<PAGE>
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 September 30, 2000
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 November 1, 2000, 83,597,550 shares of common stock, par value of $.01 per
share, 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>
September 30, December 31,
2000 1999
------------------- ---------------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 29,380 $ 35,743
Accounts and notes receivable, net of allowance for
doubtful accounts of $7,499 and $9,531, respectively 69,193 63,175
Inventories 70,134 53,499
Other current assets 15,984 14,876
------------------- ---------------------
Total current assets 184,691 167,293
Property and equipment, net 764,205 806,425
Other assets 76,916 88,092
Goodwill, net 750,192 765,092
------------------- ---------------------
Total assets $ 1,776,004 $ 1,826,902
=================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 23,731 $ 35,296
Accrued expenses 77,998 71,784
Income taxes payable 2,086 3,450
Current portion of long-term debt 53,750 34,250
Long-term debt classified as current 1,257,434
------------------- ---------------------
Total current liabilities 1,414,999 144,780
Long-term debt, less current portion - 1,186,982
Other long-term liabilities 4,959 5,204
------------------- ---------------------
Total liabilities 1,419,958 1,336,966
------------------- ---------------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01 per share, 200,000,000
shares authorized, 83,597,550 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively) 836 836
Paid-in capital 905,447 905,610
Retained deficit (520,054) (401,186)
Accumulated other comprehensive loss (30,183) (15,324)
------------------- ---------------------
Total stockholders' equity 356,046 489,936
------------------- ---------------------
Total liabilities and stockholders' equity $ 1,776,004 $ 1,826,902
=================== =====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenue $ 162,128 $ 182,799 $ 532,287 $ 546,461
---------------- ---------------- ---------------- ----------------
Operating expenses:
Cost of goods sold 37,794 66,191 118,401 143,599
Bowling center operating expenses 92,584 92,782 280,608 276,719
Selling, general, and administrative expenses 16,119 34,274 44,383 64,719
Restructuring charges - 7,500 - 7,500
Refinancing charges 2,244 - 2,244 -
Depreciation and amortization 33,421 37,732 100,562 104,059
---------------- ---------------- ---------------- ----------------
Total operating expenses 182,162 238,479 546,198 596,596
---------------- ---------------- ---------------- ----------------
Operating loss (20,034) (55,680) (13,911) (50,135)
---------------- ---------------- ---------------- ----------------
Nonoperating expenses (income):
Interest expense 34,657 31,080 98,792 95,483
Other, net 2,336 99 4,003 6,541
Interest income (1,005) (535) (1,595) (1,988)
---------------- ---------------- ---------------- ----------------
Total nonoperating expenses 35,988 30,644 101,200 100,036
---------------- ---------------- ---------------- ----------------
Loss before income taxes (56,022) (86,324) (115,111) (150,171)
Provision for income taxes 938 23,088 3,036 26,322
---------------- ---------------- ---------------- ----------------
Net loss before equity in loss of joint ventures
and extraordinary item (56,960) (109,412) (118,147) (176,493)
Equity in loss of joint ventures (104) (79) (721) (5,780)
---------------- ---------------- ---------------- ----------------
Net loss before extraordinary item (57,064) (109,491) (118,868) (182,273)
Extraordinary item - 64,460 - 64,460
---------------- ---------------- ---------------- ----------------
Net loss $ (57,064) $ (45,031) $(118,868) $(117,813)
================ ================ ================ ================
Net loss per share - basic and diluted
Net loss per share before extraordinary item $ (0.68) $ (1.43) $ (1.42) $ (2.79)
Per share effect of extraordinary item - 0.84 - 0.99
--------------------------------------------------------------------
Net loss per share - basic and diluted $ (0.68) $ (0.59) $ (1.42) $ (1.80)
================ ================ ================ ================
Weighted average shares outstanding 83,598 76,617 83,598 65,335
================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(118,868) $(117,813)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 100,562 104,059
Equity in loss of joint ventures 721 5,780
Extraordinary item - (64,460)
Deferred income taxes - 20,830
Amortization of bond discount 31,359 33,754
Loss on the sale of property and equipment, net 205 2,833
Changes in assets and liabilities:
Accounts and notes receivable, net (9,807) (1,771)
Inventories (18,699) 12,829
Other assets 10,348 (5,945)
Accounts payable and accrued expenses (3,097) (388)
Income taxes payable (738) -
Other long-term liabilities (3,862) (437)
---------------- ----------------
Net cash used in operating activities (11,876) (10,729)
---------------- ----------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (5,350) (1,424)
Purchases of property and equipment (49,497) (34,971)
Proceeds from the sale of property and equipment 3,345 744
---------------- ----------------
Net cash used in investing activities (51,502) (35,651)
---------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 85,000 53,000
Payments on long-term debt (26,407) (128,529)
Repurchase of common shares - (180)
Issuance of common shares - 119,737
Rights offering cost (163) -
Payments of noncompete obligations (196) (184)
---------------- ----------------
Net cash provided by financing activities 58,234 43,844
---------------- ----------------
Effect of exchange rates on cash (1,219) (284)
---------------- ----------------
Net decrease in cash (6,363) (2,820)
Cash and cash equivalents at beginning of period 35,743 33,002
---------------- ----------------
Cash and cash equivalents at end of period $ 29,380 $ 30,182
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Restructuring
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 presented. The interim financial information
and notes thereto should be read in conjunction with the December 31, 1999, 1998
and 1997 audited consolidated financial statements of AMF Bowling, Inc. ("AMF
Bowling") and its subsidiaries (collectively, the "Company") presented in AMF
Bowling's Annual Report on Form 10-K for the fiscal year ended December 31, 1999
filed with the U.S. Securities and Exchange Commission. The results of
operations for the nine months ended September 30, 2000 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 408 U.S. bowling
centers and 119 international bowling centers ("Bowling Centers"), including 15
joint venture centers, as of September 30, 2000, 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 also
manufactures and sells the Playmaster, Highland and Renaissance brands of
billiards tables, and owns the Michael Jordan Golf Company, which currently
operates two golf practice ranges.
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 Bowling, AMF Group
Holdings and Bowling Worldwide are Delaware corporations. AMF Bowling and AMF
Group Holdings are holding companies. The principal assets in each are comprised
of investments in subsidiaries. The Company was acquired in 1996 by an investor
group led by affiliates of Goldman, Sachs & Co. (the "Acquisition").
Since the Acquisition and through September 30, 2000, AMF Bowling Centers,
Inc., a direct subsidiary of Bowling Worldwide, purchased an aggregate of 267
bowling centers from various unrelated sellers, and it has constructed two
bowling centers and one Michael Jordan Golf practice range as part of its
capital expenditure program. The combined net purchase price for all
acquisitions was approximately $504.3 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. Long-Term Debt"), and issuances of
AMF Bowling common stock (the "Common Stock"). From January 1, 2000 through
September 30, 2000, AMF Bowling Centers, Inc. acquired four bowling centers.
Restructuring
On August 14, 2000, Bowling Worldwide announced that it had entered
into an amendment (the "Amendment") to its Credit Agreement, that it would not
make the interest payment due September 15, 2000 on its senior subordinated
notes (the "Senior Subordinated Notes") and that it would begin exploring
various alternatives to restructure and reduce its long-term debt. As part of
the Amendment, the lenders agreed to waive any default under the Credit
Agreement resulting from the failure to make the September 15, 2000 interest
payment due on the Senior Subordinated Notes unless the Company's other
creditors commenced the exercise of remedies, which could include the
acceleration of the Company's debt obligations and an involuntary bankruptcy
filing. The Amendment provided for the immediate permanent termination of $88.0
million of the otherwise available working capital commitments under the Credit
Agreement, and for an additional permanent termination of $4.0 million of those
commitments on each of October 31, 2000, November 30, 2000 and December 31,
2000. The Amendment required that Bowling Worldwide deliver to the lenders under
the Credit Agreement by September 30, 2000 a preliminary plan containing the
principal terms of a proposal to restructure the Company's debt, which plan was
required to be satisfactory to a majority of the lenders by October 15, 2000.
The Company submitted such a proposed restructuring plan during the period
required by the Amendment and a majority of the lenders indicated that the plan
was generally satisfactory in form and substance, subject to further approval of
any definitive plan. Finally, the Amendment waived Bowling Worldwide's
compliance with the financial covenants in the Credit Agreement through December
31, 2000.
5
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
After giving effect to the commitment terminations required by the
Amendment, Bowling Worldwide will have an aggregate available working capital
commitment under the Credit Agreement of $255.0 million. Based upon the current
level of performance, management believes that cash flow from operations,
together with available borrowings under the Credit Agreement and other sources
of liquidity, will be adequate to meet Bowling Worldwide's normal operating
expenses and requirements for capital expenditures during the remainder of 2000.
In calendar year 2001, principal payment obligations under the facilities of the
Credit Agreement increase significantly and cash interest becomes payable on the
senior subordinated discount notes (the "Senior Subordinated Discount Notes"),
and it is not expected that the Company will be able to make such principal and
interest payments.
On September 15, 2000, Bowling Worldwide did not make the required cash
interest payment on the Senior Subordinated Notes, and on October 15, 2000, the
30 day period to cure the non-payment of interest under the related Indenture
expired. Under the Indenture, beginning on October 15, 2000, the Trustee on its
own or the holders of 25% or more of the outstanding principal amount of the
Senior Subordinated Notes have the right, by written notice, to declare all
amounts owed under the Indenture immediately due and payable. If the
indebtedness represented by the Senior Subordinated Notes were to be so
accelerated, such acceleration would result in a default under the Credit
Agreement, Bowling Worldwide's Senior Subordinated Discount Notes, AMF Bowling's
zero coupon convertible debentures (the "Convertible Debentures") and certain
other Company indebtedness. In such event, the Company would not then be able to
meet its accelerated payment obligations. Neither the Company nor Bowling
Worldwide has received notice that any of its indebtedness has been accelerated.
The Company has retained financial and legal advisors to evaluate and
assist it with its restructuring and refinancing alternatives. The alternatives
include a consensual, negotiated restructuring and/or reduction of the different
classes of the Company's indebtedness to be set forth in a reorganization plan
to be filed under Chapter 11 and other possible methods for reducing the
Company's long term debt and improving its capital structure. Any alternative
selected is likely to have a material adverse effect on the ability of AMF
Bowling's shareholders to recover their investment in AMF Bowling's Common Stock
and on the ability of the holders of the Senior Subordinated Notes, Senior
Subordinated Discount Notes, the Convertible Debentures and other Company
indebtedness to receive interest and principal payments due them.
The Company and its advisors have provided certain information to and
commenced discussions with the lenders under the Credit Agreement and advisors
to the holders of the Senior Subordinated Notes and Senior Subordinated Discount
Notes. The lenders and those subordinated debt holders have retained their own
separate legal and financial advisors. It appears that discussions with those
groups may continue beyond year end, in which case a further waiver of the
financial covenants under the Credit Agreement will be required. While it is
diligently pursuing a financial restructuring, the Company is unable to predict
when or if it would be able to arrive at a restructuring plan acceptable to its
lenders and other holders of its indebtedness, whether it will be able to
satisfactorily implement such a plan or whether the Company's lenders and
holders of its other classes of indebtedness will not at any point pursue any or
all remedies available to them, including acceleration of the Company's
indebtedness and, in the case of the lenders under the Credit Agreement,
realization on collateral for the indebtedness.
While the financial covenants in the Credit Agreement have been waived
through December 31, 2000, it appears likely that, unless extended, the waiver
will expire prior to the implementation of a restructuring plan. If a further
waiver is not obtained, Bowling Worldwide will not be able to meet the
reinstated financial covenants or any more stringent covenants that might be
reset at later dates. Bowling Worldwide is also obligated to make a scheduled
principal payment of approximately $12.8 million under the Credit Agreement by
December 31, 2000, which it is unlikely to make, in which case a further
amendment to the Credit Agreement may be required. In current circumstances, the
Company does not expect that it will be able to access new financing, either to
fund its operations or to pay required interest and principal payments prior to
a debt restructuring.
In connection with its financial restructuring efforts, the Company is
also exploring ways to improve its operations. The focus of these operational
restructuring efforts is to primarily reduce the level of general and
administrative expenses which support the U.S. bowling centers. In addition, the
Company is exploring cost cutting opportunities in its bowling products
business, with a similar focus on reduction of general and administrative
expenses. Potential savings from such cost cutting measures would in part fund a
major new initiative to establish a training school for center managers and key
staff, as well as to fund enhanced incentive compensation and benefits programs
for center personnel to be implemented for 2001.
6
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's Board of Directors has approved the implementation of new
bonus, severance and retention programs in order to retain key personnel and
maintain morale during the restructuring. The plans extend to senior management
and bonus-eligible and stock option-eligible personnel, including each center
manager around the world. The bonus programs are conditioned upon continued
employment to a specified date. The Company estimates the aggregate cost of
these bonus programs will approximate $5.4 million.
7
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's quarterly consolidated financial statements have been
prepared on the assumption that the Company will continue as a going concern. If
the Company's long term debt is accelerated or the Company is unable to complete
a refinancing or restructuring, the Company might not be able to continue as a
going concern. The Company has been advised by its independent public
accountants that if a refinancing or restructuring of its indebtedness has not
been completed prior to the completion of their audit of the Company's financial
statements for the year ending December 31, 2000, their auditors' report on
those financial statements will be modified to reflect this contingency.
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated results of operations of the Company have been
presented for the three months and nine months ended September 30, 2000 and
1999, respectively. All significant intercompany balances and transactions have
been eliminated in the accompanying condensed consolidated financial statements.
All dollar amounts are in thousands, except where otherwise indicated.
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers,
and in accordance with the purchase method of accounting used in all the
Company's 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 related to
goodwill was $5,253 and $15,661 for the three months and nine months ended
September 30, 2000, and $5,130 and $15,404 for the three months and nine months
ended September 30, 1999.
8
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
As of September 30, 2000, the Company had net operating losses of
approximately $263.6 million and foreign tax credits of $11.5 million that will
carry over to future years to offset U.S. income taxes. The foreign tax credits
will begin to expire in the fiscal year 2001 and the net operating losses will
begin to expire in the fiscal year 2011. The Company has recorded a valuation
reserve, as of December 31, 1999, for $113.0 million related to net operating
losses, foreign tax credits and other deferred tax assets that the Company may
not utilize prior to their expirations. The tax provision recorded for the nine
months ended September 30, 2000 primarily reflects certain international taxes.
Comprehensive Loss
Comprehensive loss was $62,165 and $133,727 for the three months and nine
months ended September 30, 2000, and $42,811 and $114,932 for the three months
and nine months ended September 30, 1999, respectively. Accumulated other
comprehensive loss consists of the foreign currency translation adjustment on
the accompanying condensed consolidated balance sheets.
Net Loss Per Share
Basic and diluted net loss per share is calculated based on the actual
weighted-average shares outstanding. Outstanding stock options and warrants are
not considered as their effect is antidilutive.
Recent Accounting Pronouncement
Effective for the quarter ended March 31, 2001, 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 September 30, 2000 and December 31, 1999, consisted of the
following:
September 30, December 31,
2000 1999
----------------- ----------------
(unaudited)
Bowling Products, at FIFO:
Raw materials $ 15,186 $ 14,285
Work in progress 1,496 1,562
Finished goods and spare parts 44,766 28,789
Bowling Centers, at average cost:
Merchandise and spare parts 8,686 8,863
----------------- ----------------
$ 70,134 $ 53,499
================= ================
9
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Property and Equipment
Property and equipment at September 30, 2000 and December 31, 1999,
consisted of the following:
September 30, December 31,
2000 1999
-------------------------------
(unaudited)
Land $ 132,592 $ 133,953
Buildings and improvements 365,265 357,365
Equipment, furniture and fixtures 605,247 588,342
Other 7,485 5,537
-------------------------------
1,110,589 1,085,197
Less: accumulated depreciation and amortization (346,384) (278,772)
-------------------------------
$ 764,205 $ 806,425
===============================
Depreciation and amortization expense related to property and equipment was
$25,654 and $76,779 for the three months and nine months ended September 30,
2000 and $24,838 and $73,536 for the three months and nine months ended
September 30, 1999, respectively.
Note 5. Long-Term Debt
Long-term debt at September 30, 2000, and December 31, 1999, consisted of
the following:
September 30, December 31,
2000 1999
---------------- ----------------
(unaudited)
Bank debt $ 615,093 $ 556,499
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 262,349 240,111
Zero coupon convertible debentures 181,749 172,630
Mortgage and equipment note 1,993 1,992
---------------- ----------------
Total debt 1,311,184 1,221,232
Current maturities (a) (53,750) (34,250)
Long-term debt classified as current (b) (1,257,434) -
---------------- ----------------
Total long-term debt $ - $ 1,186,982
================ ================
--------------------
(a) Current maturities reflect scheduled principal payments due in the next 12
months on the Term Facilities.
(b) Amounts that would be due in the next 12 months if acceleration of the
Company's debt obligations occurs as described below and in "Note 1.
Organization and Restructuring".
Bowling Worldwide's bank debt (the "Bank Debt") is governed by a credit
agreement (the "Credit Agreement") to which Bowling Worldwide is party with
Goldman Sachs, its affiliate Goldman Sachs Credit Partners, L.P., Citibank, N.A.
("Citibank") and its affiliates Citicorp Securities, Inc. and Citicorp USA, Inc.
and certain other banks, financial institutions and institutional lenders
(collectively, the "Lenders") and provides for (i) senior secured term loan
facilities aggregating $365.1 million (the "Term Facilities") and (ii) the Bank
Facility of up to $267.0 million (together with the Term Facilities, the "Senior
Facilities"). In connection with such financing, Goldman Sachs Credit Partners,
L.P. acted as Syndication Agent, Goldman Sachs Credit Partners, L.P. and
Citicorp Securities, Inc. acted as Arrangers, and Citibank is acting as
Administrative Agent. The initial borrowings under a predecessor of the Credit
Agreement were used to partially fund the Acquisition. As of September 30, 2000,
Bowling Worldwide had $12.5 million available for borrowing under the Bank
Facility, with $250.0 million outstanding and $4.5 million of standby and
documentary letters of credit.
10
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On June 14, 1999, the lenders under the Credit Agreement approved Amendment
No. 2 and Waiver to the Credit Agreement and entered into the Fourth Amended and
Restated Credit Agreement. The provisions of the Fourth Amended and Restated
Credit Agreement, among other things, permitted Bowling Worldwide to resume
borrowing to fund acquisitions subject to certain criteria and maintenance of
minimum availability under the Bank Facility of $65.0 million through 2000 and
$40.0 million through 2001, and permitted AMF Bowling to make equity
contributions to Bowling Worldwide to be included in the calculation of EBITDA
for financial covenant purposes under the Credit Agreement up to an aggregate of
$10.0 million during any four consecutive quarters through December 31, 2001 (of
which $8.0 million of contributions have been made through September 30, 2000).
In August, 2000, Bowling Worldwide and the lenders under the Credit
Agreement entered into the Amendment to the Credit Agreement pursuant to which
compliance with all financial covenants was waived through December 31, 2000 and
the revolving credit facility will be reduced to $255.0 million by year-end. As
part of the Amendment, Bowling Worldwide did not make the September 15, 2000
interest payment due on its Senior Subordinated Notes and the lenders under the
Credit Agreement agreed to waive any default under the Credit Agreement
resulting from such non-payment unless the Company's other creditors commence
the exercise of remedies, which include the acceleration of the Company's debt
obligations. Failure to make such payment within 30 days of its due date
resulted in a default under the Senior Subordinated Notes. Such default could
result in the acceleration of the obligations under such Senior Subordinated
Notes and substantially all of the Company's other indebtedness. See "Note 1.
Organization and Restructuring" in the Notes to Condensed Consolidated Financial
Statements. Without the waiver included in the Amendment, Bowling Worldwide
would not have met its financial covenants in the Credit Agreement at September
30, 2000.
Nonrecurring Restructuring Charges and Special Charges
During the third quarter of 1999, the Company recorded nonrecurring
restructuring charges of approximately $7.5 million that were related primarily
to a plan to reorganize and downsize the Bowling Products business in response
to market weakness in the Asia Pacific region and increased competition which
negatively impacted sales and profitability of new center packages ("NCPs" which
include all the equipment necessary to outfit a new bowling center or expand an
existing bowling center). The restructuring plan was developed in conjunction
with a strategic business assessment performed by Bain & Co. and was designed to
reduce the overall volatility of the Bowling Products business. Actions taken
included closing one plant in the U.S., and one plant in Korea, three warehouses
in China, one warehouse in Taiwan, four sales offices in China and one sales
office in Belgium. Additionally, sales offices were downsized in four other
countries. The restructuring charges related primarily to employee termination
benefits, asset write-offs and contract cancellations.
In addition, the strategic assessment by Bain & Co. led to programs
designed to improve product line profitability and quality. This assessment was
a catalyst to the Company recording certain charges. These charges, along with
additional reserves (collectively, the "Special Charges") recorded by the
Company totaled $27.5 million for the period ended September 30, 1999. The
Special Charges are non-cash, relate primarily to receivables and inventory and
are included within operating expenses.
11
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the nature of the restructuring charges and
Special Charges taken in the third quarter of 1999:
Bowling Bowling Bowling
Centers Products Corporate Total
------------ ------------ ------------ -----------
Restructuring charges 0.2 7.2 0.1 7.5
Special charges 6.6 20.7 0.2 27.5
------------ ------------ ------------ ------------
Total charges $ 6.8 $ 27.9 $ 0.3 $ 35.0
============ ============ ============ ============
Note 6. Commitments and Contingencies
Litigation and Claims
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 against AMF Bowling, 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. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased
Common Stock in the Company's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, 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.
In June 1998, Harbin Hai Heng Bowling Entertainment Co. Ltd. ("Hai Heng")
filed an action against AMF Bowling Products, Inc. ("AMF"), an indirect
subsidiary of AMF Bowling, in the Harbin Intermediate People's Court in
Heilongjing, China. Hai Heng sought to recover $3 to $4 million in damages
relating to 38 NCPs purchased from AMF. Hai Heng asserted that the poor quality
of the 38 NCPs entitled Hai Heng to recover the purchase price and damages for
lost profits and the cost of storing the NCPs.
On November 6, 1998, the court awarded Hai Heng approximately $3.5 million.
AMF appealed the award to the High People's Court of Heilongjing Province (the
"People's Court"). Prior to completion of the appeal review, the President of
the People's Court on February 11, 1999 issued a judgment in favor of Hai Heng
for approximately $2.8 million and ordered Hai Heng to return 24 NCPs to AMF.
AMF filed an appeal to the Supreme People's Court in Beijing (the "Supreme
Court"). The Supreme Court orally issued a stay of the execution of the
judgment. AMF has been advised that the Supreme Court has declined to review the
case and the judgment is now final.
On September 21, 2000, the United States Securities and Exchange Commission
("SEC") issued a subpoena to the Company seeking documents concerning the
Company's financial statements and accounting practices and policies. The
Company is in the process of producing documents to the SEC in response to the
subpoena. The Company does not believe at this time that this inquiry by the SEC
will have a material adverse effect on the Company or its financial statements.
In addition, 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.
12
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7. 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 September 30, 2000 and
1999, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
--------------------------------------------------------------------------------------------
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 $ 98.8 $ 27.8 $ 126.6 $18.5 $17.0 $ 35.5 $ - $ - $ 162.1
Intersegment sales - - - 5.4 1.1 6.5 - (6.5) -
Operating income (loss) (10.1) 2.0 (8.1) (2.6) (1.2) (3.8) (8.5) 0.4 (20.0)
Identifiable assets 784.3 294.2 1,078.5 604.8 70.4 675.2 17.8 4.5 1,776.0
Depreciation and amortization 22.0 5.3 27.3 5.8 0.3 6.1 0.4 (0.4) 33.4
Capital expenditures 11.6 2.4 14.0 2.3 0.1 2.4 0.4 - 16.8
Research and development expense - - - 0.1 - 0.1 - - 0.1
<CAPTION>
Three Months Ended September 30, 1999
--------------------------------------------------------------------------------------------
Bowling Centers Bowling Products
-------------------------------- --------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 94.9 $ 31.0 $ 125.9 $28.4 $28.5 $ 56.9 $ - $ - $ 182.8
Intersegment sales - - - 2.4 1.4 3.8 - (3.8) -
Operating income (loss) (18.3) (2.3) (20.6) (27.3) (1.4) (28.7) (6.6) 0.3 (55.6)
Identifiable assets 831.2 326.1 1,157.3 608.1 76.5 684.6 29.8 3.1 1,874.8
Depreciation and amortization 21.1 10.7 31.8 5.5 0.4 5.9 0.4 (0.5) 37.6
Capital expenditures 10.0 2.2 12.2 1.4 0.1 1.5 - - 13.7
Research and development expense - - - - - - - - -
</TABLE>
13
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information concerning operations in these businesses for the nine months
ended September 30, 2000 and 1999 respectively, is presented below (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
--------------------------------------------------------------------------------------------
Bowling Centers Bowling Products
-------------------------------- --------------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 339.5 $ 88.4 $ 427.9 $53.1 $51.3 $ 104.4 $ - $ - $ 532.3
Intersegment sales - - - 11.4 3.1 14.5 - (14.5) -
Operating income (loss) 7.6 7.7 15.3 (8.7) (1.8) (10.5) (19.8) 1.1 (13.9)
Identifiable assets 784.3 294.2 1,078.5 604.8 70.4 675.2 17.8 4.5 1,776.0
Depreciation and amortization 65.9 16.5 82.4 17.3 0.8 18.1 1.4 (1.3) 100.6
Capital expenditures 33.5 7.7 41.2 7.0 0.2 7.2 1.1 - 49.5
Research and development expense - - - 0.2 - 0.2 - - 0.2
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------------------
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 $ 333.6 $ 94.2 $ 427.8 $56.6 $62.1 $ 118.7 $ - $ - $ 546.5
Intersegment sales - - - 9.8 3.1 12.9 - (12.9) -
Operating income (loss) 4.6 4.2 8.8 (34.6) (6.4) (41.0) (18.9) 1.0 (50.1)
Identifiable assets 831.2 326.1 1,157.3 608.1 76.5 684.6 29.8 3.1 1,874.8
Depreciation and amortization 63.5 22.4 85.9 16.5 1.1 17.6 1.8 (1.3) 104.0
Capital expenditures 25.7 4.8 30.5 4.2 0.3 4.5 - - 35.0
Research and development expense - - - 0.1 - 0.1 - - 0.1
</TABLE>
Note 8. Condensed Consolidating Financial Statements
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 (the "Guarantor Companies"). AMF Bowling and
the third-tier and lower-tier subsidiaries of Bowling Worldwide have not
provided guarantees of such indebtedness (the "Non-Guarantor Companies").
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet for the Guarantor Companies, the
Non-Guarantor Companies and the Company as of September 30, 2000, and condensed
consolidating statements of income and cash flows for the Guarantor Companies,
the Non-Guarantor Companies and the Company for the nine months ended September
30, 2000 and (ii) elimination entries necessary to combine the entities
comprising the Company.
14
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2000
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 19,040 $ 10,340 $ - $ 29,380
Accounts and notes receivable, net
of allowance for doubtful accounts 68,866 327 - 69,193
Accounts receivable - intercompany 14,327 12,528 (26,855) -
Inventories 68,783 1,351 - 70,134
Other current assets 10,611 5,373 - 15,984
----------- ----------- ----------- -----------
Total current assets 181,627 29,919 (26,855) 184,691
Notes receivable - intercompany 49,444 5,663 (55,107) -
Property and equipment, net 712,867 49,946 1,392 764,205
Investment in subsidiaries 13,987 523,606 (537,593) -
Goodwill and other assets 803,176 23,932 - 827,108
----------- ----------- ----------- -----------
Total assets $ 1,761,101 $ 633,066 $ (618,163) $ 1,776,004
----------- ----------- ----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 22,053 $ 1,643 $ 35 $ 23,731
Accounts payable - intercompany 12,528 14,327 (26,855) -
Accrued expenses 69,712 8,286 - 77,998
Income taxes payable (3,439) 5,525 - 2,086
Current portion of long-term debt 53,750 - - 53,750
Long-term debt classified as current 1,058,682 198,752 - 1,257,434
----------- ----------- ----------- -----------
Total current liabilities 1,213,286 228,533 (26,820) 1,414,999
Notes payable - intercompany 5,663 49,444 (55,107) -
Other long-term liabilities 4,559 400 - 4,959
----------- ----------- ----------- -----------
Total liabilities 1,223,508 278,377 (81,927) 1,419,958
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock - 836 - 836
Paid-in capital 1,054,683 903,473 (1,052,709) 905,447
Retained deficit (486,907) (519,437) 486,290 (520,054)
Accumulated other comprehensive loss (30,183) (30,183) 30,183 (30,183)
----------- ----------- ----------- -----------
Total stockholders' equity 537,593 354,689 (536,236) 356,046
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,761,101 $ 633,066 $ (618,163) $ 1,776,004
=========== =========== =========== ===========
</TABLE>
15
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2000
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenue $ 489,874 $ 43,508 $ (1,095) $ 532,287
--------- --------- --------- ---------
Operating expenses:
Cost of goods sold 114,325 4,809 (733) 118,401
Bowling center operating expenses 257,391 23,577 (360) 280,608
Selling, general, and administrative expenses 35,968 8,415 - 44,383
Refinancing charges 2,244 - - 2,244
Depreciation and amortization 93,385 7,269 (92) 100,562
--------- --------- --------- ---------
Total operating expenses 503,313 44,070 (1,185) 546,198
--------- --------- --------- ---------
Operating income (13,439) (562) 90 (13,911)
--------- --------- --------- ---------
Nonoperating expenses (income):
Interest expense 88,491 10,301 - 98,792
Other expenses, net 3,163 840 - 4,003
Interest income (1,568) (27) - (1,595)
Equity in loss (income) of subsidiaries (2,153) 106,318 (104,165) -
--------- --------- --------- ---------
Total nonoperating expenses 87,933 117,432 (104,165) 101,200
--------- --------- --------- ---------
Loss before income taxes (101,372) (117,994) 104,255 (115,111)
Provision for income taxes 2,072 964 - 3,036
--------- --------- --------- ---------
Net loss before equity in loss of
joint ventures and extraordinary item (103,444) (118,958) 104,255 (118,147)
Equity in loss of joint ventures (721) - - (721)
--------- --------- --------- ---------
Net loss $(104,165) $(118,958) $ 104,255 $(118,868)
========= ========= ========= =========
</TABLE>
16
<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 Nine Months Ended September 30, 2000
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(104,165) $(118,958) $ 104,255 $(118,868)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 93,385 7,269 (92) 100,562
Equity in loss of joint ventures 721 - - 721
Amortization of bond discount 22,240 9,119 - 31,359
Equity in (loss) income of subsidiaries (2,153) 106,318 (104,165) -
(Gain) Loss on the sale of property and equipment, net 1,920 (1,715) - 205
Changes in assets and liabilities:
Accounts and notes receivable (9,829) 22 - (9,807)
Receivables and payables - affiliates (4,375) 4,375 - -
Inventories (18,342) (357) - (18,699)
Other assets 10,558 (210) - 10,348
Accounts payable and accrued expenses (2,375) (722) - (3,097)
Income taxes payable (1,491) 753 - (738)
Other long-term liabilities (3,862) - - (3,862)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities (17,768) 5,894 (2) (11,876)
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (5,350) - - (5,350)
Investment in subsidiary - (7,000) 7,000 -
Purchases of property and equipment (45,280) (4,219) 2 (49,497)
Proceeds from sale of property and equipment 688 2,657 - 3,345
--------- --------- --------- ---------
Net cash used in investing activities (49,942) (8,562) 7,002 (51,502)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 85,000 - - 85,000
Payments on long-term debt (26,407) - - (26,407)
Rights offering costs - (163) - (163)
Capital contribution from Parent 7,000 - (7,000) -
Payments of noncompete obligations (196) - - (196)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 65,397 (163) (7,000) 58,234
--------- --------- --------- ---------
Effect of exchange rates on cash 2,721 (3,940) - (1,219)
--------- --------- --------- ---------
Net decrease in cash 408 (6,771) - (6,363)
Cash and cash equivalents at beginning of period 18,632 17,111 - 35,743
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 19,040 $ 10,340 $ - $ 29,380
========= ========= ========= =========
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain matters discussed in this report contain forward-looking
statements, which are statements other than historical information or statements
of current condition. Statements set forth in this report or statements
incorporated by reference from documents filed with the Securities and Exchange
Commission are or may be forward-looking statements, including possible or
assumed future results of the operations of AMF Bowling, Inc. ("AMF Bowling")
and its subsidiaries (collectively, the "Company"), including but not limited to
any statements contained in this report concerning: (i) timing, execution and
results of the Company's restructuring or refinancing process, (ii) the results
of the Company's plans to improve its bowling centers operations, including
revenue enhancement and cost management programs, (iii) the ability of the
Company's management to execute its strategies, (iv) the timing or amount of any
changes in the interest expense and/or principal repayment obligations of the
Company's indebtedness, including the timing of any acceleration of the
Company's indebtedness, and the timing of the pursuit of any remedies by the
Company's creditors (v) the Company's ability to generate cash flow to service
its indebtedness and meet its debt payment obligations, (vi) the results of
operations and initiatives engaged in with respect to the Company's bowling
products and bowling centers businesses, (vii) the results of the Company's
employee incentive and retention efforts, (viii) the outcome of existing or
potential litigation, (ix) the amounts of capital expenditures needed to
maintain or improve the Company's bowling centers, (x) any statements preceded
by, followed by or including the words "believes," "expects," "predicts,"
"anticipates," "intends," estimates," "should," "may" or similar expressions and
(xi) other statements contained or incorporated in this report regarding matters
that are not historical facts.
These forward-looking statements relate to the plans and objectives of the
Company or future operations. In light of the risks and uncertainties inherent
in all future projections and the Company's financial position, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by AMF Bowling 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) timing,
execution and results of the Company's restructuring or refinancing process,
(ii) the Company's ability, and the ability of its management team, to carry out
the Company's business strategies, (iii) the Company's ability to avoid the
acceleration of its long term indebtedness, the resulting cross default under
such indebtedness and any resulting enforcement of remedies relating to such
default, including the foreclosure by the lenders under the Credit Agreement on
collateral for their indebtedness and the filing of an involuntary bankruptcy
petition, (iv) the Company's ability to integrate acquired operations into its
business, (v) the Company's ability to sell to existing bowling markets and
identify and participate in sales to new bowling markets in light of the current
uncertainty surrounding the Company's financial position, (vi) the continuation
of adverse financial results and substantial competition in the Company's
bowling products business, (vii) the Company's ability to retain and attract
experienced bowling center management and other key management personnel, (viii)
the Company's ability to successfully implement initiatives designed to improve
and retain customer traffic in its bowling centers, (ix) the Company's ability
to attract and retain league bowlers in its bowling centers and customers in its
Bowling Products business, (x) the risk of adverse political acts or
developments in the Company's existing and proposed international markets, (xi)
fluctuations in foreign currency exchange rates affecting the Company's
translation of operating results, (xii) continued or increased competition,
(xiii) the popularity of bowling, (xiv) the decline in general economic
conditions, (xv) adverse judgments in pending or future litigation, (xvi) the
Company's ability to effectively implement the amended joint distribution and
related arrangements with Zhonglu and effectively sell products in the China
markets and (xvii) changes in interest and exchange rates.
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.
On August 14, 2000, Bowling Worldwide announced that it had entered
into an amendment (the "Amendment") to its Credit Agreement, that it would not
make the interest payment due September 15, 2000 on its senior subordinated
notes (the "Senior Subordinated Notes") and that it would begin exploring
various alternatives to restructure and reduce its long-term debt. As part of
the Amendment, the lenders agreed to waive any default under the Credit
Agreement resulting from the failure to make the September 15, 2000 interest
payment due on the Senior Subordinated Notes unless the Company's other
creditors commenced the exercise of remedies, which could include the
acceleration of the Company's debt obligations and an involuntary bankruptcy
filing. The Amendment provided for the immediate permanent termination of $88.0
million of the otherwise available working capital commitments under the Credit
Agreement, and for an additional permanent termination of $4.0 million of those
commitments on each of October 31, 2000, November 30, 2000 and December 31,
2000. The Amendment required that Bowling Worldwide deliver to the lenders under
the Credit Agreement by September
18
<PAGE>
30, 2000 a preliminary plan containing the principal terms of a proposal to
restructure the Company's debt, which plan was required to be satisfactory to a
majority of the lenders by October 15, 2000. The Company submitted such a
proposed restructuring plan during the period required by the Amendment and a
majority of the lenders indicated that the plan was generally satisfactory in
form and substance, subject to further approval of any definitive plan. Finally,
the Amendment waived Bowling Worldwide's compliance with the financial covenants
in the Credit Agreement through December 31, 2000.
After giving effect to the commitment terminations required by the
Amendment, Bowling Worldwide will have an aggregate available working capital
commitment under the Credit Agreement of $255.0 million. Based upon the current
level of performance, management believes that cash flow from operations,
together with available borrowings under the Credit Agreement and other sources
of liquidity, will be adequate to meet Bowling Worldwide's normal operating
expenses and requirements for capital expenditures during the remainder of 2000.
In calendar year 2001, principal payment obligations under the facilities of the
Credit Agreement increase significantly and cash interest becomes payable on the
senior subordinated discount notes (the "Senior Subordinated Discount Notes"),
and it is not expected that the Company will be able to make such principal and
interest payments.
On September 15, 2000, Bowling Worldwide did not make the required cash
interest payment on the Senior Subordinated Notes, and on October 15, 2000, the
30 day period to cure the non-payment of interest under the related Indenture
expired. Under the Indenture, beginning on October 15, 2000, the Trustee on its
own or the holders of 25% or more of the outstanding principal amount of the
Senior Subordinated Notes have the right, by written notice, to declare all
amounts owed under the Indenture immediately due and payable. If the
indebtedness represented by the Senior Subordinated Notes were to be so
accelerated, such acceleration would result in a default under the Credit
Agreement, Bowling Worldwide's Senior Subordinated Discount Notes, AMF Bowling's
zero coupon convertible debentures (the "Convertible Debentures") and certain
other Company indebtedness. In such event, the Company would not then be able to
meet its accelerated payment obligations. Neither the Company nor Bowling
Worldwide has received notice that any of its indebtedness has been accelerated.
The Company has retained financial and legal advisors to evaluate and
assist it with its restructuring and refinancing alternatives. The alternatives
would include a consensual, negotiated restructuring and/or reduction of the
different classes of the Company's indebtedness to be set forth in a
reorganization plan to be filed under Chapter 11 and other possible methods for
reducing the Company's long term debt and improving its capital structure. Any
alternative selected is likely to have a material adverse effect on the ability
of AMF Bowling's shareholders to recover their investment in AMF Bowling's
Common Stock and on the ability of the holders of the Senior Subordinated Notes,
Senior Subordinated Discount Notes, the Convertible Debentures and other Company
indebtedness to receive interest and principal payments due them.
The Company and its advisors have provided certain information to and
commenced discussions with the lenders under the Credit Agreement and advisers
to the holders of the Senior Subordinated Notes and Senior Subordinated Discount
Notes. The lenders and those subordinated debt holders have retained their own
separate legal and financial advisors. It appears that discussions with those
groups may continue beyond year end, in which case a further waiver of the
financial covenants under the Credit Agreement will be required. While it is
diligently pursuing a financial restructuring, the Company is unable to predict
when or if it would be able to arrive at a restructuring plan acceptable to its
lenders and other holders of its indebtedness, whether it will be able to
satisfactorily implement such a plan or whether the Company's lenders and
holders of its other classes of indebtedness will not at any point pursue any or
all remedies available to them, including acceleration of the Company's
indebtedness and, in the case of the lenders under the Credit Agreement,
realization on collateral for the indebtedness.
While the financial covenants in the Credit Agreement have been waived
through December 31, 2000, it appears likely that, unless extended, the waiver
will expire prior to the implementation of a restructuring plan. If a further
waiver is not obtained, Bowling Worldwide will not be able to meet the
reinstated financial covenants or any more stringent covenants that may be reset
at later dates. Bowling Worldwide is also obligated to make a scheduled
principal payment of approximately $12.8 million under the Credit Agreement by
December 31, 2000, which it is unlikely to make, in which case a further
amendment to the Credit Agreement may be required. In current circumstances, the
Company does not expect that it will be able to access new financing, either to
fund its operations or to pay required interest and principal payments prior to
a debt restructuring.
In connection with its financial restructuring efforts, the Company is
also exploring ways to improve its operations. The focus of these operational
restructuring efforts is to primarily reduce the level of general and
administrative expenses which support the U.S. bowling centers. In addition, the
Company is exploring cost cutting opportunities in its bowling products
business, with a similar focus on reduction of general and administrative
19
<PAGE>
expenses. Potential savings from such cost cutting measures would in part fund a
major new initiative to establish a training school for center managers and key
staff, as well as to fund enhanced incentive compensation and benefits programs
for center personnel to be implemented for 2001.
The Company's Board of Directors has approved the implementation of new
bonus, severance and retention programs in order to maintain morale during the
restructuring. The plans extend to senior management, bonus-eligible and stock
option-eligible personnel, including each center manager around the world. The
bonus programs are conditioned upon continued employment to a specified date.
The Company estimates the aggregate cost of these bonus programs will
approximate $5.4 million.
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) and the notes thereto included
elsewhere herein. See also "Note 1. Organization and Restructuring" in the Notes
to the Condensed Consolidated Financial Statements.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
a company's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
General
The Company principally operates in two business segments in the United
States and international markets: (i) the ownership and operation of 408 U.S.
bowling centers and 119 international bowling centers ("Bowling Centers"),
including 15 joint venture centers operated with third parties, as of September
30, 2000, 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 nine
months of 2000 versus 1999 reflect the closing of 16 centers since September 30,
1999.
Acquisitions and Dispositions
From January 1, 2000 through September 30, 2000, AMF Bowling Centers,
Inc., a direct subsidiary of Bowling Worldwide, acquired four bowling centers,
closed twelve centers and terminated a management contract for one center in the
United States, closed one center in Japan, and sold one center in the United
Kingdom and one center in Canada.
20
<PAGE>
AMF BOWLING, INC.
Selected Financial Data
(unaudited)
(in millions of dollars)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Bowling Centers (before intersegment eliminations)
---------------
Operating revenue $ 126.6 $ 125.9 $ 427.9 $ 427.8
----------- ----------- ------------- ------------
Cost of goods sold 12.8 13.9 43.6 44.5
Bowling center operating expenses 93.0 93.1 281.5 277.5
Selling, general, and administrative expenses 1.6 7.5 5.1 10.9
Restructuring charges - 0.2 - 0.2
Depreciation and amortization 27.3 31.8 82.4 85.9
----------- ----------- ------------- ------------
Operating (loss) income $ (8.1) $(20.6) $ 15.3 $ 8.8
=========== =======================================
Bowling Products (before intersegment eliminations)
----------------
Operating revenue $ 42.0 $ 60.7 $ 118.9 $ 131.6
Cost of goods sold 31.1 55.6 88.2 110.9
----------- ----------- ------------- ------------
Gross profit 10.9 5.1 30.7 20.7
- -
Selling, general, and administrative expenses 8.6 20.7 23.1 36.9
Restructuring charges - 7.2 - 7.2
Depreciation and amortization 6.1 5.9 18.1 17.6
----------- ----------- ------------- ------------
Operating loss $ (3.8) $(28.7) $ (10.5) $ (41.0)
=========== =========== ============= ============
Consolidated
------------
Operating revenue $ 162.1 $ 182.8 $ 532.3 $ 546.5
----------- ----------- ------------- ------------
Cost of goods sold 37.8 66.2 118.4 143.6
Bowling center operating expenses 92.6 92.8 280.6 276.7
Selling, general, and administrative expenses 16.1 34.3 44.4 64.8
Restructuring charges - 7.5 - 7.5
Refinancing charges 2.2 - 2.2 -
Depreciation and amortization 33.4 37.6 100.6 104.0
----------- ----------- ------------- ------------
Operating loss (20.0) (55.6) (13.9) (50.1)
Interest expense, gross 34.7 31.1 98.8 95.5
Other (income) expense, net 1.4 (0.4) 2.5 4.6
----------- ----------- ------------- ------------
Loss before income taxes (56.1) (86.3) (115.2) (150.2)
Provision for income taxes 0.9 23.1 3.0 26.3
----------- ----------- ------------- ------------
Net loss before equity in loss of joint ventures and extraordinary item (57.0) (109.4) (118.2) (176.5)
Equity in loss of joint ventures (0.1) (0.1) (0.7) (5.8)
----------- ----------- ------------- ------------
Net loss before extraordinary item (57.1) (109.5) (118.9) (182.3)
Extraordinary item - 64.5 - 64.5
----------- ----------- ------------- ------------
Net loss $(57.1) $(45.0) $ (118.9) $ (117.8)
=========== =========== ============= ============
Selected Data:
--------------
Recurring EBITDA (a)
Bowling Centers $ 19.2 $ 18.0 $ 97.7 $ 101.5
Bowling Products $ 2.3 $ 5.1 $ 7.6 $ 4.5
Recurring EBITDA margin
Bowling Centers 15.2% 14.3% 22.8% 23.7%
Bowling Products 5.5% 8.4% 6.4% 3.4%
</TABLE>
(a) Recurring EBITDA represents EBITDA before nonrecurring
restructuring charges and Special Charges of approximately $7.5
million and $27.5 million, respectively, for the three and nine
months ended September 30, 1999.
21
<PAGE>
Bowling Centers
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. To facilitate a meaningful
comparison, the constant center results discussed below reflect the results of
508 centers that had been in operation one full fiscal year as of December 31,
1999. 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 nine months ended
September 30, 2000, bowling, food and beverage and other revenue represented
57.8%, 27.2% and 15.0% of total Bowling Centers revenue, respectively. For the
nine months ended September 30, 1999, bowling, food and beverage and other
revenue represented 58.3%, 27.0% and 14.7% of total Bowling Centers revenue,
respectively.
To facilitate a meaningful comparison, the results of Bowling Centers for
the quarter and nine months ended September 30, 1999, have been restated to
exclude nonrecurring restructuring and Special Charges (as defined in "--
Consolidated - Nonrecurring Restructuring Charges and Special Charges") as shown
in the table below. The discussion below gives effect to this restatement. See
"Note 5. Long-Term Debt" in the Notes to Condensed Consolidated Financial
Statements and "--Consolidated - Nonrecurring Restructuring Charges and Special
Charges".
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-----------------------------------------------
2000 1999
------------ ----------------------------------
As As Special As
Reported. Reported Charges Adjusted
Bowling Centers (before intersegment eliminations)
<S> <C> <C> <C> <C>
Operating revenue $ 126.6 $ 125.9 $ - $ 125.9
------------ ----------- ---------- -----------
Cost of goods sold 12.8 13.9 0.9 13.0
Bowling center operating expenses 93.0 93.1 - 93.1
Selling, general, and administrative expenses 1.6 7.5 5.7 1.8
Restructuring charges - 0.2 0.2 -
Depreciation and amortization 27.3 31.8 - 31.8
------------ ----------- ---------- -----------
Operating (loss) income $ (8.1) $ (20.6) $ (6.8) $ (13.8)
============ =========== ========== ===========
Selected Data:
Recurring EBITDA $ 19.2 $ 11.2 $ 18.0
Recurring EBITDA margin 15.2% 8.9% 14.3%
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------------
2000 1999
------------ ----------------------------------
As As Special As
Reported. Reported Charges Adjusted
Bowling Centers (before intersegment eliminations)
Operating revenue $ 427.9 $ 427.8 $ - $ 427.8
----------- ----------- ---------- -----------
Cost of goods sold 43.6 44.5 0.9 43.6
Bowling center operating expenses 281.5 277.5 - 277.5
Selling, general, and administrative expenses 5.1 10.9 5.7 5.2
Restructuring charges - 0.2 0.2 -
Depreciation and amortization 82.4 85.9 - 85.9
----------- ----------- ---------- -----------
Operating (loss) income $ 15.3 $ 8.8 $ (6.8) $ 15.6
=========== =========== ========== ===========
Selected Data:
Recurring EBITDA $ 97.7 $ 94.7 $ 101.5
Recurring EBITDA margin 22.8% 22.1% 23.7%
</TABLE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Bowling Centers operating revenue increased $0.7 million, or 0.6%. An
increase of $4.9 million, or 5.2%, was attributable to U.S. constant centers,
primarily as a result of price increases in open play revenue, and food and
beverage and ancillary revenue associated with open play traffic. International
constant centers operating revenue decreased $3.0 million, or 9.9%, primarily
due to unfavorable currency translation of results. On a constant currency
basis, international operating revenue would have decreased $0.4 million, or
1.3%. An increase of $0.8 million is attributable to two new U.S. centers. A
decrease of $2.0 million in total operating revenue was attributable to fourteen
centers that were closed, two centers that were sold and one center management
contract that was terminated since September 30, 1999.
Cost of goods sold decreased $0.2 million, or 1.5%, primarily as a result
of closing centers. Constant centers cost of goods sold decreased $0.1 million,
or 0.9%, compared with 1999.
Operating expenses decreased $0.1 million, or 0.1%. An increase of $0.8
million was attributable to constant centers, an increase of $0.7 million was
attributable to new centers and an increase of $0.2 million was attributable to
higher regional, district and support staff operations expenses. A decrease of
$1.8 million was attributable to closed centers. As a percentage of its revenue,
Bowling Centers operating expenses, adjusted for the nonrecurring restructuring
and Special Charges, were 73.4% for the third quarter of 2000 compared with
73.9% for the third quarter of 1999. Due to significantly lower league play in
the second and third quarters, Bowling Center operating expenses as a percentage
of operating revenue are higher in these quarters than in the first and fourth
quarters.
22
<PAGE>
Selling, general and administrative expenses decreased $0.2 million, or
11.1%, compared with the same period in 1999 primarily as a result of more
effective expense management in international constant centers.
Recurring EBITDA increased $1.2 million, or 6.7%. Recurring EBITDA margin
for the third quarter of 2000 was 15.2% compared with 14.3% for the third
quarter of 1999. The higher recurring EBITDA margin in 2000 was attributable to
the higher operating revenue and lower expenses as discussed above.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Bowling Centers operating revenue increased $0.1 million. An increase of
$9.2 million, or 2.8%, was attributable to U.S. constant centers, primarily as a
result of price increases in open play revenue, and food and beverage and
ancillary revenue associated with open play traffic. International constant
centers operating revenue decreased $4.0 million, or 4.3%, primarily due to
unfavorable currency translation of results. On a constant currency basis,
international operating revenue would have increased $0.5 million, or 0.5%. An
increase of $0.9 million was attributable to two new U.S. centers. A decrease of
$6.0 million in total operating revenue was attributable to fourteen centers
that were closed, two centers that were sold and one center management contract
that was terminated since September 30, 1999.
Cost of goods sold was flat compared with the same period in 1999. Constant
centers cost of goods sold increased $0.4 million, or 1.0%, resulting from
increased food and beverage sales primarily in the U.S. centers. A decrease of
$0.5 million was attributable to closed centers and an increase of $0.1 million
was attributable to new centers.
Operating expenses increased $4.0 million, or 1.4%. An increase of $5.8
million was attributable to constant centers, an increase of $0.8 million was
attributable to new centers and an increase of $2.3 million was attributable to
higher regional, district and support staff operations expenses. A decrease of
$4.9 million was attributable to closed centers. As a percentage of its revenue,
Bowling Centers operating expenses were 65.8% for the first nine months of 2000
compared with 64.9% for the first nine months of 1999. The increase of 0.9% is
due primarily to higher expenses resulting from new field level positions and
national advertising programs.
Selling, general and administrative expenses decreased $0.1 million, or
1.9%, compared with 1999 as a result of a decrease in international constant
centers selling general and administrative expenses.
Recurring EBITDA decreased $3.8 million, or 3.7%. EBITDA margin for
the first nine months of 2000 was 22.8% compared with 23.7% for the first nine
months of 1999. The lower recurring EBITDA margin in 2000 was primarily
attributable to the higher operating expenses as discussed above.
23
<PAGE>
Bowling Products
To facilitate a meaningful comparison, the results of Bowling Products for the
quarter and nine months ended September 30, 1999, have been restated to exclude
nonrecurring restructuring and Special Charges (as defined in "--Consolidated -
Nonrecurring Restructuring Charges and Special Charges") as shown in the table
below. The discussion below gives effect to this restatement. See "Note 5. Long-
Term Debt" in the Notes to Condensed Consolidated Financial Statements and "--
Consolidated - Nonrecurring Restructuring Charges and Special Charges".
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-----------------------------------------------
2000 1999
------------ ----------------------------------
As As Special As
Reported. Reported Charges Adjusted
Bowling Products (before intersegment eliminations)
<S> <C> <C> <C> <C>
Operating revenue $ 42.0 $ 60.7 $ - $ 60.7
Cost of goods sold 31.1 55.6 8.0 47.6
------------ -----------------------------------
Gross profit 10.9 5.1 (8.0) 13.1
Selling, general, and administrative expenses 8.6 20.7 12.7 8.0
Restructuring charges - 7.2 7.2 -
Depreciation and amortization 6.1 5.9 - 5.9
------------ -----------------------------------
Operating loss $ (3.8) $ (28.7) $(27.9) $ (0.8)
============ ===================================
Selected Data:
Recurring EBITDA $ 2.3 $ (22.8) $ 5.1
Recurring EBITDA margin 5.5% -37.6% 8.4%
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------------
2000 1999
------------ ----------------------------------
As As Special As
Reported. Reported Charges Adjusted
<S> <C> <C> <C> <C>
Bowling Products (before intersegment eliminations)
Operating revenue $ 118.9 $ 131.6 $ - $ 131.6
Cost of goods sold 88.2 110.9 8.0 102.9
------------------------- ---------- -----------
Gross profit 30.7 20.7 (8.0) 28.7
Selling, general, and administrative expenses 23.1 36.9 12.7 24.2
Restructuring charges - 7.2 7.2 -
Depreciation and amortization 18.1 17.6 - 17.6
------------------------- ---------- -----------
Operating loss $ (10.5) $ (41.0) $(27.9) $ (13.1)
========================= ========== ===========
Selected Data:
Recurring EBITDA $ 7.6 $ (23.4) $ 4.5
Recurring EBITDA margin 6.4% -17.8% 3.4%
</TABLE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Bowling Products operating revenue decreased $18.7 million, or 30.8%.
Revenue from sales of New Center Packages ("NCPs", which include all the
equipment necessary to outfit a new bowling center or expand an existing bowling
center) decreased $8.7 million, or 41.6%, primarily as a result of lower sales
to Asia, Europe and international distributors. Modernization and Consumer
Products (which include modernization equipment, supplies, spare parts and
consumable products) revenue decreased $10.0 million, or 25.1%, primarily as a
result of decreased sales to Asia and international distributors. Management
believes that its Bowling Products business results have been negatively
impacted by the uncertainty surrounding the Company's financial position.
Gross profit decreased $2.2 million, or 16.8%, primarily as a result of
decreased sales volume.
Selling, general and administrative expenses increased $0.6 million, or
7.5%, primarily due to increased advertising expenses intended to increase
product awareness.
Recurring EBITDA was $2.3 million in the third quarter of 2000 compared
with $5.1 million in the third quarter of 1999. The recurring EBITDA margin was
5.5% in the third quarter of 2000 compared with 8.4% in the third quarter of
1999 primarily as a result of the decrease in sales and gross profit and
increase in selling, general and administrative costs.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Bowling Products operating revenue decreased $12.7 million, or 9.7%.
Revenue from sales of NCPs decreased $2.5 million, or 6.5%, primarily as a
result of lower sales to Japan. Modernization and Consumer Products revenue
decreased $10.2 million, or 11.0%, primarily as a result of lower sales to North
America and Asia.
Gross profit increased $2.0 million, or 7.0%, primarily as a result of more
favorable product mix and product cost reduction efforts in the first nine
months of 2000 compared with the first nine months of 1999.
Selling, general and administrative expenses decreased $1.1 million, or
4.5%, primarily reflecting the cost reduction program for the Bowling Products
organization implemented in this area through the second half of 1999.
24
<PAGE>
Recurring EBITDA was $7.6 million in the first nine months of 2000
compared with $4.5 million in the first nine months of 1999. The recurring
EBITDA margin was 6.4% in the first nine months of 2000 compared with 3.4% in
the first nine months of 1999 primarily as a result of the increase in gross
profit and selling, general and administrative savings achieved through cost
reductions.
Consolidated
Nonrecurring Restructuring Charges and Special Charges
During the third quarter of 1999, the Company recorded nonrecurring
restructuring charges of approximately $7.5 million that were related primarily
to a plan to reorganize and downsize the Bowling Products business in response
to market weakness in the Asia Pacific region and increased competition which
negatively and materially impacted NCP sales and profitability. The
restructuring plan was developed in conjunction with a strategic business
assessment performed by Bain & Co. and was designed to reduce the overall
volatility of the Bowling Products business. The restructuring charges related
primarily to employee termination benefits, asset write-offs and contract
cancellations.
In addition, the strategic assessment by Bain & Co. led to programs
designed to improve product line profitability and quality. This assessment was
a catalyst to the Company recording certain charges. These charges, along with
additional reserves (collectively, the "Special Charges") recorded by the
Company totaled $27.5 million for the period ended September 30, 1999. The
Special Charges are non-cash, relate primarily to receivables and inventory
write-offs and are included within operating expenses. See "Note 5. Long-Term
Debt" in the Notes to Condensed Consolidated Financial Statements.
Depreciation and Amortization
Depreciation and amortization decreased $4.2 million, or 11.2%, in the
third quarter of 2000, and $3.4 million, or 3.3%, in the nine months ended
September 30, 2000 compared to the same periods in 1999. These decreases were
primarily attributable to acceleration, in the third quarter of 1999, of the
amortization schedule of the excess of the Company's investment over the equity
in its Brazilian joint venture's net assets partially offset by incremental
depreciation expense incurred as a result of capital expenditures.
Interest Expense
Gross interest expense increased $3.6 million, or 11.6%, in the third
quarter of 2000, and $3.3 million, or 3.5%, in the nine months ended September
30, 2000 compared with the same periods in 1999. Interest incurred on bank debt
increased as the impact of higher average borrowing rates and the effect of an
increase in average amounts outstanding. See "--Liquidity" and "--Capital
Resources" for further discussion of the bank debt. Non-cash bond interest
amortization totaled $10.8 million and $31.4 million for the quarter and nine
months ended September 30, 2000, respectively, compared to $10.5 million and
$33.8 million for the quarter and nine months ended September 30, 1999,
respectively.
Income Taxes
As of September 30, 2000, the Company had net operating losses of
approximately $263.6 million and foreign tax credits of $11.5 million that will
carry over to future years to offset U.S. income taxes. The foreign tax credits
will begin to expire in the fiscal year 2001 and the net operating losses will
begin to expire in the fiscal year 2011. The Company has recorded a valuation
reserve, as of December 31, 1999, for $113.0 million related to net operating
losses, foreign tax credits and other deferred tax assets that the Company may
not utilize prior to their expirations. The tax provision recorded for the nine
months ended September 30, 2000 reflects certain international taxes.
Net Loss Before Extraordinary Item
Net loss before extraordinary item in the third quarter and nine months
ended September 30, 2000 totaled $57.1 million and $118.9 million, respectively,
compared with a net loss before extraordinary item of $109.5 million and $182.3
million in the third quarter and nine months ended September 30, 1999,
25
<PAGE>
respectively. In addition to the impact of EBITDA, depreciation, interest and
taxes discussed above, the Company recorded $0.1 million and $0.7 million in
equity in loss of joint ventures in the third quarter and first nine months of
2000, respectively, compared with equity in loss of joint ventures of $0.1
million and $5.8 million in the third quarter and first nine months of 1999,
respectively. Additionally, the Company recorded other expense of $1.4 million
and $2.5 million in the third quarter and first nine months of 2000 compared
with other income of $0.4 million and other expense of $4.6 million in the third
quarter and first nine months of 1999, respectively.
Extraordinary Item
As part of a recapitalization plan, AMF Bowling completed on July 28, 1999
an offering of rights to purchase shares of Common Stock and a tender offer for
a portion of its outstanding principal amount at maturity of Debentures at a
discount to carrying value. In the rights offering, AMF Bowling raised $120.0
million of gross proceeds in equity capital and issued 24.0 million additional
shares of Common Stock at the subscription price of $5.00 per share. AMF Bowling
purchased $514,286,000 in aggregate principal amount at maturity of the
Debentures in the tender offer at a price of $140 per $1,000 principal amount at
maturity. The Company used approximately $72.0 million of the proceeds from the
rights offering to fund the purchase of the Debentures and recorded an
extraordinary gain of approximately $64.5 million representing the difference
between the accreted value of the Debentures purchased and the purchase price
therefor.
Net Loss After Extraordinary Item
Net loss in the third quarter and nine months ended September 30, 2000
totaled $57.1 million and $118.9 million, respectively, compared with net loss
after extraordinary item of $45.0 million and $117.8 million in the third
quarter and nine months ended September 30, 1999, respectively.
Liquidity
The Company's primary source of liquidity is cash provided by operations
and funds available under credit facilities, as described below. Working capital
on September 30, 2000 was (1,230.3) million compared with $22.5 million on
December 31, 1999, a decrease of (1,252.8) million. The decrease is primarily
attributable to the reclass of $1,257.4 million of long-term debt that would be
due if the Company's debt obligations were accelerated as described in "Note 1.
Organization and Restructuring" and "Note 5. Long-Term Debt". Additionally,
scheduled principal payments due in the next 12 months under the Credit
Agreement increased $19.5 million and there was a decrease of $6.4 million in
cash. These decreases in working capital were partially offset by an increase of
$6.0 million in accounts receivable, an increase of $16.6 million in inventory
primarily attributable to a timing difference between planned production and
related shipments, an increase of $1.1 million in other current assets, a
decrease of $5.4 million in accounts payable and accrued expenses and a decrease
of $1.4 million in income taxes payable.
Net cash used by operating activities was $11.9 million for the nine months
ended September 30, 2000 compared with net cash used of $10.7 million for the
nine months ended September 30, 1999, a difference of $1.2 million. A decrease
of $1.1 million was attributable to net loss of $118.9 million recorded in the
first nine months of 2000 compared with a net loss of $117.8 million in the same
period in 1999, a decrease of $3.5 million attributable to decreased levels of
depreciation and amortization, a decrease of $5.1 million due to lower loss in
equity of joint ventures, a decrease of $2.7 million attributable to lower
levels of accounts payable and accrued expenses, a decrease of $8.0 million
attributable to increased levels of accounts receivable, a decrease of $31.5
million attributable to higher inventory balances, a net decrease of $2.4
million due to lower levels of bond amortization, a decrease of $20.8 million
resulting from deferred income taxes recorded in 1999 and a net decrease of $6.9
million attributable to changes in other operating activities. These decreases
were partially offset by an increase of $64.5 million attributable to
attributable to extraordinary item, net of tax, and an increase of $16.3 million
attributable to lower levels of other assets.
Net cash used in investing activities was $51.5 million for the nine months
ended September 30, 2000 compared with net cash used of $35.7 million for the
nine months ended September 30, 1999, an increase of $15.8 million. An increase
of $14.4 million was attributable to an increase in purchases of property and
equipment in 2000. An increase of $4.0 million was attributable to an increase
in Bowling Center acquisition spending in the first nine months of 2000 compared
with the same period in 1999. In the first nine months of 2000, four centers
were purchased compared with one center in the same period in 1999. These
factors contributing to the increase in net cash flows were offset by an
increase of $2.6 million in proceeds from the sale of property and equipment.
See "--Capital Expenditures" for additional discussion of purchases of property
and equipment.
26
<PAGE>
Net cash provided by financing activities was $58.2 million for the nine
months ended September 30, 2000 compared with net cash provided of $43.8 million
for the nine months ended September 30, 1999, a difference of $14.4 million.
Proceeds from long term debt increased $32.0 million. Payments on long-term debt
decreased $102.1 million. In accordance with the terms of Bowling Worldwide's
fourth Amended and Restated Credit Agreement dated as of June 14, 1999 (the
"Credit Agreement"), scheduled principal payments in the first nine months of
2000 were $1.9 million higher than payments made in the same period in 1999.
Additionally, in the first nine months of 2000, $5.0 million was paid against
amounts outstanding under the Bank Facility compared with $37.0 million for the
same period in 1999, $30.0 million of which represented proceeds from the 1999
rights offering. The Company also used approximately $72.0 million from the
rights offering to fund the purchase in the tender offer of the Debentures in
July 1999. In the first nine months of 1999, $119.7 million was provided from
net proceeds of the rights offering. See "Note 5. Long-Term Debt" in the Notes
to Condensed Consolidated Financial Statements and "--Capital Resources".
As a result of the aforementioned, cash decreased by $6.4 million for the
nine months ended September 30, 2000 compared with a decrease of $2.8 million
for the nine months ended September 30, 1999.
AMF Bowling is a holding company with limited financial resources. Based on
current projections, AMF Bowling will deplete its cash balance by the end of
2000. If this occurs, it would be necessary for AMF Bowling Worldwide to receive
an amendment to its Credit Agreement to permit advances to AMF Bowling. Any such
amendment would be subject to the approval of the lenders under the Credit
Agreement.
For a discussion of the impact of the Company's financial position or the
Company's ability to raise financing and meet its liquidity needs, see "Note 1.
Organization and Restructuring" in the Notes to the Condensed Consolidated
Financial Statements and "--Capital Resources" below.
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 affiliates of
Goldman, Sachs & Co. (the "Acquisition") and the Company's bowling center
acquisition program. At September 30, 2000, the Company's debt consisted of
$617.1 million of borrowings under the Credit Agreement and a mortgage
(collectively, the "Senior Debt"), $250.0 million of Bowling Worldwide's senior
subordinated notes (the "Senior Subordinated Notes"), $262.3 million of Bowling
Worldwide's senior subordinated discount notes ("Senior Subordinated Discount
Notes"), and $181.7 million of the Convertible Debentures. At September 30,
2000, the Company's Senior Debt consisted of $365.1 million outstanding under
term loan facilities under the Credit Agreement (the "Term Facilities"), $250.0
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.
Bowling Worldwide has the ability to borrow for general corporate purposes.
At September 30, 2000, $250.0 million was outstanding, $4.5 million was
committed for standby and documentary letters of credit and $12.5 million was
available for borrowing under the Bank Facility, subject to certain limitations
applicable to borrowings regarding acquisitions and capital expenditures.
Between September 30, 2000 and October 31, 2000, there were no borrowings and no
payments under the Bank Facility. The standby letters of credit increased by
approximately $0.7 million.
During the first nine months of 2000, the Company funded its cash needs
through cash flow from operations, cash balances and the Bank Facility. A
substantial portion of the Company's available cash will be applied to service
outstanding indebtedness. For the nine months ended September 30, 2000, Bowling
Worldwide incurred cash interest expense of $65.7 million, representing 73.9% of
EBITDA for the period. For the nine months ended September 30, 1999, Bowling
Worldwide incurred cash interest expense of $60.0 million, representing 67.5% of
EBITDA for the period.
The Company's capital position has very significantly impacted the
Company's ability to finance its operations and to make necessary capital
expenditures. The August 14, 2000 Amendment to the Credit Agreement
substantially reduced Bowling Worldwide's borrowing capacity under the Credit
Agreement. On September 15, 2000, Bowling Worldwide did not make the required
cash interest payment on the Senior Subordinated Notes, and on October 15, 2000,
the 30 day period to cure the non-payment of interest under the related
Indenture expired. Under the Indenture, the Trustee on its own or the holders of
25% or more of the outstanding principal amount of the Senior Subordinated Notes
have at any time the right, by written notice, to accelerate their indebtedness
and if they did so, lenders under the Credit Agreement and holders of the Senior
Subordinated Discount Notes and Convertible Debentures would have a similar
ability. If the indebtedness represented by the Senior Subordinated Notes were
so accelerated, such acceleration would result in a default under the Credit
Agreement, Bowling Worldwide's Senior Subordinated Discount Notes, AMF Bowling's
Convertible Debentures and certain other Company indebtedness. In such event,
the Company would not then be able to meet its accelerated payment obligations.
While the financial covenants in the Credit Agreement have been
27
<PAGE>
waived through December 31, 2000, unless extended, the waiver will expire
without the implementation of a restructuring plan. If the waiver is not
extended or a further waiver is not obtained, Bowling Worldwide will not be able
to meet the reinstated financial covenants. Bowling Worldwide is obligated to
make a scheduled principal payment of approximately $12.8 million under the
Credit Agreement by December 31, 2000, which it does not expect to be able to
make. The Company does not expect to be able to access new financing, either to
fund its operations or to pay required interest and principal payments until it
accomplishes a restructuring or refinancing. The Company has retained financial
and legal advisors to evaluate and assist it with its restructuring and
financing alternatives. See "Note 1. Organization and Restructuring" and "Note
5. Long-Term Debt" in the Notes to Condensed Consolidated Financial Statements.
The Company was notified on July 19, 2000 that it did not at that time meet
the New York Stock Exchange's continued listing requirements because the stock
had traded below $1 per share for over a 30 trading-day period. If this
situation continues for six months, the Company may be delisted from the New
York Stock Exchange.
Capital Expenditures
For the nine months ended September 30, 2000, Bowling Worldwide's capital
expenditures were $49.5 million compared to $35.0 million for the nine months
ended September 30, 1999, an increase of $14.5 million. Bowling Centers
maintenance and modernization expenditures increased $9.0 million. Bowling
Products expenditures increased $1.8 million. Company-wide information systems
expenditures decreased $1.4 million. Investments in Xtreme(TM) bowling equipment
at various AMF bowling centers increased by $5.7 million. Capital expenditures
for new centers were $0.6 million higher in 1999 due to the construction of a
Michael Jordan Golf Center.
Bowling Worldwide has historically funded its capital expenditures and
construction and acquisition of new centers with internally-generated cash, the
Bank Facility and issuances of Common Stock by AMF Bowling. See "Note 1.
Organization and Restructuring" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources."
On August 14, 2000, Bowling Worldwide and the lenders under the Credit
Agreement entered into an amendment, pursuant to which compliance with all
financial covenants were waived through December 31, 2000 and the revolving
credit facility will be reduced to $255.0 million by year-end. See "Note 1.
Organization and Restructuring" in the Notes to Condensed Consolidated Financial
Statements.
Seasonality and Market Development Cycles
The financial performance of Bowling Centers' operations is seasonal. Cash
flows typically peak in the winter when U.S. leagues are most active 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
receive 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.
While sales of NCPs are slightly seasonal, 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 usual 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
28
<PAGE>
export duties and quotas, foreign customs, tariffs and value added taxes and
unexpected changes in regulatory environments), difficulty in obtaining
distribution and support for products, the risk of nationalization, the laws and
policies of the United States affecting trade, international investment and
loans, and foreign tax law changes.
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.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the nine months ended September
30, 2000, revenue and EBITDA of international bowling centers represented 16.6%
and 27.9% of consolidated revenue and EBITDA, respectively. For the nine months
ended September 30, 1999, revenue and EBITDA of international bowling centers
represented 17.2% and 29.9% of consolidated revenue and EBITDA, respectively.
Economic difficulties in the Asia Pacific region, including the limited
availability of financing for customers seeking to build new centers, have
continued to keep demand for NCPs below peak levels achieved during 1997. In
response to these market conditions, Bowling Products entered into three-year
joint distribution agreements with Zhonglu on June 13, 1999. Under the terms of
these agreements, Zhonglu became the exclusive distributor of AMF products in
China, and Bowling Products became the exclusive distributor of Zhonglu's
bowling products and parts outside of China. In 1999 and the first nine months
of 2000, Bowling Products has purchased component parts from Zhonglu as part of
its long-term strategy to reduce manufacturing costs. However, sales of both AMF
products in China and Zhonglu products outside China have been slower to develop
than anticipated. In September, the Company and Zhonglu amended their
distribution agreements to move the sales relationship to a non-exclusive basis.
The Company continues to source some component parts from Zhonglu under the
revised agreements, but both parties are pursuing alternative sales channels.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 34.5% of total NCP unit sales for the nine months ended
September 30, 2000 compared to 43.0% for the year ended December 31, 1999.
China has strengthened enforcement of 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 also prohibits 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, in addition to
being a distributor of AMF products, Zhonglu produces locally and sells bowling
equipment that is not subject to the customs duties or permit requirements that
affect the Company's imported equipment. Zhonglu has experienced significant
acceptance by local customers. Management believes that these import
restrictions will continue for the foreseeable future and the Chinese market
will continue to contract.
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. There
was no significant impact on the Company's operations as a result of inflation
for the nine months ended September 30, 2000 and 1999, respectively.
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.
29
<PAGE>
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
Recent Accounting Pronouncements
Effective for the quarter ended March 31, 2001, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could impact its results of operations
and financial condition. The Company manages its exposure to these risks through
its normal operating and financing activities and through the use of interest
rate cap agreements with respect to interest rates. There were no other material
derivative instrument transactions during any of the periods presented.
The Company has generally accepted the exposure to exchange rate movements
relative to its investment in foreign operations without using derivative
financial instruments to manage the risk. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate may adversely impact sales volume and profit margins
during such periods. Foreign currency exchange rates can also affect the
translation of operating results from international bowling centers. For the
nine months ended September 30, 2000, revenue and EBITDA of international
bowling centers represented 16.6% and 27.9% of consolidated revenue and EBITDA,
respectively. For the nine months ended September 30, 1999, revenue and EBITDA
of international bowling centers represented 17.2% and 29.9% of consolidated
revenue and EBITDA, respectively.
The Company uses interest rate cap agreements to mitigate the effect of
changes in interest rates on the Company's variable rate borrowings under its
Credit Agreement. While the Company is exposed to credit risk in the event of
non-performance by the counterparty to interest rate swap agreements, in all
cases such counterparty is a highly-rated financial institution and the Company
does not anticipate non-performance. The Company does not hold or issue
derivative financial instruments for trading purposes or speculation. The
following table provides information about the Company's fixed and variable rate
debt, weighted average interest rates and respective maturity dates (dollar
amount in millions.)
Weighted Weighted
Average Variable Average
Fixed Interest Rate Interest
Maturity Rate Debt Rate Debt Rate
------------- ------------------------ ----------- ---------------
2000 $ - - $ 12.8 10.65 %
2001 - - 83.0 10.89
2002 - - 356.0 10.77
2003 - - 116.4 11.41
2004 - - 46.9 11.57
Thereafter 1,139.7 9.13% - N/A
------------ -----------
Total $1,139.7 $ 615.1
============ ===========
During December 1999, March 2000 and September 2000, Bowling Worldwide
entered into three interest rate cap agreements with Goldman Sachs Credit
Partners, L.P. (the "Counterparty") to reduce the interest rate risk of its Bank
Debt. The table below summarizes the interest rate cap agreements at September
30, 2000:
30
<PAGE>
Notional
Amount
Expiration Date (in millions) Cap Rate (a)
--------------------------- ----------------- --------------------
December 31, 2000 $ 100.0 7.6525 %
April 1, 2001 200.0 7.7800
October 2, 2001 15.0 7.5000
------------------------------
(a) The cap rate is the 3-month U.S. Dollar-London Interbank Offer Rate
("USD-LIBOR") quoted by the Counterparty.
Bowling Worldwide paid a fixed fee of $75,000, $160,000 and $7,000,
respectively, for the three interest rate caps. Bowling Worldwide will receive
quarterly payments from the Counterparty if the quoted 3-month USD-LIBOR on the
quarterly floating rate reset dates is above the respective cap rates.
31
<PAGE>
PART II
Item 1. Legal Proceedings
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 against AMF Bowling, 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. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased
Common Stock in the Company's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, 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.
In June 1998, Harbin Hai Heng Bowling Entertainment Co. Ltd. ("Hai Heng")
filed an action against AMF Bowling Products, Inc. ("AMF"), an indirect
subsidiary of AMF Bowling, in the Harbin Intermediate People's Court in
Heilongjing, China. Hai Heng sought to recover $3 to $4 million in damages
relating to 38 NCPs purchased from AMF. Hai Heng asserted that the poor quality
of the 38 NCPs entitled Hai Heng to recover the purchase price and damages for
lost profits and the cost of storing the NCPs.
On November 6, 1998, the court awarded Hai Heng approximately $3.5 million.
AMF appealed the award to the High People's Court of Heilongjing Province (the
"People's Court"). Prior to completion of the appeal review, the President of
the People's Court on February 11, 1999 issued a judgment in favor of Hai Heng
for approximately $2.8 million and ordered Hai Heng to return 24 NCPs to AMF.
AMF filed an appeal to the Supreme People's Court in Beijing (the "Supreme
Court"). The Supreme Court orally issued a stay of the execution of the
judgment. AMF has been advised that the Supreme Court has declined to review the
case and the judgment is now final.
On September 21, 2000, the United States Securities and Exchange Commission
("SEC") issued a subpoena to the Company seeking documents concerning the
Company's financial statements and accounting practices and policies. The
Company is in the process of producing documents to the SEC in response to the
subpoena. The Company does not believe at this time that this inquiry by the SEC
will have a material adverse effect on the Company or its financial statements.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1 to Fourth Amended and Restated Credit
Agreement dated as of August 14, 2000.
27.1 Financial Data Schedule for the nine months ended September
30, 2000.
(b) Reports on Form 8-K:
A current report was filed September 15, 2000 in which Bowling
Worldwide indicated that it did not make the September 15, 2000
interest payment of approximately $13.6 million due on its senior
subordinated notes.
32
<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 November 14, 2000
---------------------------------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Michael P. Bardaro November 14, 2000
---------------------------------------------
Michael P. Bardaro
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
33
