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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX-
CHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 001-12131
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AMF BOWLING WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3873272
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 AMF Drive
Richmond, Virginia 23111
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(804) 730-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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10 7/8% Series B Senior Subordinated Notes Due 2006 New York Stock Exchange
12 1/4% Series B Senior Subordinated Discount Notes
Due 2006 New York Stock Exchange
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Securities registered pursuant to Section 12 (g) of the Act:
None
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Indicate by check mark whether the Registrant (1) has filed all reports re-
quired 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 Reg-
istrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 6, 2000, 100 shares of Registrant's common stock, par value
$.01, were outstanding and held entirely by AMF Group Holdings Inc. None of
the Registrant's common stock was held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
General Development of Business
AMF Bowling Worldwide, Inc. ("Bowling Worldwide" and, together with its
subsidiaries, the "Com-pany" or "AMF") is the largest owner or operator of
bowling centers in the United States and worldwide. In addition, the Company
is one of the world's leading manufacturers of bowling center equipment,
accounting for, management believes, approximately 40% of the world's current
installed base of such equipment. AMF is principally engaged in two business
segments: (i) the ownership or operation of bowling centers ("Bowling
Centers"), consisting, as of December 31, 1999, of 417 U.S. bowling centers
and 122 international bowling centers including 15 centers operated by joint
ventures with third parties described below and (ii) the manufacture and sale
of bowling equipment such as automatic pinspotters, automatic scoring
equipment, bowling pins, lanes, ball returns, and certain spare and consumable
products, and the resale of allied products such as bowling balls, bags, shoes
and certain other spare and consumable products ("Bowling Products"). The
Bowling Products business consists of two categories: (a) New Center Packages
("NCPs") (all of the equipment necessary to outfit a new bowling center or
expand an existing bowling center) and (b) Modernization and Consumer Products
(which includes modernization equipment used to upgrade an existing center,
spare parts, supplies and consumable products essential to maintain operations
of an existing center). See "Note 16. Business Segments" in the Notes to
Consolidated Financial Statements for financial information about AMF's
business segments.
Bowling Worldwide is a wholly owned subsidiary of AMF Group Holdings Inc.
("AMF Group Holdings") and AMF Group Holdings is a wholly owned subsidiary of
AMF Bowling, Inc. ("AMF Bowling"). AMF Bowling, AMF Group Holdings and the
Company were incorporated in Delaware in 1996 by an investor group led by
GS Capital Partners II, L.P. (together with affiliated investment funds,
"GSCP"), an affiliate of Goldman, Sachs & Co. AMF Group Holdings acquired all
of the outstanding stock of the separate U.S. and foreign corporations that
constituted substantially all of the Company's predecessor (the "Predecessor
Company") for a total purchase price of approximately $1.37 billion (the "Ac-
quisition"). Bowling Worldwide conducts all of its business through subsidiar-
ies and provides certain limited management service operations to its subsidi-
aries. Unless the context indicates otherwise, the terms "Company" or "AMF" as
used herein refer to Bowling Worldwide (the "Registrant") and its subsidiar-
ies.
From May 1996 to December 1999, the Company acquired 230 centers in the
U.S. and, as of February 29, 2000, owns or operates 417 U.S. centers. In addi-
tion, in 1997 and 1998, the Company acquired 33 centers in selected interna-
tional markets and, as of February 29, 2000, owns or operates 122 interna-
tional centers, including 15 joint venture centers. In 1997, the Company
entered into two joint ventures which operate one bowling center in China and
14 bowling centers in Brazil and Argentina, respectively. AMF also manufac-
tures 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. The Company has agreed to build or acquire one addi-
tional golf practice range by the end of 2000. See "Item 6. Selected Financial
Data", and "Note 14. Acquisitions" and "Note 15. Joint Ventures" in the Notes
to Consolidated Financial Statements for discussions regarding acquisitions
and joint ventures.
In November 1997, AMF Bowling issued 15,525,000 shares of its common stock
("AMF Bowling Common Stock") at $19.50 per share pursuant to an initial public
offering (the "Initial Public Offering").
2
Business Segments
Bowling Centers
In the United States, AMF is the largest operator of bowling centers, with
417 bowling centers (as of February 29, 2000) in 40 states and Puerto Rico.
Outside the United States, AMF is also the largest operator of bowling cen-
ters, with (as of February 29, 2000) 122 centers in ten countries: Australia
(46), the United Kingdom (37), Mexico (9), Japan (4), China (including Hong
Kong) (5), Argentina (2), Brazil (12), France (4), Spain (2), and Canada (1).
Of the U.S. centers, 207 were acquired as part of the Acquisition, 230 were
acquired thereafter and two were constructed. AMF has closed 22 centers since
the Acquisition. Of the international centers, 78 were acquired as part of the
Acquisition, 33 were acquired thereafter, including 22 in the United Kingdom,
ten in Australia and one in France. One center each in Japan and China was
closed, and one each in Switzerland and China was sold. The international cen-
ters include one in China, two in Argentina and 12 in Brazil, which are oper-
ated as part of two joint ventures.
The Bowling Centers business derives its revenue and profits from three
principal sources: (i) bowling, (ii) food and beverage and (iii) other sources
such as shoe rental, amusement games, billiards and pro shops. In 1999, bowl-
ing, food and beverage and other revenue represented 58.4%, 27.3% and 14.3% of
total Bowling Centers revenue, respectively.
Bowling revenue, the largest portion of a bowling center's revenue and
profitability, is derived from league, tournament and recreational play, which
represents managed, or scheduled (e.g. birthday or corporate parties), and
open, or unscheduled, play. Food and beverage sales occur primarily through
snack bars that offer snack foods, soft drinks and, at most centers, alcoholic
beverages. Since the Acquisition, AMF acquired several centers with large
sports bars that provide a large portion of such centers' revenue. Other reve-
nue is derived from shoe rental and the operation of amusement games, bil-
liards and pro shops. Shoe rental is driven primarily by recreational bowlers
who usually do not own bowling shoes.
Bowling Products
The Company manufactures and sells bowling center equipment, including au-
tomatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare and modernization parts, and resale products, such as
bowling balls, bags, shoes and other bowlers' aids, sold primarily through pro
shops. The Bowling Products business consists of two categories: (i) NCPs and
(ii) Modernization and Consumer Products.
NCPs include the bowling equipment necessary to outfit new or expand exist-
ing bowling centers, such as lanes, pinspotters, automatic scoring equipment,
bowler seating, ball returns, masking units and bumpers. NCP sales generally
follow the trends in the growth of bowling. Traditionally, as bowling is in-
troduced and becomes popular in new markets, the economics of constructing and
operating bowling centers become attractive and drive demand for NCPs. For at
least the last 15 years, the majority of NCP sales has been to international
markets. Until 1998, this trend was fueled by the growth of bowling in several
countries, particularly China, South Korea and Taiwan. The economic difficul-
ties in the Asia Pacific region resulted in a significant reduction in NCP
sales in that region during 1998 and 1999 and are expected to continue to have
a material adverse impact on NCP sales. In addition, Shanghai Zhonglu Indus-
trial Corporation ("Zhonglu") became a significant competitor with Bowling
Products in China. Bowling Products signed 3-year joint distribution agree-
ments in June 1999 with Zhonglu whereby Zhonglu became the exclusive distribu-
tor of AMF products and parts in China, and Bowling Products became the exclu-
sive distributor of Zhonglu bowling products and parts outside China. See "--
Business Strategy" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Bowling Products."
3
Sales of Modernization and Consumer Products to bowling center operators
who manage the installed base of bowling equipment have traditionally provided
a somewhat more stable base of recurring revenue on an annual basis. These
products include modernization equipment, both proprietary and standard spare
parts for existing equipment and other products including pins, shoes and sup-
plies. Some of these products, such as bowling pins, should be replaced on ap-
proximately an annual basis to maintain a center, while certain less frequent
investments in other equipment are necessary to modernize a center and are of-
ten required to maintain a customer base. AMF also sells resale products in-
cluding balls, bags and apparel for consumer purchase and use.
In addition to bowling equipment and supplies, AMF manufactures and sells
billiards tables under the PlayMaster, Highlander and Renaissance brand names.
Business Strategy
The Company is pursuing a three-part strategy to create a nationally recog-
nized chain of bowling centers through consolidation of the bowling center in-
dustry and national marketing programs in the U.S. and selected international
markets, leverage the AMF brand and strong base of installed bowling equipment
to grow sales of bowling products globally and become the employer of choice
in its industry.
With respect to Bowling Centers, the Company curtailed its acquisitions in
1999 to focus on improving center operations and financial performance which
is fundamental to its strategy to create a nationally recognized chain. In
connection with this effort, the Company conducted a strategic business review
in which certain performance drivers and revenue opportunities were identi-
fied, recruited a new and experienced operating management team, and developed
a customer satisfaction model which incorporates center performance drivers
into seven critical success factors.
These critical success factors are (i) value, or the relationship between
price and the service provided, (ii) bowling equipment including lanes,
pinspotters and scoring; (iii) location; (iv) quality of interior and exterior
facilities; (v) quality of food and beverage offerings; (vi) marketing pro-
grams that drive trial and repeat customer visits and (vii) customer service.
The Company is in the process of identifying the acceptable level of perfor-
mance in each of the seven critical success factors, and will provide these to
each center to determine the specific actions necessary to bring each center
up to a standard level of performance. The Company expects to focus efforts on
maximizing customer service performance in order to attract and retain more
bowlers, thereby creating a sustainable competitive advantage. The Company is
also focused on creating standard operating procedures, training programs and
improving information systems in the bowling centers. Improvements in these
areas are intended to facilitate better execution of customer service and mar-
keting programs and provide better data designed to help management
proactively direct the business. Marketing programs will focus in two key
areas: (i) developing national programs that leverage the efficiencies of the
total chain and add value to individual centers and (ii) developing a "Best
Practices" process to share successful regional programs.
While the Company's intention is to continue consolidating the U.S. bowling
center industry by acquiring additional bowling centers, the Company announced
in January 2000 that it will resume 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. The Company had no commitment to
purchase any bowling centers as of February 29, 2000.
The Company's Bowling Products business markets and distributes bowling
products in global markets. In response to market conditions experienced in
1998 and 1999, Bowling Products enacted a comprehensive cost reduction program
that lowered manufacturing and global selling, general and
4
administrative costs and initiated several distributor relationships for se-
lected product lines. Additionally, Bowling Products signed 3-year joint dis-
tribution agreements in June 1999 with Zhonglu whereby Zhonglu became the ex-
clusive distributor of AMF products and parts in China, and Bowling Products
became the exclusive distributor of Zhonglu bowling products and parts outside
China. These agreements are intended to improve Bowling Products' competitive
position in China and broaden Bowling Products' product offering in developing
markets. The Company developed a customer satisfaction model for Bowling Prod-
ucts, and identified eight critical success factors which are (i) value, (ii)
technical support, (iii) product quality, (iv) financing capabilities, (v) or-
der fulfillment, (vi) sales support, (vii) product innovation and (viii) in-
stallation. Bowling Products will identify and strive to achieve a standard
level of performance in each of these factors. The Company will focus efforts
on product quality in order to create a sustainable competitive advantage, and
will concentrate on order fulfillment in an effort to improve performance lev-
els. Bowling Products continues to focus product development efforts on im-
proving its current offerings and introducing new products that will appeal to
a worldwide base of center operators. These initiatives are designed to expand
the Company's presence in the relatively more stable Modernization and Con-
sumer Products markets. To support these efforts, Bowling Products has reorga-
nized its product management organization and is implementing a worldwide
product line focused financial system.
Management recognizes that, in order to become the employer of choice in
its industry, the Company must cultivate, retain and attract enthusiastic and
motivated employees. In this connection, AMF broadened stock option award dis-
tributions to include all center managers, enhanced Company benefits plans and
improved the working environment in its three manufacturing facilities. The
Company continues its development of a competitive compensation structure and
now provides communication channels which allow employees to provide input
into decisions affecting their work environments. These initiatives are in-
tended to improve employee morale and motivation which are key drivers of cus-
tomer satisfaction. Management believes that improved customer satisfaction
should lead to improved financial performance of the Company.
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 Prod-
ucts, is driven by the beginning of league play in the fall of each year.
While operators purchase consumer products generally 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 instal-
lation 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 NCP sales are slightly seasonal, sales of NCPs can fluctuate dramati-
cally as a result of economic fluctuations in international markets, as seen
in the reduction of sales of NCPs since 1998 to markets in the Asia Pacific
region following economic difficulties in that region.
5
Industry and Competition
Bowling Centers
Bowling is both a competitive sport and a recreational entertainment activ-
ity and faces competition from numerous alternative activities. The success of
AMF's bowling operations is subject to consumers' continued interest in bowl-
ing, the availability and affordability of other sports and recreational and
entertainment alternatives, the amount of customer leisure time, as well as
various other social and economic factors over which AMF has no control.
The Company's centers also compete with other bowling centers. The Company
competes primarily through customer service as well as the quality of its
bowling equipment, location, facilities, food and beverage offerings and mar-
keting programs. See "--Business Strategy" and "Item 7. Management's Discus-
sion of Financial Condition and Results of Operations--Bowling Centers."
As shown in the following table, the U.S. bowling center industry is highly
fragmented, and consists of two relatively large bowling center operators, AMF
(which had 417 U.S. centers as of December 31, 1999) and Brunswick Corporation
("Brunswick") (which had approximately 114 U.S. centers as of December 31,
1999), three medium-sized chains, which together account for 54 bowling cen-
ters, and over 5,000 bowling centers owned by single-center and small-chain
operators, which typically own four or fewer centers. The top five operators
(including AMF) account for approximately 10.5% of the total number of U.S.
bowling centers.
U.S. BOWLING CENTER INDUSTRY (a)
Number of
Operator Locations % of Total
-------- --------- ----------
AMF.................................................. 417 7.5%
Brunswick............................................ 114 2.0
Bowl America......................................... 21 0.4
Mark Voight.......................................... 18 0.3
Bowl New England..................................... 15 0.3
----- -----
Subtotal........................................... 585 10.5
Single-center and small-chain operators.............. 5,002 89.5
----- -----
Total.............................................. 5,587 100.0%
===== =====
- --------
(a) AMF estimate at December 31, 1999.
The international bowling center industry is also highly fragmented. There
are typically few chain operators in any one country and a large number of
single-center operators. AMF generally enjoys a relative size advantage (i.e.,
a larger number of lanes per center), and is competitively well-positioned in
Australia, the United Kingdom and Mexico.
In the United States, the operation of bowling centers generally has been
characterized by slightly declining lineage (number of games bowled per lane
per day). The Company's bowling centers business has experienced and is con-
tinuing to experience a decline in lineage. This decline has been primarily
caused by a decrease in the number of league bowlers. While more people are
bowling at AMF's bowling centers, they are bowling less often. As part of the
Company's recent efforts to focus on improving the financial performance of
the Company's existing centers, AMF is seeking to improve lineage at the
Company's bowling centers; however, there can be no assurances that lineage
will increase or that the lineage will not further decline. In 1999, the U. S.
constant centers lineage declined slightly and was more than offset with price
increases yielding a net constant center revenue growth.
6
See "--Business Strategy" for a discussion of the Company's business strategy
for its bowling centers. Internationally, although trends vary by country,
certain of the markets in which AMF operates have experienced increasing com-
petition as they have matured, resulting in declining lineage.
Bowling Products
AMF and Brunswick are the two largest manufacturers of bowling center
equipment, and are the only full-line manufacturers of bowling equipment and
supplies that compete on a global basis. The Company also competes with small-
er, often regionally focused companies in certain product lines. See "--Inter-
national Operations" for a discussion of additional factors that may affect
the international operations of Bowling Products. Management estimates that
AMF accounts for approximately 40% of the worldwide installed base of bowling
center equipment.
International Operations
The Company's international operations are subject to the usual risks in-
herent 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 ex-
port duties and quotas, foreign customs, tariffs and value added taxes and un-
expected changes in regulatory environments), difficulty in obtaining distri-
bution 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 mar-
kets, 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 strengthen-
ing U.S. dollar exchange rate may adversely impact sales volume and profit
margins during such periods.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. Revenue and recurring EBITDA (as
defined in "Item 6. Selected Financial Data") of international bowling centers
represented 17.0% and 24.7% of consolidated revenue and recurring EBITDA, re-
spectively, in 1999. Revenue and EBITDA of international bowling centers rep-
resented 15.7% and 23.2% of consolidated revenue and EBITDA, respectively, in
1998.
NCP unit sales to China, Japan and other countries in the Asia Pacific re-
gion represented 43.0% of total NCP unit sales in 1999 compared to 52.8% in
1998. The economic difficulties in the Asia Pacific region have had and will
continue to have a material adverse impact on NCP sales. One of the reasons
for the decline in NCP sales is the limited availability of financing for cus-
tomers desiring to build new bowling centers, especially in the Asia Pacific
region. In addition, Zhonglu became a significant competitor in China. On June
13, 1999, Bowling Products signed three-year joint distribution agreements
with Zhonglu. Under the terms of the agreements, Zhonglu became the exclusive
distributor of AMF products and parts in China, and Bowling Products became
the exclusive distributor of Zhonglu's bowling products and parts outside Chi-
na. These agreements are intended to improve Bowling Products' competitive po-
sition in both China and other developing markets. However, there is no assur-
ance that such an improvement will occur. See "--Business Segments--Bowling
Products" for additional discussion of the Zhonglu agreements.
China strengthened enforcement of its import restrictions including requir-
ing the payment of full customs duties and value-added taxes on the importa-
tion of new and used capital goods. The Chinese government also began to pro-
hibit importation of used capital equipment without permits. Permits for the
importation of used bowling equipment are very difficult to obtain. Local Chi-
nese companies, how-
7
ever, 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 experi-
enced significant acceptance by local customers. Management believes that
these import restrictions will continue for the foreseeable future.
See "Note 16. Business Segments" and "Note 17. Geographic Segments" in the
Notes to Consolidated Financial Statements for additional financial informa-
tion concerning the Company's operations in different geographic areas.
Employees
Bowling Centers
As of December 31, 1999, Bowling Centers had approximately 15,568 full- and
part-time employees worldwide. The Company believes that its relations with
its Bowling Centers employees are satisfactory.
Number of
Country Employees (a)
------- -------------
United States.................................................. 12,929
------
International:
Australia.................................................... 1,300
United Kingdom............................................... 852
Mexico....................................................... 228
China (including Hong Kong).................................. 80
France....................................................... 58
Japan........................................................ 66
Spain........................................................ 33
Canada....................................................... 22
------
Total International........................................ 2,639
------
Total Worldwide............................................ 15,568
======
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(a) Numbers vary depending on the time of year.
Bowling Products
As of December 31, 1999, Bowling Products had approximately 957 full-time
employees worldwide. The Company believes that its relations with its Bowling
Products employees are satisfactory. Employees are divided along functional
lines as shown in the table below.
Number of
Segment Employees
------- ---------
Manufacturing...................................................... 697
------
Sales:
Asia Pacific..................................................... 92
Europe........................................................... 83
Americas......................................................... 78
Australia........................................................ 7
------
Total Sales.................................................... 260
------
Total Worldwide................................................ 957
======
8
Corporate
As of December 31, 1999, corporate had approximately 166 full-time employ-
ees. The Company believes that its relations with its corporate employees are
satisfactory.
ITEM 2. PROPERTIES
Bowling Centers
As of December 31, 1999, AMF operated 417 bowling centers and related fa-
cilities in the United States and 122 centers in ten other countries. A re-
gional list of these facilities is set forth below:
U.S. CENTERS
Number of Number of
Region Districts Locations (a) Owned Leased
------ --------- ------------- ----- ------
Northeast............................... 5 67 41 26
Mid-Atlantic............................ 6 66 42 24
Southeast............................... 5 66 45 21
Southwest............................... 6 71 56 15
Midwest................................. 5 67 46 21
West.................................... 6 79 33 46
--- --- --- ---
Total............................... 33 416 263 153
=== === === ===
- --------
(a) AMF operates one center for an unrelated party. This center is neither
owned nor leased by AMF and, therefore, is not included in the foregoing
table. In addition, the Company operates two golf practice ranges, one each
in Aurora, Illinois and Charlotte, North Carolina.
INTERNATIONAL CENTERS
Number of
Country Locations (a) Owned Leased
------- ------------- ----- ------
Australia......................................... 46 27 19
United Kingdom.................................... 37 14 23
Mexico............................................ 9 5 4
China............................................. 4 0 4
Japan............................................. 4 0 4
France............................................ 4 1 3
Spain............................................. 2 0 2
Canada............................................ 1 1 0
--- --- ---
Total......................................... 107 48 59
=== === ===
- --------
(a) The table excludes one bowling center operated by the Company's Hong Leong
joint venture and 14 bowling centers operated by its Playcenter joint ven-
ture. See "Item 1. Business--General Development of Business."
AMF's leases are subject to periodic renewal. Forty-two of the U.S. centers
have leases that expire during the next three years. Twenty-six of such leases
have renewal options. Fifteen of the international centers have leases that
expire during the next three years. Nine of such leases have renewal options.
For information concerning major encumbrances on Company-owned real estate,
see "Note 8. Long-Term Debt and Recapitalization Plan" in the Notes to Consol-
idated Financial Statements.
9
Bowling Products
As of December 31, 1999, AMF owned or leased facilities at three locations
in the United States, two of which are used for its Bowling Products business
and one of which is used for its billiards business. AMF also leased facili-
ties at 13 international locations that are used as offices or warehouses. For
information concerning major encumbrances on Company-owned real estate, see
"Note 8. Long-Term Debt and Recapitalization Plan" in the Notes to Consoli-
dated Financial Statements.
U.S. Facilities
Approximate
Location Products Square Footage Owned/ Leased
-------- -------- -------------- -------------
Richmond, VA World headquarters, pinspotters, 360,000 Owned
automatic scoring, synthetic 54,000 Leased
lanes, other capital equipment,
consumer products, used
pinspotters and lane maintenance
equipment
Lowville, NY Pins and wood lanes 171,000 Owned
Bland, MO Billiard tables (AMF Billiards and 109,210 Owned
Games) 44,373 Leased
International Facilities
Approximate
Square
Location Functions Footage Owned/Leased
- -------- --------- ----------- ------------
Emu Plains, Australia Office 400 Leased
Warehouse 10,100 Leased
Hong Kong Office 2,500 Leased
Shanghai, China Office 400 Leased
Levallois-Perret, France Office 984 Leased
Warehouse 1,470 Leased
Mainz-Kastel, Germany Office 656 Leased
Warehouse 1,650 Leased
Bangalore, India Office 1,050 Leased
New Delhi, India Office 2,000 Leased
Yokohama, Japan Office 4,626 Leased
Warehouse 8,888 Leased
Service Center 1,634 Leased
Seoul, South Korea Office 5,119 Leased
Warehouse 7,472 Leased
Mexico City, Mexico Office 1,300 Leased
Warehouse 11,431 Leased
Warsaw, Poland Office 209 Leased
Granna, Sweden Office 4,515 Leased
Warehouse 12,705 Leased
Hemel Hempstead, United Kingdom Office 11,500 Leased
Warehouse 11,770 Leased
ITEM 3. 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,
10
Schroder & Co., Inc., Richard A. Friedman and Douglas J. Stanard. The com-
plaint has subsequently been amended to, among other things, include addi-
tional named plaintiffs. The plaintiffs, as putative class representatives for
all persons who purchased AMF Bowling Common Stock in the Initial Public Of-
fering 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 in-
accurate and misleading disclosures in connection with and following the Ini-
tial 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 insur-
ance. 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.
Regulatory Matters
There are no unique federal or state regulations applicable to bowling cen-
ter operations or equipment manufacturing. State and local governments require
establishments to hold permits to sell alcoholic beverages, and, although reg-
ulations vary from state to state, once permits are issued, they generally re-
main in place indefinitely (except for routine renewals) without burdensome
reporting or supervision other than revenue tax reports.
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 cur-
rently is involved are not likely to have a material adverse impact on its fi-
nancial position or results of operations. However, it is not possible to en-
sure 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 AMF's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
PART II
ITEM 5. MARKET FOR BOWLING WORLDWIDE COMMON STOCK AND RELATED INVESTOR MATTERS
Common Stock
The common stock, $.01 par value, of Bowling Worldwide is wholly owned by
AMF Group Holdings. Bowling Worldwide did not pay any cash dividends on its
common stock during 1998 and 1999 and intends to retain earnings, if any, for
use in the Company's business.
Bowling Worldwide is prohibited under both the credit agreement dated as of
May 1, 1996, as amended and restated (the "Credit Agreement") and certain in-
dentures governing its 10 7/8% Series B Senior Subordinated Notes ("Subsidiary
Senior Subordinated Notes") and 12 1/4% Series B Senior Subordinated Discount
Notes ("Subsidiary Senior Subordinated Discount Notes" and, collectively with
the Subsidiary Senior Subordinated Notes, the "Subsidiary Notes") from
upstreaming funds to AMF Bowling by dividends, loans or otherwise, to pay cash
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years indicated
were derived from AMF Group Holdings' audited consolidated financial state-
ments for the years ended December 31, 1999, 1998 and 1997, the period ended
December 31, 1996, and the Predecessor Company's audited combined financial
statements for the four months ended April 30, 1996, and the year ended Decem-
ber 31, 1995. The consolidated pro forma results set forth below for the year
ended December 31, 1996 are presented as if the Acquisition had occurred on
January 1, 1996, and are based on the Predecessor Company's statement of in-
come for the period ending April 30, 1996, AMF Group Holdings' statement of
operations from its inception through December 31, 1996, and adjustments giv-
ing effect to the Acquisition under the purchase method of accounting. The
data should be read in conjunction with AMF Group Holdings' Consolidated Fi-
nancial Statements and "Management's Discussion and Analysis of Financial Con-
dition and Results of Operations" which appear elsewhere herein.
The comparability of the selected financial data is affected by the
Company's bowling center acquisition program. In 1996, the Company, through
AMF Bowling Centers, Inc. ("AMF Bowling Centers"), a direct subsidiary of
Bowling Worldwide, acquired 57 bowling centers from unrelated sellers. The
combined purchase price was $108.0 million. In 1997, AMF Bowling Centers ac-
quired 122 bowling centers from a number of unrelated sellers. The combined
purchase price was $232.7 million (including amounts paid in 1998 for certain
bowling centers included in the 1997 total). In 1998, AMF Bowling Centers ac-
quired 83 bowling centers from a number of unrelated sellers. The combined
purchase price was $156.8 million. In 1999, AMF Bowling Centers acquired one
center for a purchase price of $1.4 million. While the Company intends to con-
tinue its efforts to consolidate the U.S. bowling center industry by purchas-
ing additional bowling centers, the Company has curtailed the pace of its ac-
quisitions so that management can focus on improving the financial performance
of its current centers. In the near term, however, the Company continues to
evaluate acquisitions on a more limited scale. See "Item 1. Business--General
Development of Business" and "Note 13. Supplemental Disclosures to the Consol-
idated Statements of Cash Flows" and "Note 14. Acquisitions" in the Notes to
Consolidated Financial Statements.
The selected financial data include operating results expressed in terms of
EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, and other income and expenses. EBITDA informa-
tion is included because the Company understands that such information is used
by certain investors as one measure of a company's historical ability to serv-
ice debt. EBITDA is not intended to represent and should not be considered
more meaningful than, or an alternative to, other measures of performance de-
termined in accordance with U.S. generally accepted accounting principles.
12
Four Months
Ended
For the year ended December 31, April 30,
------------------------------------------------------- -----------
(dollars in millions)
AMF Group Holdings Inc.
Predecessor ------------------------------------------- Predecessor
Company Pro Forma Company
1995 1996 (a) 1996 (b) 1997 1998 1999 1996 (c)
----------- --------- -------- ------ ------- ------- -----------
Income Statement Data:
Operating revenue(d).... $564.9 $548.9 $384.8 $713.7 $ 736.4 $ 732.7 $164.9
------ ------ ------ ------ ------- ------- ------
Cost of goods sold...... 184.1 173.6 130.5 212.6 202.2 177.2 43.1
Bowling center operating
expenses(d)............ 166.5 178.8 123.7 251.2 334.0 373.4 80.2
Selling, general and
administrative
expenses............... 50.8 51.0 35.1 64.5 63.8 71.5 35.5
Restructuring and asset
impairment charges..... -- -- -- -- -- 16.6
Depreciation and
amortization........... 39.1 73.5 49.4 102.5 120.3 132.7 15.1
------ ------ ------ ------ ------- ------- ------
Operating income
(loss)................. 124.4 72.0 46.1 82.9 16.1 (38.7) (9.0)
Interest expense,
gross.................. 15.7 106.2 78.0 118.4 101.9 111.3 4.5
Other income (expense),
net.................... 0.2 3.6 3.7 (8.2) (5.5) (4.8) (0.1)
------ ------ ------ ------ ------- ------- ------
Income (loss) before
income taxes........... 108.9 (30.6) (28.2) (43.7) (91.3) (154.8) (13.6)
Provision (benefit) for
income taxes........... 12.1 (9.0) (8.6) (12.9) 7.3 27.6 (1.7)
------ ------ ------ ------ ------- ------- ------
Net income (loss) before
equity in loss of joint
ventures and
extraordinary items.... 96.8 (21.6) (19.6) (30.8) (98.6) (182.4) (11.9)
Equity in loss of joint
ventures, net of tax... -- -- -- (1.4) (8.2) (18.6) --
------ ------ ------ ------ ------- ------- ------
Net income (loss) before
extraordinary items.... 96.8 (21.6) (19.6) (32.2) (106.8) (201.0) (11.9)
Extraordinary items, net
of tax................. -- -- -- (23.4) -- -- --
------ ------ ------ ------ ------- ------- ------
Net income (loss)....... $ 96.8 $(21.6) $(19.6) $(55.6) $(106.8) $(201.0) $(11.9)
====== ====== ====== ====== ======= ======= ======
Ratio of earnings to
fixed charges(e)....... 6.1x -- -- -- -- -- --
Selected Data:
Recurring EBITDA(f)..... $163.5 $145.5 $ 95.5 $185.4 $ 136.4 $ 137.1 $ 6.1
Recurring EBITDA
margin................. 28.9% 26.5% 24.8% 26.0% 18.5% 18.7% 3.7%
For the year ended December 31,
-------------------------------------------
(dollars in millions)
Predecessor AMF Group Holdings Inc.
Company -------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
Balance Sheet Data:
Working capital(g).................. $29.2 $ 7.9 $ 44.0 $ 59.5 $ 7.1
Goodwill............................ -- 771.1 772.3 772.7 765.1
Total assets........................ 400.4 1,593.9 1,831.8 1,956.0 1,805.4
Total debt.......................... 167.4 1,091.3 1,060.6 1,047.1 1,048.6
Stockholders' equity................ 161.5 408.7 653.9 803.9 641.7
Total capital....................... 328.9 1,500.0 1,714.5 1,851.0 1,690.3
- --------
(a) Represents results of operations for the year ended December 31, 1996 as
if the Acquisition had occurred on January 1, 1996. AMF Group Holdings'
unaudited pro forma statement of income for the year ended December 31,
1996 is based on the Predecessor Company's statement of operations for the
four-month period ending April 30, 1996, AMF Group Holdings' statement of
operations for the period ended December 31, 1996, and the following
adjustments giving effect to the Acquisition under the purchase method of
accounting:
13
(i) To reflect the impact of AMF Group Holdings not acquiring in the Ac-
quisition the operations of one bowling center in Switzerland and one
bowling center in Spain.
(ii) To eliminate a one-time charge of $44.0 million for special bonuses
and payments made by the Prior Owners in April 1996.
(iii) To reflect the increase in depreciation and amortization expense re-
sulting from the allocation of the purchase price to fixed assets
and goodwill and a change in the method of depreciation of fixed as-
sets. The Predecessor Company principally used the doubled declining
balance method. The amount of the pro forma adjustment for deprecia-
tion was determined using the straight-line method over the esti-
mated lives of the assets acquired. Goodwill is being amortized over
40 years.
(iv) To reflect the incremental interest expense associated with the issu-
ance of debt which partially funded the Acquisition.
(v) To give effect to the change in status of the U.S. and international
subsidiaries of AMF Group Holdings from S corporations to taxable cor-
porations under the U.S. federal tax laws upon consummation of the Ac-
quisition.
(b) For the period from the inception date of January 12, 1996 through
December 31, 1996, which includes the results of operations of the
acquired business from May 1, 1996 through December 31, 1996.
(c) Represents results of operations from January 1, 1996 through April 30,
1996.
(d) Certain amounts have been reclassified to conform with current year
presentation.
(e) The ratios of earnings to fixed charges are computed by dividing earnings
by the fixed charges. Earnings consist of net income plus fixed charges
and income taxes. Fixed charges consist of interest expense, amortization
of debt issuance costs, and the portion of rent expense considered to
represent interest. For the years ended December 31, 1999, 1998, and 1997
AMF had a deficiency of earnings to fixed charges of $154.8 million,
$91.3 million, and $43.7 million, respectively.
(f) In 1999, recurring EBITDA represents EBITDA before restructuring charges,
asset impairment charges and Special Charges of approximately $8.5
million, $8.1 million and $26.5 million, respectively. See "Note 9.
Restructuring Charges, Asset Impairment Charges and Special Charges" in
the Notes to Consolidated Financial Statements.
(g) Predecessor Company amounts reflect elimination of affiliate receivables
and payables.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this report contain forward-looking state-
ments, which are statements other than historical information or statements of
current condition. Statements set forth in this report or statements incorpo-
rated by reference from documents filed with the Securities and Exchange Com-
mission are or may be forward-looking statements, including possible or as-
sumed future results of the operations of the Company, including but not
limited to any statements contained in this report concerning: (i) the ex-
pected success of the Company's plans to improve its bowling centers opera-
tions, including revenue enhancement and cost management programs, (ii) the
ability of the Company's management to execute its strategies (iii) the abil-
ity to resume the Company's bowling center acquisition program, (iv) the ex-
pected success of changes initiated in the Company's bowling products busi-
ness, (v) the Company's expectations concerning the Asia Pacific region and
the joint distribution and related arrangements with Zhonglu, (vi) the ex-
pected success 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 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 pre-
ceded by, followed by or including the words "believes," "expects," "pre-
dicts," "anticipates," "intends," "estimates," "should," "may" or similar ex-
pressions and (xii) other statements contained in this report regarding
matters that are not historical facts.
14
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 Bowling Worldwide 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 for-
ward-looking statements, including: (i) the Company's ability, and the ability
of its management team, to carry out the Company's long-term business strate-
gies, including resuming the pace of the Company's acquisition program, (ii)
the Company's ability to integrate acquired operations into its business,
(iii) the Company's ability to identify and develop new bowling markets to as-
sist in the growth of such markets, (iv) the continuation of adverse financial
results and substantial competition in the Company's bowling products busi-
ness, (v) the Company's ability to retain and attract experienced bowling cen-
ter management, (vi) the Company's ability to successfully implement
initiatives designed to improve customer traffic in its bowling centers, (vii)
the continuation or worsening of economic difficulties in overseas markets,
including the Asia Pacific region, (viii) the risk of adverse political acts
or developments in the Company's existing and proposed international markets,
(ix) the fluctuations in foreign currency exchange rates affecting the
Company's translation of operating results, (x) continued or increased compe-
tition, (xi) the popularity of bowling, (xii) the decline in general economic
conditions, (xiii) adverse judgments in pending or future litigation, (xiv)
the Company's ability to effectively implement the joint distribution and re-
lated arrangements with Zhonglu, (xv) changes in interest and exchange rates
and (xvi) the Company's ability to refinance existing indebtedness as it comes
due at commercially reasonable terms or at all.
The foregoing review of important factors should not be construed as ex-
haustive and should be read in conjunction with other cautionary statements
that are included elsewhere in this report. Bowling Worldwide 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 con-
tained under "Item 6. Selected Financial Data" and in AMF Group Holdings' Con-
solidated Financial Statements included elsewhere herein.
To facilitate a meaningful comparison, in addition to discussing the con-
solidated results of the Company's operations, certain portions of this Man-
agement's Discussion and Analysis of Financial Condition and Results of Opera-
tions discuss results of Bowling Centers and Bowling Products separately.
The results of operations of Bowling Centers, Bowling Products and the con-
solidated group of companies are set forth below. The business segment results
presented below are before intersegment eliminations since the Company's man-
agement believes that this provides a more accurate comparison of performance
by segment from year to year. The intersegment eliminations are not material.
Interest expense is presented on a gross basis.
Performance by Business Segment
Bowling Centers
The Bowling Centers results shown below reflect both U.S. and international
Bowling Centers operations. To facilitate a meaningful comparison, the con-
stant center results discussed below reflect the results of 440 centers that
had been in operation one full fiscal year as of December 31, 1998. The dis-
cussion of new center results reflect the results of 84 centers that were ei-
ther purchased since
15
January 1, 1998 or had been in operation less than one full fiscal year as of
December 31, 1998. Bowling Centers derives its revenue and profits from three
principal sources: (i) bowling, (ii) food and beverage and (iii) other sourc-
es, such as shoe rental, amusement games, billiards and pro shops. In 1999,
bowling, food and beverage and other revenue represented 58.4%, 27.3% and
14.3% of total Bowling Centers revenue, respectively. In 1998, bowling, food
and beverage and other revenue represented 58.8%, 27.2% and 14.0% of total
Bowling Centers revenue, respectively.
To facilitate a meaningful comparison, the results of Bowling Centers for
1999, have been restated to exclude restructuring charges, asset impairment
charges and Special Charges (as defined in "--Consolidated Items--Restructur-
ing Charges, Asset Impairment Charges and Special Charges") as shown in the
table below. The discussion below gives effect to this restatement. See "Note
9. Restructuring Charges, Asset Impairment Charges and Special Charges" in the
Notes to Consolidated Financial Statements and "--Consolidated Items--Restruc-
turing Charges, Asset Impairment Charges and Special Charges" for additional
information on these charges.
For the year ended December 31,
-------------------------------------------------
1997 1998(a) 1999
-------- -------- -----------------------------
As As As As
Reported Reported Reported Adjustments Restated
-------- -------- -------- ----------- --------
(dollars in millions)
Bowling Centers (before
intersegment
eliminations):
Operating revenue........... $ 429.1 $ 539.2 $ 585.7 $ -- $ 585.7
------- ------- ------- ------ -------
Cost of goods sold.......... 39.9 54.5 61.1 (0.9) 60.2
Bowling center operating ex-
penses..................... 252.5 341.0 374.5 -- 374.5
Selling, general and admin-
istrative expenses......... 6.3 5.8 12.8 (5.7) 7.1
Restructuring and asset im-
pairment charges........... -- -- 8.3 (8.3) --
Depreciation and amortiza-
tion....................... 82.8 97.4 109.4 -- 109.4
------- ------- ------- ------ -------
Operating income............ $ 47.6 $ 40.5 $ 19.6 $ 14.9 $ 34.5
======= ======= ======= ====== =======
Selected Data:
Recurring EBITDA............ $ 130.4 $ 137.9 $ 143.9
Recurring EBITDA margin..... 30.4% 25.6% 24.6%
Number of centers, end of
period..................... 470 545 539
Number of lanes, end of pe-
riod....................... 16,315 18,858 18,654
- --------
(a) Contains reclassification to conform to current year presentation.
1999 Compared to 1998. Bowling Centers operating revenue increased $46.5
million, or 8.6%. An increase of $40.9 million was attributable to new cen-
ters, of which $31.6 million was from U.S. centers, and $9.3 million was from
international centers. Constant centers operating revenue increased $10.6 mil-
lion, or 2.3%. U.S. constant centers operating revenue increased $9.1 million,
or 2.5%, primarily as a result of increases in open play revenue, and food and
beverage and ancillary revenue associated with open play traffic. Interna-
tional constant centers operating revenue increased $1.5 million, or 1.6%. The
increase in new and constant centers operating revenue was partially offset by
a decrease in operating revenue of $5.0 million which was primarily attribut-
able to the closing of five U.S. centers and the sale of two international
centers in 1999.
Cost of goods sold increased $5.7 million, or 10.5%. An increase of $4.7
million was attributable to new centers, of which $3.8 million was from U.S.
centers, and $0.9 million was from international centers. Constant centers
cost of goods sold increased $1.4 million, or 3.1%. U.S. constant centers cost
of goods sold increased $1.3 million, or 3.7%, primarily as a result of costs
associated with the increase in food and beverage and ancillary revenue dis-
cussed above. International constant centers
16
cost of goods sold increased $0.1 million, or 1.0%. The overall increase in
cost of goods sold was partially offset by a decrease in cost of goods sold of
$0.4 million associated with those centers that were closed or sold in 1999.
Operating expenses increased $33.5 million, or 9.8%. An increase of $24.7
million was attributable to new centers and an increase of $13.7 million was
attributable to constant centers. A decrease of $0.4 million was attributable
to lower regional and district operating expenses and a decrease of $4.5 mil-
lion was attributable to those centers that were closed or sold in 1999. As a
percentage of its revenue, Bowling Centers operating expenses were 63.2% for
1998 compared with 63.8% for 1999.
An increase of $1.3 million, or 22.4%, in selling, general and administra-
tive expenses was primarily attributable to an increase in costs associated
with growth experienced in Australia and Europe as a result of acquisitions
made in prior years. As a percentage of its revenue, Bowling Centers selling,
general and administrative expenses were 1.1% for 1998 compared with 1.2% for
1999.
Recurring EBITDA increased $6.0 million, or 4.4%. Increases of $11.5 mil-
lion from new centers and $0.4 million from lower regional and district oper-
ating expenses were partially offset by decreases of $5.8 million, or 4.4%,
from constant centers and $0.1 million from those centers that were closed or
sold in 1999. Recurring EBITDA margin in 1999 was 24.6% compared to 25.6% in
1998. The lower EBITDA margin in 1999 was attributable to AMF's operating
initiatives to improve customer traffic.
1998 Compared to 1997. Bowling Centers operating revenue increased $110.1
million, or 25.7%. An increase of $131.9 million was attributable to new cen-
ters, of which $111.3 million was from U.S. centers, and $20.6 million was
from international centers. U.S. constant centers operating revenue decreased
$9.2 million, or 3.7%, primarily as a result of lower lineage, integrating
newly acquired centers, nationally branded chain development activities, rec-
ord-setting hot weather which adversely affected customer visits in the summer
months and the later start of league play in 1998. International constant cen-
ters operating revenue decreased $7.8 million, or 8.4%, primarily due to unfa-
vorable currency translation of results. On a constant exchange rate basis,
international operating revenue would have increased $1.7 million, or 1.8%. A
decrease in operating revenue of $4.8 million was primarily attributable to
the closing of nine U.S. centers in 1998.
Cost of goods sold increased $14.6 million, or 36.6%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $88.5 million, or 35.0%, of which approxi-
mately $88.7 million was attributable to new centers, including $77.4 million
attributable to U.S. centers and $11.3 million attributable to international
centers. As a percentage of its revenue, Bowling Centers operating expenses
were 58.8% for 1997 compared with 63.2% for 1998, primarily as a result of na-
tionally branded chain development activities.
A decrease of $0.5 million, or 7.9%, in selling, general and administrative
expenses was primarily attributable to expense management. As a percent of its
revenue, Bowling Centers selling, general and administrative expenses were
1.5% for 1997 compared with 1.1% for 1998.
An increase of $7.5 million, or 5.6%, in EBITDA was attributable to new
centers. EBITDA margin in 1998 was 25.6% compared to 30.4% in 1997 primarily
as a result of nationally branded chain development activities.
17
Bowling Products
The results shown in the following table reflect Bowling Products opera-
tions. To facilitate a meaningful comparison, the results of Bowling Products
for 1999 have been restated to exclude the restructuring charges and Special
Charges as shown in the table. The following discussion gives effect to this
restatement. See "Note 9. Restructuring Charges, Asset Impairment Charges and
Special Charges" in the Notes to Consolidated Financial Statements and "--Con-
solidated Items--Restructuring Charges, Asset Impairment Charges and Special
Charges" for additional information on these charges.
For the year ended December 31,
-----------------------------------------------
1997 1998 1999
-------- -------- -----------------------------
As As As As
Reported Reported Reported Adjustments Restated
-------- -------- -------- ----------- --------
(dollars in millions)
Bowling Products (before
intersegment eliminations):
Operating revenue............. $299.3 $212.5 $169.3 $ -- $169.3
Cost of goods sold............ 185.7 159.6 137.0 (8.9) 128.1
------ ------ ------ ----- ------
Gross profit.................. 113.6 52.9 32.3 8.9 41.2
Selling, general and adminis-
trative expenses............. 42.8 42.2 44.0 (10.8) 33.2
Restructuring and asset im-
pairment charges............. -- -- 8.2 (8.2) --
Depreciation and amortiza-
tion......................... 19.8 22.5 23.6 -- 23.6
------ ------ ------ ----- ------
Operating income (loss)....... $ 51.0 $(11.8) $(43.5) $27.9 $(15.6)
====== ====== ====== ===== ======
Selected Data:
Gross profit margin........... 38.0% 24.9% 24.3%
Recurring EBITDA.............. $ 70.8 $ 10.7 $ 8.0
Recurring EBITDA margin....... 23.7% 5.0% 4.7%
New Center Packages sold...... 4,576 2,466 1,343
1999 Compared to 1998. Bowling Products operating revenue decreased $43.2
million, or 20.3%, due to a decrease of $37.9 million, or 41.9%, in NCP reve-
nue, and a decrease of $5.3 million, or 4.3%, in Modernization and Consumer
Products revenue. Economic difficulties in certain Asia Pacific markets and
increased competition in general continue to adversely impact results. During
1999, Bowling Products recorded NCP shipments of 1,343 units compared to ship-
ments of 2,466 units for 1998. Although lower compared with 1,303 unit ship-
ments for the last half of 1998, NCP shipments of 921 units for the second
half of 1999 exceeded NCP shipments of 422 units for the first half of 1999.
The decrease in Modernization and Consumer Products revenue is primarily due
to decreased sales to Asia Pacific customers because of adverse economic con-
ditions and lower U.S. sales of modernization equipment. See "--Seasonality
and Market Development Cycles" and "Item 1. Business--International Opera-
tions."
Gross profit decreased by $11.7 million, or 22.1%. Gross profit margin was
24.9% in 1998 and 24.3% in 1999. Gross profit and gross profit margin declines
were primarily a result of lower levels of NCP shipments, lower pricing and
unabsorbed fixed overhead resulting from low production levels. See "--Inter-
national Operations."
Bowling Products selling, general and administrative expenses decreased by
$9.0 million, or 21.3%, primarily as a result of an ongoing cost reduction
program in which the Bowling Products organization has been streamlined in or-
der to reduce expenses. Such cost reduction has served to partially offset the
impact of lower sales volume and unit pricing on EBITDA.
Bowling Products recurring EBITDA decreased $2.7 million, or 25.2%, and re-
curring EBITDA margin decreased from 5.0% in 1998, to 4.7% in 1999 as a result
of the lower revenue and gross profit which exceeded the effect of cost reduc-
tions.
18
1998 Compared to 1997. Bowling Products operating revenue decreased $86.8
million, or 29.0%, due to a decrease of $74.6 million, or 45.2%, in NCP reve-
nue, and a decrease of $12.2 million, or 9.1%, in Modernization and Consumer
Products revenue. Operating results were adversely impacted by the economic
difficulties in Asia Pacific and other regions, which reduced the level of
shipments for NCPs and Modernization and Consumer Products sales. The strong
U.S. dollar also unfavorably affected pricing and financial statement transla-
tion. During 1998, Bowling Products recorded NCP shipments of 2,466 units com-
pared to shipments of 4,576 units for 1997. The decrease in Modernization and
Consumer Products revenue was primarily due to decreased sales to Asia Pacific
customers because of adverse economic conditions and decreased Modernization
and Consumer Products sales to U.S. customers due to delayed product introduc-
tions in 1998. Additionally, Zhonglu gained new market share in China. See "--
Seasonality and Market Development Cycles" and "Item 1. Business--Interna-
tional Operations."
Gross profit decreased by $60.7 million, or 53.4%. Gross profit margin was
38.0% in 1997 and 24.9% in 1998. Gross profit and gross profit margin declines
were primarily a result of lower levels of NCP shipments, the strong U.S. dol-
lar and competitive pricing as discussed above, lower margins on the 1998 Mod-
ernization and Consumer Products product mix and unabsorbed fixed overhead re-
sulting from low production levels. See "--International Operations."
Bowling Products selling, general and administrative expenses decreased by
$0.6 million, or 1.4%, primarily as a result of a profit improvement plan. The
Bowling Products organization was streamlined as part of a cost reduction pro-
gram in order to further reduce manufacturing, selling, general and adminis-
trative expenses to offset the impact of lower sales volume on EBITDA. Savings
from the cost reduction programs were partially offset by the increased in-
vestment in the first half of 1998 in certain international markets with long-
term potential.
Bowling Products EBITDA decreased $60.1 million, or 84.9%, and EBITDA mar-
gin decreased from 23.7% in 1997, to 5.0% in 1998 as a result of the lower
revenue and gross profit partially offset by decreased selling, general and
administrative expenses discussed above.
Consolidated Items
Restructuring Charges, Asset Impairment Charges and Special Charges
In 1999, the Company recorded restructuring charges of approximately $8.5
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 has negatively and materially impacted
NCP sales and profitability. The restructuring plan was developed in conjunc-
tion with a strategic business assessment performed by Bain & Co. and was de-
signed to reduce the overall volatility of the Bowling Products business. The
restructuring charges relate primarily to employee termination benefits, asset
write-offs and contract cancellations.
In 1999, the Company recorded asset impairment charges of $8.1 million rep-
resenting the difference between fair market value and carrying value of im-
paired assets. The asset impairment charges relate to under-performing bowling
center locations that under an approved plan will be closed in the first half
of 2000. Fair market value is generally determined based on the average sales
proceeds from previous sales of AMF bowling center locations.
The strategic assessment by Bain & Co. discussed above led to programs de-
signed to improve product line profitability and quality in the Company. This
assessment was a catalyst to the Company's recording certain charges. These
charges, along with additional reserves (collectively, the "Special Charges")
recorded by the Company totaled $26.5 million. The Special Charges are non-
cash, relate primarily to receivables and inventory write-offs and are in-
cluded within selling, general and administrative expenses and cost of goods
sold.
See "Note 9. Restructuring Charges, Asset Impairment Charges and Special
Charges" in the Notes to Consolidated Financial Statements for additional dis-
cussion of these charges.
19
Depreciation and Amortization
For 1999, depreciation and amortization increased by $12.4 million, or
10.3%, over 1998. The increase was primarily attributable to incremental de-
preciation expense as a result of capital expenditures.
For 1998, depreciation and amortization increased by $17.8 million, or
17.4%, over 1997, primarily attributable to depreciation of property and
equipment of centers acquired during 1998 and incremental depreciation expense
as a result of capital expenditures.
Interest Expense
Gross interest expense increased by $9.4 million, or 9.2%, in 1999 compared
with 1998. Interest incurred on bank debt increased as the impact of higher
average borrowing rates more than offset the effect of a decrease in certain
average amounts outstanding. See "Note 8. Long-Term Debt and Recapitalization
Plan" in the Notes to Consolidated Financial Statements, "--Liquidity" and "--
Capital Resources" for further discussion of the bank debt. Cash interest paid
by the Company for 1999 totaled $81.8 million, while non-cash bond interest
amortization totaled $26.9 million.
Gross interest expense decreased by $16.5 million, or 13.9%, in 1998 com-
pared with 1997. Interest savings associated with the reduction of bank debt
and the redemption of a portion of the Subsidiary Senior Subordinated Discount
Notes with proceeds of AMF Bowling's Initial Public Offering were partially
offset by interest incurred on increased levels of bank debt as a result of
center acquisitions. See "--Liquidity" and "--Capital Resources" for further
discussion of the bank debt. Cash interest paid by the Company for 1998 to-
taled $76.5 million, while non-cash bond interest amortization totaled
$24.0 million.
Extraordinary Items
1997
The Company incurred after-tax extraordinary charges totaling $23.4 million
in the fourth quarter of 1997 as a result of entering into its Third Amended
and Restated Credit Agreement with its lenders, the premium paid to redeem a
portion of the Subsidiary Senior Subordinated Discount Notes with the proceeds
of the Initial Public Offering and the write-off of the portion of deferred
financing costs attributable to the Subsidiary Senior Subordinated Discount
Notes redeemed. See "Note 8. Long-Term Debt and Recapitalization Plan" in the
Notes to Consolidated Financial Statements and "Item 8. Financial Statements
and Supplementary Data--Selected Quarterly Data" included elsewhere herein.
Net Loss
Net loss in 1999 totaled $201.0 million, compared with a net loss of $106.8
million in 1998. The increased loss of $94.2 million was primarily a result of
restructuring charges, asset impairment charges and Special Charges of $8.5
million, $8.1 million and $26.5 million, respectively, an increase in the tax
provision of $20.3 million reflecting an increase in the reserve for net tax
benefits, the increase in depreciation expense of $12.4 million and the in-
crease in interest expense of $9.4 million. The Company recorded $18.6 million
in equity in loss of joint ventures in 1999, compared with equity in loss of
joint ventures of $8.2 million in 1998. The increase was primarily attribut-
able to the acceleration of the amortization schedule for the excess of the
Company's investment over its equity in its Brazilian joint venture's net as-
sets,
Net loss in 1998 was $106.8 million compared to a net loss of $55.6 million
in 1997. The increase in net loss of $51.2 million was primarily a result of
decreases in Bowling Products revenue and
20
EBITDA discussed above and the increase in depreciation expense. Additionally,
the Company recorded $8.2 million in equity in loss of joint ventures in 1998
compared to a loss of $1.4 million in 1997. The Company accounts for its in-
vestments in its Hong Leong joint venture and Playcenter joint venture by the
equity method. See "Note 15. Joint Ventures" in the Notes to Consolidated Fi-
nancial Statements. The Company recorded a tax provision of $7.3 million in
1998 compared to a tax benefit of $12.9 million in 1997. The Company recorded
extraordinary charges totaling $23.4 million in the fourth quarter of 1997 as
described in "--Extraordinary Items."
Income Taxes
As of December 31, 1999, the Company had net operating losses of approxi-
mately $284.6 million and foreign tax credits of $11.5 million that will carry
over to future years to offset U.S. taxes. The foreign tax credits will begin
to expire in the year 2001 and the net operating losses will begin to expire
in the year 2011. The Company has recorded a valuation reserve as of December
31, 1999 for $126.3 million related to net operating losses and foreign tax
credits and other deferred tax assets that the Company may not utilize prior
to their expirations. The tax provision recorded for 1999 reflects an increase
in the valuation allowance and certain international taxes.
Liquidity
1999 Compared to 1998. The Company's primary source of liquidity is cash
provided by operations and credit facilities as described below. Working capi-
tal on December 31, 1999 was $7.1 million compared with $59.5 million as of
December 31, 1998, a decrease of $52.4 million. A decrease in working capital
was primarily attributable to a decrease of $11.2 million in inventory bal-
ances primarily due to lower sales levels and Special Charges, a decrease of
$19.3 million in accounts receivable primarily as a result of decreased sales
in 1999 compared to 1998, an increase of $12.5 million in accounts payable and
accrued expenses, an increase of $1.9 million in the current portion of long-
term debt, a net decrease of $6.2 million in other current assets and liabili-
ties and a decrease of $1.3 million in cash.
Net cash flows provided by operating activities were $40.4 million for 1999
compared to net cash flows provided of $7.8 million for 1998, an increase of
$32.6 million. A decrease of $94.2 million was attributable to the net loss of
$201.0 million recorded in 1999 compared to a net loss of $106.8 million in
1999; a decrease of $6.4 million was attributable to loss on the sale of prop-
erty and equipment, net and a decrease of $2.9 million was attributable to the
change in income taxes payable. These decreases were offset by an increase of
$20.7 million attributable to a decrease in the level of deferred tax assets,
an increase of $21.6 million attributable to lower levels of accounts receiv-
able, an increase of $12.4 million in depreciation and amortization, loss on
impairment of assets of $8.1 million attributable to the closure of certain
bowling centers, an increase of $18.0 million attributable to lower inventory
balances resulting from lower Bowling Products sales volumes in 1999, in-
creased bond amortization of $2.9 million, an increase of $19.5 million caused
by increased levels of accounts payable and accrued expenses, an increase of
$22.1 million attributable to a decrease in other assets primarily related to
decreases in deposits and other assets, an increase of $0.5 million attribut-
able to changes in other operating activities and an increase of $10.4 million
in equity in loss of joint ventures.
Net cash flows used in investing activities were $51.5 million for 1999
compared to net cash flows used of $242.0 million for 1998, a decrease of
$190.5 million. Bowling Center acquisition spending decreased by $172.1 mil-
lion and purchases of property and equipment decreased by $14.6 million in
1999 compared with 1998. In 1999, the Company purchased one center compared
with 83 centers in 1998. There were no investments in or advances to joint
ventures in 1999 compared with $5.6 million
21
in 1998. Proceeds from the sale of property and equipment decreased $1.8 mil-
lion in 1999 compared with 1998. See "Note 14. Acquisitions" in the Notes to
Consolidated Financial Statements and "--Capital Expenditures" for additional
discussion of these investing activities.
Net cash provided by financing activities was $9.1 million for 1999 com-
pared to the net cash provided of $217.4 million for 1998, a decrease of
$208.3 million. Proceeds from long term debt decreased $183.5 million.
Borrowings under the Credit Agreement decreased $183.5 million as a result of
the curtailment of the pace of acquisitions. Payments on long-term debt de-
creased $195.6 million. In 1998, $249.6 million of the proceeds from the issu-
ance of AMF Bowling's Zero Coupon Convertible Debentures due 2018 (the
"Debentures") were used to pay down the revolving credit facility (the "Bank
Facility") under the Credit Agreement. In accordance with the terms of the
Credit Agreement, scheduled principal payments in 1999 were $5.0 million
higher than payments made in 1998. Additionally, in 1999, $74.0 million was
paid against amounts outstanding under the Bank Facility. In 1999, $34.7 mil-
lion was provided by additional capital contributions from AMF Bowling from
part of the net proceeds of a rights offering by AMF Bowling. In the year
ended December 31, 1998, $255.6 million was provided by additional capital
contributions from AMF Bowling attributable to the issuance of the Debentures.
See "Note 8. Long-Term Debt and Recapitalization Plan", and "Note 14. Acquisi-
tions" in the Notes to Consolidated Financial Statements and "--Capital Re-
sources."
As a result of the aforementioned, cash decreased by $1.3 million in 1999
compared to a decrease of $13.9 million in 1998.
1998 Compared to 1997. Net cash flows provided by operating activities were
$7.8 million for 1998 compared to net cash flows provided of $47.7 million for
1997, a decrease of $39.9 million. A decrease of $51.2 million was attribut-
able to the net loss of $106.8 million recorded in 1998 compared to a net loss
of $55.6 million 1997; a decrease of $27.1 million was caused by decreased
levels of accounts payable and accrued expenses; a decrease of $9.6 million
was attributable to lower levels of bond amortization resulting from the re-
demption of a portion of Bowling Worldwide's Subsidiary Senior Subordinated
Discount Notes in connection with the Initial Public Offering; and a decrease
of $6.8 million was attributable to the increase in other assets primarily due
to increases in deposits and other assets. These decreases were offset by an
increase of $20.0 million attributable to a decrease in the level of deferred
taxes; an increase of $15.9 million attributable to lower levels of accounts
receivable; an increase of $17.9 million in depreciation and amortization;
loss on the sale of property and equipment, net of $4.5 million attributable
to the closure of nine bowling centers and the sale of the Company's Swiss
bowling center in 1998; an increase of $9.9 million attributable to lower in-
ventory balances resulting from lower Bowling Products sales volumes in 1998;
a net increase of $3.2 million attributable to changes in other operating ac-
tivities and an increase in the equity in loss of joint ventures of $6.8 mil-
lion. Extraordinary items associated with the redemption of debt in 1997 with
proceeds from the Initial Public Offering totaled $23.4 million.
Net cash flows used in investing activities were $242.0 million for 1998
compared to net cash flows used of $288.6 million for 1997, a decrease of
$46.6 million. Bowling Center acquisition spending decreased by $41.2 million
and purchases of property and equipment increased by $9.9 million in 1998,
compared to the same period in 1997. In 1998, the Company purchased 83 centers
compared to 122 centers in 1997. Investments in and advances to joint ventures
totaled $5.6 million in 1998 compared to investments in or advances to joint
ventures of $21.3 million in 1997. Other cash flows provided from investing
activities decreased $0.4 million. See "Note 14. Acquisitions" in the Notes to
Consolidated Financial Statements and "--Capital Expenditures" for additional
discussion of these investing activities.
Net cash provided by financing activities was $217.4 million for 1998 com-
pared to the net cash provided of $235.7 million for 1997, a decrease of $18.3
million. Proceeds from long-term debt in-
22
creased $24.1 million primarily as a result of borrowings under the Credit
Agreement used to fund center acquisitions and working capital. Payments on
long-term debt were lower by $2.7 million in 1998 compared to 1997. In 1998,
$255.6 million was provided by additional capital contributions from AMF Bowl-
ing attributable to the issuance by AMF Bowling of the Debentures. In 1997,
$315.7 million was provided by additional capital contributions from AMF Bowl-
ing attributable to the sale of AMF Bowling Common Stock for $36.6 million by
AMF Bowling to its institutional stockholders and net proceeds of $279.1 mil-
lion from the Initial Public Offering. In 1997, $14.6 million was used to pay
the premium associated with the redemption of a portion of the Subsidiary Se-
nior Subordinated Discount Notes with proceeds from the Initial Public Offer-
ing and $0.5 million was used for a dividend to AMF Bowling for the repurchase
of AMF Bowling Common Stock. See "Note 8. Long-Term Debt and Recapitalization
Plan" and "Note 14. Acquisitions" in the Notes to Consolidated Financial
Statements and "--Capital Resources."
As a result of the aforementioned, cash decreased by $13.9 million in 1998
compared to a decrease of $7.8 million in 1997.
Capital Resources
The Company's total indebtedness is primarily a result of the financing of
the Acquisition and the Company's bowling center acquisition program. At De-
cember 31, 1999, the Company's debt structure consisted of $558.5 million of
senior debt, $250.0 million of Subsidiary Senior Subordinated Notes and $240.1
million of Subsidiary Senior Subordinated Discount Notes. The Company's senior
debt consisted of $386.5 million of term loans, $170.0 million of revolving
credit advances under 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 Fa-
cility, subject to certain conditions. At December 31, 1999, $170.0 million
was outstanding and $185.0 million was available for borrowing under the Bank
Facility subject to certain limitations regarding acquisitions and capital ex-
penditures. Between December 31, 1999 and February 29, 2000 there were no ad-
ditional borrowings and $2.0 million in payments resulting in a balance out-
standing, as of February 29, 2000, of $168.0 million under the Bank Facility.
In connection with a recapitalization plan by AMF Bowling, the lenders un-
der 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 un-
der the covenants contained in the Credit Agreement and (iii) certain other
modifications. See "Note 8. Long-Term Debt and Recapitalization Plan" in the
Notes to Consolidated Financial Statements. Bowling Worldwide was in compli-
ance with the amended covenants as of December 31, 1999. In this connection,
AMF Bowling made contributions of $1.0 million and $2.0 million as equity to
Bowling Worldwide in November 1999 and March 2000 to meet EBITDA requirements
under its financial covenant tests as of September 30, 1999 and December 31,
1999, respectively. The Credit Agreement permits AMF Bowling to make addi-
tional equity contributions to Bowling Worldwide through 2001, Management be-
lieves that Bowling Worldwide will be in compliance with the amended covenants
during 2000, including the effect of the aforementioned equity contributions,
but any downturn in the current 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 de-
fault which, if not cured or waived, will have a material adverse effect on
the Company.
During 1999, the Company funded its cash needs through the Bank Facility as
well as cash flows from operations and cash balances. A substantial portion of
the Company's available cash will be applied to service the outstanding in-
debtedness. The Company incurred cash interest expense of
23
$81.8 million in 1999, representing 59.7% of recurring EBITDA of $137.1 mil-
lion for the year. The Company incurred cash interest expense of $76.5 million
in 1998, representing 56.1% of EBITDA of $136.4 million for the year. The Com-
pany incurred cash interest expenses of $83.0 million in 1997, representing
44.8% of EBITDA of $185.4 million for the year.
The indentures governing the Subsidiary Notes and certain provisions of the
Credit Agreement contain financial and operating covenants and significant re-
strictions on the ability of the Company to pay dividends, incur indebtedness,
make investments and take certain other corporate actions. As of December 31,
1999, the Company was in compliance with all of its covenants under these in-
dentures. See "Note 8.--Long-Term Debt and Recapitalization Plan" in the Notes
to Consolidated Financial Statements.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future perfor-
mance, which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control, in-
cluding the conditions of the debt and equity markets. Based upon the current
level of performance, management believes that cash flow from operations, to-
gether 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 inter-
est on, its senior debt, and interest on the Subsidiary Notes for the year
2000. In calendar year 2001, principal payment obligations under the facili-
ties of the Credit Agreement increase significantly, cash interest becomes
payable on the Subsidiary Senior Subordinated Discount Notes and the covenants
under the Credit Agreement will be reset to their original levels. Based on
current levels of performance, the Company anticipates that some form of refi-
nancing will be required to meet the Company's financial requirements for cal-
endar 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 Com-
pany to meet its payment obligations under its indebtedness, or make necessary
capital expenditures, or that any refinancing would be available on commer-
cially reasonable terms or at all.
Capital Expenditures
The Company's capital expenditures were $52.1 million in 1999 compared with
$66.6 million in 1998, a decrease of $14.5 million. Bowling Centers mainte-
nance and modernization expenditures decreased $2.2 million. Bowling Products
expenditures decreased $2.6 million. Company-wide information systems expendi-
tures increased $3.0 million. Investments in Xtreme(TM) bowling equipment at
various AMF bowling centers decreased by $0.1 million. Capital expenditures
for new centers were $9.5 million higher in 1998 due to the construction of a
Michael Jordan Golf Center in 1998 and a decrease in center acquisitions dur-
ing 1999. In 1999, other expenditures decreased $3.1 million.
The Company's capital expenditures were $66.6 million in 1998 compared with
$56.7 million in 1997, an increase of $9.9 million. Bowling Centers capital
expenditures increased $12.1 million, which was attributable to the higher
number of the Company's centers as a result of the Company's acquisition pro-
gram; Bowling Products capital expenditures decreased $0.2 million as a result
of decreased expenditures on certain new products; expenditures on Company-
wide information systems decreased $3.5 million and other expenditures in-
creased $1.5 million.
While the Company's intention is to continue consolidating the U.S. bowling
center industry by acquiring additional bowling centers, the Company will
evaluate acquisitions on a more selective basis and will consider acquisition
targets which meet specific operating and valuation parameters. At the
24
same time, management will continue its focus on improving financial perfor-
mance of its current centers. As of February 29, 2000, the Company had no com-
mitment to build or acquire bowling centers. The Company has committed to
build one Michael Jordan Golf Center in 2000.
The Company has funded its capital expenditures from cash generated by op-
erations and, with respect to the construction and acquisition of new centers,
internally generated cash, the Bank Facility and cash contributions from AMF
Bowling funded by issuances of AMF Bowling Common Stock. See "Note 14. Acqui-
sitions" in the Notes to Consolidated Financial Statements, "--Liquidity" and
"--Capital Resources."
In connection with AMF Bowling's recapitalization plan, the lenders under
the Credit Agreement amended the terms of the Credit Agreement, as of June 14,
1999, to provide the Company with (i) the ability to increase the pace of its
bowling center acquisition program, (ii) greater financial flexibility under
the covenants contained in the Credit Agreement and (iii) certain other modi-
fications. See "Note 8. Long-Term Debt and Recapitalization Plan" in the Notes
to Consolidated Financial Statements.
Seasonality and Market Development Cycles
The U.S. bowling center operations are seasonal. The following table sets
forth AMF's U.S. constant centers revenue for the four quarters of 1999:
Quarter Ending (dollars in millions)
-----------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- ------------- ------------------ -----------------
Total Revenue........... $117.1 $77.7 $76.9 $104.3
% of Total.............. 31.1% 20.7% 20.5% 27.7%
The financial performance of Bowling Centers operations is seasonal. Cash
flows typically peak in the winter and reach their lows in the summer. While
the geographic diversity of the Company's Bowling Centers operations has
helped reduce this seasonality in the past, the increase in U.S. centers re-
sulting 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 Prod-
ucts, 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 moderni-
zation 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.
Sales of NCPs can fluctuate dramatically as a result of economic fluctua-
tions in international markets, as seen in the reduction of sales of NCPs to
markets in the Asia Pacific region following economic difficulties in that re-
gion.
International Operations
The Company's international operations are subject to the usual risks in-
herent 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 ex-
port duties and quotas, foreign customs, tariffs and value added taxes and un-
expected changes in regulatory environments),
25
difficulty in obtaining distribution and support for products, the risk of na-
tionalization, the laws and policies of the United States affecting trade, in-
ternational investment and loans, and foreign tax law changes.
The Company has a history of operating in a number of international mar-
kets, 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 strengthen-
ing U.S. dollar exchange rate may adversely impact sales volume and profit
margins during such periods.
The continuing economic difficulties in the Asia Pacific Region have had
and will continue to have a material adverse impact on NCP sales. One of the
reasons for the decline in NCP sales is the limited availability of financing
for customers desiring to build new bowling centers, especially in the Asia
Pacific region. In addition, Zhonglu became a significant competitor in China.
On June 13, 1999, Bowling Products signed three-year joint distribution agree-
ments with Zhonglu. Under the terms of the agreements, Zhonglu became the ex-
clusive distributor of AMF products and parts in China, and Bowling Products
became the exclusive distributor of Zhonglu bowling products and parts outside
China. These agreements are intended to improve Bowling Products' competitive
position in both China and other developing markets. However, there is no as-
surance that such an improvement will occur.
NCP unit sales to China, Japan and other countries in the Asia Pacific re-
gion represented 43.0% of total NCP unit sales in 1999 compared with 52.8% in
1998.
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 has also begun to prohibit
importation of used capital equipment without permits. Permits for the impor-
tation 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.
Foreign currency exchange rates can also affect the translation of operat-
ing results from international bowling centers. Revenue and recurring EBITDA
of international bowling centers represented 17.0% and 24.7% of consolidated
revenue and recurring EBITDA, respectively, in 1999. Revenue and EBITDA of in-
ternational bowling centers represented 15.7% and 23.2% of consolidated reve-
nue and EBITDA, respectively, in 1998.
Recent NCP Sales
NCP sales totaled $52.6 million in 1999, representing a decrease of 41.9 %
from 1998. NCP shipments were 1,343 units for 1999, representing a decrease of
45.5% from 1998, largely attributable to the economic difficulties in the Asia
Pacific region and increased competition in general. See "--Seasonality and
Market Development Cycles" and "--International Operations."
NCP sales totaled $90.5 million in 1998, a decrease of 45.2% from 1997. NCP
shipments were 2,466 units for 1998, representing a decrease of 46.1% compared
with shipments of 4,576 units for 1997, and largely attributable to the eco-
nomic difficulties in the Asia Pacific region. See "--Seasonality and Market
Development Cycles" and "--International Operations."
26
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 mate-
rial 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 in-
flation during 1999, 1998 and 1997.
Recent Accounting Pronouncements
Effective for the quarter ended March 31, 2001, the Company is required to
adopt Statement of Financial Accounting Standards No. 133 "Accounting for De-
rivative Instruments and Hedging Activities." The Company does not expect that
adoption of this standard will have a material impact on the Company's finan-
cial position or results of operations.
Year 2000 Issue
Year 2000
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems had
the potential to recognize the Year 2000 as "00" and assume that the year is
1900 rather than 2000. This could have caused many computer applications to
fail completely or to create erroneous results unless corrective measures were
taken. The Company recognized the need to ensure its operations would not be
adversely impacted by Year 2000 software failures, and prepared for the Year
2000. The Company evaluated its Year 2000 risk in three separate categories:
information technology ("IT") systems, non-IT systems and material third-party
relationships. The Company developed a plan in which the risks in each of
these categories were reviewed and addressed by the appropriate level of man-
agement. AMF has to date experienced no material operational difficulties re-
lated to the transition to the year 2000. The Company's critical vendors were
Year 2000 compliant and the Company experienced no material lapses in service
by these vendors.
ITEM 7A. MARKET RISK
The Company is exposed to market risk from changes in foreign currency ex-
change 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 fi-
nancial instruments to manage this risk. However, as in the case of other
U.S.-based manufacturers with export sales, local currency devaluation in-
creases the cost of the Company's bowling equipment in that market. As a re-
sult, 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 bowl-
ing centers. Revenue and recurring EBITDA of international bowling centers
represented 17.0% and 24.7% of consolidated revenue and recurring EBITDA, re-
spectively, in 1999. Revenue and EBITDA of international bowling centers rep-
resented 15.7% and 23.2% of consolidated revenue and EBITDA, respectively, in
1998.
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
27
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 finan-
cial institution and the Company does not anticipate non-performance. The Com-
pany does not hold or issue derivative financial instruments for trading pur-
poses. The following table provides information about the Company's fixed and
variable rate debt, weighted average interest rates and respective maturity
dates (dollar amounts in millions).
Weighted Weighted
Fixed Average Variable Average
Rate Interest Rate Interest
Maturity Debt Rate Debt Rate
-------- ------ -------- -------- --------
2000 $ -- -- % $ 34.3 9.77%
2001 -- -- 83.0 10.01
2002 -- -- 276.0 9.86
2003 -- -- 116.4 10.52
2004 -- -- 46.8 10.68
Thereafter 529.0 9.13 0.0 N/A
------ ------
Total $529.0 $556.5
====== ======
During March 1999 and December 1999, Bowling Worldwide entered into two in-
terest 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 December 31,
1999:
Notional Amount
Expiration Date (in millions) Cap Rate (a)
--------------- --------------- ------------
March 31, 2000 $200.0 6.5000%
December 31,
2000 100.0 7.6525
(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 $65,000 and $75,000, respectively,
for the two interest rate caps. Bowling Worldwide will receive quarterly pay-
ments from the Counterparty if the quoted 3 month USD-LIBOR on the quarterly
floating rate reset dates is above the respective cap rates.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
----
Financial Statements
Report of Independent Public Accountants................................ 30
Consolidated Balance Sheets as of December 31, 1999 and 1998............ 31
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................... 32
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................... 33
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1999, 1998 and 1997....................................... 34
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1999, 1998 and 1997....................................... 35
Notes to Consolidated Financial Statements.............................. 36
Selected Quarterly Data (unaudited)..................................... 69
Financial Statement Schedules
Report of Independent Public Accountants on Schedule I.................. 88
Schedule I--Condensed Financial Information of AMF Group Holdings
Inc. .................................................................. 89
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
AMF GROUP HOLDINGS INC.:
We have audited the accompanying consolidated balance sheets of AMF Group
Holdings Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations, cash
flows, stockholder's equity and comprehensive loss for each of the three years
in the period ended December 31, 1999. These financial statements are the re-
sponsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AMF Group Holdings Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years ended December 31,
1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Richmond, Virginia
February 28, 2000
30
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of December 31,
----------------------
1999 1998
---------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 20,515 $ 21,847
Accounts and notes receivable, net of allowance for
doubtful accounts of $9,531 and $6,492,
respectively........................................ 63,175 82,435
Inventories.......................................... 53,499 64,735
Deferred taxes and other current assets.............. 14,451 22,539
---------- ----------
Total current assets............................... 151,640 191,556
Property and equipment, net............................ 806,425 873,985
Other assets........................................... 81,751 100,295
Goodwill, net.......................................... 765,092 772,744
Investments in and advances to joint ventures.......... 448 17,436
---------- ----------
Total assets....................................... $1,805,356 $1,956,016
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................... $ 36,481 $ 33,900
Accrued expenses..................................... 70,441 60,512
Income taxes payable................................. 3,377 5,316
Current portion of long-term debt.................... 34,250 32,375
---------- ----------
Total current liabilities.......................... 144,549 132,103
Long-term debt, less current portion................... 1,014,352 1,014,716
Other long-term liabilities............................ 4,804 5,265
---------- ----------
Total liabilities.................................. 1,163,705 1,152,084
---------- ----------
Commitments and contingencies
Stockholder's equity:
Common stock (par value $.01 per share, 100 shares
authorized, issued and outstanding)................. -- --
Paid-in capital...................................... 1,040,529 1,005,798
Retained deficit..................................... (383,554) (182,541)
Accumulated other comprehensive loss................. (15,324) (19,325)
---------- ----------
Total stockholder's equity......................... 641,651 803,9