UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10 - Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 001-13539
---------------------
AMF BOWLING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3873268
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8100 AMF DRIVE
RICHMOND, VIRGINIA 23111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
--------------------
(804) 730-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| . No .
At April 29, 1999, 59,597,550 shares of common stock, par value of $.01, of the
Registrant were outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 56,784 $ 33,002
Accounts and notes receivable, net of allowance for
doubtful accounts of $7,328 and $6,492, respectively 86,422 82,435
Inventories 66,279 64,735
Deferred taxes and other 29,648 23,960
-------- --------
Total current assets 239,133 204,132
Property and equipment, net 854,124 873,985
Other assets 109,754 111,677
Goodwill, net 767,419 772,744
Investments in and advances to joint ventures 12,073 17,436
-------- --------
Total assets $ 1,982,503 $ 1,979,974
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 29,842 $ 33,912
Accrued expenses 67,483 61,809
Income taxes payable 7,036 5,389
Current portion of long-tem debt 34,250 32,375
-------- --------
Total current liabilities 138,611 133,485
Long-term debt, less current portion 1,330,181 1,311,589
Other long-term liabilities 3,872 5,265
-------- --------
Total liabilities 1,472,664 1,450,339
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01, 200,000,000 shares authorized,
59,597,550 and 59,747,550 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively) 596 597
Paid-in capital 749,126 749,305
Retained deficit (219,641) (200,942)
Foreign currency translation adjustment (20,242) (19,325)
-------- --------
Total stockholders' equity 509,839 529,635
-------- --------
Total liabilities and stockholders' equity $ 1,982,503 $ 1,979,974
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1999 1998
---- ----
<S> <C> <C>
Operating revenue $ 202,567 $ 187,284
-------- --------
Operating expenses:
Cost of goods sold 39,582 38,857
Bowling center operating expenses 93,221 78,471
Selling, general, and administrative expenses 14,753 16,901
Depreciation and amortization 33,366 26,790
-------- --------
Total operating expenses 180,922 161,019
-------- --------
Operating income 21,645 26,265
-------- --------
Nonoperating expenses (income):
Interest expense 30,973 25,974
Other expenses, net 2,974 573
Interest income (695) (533)
-------- --------
Total nonoperating expenses 33,252 26,014
-------- --------
Income (loss) before income taxes (11,607) 251
Provision for income taxes 1,569 530
-------- --------
Net loss before equity in loss of joint ventures (13,176) (279)
Equity in loss of joint ventures (5,523) (352)
-------- --------
Net loss $ (18,699) $ (631)
======== ========
Net loss per share - basic and diluted $ (0.31) $ (0.01)
======== ========
Weighted average shares outstanding 59,603 59,661
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (18,699) $ (631)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 33,366 26,790
Equity in loss of joint ventures 5,523 352
Amortization of bond discount 11,436 5,667
Loss on the sale of property and equipment, net 509 269
Changes in assets and liabilities:
Accounts and notes receivable, net (6,132) 7,287
Inventories (2,507) (10,077)
Other assets (5,411) (2,047)
Accounts payable and accrued expenses 3,088 (15,802)
Income taxes payable 641 (673)
Other long-term liabilities (933) (40)
-------- --------
Net cash provided by operating activities 20,881 11,095
-------- --------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,208) (65,615)
Investments in and advances to joint ventures (160) (4,565)
Purchases of property and equipment (4,669) (11,641)
Proceeds from the sale of property and equipment 114 104
-------- --------
Net cash used in investing activities (5,923) (81,717)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 20,000 72,000
Payments on long-term debt (10,969) (9,093)
Net proceeds from issuance of shares - 1,381
Purchase of shares (180) -
Noncompete obligations (180) (258)
-------- --------
Net cash provided by financing activities 8,671 64,030
-------- --------
Effect of exchange rates on cash 153 395
-------- --------
Net increase (decrease) in cash 23,782 (6,197)
Cash and cash equivalents at beginning of period 33,002 35,790
-------- --------
Cash and cash equivalents at end of period $ 56,784 $ 29,593
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<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, 1998, 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, 1998 filed with
the U.S. Securities and Exchange Commission. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of results to
be expected for the entire year.
The Company is principally engaged in two business segments: (i) the
ownership and operation of bowling centers, consisting of 422 U.S. bowling
centers and 123 international bowling centers ("Bowling Centers"), including
fifteen joint venture centers described in "Note 8. Acquisitions", as of March
31, 1999, and (ii) the manufacture and sale of bowling equipment such as
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare parts, and the resale of allied products such as bowling
balls, bags, shoes, and certain other spare parts ("Bowling Products"). The
principal markets for bowling equipment are U.S. and international bowling
center operators. The Company was acquired in 1996 by an investor group led by
an affiliate of Goldman, Sachs & Co. (the "Acquisition").
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 AMF
Bowling are holding companies only. The principal assets in each are comprised
of investments in subsidiaries.
As of March 31, 1999, the Company has acquired 263 bowling centers and
constructed two bowling centers since the Acquisition for a combined purchase
price of $497.5 million. The Company has funded its acquisitions and center
construction from internally generated cash, borrowings under the senior secured
revolving credit facility (the "Bank Facility") under the Credit Agreement as
defined in Note 5, and issuances of AMF Bowling common stock (the
"Common Stock"). See "Note 8. Acquisitions".
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated results of operations of the Company have been
presented for the three months ended March 31, 1999 and 1998, respectively. All
significant intercompany balances and transactions have been eliminated in the
accompanying condensed consolidated financial statements. Certain amounts in the
prior year's financial statements have been reclassified to conform to the
current year presentation. All dollar amounts are in thousands, except where
otherwise indicated.
GOODWILL
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 8. Acquisitions", and in accordance with the purchase method
of accounting for all acquisitions, the Company recorded goodwill representing
the excess of the purchase price over the allocation among the acquired assets
and liabilities in accordance with estimates of fair market value on the dates
of acquisition. Goodwill is being amortized over 40 years. Amortization expense
was $5,141 and $ 5,037 for the three months ended March 31, 1999 and 1998,
respectively.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive loss was $19,616 for the three months ended March 31, 1999 and
comprehensive income was $768 for the three months ended March 31, 1998.
Accumulated other comprehensive loss consists of the accumulated foreign
currency translation adjustment on the accompanying condensed consolidated
balance sheets.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Options to purchase shares of common stock are not
included as the effect would be antidilutive. As a result, the basic and diluted
loss per share amounts are identical.
RECENT ACCOUNTING PRONOUNCEMENT
Effective for the quarter ended March 31, 2000, the Company will be required
to adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The Company does not expect that adoption of this standard will
have a material adverse impact on the Company's financial position or results of
operations.
NOTE 3. INVENTORIES
Inventories at March 31, 1999, and December 31, 1998 consisted of the
following:
March 31, December 31,
1999 1998
------ ------
(unaudited)
Bowling Products, at FIFO:
Raw materials $ 12,519 $ 11,471
Work in progress 1,850 1,548
Finished goods and spare parts 43,226 42,980
Bowling Centers, at average cost:
Merchandise and spare parts 8,684 8,736
------ ------
$ 66,279 $ 64,735
====== ======
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999, and December 31, 1998, consisted
of the following:
March 31, December 31,
1999 1998
--------- -----------
(unaudited)
Land $ 131,988 $ 131,906
Buildings and improvements 361,196 362,297
Equipment, furniture and fixtures 555,448 553,203
Other 9,146 7,476
------------ ---------
1,057,778 1,054,882
Less: accumulated depreciation and amortization (203,654) (180,897)
------------ ---------
$ 854,124 $ 873,985
============ =========
Depreciation and amortization expense related to property and equipment was
$23,907 and $20,519 for the three months ended March 31, 1999 and 1998,
respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt at March 31, 1999, and December 31, 1998 consisted of the
following:
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
Bank debt $ 590,908 $ 581,877
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 219,541 213,226
Zero coupon convertible debentures 301,991 296,873
Mortgage and equipment notes 1,991 1,988
------------ ------------
Total debt 1,364,431 1,343,964
Current maturities (34,250) (32,375)
============ ============
Total long-term debt $1,330,181 $ 1,311,589
============ ============
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 AMF Bowling's initial public offering (the "Initial Public
Offering") of Common Stock in November 1997, as of November 3, 1997, among
Bowling Worldwide and its lenders (the "Credit Agreement"). The Credit Agreement
provides for (i) three senior secured term loan facilities aggregating $455.3
million (the "Term Facilities") and (ii) the Bank Facility which provides for
borrowings up to $355.0 million on a revolving basis. At March 31, 1999, amounts
outstanding under the Term Facilities and Bank Facility were $407.9 million and
$183.0 million, respectively.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Credit Agreement contains certain financial covenants, as well as
affirmative and negative covenants, constraining Bowling Worldwide. In 1998, the
Company entered into Amendment Number 1 and Waiver (the "Amendment and Waiver")
to the Credit Agreement that amended or waived certain financial covenants of
the Credit Agreement and imposed certain restrictions on the Company's
operations through December 31, 1999. In addition, for 1999, borrowings to
finance acquisitions are substantially restricted and limits have been placed on
the Company's ability to make capital expenditures, investments and
acquisitions. The Company is in compliance with the amended covenants as of
March 31, 1999 and believes that it will be in compliance throughout the
remainder of 1999, but any downturn in the current performance of the Company
could result in non-compliance with these financial covenants. The financial
covenants existing prior to the amendment will be reinstated beginning with the
year 2000. However, based on current performance, the Company will not meet the
requirements of the financial covenants that will be reinstated. Failure by the
Company to comply with its Credit Agreement covenants could result in an event
of default which, if not cured or waived, will have a material adverse effect on
the Company.
RECAPITALIZATION PLAN AND PROPOSED CREDIT AGREEMENT MODIFICATIONS
On May 5, 1999, AMF Bowling announced a recapitalization plan which includes
a rights offering to existing stockholders to raise approximately $140 million
and a tender offer for a portion of its outstanding zero coupon convertible
debentures at a discount. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Current Developments" for a more detailed
description of the recapitalization plan and intended use of proceeds thereof.
A portion of the proceeds of the rights offering would also be used to fund
future bowling center acquisitions, along with funds that may be available under
the Credit Agreement, and for general corporate purposes. The Company has
requested that, in connection with its recapitalization plan, the lenders under
its Credit Agreement provide the Company with (i) the ability to increase the
pace of its bowling center acquisition program on a selective basis, (ii)
greater financial flexibility under the covenants contained in the Credit
Agreement and (iii) certain other modifications.
NOTE 6. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at bowling centers.
Management believes that the ultimate resolution of such matters will not have a
material adverse effect on the Company's results of operations or financial
position. While the ultimate outcome of the litigation and claims against the
Company cannot presently be determined, management believes the Company has made
adequate provision for possible losses.
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation ("Vulcan") against the Company, The Goldman Sachs Group, L.P.,
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Cowen & Company,
Schroder & Co. Inc., Richard A. Friedman and Douglas J. Stanard. Vulcan, as
putative class representative for itself and all persons who purchased the
Common Stock in the Initial Public Offering, seeks, among other things, damages
and/or rescission against all defendants jointly and severally pursuant to
Sections 11, 12 and/or 15 of the Securities Act of 1933 based on allegedly
inaccurate and misleading disclosures in connection with and following the
Initial Public Offering. Management believes that the litigation is without
merit and intends to defend it vigorously.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 at March 31, 1999 under the AMF Bowling, Inc.
1996 Stock Incentive Plan (the "1996 Plan") was 1,767,151. At March 31, 1999,
the number of Stock Options outstanding to senior management, other employees,
consultants and directors totaled 864,650 at an exercise price of $10.00 per
share. Of the total Stock Options awarded under the 1996 Plan, 572,200 were
exercisable at March 31, 1999, and no Stock Options were exercised in the three
months ended March 31, 1999. Forfeited Stock Options under the 1996 Plan totaled
585,450 through March 31, 1999. There were 834,951 shares of Common Stock
available for grant under the 1996 Plan as of March 31, 1999.
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. Four million shares of Common Stock are reserved
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 March 31, 1999, options to purchase
1,384,650 shares were granted under the 1998 Plan.
CHIEF EXECUTIVE STOCK OPTION
On April 28,1999, the Company granted to Roland Smith a nonqualified stock
option (the "Smith Option") to purchase one million (1,000,000) shares of Common
Stock at an exercise price of $5.2813 per share of Common Stock in connection
with Mr. Smith's employment as president and chief executive officer of the
Company. The exercise price of the Smith Option is equal to the fair market
value of the Common Stock on the date the Smith Option was granted. The Smith
Option was not granted pursuant to either the 1996 Plan or the 1998 Plan.
However, the Smith Option is subject to the terms of the 1998 Plan and such
terms are incorporated into the option agreement. The Smith Option will vest and
become exercisable in 20% increments beginning on the date of grant and on each
of the next four anniversaries thereof, and becomes vested and fully exercisable
upon a Change of Control (as defined in the 1998 Plan).
NOTE 8. ACQUISITIONS
Since May 1, 1996 and prior to December 31, 1998, AMF Bowling Centers
purchased an aggregate of 262 bowling centers from various unrelated sellers.
From January 1, 1999 through March 31, 1999, the Company acquired one center in
the United States. The combined net purchase price for all acquisitions was
approximately $498.7 million, and was funded with approximately $76.6 million
from the sale of equity by AMF Bowling, $420.9 million from available borrowing
under Bowling Worldwide's then existing Acquisition Facility and current Bank
Facility, and with $1.2 million from the issuance of Common Stock.
As a result of these acquisitions, and after giving effect to the
construction of two new U.S. centers, the closing of 17 U.S. centers and two
international centers and the sale of a center in Switzerland since the
Acquisition, the Company owned and operated 422 U.S. bowling centers and 123
international bowling centers as of March 31, 1999. As of April 30, 1999, the
Company had no commitments regarding the acquisition of additional bowling
centers.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. BUSINESS SEGMENTS
The Company operates in two major lines of business: operating bowling
centers and manufacturing bowling and related products. Information concerning
operations in these businesses for the three months ended March 31, 1999 and
1998, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 (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 $ 140.9 $31.7 $ 172.6 $ 13.4 $16.6 $ 30.0 $ - $ - $202.6
Intersegment sales - - - 1.1 0.9 2.0 - - 2.0
Operating income (loss) 29.7 3.7 33.4 (3.2) (3.3) (6.5) (5.7) 0.4 21.6
Identifiable assets 870.5 338.9 1,209.4 636.8 81.6 718.4 52.2 2.5 1,982.5
Depreciation and amortization 21.6 5.5 27.1 5.5 0.4 5.9 0.8 (0.4) 33.4
Capital expenditures 2.0 1.1 3.1 1.4 0.2 1.6 - - 4.7
Research and development expense - - - 0.1 - 0.1 - - 0.1
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 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 $ 125.0 $25.2 $ 150.2 $ 13.6 $23.5 $ 37.1 $ - $ - $187.3
Intersegment sales - - - 3.7 0.3 4.0 - - 4.0
Operating income (loss) 32.6 2.3 34.9 (3.9) (1.4) (5.3) (4.0) 0.7 26.3
Identifiable assets 865.4 312.4 1,177.8 631.3 75.1 706.4 3.9 1.9 1,890.0
Depreciation and amortization 17.4 4.5 21.9 5.1 0.3 5.4 0.2 (0.7) 26.8
Capital expenditures 7.0 0.9 7.9 3.2 0.5 3.7 - - 11.6
Research and development expense - - - 0.2 - 0.2 - - 0.2
</TABLE>
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of March 31, 1999, and condensed
consolidating statements of income and cash flows for the three months ended
March 31, 1999 and (ii) elimination entries necessary to combine the entities
comprising the Company.
Bowling Worldwide's subsidiary senior subordinated notes and subsidiary
senior subordinated discount notes are jointly and severally guaranteed on a
full and unconditional basis by AMF Group Holdings and the first and
second-tier subsidiaries of Bowling Worldwide. AMF Bowling and the third-tier
subsidiaries of Bowling Worldwide have not provided guarantees of such
indebtedness.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1999
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 46,855 $ 9,929 $ - $ 56,784
Accounts and notes receivable, net
of allowance for doubtful accounts 85,849 573 - 86,422
Accounts receivable - intercompany 9,688 12,036 (21,724) -
Inventories 65,253 1,026 - 66,279
Deferred taxes and other 21,863 7,785 - 29,648
---------------- ------------------ ---------------- -----------------
Total current assets 229,508 31,349 (21,724) 239,133
Notes receivable - intercompany 44,403 5,663 (50,066) -
Property and equipment, net 777,983 74,931 1,210 854,124
Investment in subsidiaries 20,783 769,094 (789,877) -
Goodwill and other assets 866,864 22,382 - 889,246
---------------- ------------------ ---------------- -----------------
Total assets $ 1,939,541 $ 903,419 $ (860,457) $ 1,982,503
================= ================= ================ =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 26,461 $ 3,381 $ - $ 29,842
Accounts payable - intercompany 12,036 9,688 (21,724) -
Accrued expenses 54,787 12,696 - 67,483
Income taxes payable 2,423 4,613 - 7,036
Current portion of long-term debt 34,250 - - 34,250
---------------- ------------------ ---------------- -----------------
Total current liabilities 129,957 30,378 (21,724) 138,611
Long-term debt, less current portion 1,011,187 318,994 - 1,330,181
Notes payable - intercompany 5,663 44,403 (50,066) -
Other long-term liabilities 2,857 1,015 - 3,872
---------------- ------------------ ---------------- -----------------
Total liabilities 1,149,664 394,790 (71,790) 1,472,664
---------------- ------------------ ---------------- -----------------
Commitments and contingencies
Stockholders' equity:
Common stock 596 596 (596) 596
Paid-in capital 1,002,845 747,122 (1,000,841) 749,126
Retained (deficit) earnings (193,322) (218,847) 192,528 (219,641)
Equity adjustment from foreign
currency translation (20,242) (20,242) 20,242 (20,242)
---------------- ------------------ ---------------- -----------------
Total stockholders' equity 789,877 508,629 (788,667) 509,839
---------------- ------------------ ---------------- -----------------
Total liabilities and stockholders'
equity $ 1,939,541 $ 903,419 $ (860,457) $ 1,982,503
================= ================= ================ =================
</TABLE>
<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 THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenue $ 186,372 $ 16,397 $ (202) $ 202,567
Operating expenses:
Cost of goods sold 37,938 1,779 (135) 39,582
Bowling center operating expenses 84,796 8,492 (67) 93,221
Selling, general, and administrative expenses 12,365 2,388 - 14,753
Depreciation and amortization 31,172 2,224 (30) 33,366
--------- -------- ------- ----------
Total operating expenses 166,271 14,883 (232) 180,922
--------- -------- ------- ----------
Operating income 20,101 1,514 30 21,645
--------- -------- ------- ----------
Nonoperating expenses (income):
Interest expense 25,589 5,384 - 30,973
Other expenses, net 2,047 927 - 2,974
Interest income (572) (123) - (695)
Equity in (income) loss of subsidiaries (504) 12,609 (12,105) -
--------- -------- ------- ----------
Total nonoperating expenses 26,560 18,797 (12,105) 33,252
--------- -------- ------- ----------
Loss before income taxes (6,459) (17,283) 12,135 (11,607)
Provision for income taxes 123 1,446 - 1,569
--------- -------- ------- ----------
Net loss before equity in loss of
joint ventures (6,582) (18,729) 12,135 (13,176)
Equity in loss of joint ventures (5,523) - - (5,523)
--------- -------- ------- ----------
Net loss $ (12,105) $ (18,729) $ 12,135 $ (18,699)
========== ======== ======== ===========
</TABLE>
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,105) $ (18,729) $ 12,135 $ (18,699)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 31,172 2,224 (30) 33,366
Equity in loss of joint ventures 5,523 - - 5,523
Amortization of bond discount 6,318 5,118 - 11,436
Equity in earnings of subsidiaries (504) 12,609 (12,105) -
Loss on the sale of property and equipment, net 509 - - 509
Changes in assets and liabilities:
Accounts and notes receivable (5,970) (162) - (6,132)
Receivables and payables - affiliates 2,460 (2,460) - -
Inventories (2,485) (22) - (2,507)
Other assets (2,021) (3,390) - (5,411)
Accounts payable and accrued expenses 277 2,811 - 3,088
Income taxes payable (102) 743 - 641
Other long-term liabilities (933) - - (933)
--------- -------- --------- ---------
Net cash provided by (used in) operating activities 22,139 (1,258) - 20,881
--------- -------- --------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,208) - - (1,208)
Investments in and advances to joint ventures (160) - - (160)
Investment in subsidiaries - - - -
Purchases of property and equipment (4,075) (594) - (4,669)
Proceeds from sale of property and equipment 114 - - 114
--------- -------- --------- ---------
Net cash used in investing activities (5,329) (594) - (5,923)
--------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing 20,000 - 20,000
Payments on long-term debt (10,969) - - (10,969)
Capital contribution from Parent - - - -
Issuance of shares - - - -
Purchase of shares - (180) - (180)
Noncompete obligations (180) - - (180)
--------- -------- --------- ---------
Net cash provided by financing activities 8,851 (180) - 8,671
--------- -------- --------- ---------
Effect of exchange rates on cash 1,351 (1,198) - 153
--------- -------- --------- ---------
Net increase in cash 27,012 (3,230) - 23,782
Cash and cash equivalents at beginning of period 19,843 13,159 - 33,002
--------- -------- --------- ---------
Cash and cash equivalents at end of period $46,855 $ 9,929 $ - $ 56,784
========= ======== ========= =========
</TABLE>
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information in this report contains forward-looking statements, which are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as
"believes", "anticipates", "intends", or "expects". These forward-looking
statements relate to the plans and objectives of AMF Bowling, Inc. ("AMF
Bowling" or "AMF") and its subsidiaries (collectively, 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 report should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the
forward-looking statements, including: (i) the Company's ability to integrate
acquired operations into its business, (ii) the ability of the Company's new
management to execute its long term strategies, including to identify, finance
and execute increased 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 success of the recent
management reorganization of the bowling centers and bowling products
businesses, (v) the expected success of the Company's plans to improve its
bowling centers operations, including revenue enhancement and cost management
programs, (vi) the ability to increase the pace of the Company's bowling center
acquisition program, (vii) the amounts of capital expenditures needed to
maintain or improve the Company's bowling centers, (viii) the manner, timing and
expected results of the Company's recapitalization plan and related activities
and charges, (ix) 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, (x) the Company's ability to retain experienced senior
management, (xi) the success of Company employee incentive efforts, (xii) the
outcome of existing or potential litigation, (xiii) 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, (xiv) the timing
or amount of any changes in the interest expense of the Company's debt, (xv) the
popularity of bowling as an activity in the United States and abroad, (xvi) the
continuation or worsening of economic difficulties currently being experienced
by certain countries in Asia Pacific and other regions, (xvii) fluctuations in
currency exchange rates which affect translation of operating results and
(xviii) increased competitive pressure from current competitors and future
market entrants.
In addition, actual results may differ materially from forward-looking
statements in this report as a result of factors generally applicable to
companies in similar businesses, including, among other things: (i) a decline in
general economic conditions, (ii) an adverse judgment in pending or future
litigation, (iii) the continuation of adverse financial results and substantial
competition in the Company's bowling products business and (iv) the status or
effectiveness of the Company's Year 2000 efforts. The foregoing review of
important factors should not be construed as exhaustive and should be read in
conjunction with other cautionary statements that are included elsewhere in this
report. AMF Bowling undertakes no obligation to release publicly the results of
any future revisions it may make to forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
BACKGROUND
This discussion should be read in conjunction with the information contained
under "Selected Financial Data" and AMF Bowling's Condensed Consolidated
Financial Statements (unaudited) included elsewhere herein.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
an issuer's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
<PAGE>
GENERAL
The Company principally operates in two business segments in the United
States and international markets: (i) the ownership and operation of 422 U.S.
bowling centers and 123 international bowling centers ("Bowling Centers"),
including 15 joint venture centers operated with third parties, as of March 31,
1999; and (ii) the manufacture and sale of bowling equipment and bowling
products ("Bowling Products").
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations discuss
results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
are set forth below. The business segment results presented below are before
intersegment eliminations since the Company's management believes that this will
provide a more accurate comparison of performance by segment from year to year.
The intersegment eliminations are not material. Interest expense is presented on
a gross basis. The comparative results of Bowling Centers for the first three
months of 1999 versus 1998 reflect the inclusion of 51 centers acquired and one
center constructed since April 1, 1998.
CURRENT DEVELOPMENTS
NEW CHIEF EXECUTIVE OFFICER
On April 29, 1999, AMF Bowling announced the appointment of Roland Smith as
president and chief executive officer of the Company. Mr. Smith, 44, succeeds
Stephen E. Hare, the Company's chief financial officer, who was acting president
and chief executive officer for the past six months. Mr. Hare will continue his
role as chief financial officer. Mr. Smith has been appointed to AMF Bowling's
board of directors and to the executive committee of the board of directors.
RECAPITALIZATION PLAN
On May 5, 1999, the Company announced a recapitalization plan which includes
a rights offering to existing stockholders to raise approximately $140 million
and a tender offer for a portion of its outstanding zero coupon convertible
debentures (the "Debentures") at a discount.
The Company intends to effect a rights offering in which all stockholders of
the Company would receive rights to purchase new shares of AMF Bowling common
stock (the "Common Stock"). The number of rights per share to be offered and the
exercise price of the rights have not been determined. Certain of the Company's
significant stockholders are currently expected to participate in the rights
offering, subject to final terms and conditions, but they are not obligated to
do so. The rights offering is expected to raise approximately $140 million. The
Company filed a registration statement relating to the rights offering on May 5,
1999 with the Securities and Exchange Commission which has not yet become
effective.
The Company currently intends to use a portion of the proceeds of the rights
offering to make a tender offer for the Company's outstanding Debentures. The
Company currently intends to tender for a minimum of 45% and up to 60% of the
outstanding Debentures at an indicated price not to exceed 14% of face value.
Affiliates of Goldman, Sachs & Co. and Kelso & Company, which together own
approximately 44% of the outstanding Debentures, have indicated that they
currently expect to tender their debentures pursuant to the tender offer,
subject to pro ration, and subject to market conditions and the terms and
conditions and prices of the tender offer, but they are not obligated to do so.
A portion of the proceeds of the rights offering would also be used to fund
future bowling center acquisitions, along with funds that may be available under
the Credit Agreement, and for general corporate purposes. The Company has
requested that, in connection with its recapitalization plan, the lenders under
AMF Bowling Worldwide, Inc.'s ("Bowling Worldwide") third amended and restated
credit agreement dated November 3, 1997, as amended (the "Credit Agreement")
provide the Company with (i) the ability to increase the pace of its
bowling center acquisition program on a selective basis, (ii) greater
financial flexibility under the covenants contained in the Credit Agreement
and (iii) certain other modifications.
<PAGE>
The commencement of the rights offering and the tender offer are subject to
approval by the Board of Directors of the final terms and pricing. The rights
offering and the tender offer are expected to be conditioned upon each other.
ACQUISITION
From January 1, 1999 through March 31, 1999, the Company acquired one
bowling center in the United States. See "Note 8. Acquisitions" in the Notes to
Condensed Consolidated Financial Statements for a discussion of this
transaction.
AMF BOWLING, INC.
SELECTED FINANCIAL DATA
(UNAUDITED)
(in millions of dollars)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
---- -----
<S> <C> <C>
Bowling Centers (before intersegment eliminations)
Operating revenue $ 172.6 $ 150.2
-------- --------
Cost of goods sold 16.9 13.4
Bowling center operating expenses 93.5 78.5
Selling, general, and administrative expenses 1.7 1.5
Depreciation and amortization 27.1 21.9
-------- --------
Operating income $ 33.4 $ 34.9
======== ========
Bowling Products (before intersegment eliminations)
Operating revenue $ 32.0 $ 41.1
Cost of goods sold 24.4 29.3
-------- --------
Gross profit 7.6 11.8
Selling, general, and administrative expenses 8.2 11.7
Depreciation and amortization 5.9 5.4
-------- --------
Operating loss $ (6.5) $ (5.3)
======== ========
Consolidated
Operating revenue $ 202.6 $ 187.3
-------- --------
Cost of goods sold 39.6 38.9
Bowling center operating expenses 93.2 78.4
Selling, general, and administrative expenses 14.8 16.9
Depreciation and amortization 33.4 26.8
-------- --------
Operating income 21.6 26.3
Interest expense, gross 31.0 26.0
Other expense, net 2.3 0.1
-------- --------
Income (loss) before income taxes (11.7) 0.2
Provision (benefit) for income taxes 1.5 0.5
-------- --------
Net loss before equity in loss of joint ventures (13.2) (0.3)
Equity in loss of joint ventures (5.5) (0.3)
-------- --------
Net loss $ (18.7) $ (0.6)
======== ========
Selected Data:
EBITDA
Bowling Centers $ 60.5 $ 56.8
Bowling Products $ (0.6) $ 0.1
EBITDA margin
Bowling Centers 35.1% 37.8%
Bowling Products -1.9% 0.2%
</TABLE>
<PAGE>
BOWLING CENTERS
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. Bowling Centers derives its
revenue and cash flows from three principal sources: (i) bowling, (ii) food and
beverage and (iii) other sources, such as shoe rental, amusement games,
billiards and pro shops. For the three months ended March 31, 1999, bowling,
food and beverage and other revenue represented 59.7%, 27.1% and 13.2% of total
Bowling Centers revenue, respectively.
FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER 1998
Bowling Centers operating revenue increased $22.4 million, or 14.9%. An
increase of $25.7 million is attributable to new centers, of which $18.7 million
is from U.S. centers and $7.0 million is from international centers. Of these
new centers, 51 centers were acquired and one center was constructed between
April 1, 1998 and March 31, 1999. Constant centers operating revenue decreased
$1.7 million, or 1.2%. U.S. constant centers operating revenue decreased $1.4
million, or 1.1%, primarily as a result of lower league revenue, which was
established at the start of league play in the fall of 1998, partially offset by
increases in open play revenue, food and beverage and ancillary revenue
associated with open play traffic. International constant centers operating
revenue decreased $0.3 million, or 1.4%, due to unfavorable currency translation
of results. On a constant exchange rate basis, international constant centers
operating revenue increased $0.2 million, or 0.8%, in the first quarter of 1999
compared to the first quarter of 1998. A decrease of $1.7 million in total
operating revenue was attributable to 11 centers which were closed since March
31, 1998.
Cost of goods sold increased $3.5 million, or 26.1%. Of the total increase
in cost of goods sold, $2.9 million is attributable to the new centers. Constant
centers cost of goods sold increased $0.7 million, or 5.6%, as a result of
higher food costs.
Operating expenses increased $15.0 million, or 19.1%. An increase of $13.9
million was attributable to the increase in the number of centers and an
increase of $2.9 million was primarily attributable to constant centers. A
decrease of $1.2 million was attributable to closed centers and a decrease of
$0.6 million was attributable to lower regional and district operations
expenses. As a percentage of its revenue, Bowling Centers operating expenses
were 54.2% for the first quarter of 1999 compared to 52.3% for the first quarter
of 1998. The 1.9% increase was primarily attributable to higher expenses related
to maintenance and supplies, advertising and payroll.
Selling, general and administrative expenses increased $0.2 million, or
13.3%, due to an increase in costs associated with growth experienced in
Australia and the United Kingdom.
EBITDA increased $3.7 million, or 6.5%. The EBITDA contribution of new
centers was partially offset by the increased expenses discussed above. EBITDA
margin for the first quarter of 1999 was 35.1% compared to 37.8% for the first
quarter of 1998.
BOWLING PRODUCTS
FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER 1998
Bowling Products operating revenue decreased $9.1 million, or 22.1%. Revenue
from sales of New Center Packages ("NCP"s which include all the equipment
necessary to outfit a new bowling center or expand an existing bowling center)
decreased $8.7 million, or 49.2%, and Modernization and Consumer Products (which
include modernization equipment, supplies, spare parts and consumable products)
revenue decreased $0.4 million, or 1.7%. Operating results have been adversely
impacted by economic difficulties and increased competition in certain markets
of the Asia Pacific region which have reduced the level of shipments for NCPs
and Modernization and Consumer Products. The strong U.S. dollar also unfavorably
affected pricing and financial statement translation. During the first quarter
of 1999, Bowling Products recorded NCP shipments of 269 units compared to
shipments of 504 units for the first quarter of 1998.
Gross profit decreased $4.2 million, or 35.6%, primarily as a result of the
decreased levels of NCP shipments, lower pricing and unabsorbed fixed overhead
resulting from low production levels.
<PAGE>
Bowling Products selling, general and administrative expenses decreased $3.5
million, or 29.9%, primarily as a result of the implementation of an ongoing
cost reduction program in which the Bowling Products organization has been
streamlined in order to reduce selling, general and administrative expenses to
offset the impact of lower sales volume on EBITDA.
Bowling Products EBITDA decreased from $0.1 million in the first quarter of
1998 to $0.6 million loss in the first quarter of 1999, and the Bowling Products
EBITDA margin decreased from 0.2% in the first quarter of 1998 to (1.9)% in the
first quarter of 1999 primarily as a result of lower revenue and gross profit
which exceeded the effect of savings achieved through cost reduction.
CONSOLIDATED
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $6.6 million, or 24.6%, in the first
quarter of 1999 compared to the first quarter of 1998. The increase was
attributable to depreciation of property and equipment of centers acquired since
March 31, 1998 and incremental depreciation expense incurred as a result of
capital expenditures.
INTEREST EXPENSE
Gross interest expense increased $5.0 million, or 19.2%, in the first
quarter of 1999 compared to the first quarter of 1998 primarily due to interest
incurred on the Debentures. See "--Liquidity" and "--Capital Resources" for
further discussion of the bank debt and the Debentures. Non-cash bond interest
amortization totaled $11.4 million for the first quarter of 1999 compared to
$5.7 million for the first quarter of 1998.
NET LOSS
Net loss in the first quarter of 1999 was $18.7 million compared to net loss
of $0.6 million in the first quarter of 1998. The increased loss of $18.1
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 $5.5 million in equity in loss of joint ventures in the
first quarter of 1999 compared to a loss of $0.3 million in the first quarter of
1998.
INCOME TAXES
As of December 31, 1998, the Company had net operating losses of
approximately $194.5 million and foreign tax credits of $19.7 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
March 31, 1999, for $45.6 million related to net operating losses and foreign
tax credits that the Company does not expect will be utilized prior to their
expirations.
LIQUIDITY
The Company's primary source of liquidity is cash provided by operations and
credit facilities, as described below. Working capital on March 31, 1999 was
$100.5 million compared to $70.6 million as of December 31, 1998, an increase of
$29.9 million. Increases in working capital were primarily attributable to an
increase of $23.8 million in cash attributable to cash balances held to fund
general corporate purposes, an increase of $4.0 million in accounts receivable
primarily as a result of recently generating more trade sales than letter of
credit sales, an increase of $1.5 million in inventory balances, a decrease of
$4.1 million in accounts payable, and a net increase of $4.1 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 $5.7 million in
accrued expenses and an increase of $1.9 million in the current portion of long
term debt.
Net cash flows provided by operating activities were $20.9 million for the
three months ended March 31, 1999 compared to net cash flows provided of $11.1
million for the three months ended March 31, 1998, an increase of $9.8 million.
<PAGE>
An increase of $18.9 million was attributable to increased levels of accounts
payable and accrued expenses; an increase of $7.6 million was attributable to
lower inventory balances resulting from lower Bowling Products sales volumes in
1999; an increase of $6.6 million was due to higher amounts of depreciation and
amortization; an increase of $5.8 million was attributable to higher levels of
bond amortization attributable to the Debentures; and an increase of $5.1
million was due to the increased loss in equity of joint ventures caused by the
Company's Brazilian joint venture results which were adversely impacted by a
currency devaluation. These increases were partially offset by a decrease of
$18.1 million attributable to net loss of $18.7 million recorded in the first
three months of 1999 compared to a net loss of $0.6 million in the same period
in 1998; a decrease of $13.4 million attributable to lower levels of accounts
receivable and a net decrease of $2.4 million attributable to changes in other
operating activities.
Net cash flows used in investing activities were $5.9 million for the three
months ended March 31, 1999 compared to net cash flows used of $81.7 million for
the three months ended March 31, 1998, a decrease of $75.8 million. Bowling
Center acquisition spending decreased by $64.4 million and purchases of property
and equipment decreased by $7.0 million in the first three months of 1999
compared to the same period in 1998. In the first three months of 1999, one
center was purchased compared to 33 centers in the same period in 1998.
Investments in and advances to joint ventures decreased $4.4 million in the
first three months of 1999 compared to the same period in 1998. See "Note 8.
Acquisitions" in the Notes to Condensed Consolidated Financial Statements and
"--Capital Expenditures" for additional discussion of these investing
activities.
Net cash provided by financing activities was $8.7 million for the three
months ended March 31, 1999 compared to net cash provided of $64.1 million for
the three months ended March 31, 1998, a decrease of $55.4 million. Proceeds
from long term debt decreased $52.0 million primarily as a result of decreased
borrowings under the Credit Agreement attributable to curtailment of the pace of
acquisitions. In accordance with the terms of the Credit Agreement, scheduled
principal payments in the first three months of 1999 were $1.9 million higher
than payments made in the same period in 1998. In the first three months of
1998, $1.4 million of Common Stock was issued, of which $1.2 million was
attributable to shares issued in the Active West acquisition and $0.2 million
was attributable to shares issued upon exercise of employee stock options.
Net cash flows provided by other financing activities decreased $0.1 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 $23.8 million for the
three months ended March 31, 1999 compared to a decrease of $6.2 million for the
three months ended March 31, 1998.
CAPITAL RESOURCES
The Company's total indebtedness is primarily a result of the financing of
the acquisition of the Company in 1996 by an investor group led by an affiliate
of Goldman, Sachs & Co. (the "Acquisition") and the Company's bowling center
acquisition program. At March 31, 1999, the Company's debt structure consisted
of $592.9 million of borrowings under the Credit Agreement and a mortgage
(collectively, the "Senior Debt"), $250.0 million of subsidiary senior
subordinated notes ("Subsidiary Senior Subordinated Notes"), $219.5 million of
subsidiary senior subordinated discount notes ("Subsidiary Senior Subordinated
Discount Notes"), and $302.0 million of Debentures. The Company's Senior Debt
consisted of $407.9 million outstanding under term loan facilities under the
Credit Agreement (the "Term Facilities"), $183.0 million outstanding under a
non-amortizing revolving credit facility under the Credit Agreement (the "Bank
Facility") and $2.0 million represented by one mortgage note. At March 31, 1999,
the Company was also capitalized with equity of $509.8 million.
The Company has the ability to borrow for general corporate purposes and, to
a limited extent, for acquisitions pursuant to the $355.0 million Bank Facility,
subject to certain conditions. At March 31, 1999, $183.0 million was outstanding
and $172.0 million was available for borrowing under the Bank Facility. Between
March 31, 1999 and April 30, 1999, there were no additional borrowings under the
Bank Facility.
In 1998, the Company entered into Amendment Number 1 and Waiver (the
"Amendment and Waiver") to the Credit Agreement that amended or waived certain
financial covenants of the Credit Agreement and imposed certain restrictions on
<PAGE>
the Company's ability to make capital expenditures, investments and
acquisitions. The Company is in compliance with the amended covenants as of
March 31, 1999 and believes that it will be in compliance throughout the
remainder of 1999, but any downturn in the current performance of the Company
could result in non-compliance with these financial covenants. The financial
covenants existing prior to the amendment will be reinstated in the year
beginning 2000. However, based on current performance, the Company will not meet
the requirements of the financial covenants that will be reinstated. Failure by
the Company to comply with its Credit Agreement covenants could result in an
event of default which, if not cured or waived, will have a material adverse
effect on the Company.
During the first quarter of 1999, the Company 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 three months ended March 31, 1999,
the Company incurred cash interest expense of $19.5 million, representing 35.5%
of EBITDA for the quarter. For the three months ended March 31, 1998, the
Company incurred cash interest expense of $19.9 million, representing 37.5% of
EBITDA for the quarter.
The indentures governing the Subsidiary Senior Subordinated Notes and the
Subsidiary Senior Subordinated Discount Notes (together with the Subsidiary
Senior Subordinated Notes, the "Subsidiary Notes") and certain provisions of the
Credit Agreement contain financial and operating covenants and significant
restrictions on the ability of the Company to pay dividends, incur indebtedness,
make investments and take certain other corporate actions. As of March 31, 1999,
the Company is in compliance with all of its covenants.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control,
including the conditions of the debt and equity markets. Based upon the current
level of operations, management believes that available cash flow, together with
available borrowings under the Credit Agreement and other sources of liquidity,
will be adequate to meet the Company's requirements for working capital, capital
expenditures, scheduled payments of principal of, and interest on, its Senior
Debt, and interest on the Subsidiary Notes. There can be no assurance, however,
that the Company's business will generate sufficient cash flow from operations
or that future borrowings will be available in an amount sufficient to enable
the Company to service its indebtedness, or make necessary capital expenditures,
or that any refinancing would be available on commercially reasonable terms or
at all.
The Company has requested that, in connection with its recapitalization
plan, the lenders under the Credit Agreement provide the Company with (i) the
ability to increase the pace of its bowling center acquisition program on a
selective basis, (ii) greater financial flexibility under the covenants
contained in the Credit Agreement and (iii) certain other modifications.
CAPITAL EXPENDITURES
For the three months ended March 31, 1999, the Company's capital
expenditures were $4.7 million compared to $11.6 million for the three months
ended March 31, 1998, a decrease of $6.9 million. Bowling Centers maintenance
and modernization expenditures decreased $1.7 million. Bowling Products
expenditures decreased $2.0 million. Company-wide information systems
expenditures decreased $2.6 million and other expenditures decreased $0.6
million.
While the Company's intention is to continue to consolidate the U.S. bowling
center industry by acquiring additional bowling centers, the Company recently
curtailed its pace of acquisitions so that management can focus on improving
financial performance of its current centers. However, the Company continues to
evaluate acquisitions on a more selective basis. As of April 30, 1999, the
Company had no formal commitments to build or acquire centers. The Company has
committed to build one Michael Jordan Golf Center in 1999.
The Company funded its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new centers,
internally-generated cash, the Bank Facility and issuances of Common Stock. See
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources."
<PAGE>
The Company has requested that, in connection with its recapitalization
plan, the lenders under the Credit Agreement provide the Company with (i) the
ability to increase the pace of its bowling center acquisition program on a
selective basis, (ii) greater financial flexibility under the covenants
contained in the Credit Agreement and (iii) certain other modifications.
SEASONALITY AND CYCLICALITY
The financial performance of Bowling Centers operations is seasonal. Cash
flows typically peak in the winter and reach their lows in the summer. While the
geographic diversity of the Company's Bowling Centers operations has helped
reduce this seasonality in the past, the increase in U.S. centers resulting from
acquisitions has increased the seasonality of that business.
Modernization and Consumer Products sales also display seasonality. The U.S.
market, which is the largest market for Modernization and Consumer Products, is
driven by the beginning of league play in the fall of each year. While operators
purchase consumer products throughout the year, they often place larger orders
during the summer in preparation for the start of league play in the fall.
Summer is also generally the peak period for installation of modernization
equipment. Operators typically sign purchase orders for modernization equipment
during the first four months of the year after they received winter league
revenue indications. Equipment is then shipped and installed during the summer
when leagues are generally less active. However, sales of some modernization
equipment such as automatic scoring and synthetic lanes are less predictable and
fluctuate from year to year because of the longer life cycle of these major
products.
Sales of NCPs can fluctuate dramatically as a result of economic
fluctuations in international markets, as seen in the reduction of sales of NCPs
to markets in the Asia Pacific region following economic difficulties in that
region.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the risks inherent in
operating abroad, including, but not limited to, currency exchange rate
fluctuations, economic and political fluctuations and destabilization, other
disruption of markets, restrictive laws, tariffs and other actions by foreign
governments (such as restrictions on transfer of funds, import and export duties
and quotas, foreign customs, tariffs and value added taxes and unexpected
changes in regulatory environments), difficulty in obtaining distribution and
support for products, the risk of nationalization, and the laws and policies of
the United States affecting trade, international investment and loans, and
foreign tax law changes.
The Company has a history of operating in a number of international markets,
in some cases, for over 30 years. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate adversely impacts sales volume and profit margins
during such periods.
Recent economic difficulties in the Asia Pacific region have had and will
continue to have an adverse impact on NCP sales, shipments and order backlog.
One of the reasons for the decline in NCP sales is the limited availability of
financing for customers desiring to build new bowling centers, especially in the
Asia Pacific region. In addition, a low cost Chinese manufacturer of bowling
equipment has become a significant competitor in China. As of March 31, 1999,
the NCP backlog was 755 units, which represents a reduction of 53.2% compared to
a backlog of 1,612 units as of March 31, 1998, and a reduction of 30.0% compared
to a backlog of 1,078 units as of December 31, 1998.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 66.5% of total NCP unit sales for the three months ended
March 31, 1999 compared to 72.7% for the year ended December 31, 1998. NCP unit
backlog related to China, Japan and other countries in the Asia Pacific region
represented 66.6% of total NCP unit backlog at March 31, 1999 compared to 74.2%
at December 31, 1998.
<PAGE>
Due to the decline in NCP sales, shipments and order backlog, in the near
term, the Company plans to concentrate on sales of Modernization and Consumer
Products.
China has recently strengthened its import restrictions by requiring the
payment of full customs duties and value added taxes on the importation of new
and used capital goods. The Chinese government has also begun to prohibit
importation of used capital equipment without permits. Permits for the
importation of used bowling equipment are very difficult to obtain. Local
Chinese companies, however, are not subject to the same restrictions. For
example, a Chinese competitor recently began producing locally and selling
bowling equipment which is not subject to the customs duties or permit
requirements that affect the Company's imported equipment. The Chinese
manufacturer has experienced significant acceptance by local customers. These
Chinese import restrictions have had, and for the foreseeable future management
believes will continue to have, an adverse effect on the Bowling Products
business. The Chinese competitor does not currently sell bowling equipment
outside China. There can be no assurance, however, that this competitor will not
be able to compete with the Company outside China in the future.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the three months ended March 31,
1999, revenue and EBITDA of international bowling centers represented 15.6% and
16.7% of consolidated results, respectively. For the three months ended March
31, 1998, revenue and EBITDA of international bowling centers represented 13.5%
and 12.8% of consolidated results, respectively. For the year ended December 31,
1998, revenue and EBITDA of international bowling centers represented 15.6% and
24.3% of consolidated results, respectively.
BACKLOG: RECENT NCP SALES
The total backlog of NCPs was 755 units as of March 31, 1999, representing a
reduction of 30.0% compared to 1,078 units as of December 31, 1998, and a
reduction of 53.2% compared to 1,612 units as of March 31, 1998. It is expected
that NCP backlog will continue for the foreseeable future at levels which are
substantially lower than those experienced in 1998. It is customary for a
certain portion of the backlog to be cancelled before the expected shipping
date. The Company has experienced a greater number of order cancellations
recently because of economic difficulties in the Asia Pacific region. There can
be no assurance that economic conditions in the Asia Pacific region and other
regions will improve or that NCP sales will not decrease any further. NCP
shipments were 269 units for the three months ended March 31, 1999, representing
a reduction of 46.6% compared to shipments of 504 units for the three months
ended March 31, 1998, which was largely attributable to the recent economic
difficulties in the Asia Pacific region. See "--International Operations."
IMPACT OF INFLATION
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have a
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions or
future events, such as changes in existing laws and regulations, may give rise
to additional environmental costs. Furthermore, actions by federal, state, local
and foreign governments concerning environmental matters could result in laws or
<PAGE>
regulations that could increase the cost of producing the Company's products, or
providing its services, or otherwise adversely affect the demand for its
products or services.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the quarter ended March 31, 2000, the Company will be required
to adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The Company does not expect that adoption of this standard will
have a material adverse impact on the Company's financial position or results of
operations.
YEAR 2000
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the Year 2000 as "00" and may assume that the year is 1900 rather than
2000. This could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures, and is in the process of preparing for the Year
2000.
The Company has evaluated its Year 2000 risk in three separate categories:
information technology systems ("IT"), non-IT systems ("Non-IT") and material
third party relationships ("Third Party Risk"). The Company has developed a plan
in which the risks in each of these categories are being reviewed and addressed
by the appropriate level of management as follows:
IT. The Company has a number of financial, retail and operational
systems worldwide. The retail systems in many of its bowling centers are
already Year 2000 compliant. The Company is in the process of installing
corrective measures for those bowling centers that are not compliant and
expects this effort to be complete by the third quarter of 1999. The
Company is installing new financial and operational systems at several
locations. In connection with this effort, system programs have been
designed so that the Year 2000 will be recognized as a valid date and
will not affect the processing of date-sensitive information. The
financial and operational systems have already been installed for U.S.
Bowling Centers and at the corporate level. The effort will be complete
for Bowling Products locations before year-end. Several locations have
existing systems that are being upgraded for Year 2000 compliance, which
will be completed by the end of the second quarter of 1999. In 1997,
1998 and for the three months ended March 31, 1999, the Company spent
approximately $12.6 million, $4.1 million and $1.0 million,
respectively, on systems that are designed to be Year 2000 compliant.
The Company expects to spend an additional $6.6 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
<PAGE>
things, processing transactions to an incorrect accounting period, difficulties
in posting general ledger interfaces and lapse of certain services by vendors to
the Bowling Centers operations. If the Company's plan to install new systems
which effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed through the implementation of these new systems
and software development and by its critical vendors and certain business
partners and does not expect the Year 2000 issue to have a material adverse
impact on the financial position, results of operations or cash flows of the
Company in future periods. However, should the remaining review of the Company's
Year 2000 risks reveal potentially non-compliant computer systems or material
third parties, contingency plans will be developed at that time.
PART II
ITEM 1. LEGAL
The Company currently and from time to time is subject to claims and actions
arising in the ordinary course of its business, including environmental claims,
discrimination claims, workers' compensation claims, and personal injury claims
from customers of Bowling Centers. In some actions, plaintiffs request punitive
or other damages that may not be covered by insurance. In management's opinion,
the claims and actions in which the Company is involved will not have a material
adverse impact on its financial position or results of operations. However, it
is not possible to predict the outcome of such claims and actions.
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation ("Vulcan") against the Company, The Goldman Sachs Group, L.P.,
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Cowen & Company,
Schroder & Co. Inc., Richard A. Friedman and Douglas J. Stanard. Vulcan, as
putative class representative for itself and all persons who purchased the
Common Stock in the Initial Public Offering, seeks, among other things, damages
and/or rescission against all defendants jointly and severally pursuant to
Sections 11, 12 and/or 15 of the Securities Act of 1933 based on allegedly
inaccurate and misleading disclosures in connection with and following the
Initial Public Offering. Management believes that the litigation is without
merit and intends to defend it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SHAREHOLDER CONSENT
Pursuant to a written consent dated April 22, 1999, the holders of
41,492,203 shares of Common Stock, or approximately 69.6% of the outstanding
shares of Common Stock, approved (i) the Company's employment agreement with the
Company's new chief executive officer and president, Roland Smith, and (ii) the
grant to Mr. Smith of a nonqualified stock option to purchase 1,000,000 shares
of Common Stock. The approvals were obtained pursuant to Section 228 of the
Delaware General Corporation Law, subject to the expiration of 20 days following
the mailing on May 6, 1999 of an Information Statement to the Company's
stockholders as required under the Securities Exchange Act of 1934, as amended.
<PAGE>
ANNUAL MEETING OF AMF BOWLING, INC. SHAREHOLDERS
(a) Annual Meeting held May 4, 1999.
(b) Not Applicable.
(c) There were 59,597,550 shares of AMF Bowling Common Stock outstanding as of
March 8, 1999, the record date for the 1999 annual meeting of shareholders.
A total of 58,567,209 shares were voted.
All of the board's nominees for directors of AMF Bowling were elected with
the following vote:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD BROKER NON-VOTES
------- --------- -------------- ----------------
<S> <C> <C> <C>
Richard A Friedman 58,490,558 76,651 0
Stephen E. Hare 58,493,951 73,258 0
Terence M. O'Toole 58,489,665 77.544 0
Peter M. Sacerdote 58,492,165 75,044 0
Charles M. Diker 58,493,915 73,294 0
Paul B. Edgerley 58,490,015 77,194 0
Howard A. Lipson 58,489,315 77,894 0
Thomas R. Wall, IV 58,489,515 77,694 0
</TABLE>
The adoption of the amendment to the AMF Bowling, Inc. 1998 Stock Incentive
Plan was approved by the shareholders with the following vote:
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
--------- ------- ------------ ---------
58,228,436 318,088 20,685 0
The appointment of Arthur Andersen LLP as AMF Bowling's independent public
accountants to audit the consolidated financial statements of AMF Bowling
for the fiscal year 1999 was ratified by its shareholders with the following
vote:
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
--------- ------- ------------ ---------
58,530,645 24,704 11,860 0
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement, dated as of April 28, 1999, between AMF
Bowling, Inc. and Roland Smith.
10.2 Stock Option Agreement, dated as of April 28, 1999, between AMF
Bowling, Inc. and Roland Smith.
27.1 Financial Data Schedule for the three months ended March 31, 1999.
(b) REPORTS ON FORM 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMF Bowling, Inc.
(Registrant)
/s/ Stephen E. Hare May 14, 1999
- --------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ Michael P. Bardaro May 14, 1999
- ------------------------
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
EXECUTION COPY
Exhibit 10.1
EMPLOYMENT AGREEMENT
AGREEMENT (the "Agreement") by and between AMF Bowling Inc., a
Delaware corporation (the "Company"), and Roland Smith (the "Executive"), dated
as of the 28th day of April, 1999 (the "Effective Date").
1. Employment Period. The Company shall employ the Executive, and
the Executive agrees to, and shall, serve the Company, on the terms and
conditions set forth in this Agreement, for the period commencing on the
Effective Date and ending on the third anniversary of the Effective Date (the
"Employment Period"); provided, however, that on the scheduled end of the
Employment Period, and on each anniversary of such date, the Employment Period
shall automatically be extended for a one-year period unless the Company or the
Executive gives notice to the other at least 180 days before an extension is to
take effect that they do not desire the Employment Period to be extended.
2. Position and Duties. (a) Position. During the Employment
Period, the Executive shall be the President and Chief Executive Officer of the
Company with such duties, authority and responsibilities as are reasonably
assigned to him by the Board of Directors of the Company (the "Board")
consistent with his position as President and Chief Executive Officer of the
Company. Such duties and responsibilities may, at the request of the Board,
include serving as an officer or director of certain subsidiaries of the
Company. Upon the Effective Date, the Executive shall be appointed to the Board.
(b) Duties. During the Employment Period, excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
<PAGE>
shall devote his full attention and time during normal business hours to the
business and affairs of the Company and shall perform his services primarily at
the Company's headquarters, wherever the Board may from time to time designate
them to be, but in any case, within a 30-mile radius of the Company's current
corporate headquarters in Richmond, Virginia, and to the extent necessary to
discharge the responsibilities reasonably assigned to the Executive under this
Agreement, use the Executive's reasonable best efforts to carry out such
responsibilities faithfully and efficiently. It shall not be considered a
violation of the foregoing for the Executive to (i) serve on civic or charitable
boards or committees, (ii) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (iii) manage personal investments, so long
as such activities do not compete with and are not provided to or for any entity
that competes with or intends to compete with the Company or any of its
subsidiaries and do not interfere significantly with the performance of the
Executive's responsibilities under this Agreement.
3. Compensation. (a) Base Salary. During the Employment Period,
the Executive shall receive from the Company an annual base salary ("Annual Base
Salary") of $575,000, payable in equal installments at intervals not less
frequent than monthly. The Executive's Annual Base Salary may be increased by
the Board which shall review it annually in January of each year. The
Executive's Annual Base Salary shall not be reduced below $575,000, and the term
Annual Base Salary as utilized in this Agreement shall refer to Annual Base
Salary as so increased.
(b) Annual Bonus. In addition to the Annual Base Salary, for each
calendar year or portion thereof ending during the Employment Period, the
Executive shall be eligible to earn an annual bonus from the Company (the annual
bonus from time to time in effect for the then current year is referred to as
the "Annual Bonus") in an amount equal to 75 percent of the Executive's Annual
<PAGE>
Base Salary. 50 percent of the Annual Bonus (the "Discretionary Bonus") shall be
based on discretionary objectives (the "Objectives") set by the Compensation
Committee of the Board (the "Committee") and 50 percent of the Annual Bonus
shall be based on operation and financial targets (the "Targets") set by the
Committee (the "Target Bonus"). The Annual Bonus shall be reduced pro rata for
any year during the Employment Period that is not a full year (based on the
actual number of days of such year included in the Employment Period). The
Objectives and the Targets shall be determined by the Committee (provided, that
the Executive may consult with the Committee prior to its determinations), and
set forth in writing each year prior to the end of the first quarter of the year
to which such Objectives and Targets apply. Each Annual Bonus shall be paid no
later than 30 days after the Company's audited consolidated financial statements
with respect to the year for which the Annual Bonus is awarded are available,
but in no event later than March 31 of the following year. Notwithstanding the
foregoing, the Executive's Annual Bonus for 1999 shall not be less than
$431,250. Nothing herein shall prevent the Committee from awarding the Executive
any additional discretionary bonus that it may deem appropriate.
(c) Signing Bonus. The Executive shall be entitled to a payment
of $500,000, that shall be paid within 30 days following the Effective Date and
that shall be deemed fully earned on the Effective Date.
(d) Relocation Expenses. The Executive shall be entitled to
prompt reimbursement of relocation expenses as set forth in Exhibit A hereto,
plus any losses (after deducting any costs that are not reimbursed by the
<PAGE>
Company) incurred by the Executive in the sale of the Executive's house (cost,
including capital improvements, of $850,000) and boat (cost, including capital
improvements, of $210,000); provided, that reimbursement for any losses shall
not exceed $50,000 in the aggregate.
(e) Other Benefits. During the Employment Period: (i) the
Executive shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs of the Company to the same
extent as generally applicable to other senior executives; and (ii) the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in, and shall receive all benefits under, all welfare benefit
plans, practices, policies and programs provided by the Company (including, to
the extent provided, without limitation, medical, prescription, dental,
disability, salary continuance, employee life insurance, group life insurance,
accidental death and travel accident insurance plans and programs) to the same
extent as provided generally to senior executives of the Company; provided,
however, that nothing in this Agreement shall impose on the Company any
obligation to offer to the Executive participation in any stock, stock option,
bonus or other incentive award, plan, practice, policy or program other than the
awards made pursuant to Sections 3(b) or 4 hereof. The Executive shall be
entitled to retain for his own personal use any frequent flyer miles and similar
travel awards obtained with respect to the Executive's travel.
(f) Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable travel and other expenses incurred by the
Executive in carrying out the Executive's duties under this Agreement, provided
that the Executive complies with the policies, practices and procedures of the
Company for submission of expense reports, receipts or similar documentation of
such expenses.
<PAGE>
(g) Vacation. The Executive shall be entitled to 4 weeks of paid
vacation for each full year during the Employment Period and a pro rata portion
thereof during each partial year during the Employment Period; provided,
however, that the Executive shall be entitled to 4 weeks of paid vacation for
the year ending December 31, 1999. Up to an aggregate of 2 weeks of unused
vacation may be carried forward to the next year during the Employment Period
and used therein and any unused vacation in excess of 2 weeks shall lapse.
4. Option. (a) Option Grant. The Executive is hereby granted on
the Effective Date an option (the "Option") to purchase 1,000,000 shares of the
Company's common stock, at an exercise price per share equal to "fair market
value" on the date of grant, as defined in the Company's 1998 Stock Incentive
Plan, as amended (the "Plan"). The Executive may make payment on the exercise of
the vested portion of the Option by certified or bank check or such other
instrument as the Company may accept or by "cashless exercise" procedures
established by the Company. Unless sooner exercised or forfeited as provided in
this Agreement, the Option shall expire on the tenth anniversary of the date of
this Agreement. The Option is granted pursuant to the attached Option Agreement
and the Option shall, except as otherwise expressly provided herein, be governed
by the terms of the Plan and Option Agreement. Although the Option is not
granted pursuant to the Plan, the Executive hereby acknowledges receipt of a
copy of the Plan and agrees to be bound by all the terms and provisions thereof
as if the Option had been granted thereunder. Within a reasonable time after the
Effective Date, the Company will register the issuance of the common stock
underlying the Option on Form S-8 (or any successor form) and will use its
reasonable efforts to cause such registration statement to remain effective
until the full exercise or expiration of the Option.
<PAGE>
(b) Vesting. The Option shall vest and become exercisable in
installments according to the following schedule:
Term of Employment
Since the Effective Date Vested Percentage
------------------------ -----------------
Effective Date 20 percent
At least 1 year,
but less than 2 years 40 percent
At least 2 years,
but less than 3 years 60 percent
At least 3 years,
but less than 4 years 80 percent
4 years, or more 100 percent
In the event of a Change in Control (as defined in Section 6(d) hereof), any
outstanding and unvested portion of the Option shall immediately vest and become
exercisable.
(c) Treatment of Option Upon Termination of Employment. In the
event of a termination of the Executive's employment by the Company without
Cause (other than Disability) or by the Executive for Good Reason, (i) the
portion of the Option that would have vested during the two-year period
following the Date of Termination shall immediately vest and become exercisable;
(ii) the portion of the Option vested as of the Date of Termination, including
that portion vested pursuant to clause (i) above, shall be exercisable for the
90-day period following the Date of Termination; and (iii) the portion of the
Option not vested as of the Date of Termination, shall be forfeited on the Date
of Termination. In the event of the Executive's death or termination of the
Executive's employment, other than by the Company without Cause or by the
Executive for Good Reason, the Executive (or the Executive's estate or legal
<PAGE>
representative): (i) shall forfeit the portion of the Option not vested as of
the Date of Termination; and (ii) shall have 90 days following the Date of
Termination to exercise the vested portion of the Option, if such termination of
employment is for any reason other than the Executive's death (in which event
the exercise period shall be one year) or for Cause. In the event of the
Executive's termination of employment for Cause, the Executive shall forfeit the
unexercised portion of the Option (whether vested or unvested) on the Date of
Termination. The vested portion of the Option not exercised within the specified
periods of time shall be forfeited by the Executive or the Executive's estate or
legal representative.
5. Termination of Employment. (a) Death or Disability. The
Executive's employment under this Agreement shall terminate automatically in the
event of the Executive's death. The Company shall be entitled to terminate the
Executive's employment in the event of the Executive's Disability. "Disability"
means that the Executive has been unable, for a period of (i) 120 consecutive
days or (ii) an aggregate of 180 days in a period of 365 consecutive days, to
perform, with or without reasonable accommodation to the Executive, his
essential duties under this Agreement, as a result of physical or mental illness
or injury. A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and shall
be effective on the 30th day after receipt of such notice by the Executive (the
"Disability Effective Date"), unless the Executive returns to full-time
performance of his duties in accordance with the provisions of Section 2(b)
hereof before the Disability Effective Date. In the event of a dispute as to
whether the Executive has suffered a Disability, the final determination shall
be made by a licensed physician selected by the Board and acceptable to
Executive in the Executive's reasonable judgment.
<PAGE>
(b) Good Reason. The Executive's employment may be terminated by
the Executive for Good Reason within 90 days following the Executive's actual
knowledge of an event constituting Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, without the Executive's written consent: (i) any
material diminution in the Executive's title, authority, duties or
responsibilities inconsistent with his position as the President and Chief
Executive Officer of the Company (other than as a result of the Executive's
physical or mental incapacity); (ii) any removal of the Executive from any of
the positions set forth in Section 2(a) hereof; (iii) any reduction in the
Executive's Annual Base Salary; (iv) the Company's requiring the Executive to be
based at any office or location other than as provided in Section 2(b) hereof;
or (v) the Company's failure to comply with its material obligations under this
Agreement. The Executive shall provide the Company with written notice of any of
the events set forth in subsections (i) or (v) of this Section 5(b) and the
Company shall have 15 days to cure. The Executive may not terminate employment
for Good Reason as a result of any such event specified in subsections (i) or
(v) of this Section 5(b) if the Company effectuates such cure within the 15-day
period.
(c) Termination by the Company. The Company may terminate the
Executive's employment at any time during the Employment Period with or without
Cause. A termination of the Executive's employment at the end of the Employment
Period by the Company providing the notice described in Section 1 hereof, as the
same may be extended from time to time as provided in Section 1 hereof, shall be
deemed to be a termination of the Executive's employment by the Company without
Cause. For purposes of this Agreement "Cause" means: (i) commission of any act
of fraud or gross negligence by the Executive in the course of his employment
hereunder which, in the case of gross negligence, has a materially adverse
effect on the business or financial condition of the Company; (ii) willful
<PAGE>
material misrepresentation at any time by the Executive to the Company; (iii)
voluntary termination of employment by the Executive; (iv) the Executive's
willful failure or refusal to comply with any of his material obligations under
this Agreement or to comply with a reasonable and lawful instruction of the
Board, which in each case continues for a period of 15 days after the
Executive's receipt of a written notice from the Board identifying the
objectionable action or inaction by the Executive; (v) any conviction of, or
plea of guilty or nolo contendere to, any felony, whether of the United States
or any state thereof or any similar foreign law to which the Executive may be
subject; (vi) any willful or grossly negligent failure substantially to comply
with any written rules, regulations, policies or procedures of the Company
furnished to the Executive which, if not complied with, would reasonably be
expected to have a material adverse effect on the business or financial
condition of the Company; or (vii) any willful failure to comply with the
Company's policies regarding insider trading.
(d) Date of Termination. The "Date of Termination" means the date
of the Executive's death, the Disability Effective Date, or the date on which
the termination of the Executive's employment by the Company, or by the
Executive, is effective, as the case may be.
6. Obligations of the Company Upon Termination. (a) By the
Company without Cause (Other than for Death or Disability) or by the Executive
for Good Reason. If the Company terminates the Executive's employment without
Cause (other than due to the Executive's death or Disability), or the Executive
terminates his employment for Good Reason, the Company shall: (x) pay the
amounts described in subparagraph (i) below to the Executive in a lump sum
<PAGE>
within 10 days following the Date of Termination; (y) continue payments of the
Executive's Annual Base Salary as described in subparagraph (ii) below; and (z)
continue the benefits described in subparagraph (iii) below throughout the
remainder of the Employment Period and thereafter for a period of 12 months.
(i) The amounts to be paid in a lump sum as described in
subsection (x) above are:
A. The Executive's accrued but unpaid cash compensation
(the "Accrued Obligations"), which shall equal the sum of (1) any
portion of the Executive's Annual Base Salary through the Date of
Termination that has not yet been paid; (2) any compensation
previously deferred by the Executive (together with any accrued
interest or earnings thereon) that has not yet been paid; and (3)
any accrued but unpaid vacation pay; and
B. The Target Bonus and the Discretionary Bonus for the
fiscal year during which the Date of Termination occurs (in lieu
of any pro rata Annual Bonus for such fiscal year).
(ii) The Annual Base Salary shall be continued throughout the
remainder of the Employment Period and thereafter for a period of 12 months and
shall be payable in semi-monthly installments.
(iii) The benefits shall be continued as described in subsection
(z) above and in paragraph (b) below and shall be benefits for the Executive
and/or the Executive's family at least as favorable as those that would have
been provided under Section 3(e)(ii) of this Agreement if the Executive's
employment had continued until 12 months following the end of the Employment
Period; provided, however, that during any period when the Executive is eligible
to receive such benefits under another employer-provided plan, the benefits
<PAGE>
provided by the Company under this subparagraph may be made secondary to those
provided under such other plan. For purposes of determining eligibility (but not
the time of commencement of benefits) of the Executive for retiree benefits
under this subparagraph, the Executive shall be deemed to have retired on the
12-month anniversary of the end of the Employment Period.
(b) Death or Disability. If the Executive's employment is
terminated by reason of the Executive's death or Disability, the Company shall
(x) pay the Accrued Obligations to the Executive or the Executive's estate or
legal representative, as applicable, in a lump sum in cash within 10 days after
the Date of Termination; (y) pay to the Executive or the Executive's estate or
legal representative on or before the date that such amounts would have been
payable but for the death or Disability of the Executive, an amount equal to the
pro-rata (based on the number of days employed) Target Bonus and Discretionary
Bonus for the year in which the Date of Termination occurs, provided that the
Objectives and Targets are achieved for such year; and (z) continue the benefits
described in Section 6(a)(iii), to the extent applicable, until the first
anniversary of the Executive's Date of Termination. Thereafter, the Company
shall have no further obligations under this Agreement.
(c) By the Company for Cause or by the Executive without Good
Reason. If the Company terminates the Executive's employment for Cause or if the
Executive terminates his employment without Good Reason, the Company shall pay
the Executive in a lump sum the Accrued Obligations not later than 30 days after
the Date of Termination. Thereafter, the Company shall have no further
obligations under this Agreement.
(d) Effect on Employment of the Executive of a Change in Control
and Certain Stock or Asset Purchasers. In the event of a Change in Control of
the Company or if all or substantially all of the stock or assets of the Company
are sold or otherwise disposed of to a person or entity not affiliated with the
Company, the Executive shall have the right to resign during the Employment
Period, as an officer, director and employee of the Company within nine months
following such occurrence if a "Triggering Event" occurs, and be entitled to
<PAGE>
receive, commencing on the date of such termination, the same payments and other
benefits to which the Executive would have been entitled had the Company
terminated the Executive's employment without Cause. For purposes of this
Agreement, "Triggering Event" shall mean a material and adverse alteration in
the Executive's duties, authority, responsibilities, title or compensation
following a Change in Control. "Change in Control" shall have the meaning given
in the Plan, except that for the purposes of this Agreement, the sale of the
Company's operations of bowling centers shall be deemed a "Change in Control".
7. Full Settlement. The Company's obligations to make the
payments provided for in, and otherwise to perform its obligations under, this
Agreement shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action that the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, except as
specifically provided in Section 6(a)(iii), such amounts shall not be reduced,
regardless of whether the Executive obtains other employment.
8. Confidential Information. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or its subsidiaries that
the Executive obtains during the Executive's employment by the Company and that
is not public knowledge or does not become (other than as a result of the
Executive's violation of this Section 8) ("Confidential Information"). The
<PAGE>
Executive shall not communicate, divulge or disseminate Confidential Information
at any time during or after the Executive's employment with the Company, except
with the prior written consent of the Company or as otherwise required by law.
9. Noncompetition; Nonsolicitation. (a) Unless the Executive's
employment is terminated by the Company without Cause, during the Employment
Period and during the two-year period thereafter (the "Restriction Period"), the
Executive shall not directly or indirectly participate in or permit his name
directly or indirectly to be used by or become associated with (including as an
advisor, representative, agent, promoter, independent contractor, provider of
personal services or otherwise) any person, corporation, partnership, firm,
association or other enterprise or entity that is, or intends to be, engaged in
any business which is in competition with the "business" of the Company or any
of its subsidiaries in any country in which the Company or any of its
subsidiaries operate, compete or are engaged in such business or at such time
have an intention so to operate, compete or become engaged in such business (a
"Competitor"). For purposes of this Agreement, "business" shall mean bowling
centers, movie theaters and the sale of products relating to bowling. For
purposes of this Agreement, the term "participate" includes any direct or
indirect interest, whether as an officer, director, employee, partner, sole
proprietor, trustee, beneficiary, agent, representative, independent contractor,
consultant, advisor, provider of personal services, creditor, owner (other than
by ownership of less than five percent of the stock of a publicly-held
corporation whose stock is traded on a national securities exchange or in the
over-the-counter market).
(b) During the Restriction Period, the Executive shall not,
directly or indirectly, encourage or solicit, or assist any other person or firm
in encouraging or soliciting, any person that from the beginning of the two-year
<PAGE>
period preceding such termination of the Executive's employment through the date
of any solicitation or other such action is or was engaged in a business
relationship with the Company or any of its subsidiaries to terminate its
relationship with the Company or any of its subsidiaries or to engage in a
business relationship with a Competitor.
(c) During the Restriction Period, the Executive will not, except
with the prior written consent of the Company, directly or indirectly, induce
any employee of the Company or any of its subsidiaries or Affiliates to
terminate employment with such entity.
(d) Promptly following the expiration of the Employment Period,
the Executive shall return to the Company all property of the Company and its
subsidiaries, and all copies thereof in the Executive's possession or under his
control, including, without limitation, all Confidential Information in whatever
media such Confidential Information is maintained.
(e) The Executive acknowledges and agrees that (i) the
Restriction Period and the covenants and obligations of the Executive in
Sections 8 and 9 are fair and reasonable and the result of negotiation, relate
to special, unique and extraordinary matters, and a violation of any of the
terms of such covenants and obligations will cause the Company and its
subsidiaries irreparable injury for which adequate remedies are not available at
law; and (ii) the Company shall be entitled to an injunction, restraining order
or such other equitable relief as a court of competent jurisdiction may deem
necessary or appropriate to restrain the Executive from violating of any such
covenants and obligations. Such injunctive remedies shall be cumulative and in
<PAGE>
addition to any other rights and remedies the Company may have at law or in
equity. If a court holds that such restrictions are unreasonable under
circumstances then existing, the parties hereto agree that the maximum period,
scope, or geographical area legally permissible under such circumstances will be
substituted for the period, scope or area stated herein.
10. Successors. (a) This Agreement is personal to the Executive
and, without the prior written consent of the Company, shall not be assignable
by the Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
11. Miscellaneous. (a) This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified except by a written agreement executed
by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Roland Smith
2631 N.E. 36 Street
Lighthouse Point, Florida 33064
<PAGE>
If to the Company:
8100 AMF Drive
Richmond, VA 23111
Attention: Corporate Secretary
or to such other address as either party furnishes to the other in writing in
accordance with this Section 11(b). Notices and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all Federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations. No later than any date as of which an amount first becomes
includible in the gross income of the Executive for federal income tax purposes
with respect to any stock option, the Executive shall pay to the Company, as
appropriate, or make arrangements reasonably satisfactory to the Company, as
appropriate, regarding the payment of, all federal, state, local and foreign
taxes that are required by applicable laws and regulations to be withheld with
respect to such amount. If the Executive desires to use unrestricted,
unencumbered stock to pay any required withholding taxes, the Company will
cooperate with the Executive in that regard.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision of, or to assert any right under, this
Agreement shall not be deemed to be a waiver of such provision or right or any
other provision of or right under this Agreement.
<PAGE>
(f) The Executive and the Company each acknowledge that this
Agreement (together with the terms of the Plan and Option Agreement) supersede
all other agreements and understandings, both written and oral, among the
parties concerning the subject matter hereof. The Executive hereby represents
and warrants that he is not a party to any agreement or understanding which
would prohibit him from entering into this Agreement and accepting employment
with the Company or otherwise fulfilling his obligations hereunder.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization of it Boards of Directors, the Company has caused
this Agreement to be executed in its name on its behalf, all as of the day and
year first above written.
AMF BOWLING, INC.
By: /s/ Stephen E. Hare
-------------------
Name: Stephen E. Hare
Title: CFO
/s/ Roland Smith
----------------
Roland Smith
<PAGE>
EXHIBIT A
RELOCATION EXPENSES
1. Up to three house hunting trips for the Executive and his family for the
purpose of obtaining a new residence and to become familiar with the schooling
situation. Such expenses may include reasonable costs for transportation,
lodging and meals.
2. Reasonable costs of moving of all household goods including packing and
unpacking, insurance at replacement value and temporary storage, if needed. Such
costs may also include the shipping of automobiles. Executive should get a
minimum of two estimates including a Company-recommended mover; however, the
final decision on choice of moving company is the responsibility of the
Executive. Up to 30 days of reasonable temporary housing and living expenses, if
needed. Such expenses may include lodging, meals and telephone calls.
3. Company shall pay all reasonable and customary expenses related to the sale
of existing residence as well as the purchase of a new residence. Such expenses
may also include the utilization of a third party buy-on firm for the sale of
the existing residence, if necessary. Any losses incurred on the sale of the
existing residence and the boat shall be limited to $50,000 in the aggregate, as
set forth in the Agreement. Reasonable and customary expenses may include, but
shall not be limited to, such items as mortgage pre-payment penalty, loan
origination fees, real estate commissions, title search, document preparation
fees, notary fees, attorneys fees, title insurance, recording fees, tax/stamps,
transfer taxes, pest and building inspections.
4. A one-time miscellaneous allowance of one-half month's base salary.
5. Income tax gross-up on the relocation expenses.
EXECUTION COPY
Exhibit 10.2
STOCK OPTION AGREEMENT
----------------------
STOCK OPTION AGREEMENT ("Agreement") by and between AMF Bowling, Inc., a
Delaware corporation (the "Company") and Roland Smith (the "Employee").
WHEREAS, pursuant to the employment agreement by and between the
Employee and the Company, dated as of April 28, 1999 (the "Employment
Agreement"), the Employee has been awarded a stock option on the terms and
conditions set forth in this Agreement; and
WHEREAS, the Executive acknowledges and agrees that the option granted
hereunder shall be subject to the terms of the Company's 1998 Stock Incentive
Plan (the "Plan"), although it is not granted under the Plan;
NOW, THEREFORE, in order to implement the foregoing and in consideration
of the mutual representations, warranties, covenants and agreements contained
herein, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have the
meanings set forth below. Any capitalized term used in this Agreement which is
not defined below or elsewhere in this Agreement shall have the meaning set
forth in the Plan.
1.1. "Committee" shall mean the Stock Option Plan Subcommittee of
the Compensation Committee of the Company's Board of Directors.
1.2. "Common Stock" shall mean the common stock of the Company, par
value $0.01 per share, subject to adjustment pursuant to Section 3(c) of the
Plan.
1.3. "Disability" shall have the meaning set forth in the Employment
Agreement.
1.4. "Employment" shall mean employment with the Company pursuant to
the Employment Agreement.
1.5. "Option" shall have the meaning set forth in Section 2.1.
1.6. "Person" shall mean an individual, corporation, partnership, joint
venture, trust, unincorporated organization, government (or any department
thereof) or other entity.
1.7. "Shares" shall mean the shares of Common Stock acquired upon
exercise of the Option.
<PAGE>
1.8. "Stockholders Agreement" shall mean the Stockholders Agreement,
dated as of April 30, 1996, between the Company and certain of its stockholders,
as amended from time to time.
2. Grant and Terms of Option.
2.1. Grant of Option. The Company hereby grants to the Employee
effective on April 28, 1999 (the "Grant Date"), a Nonqualified Stock Option (the
"Option") to purchase 1,000,000 shares of Common Stock on the terms and
conditions set forth below, and in reliance upon the representations and
covenants of the Employee set forth below. Unless sooner exercised or forfeited
as provided for in the Plan or this Agreement, the Option shall expire on the
tenth anniversary of the Grant Date.
2.2. Exercise Price. The exercise price of the Option is $5.2813
per share of Common Stock (the "Exercise Price").
2.3. Exercisability. The Option shall vest and become exercisable in
installments according to the following schedule:
Term of Employment
Since Grant Date Vested Percentage
--------------------- -----------------
Grant Date 20 percent
At least 1 year, 40 percent
but less than 2 years
At least 2 years , 60 percent
but less than 3 years
At least 3 years, 80 percent
but less than 4 years
4 years or more 100 percent
Notwithstanding the provisions of this Section 2.3, the Option shall become
fully exercisable and vested in the event of a Change of Control.
2.4. Limitations on Exercisability. Upon the Employee's termination of
employment, the exercisability of the Option shall be determined pursuant to
Section 4(c) of the Employment Agreement.
<PAGE>
2.5. Method of Exercise. The Option may be exercised in whole or in part
(but only with respect to whole shares of Common Stock) by giving written notice
of the exercise to the Company stating the number of shares to be purchased. In
order to be effective, the properly completed notice of exercise must be
accompanied by one or more of the following methods of payment of the Exercise
Price. Payment of the Exercise Price may be made by certified or bank check, by
delivering shares of Common Stock that the Employee has owned for at least six
months or that the Employee has acquired in the open market, or by any
combination thereof. Shares of Common Stock used to make any such payment shall
be valued at their Fair Market Value on the date of exercise. The Option also
may be exercised by delivering to the Company a properly executed exercise
notice, together with a copy of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds to pay the Exercise
Price and the amount of any federal, state, local or foreign withholding taxes.
The exercise of all or any part of the Option is subject to Section 6.4 of this
Agreement pertaining to applicable withholding taxes.
2.6 Shareholder Approval. The Company has obtained written consent from
holders of a majority of its voting stock to permit the grant of the Option.
3. Shares. Any Shares delivered to the Employee pursuant to this
Agreement shall be subject to the terms of the Stockholders Agreement.
4. Employee's Representations, Warranties and Agreements. In connection
with the exercise of the Option, the Employee shall make to the Company, in
writing, such representations, warranties and agreements in connection with such
exercise and investment in shares of Common Stock as the Committee shall
reasonably request.
5. Successors.
5.1. This Agreement and the Option described herein are personal to the
Employee and, without the prior written consent of the Company, shall not be
transferable or assignable by the Employee otherwise than (i) by will or the
laws of descent and distribution or (ii) pursuant to a qualified domestic
relations order (as defined in the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder). This Agreement shall inure to the
benefit of and be enforceable by the Employee's legal representatives.
5.2. This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
5.3. The Company shall require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise (an "Acquisition"), to
all or substantially all of the business and/or assets of the Company to
expressly assume and to agree to perform this Agreement in the same manner and
to the same extent that the Company would have been required to perform the
<PAGE>
Agreement if no such succession had taken place (or by substituting for the
Option a new option, based upon the stock of such successor, having an aggregate
spread between the Fair Market Value of the underlying stock and the Exercise
Price thereof, and the same term, immediately after such substitution, equal to
the spread on, and the term of, the Option immediately before such
substitution). Notwithstanding the foregoing, the Company or such successor may,
in its discretion and subject to the terms of the Plan, at the time of or
promptly after such Acquisition, terminate all of its obligations hereunder with
respect to the Option by paying to the Employee or the Employee's successors or
assigns an amount equal to the product of (i) the number of shares of Common
Stock subject to the Option and (ii) the Fair Market value per share of the
shares of Common Stock subject to the Option at the time of such Acquisition
less the Exercise Price (but not in excess of such Fair Market Value per share),
in either case, in exchange for the Employee's Option. As used in this
Agreement, "Company" shall mean both the Company (as defined above) and any such
successor that assumes and agrees to perform this Agreement, by operation of law
or otherwise.
6. Miscellaneous.
6.1. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without regard to the
principles of conflicts of law thereof. The captions of this Agreement are not
part of the provisions hereof and shall have no force or effect. This Agreement
may be amended or modified by the Committee as provided under the terms of the
Plan.
6.2. All notices and other communications under this Agreement shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the Employee at the address set forth on the signature page hereto,
and addressed to the Company at: AMF Bowling, Inc., 8100 AMF Drive, Richmond,
Virginia 23111, Attention: Corporate Secretary, or to such other address as
either party furnishes to the other in writing in accordance with this Section
6.2. Notices and communications shall be effective when actually received by the
addressee.
6.3. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
6.4. No later than the date as of which an amount first becomes
includible in the gross income of the Employee for federal income tax purposes
with respect to the Option, the Employee shall pay to the Company, or if
appropriate, any of its Affiliates, or make arrangements satisfactory to the
Committee regarding the payment of, any federal, state, local or foreign taxes
of any kind required by law to be withheld with respect to such amount. The
obligations of the Company under this Agreement shall be conditional on such
<PAGE>
payment or arrangements, and the Company and its Affiliates shall, to the extent
permitted by law, have the right to deduct any applicable withholding taxes from
any payment otherwise due to the Employee. In addition, the Employee may (i)
deliver to the Company shares of Common Stock that the Employee has owned for at
least six months or that the Employee has acquired in the open market to satisfy
all or a portion of applicable withholding taxes (including amounts in excess of
any minimum required withholding), or (ii) have the Company retain shares of
Common Stock that are part of the Option to satisfy all or a portion of
applicable withholding taxes (but only to the extent of the minimum required
withholding). The Committee may establish such procedures as it deems
appropriate, including making irrevocable elections, for the settlement of
applicable withholding taxes with Common Stock.
6.5. Any failure by the Company or the Employee to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
6.6 The Option is governed by the terms of the Plan, which are
incorporated herein by reference. In the case of any conflict between the Plan
and this Agreement, the terms of the Plan shall control. Although the Option is
not granted pursuant to the Plan, the Employee hereby acknowledges receipt of a
copy of the Plan and agrees to be bound by all the terms and provisions thereof
as if Option had been granted thereunder. The Employee and the Company each
acknowledges that this Agreement (together with the Stockholders Agreement, the
terms of the Plan and the other agreements referred to herein and therein)
constitutes the entire agreement and supersedes all other agreements and
understandings, both written and oral, among the parties or either of them, with
respect to the subject matter hereof.
6.7 The terms of the Plan, the Option, and this Agreement shall be
administered by the Committee. Any controversy which arises concerning the terms
of the Plan, the Option or this Agreement shall be resolved by the Committee as
it deems appropriate, and any decision of the Committee shall be final and
conclusive.
6.8 The fact that the Employee has been granted the Option shall not
affect or qualify in any way the right of the Company of any Affiliate to
terminate the Employee's Employment at any time.
6.9 By signing below, the Employee hereby acknowledges receipt of the
Option, a copy of the Plan and a Plan prospectus.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date or dates indicated below.
AMF BOWLING, INC.
Date: April 28, 1999 By: /s/ Stephen E. Hare
--------------------------
Name: Stephen E. Hare
Title: CFO
EMPLOYEE:
Date: April 28, 1999 /s/ Roland Smith
---------------------------
Name: Roland Smith
Address:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 56,784
<SECURITIES> 0
<RECEIVABLES> 86,422
<ALLOWANCES> 7,328
<INVENTORY> 66,279
<CURRENT-ASSETS> 239,133
<PP&E> 854,124
<DEPRECIATION> 23,907
<TOTAL-ASSETS> 1,982,503
<CURRENT-LIABILITIES> 138,611
<BONDS> 1,330,181
0
0
<COMMON> 749,722
<OTHER-SE> (219,641)
<TOTAL-LIABILITY-AND-EQUITY> 1,982,503
<SALES> 202,567
<TOTAL-REVENUES> 202,567
<CGS> 39,582
<TOTAL-COSTS> 180,922
<OTHER-EXPENSES> 2,279
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,973
<INCOME-PRETAX> (11,607)
<INCOME-TAX> 1,569
<INCOME-CONTINUING> (13,176)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,523)
<CHANGES> 0
<NET-INCOME> (18,699)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
