. Bardaro was the Chief Financial
Officer of AMF Bowling Centers from 1994 to May 1996. He joined AMF after
having been Controller at General Medical Manufacturing Co. in Richmond,
Virginia between 1989 and 1994.
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 21st Century Newspapers, Inc., Western Wireless
Corporation and Amscan Holdings, Inc.
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, Inc.
CHARLES M. DIKER has been a non-managing principal of Weiss, Peck & Greer,
an investment management firm, since 1975. He has been Chairman of the Board
of Cantel Industries, Inc. since 1986. Mr. Diker also serves as a director of
BeautiControl Cosmetics, International Specialty Products, Data Broadcasting
and Chyron Corporation.
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., GS
Industries, Inc. and Sealy Mattress Company.
HOWARD A. LIPSON is Senior Managing Director of The Blackstone Group L.P.,
and has been involved in that firm's principal activities since 1988. He
serves on the Boards of Directors of Allied Waste Industries, Inc., Rose Hills
Holdings Corp., Prime Succession, Inc., VSI Acquisition II Corporation and
Ritvik Toys, Inc.
THOMAS R. WALL IV joined Kelso & Company, L.P. 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., Hillside Broadcasting of North
Carolina, Inc., IXL Holdings, Inc., Mitchell Supreme Fuel Company, Mosler
Inc., Peebles, Inc., TransDigm Inc. and 21st Century Newspapers, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has three standing committees: an Audit Committee, a Compensation
Committee and an Executive Committee. The Executive Committee is required by,
and its membership is determined pursuant to, the Stockholders Agreement. See
"Securities Owned by Management and Certain Beneficial Owners--Stockholders
Agreement." The Audit and Compensation Committees were created in 1997 in
connection with the Initial Public Offering.
Audit Committee. The members of the Audit Committee are Howard A. Lipson
(Chairman) and Paul B. Edgerley. The Audit Committee, which is composed
entirely of independent directors, recommends to the Board the engagement of
the independent auditors of the Company and reviews with the independent
auditors the scope and results of the Company's audits, the Company's
56
<PAGE>
internal accounting controls and the professional services furnished by the
independent auditors to the Company.
Compensation Committee. The members of the Compensation Committee are
Richard A. Friedman (Chairman), Charles M. Diker and Thomas R. Wall, IV. The
Compensation Committee is responsible for reviewing and approving the amount
and type of consideration to be paid to senior management. A subcommittee of
the Compensation Committee composed of independent directors (the "Stock
Option Plan Subcommittee") is authorized to grant awards under and to
administer the Company's 1996 Stock Incentive Plan (the "1996 Plan") and, if
adopted by shareholders at the Meeting, the 1998 Plan (as hereinafter
defined).
Executive Committee. The members of the Executive Committee are Richard A.
Friedman (Chairman), Stephen E. Hare and Terence M. O'Toole. Subject to the
Stockholders Agreement, the Executive Committee may exercise all the powers
and authority of the Board (subject further to any restrictions under Delaware
law) except with respect to those actions requiring a Special Vote (as
hereinafter defined) and, in the case of matters requiring a prior meeting of
the Board, only after such meeting has occurred. See "Certain Relationships
and Related Transactions--Stockholders Agreement".
EXECUTIVE COMPENSATION
The following table shows for each of the three years ended December 31,
1995, 1996 and 1997, compensation paid or accrued by AMF and the Predecessor
Company, as applicable, to AMF Bowling's Chief Executive Officer and its three
executive officers (collectively, the "Named Executive Officers").
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(a) COMPENSATION
--------------- ------------------------
AWARDS PAYOUTS
SECURITIES LTIP ALL OTHER
SALARY BONUS UNDERLYING STOCK PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#) (b) ($) ($)(c)
- --------------------------- ---- ------- ------- ---------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas J. Stanard(d) .. 1997 379,167 489,584(e) 25,000 -- 8,000
President/Chief 1996 308,333 229,167 130,000 -- 7,500
Executive Officer 1995 225,000 204,750 -- -- --
Richard A. Friedman(f) 1997 -- -- -- -- --
....................... 1996 -- -- -- -- --
Chairman/Former 1995 -- -- -- -- --
President and Chief
Executive Officer
Stephen E. Hare(g) ..... 1997 302,500 340,000(h) 15,000 -- 8,000
Executive Vice 1996 178,333 266,667(i) 105,000 -- --
President, Chief 1995 -- -- -- -- --
Financial Officer and
Treasurer
Robert L. Morin ........ 1997 41,668 20,000(j) -- -- 250,000(j)
Executive Vice 1996 228,341 83,325 110,000 860,100(k) 7,500
President/ Director of 1995 180,286 60,125 -- -- --
Worldwide Market
Development
Michael P. Bardaro ..... 1997 133,316 105,101 10,000 -- 8,000
Senior Vice President, 1996 120,958 40,076 25,000 -- 168,338(l)
Corporate Controller 1995 95,833 29,958 -- -- 2,327
and Assistant Secretary
</TABLE>
- --------
(a) None of the Named Executive Officers received perquisites or other
personal benefits in excess of the lesser of $50,000 or 10% of the total
of their salary and bonus or other amounts properly reportable as other
annual compensation.
(b) Options to purchase shares of Common Stock. The Company has not granted
any stock appreciation rights or restricted stock.
(c) Unless otherwise indicated, All Other Compensation represents matching
profit-sharing contributions made by the Company under its 401(k) plan.
57
<PAGE>
(d) Mr. Stanard resigned, effective as of January 1, 1999, from his positions
as President, Chief Executive Officer and a director of AMF Bowling, and
from all other positions with AMF Bowling and its subsidiaries. In
connection with his resignation, Mr. Stanard will be paid $1,250,000 by
the Company. See "--Settlement Agreement".
(e) Includes a special one-time bonus of $250,000 approved by the Compensation
Committee for services in connection with the Initial Public Offering.
(f) Mr. Friedman has received no compensation from the Company and ceased to
hold the positions of Chief Executive Officer and President of the Company
on July 31, 1997, at which time Mr. Stanard, who had been Chief Executive
Officer of AMF Bowling's principal subsidiaries, assumed the additional
titles of President and Chief Executive Officer of AMF Bowling.
(g) Mr. Hare's employment with the Company began on May 28, 1996.
(h) Includes a special one-time bonus of $175,000 approved by the Compensation
Committee for services in connection with the Initial Public Offering.
(i) Mr. Hare received two bonuses with respect to 1996, one for $166,667 and
one for $100,000. See "Employment Agreements".
(j) Mr. Morin resigned all positions with the Company and its subsidiaries as
of February 28, 1997. In connection with his resignation Mr. Morin was
paid $270,000 by the Company, representing $250,000 in severance and
$20,000 in bonus earned for the period from January 1, 1997 through
February 28, 1997.
(k) In connection with the Acquisition, Mr. Morin received a cash payment in
exchange for his 10,000 shares of phantom stock issued by a division of
the Company's predecessor under a phantom stock plan.
(l) Includes a special one-time bonus in the amount of $161,338 paid in 1996
by the Company's predecessor in connection with the Acquisition.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding the granting of stock
options to the Named Executive Officers in 1997 pursuant to the 1996 Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(5)(6)
----------------------------------------------------- ---------------------
NUMBER OF % OF
SECURITIES TOTAL STOCK
UNDERLYING OPTIONS
STOCK OPTIONS GRANTED TO EXERCISE
GRANTED (#) EMPLOYEES IN PRICE PER EXPIRATION
NAME (2)(3) 1997(4) SHARE ($/SH) DATE 5% ($) 10% ($)
- ---- ------------- ------------ ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglas J. Stanard(1)... 25,000 3.6% $10.00 June 11, 2007 $ 407,223 $ 648,435
Richard A. Friedman..... -- -- -- -- -- --
Stephen E. Hare......... 15,000 2.1% $10.00 June 11, 2007 $ 244,334 $ 389,061
Robert L. Morin......... -- -- -- -- -- --
Michael P. Bardaro...... 10,000 1.4% $10.00 June 11, 2007 $ 162,889 $ 259,374
</TABLE>
- --------
(1) Pursuant to the terms of the Settlement Agreement, all of Mr. Stanard's
stock options were cancelled and forfeited as of November 2, 1998.
(2) All stock options listed in this table were granted under the 1996 Plan.
The Company did not grant any stock appreciation rights in 1997.
(3) The stock options listed in this table that remain outstanding will become
20% vested on each anniversary of the date on which the options were
granted until all have vested. Upon an optionee's termination of
employment, the portion of an option that has not yet vested will be
forfeited. The first anniversary of each option described above will be
June 11, 1998. All options were granted at 100% of the fair market value
of the Common Stock on the date of grant.
(4) In 1997, options to purchase 703,500 shares of Common Stock were granted
under the 1996 Plan.
(5) Potential realizable value is calculated based on $10.00, the grant price
per share due to the lack of a public trading market on the date of grant
for the securities underlying the stock options.
(6) The dollar amounts under these columns use the 5% and 10% rates of
appreciation prescribed by the Commission. The 5% and 10% rates of
appreciation would result in per share prices of $16.2889 and $25.9374.
The Company expresses no opinion regarding whether this level of
appreciation will be realized and expressly disclaims any representation
to that effect.
58
<PAGE>
AGGREGATED STOCK OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
The following table provides information regarding the number and value of
unexercised stock options at December 31, 1997 for the Named Executive
Officers. No Named Executive Officer exercised any stock options in fiscal
year 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
STOCK OPTIONS AT STOCK OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglas J. Stanard(1)....... 26,000 129,000 $390,000 $1,935,000
Richard A. Friedman......... 0 0 -- --
Stephen E. Hare............. 21,000 99,000 $315,000 $1,485,000
Robert L. Morin(3).......... 0 0 -- --
Michael P. Bardaro.......... 5,000 30,000 $ 75,000 $ 450,000
</TABLE>
- --------
(1) Pursuant to the terms of the Settlement Agreement, all of Mr. Stanard's
stock options were cancelled and forfeited as of November 2, 1998.
(2) Based on the last sales price of the Common Stock on the NYSE as of
December 31, 1997 of $25.00 per share, minus the exercise price.
(3) In connection with the termination of his employment with the Company on
February 28, 1997, Mr. Morin forfeited all of his stock options.
EMPLOYMENT AGREEMENTS
Messrs. Stanard and Hare each have an employment agreement (collectively,
the "Executive Employment Agreements") with AMF Bowling and Bowling Worldwide.
Mr. Stanard's Executive Employment 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 under his Executive Employment Agreement is
$350,000. On June 1, 1997, the Board raised his salary to $400,000. Mr. Hare's
annual base salary under his Executive Employment Agreement is $300,000. On
December 1, 1997 the Board raised his salary to $330,000. 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
Bowling Worldwide (the "Targets"), are attained, and that the executive may
earn a smaller annual bonus if less than 100% but more than 90% of the Targets
are attained.
Under their respective Executive Employment Agreements, Mr. Stanard holds
the position of Chief Operating Officer of Bowling Worldwide and Mr. Hare
holds the position of Chief Financial Officer of Bowling Worldwide. In
addition, Mr. Stanard was elected President and Chief Executive Officer of AMF
Bowling 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 AMF Bowling.
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 Bowling Worldwide under certain circumstances.
The Executive Employment Agreements further provide for a severance payment
equal to the executive's annual base salary if termination by Bowling
Worldwide is not due to death or disability. The executive's employment will
be deemed to have been terminated by Bowling Worldwide if all or substantially
all of the stock or assets of Bowling Worldwide are sold or disposed of to an
unaffiliated third party and the executive is not thereafter employed by AMF
Bowling or one of its continuing affiliates; however, neither AMF Bowling nor
Bowling Worldwide 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
59
<PAGE>
employment if he is hired by the purchaser of Bowling Worldwide's stock or
assets, or if his employment is continued by Bowling Worldwide.
Mr. Stanard purchased, pursuant to his Executive Employment Agreement,
150,000 shares of Common Stock (the "Purchased Stock") for $500,000 in cash
plus a non-recourse promissory note for $1,000,000, payable to AMF Bowling and
secured by the Purchased Stock which has been pledged pursuant to a stock
pledge agreement between Mr. Stanard and AMF Bowling. Mr. Hare purchased
150,000 shares of Common Stock for $500,000 in cash plus a non-recourse
promissory note for $1,000,000, payable to AMF Bowling and secured by the
Purchased Stock which has been pledged pursuant to a stock pledge agreement
between Mr. Hare and AMF Bowling. 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 Company loaned Mr. Hare $62,614 to be used to pay taxes associated with
such bonus. In exchange, Mr. Hare gave the Company 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 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 1996 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. Pursuant to the Settlement Agreement,
Mr. Stanard's Stock Options were cancelled and forfeited as of November 2,
1998.
If any successor to AMF Bowling or Bowling Worldwide acquires all or
substantially all of the business and/or assets of AMF Bowling or Bowling
Worldwide, AMF Bowling 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 Common Stock less the exercise
price of the Stock Options.
As described below, pursuant to the Settlement Agreement, Mr. Stanard's
Executive Employment Agreement was terminated as of November 2, 1998.
Mr. Watkins has an employment agreement with AMF Bowling and receives
compensation consisting of salary and an incentive bonus if certain financial
targets, determined by the Board of Directors, are met. Mr. Watkins' annual
base salary under his employment agreement is $300,000. Mr. Watkins'
employment agreement provides for the payment of a bonus from September 8
through December 31, 1998 on a pro rata basis equal to 50% of his annual base
salary. Mr. Watkins was granted options to purchase 100,000 shares of Common
Stock on the same vesting schedule as the Company's senior management team.
The employment agreement further provides for a severance payment if AMF
Bowling terminates Mr. Watkins' employment for any reason other than cause
equal to (i) 2 years of salary if terminated up to December 31, 1998, (ii) his
salary through December 31, 2000 if terminated during 1999, and (iii) one year
of salary if terminated from and after January 1, 2000.
Prior to February 28, 1997, when his employment terminated and he resigned
all positions with AMF Bowling and its affiliates, Mr. Morin was employed by
AMF Bowling 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. 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. In addition, AMF Bowling repurchased Mr.
Morin's Common Stock for $500,000 in cash plus the cancellation of a
promissory note, including interest thereon. The Stock Options granted to Mr.
Morin were forfeited upon his resignation.
60
<PAGE>
SETTLEMENT AGREEMENT
Pursuant to the terms of a settlement agreement (the "Settlement
Agreement"), dated as of November 2, 1998, by and among Mr. Stanard, AMF
Bowling and Bowling Worldwide, effective as of January 1, 1999, Mr. Stanard
will resign all of his positions with AMF Bowling and its subsidiaries,
including his positions as Chief Executive Officer, President and a director
of AMF Bowling. In connection with his resignation, Mr. Stanard will receive
payments from AMF Bowling of (i) $400,000 with respect to severance under his
Executive Employment Agreement and (ii) $850,000 with respect to his
compliance with certain obligations under the Settlement Agreement, including
non-competition and non-solicitation provisions, and obligations to cooperate
with information requests from the Company and to reasonably assist the
Company with respect to pending and future dispute resolutions. In addition,
Mr. Stanard will transfer all of his Common Stock to AMF Bowling in exchange
for the cancellation of his non-recourse promissory note referred to under "--
Employment Agreements". Pursuant to the Settlement Agreement, all stock
options previously granted to Mr. Stanard were cancelled and forfeited as of
November 2, 1998, and Mr. Stanard will be subject to non-competition and non-
solicitation provisions for two years following his date of termination. Until
a successor to Mr. Stanard has been named, Mr. Hare has been appointed acting
Chief Executive Officer to assume all of Mr. Stanard's operational, managerial
and other responsibilities.
AMF BOWLING, INC. 1996 STOCK INCENTIVE PLAN
In connection with the Acquisition, AMF Bowling adopted the 1996 Plan under
which AMF Bowling may grant incentive awards in the form of shares of Common
Stock ("Restricted Stock Awards"), options to purchase shares of Common Stock
("Stock Options") and stock appreciation rights ("Stock Appreciation Rights")
to certain officers, employees, consultants and non-employee directors ("Plan
Participants") of AMF Bowling and its affiliates. The total number of shares
of Common Stock initially reserved and available for grant under the Stock
Incentive Plan was 1,767,151. As of September 30, 1998, Stock Options to
purchase 1,394,550 shares of Common Stock were outstanding under the 1996
Plan, at an exercise price of $10.00 per share, and Stock Options to purchase
67,550 shares of Common Stock have been exercised at a per share exercise
price of $10.00. The Compensation Committee or the Stock Option Plan
Subcommittee thereof is authorized to make grants and various other decisions
under the 1996 Plan and to make determinations as to certain terms of awards
granted under the 1996 Plan. Unless otherwise determined by the Compensation
Committee or the Stock Option Plan Subcommittee, any Plan Participant granted
an award under the 1996 Plan must become a party to, and agree to be bound by,
the Stockholders Agreement.
Stock Option awards under the 1996 Plan may include incentive Stock Options,
non-qualified Stock Options, or both, 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 or the Stock Option Plan Subcommittee, have a term of ten years.
Upon a Plan Participant's death or when the Plan Participant's employment with
AMF Bowling or the applicable affiliate of AMF Bowling is terminated for any
reason, such Plan Participant's previously unvested Stock Options are
forfeited and the Plan 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 Plan 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. To date, the Company has not
granted any Stock Appreciation Rights.
61
<PAGE>
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 1996 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 1996 Plan will terminate on May 1, 2006; however, awards outstanding as
of such date will not be affected or impaired by such termination. The Board
has authority to amend the 1996 Plan and awards granted thereunder, subject to
the terms of the 1996 Plan.
Pursuant to an Option Agreement (the "Diker Option Agreement"), dated May 1,
1996, Mr. Diker, a director of AMF Bowling, AMF Group Holdings and Bowling
Worldwide was granted, pursuant to the 1996 Plan, non-qualified Stock Options
to purchase 100,000 shares of 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 vested on May 1, 1998. If any
successor to AMF Bowling acquires all or substantially all of the business
and/or assets of AMF Bowling, AMF Bowling may purchase all of the Stock
Options then held by Mr. Diker for the fair market value of the underlying
Common Stock less the exercise price of the Stock Options. Mr. Diker is a
party to the Stockholders Agreement and any shares of 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.
AMF BOWLING, INC. 1998 STOCK INCENTIVE PLAN
AMF Bowling has adopted the 1998 Stock Incentive Plan (the "1998 Plan")
under which AMF Bowling may grant incentive awards in the form of Restricted
Stock Awards, Stock Options and Stock Appreciation Rights (the "Awards") in
substantially the same manner as provided in the 1996 Plan. This summary is
qualified in its entirety by reference to the full text of the 1998 Plan,
filed as Exhibit 10.30 to the Registration Statement. Terms used and not
otherwise defined in this summary have the meanings set forth in the 1998
Plan.
The Company believes that the 1998 Plan gives the Company a competitive
advantage in attracting, retaining and motivating employees. The 1998 Plan
links employee incentives to the financial results of the Company and
increases in stockholder value, consistent with the compensation philosophy of
the Company. In addition, the 1998 Plan permits the Company to maximize its
tax deduction for incentive compensation paid to its most highly paid officers
under Section 162(m) of the Code.
ADMINISTRATION OF THE 1998 PLAN; ELIGIBILITY
The 1998 Plan is administered by the Compensation Committee or a
subcommittee of the Compensation Committee. In order to meet the requirements
of Section 162(m) of the Code and Rule 16b-3 of the Exchange Act, the Board
established the Stock Option Plan Subcommittee of the Compensation Committee
and delegated to it responsibility for administering the 1998 Plan. The
subcommittee is referred to as the "Committee" for purposes of this summary.
Employees who have directly affected or are expected to directly affect the
management, growth and profitability of the Company are eligible to receive
Awards under the 1998 Plan. The Committee has the power and complete
discretion to select eligible employees to receive Awards, and to determine
the type, terms and conditions of the Awards. The Committee may delegate to
the Chief Executive Officer of AMF Bowling the power to select which employees
will receive Awards, the type of Award, the time the Award is granted, the
number of shares of Common Stock allocated to the Award and the terms of the
Award, except to the extent that such a delegation would prevent compliance
with Rule 16b-3, Section 162(m) or any other provisions of the Code, or other
applicable law or regulation. Actions taken by the Chief Executive Officer
pursuant to such a
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delegation must be ratified by the Committee. The Company has approximately
100 employees who would currently be eligible to receive Awards under the 1998
Plan.
AMOUNT OF STOCK AVAILABLE FOR AWARDS
Two million shares of Common Stock have been reserved and are available for
issuance under the 1998 Plan. As of September 30, 1998, Stock Options to
purchase 78,400 shares of Common Stock were outstanding under the 1998 Plan at
an exercise price of $16 3/16. None of the Stock Options outstanding under the
1998 Plan have been exercised as of September 30, 1998. In addition, shares of
Common Stock that have been reserved but not issued under the 1996 Plan, and
shares which are subject to awards under the 1996 Plan that expire or
otherwise terminate, may be allocated to Awards under the 1998 Plan. As of
September 30, 1998, there were 305,051 shares of Common Stock under the 1996
Plan which had not yet been allocated to awards under that plan.
Shares allocated to Awards under the 1998 Plan which are later forfeited,
expire or otherwise terminate (including shares subject to Stock Appreciation
Rights that are exercised for cash) may again be used for Awards under the
1998 Plan. No more than 200,000 shares of Common Stock may be allocated to the
Awards granted under the 1998 Plan to a participant in any one year.
The Board or the Committee will adjust the number or kind of shares which
may be issued under the 1998 Plan in the event of a merger, reorganization,
consolidation, recapitalization, spinoff, stock dividend, stock split, reverse
stock split, extraordinary distribution with respect to the Common Stock or
other change in corporate structure affecting the Common Stock.
Awards under the 1998 Plan are contingent on compliance with federal or
state securities law requirements. Therefore, participants cannot exercise
Stock Options or Stock Appreciation Rights that may be granted under the 1998
Plan until such conditions are met. Unless the Board sooner terminates it, the
1998 Plan will terminate ten years after the date on which the Board approved
it.
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SECURITIES OWNED BY MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below reflects the number of shares of Common Stock beneficially
owned as of November 3, 1998 by (i) each director of the Company, (ii) each
Named Executive Officer, (iii) the directors and executive officers as a group
and (iv) each person who is known by the Company to own beneficially more than
five percent of the Company's outstanding equity securities. Unless otherwise
noted, each individual has sole voting power and sole investment power with
respect to securities beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
OWNED AS OF
NOVEMBER 3, PERCENT OF
NAME OF BENEFICIAL OWNER 1998(1)(3) CLASS(2)
------------------------ ------------ ----------
<S> <C> <C>
Directors:
Richard A. Friedman(3)................................ -- *
Terence M. O'Toole(4)................................. -- *
Peter M. Sacerdote(5)................................. -- *
Charles M. Diker(6)................................... 238,184 *
Paul B. Edgerley(7)................................... -- *
Howard A. Lipson(8)................................... -- *
Thomas R. Wall, IV(9)................................. -- *
Douglas J. Stanard**(10).............................. 150,000 *
Stephen E. Hare**(11)................................. 195,000 *
Named Executive Officers:
Michael P. Bardaro(12)................................ 12,200 *
All directors and executive officers as a group (11
persons)(13)......................................... 595,384 1.0%
Beneficial Owners of More Than 5%:
The Goldman Sachs Group(14)........................... 30,836,593 50.9%
Blackstone Group (as defined below)(15)............... 5,762,805 9.6%
Kelso (as defined below)(16).......................... 5,762,805 9.6%
Baron Capital Group, Inc. and certain affiliates(17).. 12,773,200 21.4%
</TABLE>
- --------
* Less than 1%
** Messrs. Stanard and Hare are also Named Executive Officers
(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 Common Stock
subject to options and warrants held by that person that are currently
exercisable or are exercisable within 60 days 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 59,747,550 shares of Common Stock outstanding as of November 3,
1998 and warrants (with respect to Goldman Sachs) to purchase 870,000
shares of Common Stock outstanding as of November 3, 1998.
(3) 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.
(4) 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.
(5) 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.
(6) Includes 100,000 shares which may be acquired upon the exercise of Stock
Options within 60 days.
(7) 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.
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(8) 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.
(9) Mr. Wall, who is (i) a general partner of Kelso Partners V, L.P., the
general partner of Kelso Investment Associates V, L.P. ("KIA V") and (ii)
a general partner of Kelso Equity Partners V, L.P. ("KEP V," and together
with KIA V, "Kelso"), disclaims beneficial ownership of the shares owned
by KIA V and KEP V.
(10) Pursuant to the Settlement Agreement, in connection with his resignation,
effective January 4, 1999, Mr. Stanard will transfer all of his Common
Stock to AMF Bowling in exchange for the cancellation of his non-recourse
promissory note. See "Management--Settlement Agreement".
(11) Includes 45,000 shares which may be acquired upon the exercise of Stock
Options within 60 days.
(12) Includes 12,000 shares which may be acquired upon the exercise of Stock
Options within 60 days.
(13) Includes an aggregate of 214,000 shares which may be acquired upon the
exercise of Stock Options within 60 days.
(14) Of the total number of shares which may be deemed to be beneficially
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) C.L.P.,
451,922 shares are owned by Stone Street Fund 1995, L.P., 772,646 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. (collectively, "GSCP"). In addition, The Goldman
Sachs Group beneficially owns warrants to purchase 870,000 shares of
Common Stock, which were issued upon the closing of the Acquisition. GS
Capital Partners II, L.P., GS Capital Partners II 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 such partnerships and have full voting and investment
power with respect to the holding of such partnerships. Excludes certain
shares of Common Stock in client accounts managed by Goldman Sachs (the
"Managed Accounts"). Each of Goldman Sachs and The Goldman Sachs Group
disclaims beneficial ownership of the Common Stock (i) owned by
investment partnerships to the extent of partnership interests in the
investment partnerships held by persons other than The Goldman Sachs
Group or its affiliates and (ii) held in the Managed Accounts. The
address of The Goldman Sachs Group is 85 Broad Street, New York, New York
10004.
(15) 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.
(16) Of the total number of shares beneficially owned by Kelso, 5,409,974
shares are owned by KIA V and 352,831 are owned by KEP V. The address of
each such shareholder is c/o Kelso & Company, Inc., 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.
(17) Based solely on information provided in a Schedule 13D filed with the
Commission by Baron Capital Group, Inc. ("BCG"), BAMCO, Inc. ("BAMCO"),
Baron Capital Management, Inc. ("BCM"), Baron Asset Fund ("BAF") and
Ronald Baron. BAMCO and BCM are subsidiaries of BCG. BAF is an investment
advisory client of BAMCO. Ronald Baron owns a controlling interest in
BCG. Of the total number of shares beneficially owned by Baron, 65,000
shares are owned by BCG, 65,000 shares are owned by BCM and 65,000 shares
are owned by Ronald Baron. BCG and Ronald Baron disclaim beneficial
ownership of shares held by their controlled entities (or the investment
advisory clients thereof) to the extent such shares are held by persons
other than BCG and Ronald Baron. BAMCO and BCM disclaim beneficial
ownership of shares held by their investment advisory clients to the
extent such shares are held by persons other than BAMCO, BCM and their
affiliates. The address of Baron Capital Group, Inc. is 767 Fifth Avenue,
24th floor, New York, New York 10153.
STOCKHOLDERS AGREEMENT
On April 30, 1996, AMF Bowling, 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",
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and, with GSCP and the Investors, the "Stockholders") entered into the
Stockholders Agreement, which regulates the relationship among AMF Bowling and
the Stockholders. Subsequently, Mr. Hare and other members of management who
have received Stock Option awards under the 1996 Plan have become parties to
the Stockholders Agreement as additional Management Investors and
Stockholders. Pursuant to the Settlement Agreement, on the first business day
following the effectiveness of his resignation, Mr. Stanard will cease to be a
Stockholder under the Stockholders Agreement and the Registration Rights
Agreement. See "--Registration Rights Agreement". The following discussion
summarizes the terms of the Stockholders Agreement that AMF Bowling believes
are material to holders of Common Stock. This summary is qualified in its
entirety by reference to the full text of the Stockholders Agreement and the
amendments thereto, which are filed as Exhibits 10.4 to 10.11 to the
Registration Statement.
The Stockholders Agreement confers on GSCP the right to increase or decrease
the Board 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 Board, so long as GSCP and its Permitted
Transferees (as hereinafter defined) hold a majority of the outstanding shares
of Common Stock. Each Governance Investor has the right to nominate, subject
to GSCP consent, one member of the Board, so long as the number of shares of
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 shareholders.
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 shareholders.
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 Board, 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 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 Board. 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 AMF Bowling and its
subsidiaries, or any similar transactions or expenditures. GSCP and the
funding Investors have fully performed their "overcall" obligations under the
Stockholders Agreement, the proceeds of which were used in part to fund
certain acquisitions and for other corporate purposes. The parties 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, consisting of two GSCP-nominated directors and AMF
Bowling's President and Chief Executive Officer. The Executive Committee may
exercise all the powers and authority of the Board (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 require a prior meeting of the
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Board, 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 Certificate of
Incorporation or By-Laws which amendments would adversely affect the rights
and obligations of Blackstone or Kelso; provided, that any amendment affecting
a Stockholder differently from any other Stockholder requires such
Stockholder's approval. A Special Vote was obtained in connection with the
approval of the 1998 Plan by the Board and the Executive Committee. 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
AMF Bowling and its subsidiaries, and at least one investor director nominated
by Blackstone 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 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 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 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 Common Stock in any manner
inconsistent with the Stockholders Agreement.
The Stockholders Agreement provides that in the event a Stockholder
determines to sell its shares of Common Stock (subject to certain exceptions,
including sales of shares made through a broker pursuant to Rule 144 under the
Exchange Act), 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 Common Stock in such a sale. Moreover, in the event
Stockholders owning 51% or more of the outstanding Common Stock propose to
sell all of the 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 Company 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 will terminate 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 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 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 Common Stock then outstanding.
Notwithstanding these provisions, in the event of any merger,
recapitalization, consolidation, reorganization or other restructuring of AMF
Bowling 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
AMF Bowling and the Stockholders entered into a Registration Rights
Agreement on April 30, 1996 (the "Registration Rights Agreement"). Pursuant to
the Registration Rights Agreement, (i) each of Blackstone (as a group), Kelso
(as a group) and Bain (as a group) may make one
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demand (subject to certain exceptions) of AMF Bowling to register shares of
Common Stock held by such group and (ii) GSCP may make up to five demands
(subject to certain exceptions) of AMF Bowling to register shares of 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 Common Stock purchased
by GSCP prior to execution of the Subscription Agreement, (2) the number of
shares of Common Stock issued pursuant to the Subscription Agreement and (3)
the number of shares (subject to adjustment) of 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, 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 Common Stock under a registration statement filed
by AMF Bowling, subject to certain exceptions and limitations. The foregoing
summary is qualified in its entirety by reference to the full text of the
Registration Rights Agreement and the amendments thereto, which are filed as
Exhibits 10.12 to 10.17 to the Registration Statement.
CERTAIN TRANSACTIONS
Messrs. Friedman and O'Toole, each of whom is a Managing Director of Goldman
Sachs, and Mr. Sacerdote, who is a limited partner of The Goldman Sachs Group,
are directors of AMF Bowling, AMF Group Holdings and Bowling Worldwide. Mr.
Friedman is also Chairman of AMF Bowling. Goldman Sachs and its affiliates
together currently beneficially own a majority of the outstanding Common
Stock. See "Securities Owned by Management and Certain Beneficial Owners".
Goldman Sachs and their affiliates were the initial purchasers of the debt
issued by Bowling Worldwide in connection with the Acquisition and received an
underwriting discount of approximately $19.0 million in connection with the
purchase and resale of certain senior subordinated notes and senior
subordinated discount notes, each issued in March 1996, which were
subsequently exchanged by the holders thereof for the Subsidiary Senior
Subordinated Notes and the Subsidiary Senior Subordinated Discount Notes,
respectively. Goldman Sachs also served as financial advisor to the owners of
the Predecessor Company in connection with the Acquisition and received a fee
in the form of 10-year warrants (the "Warrants") to purchase 870,000 shares of
the Common Stock, on a fully diluted basis, at a purchase price of $.01 per
share. The Warrants were valued for accounting purposes at approximately $8.7
million.
In connection with the Credit Agreement and the amendments thereto, Goldman
Sachs Credit Partners, L.P., an affiliate of Goldman Sachs, acted as
Syndication Agent, Goldman Sachs Credit Partners, L.P. and Citicorp
Securities, Inc. acted as Arrangers, and Citibank, N.A. is acting as
Administrative Agent. Total fees payable to Goldman Sachs Credit Partners,
L.P. aggregate approximately $10.3 million, and such entity is reimbursed for
expenses in connection with such services. Goldman Sachs Credit Partners, L.P.
is also a lender under the Credit Agreement. See "Description of Certain
Indebtedness--Credit Agreement". Goldman Sachs also received a cash fee of
$5.0 million from AMF in connection with the Acquisition and was reimbursed
for related expenses. Blackstone Management Partners L.P., an affiliate of
Blackstone Group, and Kelso & Company, L.P., an affiliate of Kelso, each
received an investment banking fee of $1.0 million, and Bain Capital, Inc., an
affiliate of Bain, received a fee of $300,000, each in connection with the
Acquisition. In 1997, total fees paid to Goldman Sachs Credit Partners, L.P.
for services under the Credit Agreement were approximately $900,000. Such
entity was also reimbursed for expenses incurred in connection with its
services.
Goldman Sachs acted as the Company's lead underwriter in connection with the
Initial Public Offering. Underwriting discounts paid to the entire
underwriting syndicate in the Initial Public Offering totaled $18,940,500.
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Goldman Sachs was an Initial Purchaser of the Debentures in the Private
Placement. The aggregate discount paid to Goldman Sachs and the other Initial
Purchasers in the Private Placement totaled $8,527,500.
Bowling Worldwide and Goldman Sachs are parties to an engagement letter
pursuant to which Goldman Sachs was retained as Bowling Worldwide's financial
advisor to provide investment banking and financial advisory services,
including in connection with acquisitions, dispositions or financings.
Pursuant to the engagement, Bowling Worldwide has agreed to reimburse Goldman
Sachs for their out-of-pocket expenses and indemnify Goldman Sachs in
connection with their services arising under the engagement.
The Company also entered into three interest rate cap agreements with
Goldman Sachs Capital Markets, L.P. ("GSCM"), an affiliate of Goldman Sachs,
all of which were executed to hedge the Company's exposure to fluctuations in
the interest rates applicable to borrowings under the Credit Agreement. The
Company paid a fee of $3.6 million to GSCM in 1996 in connection with the
execution of the first of these transactions, which capped 3-month LIBOR on
$500 million principal amount of debt at 6.5% until April 1998 and 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 capped 3-
month LIBOR on $100 million in debt at 7.0% until March 31, 1998. The Company
paid a fee of $50,000 to GSCM in respect of the third transaction executed on
March 31, 1998, which capped 3-month LIBOR on $200 million in debt at 7.0%
until March 31, 1999.
The Company retained Michael Stanard Design, Inc. ("MSD"), a consultant, to
provide marketing and related services in 1997 for an aggregate of $580,603. A
majority owner of MSD is H. Michael Stanard, who is Douglas J. Stanard's
brother. A substantial portion of such amounts were reimbursement of costs for
materials, travel, printing and other out-of-pocket expenses.
In 1997, the Company paid a fee of $300,000 to Goldman Sachs for its
representation of the Company in connection with the Company's lease of its
new bowling center at Chelsea Piers in New York.
See "Executive Compensation--Employment Agreements" for a discussion of
arrangements under which the Company made loans to Messrs. Standard and Hare
on a non-recourse basis to enable them to purchase shares of Common Stock and
"Executive Compensation--Settlement Agreement" for a discussion of the
arrangement under which Mr. Standard's loan will be cancelled in connection
with his resignation.
AMF and the Stockholders have entered into the Stockholders Agreement and
the Registration Rights Agreement. See "Securities Owned by Management and
Certain Beneficial Owners--Stockholders Agreement" and "--Registration Rights
Agreement".
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DESCRIPTION OF DEBENTURES
As used in this "Description of Debentures", the "Company" refers to AMF
Bowling and does not, unless the context otherwise indicates, include its
subsidiaries.
The Debentures were issued under an indenture dated as of May 12, 1998 (the
"Indenture"), between the Company and The Bank of New York, as trustee (the
"Trustee"). The Indenture will be qualified under the Trust Indenture Act of
1939, as amended. The Indenture and the Debenture Registration Rights
Agreement are filed as Exhibits 4.7 and 4.8, respectively, to the Registration
Statement. The following summaries of certain provisions of the Debentures,
the Indenture and the Debenture Registration Rights Agreement do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Debentures (the form of which is
included in the Indenture), the Indenture and the Debenture Registration
Rights Agreement, including the definitions therein of certain terms that are
not otherwise defined in this Prospectus. Wherever particular provisions or
defined terms of the Indenture (or of the form of Debenture included in the
Indenture) or Debenture Registration Rights Agreement are referred to, such
provisions or defined terms are incorporated herein by reference.
GENERAL
The Debentures are unsecured obligations of the Company, limited to
$1,125,000,000 aggregate principal amount at maturity, and will mature on May
12, 2018.
The Debentures were offered at a substantial discount from their principal
amount at maturity. See "Certain Federal Income Tax Considerations". There are
not and will not be any periodic payments of interest on the Debentures. The
calculation of the accrual of Original Issue Discount (the difference between
the Issue Price of the Debentures and the principal amount of a Debenture at
maturity) in the period during which a Debenture remains outstanding is on a
semi-annual bond equivalent basis using a 360-day year composed of twelve 30-
day months. Such accrual commenced on May 12, 1998. Maturity, conversion,
purchase by the Company at the option of a Holder or redemption of a Debenture
will cause Original Issue Discount and interest and Liquidated Damages, if
any, to cease to accrue on such Debenture, under the terms and subject to the
conditions of the Indenture. The Company may not reissue a Debenture that has
matured or been converted, purchased by the Company at the option of a Holder,
redeemed or otherwise canceled (except for a cancellation for purposes of
registration of transfer, exchange or replacement of a Debenture).
The principal amount at maturity of each Debenture will be payable at the
office or agency of the paying agent, initially the Trustee, in the Borough of
Manhattan, The City of New York, or any other office of the paying agent
maintained for such purpose. Debentures may be presented for conversion or
exchange into Common Stock at the office of the conversion agent and
Debentures in definitive form may be presented for exchange for other
Debentures of any authorized denomination or for registration of transfer at
the office of the registrar, each such agent initially being the Trustee. The
Company does not charge a service charge for any registration of transfer or
exchange of Debentures; however, the Company may require payment by a Holder
of a sum sufficient to cover any tax, assessment or other governmental charge
payable in connection therewith.
FORM, DENOMINATION AND REGISTRATION
The Debentures were issued in fully registered form, without coupons, in
denominations of $1,000 principal amount at maturity and integral multiples
thereof.
GLOBAL DEBENTURES; BOOK-ENTRY FORM
The Debentures are evidenced by global Debentures in definitive, fully
registered form without interest coupons (collectively, the "Global
Debentures"), which have been deposited with The Bank
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of New York, as custodian for DTC, and registered in the name of Cede & Co.
("Cede"), as nominee for DTC. Except as set forth below, record ownership of
the Global Debentures may be transferred, in whole or in part, only to another
nominee of DTC or to a successor of DTC or its nominee.
Holders may beneficially own interests in the Global Debentures held by DTC
only through participants in DTC ("Participants") or certain banks, brokers,
dealers, trust companies and other parties that clear through or maintain a
custodial relationship with a Participant either directly or indirectly
("Indirect Participants"). A Holder may hold its interest in the Global
Debentures directly through DTC if it is a Participant in DTC or indirectly
through organizations that are Participants. Transfers between Participants
will be effected in the ordinary way in accordance with DTC's rules and will
be settled in same-day funds. The laws of some states require that certain
persons take physical delivery of securities in definitive form. Consequently,
the ability to transfer beneficial interests in the Global Debentures to such
persons may be limited.
So long as the Debentures are held in book-entry form, cash payment of
principal of, premium, if any, and interest and Liquidated Damages, if any,
on, the Global Debentures will be made to Cede, the nominee for DTC, as the
registered Holder of the Global Debentures, by wire transfer of immediately
available funds on each relevant payment date. Neither the Company nor the
Trustee has any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Debentures, including for any delay by DTC or any Participant or
Indirect Participant in identifying the beneficial ownership interests, and
the Company and the Trustee may conclusively rely on, and are protected in
relying on, instructions from DTC for all purposes.
The Company has been informed that, with respect to any cash payment of
principal of, premium, if any, and interest and Liquidated Damages, if any, on
the Global Debentures, DTC's practice is to credit Participants' accounts on
the applicable payment date with payments in amounts proportionate to their
respective beneficial interests in the Debentures represented by the Global
Debentures as shown on the records of DTC (adjusted as necessary so that such
payments are made with respect to whole Debentures only), unless DTC has
reason to believe that it will not receive payment on such payment date.
Payments by Participants to owners of beneficial interests in Debentures
represented by the Global Debentures held through such Participants are the
responsibility of such Participants, as is the case with securities held for
the accounts of customers registered in "street name".
The Company will send redemption notices to Cede, as the registered holder
of the Global Debentures. If less than all the Debentures are being redeemed,
DTC's practice is to determine by lot the amount of the holdings of each
Participant in such issue to be redeemed.
Neither DTC or Cede will consent or vote with respect to the Debentures.
Under its usual procedures, DTC mails an omnibus proxy (the "Omnibus Proxy")
to the issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede's consenting or voting rights to those Participants to whose
accounts the Debentures are credited on the record date identified in a
listing attached to the Omnibus Proxy.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, the ability of a person having a beneficial
interest in the principal amount represented by the Global Debentures to
pledge such interest to persons or entities that do not participate in the DTC
book-entry system, or otherwise take actions in respect of such interest, may
be limited by the lack of a physical certificate evidencing such interest.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Debentures (including the presentation of Debentures for
exchange as described below) only at the direction of one or more Participants
to whose account with DTC interests in the Global Debentures are credited and
only in respect of such portion of the principal amount of the Debentures
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represented by the Global Debentures as to which such Participant or
Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code, as amended, and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in accounts of its Participants, thereby eliminating the
need for physical transfer and delivery of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own
DTC. Indirect access to the DTC system is available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly. The
rules applicable to DTC and its Participants are on file with the Commission.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the Global Debentures among
Participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.
If DTC is at any time unwilling, unable or ineligible to continue as
depository and a successor depository is not appointed by the Company within
90 days, the Company will issue Debentures in definitive registered form,
without coupons, in denominations of $1,000 principal amount at maturity and
integral multiples thereof, in exchange for the Global Debentures representing
such Debentures. In addition, the Company may at any time and in its sole
discretion determine not to have any Debentures represented by the Global
Debentures and, in such event, will issue Debentures in definitive registered
form, without coupons, in exchange for the Global Debentures representing such
Debentures. In any such instance, an owner of a beneficial interest in the
Global Debentures will be entitled to physical delivery in definitive form of
Debentures represented by such Global Debentures equal in principal amount at
maturity to such beneficial interest and to have such Debentures registered in
its name.
So long as DTC, or its nominee, is the registered owner of the Global
Debentures, DTC or its nominee, as the case may be, will be considered the
sole legal owner or Holder of the Debentures represented by the Global
Debentures for all purposes under the Indenture. Except as set forth above,
owners of beneficial interests in such Global Debentures are not entitled to
have Debentures represented by the Global Debentures registered in their
names, do not receive and are not entitled to receive physical delivery of
Debentures in definitive form and are not considered the legal owners or
Holders thereof under the Indenture. Accordingly, each person owning a
beneficial interest in the Global Debentures must rely on the procedures of
DTC and, if such person is not a Participant, those of the Participant and any
Indirect Participant through which such person owns its interest, in order to
exercise any rights of a Holder under the Indenture or such Debenture.
The information in this section concerning DTC and DTC'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. None of the
Company, the Trustee nor any of their respective agents has any responsibility
for the performance by DTC, the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Debentures.
CONVERSION OF DEBENTURES
A Holder of a Debenture may convert it into Common Stock of the Company at
any time prior to the close of business on May 12, 2018; provided, that if a
Debenture is called for redemption, the
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Holder may convert it only until the close of business on the applicable
Redemption Date unless the Company defaults in the payment of the Redemption
Price. A Debenture in respect of which a Holder has delivered a Purchase
Notice (as hereinafter defined) exercising the option of such Holder to
require the Company to purchase such Debenture may be converted only if such
notice is withdrawn in accordance with the terms of the Indenture. Similarly,
a Debenture in respect of which a Holder is exercising its option to require
redemption upon a Debenture Change of Control may be converted only if such
Holder withdraws its election to exercise its option in accordance with the
terms of the Indenture. A Holder may convert such Holder's Debentures in part
so long as such part is $1,000 principal amount at maturity and integral
multiples thereof.
"Trading Day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any
day on which securities are not traded on the applicable securities exchange
or in the applicable securities market.
The initial Conversion Rate is 8.6734 shares of Common Stock per $1,000
principal amount at maturity of Debentures, subject to adjustment upon the
occurrence of certain events, as described below. A Holder entitled to a
fractional share of Common Stock will receive cash equal to the then Current
Market Price of that fractional share.
On conversion of a Debenture, a Holder will not receive any cash payment
representing accrued Original Issue Discount. The Company's delivery to the
Holder of the fixed number of shares of Common Stock into which the Debenture
is convertible (together with the cash payment, if any, in lieu of fractional
shares of Common Stock) will be deemed to satisfy the Company's obligation to
pay the principal amount of the Debenture including the accrued Original Issue
Discount attributable to the period from the Issue Date to the Conversion
Date. Thus, the accrued Original Issue Discount is deemed to be paid in full
rather than canceled, extinguished or forfeited. The Conversion Rate will not
be adjusted at any time during the term of the Debentures for such accrued
Original Issue Discount. Because the number of shares of Common Stock issuable
upon conversion of each Debenture does not increase even though the accreted
value of the Debentures (i.e., the Issue Price plus accrued Original Issue
Discount) increases over time, the implied effective conversion price will
increase over time.
For so long as the Debentures are held in the form of a Global Debenture,
Holders who desire to convert their Debentures into Common Stock should
contact their brokers or other Participants or Indirect Participants to obtain
information on procedures, including proper forms and cut-off times, for
submitting such request.
To convert a definitive Debenture into Common Stock, a Holder must (i)
complete and manually sign the conversion notice on the back of the Debenture
(or complete and manually sign a facsimile thereof) and deliver such notice to
the conversion agent, (ii) surrender the Debenture to the conversion agent,
(iii) if required, furnish appropriate endorsements and transfer documents,
and (iv) if required, pay all transfer or similar taxes. Pursuant to the
Indenture, the date on which all of the foregoing requirements have been
satisfied is the "Conversion Date".
The Conversion Rate is subject to adjustment in certain events, including
(a) dividends (and other distributions) payable in Common Stock on shares of
capital stock of the Company, (b) the issuance to all holders of Common Stock
of certain rights, options or warrants entitling them to subscribe for or
purchase Common Stock at less than the then current market price (determined
as provided in the Indenture) of Common Stock as of the record date for
holders entitled to receive such rights, options or warrants, (c)
subdivisions, combinations and reclassifications of Common Stock, (d)
distributions to all holders of Common Stock of evidences of indebtedness of
the Company, shares of capital stock or other property (including securities,
but excluding those dividends, rights, options, warrants and distributions
referred to in clauses (a) and (b) above, dividends and distributions paid
exclusively in cash and distributions upon mergers or consolidations to which
the second succeeding paragraph applies), (e) distributions consisting
exclusively of cash (excluding any cash portion of distributions referred to
in (d) above, or cash distributed upon
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a merger or consolidation to which the second succeeding paragraph applies) to
all holders of Common Stock in an aggregate amount that, together with (i)
other such all-cash distributions made within the preceding 12 months in
respect of which no adjustment has been made and (ii) any cash and the fair
market value of other consideration payable in respect of any tender offer by
the Company or any of its subsidiaries for Common Stock, to the extent that
the cash and value of any other consideration included in such payment per
share of Common Stock exceeds the closing market price per share of Common
Stock on the Trading Day next succeeding the date of payment (the "Current
Market Price"), concluded within the preceding 12 months in respect of which
no adjustment has been made, exceeds 12.5% of the Company's market
capitalization (being the product of the then current market price of the
Common Stock and the number of shares of Common Stock then outstanding) on the
record date for such distribution and (f) the successful completion of a
tender offer made by the Company or any of its subsidiaries for Common Stock,
to the extent that the cash and value of any other consideration included in
such payment per share of Common Stock exceeds the Current Market Price at
such time, the aggregate amount of which, together with (i) any cash and other
consideration in excess of the then Current Market Price paid in a tender
offer by the Company or any of its subsidiaries for Common Stock expiring
within the 12 months preceding the expiration of such tender offer in respect
of which no adjustment has been made and (ii) the aggregate amount of any such
all-cash distributions referred to in (e) above to all holders of Common Stock
within the 12 months preceding the expiration of such tender offer in respect
of which no adjustments have been made, exceeds 12.5% of the Company's market
capitalization on the expiration of such tender offer.
No adjustment in the Conversion Rate is required unless such adjustment
would require a change of at least 1% in the rate then in effect; provided
that any adjustment that would otherwise be required to be made is carried
forward and taken into account in any subsequent adjustment. Except as stated
above, the Conversion Rate is not adjusted for the issuance of Common Stock or
any securities convertible into or exchangeable for Common Stock or carrying
the right to purchase any of the foregoing.
In the case of (i) any reclassification of the Common Stock or (ii) a
consolidation or merger involving the Company or a sale or conveyance to
another corporation of the property and assets of the Company as an entirety
or substantially as an entirety, in each case as a result of which holders of
Common Stock shall be entitled to receive stock, securities, other property or
assets (including cash) with respect to or in exchange for such Common Stock,
the Holders of the Debentures then outstanding will be entitled thereafter to
convert such Debentures into the kind and amount of shares of stock,
securities or other property or assets (including cash) which they would have
owned or been entitled to receive upon such reclassification, consolidation,
merger, sale or conveyance had such Debentures been converted immediately
prior to such reclassification, consolidation, merger, sale or conveyance
assuming that a Holder of Debentures would not have exercised any rights of
election as to the stock, securities or other property or assets (including
cash) receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock or in
certain other circumstances requiring an adjustment to the Conversion Rate,
the Holders of Debentures may, in certain circumstances, be deemed to have
received a distribution subject to U.S. federal income tax as a dividend; in
certain other circumstances, the absence of such an adjustment may result in a
taxable dividend to the holders of Common Stock. See "Certain Federal Income
Tax Considerations".
The Company from time to time may, to the extent permitted by law, increase
the Conversion Rate by any amount for any period of at least 20 days if the
Board has made a determination, in its sole discretion, that such increase
would be in the best interests of the Company, which determination shall be
conclusive. The Company will give notice of such increase at least 15 days'
prior to the increase. The Company may, at its option, make such increases in
the Conversion Rate, in addition to and subject to those set forth above, as
the Board deems advisable to avoid or diminish any
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income tax to holders of Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes. See "Certain Federal Income Tax
Considerations".
REDEMPTION OF DEBENTURES AT THE OPTION OF THE COMPANY
Prior to May 12, 2003, the Debentures are not redeemable at the option of
the Company. Beginning on May 12, 2003, the Company may redeem the Debentures
for cash as a whole at any time, or from time to time in part, upon not less
than 30 days' nor more than 60 days' notice of redemption given by mail to
Holders of Debentures, at a Redemption Price equal to the Issue Price of the
Debentures plus accrued Original Issue Discount through the date of
redemption. The Debentures will be redeemable in integral multiples of $1,000
principal amount at maturity.
The table below shows the Redemption Price of the Debentures per $1,000
principal amount at maturity at May 12, 2003 and at each May 12 thereafter
prior to maturity and at maturity on May 12, 2018, which prices reflect the
accrued Original Issue Discount calculated to each such date. The Redemption
Price of a Debenture redeemed between such dates would include an additional
amount reflecting the additional Original Issue Discount accrued since the
next preceding date in the table to the actual date of redemption.
<TABLE>
<CAPTION>
(2)
ACCRUED
ORIGINAL (3)
(1) ISSUE REDEMPTION
DEBENTURE DISCOUNT PRICE
ISSUE PRICE AT 7.0% (1) + (2)
----------- -------- ----------
<S> <C> <C> <C>
May 12, 2003................................. $252.57 $103.71 $ 356.28
May 12, 2004................................. 252.57 129.08 381.65
May 12, 2005................................. 252.57 156.27 408.84
May 12, 2006................................. 252.57 185.39 437.96
May 12, 2007................................. 252.57 216.58 469.15
May 12, 2008................................. 252.57 250.00 502.57
May 12, 2009................................. 252.57 285.79 538.36
May 12, 2010................................. 252.57 324.14 576.71
May 12, 2011................................. 252.57 365.21 617.78
May 12, 2012................................. 252.57 409.21 661.78
May 12, 2013................................. 252.57 456.35 708.92
May 12, 2014................................. 252.57 506.84 759.41
May 12, 2015................................. 252.57 560.93 813.50
May 12, 2016................................. 252.57 618.87 871.44
May 12, 2017................................. 252.57 680.94 933.51
May 12, 2018................................. 252.57 747.43 1,000.00
</TABLE>
Debentures registered in the name of DTC or its nominee will be redeemed as
described under "--Global Debentures; Book-Entry Form". If less than all of
the outstanding Debentures are to be redeemed when the Debentures are held in
definitive form, the Trustee shall select the Debentures to be redeemed in
principal amounts at maturity of $1,000 or integral multiples thereof by lot,
pro rata or by any other method the Trustee considers fair and appropriate (as
long as such method is not prohibited by the rules of any stock exchange on
which the Debentures are then listed). If a portion of a Holder's certificated
Debentures is selected for partial redemption and such Holder converts a
portion of such Debentures, such converted portion shall be deemed to be the
portion selected for redemption.
No sinking fund is provided for the Debentures.
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REDEMPTION AT THE OPTION OF THE HOLDER UPON A DEBENTURE CHANGE OF CONTROL
If a Debenture Change of Control occurs, each Holder has the right, at the
Holder's option, to require the Company to repurchase any or all of such
Holder's Debentures, on the date (the "Repurchase Date") that is 45 days after
the date of the Change of Control Company Notice (as defined below), at a
price (the "Debenture Change of Control Redemption Price") equal to the Issue
Price plus accrued Original Issue Discount to the Repurchase Date. The
Debentures are redeemable in integral multiples of $1,000 principal amount at
maturity.
The Company may, at its option, in lieu of paying the Debenture Change of
Control Redemption Price in cash, pay the Debenture Change of Control
Redemption Price or a portion thereof in Common Stock. If the Company elects
to pay the Debenture Change of Control Redemption Price, in whole or in part
in Common Stock, the number of shares to be delivered in respect of the
portion of the Debenture Change of Control Redemption Price to be paid in
Common Stock shall be equal to such portion of the Debenture Change of Control
Redemption Price divided by 95% of the Market Price of the Common Stock.
However, no fractional shares of Common Stock will be delivered upon any
purchase of Debentures by the Company through the delivery of Common Stock in
payment, in whole or in part, of the Debenture Change of Control Redemption
Price. Instead, the Company will pay cash based on the Market Price for all
fractional shares of Common Stock. The Company may elect to pay the Debenture
Change of Control Redemption Price in Common Stock only if the information
necessary to calculate the Market Price is reported in a daily newspaper of
national circulation.
Within 30 days after the occurrence of a Debenture Change of Control, the
Company is obligated to give to all Holders notice, as provided in the
Indenture (the "Change of Control Company Notice"), of the occurrence of such
Debenture Change of Control and of the repurchase right arising as a result
thereof. The Change of Control Company Notice shall be sufficiently given to
Holders if in writing and mailed, first class postage prepaid, to each Holder
affected by such event, at the address of such Holder. The Company must also
deliver a copy of the Change of Control Company Notice to the Trustee. To
exercise the repurchase right, a Holder must deliver on or before the 30th day
after the date of the Change of Control Company Notice written notice to the
Trustee of the Holder's exercise of such right, together with the Debentures
with respect to which the right is being exercised. At least two business days
prior to the Repurchase Date, the Company must publish a notice in the manner
described above specifying whether the Company will pay the Debenture Change
of Control Redemption Price in cash or in Common Stock, or combination thereof
(specifying the percentage of each). Any such notice by the Holder may be
withdrawn by the Holder by a written notice of withdrawal delivered to the
paying agent prior to the close of business on the Repurchase Date. The notice
of withdrawal shall state the principal amount at maturity and the certificate
numbers of the Debentures as to which the withdrawal notice relates and the
principal amount at maturity, if any, which remains subject to the Holder's
notice.
A Debenture Change of Control shall be deemed to have occurred at such time
as there shall occur:
(i) the acquisition by any Person other than the Permitted Holders and
their Related Parties of beneficial ownership, directly or indirectly,
through a purchase, merger or other acquisition transaction or series of
transactions, of shares of capital stock of the Company entitling such
Person to exercise 50% or more of the total voting power of all shares of
capital stock of the Company entitled to vote generally in elections of
directors, other than any such acquisition by the Company, any subsidiary
of the Company or any employee benefit plan of the Company, and such Person
beneficially owns more of such voting stock than the Permitted Holders and
their Related Parties; or
(ii) any consolidation of the Company with, or merger of the Company
into, any other Person other than the Permitted Holder and their Related
Parties, any merger of another Person other than the Permitted Holder and
their Related Parties into the Company, or any sale or
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transfer of all or substantially all of the assets of the Company to
another Person other than the Permitted Holder and their Related Parties
(other than (a) any such transaction (x) which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock and (y) pursuant to which holders of Common Stock
immediately prior to such transaction have the entitlement to exercise,
directly or indirectly, 50% or more of the total voting power of all shares
of capital stock entitled to vote generally in the election of directors of
the continuing or surviving Person immediately after such transaction and
(b) any merger which is effected solely to change the jurisdiction of
incorporation of the Company and results in a reclassification, conversion
or exchange of outstanding shares of Common Stock solely into shares of
common stock);
provided, however, that a Debenture Change of Control shall not be deemed to
have occurred if either (a) the closing price per share of the Common Stock
for any five Trading Days within the period of 10 consecutive Trading Days
ending immediately after the later of the Debenture Change of Control or the
public announcement of the Debenture Change of Control (in the case of a
Debenture Change of Control under clause (i) above) or ending immediately
before the Debenture Change of Control (in the case of a Debenture Change of
Control under clause (ii) above) shall equal or exceed 105% of the effective
conversion price in effect on each such Trading Day (i.e., the Issue Price
plus the accrued Original Issue Discount through such Trading Day, divided by
the Conversion Rate in effect on such Trading Day), or (b) all of the
consideration (excluding cash payments for fractional shares) in the
transaction or transactions constituting the Debenture Change of Control
consists of common stock traded on a national securities exchange or quoted on
the Nasdaq National Market and as a result of such transaction or transactions
the Debentures become convertible solely into such common stock. "Beneficial
ownership" shall be determined in accordance with Rule 13d-3 promulgated by
the Commission under the Exchange Act, as in effect on the date of original
execution of the Indenture.
"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 meaning, 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.
"Permitted Holders" means Goldman Sachs and any of its Affiliates.
"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.
"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.
If the paying agent holds, in accordance with the terms of the Indenture,
money or securities sufficient to pay the Debenture Change of Control
Redemption Price on the Business Day following the Repurchase Date, then, on
and after such date, such Debenture will cease to be outstanding and Original
Issue Discount and interest, if any, on such Debenture will cease to accrue
whether or not book-entry transfer of such Debenture is made or such Debenture
is delivered to the paying agent, and all other rights of the Holder shall
terminate (other than the right to receive the Debenture Change of Control
Redemption Price upon delivery of the Debenture).
The Company will comply with the provisions of Rule 13e-4 of the Exchange
Act and any other tender offer rules under the Exchange Act which may then be
applicable in connection with the redemption rights of Holders of the
Debentures in the event of a Debenture Change of Control.
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The redemption rights of the Holders of Debentures could discourage a
potential acquiror of the Company. The Debenture Change of Control redemption
feature, however, is not the result of management's knowledge of any specific
effort to obtain control of the Company by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series
of anti-takeover provisions.
The term "Debenture Change of Control" is limited to certain specified
transactions and may not include other events that might adversely affect the
financial condition of the Company, nor would the requirement that the Company
offer to repurchase the Debentures upon a Debenture Change of Control
necessarily afford the Holders of the Debentures protection in the event of a
highly leveraged transaction, reorganization, merger or similar transaction
involving the Company. Moreover, at the time a Debenture Change of Control
occurs, AMF Bowling may not have cash available to repurchase the Debentures
for cash. See "Risk Factors--Risks with respect to a Debenture Change of
Control or Change of Control" and "Description of Certain Indebtedness".
No Debentures may be redeemed at the option of Holders upon a Debenture
Change of Control if there has occurred and is continuing an Event of Default
described under "--Events of Default; Notice and Waiver" below (other than a
default in the payment of the Debenture Change of Control Redemption Price
with respect to such Debentures). In the event of a Debenture Change of
Control and exercise by Holders of the Debentures of their associated rights
to require the Company to redeem all or a portion of their Debentures, there
can be no assurance that the Company would have sufficient funds to pay the
redemption price in cash for all the Debentures tendered by the Holders
thereof. Any future credit agreements or other agreements relating to other
indebtedness to which the Company or its subsidiaries become a party may
contain similar default provisions and may provide that the maturing of any
obligation to redeem the Debentures upon a Debenture Change of Control would
constitute an event of default thereunder and may restrict or prohibit the
redemption of the Debentures. A Debenture Change of Control may also
constitute a Change of Control under the Subsidiary Indentures and an event of
default under the Credit Agreement. If a Debenture Change of Control occurs at
a time when the Company is prohibited from redeeming the Debentures, the
Company could seek the consent of its then existing lenders to redeem the
Debentures 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 would remain prohibited from redeeming the Debentures.
In such case, the Company's failure to redeem Debentures required to be
redeemed under the terms of the Indenture would constitute an Event of Default
under the Indenture.
PURCHASE OF DEBENTURES AT THE OPTION OF THE HOLDER
On May 12, 2003, May 12, 2008 and May 12, 2013 (each, a "Purchase Date"),
the Company will become obligated to purchase, at the option of the Holder
thereof, any outstanding Debenture for which a written Purchase Notice has
been delivered by the Holder to the office of the paying agent (initially the
Trustee) at any time from the opening of business on the date that is 20
Business Days (as hereinafter defined) prior to such Purchase Date until the
close of business on such Purchase Date and for which such Purchase Notice has
not been withdrawn, subject to certain additional conditions.
The Purchase Notice shall state (i) the certificate numbers of the
Debentures to be delivered by the Holder thereof for purchase by the Company;
(ii) the portion of the principal amount at maturity of Debentures to be
purchased, which portion must be $1,000 or an integral multiple thereof; (iii)
that such Debentures are to be purchased by the Company pursuant to the
applicable provisions of the Debentures; and (iv) if the Company elects,
pursuant to the Company Notice (as hereinafter defined), to pay the Purchase
Price to be paid as of such Purchase Date in Common Stock, in whole or in
part, but such Purchase Price is ultimately to be paid to such Holder entirely
in cash because any of the conditions to payment of the Purchase Price (or
portion thereof) in Common Stock is not satisfied by the Purchase Date, as
described below, whether such Holder
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elects (x) to withdraw such Purchase Notice as to some or all of the
Debentures to which it relates (stating the principal amount at maturity and
certificate numbers of the Debentures as to which such withdrawal shall
relate), or (y) to receive cash in respect of the entire Purchase Price for
all Debentures subject to such Purchase Notice. If the Holder fails to
indicate, in the Purchase Notice and in any written notice of withdrawal
relating to such Purchase Notice, such Holder's choice with respect to the
election described in clause (iv) above, such Holder shall be deemed to have
elected to receive cash in respect of the entire Purchase Price for all
Debentures subject to such Purchase Notice in such circumstances. For a
discussion of the tax treatment of a Holder receiving cash or Common Stock
pursuant to its election to tender its Debentures to the Company on a Purchase
Date, see "Certain Federal Income Tax Considerations".
Any Purchase Notice may be withdrawn by the Holder by a written notice of
withdrawal delivered to the paying agent prior to the close of business on the
Purchase Date. The notice of withdrawal shall state the principal amount at
maturity and the certificate numbers of the Debentures as to which the
withdrawal notice relates and the principal amount at maturity, if any, which
remains subject to the Purchase Notice.
The Purchase Price payable in respect of a Debenture shall be equal to the
Issue Price plus accrued Original Issue Discount to the Purchase Date. The
table below shows the Purchase Prices of a Debenture as of the specified
Purchase Dates. The Company may elect to pay the Purchase Price payable as of
any Purchase Date in cash or Common Stock or any combination thereof.
<TABLE>
<CAPTION>
PURCHASE DATE PRICE
------------- -------
<S> <C>
May 12, 2003......................................................... $356.28
May 12, 2008......................................................... 502.57
May 12, 2013......................................................... 708.92
</TABLE>
If the Company elects to pay the Purchase Price, in whole or in part, in
Common Stock, the number of shares to be delivered in respect of the portion
of the Purchase Price to be paid in Common Stock shall be equal to such
portion of the Purchase Price divided by the Market Price (as hereinafter
defined) of the Common Stock. However, no fractional Common Stock will be
delivered upon any purchase by the Company of Debentures through the delivery
of Common Stock in payment, in whole or in part, of the Purchase Price.
Instead, the Company will pay cash based on the Market Price for all
fractional Common Stock.
The Company will give notice (the "Company Notice") not less than 20
Business Days prior to the Purchase Date (the "Company Notice Date") to all
Holders at their addresses shown in the register of the registrar stating,
among other things, whether the Company will pay the Purchase Price of the
Debentures in cash or Common Stock, or a combination thereof (specifying the
percentage of each) and, if the Company elects to pay in Common Stock, in
whole or in part, the method of calculating the Market Price of the Common
Stock.
The "Market Price" means the average of the Sale Prices (as hereinafter
defined) of the Common Stock for the five Trading Day period ending on the
third Business Day prior to the applicable Purchase Date if the third Business
Day prior to the applicable Purchase Date is a Trading Day or, if it is not a
Trading Day, then on the last Trading Day prior to such third Business Day.
The Market Price will be appropriately adjusted to take into account the
occurrence during the period commencing on the first of such Trading Days
during such five Trading Day period and ending on such Purchase Date of
certain events that would result in an adjustment of the Conversion Rate under
the Indenture with respect to the Common Stock. The "Sale Price" of the Common
Stock on any date means the closing per share sale price (or if no closing
sale price is reported, the average bid and ask prices or, if more than one in
either case, the average of the average bid and average ask prices) on such
date as reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is traded or, if the Common
Stock is not listed on a United States national or regional stock exchange, as
reported by
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the Nasdaq National Market. Because the Market Price of the Common Stock is
determined prior to the applicable Purchase Date, Holders of Debentures bear
the market risk with respect to the value of the Common Stock to be received
from the date of determination of such Market Price to such Purchase Date. The
Company may elect to pay the Purchase Price in Common Stock only if the
information necessary to calculate the Market Price is reported in a daily
newspaper of national circulation.
Upon determination of the actual number of shares of Common Stock in
accordance with the foregoing provisions, the Company will publish such
determination in a daily newspaper of national circulation.
The Company's right to purchase Debentures with Common Stock is subject to
the satisfaction of various conditions, including compliance with applicable
federal and state securities laws, if any. If such conditions are not
satisfied by a Purchase Date, the Company will pay the Purchase Price of the
Debentures to be purchased on such Purchase Date entirely in cash. See
"Certain Federal Income Tax Considerations". The Company will comply with the
provisions of Rule 13e-4 of the Exchange Act and any other tender offer rules
under the Exchange Act which may then be applicable and will file a Schedule
13E-4 or any other schedule required thereunder in connection with any offer
by the Company to purchase Debentures at the option of Holders.
Payment of the Purchase Price for a Debenture for which a Purchase Notice
has been delivered and not withdrawn is conditioned upon book-entry transfer
or delivery of such Debenture (together with necessary endorsements) to the
paying agent (initially, the Trustee) at its office in the Borough of
Manhattan, The City of New York, or any other office of the paying agent
maintained for such purpose, at any time (whether prior to, on or after the
Purchase Date) after delivery of such Purchase Notice. Payment of the Purchase
Price for such Debenture will be made promptly following the later of the
Purchase Date or the time of book-entry transfer or delivery of such
Debenture. If the paying agent holds, in accordance with the terms of the
Indenture, money or securities sufficient to pay the Purchase Price of such
Debenture on the Business Day following the Purchase Date, then, on and after
such date, such Debenture will cease to be outstanding and Original Issue
Discount on such Debenture will cease to accrue whether or not book-entry
transfer of such Debenture is made or such Debenture is delivered to the
paying agent, and all other rights of the Holder shall terminate (other than
the right to receive the Purchase Price upon delivery of the Debenture).
No Debentures may be purchased at the option of the Holder for cash if there
has occurred (prior to, on or after the giving by the Holders of such
Debentures of the required Purchase Notice) and is continuing an Event of
Default described under "--Events of Default; Notice and Waiver" below (other
than a default in the payment of the Purchase Price with respect to such
Debentures).
If the Company becomes obligated to purchase any outstanding Debenture on a
Purchase Date, there can be no assurance that the Company would have
sufficient funds to pay the Purchase Price on that Purchase Date (in which
case, the Company could be required to issue shares of Common Stock to pay the
Purchase Price at valuations based on then prevailing market prices) for all
the Debentures tendered by the Holders thereof. Bowling Worldwide is
prohibited under both the Credit Agreement and the Subsidiary Indenture from
upstreaming funds by dividends, loans or otherwise, to redeem or repurchase
the Debentures. See "Risk Factors--Holding Company Structure". Although the
Credit Agreement does not currently prohibit the purchase of Debentures on a
Purchase Date, any future credit agreements (including an extension of the
Credit Agreement) or other agreements relating to other indebtedness to which
the Company or its Subsidiaries become a party may provide that the maturing
of any obligation to purchase the Debentures would constitute an event of
default thereunder and may restrict or prohibit the repurchase of the
Debentures. If a Purchase Date occurs at a time when the Company is prohibited
from repurchasing the Debentures, the Company could seek the consent of its
then existing lenders to repurchase the Debentures or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not
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obtain such a consent or repay such borrowings, the Company would remain
prohibited from repurchasing the Debentures. The Company's failure to
repurchase Debentures required to be repurchased under the terms of the
Indenture would constitute an Event of Default under the Indenture.
MERGERS AND SALES OF ASSETS BY THE COMPANY
The Company may not consolidate with or merge into any other person or
convey, transfer or lease its properties and assets substantially as an
entirety to another person, unless, among other items, (i) the resulting,
surviving or transferee person (if other than the Company) is organized and
existing under the laws of the United States, any state thereof or the
District of Columbia, (ii) such successor person assumes all obligations of
the Company under the Debentures and the Indenture and (iii) the Company or
such successor person shall not immediately thereafter be in default under the
Indenture. Upon the assumption of the Company's obligations by such person in
such circumstances, subject to certain exceptions, the Company shall be
discharged from all obligations under the Debentures and the Indenture.
Certain such transactions that would constitute a Debenture Change of Control
would permit each Holder to require the Company to redeem the Debentures of
such Holder as described under "--Redemption at the Option of the Holder Upon
a Debenture Change of Control".
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that, if an Event of Default specified therein has
occurred and is continuing, either the Trustee or the Holders of not less than
25% in aggregate principal amount at maturity of the Debentures then
outstanding may declare the Issue Price of the Debentures plus the Original
Issue Discount on the Debentures, interest, if any, and any Liquidated Damages
under the Debenture Registration Rights Agreement accrued to the date of such
declaration to be immediately due and payable. In the case of certain events
of bankruptcy or insolvency, the Issue Price of the Debentures plus the
Original Issue Discount, interest, if any, or any Liquidated Damages accrued
thereon to the occurrence of such event shall automatically become and be
immediately due and payable. Under certain circumstances, the Holders of a
majority in aggregate principal amount at maturity of the outstanding
Debentures may rescind any such acceleration with respect to the Debentures
and its consequences. Upon a default in the payment of the Issue Price,
accrued Original Issue Discount, accrued Liquidated Damages, if any, or any
Redemption Price, Purchase Price or Debenture Change of Control Redemption
Price, interest shall accrue at the rate of 7% per annum and be payable on
demand on any such unpaid amount to the extent that payment of such interest
shall be legally enforceable.
Under the Indenture, Events of Default are defined as: (i) default in
payment of the principal amount at maturity, Issue Price, accrued Original
Issue Discount, accrued Liquidated Damages, if any, interest, if any,
Redemption Price, Purchase Price or Debenture Change of Control Redemption
Price with respect to any Debenture when such becomes due and payable,
provided that in the case of any failure to pay Liquidated Damages, such
failure continues for a period of 30 days; (ii) failure by the Company to
comply with any of its other agreements in the Debentures or the Indenture
upon the receipt by the Company of notice of such default by the Trustee or by
Holders of not less than 25% in aggregate principal amount at maturity of the
Debentures then outstanding and the Company's failure to cure such default
within 60 days after receipt by the Company of such notice (plus an additional
60 days in the case of defaults subject to cure, provided the Company
commences such cure within the initial 60 days, and is diligently pursuing
such cure); (iii) default which results in acceleration of any indebtedness
for money borrowed by the Company or any of its subsidiaries in an aggregate
principal amount of $25 million or more; or (iv) certain events of bankruptcy
or insolvency.
The Trustee shall give notice to Holders of the Debentures of any continuing
default known to the Trustee within 90 days after the occurrence thereof,
provided that the Trustee may withhold
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such notice (except with respect to a default in payment) if it determines in
good faith that withholding the notice is in the interests of the Holders.
The Holders of a majority in aggregate principal amount at maturity of the
outstanding Debentures may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee; provided that such direction shall not be in
conflict with any law or the Indenture and subject to certain other
limitations. Before proceeding to exercise any right or power under the
Indenture at the direction of such Holders, the Trustee shall be entitled to
receive from such Holders reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities which might be incurred by it in
complying with any such direction. No Holder of any Debenture will have any
right to pursue any remedy with respect to the Indenture or the Debentures,
unless (i) such Holder shall have previously given the Company and the Trustee
written notice of a continuing Event of Default; (ii) the Holders of at least
25% in aggregate principal amount at maturity of the outstanding Debentures
shall have made a written request to the Trustee to pursue such remedy; (iii)
such Holder or Holders have offered to the Trustee reasonable indemnity
satisfactory to the Trustee; (iv) the Holders of a majority in aggregate
principal amount at maturity of the outstanding Debentures have not given the
Trustee a direction inconsistent with such request within 60 days after
receipt of such request; and (v) the Trustee shall have failed to comply with
the request within such 60-day period.
The right of any Holder (x) to receive payment of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, accrued Liquidated
Damages, if any, Redemption Price, Purchase Price, Debenture Change of Control
Redemption Price and any interest in respect of a default in the payment of
any such amounts on a Debenture, on or after the due date expressed in such
Debenture, (y) to institute suit for the enforcement of any such payments or
conversion, or (z) to convert Debentures into Common Stock shall not be
impaired or adversely affected without such Holder's consent. The Holders of
at least a majority in aggregate principal amount at maturity of the
outstanding Debentures may waive an existing default and its consequences,
other than (i) any default in any payment on the Debentures, (ii) any default
with respect to the conversion rights of the Debentures or (iii) any default
in respect of certain covenants or provisions in the Indenture which may not
be modified without the consent of the Holder of each Debenture as described
in "--Modification" below. The Company is required to furnish to the Trustee
annually a statement as to any default by the Company in the performance and
observance of its obligations under the Indenture.
REGISTRATION RIGHTS
The Company has agreed, pursuant to the Debenture Registration Rights
Agreement, to keep the Registration Statement effective until the earlier of
(i) the sale pursuant to the Registration Statement of all the securities
registered thereunder or (ii) the expiration of the holding period applicable
to such securities held by persons that are not affiliates of the Company
under Rule 144(k) under the Securities Act, or any successor provision. After
the end of this period, the Company will not be required to file or maintain
the effectiveness of any registration statement with respect to the Debentures
or the Common Stock issuable upon conversion, redemption or repurchase
thereof. The Company will be permitted to suspend the use of the Prospectus
that is a part of the Registration Statement under certain circumstances
relating to pending corporate developments, public filings with the Commission
and similar events for a period not to exceed 30 days in any three-month
period or not to exceed an aggregate of 90 days in any 12-month period;
provided, however, that the Company will be permitted to suspend the use of
the Prospectus for a period not to exceed 60 days in any 3-month period or 90
days in any 12-month period under certain circumstances relating to
acquisitions or similar transactions. The Company has agreed to pay
predetermined liquidated damages as described herein ("Liquidated Damages") to
Holders of Debentures and Holders of Common Stock issued upon conversion of
the Debentures if the
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Prospectus is unavailable for periods in excess of those permitted above. Such
Liquidated Damages shall accrue until such unavailability is cured, (i) in
respect of any Debenture, at a rate per annum equal to 0.25% for the first 90
day period after the occurrence of such event and 0.5% thereafter of the
Applicable Principal Amount (as hereinafter defined), and (ii) in respect of
any shares of Common Stock, at a rate per annum equal to 0.25% for the first
90 day period and 0.5% thereafter of the then Applicable Conversion Price (as
hereinafter defined).
A Holder who sells Debentures and Common Stock issued upon conversion of the
Debentures pursuant to the Registration Statement generally will be required
to be named as a selling stockholder in this Prospectus (or an amendment or
supplement hereto), deliver this Prospectus (as amended or supplemented) to
purchasers and be bound by certain provisions of the Debenture Registration
Rights Agreement that are applicable to such Holder (including certain
indemnification provisions). The Company has agreed to pay all fees and
expenses incident to the filing of the Registration Statement and maintaining
its effectiveness for resales of the Securities. In addition, in the event of
an underwritten offering, the Company will pay the fees and expenses incurred
by it in connection with such offering including those of its independent
counsel and accountants, and will also pay up to a maximum of $75,000 for the
fees and expenses of a single counsel selected by a plurality of all Holders
of the Debentures holding an aggregate of not less than 25% of the Securities
included in such offering to represent them in connection with such offering.
The Holders participating in such offering will be responsible (on a pro rata
basis based on the principal amount of the Securities included in such
offering) for all fees and expenses of such counsel in excess of $75,000.
Except as provided in the preceding two sentences, each Holder of Securities
included in the Registration Statement will be responsible for all
underwriting discounts and commissions payable in connection with the sale of
such Holder's Securities and any other fees and expenses incurred by it in
connection with the Registration Statement. The Company will provide to each
registered Holder copies of this Prospectus, notify each registered Holder
when the Registration Statement has become effective and take certain other
actions as are required to permit, subject to the foregoing, unrestricted
resales of the Debentures and the Common Stock issued upon conversion,
redemption or repurchase of the Debentures. The plan of distribution of the
Prospectus permits resales of the Securities by Selling Securityholders
through brokers and dealers. See "Plan of Distribution".
The term "Applicable Principal Amount" means, as of any date of
determination, with respect to each $1,000 principal amount at maturity of
Debentures, the Issue Price of such Debentures plus accrued Original Issue
Discount with respect to such Debentures through such date of determination
or, if no Debentures are then outstanding, such sum calculated as if such
Debentures were then outstanding. The term "Applicable Conversion Price"
means, as of any date of determination, the Applicable Principal Amount per
$1,000 principal amount at maturity of Debentures as of such date of
determination divided by the Conversion Rate in effect as of such date of
determination or, if no Debentures are then outstanding, the Conversion Rate
that would be in effect were Debentures then outstanding.
The Company has agreed in the Debenture Registration Rights Agreement to
give notice (a "Filing Notice") to all Holders of the filing and effectiveness
of the Registration Statement by release made to Reuters Economic Services and
Bloomberg Business News. A notice and questionnaire in the form attached to
the Debenture Registration Rights Agreement (the "Questionnaire") must be
completed and delivered by a holder to the Company within 30 days of such
Filing Notice. Any person that acquires any Securities from an electing holder
(excluding any Securities that were not identified in the Questionnaire
delivered by such electing holder) will be entitled to have such Securities
included in the Registration Statement so long as such transferee provides the
Company with an updated Questionnaire. If a Holder's or such transferee's
Questionnaire is received on or prior to the 10th day prior to the effective
time of the Registration Statement, such Holder or transferee will be entitled
to have such Holder's or transferee's Securities included in the Registration
Statement at the effective time. If any such Holder's or transferee's updated
Questionnaire is received subsequent to such 10th day, the Securities covered
by such Questionnaire will be
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included in the Registration Statement reasonably promptly after receipt
(which date of inclusion may be subsequent to the effective time of the
Registration Statement). Holders are required to complete and deliver the
Questionnaire prior to the effectiveness of the Registration Statement so that
such Holders may be named as selling securityholders in the related prospectus
at the time of effectiveness. Upon receipt of such a completed Questionnaire,
together with such other information as may be reasonably requested by the
Company, from a Holder following the effectiveness of the Registration
Statement, the Company will, as promptly as practicable but in any event
within five business days of such receipt, file such amendments to the
Registration Statement or supplements to the related prospectus as are
necessary to permit such Holder to deliver such prospectus to purchasers of
the Securities (subject to the Company's right to suspend the use of the
prospectus as described above). The Company has agreed to pay Liquidated
Damages in the amount set forth above to such Holder if the Company fails to
make such filing in the time required or, if such filing is a post-effective
amendment to the Registration Statement required to be declared effective
under the Securities Act, if such amendment is not declared effective within
45 days of the filing thereof. Any Holder that does not complete and deliver a
Questionnaire or provide such other information will not be named as a selling
securityholder in the prospectus and therefore will not be permitted to sell
any Securities pursuant to the Registration Statement.
The summary herein of certain provisions of the Debenture Registration
Rights Agreement is subject to, and is qualified in its entirety by reference
to, all the provisions of the Debenture Registration Rights Agreement, which
has been filed as Exhibit 4.8 to the Registration Statement.
MODIFICATION
Modification and amendment of the Indenture or the Debentures may be
effected by the Company and the Trustee with the consent of the Holders of not
less than a majority in aggregate principal amount at maturity of the
Debentures then outstanding. Notwithstanding the foregoing, no such amendment
may, without the consent of each Holder affected thereby: (i) reduce the
principal amount at maturity, Issue Price, Purchase Price, Debenture Change of
Control Redemption Price or Redemption Price, or extend the stated maturity of
any Debenture or alter the manner or rate of accrual of Original Issue
Discount, interest or Liquidated Damages, or make any Debenture payable in
money or securities other than that stated in the Debenture; (ii) make any
change to the principal amount at maturity of Debentures whose Holders must
consent to an amendment or any waiver under the Indenture or modify the
Indenture provisions relating to such amendments or waivers; (iii) make any
change that adversely affects the right to convert any Debenture or the right
to require the Company to purchase a Debenture or the right to require the
Company to repurchase a Debenture upon a Debenture Change of Control; or (iv)
impair the right to institute suit for the enforcement of any payment with
respect to, or conversion of, the Debentures. The Indenture also provides for
certain modifications of its terms without the consent of the Holders.
TAXATION OF DEBENTURES
See "Certain Federal Income Tax Considerations" for a discussion of certain
tax aspects which will apply to a Holder of Debentures.
INFORMATION CONCERNING THE TRUSTEE
The Bank of New York, as Trustee under the Indenture, has been appointed by
the Company as paying agent, conversion agent, registrar and custodian with
regard to the Debentures.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Certificate of Incorporation and By-Laws is a summary and is
qualified in its entirety by the provisions of the Certificate of
Incorporation and By-Laws, filed as Exhibits 3.1 and 3.2, respectively, to the
Registration Statement.
The authorized capital stock of the Company consists of (i) 200,000,000
shares of Common Stock, par value $.01 per share, of which 59,747,550 shares
were outstanding as of October 23, 1998, and (ii) 50,000,000 shares of
Preferred Stock, of which no shares are outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted on by the stockholders of AMF Bowling and do not have cumulative
voting rights. Accordingly, holders of a majority of the outstanding shares of
Common Stock entitled to vote in any election of directors of AMF Bowling may
elect all of the directors of AMF Bowling standing for election. As a result
of its ownership of 50.9% of the outstanding Common Stock and the terms of the
Stockholders Agreement, GSCP has the ability to control the election of a
majority of the Board, appoint new management and approve or block any action
requiring the approval of AMF Bowling's stockholders, including adopting
amendments to the Certificate of Incorporation and approving mergers or sales
of substantially all of AMF Bowling's assets, in each case, subject to the
restrictions contained in the Stockholders Agreement. The Stockholders
Agreement also provides for three of the investment funds which are
stockholders of AMF Bowling each to nominate a director with each such nominee
being subject to GSCP's consent, and for the formation of the Executive
Committee.
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of AMF Bowling, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of AMF Bowling's
liabilities and the liquidation preference, if any, of any outstanding
Preferred Stock. Holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock issuable upon
conversion or repurchase of the Debentures will be, when issued and paid for,
fully paid and non-assessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which AMF
Bowling may designate and issue in the future.
The Common Stock is listed on the NYSE under the symbol "PIN".
PREFERRED STOCK
The Board is authorized to issue from time to time 50,000,000 shares of
Preferred Stock in one or more series, and to fix the rights, designations,
powers, preferences, qualifications, limitations and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series, all without stockholder approval. The
ability of the Board to issue Preferred Stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring or making a proposal to acquire, AMF Bowling or a
majority of the outstanding stock of AMF Bowling. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of holders of Preferred Stock that may be issued in the future. See "Risk
Factors--Anti-Takeover Effects of Certain Certificate of Incorporation and By-
Laws Provisions".
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RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Certificate of Incorporation authorizes the Board to create and issue
rights or options entitling the holders thereof to purchase from AMF Bowling
shares of stock or other securities of AMF Bowling or any other corporation.
The times at which and terms upon which such rights or options are issued may
be determined by the Board and set forth in the contracts or other instruments
that evidence such rights. The authority of the Board with respect to such
rights or options includes, but is not limited to, determination of (i) the
initial purchase price per share or other unit of the stock or other
securities or property to be purchased upon exercise of such rights or
options, (ii) provisions relating to the times at which and the circumstances
under which such rights or options may be exercised or sold or otherwise
transferred, either together with or separately from any other stock or other
securities of AMF Bowling, (iii) provisions that adjust the number or exercise
price of such rights or options or amount or nature of the stock or other
securities or property receivable upon exercise of such rights or options in
the event of a combination, split or recapitalization of any stock of AMF
Bowling, a change in ownership of AMF Bowling's stock or other securities or a
reorganization, merger, consolidation, sale of assets or other occurrence
relating to AMF Bowling or any stock of AMF Bowling, and provisions
restricting the ability of AMF Bowling to enter into any such transaction
absent an assumption by the other party or parties thereto of the obligations
of AMF Bowling under such rights or options, (iv) provisions that deny the
holder of a specified percentage of the outstanding stock or other securities
of AMF Bowling the right to exercise such rights or options and/or cause such
rights held by such holder to become void, (v) provisions that permit AMF
Bowling to redeem or exchange such rights or options and (vi) the appointment
of the rights agent with respect to such rights or options. This provision is
intended to confirm the authority of the Board to issue share purchase rights
or other rights or options to purchase stock or securities of AMF Bowling or
any other corporation. The affirmative vote of holders of at least 80% of the
voting power of the then outstanding shares of capital stock of AMF Bowling
entitled to vote generally in the election of directors, voting together as a
single class, is required to amend or repeal or adopt any provisions
inconsistent with the provisions described in this section under the caption
"Rights to Purchase Securities and Other Property". The ability of the Board
to issue such securities could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring or
making a proposal to acquire, AMF Bowling or a majority of the outstanding
stock of AMF Bowling.
LIMITATIONS ON DIRECTORS' LIABILITY
The Certificate of Incorporation and By-Laws limit the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
currently permits corporations to provide in their certificates of
incorporation that directors of the corporation will not be personally liable
for monetary damages for breach of their fiduciary duties as directors or
officers, except liability for (i) breach of the directors' and officers' duty
of loyalty to the corporation or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of the law, (iii) the unlawful payment of a dividend or unlawful stock
purchase or redemption and (iv) any transaction from which directors or
officers derive an improper personal benefit. Delaware law does not permit a
corporation to eliminate a director's duty of care, and this provision of the
certificate of incorporation has no effect on the availability of equitable
remedies, such as injunction or rescission, based upon a director's breach of
the duty of care.
These provisions will not limit liability under federal or state securities
laws. AMF Bowling believes that these provisions will assist AMF Bowling in
attracting and retaining qualified individuals to serve as directors.
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SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
AMF Bowling has elected in the Certificate of Incorporation to not be
subject to the provisions of Section 203 of the Delaware General Corporation
Law, which restricts certain business combinations between a Delaware
corporation and an "interested stockholder" (generally, a holder of 15% or
more of a corporation's voting stock).
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT AGREEMENT
Bowling Worldwide is party to a Credit Agreement amended and restated as of
November 3, 1997 (as amended by Amendment No. 1 and Waiver to the Third
Amended and Restated Credit Agreement, dated as of September 30, 1998 (the
"Amendment and Waiver"), 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 "Bank
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 a predecessor of 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 including the Amendment and Waiver. A copy of the Credit Agreement
has been filed as Exhibit 10.2 to the Registration Statement. A copy of the
Amendment and Waiver has been filed as Exhibit 10.32 to the Registration
Statement.
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 Loan Facility bears interest, at Bowling Worldwide's
option, at Citibank's customary base rate or at Citibank's Eurodollar rate, in
each case plus a margin which varies in accordance with a performance pricing
grid which is based on the Total Debt to EBITDA Ratio (as defined in the
Credit Agreement) for the Rolling Period (as hereinafter defined) then most
recently ended.
The margin applicable to loans bearing interest based on the base rate will
range from 0.000% to 2.000%, for advances under the Term Loan Facility, 0.875%
to 2.500%, for advances under the AXELs SM Series A Facility, and 1.125% to
2.750%, for advances under the AXELs SM Series B Facility, and the margin
applicable to loans bearing interest based on the Eurodollar rate will range
from 0.750% to 3.000%, for advances under the Term Loan Facility, 1.875% to
3.500%, for advances under AXELs SM Series A Facility, and 2.125% to 3.750%,
for advances under the AXELs SM Series B Facility.
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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.
Average amounts outstanding and average borrowing rates for the period ended
September 30, 1998, were as follows (dollars in millions):
<TABLE>
<CAPTION>
OUTSTANDING AVERAGE AVERAGE
SEPTEMBER 30, AMOUNTS BORROWING
DESCRIPTION MATURITY DATES 1998 OUTSTANDING RATES
- ----------- -------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Term Loan Facility...... March 31, 2002 $108,750 $116,419 7.52%
AXELs SM Series A
Facility............... March 31, 2003 $185,500 $186,163 7.77%
AXELs SM Series B
Facility............... March 31, 2004 $135,593 $136,339 8.02%
Bank Facility........... March 31, 2002 $188,003 $172,381 7.62%
</TABLE>
As most recently amended and restated, the Credit Agreement will require
Bowling Worldwide 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>
The Bank 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 Bowling Worldwide's option, at Citibank's customary base rate or
at Citibank's Eurodollar rate, in each case, plus a margin which varies in
accordance with a performance pricing grid which is based on the Total
Debt/EBITDA Ratio (as hereinafter defined) for the Rolling Period (as
hereinafter defined) then most recently ended. The margin applicable to
advances under the Bank Facility bearing interest based on the base rate will
range from 0.000% to 2.000% and the margin applicable to advances under the
Bank Facility bearing interest based on the Eurodollar rate will range from
0.750% to 3.000%.
In addition, Bowling Worldwide will be required to make prepayments which
permanently reduce the availability under the Senior Facilities under certain
circumstances, including upon certain asset sales and issuances of debt by
Bowling Worldwide and its subsidiaries and public issuance of equity
securities of AMF Bowling. Bowling Worldwide 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
Bowling Worldwide if the Total Debt to EBITDA Ratio for that fiscal year is
greater than or equal to 5.50 to 1.0 (except that for the fiscal year ending
December 31, 1998, such payment would be the lesser of (x) 50% of the Excess
Cash Flow (as defined in the Credit Agreement) for that fiscal year or (y) the
amount by which such Excess Cash Flow exceeds $20 million). If the Total Debt
to EBITDA Ratio for that fiscal year is less than 5.50 to 1.0, then Bowling
Worldwide is required to prepay the Bank Facility in an amount equal to up to
50% of the Excess Cash Flow for such fiscal year (except that for the fiscal
year ending December 31, 1998, such payment would be the lesser of (x) 50% of
the Excess Cash Flow for that fiscal year or (y) the amount by which such
Excess Cash Flow exceeds $20 million), but Bowling Worldwide 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 Initial Public Offering be used to
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repay borrowings under the Bank Facility (and thus would be available for
reborrowing), and the remaining net cash proceeds from the Initial Public
Offering be used, at Bowling Worldwide's option, to redeem a portion of the
Subsidiary Senior Subordinated Notes and/or the Subsidiary Senior Subordinated
Discount Notes and/or to repay borrowings under the Bank Facility. Using the
net proceeds of the Initial Public Offering, the Company repaid $150.8 million
of borrowings under the Credit Agreement and redeemed $118.9 million in
principal of the Subsidiary Senior Subordinated Discount Notes. See "Note 9.
Long-Term Debt" in the Notes to the Consolidated Financial Statements.
The Senior Facilities are guaranteed by AMF Group Holdings and by each of
Bowling Worldwide's present and future domestic Subsidiaries (as defined in
the Credit Agreement) and are secured by all of the stock of Bowling Worldwide
and Bowling Worldwide's present and future domestic Subsidiaries and Second-
Tier Subsidiaries (as defined in the Credit Agreement), by 66% of the stock of
Bowling Worldwide's present and future international subsidiaries and by
substantially all of Bowling Worldwide's and its present and future domestic
Subsidiaries' present and future property and assets.
The Company incurred after-tax extraordinary charges totaling $23.4 million
in the fourth quarter of 1997 as a result of entering into the third amendment
and restatement of the Credit Agreement, the premium paid to redeem a portion
of the Subsidiary Senior Subordinated Discount Notes with the proceeds of the
Initial Public Offering and the write-off of the portion of deferred financing
costs attributable to the Subsidiary Senior Subordinated Discount Notes
redeemed. See "Note 9. Long-Term Debt" in the Notes to Consolidated Financial
Statements and "Selected Quarterly Data" included elsewhere herein.
Covenants
The Credit Agreement contains certain financial covenants, as well as
additional affirmative and negative covenants, constraining Bowling Worldwide.
Under the terms currently in effect, Bowling Worldwide must maintain a minimum
Modified Consolidated EBITDA (as hereinafter defined) of not less than the sum
of (i) an amount ranging from $150 million for the "Rolling Period" (as
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 Bowling Worldwide or any of its
Subsidiaries after May 1, 1996 and acquired or constructed at least 15 months
prior to such time of determination, except for the quarters ending September
30, 1998 through and including December 31, 1999 during which time there will
be no EBITDA Adjustment Amount.
Bowling Worldwide must also maintain a Cash Interest Coverage Ratio (as
defined in the Credit Agreement as the ratio of (i) consolidated EBITDA of
Bowling Worldwide and its Subsidiaries during a Rolling Period, as modified
with respect to certain bowling centers acquired or constructed after May 1,
1996 ("Modified Consolidated EBITDA") to (ii) cash interest payable on all
Debt (as defined in the Credit Agreement) of Bowling Worldwide and its
Subsidiaries) at an amount ranging from not less than 1.80 to not less than
2.75. Bowling Worldwide is required to maintain a Fixed Charge Coverage Ratio
(as defined in the Credit Agreement as the ratio of (i) Modified Consolidated
EBITDA less the sum of (a) cash taxes paid plus (b) Capital Expenditures (as
defined in the Credit Agreement) made by Bowling Worldwide and its
Subsidiaries during such Rolling Period to (ii) the sum of (a) cash interest
payable on all Debt plus (b) principal amounts of all Debt under the Term
Facilities payable by Bowling Worldwide and its Subsidiaries during such
Rolling Period) at an amount ranging from not less than 1.05 for the Rolling
Period ending June 30, 1997, to not less than 1.20 for the Rolling Period
ending June 30, 2001 and declining to 1.00 for the Rolling Period ending March
31, 2002 and thereafter, except for the quarters ending September 30, 1998
through December 31, 1999 during which time the test for the Fixed Charge
Coverage Ratio covenant is waived. A Senior Debt to
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EBITDA Ratio (as defined in the Credit Agreement as the ratio of Consolidated
Debt, as defined in the Credit Agreement (other than Subordinated Debt and
Hedge Agreements, as defined in the Credit Agreement), of Bowling Worldwide
and its Subsidiaries to Modified Consolidated EBITDA for that Rolling Period)
must be maintained at levels ranging from not more than 4.25 to not more than
2.50. A Total Debt to EBITDA Ratio (as defined in the Credit Agreement as the
ratio of consolidated total Debt (other than Hedge Agreements) of Bowling
Worldwide and its Subsidiaries to Modified Consolidated EBITDA) must be
maintained at levels ranging from not more than 7.50 to not more than 4.50. 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(1)
------------------------------------------------------------------------------------
7/1/96 7/1/97 7/1/98 1/1/99 7/1/99 1/1/00 7/1/00 7/1/01 7/1/02 7/1/03
THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH AND
FINANCIAL ESTIMATIONS 6/30/97 6/30/98 12/31/98 6/30/99 12/31/99 6/30/00 6/30/01 6/30/02 6/30/03 THEREAFTER
- --------------------- ------- ------- -------- ------- -------- ------- ------- ------- ------- ----------
<S> <C> <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).. 150 150 150 145 145 165 175 185 195 200
CASH INTEREST COVERAGE
RATIO(4)
Not less than: ........ 2.00 2.25 1.90 1.85 1.80 2.75 2.75 2.50 2.75 2.75
FIXED CHARGE COVERAGE
RATIO(5)
Not less than: ........ 1.05 1.10 Waived Waived Waived 1.20 1.20 1.00 1.00 1.00
SENIOR DEBT TO EBITDA
RATIO(6)
Not less than: ........ 3.75 3.60 4.00 4.25 4.25 3.25 3.00 2.50 2.50 2.50
TOTAL DEBT TO EBITDA
RATIO(7)
Not less than: ........ 6.50 6.00 7.00 7.50 7.50 5.50 5.00 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 Bowling Worldwide 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 hereinafter
defined), Modified Consolidated EBITDA shall be calculated using Adjusted
EBITDA (as hereinafter defined) 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 hereinafter
defined). "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 hereinafter defined) 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 Bowling Worldwide 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 Bowling Worldwide or any of its Subsidiaries
after May 1, 1996 and acquired or constructed at least 15 months prior to
such time of determination, except for the quarters ending September 30,
1998 through December 31, 1999 during which time there will be no EBITDA
Adjustment Amount.
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(4) The ratio of Modified Consolidated EBITDA to cash interest payable on all
debt of Bowling Worldwide 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 Bowling Worldwide 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 Bowling
Worldwide and its Subsidiaries during such Rolling Period, except for the
quarters ending on September 30, 1998 through December 31, 1999 during
which time the Fixed Charge Coverage Ratio covenant is waived.
(6) Ratio of Consolidated debt (other than Subordinated Debt and Hedge
Agreements) of Bowling Worldwide and its Subsidiaries to Modified
Consolidated EBITDA.
(7) Ratio of Consolidated total debt (other than Hedge Agreements (as defined
in the Credit Agreement)) of Bowling Worldwide and its Subsidiaries to
Modified Consolidated EBITDA.
Affirmative covenants under the Credit Agreement oblige Bowling Worldwide
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). Bowling Worldwide 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") following the occurrence and during the continuance of a
Default, at such time as any new direct or indirect Subsidiary of Bowling
Worldwide is formed or acquired by Bowling Worldwide and the Guarantors (each,
a "Loan Party"), or when any property is acquired by any Loan Party). Bowling
Worldwide 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 Bowling Worldwide
and its Subsidiaries from incurring any liens (except for those created under
the loan documents or otherwise permitted under the Credit Agreement,
including those securing Bowling Worldwide's obligations as borrower on other
indebtedness not to exceed $5 million at any time outstanding). Bowling
Worldwide and its Subsidiaries are also prohibited from incurring any debt,
other than (in the case of Bowling Worldwide) debt owed to its Subsidiaries or
in respect of hedge agreements not entered into for speculative purposes or
(in the case of any Subsidiary) debt owed to Bowling Worldwide or any of its
wholly owned Subsidiaries, to the extent permitted under the Credit Agreement
or (in the case of either Bowling Worldwide or its Subsidiaries) debt secured
by permitted liens, capitalized leases not to exceed $10 million at any time
outstanding and any debt existing at the time of the Acquisition, among other
things. Bowling Worldwide and its Subsidiaries may not incur any obligations
under leases having a term of one year or more that would cause their direct
and contingent liabilities for any 12 months to exceed the sum of (i) $25
million, (ii) the product of (x) $200,000 and (y) the number of leased bowling
centers acquired by Bowling Worldwide or any Subsidiaries after May 1, 1996
and (iii) in each calendar year after 1996, an amount equal to 4% of the
amount permitted by this provision in the immediately preceding calendar year.
Bowling Worldwide is also prohibited from entering into a merger of which it
is not the survivor or to sell, lease, or otherwise transfer its assets
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other than in the ordinary course of business, except as otherwise permitted
by the Credit Agreement. Investments by Bowling Worldwide or its Subsidiaries
in any other person are also limited by formulas set forth in the Credit
Agreement. The Amendment and Waiver restricts to a much greater extent than
before the Company's ability to borrow to finance acquisitions. The negative
covenants also relate to the payment of dividends, prepayments of, and
amendments of the terms of, other debt (including the Subsidiary Notes),
amendment of Related Documents (as defined in the Credit Agreement), ownership
changes, negative pledges, partnerships, speculative transactions, capital
expenditures and payment restrictions affecting subsidiaries. Bowling
Worldwide is also subject to certain financial and other reporting
requirements.
Bowling Worldwide 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.
So long as Bowling Worldwide is not in default of the covenants contained in
the Credit Agreement, it may (i) declare and pay dividends in common stock,
(ii) declare and pay cash dividends to the extent necessary to make payments
under certain noncompete agreements with 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 Common Stock. As of September 30, 1998,
Bowling Worldwide 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 Bowling Worldwide 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 Bowling
Worldwide 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;
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(h) the rendering of any non-monetary judgment or order against any Loan
Party or any 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 on and security interest in the
collateral purported to be protected thereby;
(l) AMF Bowling ceases to own and control legally and beneficially all of
the outstanding shares of capital stock of AMF Group Holdings;
(m) AMF Group Holdings ceases to own and control legally and beneficially
all of the outstanding shares of capital stock of Bowling Worldwide;
(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 (as defined in the Credit
Agreement) 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
September 30, 1998, 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 September 30,
1998 was $0.1 million, and the final payment is due in 1999. This obligation
is reflected in other liabilities on the balance sheet of Holdings.
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SUBSIDIARY NOTES
At September 30, 1998, Bowling Worldwide had outstanding $250.0 million in
principal amount of 10 7/8% Subsidiary Senior Subordinated Notes due 2006 and
$206.8 million principal amount of 12 1/4% Subsidiary Senior Subordinated
Discount Notes due 2006. The following description of the Subsidiary Notes and
the Subsidiary Indentures is a summary and is qualified in its entirety by the
provisions of the Subsidiary Notes, which have been filed as Exhibits 4.4 and
4.5 to the Registration Statement, and the Subsidiary Indentures, which have
been filed as Exhibits 4.1 and 4.2 to the Registration Statement.
The Subsidiary Senior Subordinated Notes will mature on March 15, 2006.
Interest thereon accrues from the date of issuance at an annual rate of 10
7/8% and is payable in cash semiannually in arrears on March 15 and September
15 of each year which commenced on September 15, 1996.
Prior to December 15, 1997, the Subsidiary Senior Subordinated Discount
Notes had a fully-accreted value of $452.0 million based on a maturity date of
March 15, 2006. On December 15, 1997, the Company redeemed $118.9 million in
principal which represented a fully-accreted value of $175.0 million using a
portion of a capital contribution received from AMF Bowling attributable to
proceeds received by AMF Bowling from the Initial Public Offering. The
remaining balance of Subsidiary Senior Subordinated Discount Notes will mature
on March 15, 2006, at a fully-accreted value of $277.0 million. The Subsidiary
Senior Subordinated Discount Notes will result in an effective yield of 12
1/4% per annum, computed on a semiannual bond equivalent basis. No interest is
payable prior to March 15, 2001. Commencing March 15, 2001, interest will
accrue and be payable in cash semiannually in arrears on March 15 and
September 15 of each year beginning with September 15, 2001.
Bowling Worldwide's payment obligations under the Subsidiary Notes are
jointly and severally guaranteed on a senior subordinated basis by Bowling
Worldwide's direct and indirect domestic subsidiaries and by any other
subsidiaries of Bowling Worldwide that act as guarantors under the Credit
Agreement (collectively, the "Guarantors").
The guarantees of the Subsidiary Notes are subordinated to the guarantees of
the indebtedness under the Credit Agreement and certain other indebtedness
(collectively, the "Senior Debt"). The Subsidiary Notes are general, unsecured
obligations of Bowling Worldwide, are subordinated in right of payment to all
Senior Debt of Bowling Worldwide, and rank pari passu with all existing and
future subordinated debt of Bowling Worldwide. The claims of the holders of
the Subsidiary Notes will be effectively subordinated to all other
indebtedness and other liabilities (including trade payables and capital lease
obligations) of Bowling Worldwide's subsidiaries that are not Guarantors and
through which Bowling Worldwide will conduct a portion of its operations.
Prior to March 15, 1999, up to $100 million in aggregate principal amount of
Subsidiary Senior Subordinated Notes will be redeemable at the option of
Bowling Worldwide, on one or more occasions, from the net proceeds of public
or private sales of common stock of, or contributions to the common equity
capital of, Bowling Worldwide, at a price of 110.875% of the principal amount
of the Senior Subordinated Notes, together with accrued and unpaid interest,
if any, to the date of redemption, so long as at least $150 million in
aggregate principal amount of Subsidiary Senior Subordinated Notes remains
outstanding after such redemption. Similarly, prior to March 15, 1999, the
Subsidiary Senior Subordinated Discount Notes will be redeemable at the option
of Bowling Worldwide, on one or more occasions, from the net proceeds of
public or private sales of common stock of, or contributions to the common
equity capital of, Bowling Worldwide, at a price of 112.25% of the accreted
value of the Subsidiary Senior Subordinated Discount Notes, so long as at
least $150 million in accreted value of Subsidiary Senior Subordinated
Discount Notes remains outstanding after such redemption.
The Subsidiary Indentures contain certain covenants that, among other
things, limit the ability of the Company and its Restricted Subsidiaries (as
defined in the applicable Subsidiary Indenture) to incur additional
indebtedness and issue Disqualified Stock (as defined in the applicable
Subsidiary Indenture), pay dividends or distributions or make investments or
make certain other Restricted
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Payments (as defined in the applicable Subsidiary Indenture), enter into
certain transactions with affiliates, dispose of certain assets, incur liens
securing pari passu and subordinated indebtedness of Bowling Worldwide and
engage in mergers and consolidations. As of March 31, 1998, Bowling Worldwide
is in compliance with all of its covenants under the Subsidiary Indentures.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income tax
considerations relevant to holders of the Debentures and Common Stock into
which the Debentures may be converted. This discussion is based upon the Code,
Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect) or different interpretations. There can be no assurance
that the IRS will not challenge one or more of the tax consequences described
herein, since the Company has not obtained, and does not intend to obtain, a
ruling from the IRS with respect to the U.S. federal income tax consequences
of acquiring, holding or disposing of the Debentures or Common Stock.
This discussion does not purport to address all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Code). Also, it is not intended to be wholly
applicable to all categories of investors, some of which (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, and persons
holding Debentures or Common Stock as part of a hedging or conversion
transaction or straddle, persons deemed to sell Debentures or Common Stock
under the constructive sale provisions of the Code, U.S. Holders (as
hereinafter defined) whose functional currency is not the U.S. dollar and
persons who have ceased to be U.S. citizens or to be taxed as resident aliens)
may be subject to special rules. The discussion also does not discuss any
aspect of state, local or foreign law as applicable to either or both U.S.
Holders (as hereinafter defined) and non-U.S. Holders (as hereinafter
defined), or U.S. federal estate and gift tax law as applicable to U.S.
Holders (as hereinafter defined). In addition, this discussion is limited to
purchasers of Debentures who hold the Debentures and any Common Stock into
which the Debentures are converted as "capital assets" within the meaning of
Section 1221 of the Code.
ALL PROSPECTIVE PURCHASERS OF THE DEBENTURES ARE ADVISED TO CONSULT THEIR
OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP, CONVERSION AND DISPOSITION OF THE
DEBENTURES AND THE COMMON STOCK.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means the beneficial holder of a
Debenture or Common Stock that for United States federal income tax purposes
is (i) a citizen or resident of the United States, (ii) a corporation formed
under the laws of the United States or any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or (iv) a trust, if a court within the United States
is able to exercise primary jurisdiction 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-U.S. Holder" is any holder other
than a U.S. Holder.
ORIGINAL ISSUE DISCOUNT ON THE DEBENTURES
The Debentures were issued at a substantial discount from their stated
redemption price at maturity. For federal income tax purposes, the excess of
the stated redemption price at maturity of each Debenture over its issue price
constitutes original issue discount ("Original Issue Discount"). The issue
price of the Debentures equals the initial price at which a substantial amount
of the Debentures is sold (not including sales to the underwriters or
placement agents, including the Initial
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Purchasers). U.S. Holders of the Debentures will be required to include
Original Issue Discount in income as it accrues, in accordance with the
constant yield method described below, before receipt of the cash attributable
to such income, regardless of such U.S. Holder's regular method of accounting
for United States federal income tax purposes. A U.S. Holder of a Debenture
must include in gross income for federal income tax purposes the sum of the
daily portions of Original Issue Discount with respect to the Debenture for
each day during the taxable year or portion of a taxable year on which such
U.S. Holder holds the Debenture. The daily portion is determined by allocating
to each day of each accrual period a pro rata portion of an amount equal to
the adjusted issue price of the Debenture at the beginning of the accrual
period multiplied by the yield to maturity of the Debenture (determined by
compounding at the close of each accrual period and adjusted for the length of
the accrual period). The adjusted issue price of a Debenture at the start of
any accrual period will be the issue price of the Debenture increased by the
accrued Original Issue Discount for each prior accrual period. Under these
rules, U.S. Holders will have to include in gross income increasingly greater
amounts of Original Issue Discount in each successive accrual period. A U.S.
Holder's original tax basis for determining gain or loss on the sale or other
disposition of a Debenture will be increased by any accrued Original Issue
Discount includible in such U.S. Holder's gross income.
There are several circumstances under which the Company could make a payment
that would affect the yield to maturity of a Debenture, including (as
described under "Description of Debentures"), the payment of Liquidated
Damages due to failure to effect the registration of the Debentures pursuant
to the Registration Statement and the redemption or repurchase of Debentures.
According to Treasury Regulations, the possibility of a change in yield will
not be treated as affecting the amount of Original Issue Discount required to
be realized by a holder (or the timing of such recognition) if the likelihood
of the change, as of the date the debt obligation is issued, is remote. The
Company intends to report on the basis that the likelihood of any change in
the yield on the Debentures is remote. The Company also intends to report on
the basis that there is no alternative payment schedule that would minimize
the yield on the Debentures to the Company.
MARKET DISCOUNT
A U.S. Holder acquiring a Debenture at a "market discount" (as hereinafter
defined) must generally treat as ordinary income any gain realized on the
disposition or retirement of the Debenture (among other events) to the extent
that the market discount has accrued during the U.S. Holder's period of
ownership. Any accrued market discount not previously taken into income prior
to a conversion of a Debenture may carry over to the Common Stock received
upon conversion of the Debenture and be treated as ordinary income upon a
subsequent disposition of such Common Stock to the extent of any gain
recognized on such disposition.
A "market discount" exists if (i) the amount for which a U.S. Holder
purchased the Debenture is less than the Debenture's Issue Price and (ii) the
Debenture's adjusted issue price exceeds the amount for which the U.S. Holder
purchased the Debenture by at least 1/4 of 1 percent of such Debenture's
revised issue price multiplied by the number of complete years to the
Debenture's maturity. The Code provides that, for these purposes, the "revised
issue price" of a Debenture generally equals its Issue Price, increased by the
amount of any Original Issue Discount that has accrued on the Debenture. The
market discount accrued during the U.S. Holder's period of ownership will
generally equal a ratable portion of the Debenture's market discount, based on
the number of days the U.S. Holder has held the Debenture at the time of such
disposition or retirement, as a percentage of the number of days from the date
the U.S. Holder acquired the Debenture to its date of maturity.
Subject to certain limitations, a U.S. Holder may elect to include the
market discount in gross income during the period of ownership (rather than
upon disposition, retirement or certain other events) based on a constant
yield method, taking into account compounding of interest. Any such election
will also constitute an election to include market discount in income
currently on all other
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bonds and notes acquired by such U.S. Holder on or after the first day of the
first taxable year to which the election applies, and once made such an
election may be terminated only with the consent of the IRS. A U.S. Holder who
purchases a Debenture at a market discount and who does not elect to include
market discount in income as it accrues may be required to defer the deduction
of all or a portion of the interest expense on any indebtedness incurred or
maintained to purchase or carry the Debenture.
ACQUISITION PREMIUM
A U.S. Holder will be considered to have "acquisition premium" to the extent
the U.S. Holder's initial tax basis in a Debenture is greater than (x) the
adjusted issue price of such Debenture but less than (y) the stated redemption
price at maturity of such Debenture. Acquisition premium may offset the amount
of Original Issue Discount received on such Debenture that the U.S. Holder is
required to include in income.
CONVERSION OF DEBENTURES INTO COMMON STOCK
In general, no gain or loss will be recognized for U.S. federal income tax
purposes on a conversion of Debentures into Common Stock. However, cash paid
in lieu of a fractional share of Common Stock will result in taxable gain (or
loss), which will be capital gain (or loss), to the extent that the amount of
such cash exceeds (or is exceeded by) the portion of the adjusted basis of the
Debenture allocable to such fractional share. The adjusted basis of shares of
Common Stock received on conversion will equal the adjusted basis of the
Debenture converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of the
Common Stock received on conversion will generally include the period during
which the converted Debentures were held.
ADJUSTMENT OF CONVERSION RATE
The Conversion Rate of the Debentures is subject to adjustment under certain
circumstances. If at any time the Company makes a distribution of property to
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (for example, distributions of evidences of
indebtedness or assets of the Company) and, pursuant to the anti-dilution
provisions of the Indentures, the Conversion Rate of the Debentures is
increased, such increase may be deemed to be the payment of a taxable dividend
to U.S. Holders of Debentures. If the Conversion Rate is increased at the
discretion of the Company or in certain other circumstances, such increase
also may be deemed to be the payment of a taxable dividend to U.S. Holders of
Debentures.
SALE, EXCHANGE OR RETIREMENT OF THE DEBENTURES
Upon the sale, exchange or retirement of a Debenture, including as a result
of a tender upon the occurrence of a Debenture Change of Control, and, except
as discussed in the next paragraph on a Purchase Date, a holder will recognize
gain or loss equal to the difference between the sale or redemption proceeds
and the U.S. Holder's adjusted tax basis in the Debenture.
If a U.S. Holder elects to exercise its option to tender the Debentures to
the Company on a Purchase Date and the Company issues Common Stock in
satisfaction of all or part of the Purchase Price, the exchange of the
Debentures for Common Stock should qualify as a reorganization for federal
income tax purposes. If the Purchase Price is paid solely in Common Stock,
except in the case of a fractional share described below, a U.S. Holder will
not be required to recognize any gain realized and will not be permitted to
recognize any loss. If the Purchase Price is paid in a combination of Common
Stock and cash (other than cash received in lieu of a fractional share), gain
(but not loss) realized by the U.S. Holder would be recognized, but only to
the extent of the cash received. A U.S. Holder's initial tax basis in the
Common Stock received would be equal to such U.S. Holder's adjusted tax basis
in the Debenture tendered (except for any portion allocable to
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a fractional share of Common Stock), increased by the amount of gain
recognized (other than with respect to a fractional share) and decreased by
the amount of any cash received (except cash received in lieu of fractional
share). The holding period for Common Stock received in the exchange will
include the holding period of the Debenture tendered to the Company in
exchange therefor. The receipt of cash in lieu of a fractional share of Common
Stock should generally result in capital gain or loss, measured by the
difference between the amount of cash received for the fractional share and
the U.S. Holder's tax basis in the fractional share interest.
A U.S. Holder's adjusted tax basis in a Debenture generally will equal such
U.S. Holder's initial investment in the Debenture increased by any original
issue discount the U.S. Holder has included in income and decreased by any
payments received. Except to the extent of any accrued market discount, any
such gain or loss recognized on the sale, exchange, redemption, retirement or
other disposition of a Debenture should be capital gain or loss and will
generally be long-term capital gain or loss if the Debenture is a capital
asset and has been held or deemed held for more than one year at the time of
the sale or exchange. Under current law, gain on most capital assets held by
an individual for more than 12 months is subject to tax at a maximum rate of
20%.
THE COMMON STOCK
Distributions, if any, paid on the Common Stock received on a conversion of
the Debentures, to the extent made from current or accumulated earnings and
profits of the Company, as determined for U.S. federal income tax purposes,
will be included in a U.S. Holder's income as ordinary income (subject to a
possible dividends received deduction in the case of a corporate holder).
Distributions of stock received by a holder of Common Stock generally will not
be taxable, except where the distribution of stock is in lieu of a
distribution of money, results in a distribution of common stock to some
holders and preferred stock to other holders, is a distribution of convertible
preferred stock, or otherwise has the effect of increasing the proportionate
interests of some or all of the holders of Common Stock in the assets or
earnings and profits of the Company. If there is a distribution of stock or
other event that increases the proportionate interest of the holders of Common
Stock in the assets or earnings and profits of the Company, and there is not a
full adjustment to the conversion ratio of the outstanding Debentures to
reflect such dividend or other event, then such increase in the proportionate
interest of the holders of Common Stock generally will be treated as a taxable
dividend to such holders to the extent of the Company's current or accumulated
earnings and profits.
Gain or loss realized on the sale or exchange of that Common Stock will
equal the difference between the amount realized on such sale or exchange and
the U.S. Holder's adjusted tax basis in such Common Stock. Except to the
extent of any accrued market discount not previously taken into account, such
gain or loss will generally be long-term capital gain or loss if the U.S.
Holder has held or is deemed to have held the Common Stock for more than one
year. Under current law, gain on most capital assets held by an individual for
more than 12 months is subject to tax at a maximum rate of 20%.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A U.S. Holder of Debentures or Common Stock may be subject to "backup
withholding" at a rate of 31% with respect to certain "reportable payments,"
including interest and dividend payments. These backup withholding rules apply
if the holder (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties
of perjury, that the TIN furnished is the correct number and that such holder
is not subject to backup withholding. A U.S. Holder who does not provide the
Company with a correct TIN also may be subject to penalties imposed by the
IRS. Any amount withheld from a payment to a U.S. Holder under the backup
withholding rules is creditable against the U.S. Holder's
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federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply, however, with respect
to payments made to certain holders, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemptions from
backup withholding are properly established.
The Company will report to the U.S. Holders of Debentures and Common Stock
and to the IRS the amount of any "reportable payments" for each calendar year
and the amount of tax withheld, if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder.
For purposes of the following discussion, Original Issue Discount, dividends
and gain on the sale, exchange or other disposition of a Debenture or Common
Stock will be considered to be "U.S. trade or business income" if such income
or gain is (i) effectively connected with the conduct of a U.S. trade or
business or (ii) in the case of a treaty resident, attributable to a permanent
establishment (or, in the case of an individual, a fixed base) in the United
States.
ORIGINAL ISSUE DISCOUNT
Generally any Original Issue Discount paid to a Non-U.S. Holder of a
Debenture that is not U.S. trade or business income will not be subject to
U.S. tax if (i) the Non-U.S. Holder (A) does not actually or constructively
own 10% or more of the total voting power of all voting stock of the Company
and (B) is not a "controlled foreign corporation" with respect to which the
Company is a "related person" within the meaning of the Code, and (ii) either
(A) the beneficial owner, under penalty of perjury, certifies that it is not a
U.S. person and provides its name and address on IRS Form W-8 (or a suitable
substitute form), or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business (a "financial institution") and holds the Debenture
certifies under penalties of perjury that such certificate has been received
from the beneficial owner by it or by a financial institution between it and
the beneficial owner and furnishes the payor with a copy thereof.
The payment of Original Issue Discount to a Non-U.S. Holder that does not
qualify for the exemption set forth above and that is not U.S. trade or
business income ("Non-Qualifying Original Issue Discount") will be subject to
U.S. federal income tax at the rate of 30%, unless a U.S. income tax treaty
applies to reduce or eliminate withholding. U.S. trade or business income will
be taxed at regular U.S. rates rather than the 30% gross rate. In the case of
a Non-U.S. Holder that is a corporation, such U.S. trade or business income
may also be subject to the branch profits tax (which is generally imposed on a
foreign corporation on the actual or deemed repatriation from the United
States of earnings and profits attributable to U.S. trade or business income)
at a 30% rate. The branch profits tax may not apply (or may apply at a reduced
rate) if a recipient is a qualified resident of certain countries with which
the United States has an income tax treaty.
To claim the benefit of a tax treaty or to claim exemption from withholding
because the income is U.S. trade or business income, the Non-U.S. Holder must
provide a properly executed Form 1001 or 4224 (or such successor forms as the
IRS designates), as applicable, prior to the payment of interest. These forms
must be periodically updated. Under regulations issued by the Treasury
Department on October 6, 1997 (the "New Regulations"), generally effective
with respect to payments made after December 31, 1999, the Forms 1001 and 4224
will be replaced by Form W-8. Under the New Regulations, a Non-U.S. Holder who
is claiming the benefits of a treaty may be required to obtain a U.S. taxpayer
identification number, which may require providing certain documentary
evidence issued by foreign governmental authorities to prove residence in the
foreign country. Certain special procedures are provided in the New
Regulations for payments through qualified intermediaries.
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DIVIDENDS
In general, dividends paid to a Non-U.S. Holder of Common Stock will be
subject to withholding of U.S. federal income tax at a 30% rate unless such
rate is reduced by an applicable income tax treaty. Dividends that are
connected with such holder's conduct of a trade or business in the United
States (U.S. trade or business income) are generally subject to U.S. federal
income tax at regular rates, but are not generally subject to the 30%
withholding tax if the Non-U.S. Holder files the appropriate form with the
payor, as discussed above. Any U.S. trade or business income received by a
Non-U.S. Holder that is a corporation may also, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be applicable under an income tax treaty. Dividends paid to an
address in a foreign country generally are presumed (absent actual knowledge
to the contrary) to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability
of a tax treaty rate. Under the New Regulations, not generally in effect until
after December 31, 1999, however, a Non-U.S. Holder of Common Stock who wishes
to claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income treaty may obtain a refund of any
amounts currently withheld by filing an appropriate claim for a refund with
the IRS.
CONVERSION
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on the conversion of Debentures into Common Stock. However, a Non-U.S. Holder
will be subject to U.S. federal income tax on the amounts of any (i) Non-
Qualifying Original Issue Discount that has not previously been included in
income and (ii) cash received in lieu of fractional shares, to the extent that
such Non-U.S. Holder would be subject to U.S. federal income taxation on the
sale of the Debenture under the rules described in "Sale, Exchange or
Redemption of Debentures or Common Stock" below.
SALE, EXCHANGE OR REDEMPTION OF DEBENTURES OR COMMON STOCK
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a Debenture generally will not be subject to U.S. federal income
tax, unless (i) such gain is U.S. trade or business income, (ii) subject to
certain exceptions, the Non-U.S. Holder is an individual who holds the
Debenture as a capital asset and is present in the United States for 183 days
or more in the taxable year of the disposition, (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of U.S. tax law applicable to
certain U.S. expatriates (including certain former citizens or residents of
the United States), or (iv) in the case of the disposition of Common Stock,
the Company is a U.S. real property holding corporation. The Company does not
believe that it is currently a "United States real property holding
corporation", or that it will become one in the future.
Federal Estate Tax
A Debenture held (or treated as held) by an individual who is not a citizen
or resident of the United States (for federal estate tax purposes) at the time
of his or her death will not be subject to U.S. federal estate tax if the
individual did not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company and, at the time
of the individual's death, payments with respect to such Debenture would not
have been effectively connected with the conduct by such individual of a trade
or business in the United States. Common Stock owned or treated as owned by an
individual who is not a citizen or resident of the United States (for federal
estate tax purposes) will be included in such individual's estate for U.S.
federal income tax purposes unless an applicable estate tax treaty otherwise
applies.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder any
dividend that is subject to withholding or is exempt from U.S. withholding tax
pursuant to a tax treaty. Copies of these information returns may also be made
available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Non-U.S. Holder resides.
Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments of principal, including cash
payments in respect of Original Issue Discount, on the Debentures by the
Company to a Non-U.S. Holder if the holder certifies as to its Non-U.S. Holder
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its Paying Agent has actual knowledge
that the holder is a U.S. person or that the conditions of any other exemption
are not, in fact, satisfied).
The payment of the proceeds on the disposition of Debentures or Common Stock
to or through the U.S. office of any broker, U.S. or foreign, will be subject
to information reporting and possible backup withholding unless the owner
certifies as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of
any other exemption are not, in fact, satisfied. The payment of the proceeds
from the disposition of a Debenture to or through a non-U.S. office of a non-
U.S. broker that is not a U.S. related person will not be subject to
information reporting or backup withholding. For this purpose, a "U.S. related
person" is (i) a "controlled foreign corporation" for U.S. federal income tax
purposes or (ii) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.
In the case of the payment of proceeds from the disposition of Debentures or
Common Stock to or through a non-U.S. office of a broker that is either a U.S.
person or a U.S. related person, information reporting is required on the
payment unless the broker has documentary evidence in the files that the owner
is a Non-U.S. Holder and the broker has no actual knowledge to the contrary.
Backup withholding will not apply to payments made through foreign offices of
a broker that is not a U.S. person or a U.S. related person (absent actual
knowledge that the payee is a U.S. person).
The New Regulations, not currently in effect, make certain modifications to
the withholding, backup withholding and information reporting rules described
above. The New Regulations generally attempt to unify certification
requirements and modify reliance standards. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the required
information is provided to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE DEBENTURES
AND THE COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN
APPLICABLE LAWS.
101
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 59,747,550 shares of Common Stock outstanding as of October 23, 1998,
15,642,350 are available for resale in the public market without restriction
or further registration under the Securities Act, unless owned by an affiliate
of AMF Bowling. The remaining 44,105,200 outstanding shares of Common Stock
are deemed to be "restricted securities" as that term is defined in Rule 144,
all of which are eligible for sale in the public market in compliance with
Rule 144.
In general, under Rule 144, any person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is
entitled to sell, within any three-month period, a number of restricted
securities which does not exceed the greater of 1% of the then-outstanding
shares of Common Stock (597,476 shares) or the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 also may
be subject to certain manner of sale provisions, notice requirements and the
availability of current public information about AMF Bowling. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of AMF Bowling at any time during the three months preceding a sale,
and who has beneficially owned shares within the definition of "restricted
securities" under Rule 144 for at least two years, is entitled to sell such
shares under Rule 144(k) promulgated under the Securities Act without regard
to the volume limitation manner of sale provisions, public information
requirements or notice requirements.
Since the Private Placement, certain of the Initial Purchasers have made a
market in the Debentures. Such Initial Purchasers are not obligated to do so,
however, and any market-making with respect to the Debentures may be
interrupted or discontinued at any time without notice. There can be no
assurance as to the liquidity of any trading market of the Debentures, if any
develops, or that an active public market for the Debentures will develop or,
if one does develop, that it will be maintained. If an active market for the
Debentures fails to develop or be sustained, the trading price of the
Debentures could be adversely affected. No prediction can be made as to the
effect, if any, that future sales of shares of Common Stock that are
restricted securities or the availability of such shares for future sale will
have on the market price of the Debentures or the Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect prevailing
market prices for the Debentures and the Common Stock issuable upon conversion
or repurchase thereof and could impair AMF Bowling's future ability to raise
capital through an offering of securities.
AMF Bowling has filed registration statements on Form S-8 to register (i)
1,767,151 shares of Common Stock reserved for issuance or sale under the 1996
Plan and (ii) 2,000,000 shares of Common Stock reserved for issuance or sale
under the 1998 Plan.
102
<PAGE>
SELLING SECURITYHOLDERS
The Selling Securityholders may from time to time offer and sell pursuant to
this Prospectus (or an amendment or supplement thereto) any or all of the
Debentures and the Common Stock issued upon conversion, redemption or
repurchase thereof. The term Selling Securityholder includes the holders
listed below and the beneficial owners of the Debentures and their respective
transferees, pledgees, donees or their successors.
Each of the Selling Securityholders listed below is either an Initial
Purchaser or a transferee of an Initial Purchaser and has agreed to be bound
by the terms applicable to the transferor under the Debenture Registration
Rights Agreement. Pursuant to the Debenture Registration Rights Agreement, the
Company has filed the Registration Statement of which this Prospectus forms a
part and has also agreed to bear certain expenses related thereto and to
indemnify each Selling Securityholder against certain liabilities, including
certain liabilities arising under the federal securities laws. See "Plan of
Distribution".
The Company has filed with the Commission the Registration Statement of
which this Prospectus forms a part with respect to the sale by the Selling
Securityholders of the Securities from time to time through the facilities of
any national securities exchange or U.S. inter-dealer quotation system of a
registered national securities association on which the Securities may be
listed or quoted at the time of such sale, in the over-the-counter market, in
transactions otherwise than on such exchanges or systems or in the over-the-
counter market, or through the writing of options, in privately negotiated
transactions or otherwise, as more fully described under "Plan of
Distribution".
The table below sets forth information with respect to the Selling
Securityholders and the respective principal amounts of the Debentures and
Common Stock into which such Debentures are convertible beneficially owned by
each Selling Securityholder at or prior to October 9, 1998. Such information
has been obtained from the Selling Securityholders. To the Company's
knowledge, none of the Selling Securityholders has, or within the past three
years has had, any position, office or other material relationship with the
Company (or its predecessors) or any of its affiliates. Although the Selling
Securityholders may offer for sale from time to time all or a portion of the
Securities pursuant to this Prospectus (or an amendment or supplement
thereto), the table below assumes that all of the Securities will be offered
and sold by the Selling Securityholders. In addition, the Selling
Securityholders identified below may have sold, transferred or otherwise
disposed of all or a portion of their Securities since the date on which they
provided the Company with information regarding their Securities in
transactions exempt from the registration requirements of the Securities Act.
Information concerning Selling Securityholders may change from time to time
and, to the extent required, will be set forth in supplements or amendments to
this Prospectus. The Securities are being registered hereby to permit
secondary trading of the Securities without restriction under the Securities
Act. See "Plan of Distribution".
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
- ----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
American High-Income
Trust(3)............... $ 21,900,000 1.9 189,947 $ 21,900,000
American Investors Life
Insurance Company,
Inc. .................. 3,000,000 * 26,020 3,000,000
Arkansas Public
Employees Retirement
System(4).............. 3,000,000 * 26,020 3,000,000
Baker Nye Securities,
LP..................... 5,000,000 * 43,367 5,000,000
Baltimore Gas & Electric
Pension Plan(4)........ 5,200,000 * 45,101 5,200,000
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
- ----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Blue Cross Blue Shield
of Michigan Retirement
Income Plan(4)......... $ 800,000 * 6,938 $ 800,000
Boston Edison NDT Non-
Qualified
Corporate(4)........... 375,000 * 3,252 375,000
Boston Edison NDT
Qualified(4)........... 5,965,000 * 51,736 5,965,000
Boston Edison VEBA(4)... 275,000 * 2,385 275,000
BT Equities Strategies
Fund of the BT Pyramid
Trust.................. 3,000,000 * 26,020 3,000,000
Caywood Capital Fund
L.P. .................. 400,000 * 3,469 400,000
Central Pension Fund of
the IUOE and
Participating
Employees(4)........... 15,750,000 1.4 136,606 15,750,000
Century National
Company................ 2,730,000 * 23,678 2,730,000
Chapman University...... 50,000 * 433 50,000
Chrysler Insurance
Company--Total Return.. 120,000 * 1,040 120,000
City of New Bedford
Retirement System(4)... 500,000 * 4,336 500,000
City of Richmond
Retirement System(4)... 1,100,000 * 9,540 1,100,000
City of Worchester
Retirement System(4)... 2,050,000 * 17,780 2,050,000
Columbia/HCA............ 700,000 * 6,071 700,000
Community Investment
Group Convertible
Bond(4)................ 50,000 * 433 50,000
Credit Research &
Trading, LLC........... 875,000 * 7,589 875,000
Curtiss-Wright
Retirement Plan(4)..... 750,000 * 6,505 750,000
Dallas Police & Fire
Pension System(4)...... 9,000,000 * 78,060 9,000,000
Data General
Corporation(4)......... 1,825,000 * 15,828 1,825,000
De Moss Foundation...... 500,000 * 4,336 500,000
Delaware Public
Employees' Retirement
System(4).............. 7,500,000 * 65,050 7,500,000
Detroit Edison
Employees' Retirement
Trust(4)............... 5,750,000 * 49,872 5,750,000
Detroit Medical Center
Endowment/Depreciation
Fund(4)................ 3,000,000 * 26,020 3,000,000
Detroit Medical Center
Pension Plan(4)........ 3,550,000 * 30,790 3,550,000
Deutsche Bank A.G. ..... 123,756,000 11.0 1,073,385 123,756,000
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
- ----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Dow Corning Retirement
Plan(4)................ $ 4,550,000 * 39,463 $ 4,550,000
Employees' Retirement
System of the City of
Milwaukee(4)........... 10,000,000 * 86,734 10,000,000
Employers Reinsurance
Corp.(3)............... 2,500,000 * 21,683 2,500,000
Enterprise Accumulation
Trust High Yield....... 1,550,000 * 13,443 1,550,000
Enterprise High Yield
Bond Fund.............. 1,950,000 * 16,913 1,950,000
F. R. Bigelow Foundation
Convertible Bond(4).... 70,000 * 607 70,000
Fede Corporation........ 50,000 * 433 50,000
Fort Dearborn Life
Insurance Company...... 600,000 * 5,204 600,000
Franklin Investor
Securities Trust--
Franklin Convertible
Securities Fund........ 6,000,000 * 52,040 6,000,000
Franklin Strategic
Series--Franklin Small
Cap Growth Fund........ 12,900,000 1.1 111,886 12,900,000
Gencorp(4).............. 7,750,000 * 67,218 7,750,000
General Motors
Investment Management
Corp.(3)............... 15,000,000 1.3 130,101 15,000,000
General Motors MetLife
High Yield Pension(4).. 7,820,000 * 67,825 7,820,000
General Motors Pension
Fund--High Yield
Sector(4).............. 10,500,000 * 91,070 10,500,000
Golden Rule Insurance
High Yield............. 700,000 * 6,071 700,000
Guardian Life Insurance
Company of America..... 28,500,000 2.5 247,191 28,500,000
Guardian Master Pension
Trust.................. 1,500,000 * 13,010 1,500,000
Halliburton High
Yield(4)............... 1,350,000 * 11,709 1,350,000
Hamilton Global
Investors Limited...... 20,000,000 1.7 173,468 20,000,000
HBK Cayman L.P.......... 60,773,000 5.4 527,108 60,773,000
HBK Offshore Fund
Ltd. .................. 141,377,000 12.6 1,226,219 141,377,000
Health Services
Retirement Plan(4)..... 1,000,000 * 8,673 1,000,000
Houston Firemen's Relief
and Pension Fund
"B"(4)................. 2,750,000 * 23,851 2,750,000
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
- ----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Houston Municipal Em-
ployees Pension Sys-
tem(4) $ 7,300,000 * 63,315 $ 7,300,000
IBM Pension Plan(4)..... 11,500,000 * 99,744 11,500,000
IL Annuity & Insurance.. 250,000 * 2,168 250,000
International Union Op-
erating Engineers Local
#4(4).................. 450,000 * 3,903 450,000
Ironworkers District
Council of New
England(4)............. 1,500,000 * 13,010 1,500,000
KA Management Ltd....... 19,005,000 1.7 164,837 19,005,000
KA Trading L.P. ........ 8,145,000 * 70,644 8,145,000
Loomis Sayles Bond
Fund(4)................ 18,700,000 1.6 162,192 18,700,000
Loomis Sayles Fixed In-
come Fund(4)........... 3,000,000 * 26,020 3,000,000
Loomis Sayles High Yield
Fixed Income Fund(4)... 3,275,000 * 28,405 3,275,000
Loomis Sayles High Yield
Fund(4)................ 1,250,000 * 10,841 1,250,000
Loomis Sayles
International Fund--
High Yield(4).......... 2,125,000 * 18,430 2,125,000
Loomis Sayles Managed
Bond Fund(4)........... 2,000,000 * 17,346 2,000,000
Loomis Sayles Worldwide
Fund--Domestic Fixed
Income Sector(4)....... 750,000 * 6,505 750,000
LS International
Fund(4)................ 2,500,000 * 21,683 2,500,000
Maine State Retirement
System(4).............. 3,475,000 * 30,140 3,475,000
Maxim Corporate Bond
Fund(4)................ 4,250,000 * 36,861 4,250,000
Merrill Lynch Interna-
tional Ltd............. 5,000,000 * 43,367 5,000,000
MetLife Separate Account
235(4)................. 1,000,000 * 8,673 1,000,000
Metropolitan Life Loomis
Sayles High Yield Bond
Portfolio(4)........... 4,200,000 * 36,428 4,200,000
Milwaukee County
"B"(4)................. 11,200,000 * 97,142 11,200,000
Minneapolis Teachers
Retirement Fund(4)..... 1,950,000 * 16,913 1,950,000
Morgan Guaranty Trust
Company of New York as
Investment Manager and
Agent for a private
client(5).............. 6,000,000 * 52,040 6,000,000
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Morgan Guaranty Trust
Company of New York as
Trustee of the
Commingled Pension
Trust Fund (Multi-
Market Special
Investment Fund I) of
Morgan Guaranty Trust
Company of New
York(6)................ $16,000,000 1.4 138,774 $16,000,000
Morgan Guaranty Trust
Company of New York as
Trustee of the
Commingled Pension
Trust Fund (Multi-
Market Special
Investment Fund II) of
Morgan Guaranty Trust
Company of New
York(7)................ 32,000,000 2.8 277,548 32,000,000
Morgan Guaranty Trust
Company of New York as
Trustee of the Multi-
Market Special
Investment Trust Fund
of Morgan Guaranty
Trust Company of New
York(8)................ 6,000,000 * 52,040 6,000,000
Motors Insurance
Corp.(3)............... 500,000 * 4,336 500,000
National Geographic
Society(4)............. 250,000 * 2,168 250,000
New York City Board of
Education Retirement
System(4).............. 1,000,000 * 8,673 1,000,000
New York City Employees'
Retirement System(4)... 6,750,000 * 58,545 6,750,000
New York City Fire
Department Pension
Fund(4)................ 3,750,000 * 32,525 3,750,000
New York City Police
Department Pension
Fund(4)................ 4,000,000 * 34,693 4,000,000
New York City Teachers
Retirement System(4)... 22,900,000 1.8 198,620 22,900,000
New York State Electric
& Gas Corp. Retirement
Benefit Plan(4)........ 3,000,000 * 26,020 3,000,000
New York State Nurses
Assn. Pension Plan &
Benefits Fund(4)....... 2,250,000 * 19,515 2,250,000
Nike, Inc. Profit
Sharing Plan(4)........ 300,000 * 2,602 300,000
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Oppenheimer Millennuim
Funds plc for the
Oppenheimer Millennium
Income & Growth Fund... $ 200,000 * 1,734 $ 200,000
Orange County Employees
Retirement System(4)... 1,500,000 * 13,010 1,500,000
Pacific Life Insurance
Company................ 2,000,000 * 17,346 2,000,000
Partner Reinsurance
Co.(4)................. 600,000 * 5,204 600,000
Partners Healthcare(4).. 1,250,000 * 10,841 1,250,000
Peter & Elizabeth Tower
Foundation(4).......... 1,050,000 * 9,107 1,050,000
Phoenix Convertible
Fund................... 3,300,000 * 28,622 3,300,000
Phoenix Home Life
Convertible Fund....... 1,500,000 * 13,010 1,500,000
PHS Pension(4).......... 2,250,000 * 19,515 2,250,000
Presbyterian
Intercommunity
Hospital............... 150,000 * 1,301 150,000
Presbyterian
Intercommunity Hospital
Defined Benefit Plan... 50,000 * 433 50,000
Raytheon Master
Trust(4)............... 2,550,000 * 22,117 2,550,000
Regence Blue Cross/Blue
Shield of Idaho(3)..... 86,000 * 745 86,000
Regence Blue Cross/Blue
Shield of Oregon(3).... 141,000 * 1,222 141,000
Regence Blue Cross/Blue
Shield of Utah(3)...... 43,000 * 372 43,000
Regence Blue Cross/Blue
Shield of
Washington(3).......... 230,000 * 1,994 230,000
Rohm & Haas Company
Convertible Fund(4).... 240,000 * 2,081 240,000
Rose Hills Endowment
Care Fund.............. 250,000 * 2,168 250,000
SouthShore Holdings
Ltd.................... 30,075,000 2.6 260,852 30,075,000
State of Connecticut
Fund "F"(4)............ 4,350,000 * 37,729 4,350,000
State of Oregon/SAIF
Corporation............ 20,000,000 1.7 173,468 20,000,000
State of Rhode Island
Employees Retirement
System(4).............. 11,995,000 * 104,037 11,995,000
Teachers Insurance and
Annuity Association of
America................ 12,000,000 1.0 104,080 12,000,000
Teamsters Affiliates
Pension Plan(4)........ 2,000,000 * 17,346 2,000,000
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AT
OCTOBER 9, 1998(1) SHARES OF PRINCIPAL AMOUNT
------------------------------ COMMON STOCK AT MATURITY
PRINCIPAL AMOUNT COVERED BY OF DEBENTURES
AT MATURITY PERCENTAGE OF THIS COVERED BY THIS
SELLING SECURITYHOLDERS OF DEBENTURES DEBENTURES PROSPECTUS(2) PROSPECTUS
----------------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Teamsters Retirement &
Family Protection
Plan(4)................ 400,000 * 3,469 400,000
The Bond Fund of
America, Inc........... 23,100,000 2.0 200,355 23,100,000
The Income Fund of
America, Inc........... 90,000,000 8.0 780,606 90,000,000
The Salser Partnership
No. 1 + 3.............. 50,000 * 433 50,000
TPW Investments, Ltd.... 100,000 * 867 100,000
Tredegar Industries,
Inc.(4)................ 750,000 * 6,505 750,000
Tribeca Investments
L.L.C.................. 12,500,000 1.1 108,417 12,500,000
Trust FBO Wm. Keck Jr.
Fdn.................... 50,000 * 433 50,000
UA General Officers
Retirement Plan(4)..... 275,000 * 2,385 275,000
UA Local Union Officers
& Employees
Pension(4)............. 2,455,000 * 21,293 2,455,000
UA Office Employees
Retirement Plan(4)..... 130,000 * 1,127 130,000
UFCW Tri-State Pension
Fund(4)................ 500,000 * 4,336 500,000
United Mine Workers of
America Health and
Retirement Fund(4)..... 5,000,000 * 43,367 5,000,000
USF Convertible Fund.... 700,000 * 6,071 700,000
Wilson East L.P......... 100,000 * 867 100,000
Wm. M. Keck Jr. Fdn..... 200,000 * 1,734 200,000
World Bank "B"(4)....... 2,500,000 * 21,683 2,500,000
World Bank "RSBP"(4).... 3,650,000 * 31,657 3,650,000
Zazove Convertible Fund,
L.P.................... 350,000 * 3,035 350,000
Unnamed holders of
Securities or any
future transferees,
pledgees, donees or
successors of or from
such unnamed holders... 99,194,000 8.8 860,408 99,194,000
-------------- --- --------- --------------
Total................... $1,125,000,000 100% 9,757,575 $1,125,000,000
</TABLE>
- --------
* Less than one percent.
(1) The information contained in this table reflects "beneficial" ownership of
the Debentures within the meaning of Rule 13d-3 under the Exchange Act.
With respect to all holders listed in the table above, the Company has not
conducted any independent inquiry or investigation to ascertain such
information and has relied exclusively on written questionnaires furnished
to the Company by the Selling Securityholders on or prior to October 9,
1998 for the express purpose of including the information set forth
therein in this Prospectus.
(2) Includes shares of Common Stock issuable upon conversion of the Debentures
only. Represents the number of shares of Common Stock into which the
Debentures listed for such Selling Securityholder in this table are
convertible on an "as converted" basis using the conversion rate described
on the cover page of this Prospectus.
(3) Salomon Brothers Asset Management Inc. ("SBAM") acts as discretionary
investment adviser with respect to the noted accounts that hold the
Debentures.
109
<PAGE>
(4) Loomis, Sayles & Company, L.P. acts as discretionary investment adviser
with respect to the noted accounts that hold the Debentures.
(5) The Selling Securityholder is the beneficial owner of $956,000 face value
of the Subsidiary Senior Subordinated Discount Notes.
(6) The Selling Securityholder is the beneficial owner of $4,692,000 face
value of the Subsidiary Senior Subordinated Discount Notes.
(7) The Selling Securityholder is the beneficial owner of $5,514,000 face
value of the Subsidiary Senior Subordinated Discount Notes.
(8) The Selling Securityholder is the beneficial owner of $878,000 face value
of the Subsidiary Senior Subordinated Discount Notes.
The Conversion Rate and, therefore, the number of shares of Common Stock
issuable upon conversion, redemption or repurchase of the Debentures is
subject to adjustment in certain events. Accordingly, the number of shares of
Common Stock issuable upon conversion, redemption or repurchase of the
Debentures may increase or decrease. In addition, the Selling Securityholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of their Debentures since the date on which they provided the
information regarding their Debentures, in transactions exempt from the
registration requirements of the Securities Act.
Because the Selling Securityholders may, pursuant to this Prospectus (or an
amendment or supplement hereto), offer all or some portion of the Debentures
or Common Stock issuable upon conversion, redemption or repurchase of the
Debentures, no estimate can be given as to the amount of the Debentures or
shares of Common Stock that will be held by the Selling Securityholders upon
termination of any such sales.
Generally, only Selling Securityholders identified in the foregoing table
who beneficially own the Debentures set forth opposite their respective names,
may sell such Debentures pursuant to the Registration Statement. The Company
may from time to time, in accordance with the Debenture Registration Rights
Agreement, include additional Selling Securityholders in supplements or
amendments to this Prospectus.
110
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock is listed on the NYSE under the symbol "PIN". The Common
Stock issuable upon conversion, redemption or repurchase of the Debentures
will be listed, upon notice of issuance, on the NYSE. The Debentures are
designated for trading in PORTAL and certain of the Initial Purchasers
currently make a market in the Debentures. The Company has not applied and
does not intend to apply for listing of the Debentures on any securities
exchange or for inclusion of the Debentures on any automated inter-dealer
quotation system. The Selling Securityholders have advised the Company that
the Securities may be sold from time to time directly by the Selling
Securityholders or, alternatively, through underwriters, broker-dealers or
agents, in one or more transactions (which may involve crosses or block
transactions) effected (i) on any national securities exchanges or U.S. inter-
dealer quotation system of a registered national securities association on
which any of the Securities may be listed or quoted at the time of sale, (ii)
in the over-the-counter market, (iii) in transactions other than on such
exchanges or systems or in the over-the-counter market, or (iv) through the
writing of options, in each case, at fixed prices, at prevailing market prices
at the time of sale, at varying prices determined at the time of sale, or at
negotiated prices. The Securities may also be sold in a single underwritten
public offering if the holders of at least 33 1/3% in aggregate principal
amount at maturity of the Securities so elect. See "Description of
Debentures--Registration Rights". The Selling Securityholders have advised the
Company that in connection with sales of the Securities or otherwise, the
Selling Securityholders may enter into hedging transactions with broker-
dealers, which may in turn engage in short sales of the Securities in the
course of hedging the positions they assume, and that the Selling
Securityholders may sell the Securities short and deliver Securities to close
out such short positions, or loan or pledge Securities to broker-dealers that
in turn may sell such Securities. At the time a particular offer is made, a
supplement to this Prospectus, if required, will be distributed that sets
forth the name or names of agents or broker-dealers, any commissions,
discounts, concessions or allowances and other terms constituting selling
compensation and any other required information. Moreover, in effecting sales,
broker-dealers engaged by any Selling Securityholder and/or the purchasers of
the Securities may arrange for other broker-dealers to participate in the sale
process. Broker-dealers will receive discounts, concessions, allowances or
commissions from the Selling Securityholders and/or the purchasers of the
Securities in amounts which will be negotiated prior to the time of sale.
Sales will be made only through broker-dealers registered as such in a subject
jurisdiction or in transactions exempt from such registration. The Company has
not been advised of any definitive selling arrangement at the date hereof
between any Selling Securityholder and any broker-dealer or agent.
Any broker-dealer participating in any distribution of Securities in
connection with the offering made hereby may be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities Act and may be required
to deliver a copy of this Prospectus, including a Prospectus Supplement, to
any person who purchases any of the Securities from or through such broker-
dealer.
The Company has agreed to pay certain expenses incident to the filing of the
Registration Statement and the maintenance of its effectiveness for resales,
from time to time, of the Securities. The Selling Securityholders will be
indemnified by the Company against certain liabilities, including certain
liabilities under the Securities Act, or, to the extent such indemnification
is unavailable or otherwise limited, will be entitled to contribution in
connection therewith. The Company will not receive any of the proceeds from
the sale of the Securities by the Selling Securityholders.
Upon sale pursuant to the Registration Statement, the Securities will be
transferrable, other than by affiliates of the Company, without restrictions
under the Securities Act.
111
<PAGE>
VALIDITY OF DEBENTURES AND COMMON STOCK
The validity of the Debentures and the Common Stock issuable upon the
conversion of the Debentures is being passed upon for the Company by McGuire,
Woods, Battle & Boothe LLP, Richmond, Virginia and Wachtell, Lipton, Rosen &
Katz, New York, New York.
EXPERTS
The consolidated balance sheets of AMF Bowling and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1997 and
the period from inception (January 12, 1996) through December 31, 1996,
included in this Prospectus, and the related financial statement schedule
included elsewhere in the Registration Statement of which this Prospectus is a
part, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein, in reliance upon the authority of said firm as experts in
giving said reports.
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 the year ended December 31, 1995, included in this
Prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AMF Bowling has agreed to indemnify PricewaterhouseCoopers LLP for the
payment of all legal costs and expenses incurred in PricewaterhouseCoopers
LLP's successful defense of any legal action or proceeding that arises as a
result of inclusion of PricewaterhouseCoopers LLP's audit reports on the
combined financial statements of AMF Bowling Group included in this
Registration Statement.
The consolidated financial statements of Charan as of August 31, 1996 and
for the year then ended, included elsewhere in the Registration Statement of
which this Prospectus is a part, have been audited by Todres & Sheiffer,
independent auditors, as stated in their report appearing herein and elsewhere
in the Registration Statement, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMF BOWLING, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............ F-3
Consolidated Statements of Income for the Year Ended December 31, 1997,
and the Period Ended December 31, 1996................................. F-4
Consolidated Statements of Cash Flows for the Year Ended December 31,
1997, and the Period Ended December 31, 1996........................... F-5
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1997, and the Period Ended December 31, 1996.............. F-6
Notes to Consolidated Financial Statements.............................. F-7
AMF BOWLING, INC. AND SUBSIDIARIES--INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidated Balance Sheet as of September 30, 1998........... F-38
Condensed Consolidated Statements of Income for the Nine Months Ended
September 30, 1998 and 1997............................................ F-39
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997...................................... F-40
Notes to Condensed Consolidated Financial Statements.................... F-41
AMF BOWLING GROUP (PREDECESSOR COMPANY)
Report of Independent Accountants....................................... F-50
Combined Balance Sheets as of April 30, 1996, and December 31, 1995..... F-51
Combined Statements of Operations for the Four Months Ended April 30,
1996, and the Year Ended December 31, 1995............................. F-52
Combined Statements of Cash Flows for the Four Months Ended April 30,
1996, and the Year Ended December 31, 1995............................. F-53
Combined Statements of Changes in Stockholders' Equity for the Four
Months Ended April 30, 1996, and the Year Ended December 31, 1995...... F-54
Notes to Combined Financial Statements.................................. F-55
SELECTED QUARTERLY DATA (UNAUDITED)....................................... F-86
BCA & AFFILIATES
Report of Independent Auditors.......................................... F-87
Balance Sheet as of August 31, 1996..................................... F-88
Statement of Income for the Year Ended August 31, 1996.................. F-89
Statement of Cash Flows for the Year Ended August 31, 1996.............. F-90
Notes to Financial Statements........................................... F-91
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of AMF Bowling, Inc.:
We have audited the accompanying consolidated balance sheets of AMF Bowling,
Inc. (a Delaware corporation, formerly named AMF Holdings Inc.) and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 1997, and 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 audits.
We conducted our audits 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 audits provide 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 Bowling, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997, and the
period from inception (January 12, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
February 20, 1998
F-2
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 35,790 $ 43,568
Accounts and notes receivable, net of allowance for
doubtful accounts of $5,012 and $4,492,
respectively......................................... 73,991 42,625
Inventories........................................... 56,568 41,001
Deferred taxes and other.............................. 17,049 11,178
---------- ----------
TOTAL CURRENT ASSETS............................... 183,398 138,372
Property and equipment, net............................ 750,885 579,308
Leasehold interests, net............................... 47,180 51,488
Deferred financing costs, net.......................... 18,911 40,595
Goodwill, net.......................................... 772,348 771,146
Investments in and advances to joint ventures.......... 19,999 --
Other assets........................................... 39,331 13,101
---------- ----------
TOTAL ASSETS....................................... $1,832,052 $1,594,010
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 41,583 $ 31,563
Accrued expenses...................................... 64,865 54,357
Income taxes payable.................................. 5,644 2,276
Long-term debt, current portion....................... 27,376 42,376
---------- ----------
TOTAL CURRENT LIABILITIES.......................... 139,468 130,572
Long-term debt, less current portion................... 1,033,223 1,048,877
Other long-term liabilities............................ 5,333 1,851
Deferred income taxes.................................. -- 3,895
---------- ----------
TOTAL LIABILITIES.................................. 1,178,024 1,185,195
---------- ----------
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Common stock (par value $.01 per share, 200,000,000
shares authorized, 59,630,000 issued and outstanding
at December 31, 1997, 42,375,000 issued and
outstanding at December 31, 1996).................... 596 424
Paid-in capital....................................... 748,053 429,026
Retained deficit...................................... (75,048) (19,484)
Equity adjustment from foreign currency translation... (19,573) (1,151)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY......................... 654,028 408,815
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,832,052 $1,594,010
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996(a)
------------ ------------
<S> <C> <C>
Operating revenue.................................... $713,668 $384,809
-------- --------
OPERATING EXPENSES:
Cost of goods sold.................................. 212,544 130,542
Bowling center operating expenses................... 251,206 123,673
Selling, general, and administrative expenses....... 64,546 35,070
Depreciation and amortization....................... 102,447 49,386
-------- --------
Total operating expenses......................... 630,743 338,671
-------- --------
Operating income................................. 82,925 46,138
-------- --------
NONOPERATING EXPENSES (INCOME):
Interest expense.................................... 118,385 77,990
Other expenses, net................................. 10,106 1,912
Interest income..................................... (1,954) (5,748)
-------- --------
Total nonoperating expenses...................... 126,537 74,154
-------- --------
Loss before income taxes............................ (43,612) (28,016)
Benefit for income taxes............................ (12,776) (8,532)
-------- --------
Net loss before equity in loss of joint ventures and
extraordinary items................................ (30,836) (19,484)
Equity in loss of joint ventures.................... (1,362) --
-------- --------
Net loss before extraordinary items................. (32,198) (19,484)
Extraordinary items, net of tax of $12,778.......... (23,366) --
-------- --------
Net loss............................................ $(55,564) $(19,484)
======== ========
NET LOSS PER SHARE, BASIC AND DILUTED:
Net loss per share before extraordinary items....... $ (0.71) $ (0.49)
Per share effect of extraordinary items............. (0.52) --
-------- --------
Net loss per share.................................. $ (1.23) $ (0.49)
======== ========
Weighted average shares outstanding................. 45,249 39,713
======== ========
</TABLE>
- --------
(a) 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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
DECEMBER 31, DECEMBER
1997 31, 1996(a)
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (55,564) $ (19,484)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization...................... 102,447 49,386
Equity in loss of joint ventures................... 1,362 --
Extraordinary items, net of tax.................... 23,366 --
Deferred income taxes.............................. (20,221) (14,040)
Amortization of bond discount...................... 33,562 24,731
Loss on the sale of property and equipment, net.... 4,446 408
Changes in assets and liabilities:
Accounts and notes receivable, net................ (26,093) (6,504)
Inventories....................................... (16,971) 1,862
Other assets...................................... (12,897) (4,010)
Accounts payable and accrued expenses............. 17,782 21,930
Income taxes payable.............................. 602 417
Other long-term liabilities....................... (4,089) 19,135
--------- -----------
Net cash provided by operating activities........ 47,732 73,831
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of operating units, net of cash
acquired........................................... (214,761) (1,450,928)
Investments in and advances to joint ventures....... (21,361) --
Purchases of property and equipment................. (56,703) (16,941)
Proceeds from the sale of property and equipment.... 4,180 754
--------- -----------
Net cash used in investing activities............ (288,645) (1,467,115)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt, net of deferred
financing costs.................................... 240,406 1,059,277
Payments on long-term debt.......................... (304,621) (38,875)
Prepayment penalty.................................. (14,571) --
Capital contributions............................... 36,600 420,750
Net proceeds from initial public offering of
shares............................................. 279,071 --
Repurchase of shares................................ (500) --
Noncompete obligations.............................. (647) (2,892)
--------- -----------
Net cash provided by financing activities........ 235,738 1,438,260
--------- -----------
Effect of exchange rates on cash.................... (2,603) (1,408)
--------- -----------
NET (DECREASE) INCREASE IN CASH...................... (7,778) 43,568
Cash and cash equivalents at beginning of period..... 43,568 --
--------- -----------
Cash and cash equivalents at end of period........... $ 35,790 $ 43,568
========= ===========
</TABLE>
- --------
(a) For the period from the inception date of January 12, 1996, through
December 31, 1996, which includes the cash flows of the acquired business
from May 1, 1996 through December 31, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
COMMON FROM FOREIGN TOTAL
SHARES COMMON PAID-IN RETAINED CURRENCY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT TRANSLATION EQUITY
----------- ------ -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 12,
1996................... -- $ -- $ -- $ -- $ -- $ --
Initial capitalization.. 38,375,000 384 389,066 -- -- 389,450
Capital contribution by
stockholders........... 4,000,000 40 39,960 -- -- 40,000
Net loss................ -- -- -- (19,484) -- (19,484)
Equity adjustment from
foreign currency
translation............ -- -- -- -- (1,151) (1,151)
---------- ---- -------- -------- -------- --------
BALANCE DECEMBER 31,
1996................... 42,375,000 424 429,026 (19,484) (1,151) 408,815
---------- ---- -------- -------- -------- --------
Capital contribution by
stockholders........... 1,780,000 18 35,582 -- -- 35,600
Issuance of stock and
stock options (Note
14).................... 100,000 1 5,027 -- -- 5,028
Initial public offering
of common stock........ 15,525,000 155 278,916 -- -- 279,071
Repurchase of common
stock.................. (150,000) (2) (498) -- -- (500)
Net loss................ -- -- -- (55,564) -- (55,564)
Equity adjustment from
foreign currency
translation............ -- -- -- -- (18,422) (18,422)
---------- ---- -------- -------- -------- --------
BALANCE DECEMBER 31,
1997................... 59,630,000 $596 $748,053 $(75,048) $(19,573) $654,028
========== ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
AMF Bowling, Inc. ("AMF Bowling") changed its name from AMF Holdings Inc. in
1997. AMF Bowling and its subsidiaries (collectively, the "Company" or "AMF")
are principally engaged in two business segments: (i) the ownership or
operation of bowling centers, consisting of 370 U.S. bowling centers and 100
international bowling centers ("Bowling Centers"), including fourteen joint
venture centers described in "Note 16. Joint Ventures", as of December 31,
1997, 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 independent bowling
center operators.
AMF Bowling Worldwide, Inc., formerly named AMF Group Inc. ("Bowling
Worldwide"), is a wholly owned subsidiary of AMF Group Holdings Inc. ("AMF
Group Holdings"). AMF Group Holdings is a wholly owned subsidiary of AMF
Bowling. AMF Group Holdings and Bowling Worldwide are Delaware corporations
organized by GS Capital Partners II, L.P., and certain other investment funds
(collectively, "GSCP") affiliated with Goldman, Sachs & Co. ("Goldman Sachs"),
to effect the Acquisition (described below). AMF Bowling and AMF Group
Holdings are holding companies. The principal assets in each are comprised of
investments in subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between AMF
Group Holdings and the stockholders (the "Prior Owners") of AMF Bowling Group
(the "Predecessor Company"), on May 1, 1996 (the "Closing Date"), AMF Group
Holdings acquired the Predecessor Company through a stock purchase by AMF
Group Holdings' subsidiaries of all the outstanding stock of the separate
domestic and foreign corporations that constituted substantially all of the
Predecessor Company and through the purchase of certain of the assets of the
Predecessor Company's bowling center operations in Spain and Switzerland (the
"Acquisition"). AMF Group Holdings did not acquire the assets of two bowling
centers located in Madrid, Spain, and Geneva, Switzerland (both of which were
retained by the Prior Owners.)
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 $1.323 billion to the Prior Owners. The
Acquisition was funded with $380.8 million of contributed capital, and $1.015
billion of debt, including bank debt and senior subordinated notes and
discount notes. The purchase price included $8.7 million which represents
warrants to purchase 870,000 shares of AMF Bowling common stock, par value
$.01 per share ("Common Stock"), which were issued on the Closing Date to The
Goldman Sachs Group, L.P., an affiliate of Goldman Sachs. See "Note 9. Long-
Term Debt". See also "Note 14. Supplemental Disclosures to the Consolidated
Statements 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 year ended December 31, 1997, reflect the
results of the Company from January 1, 1997 ("1997"). The results of
operations for the period ended December 31, 1996, reflect the results of the
Company since the inception date of January 12, 1996,
F-7
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and the subsidiaries acquired as of May 1, 1996, from the Predecessor Company
("1996"). All significant intercompany balances and transactions have been
eliminated in the accompanying 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.
Joint Ventures
Investments in joint ventures are accounted for under the equity method.
These investments are managed as part of the Company's Bowling Centers segment
operations, and the Company's share of joint venture earnings is included in
earnings for the Bowling Centers segment. (See "Note 16. Joint Ventures".)
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 dates of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. 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 Bowling Products' 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 a
significant portion of 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 also offers
customers the option to purchase extended warranties on certain products.
Warranty expense aggregated $3,007 for 1997 and $4,471 for 1996, and is
included in cost of goods sold in the accompanying consolidated statements 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.
F-8
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 equipment, and any gain or loss is recognized.
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 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
equipment.............. 5 - 10 years
Manufacturing
equipment.............. 2 - 7 years
Furniture and fixtures.. 3 - 8 years
</TABLE>
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 15. Acquisitions", and in accordance with the purchase
method of accounting used for all acquisitions, the Company recorded goodwill
representing the excess of the purchase price over the allocation among the
acquired assets and liabilities in accordance with estimates of fair market
value on the dates of acquisition. Goodwill is being amortized over 40 years.
Amortization expense was $19,827 in 1997 and $13,070 in 1996.
Income Taxes
Upon consummation of the Acquisition, the U.S. and international
subsidiaries of AMF Bowling 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. Amounts charged against income were approximately $922 in 1997 and
$1,312 in 1996, and are included in cost of goods sold in the accompanying
consolidated statements of income.
F-9
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. The amounts charged against income were approximately $21,642 in
1997 and $9,299 in 1996, with $12,768 and $5,932, respectively, included in
bowling center operating expenses for Bowling Centers, and $8,856 and $3,367,
respectively, included in selling, general and administrative expenses for
Bowling Products and Corporate in the accompanying consolidated statements of
income.
Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share" which requires the calculation and
presentation of basic and diluted earnings per share. Basic and diluted net
loss per share for 1997 and 1996 is calculated based on the actual weighted
average shares outstanding. Outstanding stock options and warrants are not
considered as their effect is antidilutive. See "Note 12. Stockholders'
Equity" and "Note 13. Employee Benefit Plans".
Foreign Currency Translation
All assets and liabilities of AMF Bowling's international operations are
translated from foreign currencies into U.S. dollars at year-end exchange
rates, except those of Mexico which has a highly inflationary economy.
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 sheets. Revenue 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. Net losses from transactions in
foreign currencies of $3,537 for 1997 and $488 for 1996 are included in other
expenses in the accompanying consolidated statements of income.
Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash
equivalents and short-term debt approximate fair value at December 31, 1997
and 1996, because of the short maturity of these instruments. At December 31,
1997 and 1996, fair value of the interest rate cap agreements (to reduce the
interest rate risk of the Company's floating rate debt) was approximately zero
and $577, respectively. The interest rate cap agreements are valued using the
estimated amount that the Company would receive to terminate the cap
agreements as of December 31, 1997 and 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 agreements. The fair value of the Term Facilities under the Senior
Debt, as defined in "Note 9. Long-Term Debt," at December 31, 1997 and 1996,
was approximately $467,361 and $623,520, respectively, based on the fair value
of debt with similar maturities and covenants. The fair value of the Notes, as
defined in "Note 9. Long-Term Debt," at December 31, 1997 and 1996, was
approximately $493,551 and $560,315, respectively, based on the trading value
at December 31, 1997 and 1996.
Noncompete Agreements
AMF Bowling, 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 sheets and are amortized on a
F-10
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
straight-line basis over the terms of the agreements. Noncompete obligations
at December 31, 1997 and 1996, net of accumulated amortization, totaled
approximately $3,171 and $2,498, respectively.
Annual maturities on noncompete obligations as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998................................................................ $1,019
1999................................................................ 512
2000................................................................ 243
2001................................................................ 228
2002................................................................ 185
Thereafter.......................................................... 984
------
$3,171
======
</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, 1997 and 1996, which is included in accrued
expenses in the accompanying consolidated balance sheets.
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 had occurred on
January 1, 1996 and 1995, respectively. AMF Bowling's 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, reported elsewhere in this report, AMF Bowling's 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. AMF Bowling's 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 report 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.
F-11
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA RESULTS OF OPERATIONS (IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
AMF PREDECESSOR AMF
BOWLING, COMPANY BOWLING, 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
(income):
Interest expense....... 78.0 4.5 23.7 (e) 106.2
Other expenses, net.... 1.9 0.7 -- 2.6
Interest income........ (5.8) (0.6) -- (6.4)
------ ------ ----- ------
Income (loss) before
income taxes........... (28.0) (13.6) 11.2 (30.4)
Provision (benefit) for
income taxes........... (8.5) (1.7) 1.3 (f) (8.9)
------ ------ ----- ------
Net income (loss)... $(19.5) $(11.9) $ 9.9 $(21.5)
====== ====== ===== ======
Net loss per share...... $(0.55)
======
</TABLE>
- --------
(a) 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.
(b) To reflect the impact of AMF Group 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 Prior Owners 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 AMF Bowling from S corporations to taxable corporations
under the U.S. federal tax laws upon consummation of the Acquisition.
F-12
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA RESULTS OF OPERATIONS (IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR AMF
COMPANY BOWLING, INC.
TWELVE MONTHS TWELVE MONTHS
ENDED PRO FORMA ENDED
12/31/95 ADJUSTMENTS 12/31/95
------------- ----------- -------------
<S> <C> <C> <C>
Operating revenue.................... $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 (income):
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)
------ ------- ------
Net loss per share................... $(0.47)
======
</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 revenue and expenses related to the
following:
(i) Certain assets of the Predecessor Company not purchased by AMF Group
Holdings.
(ii) Impact of AMF Group 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 the
Prior Owners and other related parties were cancelled.
(i) To reflect the termination of management fees charged by an affiliate of
the Prior Owners.
(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.
F-13
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. INVENTORIES
Inventories at December 31, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Bowling Products, at FIFO:
Raw materials.............................................. $15,283 $11,683
Work in progress........................................... 2,279 2,335
Finished goods and spare parts............................. 33,082 23,195
Bowling Centers, at average cost:
Merchandise inventory...................................... 5,924 3,788
------- -------
$56,568 $41,001
======= =======
</TABLE>
NOTE 5. DEFERRED TAXES AND OTHER CURRENT ASSETS
The components of deferred taxes and other current assets at December 31,
1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred income taxes....................................... $ 5,547 $ 4,847
Advances or deposits........................................ 3,288 2,018
Other....................................................... 8,214 4,313
------- -------
$17,049 $11,178
======= =======
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment, net at December 31, 1997 and 1996, consists of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land..................................................... $113,629 $ 90,512
Buildings and improvements............................... 280,046 210,298
Equipment, furniture, and fixtures....................... 444,437 304,067
Other.................................................... 7,282 2,631
-------- --------
845,394 607,508
Less: accumulated depreciation and amortization.......... (94,509) (28,200)
-------- --------
$750,885 $579,308
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$64,480 for 1997 and $28,200 for 1996.
NOTE 7. OTHER LONG-TERM ASSETS
Other long-term assets are primarily composed of deferred income taxes,
long-term rent deposits, long-term portion of noncompete assets, and notes
receivable.
F-14
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued compensation........................................ $ 9,523 $ 9,141
Accrued interest............................................ 8,253 8,640
League bowling accounts..................................... 14,237 7,676
Accrued installation costs.................................. 4,868 4,451
Other....................................................... 27,984 24,449
------- -------
$64,865 $54,357
======= =======
</TABLE>
NOTE 9. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Bank debt............................................ $ 619,362 $ 564,625
Senior subordinated notes............................ 250,000 250,000
Senior subordinated discount notes................... 189,261 274,663
Mortgage and equipment note.......................... 1,976 1,965
---------- ----------
Total debt....................................... 1,060,599 1,091,253
Current maturities................................... (27,376) (42,376)
---------- ----------
Total long-term debt............................. $1,033,223 $1,048,877
========== ==========
</TABLE>
Bank Debt
The bank debt (the "Senior Debt") was incurred pursuant to a credit
agreement dated as of May 1, 1996, and amended and restated as of November 3,
1997 (the "Credit Agreement"), between Bowling Worldwide and its lenders. The
Credit Agreement provides 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 "Bank Facility", and
together with the Term Facilities, the "Senior Facilities").
The Term Facilities consist of the following three tranches: (i) a Term Loan
Facility of $130.0 million, (ii) an Amortization Extended Loans ("AXELsSM")
Series A Facility of $187.5 million, and (iii) an AXELsSM Series B Facility of
$137.8 million. Maturity dates of the three tranches and scheduled
amortization payments are included in tables below.
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 that varies in accordance with a performance pricing grid that is based
on the ratio of total debt to EBITDA (defined as earnings before net interest
expense, income taxes, depreciation and amortization, and other income and
expenses) for the rolling period (defined as the four most recent quarters)
then most recently ended. Until November 7, 1998, the margin applicable to
advances under the Term Loan Facility bearing interest based on Citibank's
customary base rate will range from 0.75% to 0.875%, and the margin applicable
to advances under the Term Loan Facility bearing interest based on Citibank's
Eurodollar rate will range from 1.75% to 1.875%. Thereafter, the margin
applicable to advances under the Term Loan Facility bearing interest based on
Citibank's customary base rate will range from 0.00% to 0.875% and the margin
applicable to advances under the Term Loan Facility bearing interest based on
Citibank's Eurodollar rate will range from 0.75% to 1.875%. At December 31,
1997, the applicable margin for advances under the Term Loan Facility bearing
interest based on
F-15
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Citibank's customary base rate was 0.75% and the applicable margin for
advances under the Term Loan Facility bearing interest based on Citibank's
Eurodollar rate was 1.75%. At December 31, 1997, the interest rate for
advances under the Term Loan Facility was 7.6875%.
Until November 7, 1998, the margin applicable to advances under the AXELsSM
Series A Facility bearing interest based on Citibank's customary base rate
will range from 1.00% to 1.125% and the margin applicable to advances under
the AXELsSM Series A Facility bearing interest based on Citibank's Eurodollar
rate will range from 2.00% to 2.125%. Thereafter, the margin applicable to
advances under the AXELsSM Series A Facility bearing interest based on
Citibank's customary base rate will range from 0.875% to 1.125% and the margin
applicable to advances under the AXELsSM Series A Facility bearing interest
based on Citibank's Eurodollar rate will range from 1.875% to 2.125%. At
December 31, 1997, the applicable margin for advances under the AXELsSM Series
A Facility bearing interest based on Citibank's customary base rate was 1.00%
and the applicable margin for advances under the AXELsSM Series A Facility
bearing interest based on Citibank's Eurodollar rate was 2.00%. At December
31, 1997, the interest rate for advances under the AXELsSM Series A Facility
was 7.9375%.
Until November 7, 1998, the margin applicable to advances under the AXELsSM
Series B Facility bearing interest based on Citibank's customary base rate
will range from 1.25% to 1.375% and the margin applicable to advances under
the AXELsSM Series B Facility bearing interest based on Citibank's Eurodollar
rate will range from 2.25% to 2.375%. Thereafter, the margin applicable to
advances under the AXELsSM Series B Facility bearing interest based on
Citibank's customary base rate will range from 1.125% to 1.375% and the margin
applicable to advances under the AXELsSM Series B Facility bearing interest
based on Citibank's Eurodollar rate will range from 2.125% to 2.375%. At
December 31, 1997, the applicable margin for advances under the AXELsSM Series
B Facility bearing interest based on Citibank's customary base rate was 1.25%
and the applicable margin for advances under the AXELsSM Series B Facility
bearing interest based on Citibank's Eurodollar rate was 2.25%. At December
31, 1997, the interest rate for advances under the AXELsSM Series B Facility
was 8.1875%
The Bank Facility has an aggregate amount available of $355.0 million, and
will mature on March 31, 2002. The Bank Facility 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 ratios of total debt to EBITDA (defined above). Until November 7,
1998, the margin applicable to advances under the Bank Facility bearing
interest based on Citibank's customary base rate will range from 0.75% to
0.875% and the margin applicable to advances under the Bank Facility bearing
interest based on Citibank's Eurodollar rate will range from 1.75% to 1.875%.
Thereafter, the margin applicable to advances under the Bank Facility bearing
interest based on Citibank's customary base rate will range from 0.00% to
0.875% and the margin applicable to advances under the Bank Facility bearing
interest based on Citibank's Eurodollar rate will range from 0.75% to 1.875%.
At December 31, 1997, the applicable margin for advances under the Bank
Facility bearing interest based on Citibank's customary base rate was 0.75%
and the applicable margin for advances under the Bank Facility bearing
interest based on Citibank's Eurodollar rate was 1.75%. At December 31, 1997,
the interest rate for advances under the Bank Facility was 7.6875%.
The 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 Credit Agreement also contains certain provisions which
limit the amount of funds available for transfer from Bowling Worldwide to AMF
Group Holdings, and from AMF Group Holdings to AMF Bowling. Limits exist on,
among other
F-16
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
things, the declaration or payment of dividends, distributions of assets,
amount of debt and issuance or sale of capital stock.
So long as Bowling Worldwide is not in default of the covenants contained in
the Credit Agreement, it may i) declare and pay dividends in common stock; ii)
declare and pay cash dividends to the extent necessary to make payments of
approximately $0.15 million in May 1997 and, to the extent necessary, to make
payments of approximately $0.15 million due in May 1998 under certain
noncompete agreements with the Prior Owners; iii) declare and pay cash
dividends for general administrative expenses not to exceed $0.25 million; and
iv) declare and pay cash dividends not to exceed $2.0 million for the
repurchase of Common Stock. As of December 31, 1997, Bowling Worldwide was in
compliance with all of its covenants.
The lenders (the "Senior Lenders") of the Senior Debt are secured by
collateral described in the Senior Debt security agreement, intellectual
property security agreement, mortgages and any other agreements with the
Senior Lenders that create a lien in favor of the Senior Lenders. The
collateral includes, but is not limited to stock in subsidiaries of AMF
Bowling Worldwide, cash and cash equivalents, equipment, inventory,
investments, intellectual property and mortgages.
Mortgage and Equipment Note
At December 31, 1997 and 1996, a mortgage and equipment note relating to one
U.S. bowling center bore interest at 9.175%.
Notes
The senior subordinated notes will mature on March 15, 2006. Interest
accrues from the date of issuance at an annual rate of 10 7/8% and is payable
in cash semiannually in arrears on March 15 and September 15 of each year
which commenced on September 15, 1996.
Prior to December 15, 1997, the senior subordinated discount notes had a
fully-accreted value of $452.0 million based on a maturity date of March 15,
2006. On December 15, 1997, the Company redeemed $118.9 million in principal
which represented a fully-accreted value of $175.0 million using a portion of
the proceeds received from an initial public offering of AMF Bowling common
stock. See "Note 12. Stockholders' Equity". The remaining balance of senior
subordinated discount notes will mature on March 15, 2006, at a fully-accreted
value of $277.0 million. The senior subordinated discount notes will result in
an effective yield of 12 1/4% per annum, computed on a semiannual bond
equivalent basis. No interest is 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.
The Company's payment obligations under the senior subordinated notes and
the senior subordinated discount notes (together, the "Notes") are jointly and
severally guaranteed on a senior subordinated basis by AMF Group Holdings and
each of Bowling Worldwide's subsidiaries identified below in "Note 21.
Condensed Consolidating Financial Statements" (collectively, the
"Guarantors").
The guarantees of the Notes are subordinated to the guarantees of the Senior
Debt and the mortgage and equipment note outstanding at December 31, 1997,
referred to above. The Notes are general, unsecured obligations of Bowling
Worldwide, are subordinated in right of payment to all Senior Debt of Bowling
Worldwide, and rank pari passu with all existing and future subordinated debt
of Bowling Worldwide. The claims of the holders of the Notes will be
effectively subordinated to all other indebtedness and other liabilities
(including trade payables and capital lease obligations) of Bowling
Worldwide's subsidiaries that are not Guarantors and through which Bowling
Worldwide will conduct a portion of its operations. See "Note 21. Condensed
Consolidating Financial Statements."
F-17
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to March 15, 1999, up to $100 million in aggregate principal amount of
senior subordinated notes will be redeemable at the option of Bowling
Worldwide, on one or more occasions, from the net proceeds of public or
private sales of common stock of, or contributions to the common equity
capital of, Bowling Worldwide, at a price of 110.875% of the principal amount
of the senior subordinated notes, together with accrued and unpaid interest,
if any, to the date of redemption; so long as at least $150 million in
aggregate principal amount of senior subordinated notes remains outstanding
after such redemption. Similarly, prior to March 15, 1999, the senior
subordinated discount notes will be redeemable at the option of Bowling
Worldwide, on one or more occasions, from the net proceeds of public or
private sales of common stock of, or contributions to the common equity
capital of, Bowling Worldwide, at a price of 112.25% of the accreted value of
the senior subordinated discount notes; so long as at least $150 million in
accreted value of senior subordinated discount notes remains outstanding after
such redemption.
The indenture governing the senior subordinated notes and the indenture
governing the senior subordinated discount notes (the "Note Indentures")
contain certain covenants that, among other things, limit the ability of
Bowling Worldwide 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 Bowling Worldwide and engage in mergers and
consolidations. As of December 31, 1997, Bowling Worldwide was in compliance
with all of its covenants.
Annual maturities of long-term debt, including accretion of the senior
subordinated discount notes, as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $ 27,376
1999.............................................................. 32,376
2000.............................................................. 34,251
2001.............................................................. 83,001
2002.............................................................. 279,110
Thereafter........................................................ 692,246
----------
$1,148,360
==========
</TABLE>
Interest Rate Cap Agreements
During 1996, Bowling Worldwide entered into an interest rate cap agreement
with Goldman Sachs Capital Markets, L.P., to reduce the interest rate risk of
its Senior Debt. The notional amount of this cap was $300.0 million at
December 31, 1997. Under the terms of this agreement, Bowling Worldwide
receives payment if the three-month LIBOR rises above 5.75% through April
1997, above 6.50% from May 1997 through April 1998 and above 7.5% from May
1998 through October 1998. No amounts were received under this agreement
during 1996 or 1997. During 1997, Bowling Worldwide entered into a second
interest rate cap agreement with Goldman Sachs Capital Markets, L.P. to
further reduce the interest rate risk of its Senior Debt. The notional amount
of this cap was $100.0 million at December 31, 1997. Under the terms of this
agreement, Bowling Worldwide receives payment if the three-month LIBOR rises
above 7.00% from July 7, 1997 through March 31, 1998. No amounts were received
under this agreement during 1997.
Bowling Worldwide is exposed to credit-related loss in the event of non-
performance by the counterparty. Bowling Worldwide believes its exposure to
potential loss due to counterparty non-performance is minimized primarily due
to the relatively strong credit rating of the counterparty.
F-18
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Average amounts outstanding and average borrowing rates for 1997 were as
follows:
<TABLE>
<CAPTION>
OUTSTANDING AT AVERAGE AVERAGE
DECEMBER 31, AMOUNTS BORROWING
DESCRIPTION MATURITY DATES 1997 OUTSTANDING RATES
----------- --------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Term Loan Facility...... March 31, 2002 $122,500 $205,587 8.27%
AXELs(SM) A Facility.... March 31, 2003 186,750 190,085 8.56
AXELs(SM) B Facility.... March 31, 2004 137,000 138,314 8.73
Bank Facility........... March 31, 2002 173,112 32,669 8.75
Mortgage and Equipment
Notes.................. October 1, 2013 1,976 1,970 9.18
</TABLE>
Prior to the Credit Agreement, the Company had borrowings under an
acquisition facility (the "Acquisition Facility") which was included in the
Senior Debt. Average amounts outstanding under the Acquisition Facility
between January 1, 1997 and November 7, 1997 were $77,197, at an average
borrowing rate of 8.72%.
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, which were incurred to obtain bank
financing for the Acquisition, have been amortized over eight years and were
entirely written off in the fourth quarter of 1997 in connection with the
Credit Agreement. Bank financing costs associated with the Credit Agreement
are amortized using the effective interest rate method over approximately 6.5
years. 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 $4,856 in 1997 and $3,252 in 1996. Interest expense for interest rate cap
agreements was $1,823 in 1997 and $304 in 1996.
Extraordinary Charges
The Company recorded after-tax extraordinary charges totaling $23,366 in the
fourth quarter of 1997 as a result of entering into the Credit Agreement, the
premium paid to redeem a portion of the senior subordinated discount notes and
the write-off of the portion of bond financing costs attributable to the
senior subordinated discount notes redeemed.
Other
The Company is highly leveraged as a result of 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, 1997 and 1996, consists of
the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
U.S. .................................................... $(55,695) $(28,427)
International............................................ 12,083 411
-------- --------
$(43,612) $(28,016)
======== ========
</TABLE>
F-19
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax provision (benefit) at December 31, 1997 and 1996, consists
of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CURRENT INCOME TAX EXPENSE
U.S. Federal............................................ $ -- $ --
State and local......................................... -- --
International........................................... 6,965 5,508
-------- --------
Total current provision............................. 6,965 5,508
DEFERRED TAX BENEFIT
U.S. Federal............................................ (18,039) (12,274)
State and local......................................... (1,702) (1,766)
International........................................... -- --
-------- --------
Total deferred benefit.............................. (19,741) (14,040)
-------- --------
Total benefit....................................... $(12,776) $ (8,532)
======== ========
</TABLE>
The tax effects of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities at December 31, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS
Current assets
Reserves not deductible for tax purposes................... $ 5,547 $ 4,847
NONCURRENT ASSETS
Net operating losses....................................... 38,460 8,225
Foreign tax credits........................................ 12,417 5,452
Interest expense on high-yield debt........................ 12,266 8,533
Financing costs............................................ 7,549 --
Translation effects........................................ 1,069 --
Other...................................................... 104 --
------- -------
Total noncurrent deferred tax assets........................ 71,865 22,210
------- -------
Total deferred tax assets................................... 77,412 27,057
------- -------
DEFERRED INCOME TAX LIABILITIES
Goodwill amortization...................................... 14,670 5,840
Depreciation on property and equipment..................... 41,569 20,265
------- -------
Total noncurrent deferred tax liabilities................... 56,239 26,105
------- -------
Net deferred tax assets..................................... $21,173 $ 952
======= =======
</TABLE>
In connection with the Acquisition, the Company has made a joint tax
election with the Prior Owners for certain entities under Section 338(h)(10)
of the IRC. The effect of this election is the revaluation of the assets and
liabilities 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 $110,007. The NOLs may be carried forward for fifteen
years until expiration. Foreign tax credits eligible for carry forward total
$12,417, and expire in five years. The Company had no valuation allowance
related to income tax assets as of December 31, 1997 and 1996, and there was
F-20
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
no change in the valuation allowance during 1997. Management believes that it
is more likely than not that the tax benefits will be realized.
The provision for income taxes differs from the amount computed by applying
the statutory rate of 35 percent for 1997 and 1996 to loss before taxes. The
principal reasons for these differences are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
U.S. Federal, at statutory rate......................... $(15,264) $(9,806)
Increase resulting from:
Meals and entertainment................................ 275 159
Goodwill relating to acquisition of international
bowling centers....................................... 1,658 1,093
Disallowance of certain high yield debt................ 260 192
Other, net............................................. 295 (170)
-------- -------
Total................................................... $(12,776) $(8,532)
======== =======
</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 2012. 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 $1,200 in 1997 and $912 in 1996.
Total rent expense under operating leases aggregated approximately $24,117 in
1997 and $13,737 in 1996.
Future minimum rental payments under the operating lease agreements as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.............................................................. $ 23,845
1999.............................................................. 19,960
2000.............................................................. 17,350
2001.............................................................. 14,904
2002.............................................................. 12,857
Thereafter........................................................ 82,721
--------
$171,637
========
</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 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.
F-21
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. STOCKHOLDERS' EQUITY
Stockholders Agreement
On April 30, 1996, AMF Bowling and the institutional stockholders of AMF
Bowling (the "Stockholders") entered into a stockholders agreement (the
"Stockholders Agreement") which regulates the relationship among AMF Bowling
and the Stockholders. The Stockholders Agreement primarily provides for,
subject to certain limitations and exceptions, (a) the establishment and
nomination of the Board of Directors and an Executive Committee; (b) certain
of the Stockholders to purchase additional shares of Common Stock in order to
finance acquisitions, capital expenditures, investments in partnerships or
joint ventures, or any similar transactions or expenditures; (c) Goldman Sachs
to have the exclusive right to perform all consulting, financing, investment
banking and similar services for AMF Bowling and its subsidiaries, for
customary compensation and on terms customary for similar engagements with
unaffiliated third parties (this right described in this clause (c) terminated
pursuant to the terms of the Stockholders Agreement upon the consummation of
the Initial Public Offering (as hereinafter defined)); and (d) guidance in the
event a Stockholder determines to sell its shares of Common Stock. The
foregoing rights and obligations described in clauses (a), (b) and (d) will
terminate under certain circumstances; and notwithstanding those
circumstances, in the event of any merger, recapitalization, consolidation,
reorganization or other restructuring of AMF Bowling as a result of which the
Stockholders own less than a majority of the outstanding voting power of the
entity surviving such transaction, the Stockholders Agreement will terminate.
Registration Rights Agreement
On April 30, 1996, AMF Bowling and the Stockholders entered into a
registration rights agreement (the "Registration Rights Agreement"). Pursuant
to the Registration Rights Agreement, subject to certain limitations and
exceptions, certain Stockholders may make demands of AMF Bowling to register
shares of Common Stock held by such Stockholders; provided, that AMF Bowling
is not required to so register unless the aggregate offering price is at least
$50 million. Upon a demand for registration by certain Stockholders, 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 Common Stock under
a registration statement filed by AMF Bowling, subject to certain exceptions
and limitations.
In September 1997, AMF Bowling's institutional stockholders purchased an
aggregate of 1,780,000 shares of Common Stock for $20.00 per share. The
aggregate proceeds of $35.6 million were used to fund acquisitions and for
other corporate purposes.
On August 21, 1997, AMF Bowling filed a registration statement with the
Securities and Exchange Commission for an initial public offering (the
"Initial Public Offering") of Common Stock. On November 7, 1997, AMF Bowling
issued 15,525,000 shares of its common stock at $19.50 per share pursuant to
the Initial Public Offering. The net proceeds of the Initial Public Offering
were approximately $279.1 million after deducting the underwriting discount
and expenses payable by AMF Bowling, and were used to repay $150.8 million of
indebtedness under the Credit Agreement and to redeem $118.9 million in
principal of the senior subordinated discount notes of Bowling Worldwide. See
"Note 9. Long-Term Debt".
F-22
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. 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 additional profit-sharing
contribution as determined by the Board of Directors. Employer contributions
vest 100 percent after a five-year period. The amounts charged to expense
under this plan were $1,779 in 1997 and $1,060 in 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 $814 in
1997 and $506 in 1996.
Bowling Worldwide has entered into employment agreements with two
executives, 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 two executives were also granted options to purchase a total of
235,000 shares of 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 approximated the fair value of
the Common Stock at the date of the grants.
On February 28, 1997, an executive resigned from all positions with the
Company. As part of the severance arrangement, AMF Bowling repurchased all of
the shares of Common Stock owned by the executive and all options held by the
executive were cancelled.
In connection with the Acquisition, AMF Bowling adopted a stock incentive
plan (the "1996 Plan") under which AMF Bowling may grant incentive awards in
the form of shares of Common Stock, options to purchase shares of Common Stock
("Stock Options"), and stock appreciation rights to certain officers,
employees, consultants, and nonemployee directors ("Participants") of AMF
Bowling and its affiliates. The total number of shares of Common Stock
reserved and available for grant under the 1996 Plan is 1,767,151. A committee
of AMF Bowling's Board of Directors (the "Committee") is authorized to make
grants and various other decisions under the 1996 Plan and to make
determinations as to a number of the terms of awards granted under the 1996
Plan. In 1997 and 1996, the Committee granted Stock Options to Participants to
purchase a total of 703,500 and 1,119,000 shares of Common Stock,
respectively. All such Stock Options were granted 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 dates. Stock Options are nontransferable (except
under certain limited circumstances) and, unless otherwise determined by the
Committee, have a term of ten years.
The number of Stock Options outstanding to senior management, other
employees, and directors at December 31, 1997 and 1996, total 1,573,500 and
1,096,500, respectively. 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, 1997 and 1996. Of the total Stock
Options awarded under the 1996 Plan, 265,966 were exercisable during 1997.
None of these were exercised. Of the 130,000 Stock Options granted to Mr.
Stanard, 26,000 were exercisable during 1997 and none of these were exercised.
None of the Stock Options awarded under the 1996
F-23
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Plan and to Mr. Stanard were exercisable during 1996. Forfeited Stock Options
totaled 226,500 and 22,500 in 1997 and 1996, respectively.
The 1996 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. AMF Bowling's Board of Directors and the Committee have authority
to amend the 1996 Plan and awards granted thereunder, subject to the terms of
the 1996 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 losses for 1997 and 1996 would have been increased to $56,503
and $19,858, respectively and the Company's net losses per share for 1997 and
1996 would have been increased to $1.25 and $0.50, respectively.
The weighted-average fair value of options granted during 1997 and 1996 is
$6.78 and $3.05 per option, respectively. The 1,703,500 options outstanding at
December 31, 1997 have a weighted-average exercise price of $10.00 and a
weighted-average remaining contractual life of 9 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model. The following weighted-average
assumptions were used for grants in 1997: risk-free rate of return of 6.5%;
expected dividend yield of zero; expected time of exercise of five years;
expected volatility of 27.5%. The following weighted-average assumptions were
used for grants in 1996: 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 in 1996 for the securities
underlying the options based on the minimum value method.
1998 STOCK INCENTIVE PLAN
Subject to shareholder approval, AMF Bowling's Board of Directors has
approved the 1998 Stock Incentive Plan (the "1998 Plan") under which AMF
Bowling may grant to employees of the Company and its affiliates incentive
awards ("Awards") in the form of Stock Options, stock appreciation rights and
shares of Common Stock that are subject to certain terms and conditions. Two
million shares of Common Stock will be reserved and available for issuance
under the 1998 Plan. In addition, shares of Common Stock that have been
reserved but not issued under the 1996 Plan, and shares which are subject to
awards under the 1996 Plan that expire or otherwise terminate, may be granted
as Awards pursuant to the 1998 Plan. As of December 31, 1997, there were
193,651 shares of Common Stock under the 1996 Plan that are available for
grant of awards under that plan.
Shares allocated to Awards granted under the 1998 Plan which are later
forfeited, expire or otherwise terminate (including shares subject to Stock
Appreciation Rights that are exercised for cash) may again be used for Awards
under the 1998 Plan. No more than two hundred thousand shares of Common Stock
may be allocated to the Awards granted under the 1998 Plan to a Participant in
any one year.
Awards under the 1998 Plan are contingent on Board and shareholder approval.
As of February 20, 1998, no shares of Common Stock were awarded under the 1998
Plan. Unless the Board sooner terminates it, the 1998 Plan will terminate ten
years after its effective date.
F-24
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes in 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Interest..................................................... $83,200 $44,465
Income taxes................................................. $ 5,518 $ 7,990
</TABLE>
Net cash used for business acquisitions in 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
BOWLING
CENTER
ACQUISITIONS
------------
<S> <C>
Year ended December 31, 1997:
Working capital, other than cash acquired...................... $ 6,876
Plant and equipment............................................ (200,178)
Purchase price in excess of the net assets acquired............ (20,916)
Other assets................................................... (9,106)
Noncurrent liabilities......................................... 8,563
---------
Net cash used for business acquisitions........................ $(214,761)
=========
</TABLE>
<TABLE>
<CAPTION>
OTHER
BOWLING
CHARAN CENTER
ACQUISITION ACQUISITION ACQUISITIONS TOTAL
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Period ended December
31, 1996:
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)
Warrants to purchase
shares of Common
Stock................. 8,700 -- -- 8,700
Noncurrent
liabilities........... 6,198 -- -- 6,198
----------- --------- ------- -----------
Net cash used for
business
acquisitions.......... $(1,342,861) $(102,885) $(5,182) $(1,450,928)
=========== ========= ======= ===========
</TABLE>
Noncash financing activities in 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Issuance of Common Stock and Stock Options in connection
with a service contract.................................... $4,028 --
Warrants to purchase shares of Common Stock................. -- $8,700
Notes receivable from three executive officers for the
purchase of Common Stock................................... -- 3,000
</TABLE>
NOTE 15. ACQUISITIONS
On October 10, 1996, AMF Bowling Centers, Inc. ("AMF Bowling Centers"), a
Virginia corporation and an indirect, wholly owned subsidiary of Bowling
Worldwide, 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
F-25
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, net of cash acquired, was
approximately $102.9 million, subject to certain adjustments. The Charan
Acquisition was funded with approximately $40.0 million from the sale of
equity by AMF Bowling to its institutional stockholders and one of its
directors, and with approximately $62.9 million from available borrowings
under Bowling Worldwide's then 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 is based on pro forma AMF Bowling 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 Charan 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,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Operating revenue......................................... $ 595.5 $ 622.7
Operating income.......................................... $ 80.0 $ 105.2
Loss before income taxes.................................. $ (26.9) $ (4.9)
Net loss.................................................. $ (19.5) $ (16.1)
Net loss per share........................................ $ (0.50) $ (0.42)
Weighted average shares outstanding....................... 39,293 38,375
</TABLE>
Other Acquisitions
Since the Acquisition and prior to December 31, 1997, AMF Bowling Centers
purchased an aggregate of 179 bowling centers from various unrelated sellers
including Charan. The combined purchase price, net of cash acquired, was
approximately $322.8 million, and was funded with approximately $40.0 million
from the sale of equity by AMF Bowling to its institutional stockholders and
one of its directors, and with $282.8 million from available borrowing under
Bowling Worldwide's then existing Acquisition Facility and current Bank
Facility. The results of operations for acquired bowling centers and certain
related assets and liabilities other than the Charan Acquisition were not
material in relation to the Company's consolidated results of operations or
financial position.
Subsequent to December 31, 1997, the Company acquired an additional 24
bowling centers in the United States, two bowling centers in the United
Kingdom and one center in Australia from unrelated sellers, including fifteen
bowling centers in the U.S. from Active West, Inc. ("Active West"). The
aggregate purchase price for these acquisitions was approximately $36.5
million, including $35.3 million funded with borrowings under the Bank
Facility and, with respect to the Active West acquisition, 50,000 shares of
Common Stock valued at the closing price of $24 3/16 per share on the New York
Stock Exchange on the date of acquisition.
NOTE 16. JOINT VENTURES
In April 1997, the Company entered into a joint venture with Hong Leong
Corporation Limited, a Singapore-based conglomerate ("Hong Leong"), to build
and operate bowling centers in the Asia
F-26
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pacific region. The joint venture ("Hong Leong JV") is owned 50% by the
Company and 50% by Hong Leong. The Hong Leong JV opened its first bowling
center during November 1997 in Tianjin, China. Additional sites are being
evaluated for future development.
In August 1997, the Company entered into a joint venture with Playcenter
S.A., a Sao Paulo-based amusement and entertainment company ("Playcenter"), to
build and operate bowling centers in Brazil and Argentina. The joint venture
("Playcenter JV") is owned 50% by the Company and 50% by Playcenter. As of
December 31, 1997, Playcenter JV operated eleven centers in Brazil and two
centers in Argentina.
The Company accounts for its investments in Hong Leong JV and Playcenter JV
by the equity method. The joint ventures' operations and the Company's equity
in earnings of the joint ventures are presented below (in thousands,
unaudited):
<TABLE>
<CAPTION>
JOINT VENTURE
-----------------
HONG
JOINT VENTURE OPERATIONS LEONG PLAYCENTER TOTAL
------------------------ ----- ---------- -------
<S> <C> <C> <C> <C>
Operating revenue........................... $ 297 $ 4,894 $ 5,191
Operating income (loss)..................... 15 (1,215) (1,200)
Income (loss) before income taxes........... 15 (1,546) (1,531)
Income (loss) after income taxes............ 1 (1,608) (1,607)
<CAPTION>
JOINT VENTURE
-----------------
HONG
AMF EQUITY IN EARNINGS LEONG PLAYCENTER TOTAL
---------------------- ----- ---------- -------
<S> <C> <C> <C> <C>
AMF equity in income (loss)................. $ -- $ (804) $ (804)
Elimination of 50% gross profit on sales to
joint ventures............................. (354) (204) (558)
Equity in earnings of joint ventures........ $(354) $(1,008) $(1,362)
</TABLE>
The joint ventures' financial position as of December 31, 1997, and the
Company's investments in the joint ventures and amounts due from Playcenter JV
as of December 31, 1997, are presented below (in thousands, unaudited):
<TABLE>
<CAPTION>
JOINT VENTURE
-----------------
HONG
JOINT VENTURE FINANCIAL POSITION LEONG PLAYCENTER
-------------------------------- ------ ----------
<S> <C> <C>
Current assets............................................. $1,240 $ 4,004
Noncurrent assets.......................................... 5,946 25,153
Current liabilities........................................ 493 2,734
Noncurrent liabilities..................................... 2,242 23,238
Stockholders' equity....................................... 4,451 3,185
</TABLE>
<TABLE>
<CAPTION>
JOINT VENTURE
-------------------------
HONG
INVESTMENTS/AMOUNTS DUE FROM JOINT VENTURES LEONG PLAYCENTER TOTAL
------------------------------------------- ------ ---------- -------
<S> <C> <C> <C>
Investments in joint ventures..................... $1,149 $ 8,669 $ 9,818
Note receivable due from joint venture............ -- 3,781 3,781
Loan to joint venture............................. -- 6,400 6,400
------ ------- -------
Total investment/due from joint ventures........ $1,149 $18,850 $19,999
====== ======= =======
</TABLE>
F-27
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's investment in Playcenter JV includes the unamortized excess of
the Company's investment over its equity in the joint venture's net assets.
This excess was $7,076 at December 31, 1997, and is being amortized on a
straight-line basis over the estimated life of the joint venture of ten years.
The note receivable due from Playcenter JV represents the balance due for
sales of equipment to the joint venture through a Brazilian distributor. The
balance due on the equipment sales and the loan to Playcenter JV bear interest
at 12% through November 21, 1997, and 8% thereafter. Principal and interest
will be repaid to the Company by the joint venture from its operating cash
flow in excess of capital expenditures required to build additional bowling
centers. Subsequent to December 31, 1997, the Company lent Playcenter JV an
additional $1,600 under the same terms.
NOTE 17. BUSINESS SEGMENTS
The Company operates in two major lines of business: operation of bowling
centers and manufacturing and sale of bowling and related products.
Information concerning operations in these business segments for 1997 and 1996
is presented below:
<TABLE>
<CAPTION>
AMF BOWLING, INC.
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS)
BOWLING CENTERS BOWLING PRODUCTS
----------------------------- -----------------------------
SUB SUB
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL CORPORATE ELIMINATIONS TOTAL
------ ------------- -------- ------ ------------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
unaffiliated
customers.............. $324.7 $104.4 $ 429.1 $105.7 $178.9 $284.6 $ -- $ -- $ 713.7
Intersegment sales...... -- -- -- 9.4 5.3 14.7 -- -- 14.7
Operating income
(loss)................. 36.5 11.1 47.6 36.6 14.4 51.0 (16.8) 1.1 82.9
Identifiable assets..... 810.5 309.1 1,119.6 631.1 69.9 701.0 10.3 1.2 1,832.1
Depreciation and
amortization........... 64.3 18.5 82.8 18.6 1.2 19.8 1.4 (1.5) 102.5
Capital expenditures.... 33.4 6.0 39.4 8.1 1.1 9.2 8.6 (0.5) 56.7
Research and development
expense................ -- -- -- 0.9 -- 0.9 -- -- 0.9
<CAPTION>
AMF BOWLING, INC.
-------------------------------------------------------------------------------------------
PERIOD ENDED DECEMBER 31, 1996
(IN MILLIONS)
BOWLING CENTERS BOWLING PRODUCTS
----------------------------- -----------------------------
U.S. INTERNATIONAL SUBTOTAL U.S. INTERNATIONAL SUBTOTAL CORPORATE ELIMINATIONS TOTAL
------ ------------- -------- ------ ------------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
unaffiliated
customers.............. $132.3 $ 67.4 $ 199.7 $ 69.1 $116.0 $185.1 $ -- $ -- $ 384.8
Intersegment sales...... -- -- -- 3.7 2.3 6.0 -- -- 6.0
Operating income
(loss)................. 10.8 6.8 17.6 26.1 10.9 37.0 (8.6) 0.1 46.1
Depreciation and
amortization........... 25.6 12.1 37.7 12.1 0.5 12.6 -- (0.9) 49.4
Capital expenditures.... 8.1 5.0 13.1 1.5 1.7 3.2 1.3 (0.7) 16.9
Research and development
expense................ -- -- -- 1.3 -- 1.3 -- -- 1.3
</TABLE>
F-28
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18. GEOGRAPHIC SEGMENTS
Information about the Company's operations in different geographic areas for
1997 and 1996, and identifiable assets at December 31, 1997 and 1996, are
presented below:
Operating revenue:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
United States............................................ $439,800 $205,800
China, including Hong Kong............................... 82,400 60,700
Japan.................................................... 54,700 36,800
Australia................................................ 49,500 33,500
United Kingdom........................................... 44,100 15,900
Sweden................................................... 9,100 7,400
Mexico................................................... 8,800 5,400
Korea.................................................... 14,100 14,300
Spain.................................................... 3,300 900
Canada................................................... 600 200
Other European countries................................. 21,300 9,900
Middle East.............................................. 700 --
Eliminations............................................. (14,700) (6,000)
-------- --------
$713,700 $384,800
======== ========
</TABLE>
Operating revenue for the U.S. Bowling Products operation has been reduced
by $104,900 in 1997 and $63,400 in 1996 to reflect the elimination of
intracompany sales between the U.S. Bowling products operation and the Bowling
Products international sales and service branches.
Operating income (loss):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
United States.............................................. $56,300 $28,200
China, including Hong Kong................................. 8,300 7,600
Japan...................................................... 4,500 4,000
Australia.................................................. 6,700 4,900
United Kingdom............................................. 4,400 600
Sweden..................................................... 1,300 1,000
Mexico..................................................... 1,300 500
Korea...................................................... 200 100
Spain...................................................... (200) (100)
Canada..................................................... (100) (100)
Middle East................................................ -- --
Other European countries................................... (900) (700)
Eliminations............................................... 1,100 100
------- -------
$82,900 $46,100
======= =======
</TABLE>
Operating income for the U.S. Bowling Products operation has been increased
by $2,300 in 1997 and reduced by $1,000 in 1996 to reflect the elimination of
intracompany gross profit between the U.S. Bowling Products operations and the
Bowling Products international sales and service branches.
F-29
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Identifiable assets:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
United States......................................... $1,451,900 $1,246,700
China, including Hong Kong............................ 36,900 32,700
Japan................................................. 38,300 40,200
Australia............................................. 112,300 138,000
United Kingdom........................................ 115,900 72,300
Sweden................................................ 3,900 3,000
Mexico................................................ 17,200 15,200
Korea................................................. 5,400 4,600
Spain................................................. 6,300 7,300
Canada................................................ 3,400 3,700
Middle East........................................... 200 --
Other European countries.............................. 39,200 30,200
Eliminations.......................................... 1,200 100
---------- ----------
$1,832,100 $1,594,000
========== ==========
</TABLE>
Identifiable assets for the international sales and service branches have
been reduced by $3,200 at December 31, 1997, and $5,500 at December 31, 1996
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 19. RELATED PARTIES
Goldman Sachs and its affiliates have certain interests in the Company in
addition to being the initial purchasers of the Notes 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, and Peter M. Sacerdote,
who is a limited partner of The Goldman Sachs Group, L.P., are directors of
AMF Bowling, AMF Group Holdings and Bowling Worldwide. Goldman Sachs and its
affiliates together currently beneficially own a majority of the outstanding
voting equity of AMF Bowling; 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 Prior Owners in
connection with the Acquisition and received a fee in the form of 10-year
warrants to purchase 870,000 shares of Common Stock. The warrants were 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 which partially funded the
Acquisition, 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., was 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 Company in connection with the Acquisition
and was reimbursed for related expenses.
Under the 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; Citibank, N.A. is acting as
Administrative Agent and Citicorp USA, Inc. is acting as Collateral Agent.
Total fees
F-30
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payable to Goldman Sachs Credit Partners, L.P. in connection with its services
under the Credit Agreement aggregated approximately $900, and such entity was
reimbursed for expenses in connection with such services.
Goldman Sachs acted as the Company's lead underwriter in connection with the
Initial Public Offering. Underwriting discounts paid to the entire
underwriting syndicate in the Initial Public Offering totaled $18,941.
In 1997, the Company paid a fee of $300 to Goldman Sachs for its
representation of the Company in connection with the Company's lease of its
new bowling center at Chelsea Piers in New York.
Pursuant to the two employment agreements with executives of the Company
discussed in "Note 13. Employee Benefit Plans," AMF Bowling issued to each
executive 150,000 shares of 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 Common Stock. Each
executive has borrowed $1.0 million from AMF Bowling in order to fund the
portion of his purchase of 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 AMF Bowling, AMF Group Holdings, and Bowling
Worldwide, purchased 125,000 shares of 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 1996
Plan, non-qualified Stock Options to purchase 100,000 shares of Common Stock
at an exercise price of $10.00 per share. One third of such options vested on
May 1, 1996, one-third vested 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 Common Stock held by Mr. Diker will
be subject to the terms of that agreement.
NOTE 20. RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the fiscal year ended December 31, 1998, the Company is
required to adopt SFAS No. 130 "Reporting Comprehensive Income" and SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information." The
Company does not expect that adoption of these standards will have a material
impact on the Company's financial position or results of operations. The
adoption of SFAS No. 130 by the Company will require reporting comprehensive
income, which includes the foreign currency translation adjustment, in an
alternative format prescribed by the standard.
NOTE 21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating information presents:
. Condensed consolidating balance sheets as of December 31, 1997 and 1996,
and condensed consolidating statements of income and cash flows for 1997
and 1996.
. Elimination entries necessary to combine the entities comprising AMF
Bowling.
The Notes are jointly and severally guaranteed on a full and unconditional
basis by AMF Group Holdings and by the first- and second-tier subsidiaries of
Bowling Worldwide (the "Guarantors"). Third-tier subsidiaries of Bowling
Worldwide, all of which are wholly owned subsidiaries of AMF Worldwide Bowling
Centers Holdings Inc., a second-tier subsidiary of Bowling Worldwide, have not
provided guarantees (the "Non-Guarantors").
F-31
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 33,451 $ 2,339 $ -- $ 35,790
Accounts and notes receivable,
net of allowance for doubtful
accounts..................... 71,652 2,339 -- 73,991
Accounts receivable--
intercompany................. 6,682 1,963 (8,645) --
Inventories................... 54,765 1,803 -- 56,568
Deferred taxes and other...... 14,345 2,704 -- 17,049
---------- -------- --------- ----------
Total current assets....... 180,895 11,148 (8,645) 183,398
Notes receivable--
intercompany.................. 15,482 1,663 (17,145) --
Property and equipment, net.... 712,032 37,845 1,008 750,885
Investment in subsidiaries..... 24,499 628,355 (652,854) --
Goodwill and other assets...... 891,011 6,758 -- 897,769
---------- -------- --------- ----------
Total assets............... $1,823,919 $685,769 $(677,636) $1,832,052
========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 38,513 $ 3,070 $ -- $ 41,583
Accounts payable--
intercompany................. 1,934 6,711 (8,645) --
Accrued expenses.............. 59,495 5,370 -- 64,865
Income taxes payable.......... 3,237 2,407 -- 5,644
Long-term debt, current
portion...................... 27,376 -- -- 27,376
---------- -------- --------- ----------
Total current liabilities.. 130,555 17,558 (8,645) 139,468
Long-term debt................. 1,033,223 -- -- 1,033,223
Notes payable--intercompany.... 2,990 14,155 (17,145) --
Other long-term liabilities.... 5,333 -- -- 5,333
Deferred income taxes.......... (1,036) 1,036 -- --
---------- -------- --------- ----------
Total liabilities.......... 1,171,065 32,749 (25,790) 1,178,024
---------- -------- --------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock.................. -- 596 -- 596
Paid-in capital............... 747,145 746,049 (745,141) 748,053
Retained earnings (deficit)... (74,718) (74,052) 73,722 (75,048)
Equity adjustment from foreign
currency translation......... (19,573) (19,573) 19,573 (19,573)
---------- -------- --------- ----------
Total stockholders'
equity.................... 652,854 653,020 (651,846) 654,028
---------- -------- --------- ----------
Total liabilities and
stockholders' equity...... $1,823,919 $685,769 $(677,636) $1,832,052
========== ======== ========= ==========
</TABLE>
F-32
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)
(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.... 548,218 30,139 951 579,308
Investment in subsidiaries..... 29,628 378,074 (407,702) --
Goodwill and other assets...... 875,250 1,080 -- 876,330
---------- -------- --------- ----------
Total assets............... $1,588,485 $420,561 $(415,036) $1,594,010
========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS'
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.......... 1,676 600 -- 2,276
Long-term debt, current
portion...................... 42,376 -- -- 42,376
---------- -------- --------- ----------
Total current liabilities.. 125,483 9,713 (4,624) 130,572
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 12,778 (8,285) 1,185,195
========== ======== ========= ==========
Commitments and contingencies
Stockholders' equity:
Common stock.................. -- 424 -- 424
Paid-in capital............... 427,446 427,022 (425,442) 429,026
Retained earnings (deficit)... (18,512) (18,512) 17,540 (19,484)
Equity adjustment from foreign
currency translation......... (1,151) (1,151) 1,151 (1,151)
---------- -------- --------- ----------
Total stockholders'
equity.................... 407,783 407,783 (406,751) 408,815
---------- -------- --------- ----------
Total liabilities and
stockholders' equity...... $1,588,485 $420,561 $(415,036) $1,594,010
========== ======== ========= ==========
</TABLE>
F-33
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenue............. $673,714 $ 42,205 $(2,251) $713,668
-------- -------- ------- --------
Operating expenses:
Cost of goods sold........... 207,820 6,230 (1,506) 212,544
Bowling center operating
expenses.................... 229,629 22,188 (611) 251,206
Selling, general, and
administrative expenses..... 61,421 3,125 -- 64,546
Depreciation and
amortization................ 96,812 5,826 (191) 102,447
-------- -------- ------- --------
Total operating expenses.. 595,682 37,369 (2,308) 630,743
-------- -------- ------- --------
Operating income.......... 78,032 4,836 57 82,925
-------- -------- ------- --------
Nonoperating expenses
(income):
Interest expense............. 117,804 581 -- 118,385
Other expenses, net.......... 6,054 2,225 1,827 10,106
Interest income.............. (1,631) (323) -- (1,954)
Equity in loss of
subsidiaries................ 1,043 53,336 (54,379) --
-------- -------- ------- --------
Total nonoperating
expenses................. 123,270 55,819 (52,552) 126,537
-------- -------- ------- --------
Income (loss) before income
taxes........................ (45,238) (50,983) 52,609 (43,612)
Provision (benefit) for income
taxes........................ (15,587) 2,811 -- (12,776)
-------- -------- ------- --------
Net loss before equity in loss
of joint ventures and
extraordinary items.......... (29,651) (53,794) 52,609 (30,836)
Equity in loss of joint
ventures..................... (1,362) -- -- (1,362)
-------- -------- ------- --------
Net loss before extraordinary
items........................ (31,013) (53,794) 52,609 (32,198)
Extraordinary items, net of
tax.......................... (23,366) -- -- (23,366)
-------- -------- ------- --------
Net loss...................... $(54,379) $(53,794) $52,609 $(55,564)
======== ======== ======= ========
</TABLE>
F-34
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenue................ $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) (268) -- (5,748)
Equity in loss of subsidiaries.. 499 18,234 (18,733) --
-------- -------- -------- --------
Total nonoperating expenses.. 72,948 19,017 (17,811) 74,154
-------- -------- -------- --------
Income (loss) before income
taxes....................... (28,436) (17,481) 17,901 (28,016)
Provision (benefit) for
income taxes................ (9,703) 1,171 -- (8,532)
-------- -------- -------- --------
Net loss..................... $(18,733) $(18,652) $ 17,901 $(19,484)
======== ======== ======== ========
</TABLE>
F-35
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $ (54,379) $ (53,794) $ 52,609 $ (55,564)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization................. 96,812 5,826 (191) 102,447
Equity in loss of joint
ventures..................... 1,362 -- -- 1,362
Extraordinary items, net of
tax.......................... 23,366 -- -- 23,366
Deferred income taxes......... (20,227) 6 -- (20,221)
Amortization of bond
discount..................... 33,562 -- -- 33,562
Equity in loss of
subsidiaries................. 1,043 53,336 (54,379) --
Dividends from guarantor
companies.................... (500) 500 -- --
Dividends from non-guarantor
companies.................... 1,327 (1,327) -- --
Loss on the sale of property
and equipment, net........... 4,417 29 -- 4,446
Changes in assets and
liabilities:
Accounts and notes
receivable, net............. (25,218) (875) -- (26,093)
Receivables and payables --
affiliates................. (12,745) 12,745 -- --
Inventories.................. (16,570) (401) -- (16,971)
Other assets................. (13,375) (1,797) 2,275 (12,897)
Accounts payable and accrued
expenses.................... 14,522 3,260 -- 17,782
Income taxes payable......... (1,152) 1,754 -- 602
Other long-term
liabilities................. (4,089) -- -- (4,089)
--------- --------- --------- ---------
Net cash provided by (used
in) operating activities... 28,156 19,262 314 47,732
--------- --------- --------- ---------
Cash flows from investing
activities:
Acquisitions of operating
units, net of cash acquired.. (197,271) (17,490) -- (214,761)
Investment in subsidiary...... -- (315,671) 315,671 --
Investments in and advances to
joint ventures............... (21,361) -- -- (21,361)
Purchases of property and
equipment.................... (53,911) (2,926) 134 (56,703)
Proceeds from sale of property
and equipment................ 4,123 57 -- 4,180
--------- --------- --------- ---------
Net cash provided by (used
in) investing activities... (268,420) (336,030) 315,805 (288,645)
--------- --------- --------- ---------
Cash flows from financing
activities:
Proceeds from long-term debt,
net of deferred financing
costs........................ 231,406 9,000 -- 240,406
Payments on long-term debt.... (295,621) (9,000) -- (304,621)
Prepayment penalty............ (14,571) -- -- (14,571)
Capital contribution.......... 315,671 37,048 (316,119) 36,600
Net proceeds from initial
public offering of shares.... -- 279,071 -- 279,071
Repurchase of shares.......... -- (500) -- (500)
Noncompete obligations........ (647) -- -- (647)
--------- --------- --------- ---------
Net cash provided by (used
in) financing activities... 236,238 315,619 (316,119) 235,738
--------- --------- --------- ---------
Effect of exchange rates on
cash....................... (2,183) (420) -- (2,603)
--------- --------- --------- ---------
Net decrease in cash........ (6,209) (1,569) -- (7,778)
Cash and cash equivalents at
beginning of period........ 39,660 3,908 -- 43,568
--------- --------- --------- ---------
Cash and cash equivalents at
end of period.............. $ 33,451 $ 2,339 $ -- $ 35,790
========= ========= ========= =========
</TABLE>
F-36
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(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) $(18,652) $ 17,901 $ (19,484)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and
amortization............... 46,198 3,260 (72) 49,386
Deferred income taxes....... (14,040) -- -- (14,040)
Amortization of bond
discount................... 24,731 -- -- 24,731
Equity in loss of
subsidiaries............... 499 18,234 (18,733) --
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, net........... (6,663) 159 -- (6,504)
Receivables and payables--
affiliates................ 399 (399) -- --
Inventories................ 1,830 32 -- 1,862
Other assets............... (4,332) (582) 904 (4,010)
Accounts payable and
accrued expenses.......... 21,631 299 -- 21,930
Income taxes payable....... 662 (245) -- 417
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
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-37
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 54,185
Accounts and notes receivable, net of allowance for doubtful
accounts of $5,146............................................. 78,485
Inventories..................................................... 71,767
Deferred taxes and other current assets......................... 21,994
----------
Total current assets......................................... 226,431
Property and equipment, net...................................... 874,497
Leasehold interests, net......................................... 44,122
Deferred financing costs, net.................................... 28,782
Goodwill, net.................................................... 772,991
Investments in and advances to joint ventures.................... 22,581
Other assets..................................................... 70,075
----------
Total assets................................................. $2,039,479
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 34,136
Accrued expenses................................................ 47,486
Income taxes payable............................................ 2,919
Long-term debt, current portion................................. 30,501
----------
Total current liabilities.................................... 115,042
Long-term debt, less current portion............................. 1,337,921
Other long-term liabilities...................................... 6,646
----------
Total liabilities............................................ 1,459,609
----------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01, 200,000,000 shares authorized,
59,747,550 shares issued and outstanding at September 30,
1998).......................................................... 597
Paid-in capital................................................. 749,303
Retained deficit................................................ (147,090)
Accumulated other comprehensive income.......................... (22,940)
----------
Total stockholders' equity................................... 579,870
----------
Total liabilities and stockholders' equity................... $2,039,479
==========
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
balance sheet.
F-38
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating revenue........................................ $ 522,283 $ 505,594
--------- ---------
Operating expenses:
Cost of goods sold...................................... 139,098 150,480
Bowling center operating expenses....................... 242,815 181,161
Selling, general, and administrative expenses........... 52,021 47,226
Depreciation and amortization........................... 87,744 66,811
--------- ---------
Total operating expenses............................. 521,678 445,678
--------- ---------
Operating income......................................... 605 59,916
--------- ---------
Nonoperating expenses (income):
Interest expense........................................ 84,457 89,181
Other expenses, net..................................... 7,818 3,623
Interest income......................................... (1,446) (1,579)
--------- ---------
Total nonoperating expenses.......................... 90,829 91,225
--------- ---------
Loss before income taxes................................. (90,224) (31,309)
Benefit for income taxes................................. 21,088 (8,896)
--------- ---------
Net loss before equity in loss of joint ventures......... (69,136) (22,413)
Equity in loss of joint ventures......................... (2,906) --
--------- ---------
Net loss............................................... $ (72,042) $ (22,413)
========= =========
Net loss per share -- basic and diluted................. $ (1.21) $ (0.53)
========= =========
Weighted average shares outstanding..................... 59,707 42,396
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-39
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (72,042) $ (22,413)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 87,744 66,811
Equity in loss of joint ventures....................... 2,906 --
Deferred income taxes.................................. (27,031) (2,912)
Amortization of bond discount.......................... 25,178 25,507
Loss on the sale of property and equipment, net........ 5,856 96
Changes in assets and liabilities:
Accounts and notes receivable, net.................... (4,784) (35,326)
Inventories........................................... (14,221) (19,857)
Other assets.......................................... (29,561) (18,206)
Accounts payable and accrued expenses................. (23,080) 4,992
Income taxes payable.................................. (2,344) 4,270
Other long-term liabilities........................... 1,650 (1,506)
--------- ---------
Net cash (used in) provided by operating activities...... (49,729) 1,456
--------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired... (168,865) (192,395)
Investments in and advances to joint ventures........... (2,583) --
Purchases of property and equipment..................... (47,739) (42,589)
Proceeds from the sale of property and equipment........ 29 3,644
--------- ---------
Net cash used in investing activities.................... (219,158) (231,340)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing
costs.................................................. 548,641 210,000
Payments on long-term debt.............................. (266,014) (25,782)
Repurchase of shares.................................... -- (500)
Capital contribution.................................... -- 35,600
Issuance of common shares............................... 1,253 --
Payments of noncompete obligations...................... (589) (478)
--------- ---------
Net cash provided by financing activities................ 283,291 218,840
--------- ---------
Effect of exchange rates on cash......................... 3,991 (587)
--------- ---------
Net increase (decrease) in cash.......................... 18,395 (11,631)
Cash and cash equivalents at beginning of period......... 35,790 43,568
--------- ---------
Cash and cash equivalents at end of period............... $ 54,185 $ 31,937
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-40
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation of the results
of operations for the interim periods. The interim financial information and
notes thereto should be read in conjunction with the December 31, 1997 and
1996 audited consolidated financial statements of AMF Bowling, Inc. ("AMF
Bowling") and its subsidiaries (collectively, the "Company") presented in AMF
Bowling's Form 10-K Annual Report for the fiscal year ended December 31, 1997
filed with the U.S. Securities and Exchange Commission. The results of
operations for the nine months ended September 30, 1998, are not necessarily
indicative of results to be expected for the entire year.
The Company is principally engaged in two business segments: (i) the
ownership or operation of bowling centers, consisting of 416 U.S. bowling
centers and 123 international bowling centers ("Bowling Centers"), including
fifteen joint venture centers described in "Note 8. Acquisitions", as of
September 30, 1998, and (ii) the manufacture and sale of bowling equipment
such as automatic pinspotters, automatic scoring equipment, bowling pins,
lanes, ball returns, certain spare parts, and the resale of allied products
such as bowling balls, bags, shoes, and certain other spare parts ("Bowling
Products"). The principal markets for bowling equipment are U.S. and
international bowling center operators.
AMF Bowling Worldwide, Inc. ("Bowling Worldwide") is a wholly owned, direct
subsidiary of AMF Group Holdings Inc. ("AMF Group Holdings"). AMF Group
Holdings is a wholly owned, direct subsidiary of AMF Bowling. AMF Group
Holdings and Bowling Worldwide are Delaware corporations organized by GS
Capital Partners II, L.P., and certain other investment funds (collectively,
"GSCP") affiliated with Goldman, Sachs & Co. ("Goldman Sachs") to effect the
Acquisition (defined below). AMF Group Holdings and AMF Bowling are holding
companies only. The principal assets in each are comprised of investments in
subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between AMF
Group Holdings and the stockholders (the "Prior Owners") of AMF Bowling Group
(the "Predecessor Company"), on May 1, 1996 (the "Closing Date"), AMF Group
Holdings acquired the Predecessor Company through a stock purchase by AMF
Group Holdings' subsidiaries of all the outstanding stock of the separate
domestic and foreign corporations that constituted substantially all of the
Predecessor Company and through the purchase of certain of the assets of the
Predecessor Company's bowling center operations in Spain and Switzerland (the
"Acquisition"). The purchase price for the Acquisition was approximately $1.37
billion. The Acquisition was accounted for by the purchase method of
accounting, pursuant to which the purchase price was allocated among the
acquired assets and liabilities in accordance with estimates of fair market
value on the Closing Date.
On November 7, 1997, AMF Bowling completed an initial public offering (the
"Initial Public Offering") of 15,525,000 shares of common stock (the "Common
Stock"), which trades on the New York Stock Exchange under the symbol "PIN".
The net proceeds of $279.1 million from the Initial Public Offering were
contributed by AMF Bowling to Bowling Worldwide and used by Bowling Worldwide
to reduce and refinance its bank debt pursuant to Bowling Worldwide's third
amended and restated credit agreement (the "Credit Agreement") and to redeem a
portion of Bowling Worldwide's senior subordinated discount notes.
As of September 30, 1998, the Company has acquired 256 bowling centers and
constructed one bowling center since the Acquisition for a combined purchase
price of $491.7 million. The Company has funded its acquisitions and center
construction from internally generated cash, borrowings
F-41
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under the senior secured revolving credit facility (the "Bank Facility") under
the Credit Agreement, and issuances of 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 nine months ended September 30, 1998 and 1997, respectively.
All significant intercompany balances and transactions have been eliminated in
the accompanying condensed consolidated financial statements. All dollar
amounts are in thousands, except where otherwise indicated.
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 8. Acquisitions", and in accordance with the purchase
method of accounting for all acquisitions, the Company recorded goodwill
representing the excess of the purchase price over the allocation among the
acquired assets and liabilities in accordance with estimates of fair market
value on the dates of acquisition. Goodwill is being amortized over 40 years.
Amortization expense was $15,177 and $14,818 for the nine months ended
September 30, 1998 and 1997, respectively.
Comprehensive Income
Effective January 1, 1998, the Company adopted, as required, Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income." Comprehensive loss was $75,409 and $30,665 for the nine months ended
September 30, 1998 and 1997, respectively.
NOTE 3. INVENTORIES
Inventories at September 30, 1998 consisted of the following (unaudited):
<TABLE>
<S> <C>
Bowling Products, at FIFO:
Raw materials...................................................... $13,052
Work in progress................................................... 1,892
Finished goods and spare parts..................................... 48,452
Bowling Centers, at average cost:
Merchandise and spare parts........................................ 8,371
-------
$71,767
=======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1998 consisted of the following
(unaudited):
<TABLE>
<S> <C>
Land.............................................................. $ 131,150
Buildings and improvements........................................ 351,477
Equipment, furniture, and fixtures................................ 537,305
Other............................................................. 13,302
---------
Less: accumulated depreciation and amortization................... (158,737)
---------
$ 874,497
=========
</TABLE>
F-42
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization expense related to property and equipment was
$65,480 and $46,816 for the nine months ended September 30, 1998 and 1997,
respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt at September 30, 1998 consisted of the following (unaudited):
<TABLE>
<S> <C>
Bank debt........................................................ $ 617,846
Senior subordinated notes........................................ 250,000
Senior subordinated discount notes............................... 206,829
Zero coupon convertible debentures............................... 291,762
Mortgage and equipment notes..................................... 1,985
----------
Total debt................................................... 1,368,422
Current maturities............................................... (30,501)
----------
Total long-term debt......................................... $1,337,921
==========
</TABLE>
The Company's bank debt (the "Senior Debt") was incurred pursuant to a
credit agreement, dated as of May 1, 1996, which was amended and restated in
connection with the Initial Public Offering, as of November 3, 1997, and
further amended by Amendment No. 1 and Waiver to the Third Amended and
Restated Credit Agreement, dated as of September 30, 1998, as the Credit
Agreement among Bowling Worldwide and its lenders. The Credit Agreement
provides for (i) three senior secured term loan facilities aggregating $455.3
million (the "Term Facilities") and (ii) the Bank Facility which provides for
borrowings up to $355.0 million on a revolving basis. At September 30, 1998,
amounts outstanding under the Term Facilities and Bank Facility were $188.0
million and $429.8 million, respectively.
On September 30, 1998, the Third Amended and Restated Credit Agreement was
amended by Amendment No. 1 and Waiver (the "Amendment and Waiver") in which
certain financial covenants were adjusted, and certain restrictions on the
Company's operations were imposed, for the third and fourth quarters of 1998
and the year 1999. In addition, for the third and fourth quarters of 1998 and
the year 1999, borrowings to finance acquisitions are substantially restricted
as is the Company's ability to make capital expenditures, investments and
acquisitions.
On May 12, 1998, AMF Bowling issued its zero coupon convertible debentures
(the "Debentures") for gross proceeds of approximately $284.1 million. The
Debentures mature on May 12, 2018 and have a yield to maturity of 7% per
annum. The Debentures were issued at an original price of $252.57 per $1,000
principal amount at maturity. The Debentures are convertible at any time prior
to maturity into shares of Common Stock at a conversion rate of 8.6734 shares
per $1,000 principal amount at maturity. If held to maturity and not redeemed
or repurchased by AMF Bowling, the Debentures will accrue to an aggregate
principal amount at maturity of $1.125 billion. The Debentures are not
entitled to a sinking fund. The Debentures are not redeemable at the option of
AMF Bowling before May 12, 2003.
The Debentures will be purchased by AMF Bowling, at the option of holders of
the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for purchase
prices specified in the Debentures. The Debentures may also be redeemed at the
option of the holders of the Debentures upon the occurrence of a Change of
Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof. In connection with
the issuance of the Debentures, AMF Bowling has agreed to file a shelf
registration statement in respect of the
F-43
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debentures and the Common Stock issuable on conversion, redemption or
repurchase thereof. If the shelf registration statement has not been filed
within 90 days, or declared effective within 180 days, after May 12, 1998, AMF
Bowling must pay liquidated damages as specified in the related registration
rights agreement.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance upon
conversion, of the Debentures, based on the Common Stock price at the time of
issuance of the Debentures.
The net proceeds of the Debentures were approximately $273.6 million of
which $249.6 million was used to repay senior bank indebtedness under the
Credit Agreement and $24.0 million was used for acquisitions and general
corporate purposes.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Litigation and Claims
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at bowling centers.
Management believes that the ultimate resolution of such matters will not have
a material adverse effect on the Company's results of operations or financial
position. While the ultimate outcome of the litigation and claims against the
Company cannot presently be determined, management believes the Company has
made adequate provision for possible losses.
NOTE 7. EMPLOYEE BENEFIT PLANS
AMF Bowling, Inc. 1996 Stock Incentive Plan
The total number of shares of Common Stock ("Stock Options") initially
reserved and available for grant under the AMF Bowling, Inc. 1996 Stock
Incentive Plan (the "1996 Plan") was 1,767,151. At September 30, 1998, the
number of shares of Common Stock subject to Stock Options outstanding to
senior management, other employees, consultants and directors totaled
1,394,550 at an exercise price of $10.00 per share. In addition to Stock
Options outstanding under the 1996 Plan, 130,000 Stock Options granted to
Douglas J. Stanard on May 1, 1996 were outstanding at September 30, 1998. Of
the total Stock Options awarded under the 1996 Plan, 469,150 were exercisable
at September 30, 1998 and 67,550 were exercised in the nine months ended
September 30, 1998. Forfeited Stock Options under the 1996 Plan totaled
358,900 through September 30, 1998. There were 305,051 shares of Common Stock
available for grant under the 1996 Plan as of September 30, 1998.
AMF Bowling, Inc. 1998 Stock Incentive Plan
Under the AMF Bowling, Inc. 1998 Stock Incentive Plan (the "1998 Plan"), AMF
Bowling may grant incentive awards in the form of restricted stock Awards,
Stock Options and stock appreciation rights in substantially the same manner
as provided under the 1996 Plan. Two million shares of Common Stock have been
reserved and will be available for issuance under the 1998 Plan. In addition,
shares of Common Stock that have been reserved but not issued under the 1996
Plan, and shares which are subject to awards under the 1996 Plan that expire
or otherwise terminate, may be granted as awards pursuant to the 1998 Plan. As
of September 30, 1998, options to purchase 78,400 shares were granted under
the 1998 Plan.
NOTE 8. ACQUISITIONS
From the Acquisition until December 31, 1997, Bowling Centers purchased an
aggregate of 179 bowling centers from unrelated sellers. The combined purchase
price, net of cash acquired, was
F-44
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximately $340.7 million (including amounts paid in 1998 for certain
bowling centers included in the 1997 total), and was funded with approximately
$40.0 million from the sale of equity by AMF Bowling to its institutional
stockholders and one of its directors, and with $299.8 million from available
borrowing under Bowling Worldwide's acquisition facility then existing under
the bank credit agreement and under the Bank Facility.
From January 1, 1998 through September 30, 1998, the Company acquired 55
centers in the United States, fifteen centers in the United Kingdom, six
centers in Australia and one center in France from unrelated sellers,
including 15 centers from Active West, Inc. ("Active West"). The aggregate
purchase price was approximately $151.0 million, including $130.1 million
funded with borrowings under the Bank Facility and, with respect to the Active
West acquisition, the issuance of 50,000 shares of Common Stock.
Between September 30, 1998 and October 23, 1998, the Company acquired one
center in the United States and two centers in Australia and sold one center
in Switzerland. As a result of these acquisitions and the sale of the Swiss
center, and after giving effect to the closing of 17 U.S. centers and one
international center since the Acquisition, the Company owned or operated 417
U.S. bowling centers and 124 international bowling centers as of October 23,
1998.
As of October 23, 1998, the Company had no commitments regarding the
acquisition of additional bowling centers.
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 nine months ended September 30, 1998
and 1997, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
-----------------------------------------------------------------------------
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.............. $299.6 $ 84.2 $ 383.8 $ 63.7 $74.8 $138.5 $ -- $ -- $ 522.3
Intersegment sales...... -- -- -- 10.5 3.7 14.2 -- -- 14.2
Operating income
(loss)................. 15.5 8.7 24.2 (3.1) (4.9) (8.0) (16.6) 1.0 0.6
Identifiable assets..... 912.4 366.7 1,279.1 649.6 79.5 729.1 29.2 2.1 2,039.5
Depreciation and
amortization........... 56.8 14.8 71.6 15.5 1.0 16.5 1.0 (1.3) 87.8
Capital expenditures.... 32.8 7.0 39.8 6.9 0.8 7.7 0.2 -- 47.7
Research and development
expense................ -- -- -- 0.2 -- 0.2 -- -- 0.2
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
---------------------------------------------------------------------------
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.............. $218.1 $ 79.8 $ 297.9 $ 82.1 $125.6 $207.7 $ -- $ -- $ 505.6
Intersegment sales...... -- -- -- 7.1 4.1 11.2 -- -- 11.2
Operating income
(loss)................. 21.5 9.2 30.7 29.9 10.6 40.5 (12.0) 0.7 59.9
Identifiable assets..... 795.0 307.0 1,102.0 646.2 52.8 699.0 17.2 0.8 1,819.0
Depreciation and
amortization........... 39.3 14.0 53.3 13.8 0.8 14.6 -- (1.1) 66.8
Capital expenditures.... 30.9 4.7 35.6 3.6 0.5 4.1 3.3 (0.4) 42.6
Research and development
expense................ -- -- -- 1.0 -- 1.0 -- -- 1.0
</TABLE>
F-45
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of September 30, 1998, and
condensed consolidating statements of income and cash flows for the nine
months ended September 30, 1998 and (ii) elimination entries necessary to
combine the entities comprising the Company.
Bowling Worldwide's senior subordinated notes and senior subordinated
discount notes are jointly and severally guaranteed on a full and
unconditional basis by AMF Group Holdings and the first and second-tier
subsidiaries of Bowling Worldwide. AMF Bowling and the third-tier subsidiaries
of Bowling Worldwide have not provided guarantees of such indebtedness.
F-46
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 43,079 $ 11,106 $ -- $ 54,185
Accounts and notes
receivable, net of allowance
for doubtful accounts....... 78,107 378 -- 78,485
Accounts receivable --
intercompany................ 11,281 8,928 (20,209) --
Inventories.................. 70,716 1,051 -- 71,767
Deferred taxes and other
current assets.............. 18,420 3,574 -- 21,994
---------- --------- ----------- ----------
Total current assets...... 221,603 25,037 (20,209) 226,431
Notes receivable --
intercompany................. 43,501 5,663 (49,164) --
Property and equipment, net... 793,132 80,197 1,168 874,497
Investment in subsidiaries.... 20,300 824,488 (844,788) --
Goodwill and other current
assets....................... 915,068 23,483 -- 938,551
---------- --------- ----------- ----------
Total assets.............. $1,993,604 $ 958,868 $ (912,993) $2,039,479
========== ========= =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable............. $ 28,470 $ 5,666 $ -- $ 34,136
Accounts payable --
intercompany................ 8,928 11,281 (20,209) --
Accrued expenses............. 39,697 7,789 -- 47,486
Income taxes payable......... 934 1,985 -- 2,919
Long-term debt, current
portion..................... 30,501 -- -- 30,501
---------- --------- ----------- ----------
Total current
liabilities.............. 108,530 26,721 (20,209) 115,042
Long-term debt, less current
portion...................... 1,029,143 308,778 -- 1,337,921
Notes payable --
intercompany................. 5,663 43,501 (49,164) --
Other long-term liabilities... 5,480 1,166 -- 6,646
---------- --------- ----------- ----------
Total liabilities......... 1,148,816 380,166 (69,373) 1,459,609
---------- --------- ----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock................. 597 -- -- 597
Paid-in capital.............. 1,005,716 747,896 (1,004,309) 749,303
Retained (deficit) earnings.. (138,585) (146,254) 137,749 (147,090)
Accumulated other
comprehensive income........ (22,940) (22,940) 22,940 (22,940)
---------- --------- ----------- ----------
Total stockholders'
equity................... 844,788 578,702 (843,620) 579,870
---------- --------- ----------- ----------
Total liabilities and
stockholders' equity..... $1,993,604 $ 958,868 $ (912,993) $2,039,479
========== ========= =========== ==========
</TABLE>
F-47
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenue............. $482,904 $ 39,379 $ -- $522,283
-------- -------- -------- --------
Operating expenses:
Cost of goods sold........... 134,672 4,426 -- 139,098
Bowling center operating
expenses.................... 220,245 22,570 -- 242,815
Selling, general, and
administrative expenses..... 45,587 6,434 -- 52,021
Depreciation and
amortization................ 82,181 5,723 (160) 87,744
-------- -------- -------- --------
Total operating expenses.. 482,685 39,153 (160) 521,678
-------- -------- -------- --------
Operating income.............. 219 226 160 605
-------- -------- -------- --------
Nonoperating expenses
(income):
Interest expense............. 75,246 9,211 -- 84,457
Other expenses, net.......... 6,893 925 -- 7,818
Interest income.............. (1,201) (245) -- (1,446)
Equity in loss (income) of
subsidiaries................ 2,613 61,746 (64,359) --
-------- -------- -------- --------
Total nonoperating
expenses................. 83,551 71,637 (64,359) 90,829
-------- -------- -------- --------
Loss before income taxes...... (83,332) (71,411) 64,519 (90,224)
Provision (benefit) for income
taxes........................ (18,973) (2,115) -- (21,088)
-------- -------- -------- --------
Net (loss) income before
equity in loss of joint
ventures..................... (64,359) (69,296) 64,519 (69,136)
Equity in loss of joint
ventures..................... -- (2,906) -- (2,906)
-------- -------- -------- --------
Net (loss) income............. $(64,359) $(72,202) $ 64,519 $(72,042)
======== ======== ======== ========
</TABLE>
F-48
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income............. $ (64,359) $ (72,202) $ 64,519 $ (72,042)
Adjustments to reconcile net
(loss) income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization................. 82,181 5,723 (160) 87,744
Equity in loss of joint
ventures..................... 2,906 -- -- 2,906
Deferred income taxes......... (27,067) 36 -- (27,031)
Amortization of bond
discount..................... 17,557 7,621 -- 25,178
Equity in earnings of
subsidiaries................. 2,613 61,746 (64,359) --
Loss on the sale of property
and equipment, net........... 5,856 -- -- 5,856
Changes in assets and
liabilities:
Accounts and notes
receivable.................. (5,798) 1,014 -- (4,784)
Receivables and payables--
affiliates.................. (21,661) 21,661 -- --
Inventories.................. (14,102) (119) -- (14,221)
Other assets................. (11,835) (17,726) -- (29,561)
Accounts payable and accrued
expenses.................... (27,898) 4,818 -- (23,080)
Income taxes payable......... (1,993) (351) -- (2,344)
Other long-term liabilities.. 1,553 97 -- 1,650
--------- --------- -------- ---------
Net cash provided by (used in)
operating activities......... (62,047) 12,318 -- (49,729)
--------- --------- -------- ---------
Cash flows from investing
activities:
Acquisitions of operating
units, net of cash acquired.. (120,647) (48,218) -- (168,865)
Investments in and advances to
joint ventures............... (2,583) -- -- (2,583)
Investment in subsidiaries.... -- (258,417) -- (258,417)
Purchases of property and
equipment.................... (45,158) (2,581) -- (47,739)
Proceeds from sale of property
and equipment................ 29 -- -- 29
--------- --------- -------- ---------
Net cash used in investing
activities................... (168,359) (309,216) -- (477,575)
--------- --------- -------- ---------
Cash flows from financing
activities:
Proceeds from long-term debt,
net of deferred financing
costs........................ 224,500 324,141 548,641
Payments on long-term debt.... (243,017) (22,997) -- (266,014)
Capital contribution from
Parent....................... 258,417 -- -- 258,417
Issuance of shares............ 1,253 -- -- 1,253
Noncompete obligations........ (589) -- -- (589)
--------- --------- -------- ---------
Net cash provided by (used in)
financing activities......... 240,564 301,144 -- 541,708
--------- --------- -------- ---------
Effect of exchange rates on
cash......................... (536) 4,527 -- 3,991
--------- --------- -------- ---------
Net (decrease) increase in
cash......................... 9,622 8,773 -- 18,395
Cash and cash equivalents at
beginning of period.......... 33,457 2,333 -- 35,790
--------- --------- -------- ---------
Cash and cash equivalents at
end of period................ $ 43,079 $ 11,106 $ -- $ 54,185
========= ========= ======== =========
</TABLE>
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and the Stockholders
AMF Bowling Group
In our opinion, the combined financial statements listed in the accompanying
index 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 four months ended April 30, 1996 and for
the year 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-50
<PAGE>
AMF BOWLING GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Currents 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-51
<PAGE>
AMF BOWLING GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Operating revenues:
Sales of products and services....................... $164,371 $563,998
Revenue from operating lease activities.............. 573 926
-------- --------
Total operating revenues.......................... 164,944 564,924
-------- --------
Operating expenses:
Cost of sales, excluding depreciation of $791 and
$2,531, respectively................................ 43,118 184,129
Bowling center operations............................ 80,156 166,465
Selling, general and administrative.................. 35,557 50,778
Depreciation and amortization........................ 15,097 39,139
-------- --------
Total operating expenses.......................... 173,928 440,511
-------- --------
Operating (loss) income........................... (8,984) 124,413
Nonoperating income (expenses):
Interest expense..................................... (4,504) (15,711)
Other expenses, net.................................. (692) (1,043)
Interest income...................................... 611 2,184
Foreign currency transaction loss.................... (29) (979)
-------- --------
(Loss) income before income taxes..................... (13,598) 108,864
Income tax benefit (expense).......................... 1,731 (12,098)
-------- --------
Net (loss) income................................. $(11,867) $ 96,766
======== ========
Pro Forma Financial Information (unaudited):
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Net (loss) income before income taxes and pro forma
adjustments.......................................... $(13,598) $108,864
Pro forma C Corporation--tax benefit (provision)...... 5,065 (40,616)
-------- --------
Pro forma net (loss) income........................... $ (8,533) $ 68,248
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
AMF BOWLING GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................... $(11,867) $ 96,766
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization....................... 15,097 39,139
Deferred income taxes............................... 414 (830)
Loss on sale of property and equipment, net......... -- 567
Changes in assets and liabilities, net of effects
from companies acquired:
Accounts and notes receivable, net................. 4,784 10,630
Receivables and payables--affiliates............... 1,535 6,147
Inventories........................................ (3,631) (5,996)
Other assets and liabilities....................... (2,673) (101)
Accounts payable and accrued expenses.............. 8,713 (18,741)
Income taxes payable............................... (5,745) (2,830)
-------- --------
Net cash provided by operating activities......... 6,627 124,751
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................... (6,874) (29,965)
Proceeds from sales of property and equipment........ -- 1,410
Other................................................ 2,989 229
-------- --------
Net cash used for investing activities............ (3,885) (28,326)
-------- --------
Cash flows from financing activities:
Payments on credit note agreements, net.............. -- (11,057)
Distributions to stockholders........................ (36,721) (71,851)
Payment of long-term debt............................ (3,812) (10,285)
Payment for redemption of stock...................... -- (3,960)
Proceeds (payments) on notes payable--stockholders,
net................................................. 1,236 (3,793)
Capital contributions by stockholders................ 24,805 8,329
Collection of notes receivable--affiliates........... 19,408 --
Other................................................ 3,988 (2,056)
-------- --------
Net cash provided by (used for) financing
activities....................................... 8,904 (94,673)
Effect of exchange rates on cash.................. 535 (194)
-------- --------
Net increase in cash................................. 12,181 1,558
Cash at beginning of period.......................... 9,732 8,174
-------- --------
Cash at end of period................................ $ 21,913 $ 9,732
======== ========
</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-53
<PAGE>
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,
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-54
<PAGE>
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 Louie 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
F-55
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
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 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, uncollectable 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.
F-56
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
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 sold. Warranty expense aggregated
approximately $1,313 for the four months ended April 30, 1996 and $2,748 for
the year ended December 31, 1995.
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
F-57
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
and liable for state income taxes in certain jurisdictions; all other domestic
income taxes are the responsibility of the Combined Companies' stockholders.
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 for the year ended December 31,
1995.
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 for the year ended December 31,
1995.
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
F-58
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
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.
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, and 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 rate plus .75%, which was 6.48% at
December 31, 1995. Interest income for the year ended December 31, 1995 was
$602.
F-59
<PAGE>
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 year ended December 31, 1995 was
approximately $8,053.
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 for the year ended
December 31, 1995.
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. The maximum amount outstanding under these agreements was
$21,246 during fiscal 1995. The average interest rate on the outstanding debt
was 7.5% during fiscal 1995.
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,
F-60
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
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 for the year ended
December 31, 1995.
Other related party transactions
The Combined Companies were charged $512 for the four months ended April 30,
1996 and $1,622 for the year ended December 31, 1995 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
during the year ended 1995.
The Combined Companies charged service fees and sales commissions of $53 for
the year ended December 31, 1995 to CLC. 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 for the year ended December 31, 1995.
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-61
<PAGE>
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 for the year ended December 31, 1995.
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-62
<PAGE>
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 consists 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 rate 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 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-63
<PAGE>
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. The maximum amount outstanding under these credit
arrangements was $39,454 during fiscal 1995. The average interest rate on
these credit arrangements was 6.43% during fiscal 1995.
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
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
United States....................................... $ (7,757) $ 77,931
Foreign............................................. (5,841) 30,933
-------- --------
$(13,598) $108,864
======== ========
</TABLE>
The income tax benefit (provision) consists of the following:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current tax benefit (provision)
U.S. federal...................................... $ -- $ --
State and local................................... 205 (1,065)
Foreign........................................... 1,940 (11,961)
------ --------
Total current...................................... 2,145 (13,026)
------ --------
Deferred tax benefit (provision)
U.S. federal...................................... -- --
State and local................................... -- 32
Foreign........................................... (414) 896
------ --------
Total deferred..................................... (414) 928
------ --------
Total benefit...................................... $1,731 $(12,098)
====== ========
</TABLE>
F-64
<PAGE>
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 year ended December 31, 1995 to income (loss) before income taxes. The
principal reasons for this difference are follows:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Tax benefit (provision) at federal statutory
rate............................................. $ 4,759 $(38,102)
(Increase) decrease in rates resulting from:
S Corporation election for U.S. federal tax
purposes........................................ (4,759) 38,102
State and local taxes............................ 205 (1,033)
Foreign income taxes............................. 1,526 (11,065)
------- --------
Total............................................. $ 1,731 $(12,098)
======= ========
</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-65
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Pro forma tax benefit (provision) is as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current
U.S. federal....................................... $3,222 $(26,404)
State and local.................................... 329 (3,491)
Foreign............................................ 1,940 (11,961)
------ --------
Total current....................................... 5,491 (41,856)
------ --------
Deferred
U.S. federal....................................... (85) 317
State and local.................................... 73 27
Foreign............................................ (414) 896
------ --------
Total deferred...................................... (426) 1,240
------ --------
Total provision (benefit)........................... $5,065 $(40,616)
====== ========
</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)
<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) assets................. $(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-66
<PAGE>
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
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Tax benefit (provision) at federal statutory
rate............................................ $ 4,759 $(38,102)
(Increase) decrease in rates resulting from:
State and local taxes, net...................... 402 (2,272)
Foreign income taxes............................ 1,526 (11,065)
Foreign tax credits............................. (1,526) 11,065
Other business credits.......................... -- --
Nondeductible items............................. (91) (171)
Environmental tax............................... -- (102)
Other........................................... (5) 31
------- --------
$ 5,065 $(40,616)
======= ========
</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 for the year ended
December 31, 1995.
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 for the year ended
December 31, 1995.
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.
F-67
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
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. 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
F-68
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
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 for the year ended December 31, 1995.
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 for the year ended December 31, 1995. 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 for the year ended December 31, 1995.
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-69
<PAGE>
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
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Cash paid during the year for:
Interest.......................................... $ 12,862 $ 5,909
Income taxes...................................... $ 5,359 $16,922
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 year ended December 31, 1995 and identifiable assets at
April 30, 1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Revenues from unaffiliated customers
Bowling centers
Domestic.......................................... $ 75,000 $192,400
International..................................... 33,500 99,900
Manufacturing...................................... 56,400 272,600
-------- --------
$164,900 $564,900
======== ========
Intersegment sales
Bowling centers
Domestic.......................................... $ -- $ --
International..................................... -- --
Manufacturing...................................... 4,600 13,900
-------- --------
$ 4,600 $ 13,900
======== ========
Operating (loss) income Intersegment sales
Bowling centers
Domestic.......................................... $ 3,600 $ 26,500
International..................................... (2,500) 23,700
Manufacturing...................................... (9,600) 75,700
-------- --------
Eliminations....................................... (500) (1,500)
-------- --------
$ (9,000) $124,400
======== ========
</TABLE>
F-70
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <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
International..................................... 2,500 7,500
Manufacturing...................................... 1,200 3,600
Eliminations....................................... (400) (1,000)
-------- --------
$ 15,100 $ 39,200
======== ========
Capital expenditures
Bowling centers
Domestic.......................................... $ 5,100 $ 17,800
International..................................... 2,300 10,200
Manufacturing...................................... 400 4,500
Eliminations....................................... (900) (2,500)
-------- --------
$ 6,900 $ 30,000
======== ========
</TABLE>
F-71
<PAGE>
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 year ended December 31,
1995 and identifiable assets at April 30, 1996 and December 31, 1995 are
presented below:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Net operating revenue:
United States...................................... $103,800 $371,400
Japan.............................................. 13,700 50,300
Hong Kong.......................................... 14,000 40,800
Korea.............................................. 5,800 6,000
Australia.......................................... 14,700 47,100
United Kingdom..................................... 7,300 26,100
Mexico............................................. 2,100 7,800
Sweden............................................. 1,200 10,000
Canada............................................. 300 600
Spain.............................................. 1,000 2,700
Other European countries........................... 5,200 16,000
China.............................................. 400 --
Eliminations....................................... (4,600) (13,900)
-------- --------
$164,900 $564,900
======== ========
</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 for the year ended December 31, 1995 to reflect the elimination of
intercompany sales between the domestic manufacturing operation and the
manufacturing foreign sales and service branches.
F-72
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Operating (loss) income:
United States...................................... $(2,900) $ 92,200
Japan.............................................. (1,400) 8,800
Hong Kong.......................................... 800 6,200
Korea.............................................. (300) (1,200)
Australia.......................................... (1,300) 13,300
United Kingdom..................................... (1,100) 2,400
Mexico............................................. (200) 1,500
Sweden............................................. (500) 1,500
Canada............................................. -- --
Spain.............................................. (100) (100)
Other European countries........................... (1,300) 1,300
China.............................................. (200) --
Eliminations....................................... (500) (1,500)
------- --------
$(9,000) $124,400
======= ========
</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 for the year ended December 31, 1995 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 intercompany gross profit in inventory
between the domestic manufacturing operations and the manufacturing foreign
sales and service branches.
F-73
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
NOTE 14. BUSINESS COMBINATIONS
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 period 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-74
<PAGE>
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-75
<PAGE>
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-76
<PAGE>
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 Holdings, Inc.
Included with the guarantor companies at December 31, 1995 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-77
<PAGE>
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 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 year ended
December 31, 1995.
. Elimination entries necessary to combine the entities comprising the
Combined Companies.
F-78
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING BALANCE SHEETS
FOUR 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 notesreceivable--
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-79
<PAGE>
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-80
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF OPERATIONS
FOUR MONTHS 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-81
<PAGE>
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-82
<PAGE>
AMF BOWLING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
CONDENSED COMBINING STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR COMBINED
COMPANIES COMPANIES ELIMINATIONS COMPANIES
--------- --------- ------------ ---------
<S> <C> <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 --
Change 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-83
<PAGE>
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
Change in assets and liabilities,
net of effects from companies
acquired:
Accounts and notes receivable,
net............................. 11,864 (1,234) -- 10,630
Receivables and payables--affili-
ates............................ 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
and cash equivalents........... (5) (189) -- (194)
-------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents................... 2,190 (632) -- 1,558
Cash and cash equivalents at
beginning of year.................. 6,653 1,521 -- 8,174
-------- ------- ------- --------
Cash and cash equivalents at end of
year............................... $ 8,843 $ 889 $ -- $ 9,732
======== ======= ======= ========
</TABLE>
F-84
<PAGE>
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-85
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
SELECTED QUARTERLY DATA (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMF BOWLING, INC.
------------------------------
1998 QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30
------------------ -------- ------- ------------
<S> <C> <C> <C>
Net sales........................................ $187.6 $162.2 $172.5
Operating income (loss).......................... 26.3 (12.6) (13.1)
Net loss......................................... (0.6) (35.8) (35.6)
Net loss per share(a)............................ $(0.01) $(0.61) $(0.60)
</TABLE>
<TABLE>
<CAPTION>
AMF BOWLING, INC.
------------------------------------------
1997 QUARTERS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales.......................... $157.6 $160.5 $187.5 $208.1
Operating income................... 29.7 12.7 17.5 23.0
Net income (loss) before
extraordinary items............... 0.1 (12.3) (10.2) (9.8)
Extraordinary items, net of
tax(b)............................ -- -- -- (23.4)
Net income (loss).................. 0.1 (12.3) (10.2) (33.2)
Net income (loss) per share before
extraordinary items(a)............ $ 0.00 $(0.29) $(0.24) $(0.18)
Per share effect of extraordinary
items(a)(b)....................... -- -- -- (0.44)
------ ------ ------ ------
Net income (loss) per share(a)..... $ 0.00 $(0.29) $(0.24) $(0.62)
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY AMF BOWLING, INC.
-------------------- -------------------------------------------
ONE TWO PRO FORMA
MONTH 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
Operating income
(loss)................. 27.9 (36.9) 4.0 5.3 14.3 27.8
Net income (loss)....... 21.6 (33.4) (11.9) (13.6) (5.3) (2.1)
Net income (loss) per
share(a)............... N/A N/A (0.31) (0.36) (0.14) (0.05)
</TABLE>
- --------
(a) Basic and diluted. Outstanding stock options and warrants are not
considered as their effect is antidilutive.
(b) Costs incurred in connection with the use of proceeds of the Initial
Public Offering. See "Note 9. Long-Term Debt" and "Note 12. Stockholders'
Equity" in the Notes to Consolidated Financial Statements.
F-86
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
BCA & Affiliates
We have audited the accompanying balance sheet of BCA & Affiliates as of
August 31, 1996, and the related statement of income and cash flows for the
year then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. 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 audits provide 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 BCA & Affiliates as of
August 31, 1996, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Todres & Sheiffer
Westbury, New York
December 4, 1996
F-87
<PAGE>
BCA & AFFILIATES
BALANCE SHEET
AUGUST 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 598,000
Accounts receivable............................................... 203,000
Inventories....................................................... 642,000
Prepaid expenses.................................................. 509,000
-----------
Total current assets........................................... 1,952,000
Property, plant and equipment--net (Notes 1 and 2)................. 42,892,000
Other assets (Note 8).............................................. 613,000
-----------
$45,457,000
===========
LIABILITIES AND EXCESS OF ASSETS OVER LIABILITIES
Liabilities:
Current liabilities:
Accounts payable and accrued expenses............................ $ 2,156,000
Current portion of long-term debt (Note 3)....................... 17,901,000
Bank line of credit (Note 4)..................................... 4,677,000
Capital lease obligation (Note 5)................................ 811,000
-----------
Total current liabilities...................................... 25,545,000
Long-term liabilities:
Long-term debt (Note 3)........................................... --
-----------
Total liabilities.............................................. 25,545,000
Contingencies (Note 6)............................................ --
Excess of assets over liabilities................................. 19,912,000
-----------
$45,457,000
===========
</TABLE>
See notes to financial statements
F-88
<PAGE>
BCA & AFFILIATES
STATEMENT OF INCOME
YEAR ENDED AUGUST 31, 1996
<TABLE>
<S> <C>
Revenues:
Bowling........................................................... $63,818,000
Other............................................................. 178,000
-----------
Total revenues................................................. 63,996,000
Cost of sales..................................................... 7,219,000
-----------
Gross profit................................................... 56,777,000
-----------
Operating expenses:
Payroll and related costs......................................... 17,522,000
Parts and supplies................................................ 4,270,000
Repairs and maintenance........................................... 1,301,000
Occupancy costs................................................... 7,239,000
Promotional and marketing......................................... 4,531,000
Insurance and other costs......................................... 3,215,000
General and administrative--home office........................... 6,146,000
Interest.......................................................... 2,003,000
-----------
Total operating expenses....................................... 46,227,000
-----------
Income before depreciation expense................................. 10,550,000
Depreciation expense............................................... 7,093,000
-----------
Net income..................................................... $ 3,457,000
===========
</TABLE>
See notes to financial statements
F-89
<PAGE>
BCA & AFFILIATES
STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 1996
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income....................................................... $ 3,457,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 7,093,000
(Increase) decrease in:
Accounts receivable............................................ 75,000
Inventories.................................................... (19,000)
Prepaid expenses............................................... (51,000)
Other.......................................................... 55,000
Increase (decrease) in:
Accounts payable and accrued expenses.......................... (554,000)
-----------
Net cash from operating activities............................... 10,056,000
-----------
Cash Flows for Investing Activities:
Additions to property, plant and equipment, net.................. (4,997,000)
-----------
Net cash used for investing activities............................ (4,997,000)
-----------
Cash flows for financing activities:
Principal payments on long-term debt............................. (1,661,000)
Transfers to home office......................................... (3,075,000)
-----------
Net cash used for financing activities........................... (4,736,000)
-----------
Net increase in cash and cash equivalents......................... 323,000
Cash and cash equivalents at beginning of year.................... 275,000
-----------
Cash and cash equivalents at end of year.......................... $ 598,000
===========
Supplemental Schedule of Cash Flow Information:
Cash paid during the year for:
Interest........................................................ $ 2,003,000
===========
Income taxes.................................................... $ 183,000
===========
</TABLE>
See notes to financial statements
F-90
<PAGE>
BCA & AFFILIATES
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
DESCRIPTION OF THE BUSINESS
ORGANIZATION
The financial statements of BCA and Affiliates (the "Company") consists of
the operations of 50 bowling centers, one golf course, and certain related
recreational activities. BCA is a division of Charan Industries, Inc. The
affiliates of BCA include two partnerships which are owned primarily by the
principal shareholders of Charan Industries, Inc.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers cash in the operating bank accounts, overnight
investments, and money market accounts to be cash and cash equivalents.
INVENTORIES
Inventories consists of food, liquor, and various bowling equipment at the
lower of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Depreciation for financial reporting is computed using the straight-line
method over the estimated useful life of the asset beginning in the year of
acquisition. Accelerated methods are used for income tax reporting. When
assets are disposed of, the related costs and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income for the
period. The installment sales method for reporting gains is used where
applicable.
LEASES
Leases which meet certain criteria are classified as capital leases, and
assets and liabilities are recorded at amounts equal to the lesser of the
present value of the minimum lease payments or the fair value of the leased
properties at the beginning of the lease term. Such assets are amortized
evenly over the related lease terms or their economic lives. Interest expense
relating to the lease liabilities is recorded to effect constant rates of
interest over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged to
expense as incurred.
INCOME TAXES
On September 1, 1988 the Charan Industries, Inc. elected to be taxed under
the provisions of Subchapter "S" of the Internal Revenue Code. Under those
provisions, Charan Industries, Inc. is not subject to federal corporate income
taxes, other than on certain types of transactions. The stockholders are
liable for individual federal and state income taxes on their proportionate
shares of Charan's income. Accordingly, there is no provision for income taxes
for BCA & Affiliates.
ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses of Charan Industries, Inc. (consisting
primarily of home office payroll costs, rent, professional fees, and general
insurance) are allocated to the company on the basis of revenues, which
approximate 90% of the total amount, unless the expenses are specifically
related to either bowling or non-bowling activities. Interest expense for the
term loan is
F-91
<PAGE>
BCA & AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
allocated to the Company on the basis of the proportional values of the
collateralized assets between non-bowling and bowling assets. All other
interest expense is specific to the bowling operation.
EXCESS OF ASSETS OVER LIABILITIES
The excess of assets over liabilities represents the net asset value of BCA
and Affiliates. Charan Industries, Inc. and two partnerships primarily owned
by the shareholders of Charan Industries, Inc., own the equity interests in
BCA and affiliates.
NOTE 2--PROPERTY, PLANT AND EQUIPMENT
The estimated useful lives of the various classes of fixed assets are as
follows:
<TABLE>
<S> <C>
Buildings and building improvements........................... 31.5 years
Bowling lanes and equipment................................... 7 years
Pinspotter equipment.......................................... 7 years
Restaurant and bar equipment.................................. 7 years
Furniture, fixtures and other equipment....................... 3-7 years
Leasehold improvements........................................ 31.5 years
Property, plant and equipment consists of the following:
Land.......................................................... $ 5,072,000
Buildings..................................................... 33,533,000
Bowling lanes/pinspotters..................................... 23,574,000
Other equipment............................................... 43,187,000
------------
105,366,000
Less: Accumulated depreciation................................ (62,474,000)
------------
$ 42,892,000
============
Leased property under capital leases included in property, plant and
equipment is as follows:
Land and buildings -- bowling properties...................... $ 815,000
Less: accumulated amortization................................ 268,000
------------
$ 547,000
============
NOTE 3--LONG-TERM DEBT
Long-term debt consists of the following:
Bowling properties:
various 7%--10% debt instruments requiring monthly payments
of interest and principal maturing at various dates through
2007........................................................ $ 4,324,000
(A) Term loans:
Two term loans with independent banks. Bank prime rate
requiring quarterly payments through May, 2000.............. 13,577,000
------------
17,901,000
Less: Current portion of long-term debt....................... 17,901,000
------------
Total..................................................... $ 0
============
</TABLE>
F-92
<PAGE>
BCA & AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total long-term principal balance of $17,901,000 is classified as a
current liability since all debt attributable to bowling was repaid in October
1996. See Note 9 in connection with the sale of the Company.
(A) On May 27, 1993 Charan Industries, Inc. borrowed $35,500,000, the
proceeds of which were used for the refinancing of existing debt in the amount
of $28,675,000, with the balance used for working capital. The borrowing
consisted of two separate term loan agreements executed simultaneously with
two independent banking institutions. The principal amount of each term loan
was $23,000,000 and $12,500,000. The term notes require twenty-eight quarterly
principal payments the first of which was paid on August 31, 1993 with
succeeding quarterly installments due on the last day of each succeeding
November, February, and May thereafter until May 31, 2000 when the principal
amount of $14,200,000 shall be due and payable together with any remaining
interest. Interest is payable monthly at each bank's prime rate. The term
notes are secured by first mortgages upon certain assets. The loan agreements
contain covenants, that the Company maintain certain minimum requirements of
net worth, debt to equity ratio and certain other earnings and cash flow
ratios. At August 31, 1996 the balance of $29,349,000 was allocated to BCA &
Affiliates on the basis of the collateralized assets pledged resulting in a
balance outstanding to the Company totaling $13,577,000.
NOTE 4--BANK LINE OF CREDIT
On May 27, 1993, Charan Industries, Inc. entered into a three-year revolving
credit agreement which enables the Company to borrow up to $5,000,000 through
October 1996. Interest is payable monthly at the bank prime rate. The note is
secured by first mortgages on certain assets. The loan agreement contains
covenants requiring the Company to satisfy certain minimum requirements of net
worth, debt to equity, earnings and cash flow rates.
This facility was utilized to the extent of $4,677,000 for the year ended
August 31, 1996.
NOTE 5--LEASES
The Company is committed under a number of long-term leases expiring at
various dates through the year 2058. Certain operating leases contain
provisions for a percentage of gross sales to be paid as rent, should sales
exceed an agreed amount, otherwise base rents are to be paid. The agreements
generally require the payment of utilities, real estate taxes, insurance and
repairs. The following is a schedule of future minimum lease payments for all
noncancellable leases together with the present value of the net minimum lease
payments for capital leases.
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ---------- ----------
<S> <C> <C>
1997.................................................. $ 98,000 $1,220,000
1998.................................................. 98,000 1,193,000
1999.................................................. 98,000 1,138,000
2000.................................................. 98,000 984,000
2001.................................................. 98,000 444,000
2002 and thereafter................................... 3,990,000 4,949,000
---------- ----------
Total minimum lease payments.......................... 4,480,000 $9,928,000
==========
Less imputed interest................................. 3,669,000
----------
Present value of minimum lease payments............... $ 811,000
==========
</TABLE>
F-93
<PAGE>
BCA & AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Total rent expense for the years ended August 31, 1996 amounted to
$1,785,000.
NOTE 6--CONTINGENCIES
The Company is involved in litigation on a number of matters and is subject
to certain claims which arise in the normal course of business, none of which,
in the opinion of management, is expected to have a materially adverse effect
on the Company's financial position.
NOTE 7--401(K) RETIREMENT/PROFIT SHARING PLAN
In January 1991, Charan Industries, Inc. established a 401(K) Retirement
Profit Sharing Plan. The Board of Directors established a matching
contribution equal to a maximum of 50% of the first 2% of the employee
contribution. The profit sharing plan contribution is subject to annual
determination and is not mandatory.
NOTE 8--OTHER ASSETS
Other assets are as follows:
<TABLE>
<S> <C>
Non-compete agreements (net)....................................... $485,000
Mortgage acquisition costs (net)................................... 53,000
Other.............................................................. 75,000
--------
$613,000
========
</TABLE>
Non-compete agreements and mortgage acquisition costs are shown net of
amortization.
NOTE 9--SUBSEQUENT EVENTS
All of the assets of the Company were sold to AMF Bowling Centers Inc. on
October 9, 1996, under the provisions of an asset purchase agreement dated
September 10, 1996. A portion of the proceeds of the sale were used by the
Company to satisfy its outstanding debt.
F-94
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 BY THE COMPANY OR THE SELLING SECURITYHOLDERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
ANY SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN A CHANGE IN THE INFORMATION SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Forward-Looking Statements............................................... 3
Summary.................................................................. 4
Risk Factors............................................................. 13
Ratio of Earnings to Fixed Charges....................................... 22
Use of Proceeds.......................................................... 22
Price Range of Common Stock and Debentures............................... 23
Dividend Policy.......................................................... 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 43
Management............................................................... 55
Securities Owned by Management and Certain Beneficial Owners............. 64
Certain Transactions..................................................... 68
Description of Debentures................................................ 70
Description of Capital Stock............................................. 85
Description of Certain Indebtedness...................................... 87
Certain Federal Income Tax Considerations................................ 95
Shares Eligible for Future Sale.......................................... 102
Selling Securityholders.................................................. 103
Plan of Distribution..................................................... 111
Validity of Debentures and Common Stock.................................. 112
Experts.................................................................. 112
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AMF BOWLING, INC.
---------------
$1,125,000,000
AGGREGATE PRINCIPAL AMOUNT
AT MATURITY OF
ZERO COUPON CONVERTIBLE
DEBENTURES DUE 2018
AND
SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION,
REDEMPTION OR REPURCHASE THEREOF
---------------
[AMF LOGO]
---------------
PROSPECTUS
NOVEMBER 6, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
