<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 March 31, 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 May 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>
March 31, December 31,
2000 1999
----------- -------------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 32,604 $ 35,743
Accounts and notes receivable, net of allowance for
doubtful accounts of $9,867 and $9,531, respectively 54,673 63,175
Inventories 60,290 53,499
Other current assets 16,037 14,876
----------- ----------
Total current assets 163,604 167,293
Property and equipment, net 788,196 806,425
Other assets 85,614 88,092
Goodwill, net 760,430 765,092
----------- ----------
Total assets $ 1,797,844 $1,826,902
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 28,685 $ 35,296
Accrued expenses 74,433 71,784
Income taxes payable 2,498 3,450
Current portion of long-term debt 34,250 34,250
----------- ----------
Total current liabilities 139,866 144,780
Long-term debt, less current portion 1,179,291 1,186,982
Other long-term liabilities 5,210 5,204
----------- ----------
Total liabilities 1,324,367 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 March 31, 2000 and December 31, 1999, respectively) 836 836
Paid-in capital 905,490 905,610
Retained deficit (411,832) (401,186)
Accumulated other comprehensive loss (21,017) (15,324)
----------- ----------
Total stockholders' equity 473,477 489,936
----------- ----------
Total liabilities and stockholders' equity $ 1,797,844 $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)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
Operating revenue $209,462 $202,567
--------- ----------
Operating expenses:
Cost of goods sold 43,386 39,582
Bowling center operating expenses 96,939 93,221
Selling, general, and administrative expenses 13,832 14,753
Depreciation and amortization 33,418 33,366
--------- ----------
Total operating expenses 187,575 180,922
--------- ----------
Operating income 21,887 21,645
--------- ----------
Nonoperating expenses (income):
Interest expense 32,035 30,973
Other, net (251) 2,974
Interest income (418) (695)
--------- ----------
Total nonoperating expenses 31,366 33,252
--------- ----------
Loss before income taxes (9,479) (11,607)
Provision for income taxes 1,060 1,569
--------- ----------
Net loss before equity in loss of joint ventures (10,539) (13,176)
Equity in loss of joint ventures (107) (5,523)
--------- ---------
Net loss $(10,646) $(18,699)
========= ==========
Net loss per share - basic and diluted $ (0.13) $ (0.31)
========= ==========
Weighted average shares outstanding 83,598 59,603
========= ==========
</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>
Three Months
Ended March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,646) $(18,699)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 33,418 33,366
Equity in loss of joint ventures 107 5,523
Amortization of bond discount 10,153 11,436
Loss on the sale of property and equipment, net (1,711) 509
Changes in assets and liabilities:
Accounts and notes receivable, net 7,066 (6,132)
Inventories (7,583) (2,507)
Other assets 951 (5,411)
Accounts payable and accrued expenses (3,329) 3,088
Income taxes payable (821) 641
Other long-term liabilities (1,236) (933)
--------- --------
Net cash provided by operating activities 26,369 20,881
--------- --------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired - (1,208)
Investments in and advances to joint ventures - (160)
Purchases of property and equipment (12,688) (4,669)
Proceeds from the sale of property and equipment 2,657 114
--------- --------
Net cash used in investing activities (10,031) (5,923)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs - 20,000
Payments on long-term debt (17,844) (10,969)
Repurchase of common shares - (180)
Rights offering cost (120) -
Payments of noncompete obligations (88) (180)
--------- --------
Net cash (used in) provided by financing activities (18,052) 8,671
--------- --------
Effect of exchange rates on cash (1,425) 153
--------- --------
Net (decrease) increase in cash (3,139) 23,782
Cash and cash equivalents at beginning of period 35,743 33,002
--------- --------
Cash and cash equivalents at end of period $ 32,604 $ 56,784
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the interim periods 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 three months ended March 31, 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 414 U.S. bowling centers and 121
international bowling centers ("Bowling Centers"), including 15 joint venture
centers, as of March 31, 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 March 31, 2000, AMF Bowling Centers, Inc.,
a direct subsidiary of Bowling Worldwide, purchased an aggregate of 263 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 $498.9 million. The Company has funded its acquisitions and
center construction from internally generated cash, borrowings under the senior
secured revolving credit facility (the "Bank Facility") under the Credit
Agreement (as defined in "Note 5. Long-Term Debt"), and issuances of AMF Bowling
common stock (the "Common Stock"). From January 1, 2000 through March 31, 2000,
AMF Bowling Centers, Inc. has not acquired any bowling centers.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control,
including the conditions of the debt and equity markets. Based upon the current
level of 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 the Company's requirements for working
capital, capital expenditures, scheduled payments of principal of, and interest
on, its senior debt, and interest on the subsidiary senior subordinated notes
for 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 subsidiary senior subordinated discount notes.
In the first quarter of calendar year 2002, the financial covenants under the
Credit Agreement will be reset to their original, more stringent, levels. Based
on current levels of performance, the Company anticipates that a refinancing of
its indebtedness will be required to meet the Company's financial requirements
for calendar years 2001 and beyond. There can be no assurance, however, that the
Company's business will generate sufficient cash flow from operations or that
future borrowings will be available in an amount sufficient to enable the
Company to meet its payment obligations under its indebtedness, or make
necessary capital expenditures, or that any refinancing of its indebtedness
would be available on commercially reasonable terms or at all.
5
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated results of operations of the Company have been
presented for the three months ended March 31, 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 $6,020 for the three months ended March 31, 2000, and $5,141 for
the three months ended March 31, 1999.
Income Taxes
As of December 31, 1999, 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 three months ended
March 31, 2000 primarily reflects certain international taxes.
Comprehensive Loss
Comprehensive loss was $16,339 and $19,616 for the three months ended March
31, 2000 and March 31, 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.
6
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3. Inventories
Inventories at March 31, 2000 and December 31, 1999, consisted of the
following:
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
Bowling Products, at FIFO:
Raw materials $ 13,929 $ 14,285
Work in progress 1,988 1,562
Finished goods and spare parts 35,768 28,789
Bowling Centers, at average cost:
Merchandise and spare parts 8,605 8,863
----------- -----------
$ 60,290 $ 53,499
=========== ===========
Note 4. Property and Equipment
Property and equipment at March 31, 2000 and December 31, 1999, consisted
of the following:
March 31, December 31,
2000 1999
--------- ------------
(unaudited)
Land $ 133,509 $ 133,953
Buildings and improvements 357,464 357,365
Equipment, furniture and fixtures 597,599 588,342
Other 3,627 5,537
---------- -----------
1,092,199 1,085,197
Less: accumulated depreciation and
amortization (304,003) (278,772)
---------- -----------
$ 788,196 $ 806,425
========== ===========
Depreciation and amortization expense related to property and equipment was
$24,770 and $23,907 for the three months ended March 31, 2000 and March 31,
1999, respectively.
7
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Long-Term Debt
Long-term debt at March 31, 2000, and December 31, 1999, consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Bank debt $ 538,655 $ 556,499
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 247,272 240,111
Zero coupon convertible debentures 175,622 172,630
Mortgage and equipment note 1,992 1,992
------------ ------------
Total debt 1,213,541 1,221,232
Current maturities (34,250) (34,250)
------------ ------------
Total long-term debt $ 1,179,291 $ 1,186,982
============ ============
</TABLE>
The Company'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
$373.7 million (the "Term Facilities") and (ii) the Bank Facility of up to
$355.0 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 March 31, 2000, the Company had $190.0
million available for borrowing under the Bank Facility and $165.0 million
outstanding.
In 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, waived mandatory prepayment provisions previously
existing under the Credit Agreement with respect to the Company's
recapitalization plan in 1999, permit the Company 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, permit AMF Bowling to make equity contributions to Bowling Worldwide which
may 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 and modified or waived certain
financial covenants.
Bowling Worldwide was in compliance with the amended covenants under the
Credit Agreement as of March 31, 2000. In this connection, AMF Bowling made
contributions of $1.0 million, $2.0 million and $3.0 million as equity to
Bowling Worldwide in November 1999, March 2000 and May 2000, respectively, to
meet EBITDA requirements under its financial covenant tests as of September 30,
1999, December 31, 1999, and March 31, 2000, respectively. The Credit Agreement
permits AMF Bowling to make additional equity contributions through 2001 as
specified above. Management believes that Bowling Worldwide will be in
compliance with the amended covenants during the remainder of 2000, including
the effect of the aforementioned equity contributions, but any downturn in the
expected performance of Bowling Worldwide could result in non-compliance with
these financial covenants. Failure by Bowling Worldwide to comply with its
Credit Agreement covenants could result in an event of default which, if not
cured or waived, would have a material adverse effect on the Company.
8
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
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 March 31, 2000 and
1999, respectively, is presented below (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31, 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 $ 142.5 $31.6 $174.1 $ 15.5 $ 19.9 $ 35.4 $ - $ - $ 209.5
Intersegment sales - - - 2.7 0.3 3.0 - (3.0) -
Operating income (loss) 27.3 3.3 30.6 (3.1) (0.4) (3.5) (5.6) 0.4 21.9
Identifiable assets 794.6 308.3 1,102.9 593.8 69.7 663.5 27.6 3.8 1,797.8
Depreciation and amortization 21.7 5.7 27.4 5.7 0.3 6.0 0.4 (0.4) 33.4
Capital expenditures 7.3 2.7 10.0 2.4 - 2.4 0.3 - 12.7
Research and development expense - - - 0.1 - 0.1 - - 0.1
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 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 $ 140.9 $31.7 $172.6 $ 13.4 $ 16.6 $ 30.0 $ - $ - $ 202.6
Intersegment sales - - - 1.1 0.9 2.0 - (2.0) -
Operating income (loss) 29.7 3.7 33.4 (3.2) (3.3) (6.5) (5.7) 0.4 21.6
Identifiable assets 870.5 338.9 1,209.4 636.8 81.6 718.4 52.2 2.5 1,982.5
Depreciation and amortization 21.6 5.5 27.1 5.5 0.4 5.9 0.8 (0.4) 33.4
Capital expenditures 2.0 1.1 3.1 1.4 0.2 1.6 - - 4.7
Research and development expense - - - 0.1 - 0.1 - - 0.1
</TABLE>
9
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 March 31, 2000, and condensed
consolidating statements of income and cash flows for the Guarantor Companies,
the Non-Guarantor Companies and the Company for the three months ended March 31,
2000 and (ii) elimination entries necessary to combine the entities comprising
the Company.
10
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 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 $ 19,355 $ 13,249 $ - $ 32,604
Accounts and notes receivable, net
of allowance for doubtful accounts 54,362 311 - 54,673
Accounts receivable - intercompany 6,693 9,364 (16,057) -
Inventories 59,250 1,040 - 60,290
Other current assets 9,744 6,293 - 16,037
------------- ----------- ------------ -------------
Total current assets 149,404 30,257 (16,057) 163,604
Notes receivable - intercompany 48,618 5,663 (54,281) -
Property and equipment, net 731,542 55,352 1,302 788,196
Investment in subsidiaries 19,010 615,820 (634,830) -
Goodwill and other assets 819,376 26,668 - 846,044
------------- ----------- ------------ -------------
Total assets $1,767,950 $733,760 $ (703,866) $ 1,797,844
============= =========== ============ =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 27,213 $ 1,472 $ - $ 28,685
Accounts payable - intercompany 9,364 6,693 (16,057) -
Accrued expenses 65,270 9,163 - 74,433
Income taxes payable (2,530) 5,028 - 2,498
Current portion of long-term debt 34,250 - - 34,250
------------- ----------- ------------ -------------
Total current liabilities 133,567 22,356 (16,057) 139,866
Long-term debt, less current portion 986,666 192,625 - 1,179,291
Notes payable - intercompany 5,663 48,618 (54,281) -
Other long-term liabilities 3,886 1,324 - 5,210
------------- ----------- ------------ -------------
Total liabilities 1,129,782 264,923 (70,338) 1,324,367
------------- ----------- ------------ -------------
Commitments and contingencies
Stockholders' equity:
Common stock - 836 - 836
Paid-in capital 1,047,662 897,907 (1,040,079) 905,490
Retained deficit (388,479) (413,624) 390,271 (411,832)
Accumulated other comprehensive income (21,015) (16,282) 16,280 (21,017)
------------- ----------- ------------ -------------
Total stockholders' equity 638,168 468,837 (633,528) 473,477
------------- ----------- ------------ -------------
Total liabilities and stockholders' equity $1,767,950 $733,760 $ (703,866) $ 1,797,844
============= =========== ============ =============
</TABLE>
11
<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 Three Months Ended March 31, 2000
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenue $ 193,244 $ 16,389 $ (171) $ 209,462
--------------- ----------- ------------- -------------
Operating expenses:
Cost of goods sold 41,733 1,768 (115) 43,386
Bowling center operating expenses 86,798 10,197 (56) 96,939
Selling, general, and administrative expenses 12,711 1,121 - 13,832
Depreciation and amortization 30,944 2,506 (32) 33,418
--------------- ----------- ------------- -------------
Total operating expenses 172,186 15,592 (203) 187,575
--------------- ----------- ------------- -------------
Operating income 21,058 797 32 21,887
--------------- ----------- ------------- -------------
Nonoperating expenses (income):
Interest expense 28,592 3,443 - 32,035
Other expenses, net 446 (697) - (251)
Interest income (411) (7) - (418)
Equity in loss (income) of subsidiaries (2,724) 8,383 (5,659) -
--------------- ----------- ------------- -------------
Total nonoperating expenses 25,903 11,122 (5,659) 31,366
--------------- ----------- ------------- -------------
Loss before income taxes (4,845) (10,325) 5,691 (9,479)
Provision for income taxes 707 353 - 1,060
--------------- ----------- ------------- -------------
Net loss before equity in loss of
joint ventures (5,552) (10,678) 5,691 (10,539)
Equity in loss of joint ventures (107) - - (107)
--------------- ----------- ------------- -------------
Net loss $ (5,659) $(10,678) $ 5,691 $ (10,646)
=============== =========== ============= =============
</TABLE>
12
<PAGE>
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 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 $ (5,659) $ (10,678) $ 5,691 $ (10,646)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 30,944 2,506 (32) 33,418
Equity in loss of joint ventures 107 - - 107
Amortization of bond discount 7,160 2,993 - 10,153
Equity in earnings of subsidiaries (2,724) 8,383 (5,659) -
Loss on the sale of property and equipment, net (1,711) - - (1,711)
Changes in assets and liabilities:
Accounts and notes receivable 6,994 72 - 7,066
Receivables and payables - affiliates 6,172 (6,172) - -
Inventories (7,633) 50 - (7,583)
Other assets 2,125 (1,174) - 951
Accounts payable and accrued expenses (5,572) 2,243 - (3,329)
Income taxes payable (735) (86) - (821)
Other long-term liabilities (1,236) - - (1,236)
---------- ---------- ---------- -----------
Net cash provided by (used in) operating activities 28,232 (1,863) - 26,369
---------- ---------- ---------- -----------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired - - - -
Investment in subsidiary - - - -
Investments in and advances to joint ventures - - - -
Purchases of property and equipment (11,069) (1,619) - (12,688)
Proceeds from sale of property and equipment 2,657 - - 2,657
---------- ---------- ---------- -----------
Net cash used in investing activities (8,412) (1,619) - (10,031)
---------- ---------- ---------- -----------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs - - - -
Payments on long-term debt (17,844) - - (17,844)
Rights offering cost - (120) - (120)
Payments of noncompete obligations (88) - - (88)
---------- ---------- ---------- -----------
Net cash used in financing activities (17,932) (120) - (18,052)
---------- ---------- ---------- -----------
Effect of exchange rates on cash (1,165) (260) - (1,425)
---------- ---------- ---------- -----------
Net increase (decrease) in cash 723 (3,862) - (3,139)
Cash and cash equivalents at beginning of period 18,632 17,111 - 35,743
---------- ---------- ---------- -----------
Cash and cash equivalents at end of period $ 19,355 $ 13,249 $ - $ 32,604
========== ========== ========== ===========
</TABLE>
13
<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) the results of the Company's
plans to improve its bowling centers operations, including revenue enhancement
and cost management programs, (ii) the ability of the Company's management to
execute its strategies, (iii) the ability to resume the Company's bowling center
acquisition program, (iv) the results of changes initiated in the Company's
bowling products business, (v) the Company's expectations concerning the Asia
Pacific region and the joint distribution and related arrangements with Shanghai
Zhonglu Industrial Corporation ("Zhonglu"), (vi) the results of the Company's
employee incentive efforts, (vii) the outcome of existing or potential
litigation, (viii) the timing or amount of any changes in the interest expense
and/or principal repayment obligations of the Company's indebtedness, (ix) the
Company's ability to generate cash flow to service its indebtedness and meet its
debt payment obligations, (x) the amounts of capital expenditures needed to
maintain or improve the Company's bowling centers, (xi) any statements preceded
by, followed by or including the words "believes," "expects," "predicts,"
"anticipates," "intends," estimates," "should," "may" or similar expressions and
(xii) 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, 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) the Company's ability, and the ability of its
management team, to carry out the Company's long-term business strategies,
including resuming the pace of the Company's acquisition program, (ii) the
Company's ability to refinance existing indebtedness as it comes due at
commercially reasonable terms or at all, (iii) the Company's ability to
integrate acquired operations into its business, (iv) the Company's ability to
identify and develop new bowling markets to assist in the growth of such
markets, (v) the continuation of adverse financial results and substantial
competition in the Company's bowling products business, (vi) the Company's
ability to retain and attract experienced bowling center management, (vii) the
Company's ability to successfully implement initiatives designed to improve
customer traffic in its bowling centers, (viii) the continuation or worsening of
economic difficulties in overseas markets, including the Asia Pacific region,
(ix) the risk of adverse political acts or developments in the Company's
existing and proposed international markets, (x) fluctuations in foreign
currency exchange rates affecting the Company's translation of operating
results, (xi) continued or increased competition, (xii) the popularity of
bowling, (xiii) the decline in general economic conditions, (xiv) adverse
judgments in pending or future litigation, (xv) the Company's ability to
effectively implement the joint distribution and related arrangements with
Zhonglu and (xvi) 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.
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.
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.
14
<PAGE>
General
The Company principally operates in two business segments in the United States
and international markets: (i) the ownership and operation of 414 U.S. bowling
centers and 121 international bowling centers ("Bowling Centers"), including 15
joint venture centers operated with third parties, as of March 31, 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
three months of 2000 versus 1999 reflect the closing of 10 centers since March
31, 1999.
Acquisitions and Dispositions
From January 1, 2000 through March 31, 2000, AMF Bowling Centers, Inc., a
direct subsidiary of Bowling Worldwide, acquired no bowling centers, closed
three centers in the United States and sold one center in the United Kingdom.
15
<PAGE>
AMF BOWLING, INC.
Selected Financial Data
(unaudited)
(In millions of dollars)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
2000 1999
---- ----
<S> <C> <C>
Bowling Centers (before intersegment eliminations)
- ---------------
Operating revenue $ 174.1 $ 172.6
--------- ---------
Cost of goods sold 17.3 16.9
Bowling center operating expenses 97.0 93.5
Selling, general, and administrative expenses 1.8 1.7
Depreciation and amortization 27.4 27.1
--------- ---------
Operating income $ 30.6 $ 33.4
========= =========
Bowling Products (before intersegment eliminations)
- ----------------
Operating revenue $ 38.4 $ 32.0
Cost of goods sold 29.0 24.4
--------- ---------
Gross profit 9.4 7.6
Selling, general, and administrative expenses 6.9 8.2
Depreciation and amortization 6.0 5.9
========= =========
Operating loss $ (3.5) $ (6.5)
Consolidated
- ------------
Operating revenue $ 209.5 $ 202.6
--------- ---------
Cost of goods sold 43.4 39.6
Bowling center operating expenses 96.9 93.2
Selling, general, and administrative expenses 13.9 14.8
Depreciation and amortization 33.4 33.4
--------- ---------
Operating income 21.9 21.6
Interest expense, gross 32.0 31.0
Other (income) expense, net (0.7) 2.3
--------- ---------
Loss before income taxes (9.4) (11.7)
Provision for income taxes 1.1 1.5
--------- ---------
Net loss before equity in loss of joint ventures (10.5) (13.2)
Equity in loss of joint ventures (0.1) (5.5)
--------- ---------
Net loss $ (10.6) $ (18.7)
========= =========
Selected Data:
- --------------
EBITDA
Bowling Centers $ 58.0 $ 60.5
Bowling Products $ 2.5 $ (0.6)
EBITDA margin
Bowling Centers 33.3% 35.1%
Bowling Products 6.5% -1.9%
- -----------------
</TABLE>
16
<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
520 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 three months
ended March 31, 2000, bowling, food and beverage and other revenue represented
59.2%, 27.4% and 13.4% of total Bowling Centers revenue, respectively. For the
three months ended March 31, 1999, bowling, food and beverage and other revenue
represented 59.7%, 27.1% and 13.2% of total Bowling Centers revenue,
respectively.
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Bowling Centers operating revenue increased $1.5 million, or 0.9%. An
increase of $2.4 million, or 1.7%, was attributable to U.S. constant centers,
primarily as a result of increases in open play revenue, and food and beverage
and ancillary revenue associated with open play traffic. International constant
centers operating revenue increased $0.5 million, or 1.6%, primarily as a result
of an increase in food and beverage revenue of 3.1%. A decrease of $1.4 million
in total operating revenue was attributable to 9 centers that were closed and
one center that was sold since March 31, 1999.
Cost of goods sold increased $0.4 million, or 2.4%. Constant centers cost of
goods sold increased $0.5 million, or 3.0%, primarily as a result of increased
food and beverage sales in both the U.S. and international centers. A decrease
of $0.1 million was attributable to closed centers.
Operating expenses increased $3.5 million, or 3.7%. An increase of $3.6
million was attributable to constant centers, an increase of $1.1 million was
attributable to higher regional, district and support staff operations expenses
and a decrease of $1.2 million was attributable to closed centers. As a
percentage of its revenue, Bowling Centers operating expenses were 55.7% for the
first quarter of 2000 compared with 54.2% for the first quarter of 1999. The
increase of 1.5% is due primarily to higher expenses resulting from new field
level positions and national advertising programs.
Selling, general and administrative expenses increased $0.1 million, or 5.9%,
due to an increase in international administrative expenses.
EBITDA decreased $2.5 million, or 4.1%. EBITDA margin for the first
quarter of 2000 was 33.3% compared with 35.1% for the first quarter of 1999. The
lower EBITDA margin in 2000 was attributable to the higher operating expenses as
discussed above and the change in the revenue mix, including higher food and
beverage sales.
Bowling Products
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Bowling Products operating revenue increased $6.4 million, or 20.0%. 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)
increased $2.7 million, or 30.0%, primarily as a result of improved sales to
Europe and Japan. Modernization and Consumer Products (which include
modernization equipment, supplies, spare parts and consumable products) revenue
increased $3.7 million, or 16.1%, primarily as a result of improved sales to
North America, Japan and Europe. During the first quarter of 2000, Bowling
Products recorded NCP shipments of 360 units compared with shipments of 269
units for the first quarter of 1999.
Gross profit increased $1.8 million, or 23.7%, primarily as a result of
increased sales in the first quarter of 2000 compared with the first quarter of
1999.
Selling, general and administrative expenses decreased $1.3 million, or 15.9%,
primarily as a result of an ongoing cost reduction program for the Bowling
Products organization.
17
<PAGE>
EBITDA was $2.5 million in the first quarter of 2000 compared with a loss of
$0.6 million in the first quarter of 1999. The EBITDA margin was 6.5% in the
first quarter of 2000 compared with (1.9)% in the first quarter of 1999
primarily as a result of the increase in sales, gross profit and selling,
general and administrative savings achieved through cost reductions.
Consolidated
Depreciation and Amortization
Depreciation and amortization was flat in the first quarter of 2000 compared
with the same period in 1999.
Interest Expense
Gross interest expense increased $1.0 million, or 3.2%, in the first quarter
of 2000 compared with the same period in 1999. Interest incurred on bank debt
increased as the impact of higher average borrowing rates offset the effect of a
decrease in average amounts outstanding. See "--Liquidity" and "--Capital
Resources" for further discussion of the bank debt. Non-cash bond interest
amortization totaled $10.1 million for the quarter ended March 31, 2000 compared
with $11.4 million for the quarter ended March 31, 1999.
Income Taxes
As of December 31, 1999, 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 three months ended
March 31, 2000 reflects certain international taxes.
Net Loss
Net loss in the first quarter of 2000 totaled $10.6 million compared with a
net loss of $18.7 million in the first quarter of 1999, a decrease of $8.1
million. The Company recorded $0.1 million in equity in loss of joint ventures
in the first quarter of 2000 compared with equity in loss of joint ventures of
$5.5 million in the first quarter of 1999. Additionally, the Company recorded
other income of $0.7 million in the first quarter of 2000 compared with other
expense of $2.3 million in the first quarter of 1999. Consolidated EBITDA
increased $0.3 million and the provision for income taxes decreased $0.4
million. These reductions in certain non-operating expenses were offset by an
increase of $1.0 million in interest expense.
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
March 31, 2000 was $23.7 million compared with $22.5 million on December 31,
1999, an increase of $1.2 million. The increase in working capital was primarily
attributable to a decrease of $4.0 million in accounts payable and accrued
expenses, an increase of $6.8 million in inventory, an increase of $1.1 million
in deferred taxes and other current assets and a decrease of $0.9 in income
taxes payable. These factors contributing to the increase in working capital
were offset by a decrease of $3.1 million in cash and a decrease of $8.5 million
in accounts receivable due to timing of customer payments.
Net cash provided by operating activities was $26.4 million for the three
months ended March 31, 2000 compared with net cash provided of $20.9 million for
the three months ended March 31, 1999, an increase of $5.5 million. An increase
of $8.1 million was attributable to a net loss of $10.6 million recorded in the
first three months of 2000 compared with a net loss of $18.7 million in the same
period in 1999. An increase of $13.2 million was attributable to decreased
levels of accounts receivable and an increase of $6.3 million was attributable
to lower
18
<PAGE>
levels of other assets. These factors contributing to the increase in net cash
were offset by a decrease of $5.4 million due to the lower equity in loss
of joint ventures recorded by the Company in the first quarter of 2000 compared
with the same period in 1999, a decrease of $6.4 million attributable to lower
levels of accounts payable and accrued expenses, a decrease of $5.1 million
attributable to higher inventory balances and a net decrease of $5.2 million
attributable to changes in other operating activities.
Net cash used in investing activities was $10.0 million for the three months
ended March 31, 2000 compared with net cash used of $5.9 million for the three
months ended March 31, 1999, an increase of $4.1 million. An increase of $8.0
million was attributable to an increase in purchases of property and equipment
in 2000. This factor contributing to the increase in net cash flows was offset
by a decrease in Bowling Center acquisition spending of $1.2 million in the
first three months of 2000 compared with the same period in 1999. In the first
three months of 2000, no centers were purchased compared with one center in the
same period in 1999. Additionally, proceeds from the sale of property and
equipment increased $2.6 million and investments in and advances to joint
ventures decreased $0.2 million. See "--Capital Expenditures" for additional
discussion of purchases of property and equipment.
Net cash used in financing activities was $18.0 million for the three months
ended March 31, 2000 compared with net cash provided of $8.6 million for the
three months ended March 31, 1999, a difference of $26.6 million. Proceeds from
long term debt decreased $20.0 million. Payments on long-term debt increased
$6.8 million. In accordance with the terms of the Credit Agreement, scheduled
principal payments in the first three months of 2000 were $1.8 million higher
than payments made in the same period in 1999. Additionally, in the first three
months of 2000, $5.0 million was paid against amounts outstanding under the
Bank Facility. Cash used in financing activities was offset by a net increase
of $0.2 million provided by other financing activities. 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 $3.1 million for the
three months ended March 31, 2000 compared with an increase of $23.8 million for
the three months ended March 31, 1999.
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 March 31, 2000, the Company's debt consisted of $540.7
million of borrowings under the Credit Agreement and a mortgage (collectively,
the "Senior Debt"), $250.0 million of Bowling Worldwide's senior subordinated
notes ("Subsidiary Senior Subordinated Notes"), $247.3 million of Bowling
Worldwide's senior subordinated discount notes ("Subsidiary Senior Subordinated
Discount Notes"), and $175.6 million of AMF Bowling's zero coupon convertible
debentures due 2018. At March 31, 2000, the Company's Senior Debt consisted of
$373.7 million outstanding under term loan facilities under the Credit Agreement
(the "Term Facilities"), $165.0 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.
The Company has the ability to borrow for general corporate purposes and, to a
limited extent, for acquisitions pursuant to the $355.0 million Bank Facility,
subject to certain conditions. At March 31, 2000, $165.0 million was
outstanding and $190.0 million was available for borrowing under the Bank
Facility subject to certain limitations applicable to borrowings regarding
acquisitions and capital expenditures. Between March 31, 2000 and April 30,
2000, there were no borrowings and no payments under the Bank Facility.
The lenders under the Credit Agreement amended the terms of the Credit
Agreement, as of June 14, 1999, to provide the Company with (i) the ability to
increase the pace of its bowling center acquisition program, (ii) greater
financial flexibility under the covenants contained in the Credit Agreement and
(iii) certain other modifications. See "Note 5. Long-Term Debt" in the Notes to
Condensed Consolidated Financial Statements. Bowling Worldwide was in compliance
with the amended covenants as of March 31, 2000. In this connection, AMF Bowling
made contributions of $1.0 million, $2.0 million and $3.0 million as equity to
Bowling Worldwide in November 1999, March 2000 and May 2000, respectively, to
meet EBITDA requirements under the Credit Agreement's financial covenant tests
as of September 30, 1999, December 31, 1999 and March 31, 2000, respectively.
The Credit Agreement would permit AMF Bowling to make an additional equity
contribution of up to $4.0 million dollars for
19
<PAGE>
the second quarter of 2000 and up to an aggregate of $10.0 million for any four
consecutive quarters through the end of 2001. Management believes that Bowling
Worldwide will be in compliance with the amended covenants during the remainder
of 2000, including the effect of the aforementioned equity contribution but
any downturn in the expected performance of Bowling Worldwide could result in
non-compliance with these financial covenants. Failure by Bowling Worldwide to
comply with its Credit Agreement covenants could result in an event of default
which, if not cured or waived, would have a material adverse effect on the
Company.
During the first three months of 2000, the Company funded its cash needs
through cash flow from operations and cash balances. A substantial portion of
the Company's available cash will be applied to service outstanding
indebtedness. For the three months ended March 31, 2000, the Company incurred
cash interest expense of $21.5 million, representing 38.8% of EBITDA for the
period. For the three months ended March 31, 1999, the Company incurred cash
interest expense of $19.5 million, representing 35.5% of EBITDA for the period.
The indentures governing the Subsidiary Senior Subordinated Notes and the
Subsidiary Senior Subordinated Discount Notes (together with the Subsidiary
Senior Subordinated Notes, the "Subsidiary Notes") and certain provisions of the
Credit Agreement contain financial and operating covenants and significant
restrictions on the ability of the Company to pay dividends, incur indebtedness,
make investments and take certain other corporate actions. As of March 31,
2000, Bowling Worldwide was in compliance with all of its covenants under these
indentures and the Credit Agreement. See "Note 5. Long-Term Debt" in the Notes
to Condensed Consolidated Financial Statements.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control,
including the conditions of the debt and equity markets. Based upon the current
level of 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 the Company's requirements for working
capital, capital expenditures, scheduled payments of principal of, and interest
on, its Senior Debt, and interest on the Subsidiary Senior Subordinated Notes
for 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 Subsidiary Senior Subordinated Discount Notes.
In the first quarter of calendar year 2002, the financial covenants under the
Credit Agreement will be reset to their original, more stringent, levels. Based
on current levels of performance, the Company anticipates that a refinancing of
its indebtedness will be required to meet the Company's financial requirements
for calendar years 2001 and beyond. There can be no assurance, however, that the
Company's business will generate sufficient cash flow from operations or that
future borrowings will be available in an amount sufficient to enable the
Company to meet its payment obligations under its indebtedness, or make
necessary capital expenditures, or that any refinancing of its indebtedness
would be available on commercially reasonable terms or at all.
Capital Expenditures
For the three months ended March 31, 2000, the Company's capital expenditures
were $12.7 million compared to $4.7 million for the three months ended March 31,
1999, an increase of $8.0 million. Bowling Centers maintenance and modernization
expenditures increased $1.8 million. Bowling Products expenditures decreased
$0.2 million. Company-wide information systems expenditures increased $2.3
million. Investments in Xtreme bowling equipment at various AMF bowling centers
increased by $4.2 million. Capital expenditures for new centers were $0.1
million higher in 1999 due to the construction of a Michael Jordan Golf Center.
While the Company's intention is to continue consolidating the U.S. bowling
center industry by acquiring additional bowling centers, the Company will
evaluate acquisitions on a more selective basis and will consider acquisition
targets which meet specific operating and valuation parameters. At the same
time, management will continue its focus on improving financial performance of
its current centers. As of April 30, 2000, the Company had commitments to
acquire five bowling centers for a total purchase price of $5.0 million.
The Company has funded its capital expenditures and construction and
acquisition of new centers with internally-generated cash, the Bank Facility and
issuances of Common Stock. The Company expects to continue funding its capital
expenditures and
20
<PAGE>
construction and acquisition of new centers with internally-generated
cash and the Bank Facility. See "Note 1. Organization" in the Notes to Condensed
Consolidated Financial Statements, "--Liquidity" and "--Capital Resources."
The lenders under the Credit Agreement amended the terms of the Credit
Agreement, as of June 14, 1999, to provide the Company with (i) the ability to
increase the pace of its bowling center acquisition program, (ii) greater
financial flexibility under the covenants contained in the Credit Agreement and
(iii) certain other modifications. See "Note 5. Long-Term Debt" in the Notes to
Condensed Consolidated Financial Statements.
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 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 three months ended March
31, 2000, revenue and EBITDA of international bowling centers represented 15.0%
and 16.3% of consolidated revenue and EBITDA, respectively. For the three
months ended March 31, 1999, revenue and EBITDA of international bowling centers
represented 15.6% and 16.7% 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 is the exclusive distributor of AMF products
in China, and Bowling Products is the exclusive distributor of Zhonglu's bowling
products and parts
21
<PAGE>
outside of China. In 1999 and the first quarter 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.
Discussions are underway to amend the distribution agreements to better reflect
current global market conditions for bowling equipment sales.
NCP unit sales to China, Japan and other countries in the Asia Pacific region
represented 32.2% of total NCP unit sales for the three months ended March 31,
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 the exclusive 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.
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 three months ended March 31, 2000 and 1999, respectively, or for the
year ended December 31, 1999.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions or
future events, such as changes in existing laws and regulations, may give rise
to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
Recent Accounting Pronouncements
Effective for the 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.
22
<PAGE>
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
three months ended March 31, 2000, revenue and EBITDA of international bowling
centers represented 15.0% and 16.3% of consolidated revenue and EBITDA,
respectively. For the three months ended March 31, 1999, revenue and EBITDA of
international bowling centers represented 15.6% and 16.7% 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 $ - - $ 34.3 10.45 %
2001 - - 83.0 10.67
2002 - - 271.0 10.51
2003 - - 116.4 10.18
2004 - - 46.8 11.34
Thereafter 1,139.7 9.13% - N/A
----------- ---------
Total $ 1,139.7 $ 551.5
=========== =========
During December 1999 and March 2000, Bowling Worldwide entered into two
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 in effect at
March 31, 2000:
Notional
Amount
Expiration Date (in millions) Cap Rate (a)
--------------- ------------- ------------
December 31, 2000 $ 100.0 7.6525 %
April 1, 2001 200.0 7.7800
- ---------------------
(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 and $160,000, respectively, for
the two 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.
23
<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 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 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of AMF Bowling, Inc. Shareholders
(a) Annual Meeting held May 2, 2000.
(b) Not Applicable.
(c) There were 83,597,550 shares of AMF Bowling Common Stock outstanding as of
March 6, 1999, the record date for the 2000 Annual Meeting of Shareholders.
A total of 81,591,645 shares were voted.
All of the board's nominees for directors of AMF Bowling were elected with the
following vote:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld Broker Non-Votes
- ---------------------- ---------- -------------- ----------------
<S> <C> <C> <C>
Richard A Friedman 81,341,793 249,852 0
Stephen E. Hare 81,450,041 141,604 0
Roland C. Smith 81,443,830 147,815 0
Terence M. O'Toole 81,446,143 145,502 0
Peter M. Sacerdote 81,447,690 143,955 0
Charles M. Diker 81,447,123 144,522 0
Paul B. Edgerley 81,448,769 142,876 0
Howard A. Lipson 81,448,590 143,055 0
Thomas R. Wall, IV 81,448,024 143,621 0
</TABLE>
24
<PAGE>
The appointment of Arthur Andersen LLP as AMF Bowling's independent public
accountants to audit the consolidated financial statements of AMF Bowling for
the fiscal year 2000 was ratified by its shareholders with the following vote:
Votes Broker
Votes For Against Abstentions Non-Votes
---------- ------- ----------- ---------
81,509,943 57,580 24,122 0
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the three months ended March 31, 2000.
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMF Bowling, Inc.
(Registrant)
/s/ Stephen E. Hare May 12, 2000
- ---------------------------------------
Stephen E. Hare
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Michael P. Bardaro May 12, 2000
- ---------------------------------------
Senior Vice President, Corporate Controller
and Assistant Secretary
(Principal Accounting Officer)
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 32,604
<SECURITIES> 0
<RECEIVABLES> 54,673
<ALLOWANCES> 9,867
<INVENTORY> 60,290
<CURRENT-ASSETS> 163,604
<PP&E> 788,196
<DEPRECIATION> 24,770
<TOTAL-ASSETS> 1,797,844
<CURRENT-LIABILITIES> 139,866
<BONDS> 1,179,291
0
0
<COMMON> 906,326
<OTHER-SE> (432,849)
<TOTAL-LIABILITY-AND-EQUITY> 1,797,844
<SALES> 209,462
<TOTAL-REVENUES> 209,462
<CGS> 43,386
<TOTAL-COSTS> 187,575
<OTHER-EXPENSES> (669)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,035
<INCOME-PRETAX> (9,479)
<INCOME-TAX> 1,060
<INCOME-CONTINUING> (10,539)
<DISCONTINUED> 0
<EXTRAORDINARY> (107)
<CHANGES> 0
<NET-INCOME> (10,646)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
