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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 001-12131
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
10 7/8% Series B Senior Subordinated Notes Due 2006 New York Stock Exchange
121/4% Series B Senior Subordinated Discount Notes Due 2006 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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. |_|
As of March 23, 2001, 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.
PART I
ITEM 1. BUSINESS
General Development of Business
AMF Bowling Worldwide, Inc. ("Bowling Worldwide" and, together with its
subsidiaries, the "Company" or "AMF") is the largest owner 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, consisting of 408 U.S. bowling
centers and 117 international bowling centers ("Bowling Centers"), as of
December 31, 2000, and (ii) the manufacture and sale of bowling equipment such
as automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare parts, and the resale of allied products such as bowling
balls, bags, shoes, and certain other spare parts ("Bowling Products"). The
principal markets for bowling equipment are U.S. and international bowling
center operators. AMF also manufactures and sells the PlayMaster, Highland and
Renaissance brands of billiards tables, and owns the Michael Jordan Golf
Company, which operates two golf practice ranges.
Bowling Worldwide conducts all of its business through subsidiaries and
provides certain limited management service operations to its subsidiaries and
AMF Bowling, Inc. ("AMF Bowling"). Bowling Worldwide is a wholly-owned, direct
subsidiary of AMF Group Holdings Inc. ("AMF Group Holdings"). AMF Group Holdings
is a wholly-owned, direct subsidiary of AMF Bowling. AMF Bowling, AMF Group
Holdings and Bowling Worldwide are Delaware corporations. An investor group led
by affiliates of Goldman, Sachs & Co. acquired the Company in 1996 (the
"Acquisition").
Since the Acquisition and prior to December 31, 2000, the Company purchased
an aggregate of 280 bowling centers for a combined purchase price of
approximately $507.4 million. The Company has funded its acquisitions and new
center construction from internally generated cash, borrowings under the senior
secured revolving credit facility (the "Bank Facility") under its credit
agreement dated as of May 1, 1996, as amended and restated (the "Credit
Agreement"), issuances of AMF Bowling common stock (the "Common Stock") and AMF
Bowling's Zero Coupon Convertible Debentures due 2018 (the "Convertible
Debentures").
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 (modernization equipment used to upgrade an existing center, spare
parts, supplies and consumable products essential to maintain operations of an
existing center and resale products for bowlers).
See "Item 6. Selected Financial Data," and "Note 14. Acquisitions," "Note
16. Business Segments," and "Note 17. Geographic Segments" in the Notes to
Consolidated Financial Statements for discussions regarding acquisitions and
business and geographic segments.
Restructuring
In August 2000, AMF Bowling announced that Bowling Worldwide and Citibank,
N.A., Administrative Agent of Bowling Worldwide's senior secured lenders
(collectively, the "Lenders"), had amended (the "Amendment") the Credit
Agreement. Pursuant to the Amendment, Bowling Worldwide agreed, among other
things, to forbear from making the September 15, 2000 interest payment due on
its 10 7/8% Series B Senior Subordinated Notes (the "Senior Subordinated Notes")
and that it would begin exploring various alternatives to restructure and reduce
its long-term debt. As part of the Amendment, the Lenders agreed to waive any
default under the Credit Agreement resulting from the failure to make the
September 15, 2000 interest payment due on the Senior Subordinated Notes unless
the Company's other creditors commenced the exercise of remedies, which could
include the acceleration of the Company's debt obligations and an involuntary
bankruptcy filing. The Amendment further provided for the permanent termination
of $100.0 million of the otherwise available working capital commitments under
the Credit Agreement. Moreover, the Amendment waived Bowling Worldwide's
compliance with the financial covenants in the Credit Agreement through December
31, 2000. The Amendment also required that Bowling Worldwide deliver a
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preliminary plan containing the principal terms of a proposal to restructure the
Company's debt to the Lenders. Bowling Worldwide submitted a proposed
restructuring plan on September 30, 2000 and a majority of the Lenders indicated
by October 15, 2000 that the plan was generally satisfactory in form and
substance, subject to further approval of any definitive plan.
Bowling Worldwide did not make the cash interest payment of approximately
$13.6 million on the Senior Subordinated Notes required on September 15, 2000
and the 30 day period to cure the non-payment of interest under the related
indenture expired. Under the indenture, the Trustee on its own or the holders of
25% or more of the outstanding principal amount of the Senior Subordinated Notes
have had the right, by written notice, since the expiration of the cure period,
to declare all amounts owed under the indenture immediately due and payable. If
the indebtedness represented by the Senior Subordinated Notes is accelerated,
such acceleration would result in a default under the Credit Agreement, the
Company's 12 1/4% Series B Senior Subordinated Discount Notes (the "Senior
Subordinated Discount Notes"), the Convertible Debentures and certain other
Company indebtedness. In such event, the Company would not then be able to meet
its accelerated payment obligations. Bowling Worldwide also failed to make the
required cash interest payment of approximately $13.6 million on the Senior
Subordinated Notes due on March 15, 2001 and did not make such payment during
the 30 day period to cure. As of April 15, 2001, neither Bowling Worldwide nor
AMF Bowling has received notice that any of its indebtedness has been or will be
accelerated.
Bowling Worldwide did not make a scheduled principal payment to the Lenders
of $12.8 million that was due on December 29, 2000. Bowling Worldwide did pay
$3.0 million of the $14.7 million of interest then due under the Credit
Agreement on December 29, 2000. The remainder of the $14.7 million of interest
(at a non-default interest rate) due was paid on a weekly schedule during the
first quarter of 2001. In addition, the Lenders' waiver of the financial
covenants in the Credit Agreement expired on December 31, 2000. As a result of
the foregoing, Bowling Worldwide is in default under the Credit Agreement.
Bowling Worldwide did not make a scheduled principal payment under the
Credit Agreement of $12.8 million, which was due on March 30, 2001 but did make
a $16.4 million interest payment under the Credit Agreement on March 30, 2001.
This payment represented interest at the non-default interest rate and was
approximately $2.8 million less than the interest would have been at the default
rate. As explained above, Bowling Worldwide is in default under the Credit
Agreement and the Senior Subordinated Notes and such defaults could result in
the acceleration of the indebtedness under the Credit Agreement, the Senior
Subordinated Notes, the Senior Subordinated Discount Notes, the Convertible
Debentures and certain other indebtedness of the Company. However, as of April
15, 2001, neither AMF Bowling nor Bowling Worldwide has received notice that any
of its indebtedness has been or will be accelerated. The Company is also not
aware that a creditor, including the Lenders and the holders of Senior
Subordinated Notes and the Senior Subordinated Discount Notes (collectively, the
"Subordinated Note Holders"), has taken action, or notified the Company that it
will take action, to enforce their rights or remedies against the Company or its
assets as a result of the defaults described above.
Since January 2001, the Company has funded its day to day operating
expenses and requirements for capital expenditures from cash flow from
operations. During 2001, scheduled principal payments under the Credit Agreement
increase significantly and cash interest becomes payable on the Senior
Subordinated Discount Notes. Management anticipates that the Company will not
make such principal and interest payments.
During 2000, the New York Stock Exchange (the "NYSE") delisted the Common
Stock, the Senior Subordinated Notes and Senior Subordinated Discount Notes. The
NYSE's action was taken in part due to the Company's restructuring and in part
due to the fact that the Common Stock traded below the NYSE's continued listing
criteria relating to a minimum share price. Since November 22, 2000, the Common
Stock has traded in the over-the-counter market under the symbol "AMBW."
In mid 2000, Bowling Worldwide retained financial and legal advisors to
assist it in evaluating its restructuring and refinancing alternatives. At the
time, management believed the possible alternatives included a consensual,
negotiated restructuring, a reorganization under Chapter 11 of the U.S.
Bankruptcy Code, 11 U.S. ss. 101 et seq. ("Chapter 11") and/or other possible
methods for reducing the Company's long-term debt and improving its capital
structure. Any alternative selected would likely have a material adverse effect
on the ability of AMF Bowling's shareholders to recover their investment in the
Common Stock and on the ability of the Subordinated
3
Notes Holders and the holders of the Convertible Debentures and other Company
indebtedness to receive interest and principal payments due thereon.
Bowling Worldwide and its advisors have provided certain information to and
held substantive discussions with the steering committees for the Lenders and
the Subordinated Notes Holders. The Lenders and the Subordinated Notes Holders
have each retained their own separate legal and financial advisors.
Management now believes that a Chapter 11 filing is the most likely and
efficient means to complete the debt restructuring. The Company and the steering
committees for the Lenders and the Subordinated Notes Holders are continuing
discussions regarding the debt restructuring. The Company believes that these
discussions are constructive and progress is being made. Accordingly, at this
time management has not made a recommendation to the Board of Directors of
Bowling Worldwide (the "Board") with respect to a Chapter 11 filing and the
Board has not yet taken any action in this regard. Bowling Worldwide has also
begun discussions with the Lenders and the Subordinated Notes Holders about a
potential Chapter 11 filing as well as business and legal issues related to such
a filing in order to ensure an orderly proceeding with minimal impact on the
Company's operations, employees and customers.
In order to facilitate a restructuring in a Chapter 11 proceeding, Bowling
Worldwide has received proposals for a secured debtor-in-possession financing
facility (a "DIP Facility"). Although no assurances can be given, Bowling
Worldwide believes that it would have a commitment from the Lenders for a DIP
Facility at the time of filing for a reorganization under Chapter 11. Management
believes that the borrowing capacity under a DIP Facility, in addition to
available cash on hand of approximately $40.0 million as of April 13, 2001, will
be sufficient to meet the Company's current liquidity and capital expenditure
requirements during the period when the Company would be operating under Chapter
11, although no assurances can be given in this regard.
While it is diligently pursuing a financial restructuring, Bowling
Worldwide is unable to predict if it will be able to arrive at a restructuring
plan, acceptable to the Lenders and the Subordinated Notes Holders, before a
filing is made or during a Chapter 11 proceeding. Bowling Worldwide is unable to
predict whether it will be able to satisfactorily implement such a plan, or
whether, in the interim, the Lenders and the Subordinated Notes Holders will
continue to forbear from exercising any or all of the remedies available to
them, including acceleration of the Company's indebtedness, an involuntary
bankruptcy proceeding and, in the case of the Lenders, realization on collateral
for their indebtedness.
Because retention of key personnel and maintenance of employee morale is so
critical during a restructuring, in mid 2000, certain bonus, severance and
retention programs were approved. The programs extend to senior management,
bonus-eligible and stock option-eligible personnel, including all center
managers around the world. These retention programs are conditioned upon
continued employment to specific dates. In March 2001, after consultation with
its compensation advisor and financial advisor, the Board approved several
enhancements to the year 2001 incentive compensation plan designed to encourage
retention and motivate key personnel during the restructuring process.
Business Segments
Bowling Centers
In the United States, AMF owns 403 bowling centers (as of March 31, 2001)
in 40 states and Puerto Rico. Outside the United States, AMF owns (as of March
31, 2001) 118 centers in nine countries: Australia (48), the United Kingdom
(35), Brazil (12), Mexico (9), China (including Hong Kong) (4), France (4),
Japan (3), Spain (2) and Argentina (1). Of the U.S. centers, 207 were acquired
as part of the Acquisition, 234 were acquired thereafter and two were
constructed. AMF has closed 40 centers since the Acquisition. Of the
international centers, 78 were acquired as part of the Acquisition, 46 were
acquired thereafter, including 22 in the United Kingdom, ten in Australia, one
in France and 13 centers in Argentina and Brazil that were previously owned as
part of a joint venture with a Sao Paulo-based amusement and entertainment
company and one was constructed in Australia. One center each in China, Japan
and the United Kingdom was closed, and one center each in Canada, Switzerland,
China and the United Kingdom was sold. See "Note 14. Acquisitions" and "Note 15.
Joint Ventures" in the Notes to Consolidated Financial Statements for
discussions regarding acquisitions and joint ventures.
4
Bowling Centers derives its revenue from three principal sources: (i)
bowling, (ii) food and beverage and (iii) other sources such as shoe rental,
amusement machines, billiards and pro shops. In 2000, bowling, food and beverage
and other revenue represented 58.0%, 27.5% and 14.5% of total Bowling Centers
revenue, respectively.
Bowling revenue, the largest segment of a bowling center's revenue, is
derived from league, tournament and recreational play, which includes managed,
or scheduled (such as birthday or corporate parties), and open, or unscheduled,
play. Food and beverage sales are generally through snack bars that offer food,
soft drinks and, at most centers, alcoholic beverages. Other revenue is derived
from shoe rental, amusement machines, billiards and pro shops.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Note 16. Business Segments" and "Note 17.
Geographic Segments" in the Notes to Consolidated Financial Statements for
additional information regarding business and geographic segments.
Bowling Products
Bowling Products manufactures and sells bowling center equipment and
supplies, including automatic pinspotters, automatic scoring equipment, bowling
pins, lanes, ball returns, lane machines and chemicals and certain spare and
modernization parts. Bowling Products also resells products including bowling
balls, bags, shoes and other bowlers' aids, primarily through pro shops. Bowling
Products consists of two categories: (i) NCPs and (ii) Modernization and
Consumer Products.
NCPs include the bowling equipment necessary to outfit new or expand
existing bowling centers, such as lanes, pinspotters, automatic scoring
equipment, bowler seating, ball returns, masking units and bumpers. In addition,
Bowling Products also refurbishes and sells used pinspotters. Combined with new
automatic scoring, lanes, bowler seating, and other components, these used
pinspotters are sold as Factory Certified Packages ("FCPs"). FCP revenue is
included in the NCP category. Traditionally, as bowling is introduced and
becomes popular in new markets, the economics of constructing and operating
bowling centers become attractive and drive demand for NCPs. For over 20 years,
the majority of NCP sales have been to international markets. Until 1998, this
trend was fueled by the growth of bowling in several countries, particularly
China, Korea and Taiwan. Economic difficulties in the Asia Pacific region, as
well as the limited availability of construction financing for customers and the
lack of a significant emerging market to replace China, Korea and Taiwan, have
continued to keep demand for NCPs below peak levels achieved during 1997.
As an initial response to these soft market conditions, Bowling Products
entered into three-year joint distribution agreements with Shanghai Zhonglu
Industrial Corporation ("Zhonglu") in June 1999 whereby Zhonglu became the
exclusive distributor of AMF products in China and Bowling Products became the
exclusive distributor of Zhonglu's bowling products and parts outside of China.
In 1999 and 2000, Bowling Products purchased component parts from Zhonglu as
part of its long-term strategy to reduce manufacturing costs. However, sales of
both AMF products in China and Zhonglu products outside China were slower than
anticipated. In September 2000, the Company and Zhonglu amended the distribution
agreements to replace the exclusive sales relationship with a non-exclusive
relationship. Although the Company continues to purchase certain component parts
from Zhonglu under the revised agreements, both parties are pursuing alternative
sales channels. See "--Business Strategy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Bowling Products."
Sales of Modernization and Consumer Products to bowling center operators
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 supplies. Some of these products, such as bowling
pins, should be replaced on approximately an annual basis to maintain a center,
while certain less frequent investments in other equipment are necessary to
modernize a center and are often required to maintain customers. AMF also sells
products including balls, bags and apparel to pro shops and bowlers.
In addition to bowling equipment and supplies, AMF manufactures and sells
billiards tables under the PlayMaster, Highland and Renaissance brand names.
5
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Note 16. Business Segments" and "Note 17.
Geographic Segments" in the Notes to Consolidated Financial Statements for
additional information regarding business and geographic segments.
Business Strategy
U.S. Bowling Centers
Based upon an internal evaluation of the key drivers for successful center
performance, management has and will continue to focus on the following
initiatives: (i) improved training for center and facility managers; (ii)
enhanced incentive-based compensation for center managers and key staff; (iii)
more effective marketing programs; (iv) improved cost management of payroll
through better labor scheduling and (v) more efficient center purchasing through
a centralized program to reduce supplies expense. Management believes that there
is an opportunity for external growth through acquisition, construction and
eventual franchising of bowling centers. However, the Company's restructuring
precludes pursuit of these opportunities at this time.
Management believes that quality and experience of the center manager and
staff are the most important factors that differentiate the better performing
centers in the AMF system. Because a bowling center manager is responsible for a
wider range of functional areas than most retail managers, the quality and
experience of a center manager has a greater impact on the operations of the
center than a typical retail store manager. The Company is attempting to recruit
higher quality center managers and staff and to devote more resources to
training. During 2001, the Company will implement a comprehensive training
program that combines classroom and on-site training to improve overall center
performance and reduce turnover.
The Company recently established a more aggressive incentive compensation
plan to reward performance with an increased bonus potential for
over-achievement. Management believes that higher profitability should offset
the cost of this performance-based compensation. The new compensation system
should also help attract better manager candidates as well as reduce management
turnover.
The Company's national marketing team supports the bowling centers through
programs designed to increase awareness and visits to bowling centers across a
broad customer base. The Company's 2001 national marketing calendar will focus
on radio advertising supported by targeted mailing programs and special
promotions geared separately to league, open and managed play customers.
The Company will also focus on improving food and beverage revenue growth
through several initiatives expected to increase the speed and improve the
quality of food service. Implementation of better inventory and cost controls,
along with menu consolidations, should further improve food and beverage margin.
Management expects to improve cash flow margins with the help of certain
cost reduction initiatives. At the center level, a weekly payroll report and
payroll planning guide will help each center manager better schedule and manage
payroll, the largest category of a center's operating expenses. An automated
center purchasing program has been rolled out to all U.S. centers to leverage
the Company's size in order to increase purchasing efficiency. In late 2000,
management reduced the size of its field organization to eliminate certain
supervisory, monitoring and support services that did not add sufficient value.
Management also expects to improve center operating performance by driving more
decision-making and accountability to the center level.
International Bowling Centers
The Company's operating strategies vary by country, although in general,
local management is focused on operating initiatives similar to those described
for U.S. centers. As the Company expanded in the U.K. and Australia, the
turnover of center managers was generally less. A greater emphasis on training
has already been implemented in both the U.K. and Australia.
6
Bowling Products
In March 2001, the Company hired John Suddarth as Chief Operating Officer
for Bowling Products. His new management team intends to evaluate strategy,
operations and organization with the intent to put in motion a turnaround plan
to achieve profitability. The increased product and customer focus expected to
be achieved from reorganization will be complementary to recent strategic
initiatives focused on product quality enhancements and better management
information systems.
The Company believes that opportunities exist to reduce international order
fulfillment lead times while continuing to improve the accuracy and completeness
of shipments. The new management team is exploring regional distribution to
replace country-based inventory storage facilities. In addition, management will
continue to eliminate outdated and redundant stock keeping units ("SKUs").
The new management team will also implement a working capital management
program. With declining sales, working capital management has become more of a
challenge because of the broad product line and SKUs required to serve the
global markets. Bowling Products began establishing inventory and accounts
receivable targets in late 2000 as performance measures for some of its
international managers. In 2001, specific working capital targets will be used
as key operational measures in determining incentive compensation.
Seasonality
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 Bowling Centers operations helped reduce this
seasonality in the past, the increase in the number of U.S. centers owned and/or
operated by the Company resulting from acquisitions has accentuated the
seasonality of that business.
Modernization and Consumer Products sales also display seasonality. The
beginning of league play in the fall of each year drives the U.S. market, which
is the largest market for Modernization and Consumer Products. While operators
purchase consumer products throughout the year, they often place larger orders
during the summer in preparation for the start of league play in the fall.
Summer is also generally the peak period for installation of modernization
equipment. Operators typically sign purchase orders for modernization equipment
during the first four months of the year after they receive winter league
revenue indications. Equipment is then shipped and installed during the summer
when leagues are generally less active. However, sales of some modernization
equipment such as automatic scoring and synthetic lanes are less predictable and
fluctuate from year to year because of the longer life cycle of these major
products.
Industry and Competition
Bowling Centers
Bowling is both a competitive sport and a recreational entertainment
activity and faces competition from numerous alternative leisure activities. The
success of AMF's bowling operations is subject to continued interest in bowling,
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
marketing programs. See "--Business Strategy" and "Management's Discussion of
Financial Condition and Results of Operations--Bowling Centers."
7
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 408 U.S. centers as of December 31, 2000) and Brunswick Corporation
("Brunswick") (which had approximately 113 U.S. centers as of December 31,
2000), three medium-sized chains, which together account for 59 bowling centers,
and approximately 5,016 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 10.4% of the total number of U.S.
bowling centers.
U.S. BOWLING CENTER INDUSTRY (a)
Number of
Operator Locations % of Total
-------- --------- ----------
AMF 408 7.3 %
Brunswick 113 2.0
Bowl America 22 0.4
Community Bowling Centers 22 0.4
Bowl New England 15 0.3
-------- --------
Subtotal 580 10.4
Single-center and small-chain operators 5,016 89.6
-------- --------
Total 5,596 100.0 %
======== ========
- ---------------------------------------
(a) AMF estimate at December 31, 2000.
The international bowling center industry is also highly fragmented. There
are 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, including the
Company's, generally has been characterized by slightly declining lineage
(number of games bowled per lane per day). 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 improve the financial performance of the Company's
centers, AMF is seeking to improve lineage. However, there can be no assurances
that lineage will increase or that the lineage will not further decline. In 1999
and 2000, the U. S. constant centers (centers that have been operated by the
Company at least one full fiscal year) lineage declined slightly each year.
These decreases were offset with price increases yielding a net constant center
revenue growth. 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 competition 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 smaller,
focused companies in certain product lines. See "--International 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.
8
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, currency exchange
rate fluctuations, economic and political fluctuations and destabilization,
other disruption of markets, restrictive laws, tariffs and other actions by
foreign governments (such as restrictions on transfer of funds, import and
export duties and quotas, foreign customs, tariffs and value added taxes and
unexpected changes in regulatory environments), difficulty in obtaining
distribution and support for products, the risk of nationalization, the laws and
policies of the United States affecting trade, international investment and
loans, and foreign tax law changes.
The Company has operated in international markets 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 and 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 EBITDA of international
bowling centers represented 15.9% and 25.4% of consolidated revenue and EBITDA,
respectively, in 2000. Revenue and EBITDA of international bowling centers
represented 17.0% and 30.6% of consolidated revenue and EBITDA, respectively, in
1999.
The demand for NCPs remains below the peak levels achieved during 1997.
Management believes this was the result of economic difficulties in the Asia
Pacific region, as well as the failure of another international market to
develop the strong demand experienced in Asia Pacific in the early and mid
1990's and the limited availability of financing for customers who want to build
new centers.
In response to these market conditions as well as the strengthened
enforcement of import restrictions in China discussed below, Bowling Products
entered into three-year joint distribution agreements with Zhonglu in June 1999.
Under the terms of these agreements, Zhonglu became the exclusive distributor of
AMF products in China and Bowling Products became the exclusive distributor of
Zhonglu's bowling products and parts outside of China. In 1999 and 2000, Bowling
Products purchased component parts from Zhonglu as part of its long-term
strategy to reduce manufacturing costs. However, sales of both AMF products in
China and Zhonglu products outside China were slower than anticipated. In
September 2000, the Company and Zhonglu amended the distribution agreements to
replace the sales relationship with a non-exclusive arrangement. The Company
continues to source some component parts from Zhonglu under the revised
agreements, but both parties are pursuing alternative sales channels. Management
believes that in January, 2000, Zhonglu reached an agreement with Brunswick for
Brunswick to become the primary global sales organization for Zhonglu products.
Management is evaluating how this new relationship impacts the Company's ongoing
purchase of component parts from Zhonglu.
China has strengthened enforcement of its import restrictions by requiring
the payment of full customs duties and value-added taxes on the importation of
new and used capital goods. The Chinese government also prohibits importation of
used capital equipment without permits, which are very difficult to obtain.
Local Chinese companies, however, are not subject to the same restrictions. For
example, 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 as a barrier against the sale of the Company's products.
Management is presently reviewing its alternatives for selling bowling products
in China.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 35.4% of total NCP unit sales in 2000 compared with 43.0% in
1999. Economic difficulties in the Asia Pacific region and increased competition
in general have both affected sales of NCPs. NCP sales totaled $44.0 million in
2000, representing a decrease of 16.3% from 1999. NCP shipments were 1,513 units
for 2000, representing an increase of 12.7% from 1999. 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. See
"--Seasonality and Market Development Cycles."
9
See "Note 16. Business Segments" and "Note 17. Geographic Segments" in the
Notes to Consolidated Financial Statements for additional financial information
concerning the Company's operations in different geographic areas.
Employees
Bowling Centers
As of December 31, 2000, Bowling Centers had approximately 16,386 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 13,715
-------
International:
Australia 1,111
United Kingdom 805
Mexico 272
China (including Hong Kong) 84
France 104
Japan 62
Spain 33
Argentina 17
Brazil 183
-------
Total International 2,671
-------
Total Worldwide 16,386
=======
- ---------------------------------------
(a) Numbers vary depending on the time of year.
Bowling Products
As of December 31, 2000, Bowling Products had approximately 757 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 494
----
Sales:
Asia Pacific 75
Europe 88
Americas 80
Australia 9
Mexico 11
----
Total Sales 263
----
Total Worldwide 757
====
10
Corporate
As of December 31, 2000, corporate had approximately 137 full-time
employees. The Company believes that its relations with its corporate employees
are satisfactory.
ITEM 2. PROPERTIES
Bowling Centers
As of December 31, 2000, AMF operated 408 bowling centers and related
facilities in the United States and 117 centers in nine other countries. A
regional list of these facilities is set forth below:
U.S. CENTERS
Number of Number of
Region Districts Locations (a) Owned Leased
------ --------- ------------- ----- ------
East 12 144 91 53
Central 11 133 91 42
West 11 131 77 54
----- ------ ----- ------
Total 34 408 259 149
===== ====== ===== ======
- ----------------------------------------
(a) AMF owns and operates two golf practice ranges, one each in Aurora, Illinois
and Charlotte, North Carolina. The ranges are not included in the foregoing
table.
INTERNATIONAL CENTERS
Number of
Country Locations Owned Leased
-------
Australia 47 27 20
United Kingdom 35 12 23
Brazil 12 0 12
Mexico 9 5 4
China 4 0 4
France 4 0 4
Japan 3 0 3
Spain 2 0 2
Argentina 1 0 1
----- ---- ----
Total 117 44 73
===== ==== ====
AMF's leases are subject to periodic renewal. Fifty-one of the U.S. centers
have leases that expire during the next three years. Thirty-five of such leases
have renewal options. Twenty-two of the international centers have leases that
expire during the next three years. Three of such leases have renewal options.
For information concerning major encumbrances on AMF-owned real estate, see
"Note 8. Long-Term Debt and 1999 Recapitalization Plan" in the Notes to
Consolidated Financial Statements.
11
Bowling Products
As of December 31, 2000, 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 facilities
at 14 international locations that are used as offices or warehouses. For
information concerning major encumbrances on AMF-owned real estate, see "Note 8.
Long-Term Debt and 1999 Recapitalization Plan" in the Notes to Consolidated
Financial Statements.
U.S. Facilities
Approximate Owned/
Location Products Square Footage Leased
-------- -------- -------------- ------
Richmond, VA World headquarters, pinspotters, automatic scoring, synthetic lanes, 360,000 Owned
other capital equipment, consumer products, used pinspotters and 54,000 Leased
lane maintenance equipment
Lowville, NY Pins and wood lanes 171,000 Owned
Bland, MO Billiard tables (AMF Billiards and Games) 116,926 Owned
33,000 Leased
International Facilities
Approximate Owned/
Location Functions Square Footage Leased
-------- --------- -------------- ------
Emu Plains, Australia Office 400 Leased
Warehouse 10,100 Leased
Hong Kong Office 2,500 Leased
Shanghai, China Office 400 Leased
Beijing, China Warehouse 4,000 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
12
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, Schroder & Co., Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased
Common Stock in AMF Bowling's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, among other
things, damages and/or rescission against all defendants jointly and severally
pursuant to Sections 11, 12 and/or 15 of the Securities Act of 1933, as amended,
based on allegedly inaccurate and misleading disclosures in connection with and
following the Initial Public Offering. Management believes that the litigation
is without merit and intends to defend against it vigorously.
In June 1998, Harbin Hai Heng Bowling Entertainment Co. Ltd. ("Hai Heng")
filed an action against AMF Bowling Products, Inc. ("AMF Bowling Products"), an
indirect subsidiary of Bowling Worldwide, in the Harbin Intermediate People's
Court in Heilongjing, China. Hai Heng sought to recover $3 to $4 million in
damages relating to 38 NCPs purchased from AMF Bowling Products. Hai Heng
asserted that the poor quality of the 38 NCPs entitled Hai Heng to recover the
purchase price and damages for lost profits and the cost of storing the NCPs.
On November 6, 1998, the court awarded Hai Heng approximately $3.5 million.
AMF Bowling Products appealed the award to the High People's Court of
Heilongjing Province (the "People's Court"). Prior to completion of the appeal
review, the President of the People's Court on February 11, 1999 issued a
judgment in favor of Hai Heng for approximately $2.8 million and ordered Hai
Heng to return 24 NCPs to AMF Bowling Products. AMF Bowling Products filed an
appeal to the Supreme People's Court in Beijing (the "Supreme Court"). The
Supreme Court orally issued a stay of the execution of the judgment. AMF Bowling
Products has been advised that the Supreme Court has declined to review the case
and the People's Court judgment is now final.
On September 21, 2000, the United States Securities and Exchange Commission
(the "SEC") issued a subpoena to AMF Bowling seeking documents concerning the
Company's financial statements and accounting practices and policies. On
February 12, 2001, AMF Bowling received a notification from the staff of the SEC
stating that the investigation was terminated and that no enforcement action was
recommended to the SEC.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
environmental claims, discrimination claims, workers' compensation claims and
personal injury claims from customers of Bowling Centers. In some actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. Certain of these litigations will be subject to the automatic stay
upon a Chapter 11 filing. In management's opinion, these 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
center operations or equipment manufacturing. State and local governments
require establishments to hold permits to sell alcoholic beverages, and,
although regulations vary from state to state, once permits are issued, they
generally remain in place indefinitely (except for routine renewals) without
burdensome reporting or supervision other than revenue tax reports.
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.
13
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the 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.
14
PART II
ITEM 5. MARKET FOR BOWLING WORLDWIDE COMMON STOCK AND RELATED INVESTOR MATTERS
Common Stock
The outstanding common stock, $.01 par value, of Bowling Worldwide is
wholly owned by AMF Group Holdings. There is no established public trading
market for Bowling Worldwide's common stock. Bowling Worldwide did not pay any
cash dividends on its common stock during 1999 and 2000 and intends to retain
earnings, if any, for use in the Company's business.
Bowling Worldwide is prohibited under both the Credit Agreement and certain
indentures governing its Senior Subordinated Notes and Senior Subordinated
Discount 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 statements
for the years ended December 31, 2000, 1999, 1998 and 1997, the period ended
December 31, 1996, and the audited combined financial statements of the
Company's predecessor (the "Predecessor Company") for the four months ended
April 30, 1996. 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 income
for the period ending April 30, 1996, AMF Group Holdings' statement of
operations from its inception through December 31, 1996, and adjustments giving
effect to the Acquisition under the purchase method of accounting. The data
should be read in conjunction with AMF Group Holdings' Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appear elsewhere herein.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Company's financial position, including the default on its debt
and the continuing losses from operations, raise substantial doubt about the
Company's ability to continue as a going concern. The appropriateness of
reporting on the going concern basis is dependent upon, among other things, a
prompt restructuring, refinancing or Chapter 11 relief, future profitable
operations, and the ability to generate sufficient cash from operations and
financing sources to meet obligations. As a result of the Company's current
circumstances, however, such realization of assets and liquidation of
liabilities are uncertain. Further, a plan of reorganization could materially
affect the assets and liabilities reported in the accompanying consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability of the value of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary as a consequence of this uncertainty.
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 acquired 122
bowling centers from a number of unrelated sellers. The combined purchase price
was $232.7 million (including amounts paid in 1998 for certain bowling centers
included in the 1997 total). In 1998, AMF Bowling Centers acquired 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. In 2000, AMF Bowling Centers acquired 4 centers
(excluding the 13 joint venture centers acquired in December 2000) for a
combined purchase price of $8.6 million. See "Item 1. Business--General
Development of Business" and "Note 13. Supplemental Disclosures to the
Consolidated Statements of Cash Flows" and "Note 14. Acquisitions" in the Notes
to Consolidated Financial Statements.
15
The selected financial data include operating results expressed in terms of
EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, restructuring and asset impairment charges, and
refinancing charges. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
a company's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
For the year ended December 31, | Four Months
------------------------------------------------------- | Ended
(dollars in millions) | April 30,
AMF Group Holdings Inc. | -------------
------------------------------------------------------- | Predecessor
Pro Forma | Company
1996 (a) 1996 (b) 1997 1998 1999 2000 | 1996 (c)
--------- ------- ------- ------- ------- ------- | -------------
Income Statement Data: |
Operating revenue (d) $ 548.9 $ 384.8 $ 713.7 $ 736.4 $ 732.7 $ 715.0 | $ 164.9
Cost of goods sold 173.6 130.5 212.6 202.2 177.2 173.1 | 43.1
Bowling center operating expenses (d) 178.8 123.7 251.2 334.0 373.4 386.9 | 80.2
Selling, general and administrative expenses 51.0 35.1 64.5 63.8 71.5 64.5 | 35.5
Restructuring and asset impairment charges - - - - 16.6 5.0 | -
Refinancing charges - - - - - 6.5 | -
Depreciation and amortization 73.5 49.4 102.5 120.3 132.7 136.0 | 15.1
------- ------- ------- ------- ------- ------- | -------
Operating income (loss) 72.0 46.1 82.9 16.1 (38.7) (57.0) | (9.0)
Interest expense, gross 106.2 78.0 118.4 101.9 111.3 121.5 | 4.5
Other income (expense), net 3.6 3.7 (8.2) (5.5) (4.8) (0.2) | (0.1)
------- ------- ------- ------- ------- ------- | -------
Net loss before income taxes (30.6) (28.2) (43.7) (91.3) (154.8) (178.7) | (13.6)
Provision (benefit) for income taxes (9.0) (8.6) (12.9) 7.3 27.6 2.3 | (1.7)
------- ------- ------- ------- ------- ------- | -------
Net loss before equity in loss of |
joint ventures and extraordinary items (21.6) (19.6) (30.8) (98.6) (182.4) (181.0) | (11.9)
Equity in loss of joint ventures, net of tax - - (1.4) (8.2) (18.6) (0.5) | -
------- ------- ------- ------- ------- ------- | -------
Net loss before extraordinary items (21.6) (19.6) (32.2) (106.8) (201.0) (181.5) | (11.9)
Extraordinary items, net of tax - - (23.4) - - - | -
Net loss ------- ------- ------- ------- ------- ------- | -------
$ (21.6) $ (19.6) $ (55.6) $(106.8) $(201.0) $(181.5) | $ (11.9)
======= ======= ======= ======= ======= ======= | =======
Ratio of earning to fixed charges (e) - - - - - - | -
|
Selected Data: |
EBITDA (f) $ 145.5 $ 95.5 $ 185.4 $ 136.4 $ 110.6 $ 90.5 | $ 6.1
EBITDA margin 26.5% 24.8% 26.0% 18.5% 15.1% 12.7% | 3.7%
For the year ended December 31,
(dollars in millions)
AMF Group Holdings Inc.
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
Working capital (g) $ 7.9 $ 44.0 $ 59.5 $ 7.1 $ (1,107.1)
Goodwill 771.1 772.3 772.7 765.1 746.1
Total assets 1,593.9 1,831.8 1,956.0 1,805.4 1,726.3
Total debt 1,091.3 1,060.6 1,047.1 1,048.6 1,136.6
Stockholder's equity 408.7 653.9 803.9 641.7 453.9
Total capital 1,500.0 1,714.5 1,851.0 1,690.3 1,590.5
(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:
(i) To reflect the impact of AMF Group Holdings not acquiring in the
Acquisition the operations of one bowling center in Switzerland and
one bowling center in Spain.
16
(ii) To eliminate a one-time charge of $44.0 million for special bonuses
and payments made by the Predecessor Company owners in April 1996.
(iii)To reflect the increase in depreciation and amortization expense
resulting from the allocation of the purchase price to fixed assets
and goodwill and a change in the method of depreciation of fixed
assets. The Predecessor Company principally used the doubled declining
balance method. The amount of the pro forma adjustment for
depreciation was determined using the straight-line method over the
estimated lives of the assets acquired. Goodwill is being amortized
over 40 years.
(iv) To reflect the incremental interest expense associated with the
issuance 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 Bowling from S corporations to taxable
corporations under the U.S. federal tax laws upon consummation of the
Acquisition.
(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 ratio 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 issue costs, and the portion of rent expense considered to represent
interest. For the years ended December 31, 2000, 1999, and 1998, AMF had a
deficiency of earnings to fixed charges of $178.7 million, $154.8 million,
and $91.3 million.
(f) EBITDA includes charges primarily related to fixed assets, goodwill,
inventory and accounts receivable of $39.2 million in 2000 and $26.5
million in 1999.
(g) Working capital as of December 31, 2000 includes the classification of
$1,136.6 million of long-term debt as a current liability. See "Note 8.
Long-Term Debt and 1999 Recapitalization Plan" in the Notes to Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this report contain forward-looking
statements, which are statements other than historical information or statements
of current condition. Statements set forth in this report or statements
incorporated by reference from documents filed with the SEC are or may be
forward-looking statements, including possible or assumed future results of the
operations of the Company, including but not limited to (a) any statements
contained in this report concerning: (i) timing, execution and results of the
Company's restructuring process, (ii) the timing or amount of any changes in the
interest expense and/or principal repayment obligations of the Company's
indebtedness, including the timing of any acceleration of the Company's
indebtedness, and the timing of the pursuit of any remedies by the Company's
creditors, (iii) the Company's ability to generate cash flow to service its
indebtedness and meet its debt payment obligations, (iv) the results of the
Company's plans to improve its bowling centers operations, including revenue
enhancement and cost management programs, (v) the results of the Company's
efforts to improve the Bowling Products business (vi) the ability of the
Company's management to execute the Company's strategies, (vii) the results of
operations and initiatives engaged in with respect to the Company's Bowling
Products and Bowling Centers businesses, (viii) the results of the Company's
employee incentive and retention efforts, (ix) the outcome of existing or
potential litigation, (x) the amounts of capital expenditures needed to maintain
or improve the Company's bowling centers, (b) any statements preceded by,
followed by or including the words "believes," "expects," "predicts,"
"anticipates," "intends," "estimates," "should," "may" or similar expressions
and (c) other statements contained or incorporated in this report regarding
matters that are not historical facts.
These forward-looking statements relate to the plans and objectives of the
Company or future operations. In light of the risks and uncertainties inherent
in all future projections and the Company's financial position, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company that the objectives or plans of the Company will
be achieved. Many factors could cause the Company's actual results to differ
materially from those in the forward-looking statements, including: (i) the
ability of the Company to continue operating as a going concern and successfully
emerge from Chapter 11 pursuant to a feasible Chapter 11
17
reorganization plan that provides for the Company to remain substantially
intact, (ii) timing, execution and results of the Company's restructuring or
refinancing process, (iii) the Company's ability to avoid the acceleration of
its long term indebtedness, the resulting cross default under such indebtedness
and any resulting enforcement of remedies relating to such default, including
the filing of an involuntary bankruptcy petition and the foreclosure by the
Lenders on collateral for their indebtedness, (iv) the Company's ability, and
the ability of its management team, to carry out the Company's business
strategies, (v) the Company's ability to maintain liquidity and to have
sufficient funds to carry out its capital expenditure program, (vi) the
Company's ability to sell to existing bowling markets and identify and
participate in sales to new bowling markets in light of the current uncertainty
surrounding the Company's financial position, (vii) the continuation of adverse
financial results and substantial competition in the Company's Bowling Products
business, (viii) the Company's ability to retain and attract experienced bowling
center management and other key management personnel, (ix) the Company's ability
to successfully implement initiatives designed to improve and retain customer
traffic in its bowling centers, (x) the Company's ability to attract and retain
league bowlers in its bowling centers and customers in its Bowling Products
business, (xi) the risk of adverse political acts or developments in the
Company's existing and proposed international markets, (xii) fluctuations in
foreign currency exchange rates affecting the Company's translation of operating
results, (xiii) continued or increased competition, (xiv) the popularity of
bowling, (xv) the decline in general economic conditions, (xvi) adverse
judgments in pending or future litigation and (xvii) changes in interest and
exchange rates.
The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included elsewhere in this report. 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.
Restructuring
In August 2000, AMF Bowling announced that Bowling Worldwide and the
Lenders had entered into the Amendment. Pursuant to the Amendment, Bowling
Worldwide agreed, among other things, to forbear from making the September 15,
2000 interest payment due on its Senior Subordinated Notes and that it would
begin exploring various alternatives to restructure and reduce its long-term
debt. As part of the Amendment, the Lenders agreed to waive any default under
the Credit Agreement resulting from the failure to make the September 15, 2000
interest payment due on the Senior Subordinated Notes unless the Company's other
creditors commenced the exercise of remedies, which could include the
acceleration of the Company's debt obligations and an involuntary bankruptcy
filing. The Amendment further provided for the permanent termination of $100.0
million of the otherwise available working capital commitments under the Credit
Agreement. Moreover, the Amendment waived Bowling Worldwide's compliance with
the financial covenants in the Credit Agreement through December 31, 2000. The
Amendment also required that Bowling Worldwide deliver a preliminary plan
containing the principal terms of a proposal to restructure the Company's debt
to the Lenders. Bowling Worldwide submitted such a proposed restructuring plan
on September 30, 2000 and a majority of the Lenders indicated by October 15,
2000 that the plan was generally satisfactory in form and substance, subject to
further approval of any definitive plan.
Bowling Worldwide did not make the cash interest payment of approximately
$13.6 million on its Senior Subordinated Notes required on September 15, 2000
and the 30 day period to cure the non-payment of interest under the related
indenture expired. Under the indenture, the Trustee on its own or the holders of
25% or more of the outstanding principal amount of the Senior Subordinated Notes
have had the right, by written notice, since the expiration of the cure period,
to declare all amounts owed under the indenture immediately due and payable. If
the indebtedness represented by the Senior Subordinated Notes is accelerated,
such acceleration would result in a default under the Credit Agreement, the
Senior Subordinated Discount Notes, the Convertible Debentures and certain other
Company indebtedness. In such event, the Company would not then be able to meet
its accelerated payment obligations. Bowling Worldwide also failed to make the
required cash interest payment of approximately $13.6 million on the Senior
Subordinated Notes due on March 15, 2001. Bowling Worldwide did not make such
payment during the 30 day period to cure. As of April 15, 2001, neither Bowling
Worldwide nor AMF Bowling has received notice that any of its indebtedness has
been or will be accelerated.
Bowling Worldwide did not make a scheduled principal payment to the Lenders
of $12.8 million that was due on December 29, 2000. Bowling Worldwide did pay
$3.0 million of the $14.7 million of interest then due under the
18
Credit Agreement bank debt of December 29, 2000. The remainder of the $14.7
million of interest (at a non-default interest rate) due was paid on a weekly
schedule during the first quarter of 2001. In addition, the Lenders' waiver of
the financial covenants in the Credit Agreement expired on December 31, 2000. As
a result of the foregoing, Bowling Worldwide is in default under the Credit
Agreement.
Bowling Worldwide did not make a scheduled principal payment under the
Credit Agreement $12.8 million which was due on March 30, 2001 but did make a
$16.4 million interest payment under the Credit Agreement on March 30, 2001.
This payment represented interest at the non-default interest rate and was
approximately $2.8 million less than the interest would have been at the default
rate. As explained above, Bowling Worldwide is in default under the Credit
Agreement and the Senior Subordinated Notes and such defaults could result in
defaults being declared and the acceleration of the indebtedness under the
Credit Agreement, the Senior Subordinated Notes, the Senior Subordinated
Discount Notes, the Convertible Debentures and certain other indebtedness of the
Company. However, as of April 15, 2001, neither AMF Bowling nor Bowling
Worldwide has received notice that any of its indebtedness has been or will be
accelerated. The Company is also not aware that a creditor, including the
Lenders and the holders of Senior Subordinated Notes and the Senior Subordinated
Discount Notes (collectively, the "Subordinated Note Holders"), has taken
action, or notified the Company that it will take action, to enforce their
rights or remedies against the Company or its assets as a result of the defaults
described above.
Since January 2001, the Company has funded its day to day operating
expenses and requirements for capital expenditures from cash flow from
operations. During 2001, scheduled principal payments under the Credit Agreement
increase significantly and cash interest becomes payable on the Senior
Subordinated Discount Notes. Management anticipates that the Company will not
make such principal and interest payments.
During 2000, the NYSE delisted the Common Stock, the Senior Subordinated
Notes and Senior Subordinated Discount Notes. The NYSE's action was taken in
part due to the Company's restructuring and in part due to the fact that the
Common Stock traded below the NYSE's continued listing criteria relating to a
minimum share price. Since November 22, 2000, the Common Stock has traded in the
over-the-counter market under the symbol "AMBW."
In mid 2000, Bowling Worldwide retained financial and legal advisors to
assist it in evaluating its restructuring and refinancing alternatives. At the
time, management believed the possible alternatives included a consensual,
negotiated restructuring, a reorganization under Chapter 11 and/or other
possible methods for reducing the Company's long-term debt and improving its
capital structure. Any alternative selected would likely have a material adverse
effect on the ability of AMF Bowling's shareholders to recover their investment
in the Common Stock and on the ability of the Subordinated Notes Holders and the
holders of the Convertible Debentures and other Company indebtedness to receive
interest and principal payments due thereon.
Bowling Worldwide and its advisors have provided certain information to and
have held substantive discussions with the steering committees for the Lenders
and the Subordinated Notes Holders. The Lenders and the Subordinated Notes
Holders have each retained their own separate legal and financial advisors.
Management now believes that a Chapter 11 filing is the most likely and
efficient means to complete the debt restructuring. The Company and the steering
committees for the Lenders and the Subordinated Notes Holders are continuing
discussions regarding the debt restructuring. The Company believes that these
discussions are constructive and progress is being made. Accordingly, at this
time management has not made a recommendation to the Board with respect to a
Chapter 11 filing and the Board has not yet taken any action in this regard.
Bowling Worldwide has also begun discussions with the Lenders and the
Subordinated Notes Holders about a potential Chapter 11 filing as well as
business and legal issues related to such a filing in order to ensure an orderly
proceeding with minimal impact on the Company's operations, employees and
customers.
In order to facilitate a restructuring in a Chapter 11 proceeding, Bowling
Worldwide has received proposals for a DIP Facility. Although no assurances can
be given, Bowling Worldwide believes that it would have a commitment from the
Lenders for a DIP Facility at the time of filing for a reorganization under
Chapter 11. Management believes that the borrowing capacity under a DIP
Facility, in addition to available cash on hand of approximately $40.0 million
as of April 13, 2001, will be sufficient to meet the Company's current liquidity
and
19
capital expenditures requirements during the period when the Company would be
operating under Chapter 11, although no assurances can be given in this regard.
While it is diligently pursuing a financial restructuring, Bowling
Worldwide is unable to predict if it will be able to arrive at a restructuring
plan, acceptable to the Lenders and the Subordinated Notes Holders, before a
filing is made or during a Chapter 11 proceeding. Bowling Worldwide is unable to
predict whether it will be able to satisfactorily implement such a plan or
whether, in the interim, the Lenders and the Subordinated Notes Holders will
continue to forbear from exercising any or all of the remedies available to
them, including acceleration of the Company's indebtedness an involuntary
bankruptcy proceeding and, in the case of the Lenders, realization on collateral
for their indebtedness.
Because retention of key personnel and maintenance of employee morale is so
critical during a restructuring, in mid 2000, certain bonus, severance and
retention programs were approved. The programs extend to senior management,
bonus-eligible and stock option-eligible personnel, including all center
managers around the world. These retention programs are conditioned upon
continued employment to specific dates. In March 2001, after consultation with
its compensation advisor and financial advisor, the Board approved several
enhancements to the year 2001 incentive compensation plan designed to encourage
retention and motivate key personnel during the restructuring process.
Background
This discussion should be read in conjunction with the information
contained under "Item 6. Selected Financial Data" and in AMF Group Holdings'
Consolidated Financial Statements and the notes thereto included elsewhere
herein. See also "Note 1. Business Description - Organization and Restructuring"
in the Notes to the Consolidated Financial Statements.
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company's operations, certain portions of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss results of Bowling Centers and Bowling Products separately.
The results of operations of Bowling Centers, Bowling Products and the
consolidated group of companies are set forth below. The business segment
results presented below are before intersegment eliminations since the Company's
management believes that this provides a more accurate comparison of performance
by segment from year to year. The intersegment eliminations are not material.
Interest expense is presented on a gross basis. The comparative results of
Bowling Centers for 2000 versus 1999 reflect the closing of 14 centers, the sale
of 4 centers and the acquisition of 4 centers. The comparative results of
Bowling Centers for 1999 versus 1998 reflect the closing of 5 centers, the sale
of 2 centers and the acquisition of 1 center.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Company's financial position, including the default on its debt
and the continuing losses from operations, raise substantial doubt about the
Company's ability to continue as a going concern. The appropriateness of
reporting on the going concern basis is dependent upon, among other things, a
prompt restructuring, refinancing or Chapter 11 relief, future profitable
operations, and the ability to generate sufficient cash from operations and
financing sources to meet obligations. As a result of the Company's current
circumstances, however, such realization of assets and liquidation of
liabilities are uncertain. Further, a plan of reorganization could materially
affect the assets and liabilities reported in the accompanying consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability of the value of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary as a consequence of this uncertainty.
20
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 constant
center results discussed below reflect the results of 507 centers that had been
in operation one full fiscal year as of December 31, 1999. The discussion of new
center results reflect the results of 5 centers that were either purchased since
January 1, 1999 or had been in operation less than one full fiscal year as of
December 31, 1999. Bowling Centers derives its revenue from three principal
sources: (i) bowling, (ii) food and beverage and (iii) other sources, such as
shoe rental, amusement machines, billiards and pro shops. In 2000, bowling, food
and beverage and other revenue represented 58.0%, 27.5% and 14.5% of total
Bowling Centers revenue, respectively. In 1999, bowling, food and beverage and
other revenue represented 58.4%, 27.3% and 14.3% of total Bowling Centers
revenue, respectively.
Bowling Centers' EBITDA included charges of $12.0 million in 2000 primarily
related to the write-off of goodwill and fixed assets in the U.K. and increased
reserves in the U.S. for center closures and insurance. Bowling Centers' EBITDA
included charges of $6.6 million in 1999 primarily related to special charges
taken in 1999. See "Note 9. Restructuring Charges, Asset Impairment Charges and
Special Charges" in the Notes to Consolidated Financial Statements and
"--Consolidated--Restructuring Charges, Asset Impairment Charges and Special
Charges" for additional information on these charges.
For the year ended December 31,
(dollars in millions)
1998 (a) 1999 2000
----------- ------------ -------------
Bowling Centers (before intersegment eliminations):
Operating revenue $ 539.2 $ 585.7 $ 580.4
----------- ------------ -------------
Cost of goods sold 54.5 61.1 60.1
Bowling center operating expenses 341.0 374.5 388.0
Selling, general and administrative expenses 5.8 12.8 6.7
Restructuring and asset impairment charges - 8.3 2.6
Refinancing charges - - 0.8
Depreciation and amortization 97.4 109.4 111.7
----------- ------------ -------------
Operating income 40.5 $ 19.6 $ 10.5
=========== ============ =============
Selected Data:
Selected Data:
EBITDA $ 137.9 $ 137.3 $ 125.6
EBITDA margin 25.6% 23.4% 21.6%
Number of centers, end of period 545 539 525
Number of lanes, end of period 18,858 18,654 18,228
- ----------
(a) Contains reclassifications to conform to current year presentation.
2000 Compared to 1999. Bowling Centers operating revenue decreased $5.3
million, or 0.9%, U.S. bowling center revenue increased $5.7 million, or 1.2%,
and international bowling center revenue, substantially impacted by negative
trends in foreign currency exchange rates, decreased $11.0 million, or 8.8%. An
increase of $2.5 million was attributable to new centers, of which $2.4 million
was from U.S. centers, and $0.1 million was from international centers. Constant
center operating revenue increased $1.4 million, or 0.2%. U.S. constant center
operating revenue increased $9.7 million, or 2.2%, primarily as a result of
increases in open play revenue, and food and beverage and ancillary revenue
associated with open play traffic. International constant center revenue
21
decreased $8.3 million, or 6.9% almost entirely caused by the negative impact of
changes in foreign currency exchange rates. A decrease in operating revenue of
$9.2 million was primarily attributable to the closing of 12 U.S. centers and
two international centers and the sale of two international centers all in 2000.
Bowling Centers cost of goods sold decreased $1.0 million, or 1.6%.
Constant centers cost of goods sold decreased $0.5 million, or 0.8%. U.S.
constant centers cost of goods sold increased $0.3 million, or 0.7%, primarily
as a result of costs associated with the increase in food and beverage and
ancillary revenue discussed above. International constant centers cost of goods
sold decreased $0.8 million, or 6.7%. A decrease in cost of goods sold of $0.9
million was associated with the centers closed or sold in 2000. An increase of
$0.4 million was attributable to new centers primarily in the U.S.
Bowling Centers operating expenses increased $13.5 million, or 3.6%. An
increase of $2.0 million was attributable to new centers and an increase of
$15.9 million was attributable to constant centers. An increase of $3.2 million
was attributable to higher regional and district operating expenses resulting
from new field level positions that were added in 1999 and national advertising
campaigns. These increases were partially offset by a decrease of $7.6 million
attributable to centers closed or sold in 2000. As a percentage of revenue,
Bowling Centers operating expenses were 66.9% for 2000 compared with 63.9% for
1999. In the fourth quarter of 2000, Bowling Centers recorded charges totaling
$12.0 million to reflect: (i) the net present value of leases related to centers
scheduled to be closed ($2.8 million), (ii) the write down of U.K. property,
equipment and goodwill no longer in service ($6.2 million), (iii) the increase
in insurance claims experience that resulted from the enhancement of benefits to
U.S. bowling center employees and the occurrence of certain unusual claims ($2.2
million) and (iv) statutory audit adjustments to the French bowling centers
results ($0.8 million). Without these additional fourth quarter charges, Bowling
Centers operating expenses were $376.0 million, or 64.8% of its revenue.
Bowling Centers selling, general and administrative expenses decreased $6.1
million, or 47.7%. Constant centers selling, general and administrative expenses
were lower in 2000 by $6.0 million primarily attributable to charges recorded in
1999 related to center closures in the U.S. As a percentage of revenue, Bowling
Centers selling, general and administrative expenses were 1.2% for 2000 and 2.2%
for 1999.
Bowling Centers EBITDA decreased $11.7 million, or 8.5%. A decrease of $8.0
million in constant centers EBITDA primarily reflected the increase in charges
recorded in 2000 compared to 1999 and the decrease in operating revenue as
discussed above. Additionally, increased regional and district operating
expenses caused a decrease of $3.2 million, and a decrease of $0.9 million was
attributable to those centers that were closed or sold in 2000. These decreases
were partially offset by an increase of $0.3 million from new centers. EBITDA
margin in 2000 was 21.6% compared to a 23.4% margin in 1999.
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 centers,
of which $31.6 million was from U.S. centers and $9.3 million was from
international centers. Constant centers revenue increased $10.6 million, or
2.3%. U.S. constant centers operating revenue increased $9.1 million, or 2.5%,
primarily as a result of an increase in open play revenue and food and beverage
and ancillary revenue associated with open play traffic. International 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 attributable to the
closing of five U.S. centers and the sale of two international centers in 1999.
Cost of goods sold increased $6.6 million, or 12.1%. 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
discussed above. International constant centers 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 million
was attributable to those
22
centers that were closed or sold in 1999. As a percentage of revenue, Bowling
Centers operating expenses were 63.2% for 1998 compared with 63.9% for 1999.
An increase of $7.0 million, or 120.7%, in selling, general and
administrative expenses was primarily attributable to charges recorded in 1999
related to center closures and 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 2.2% for 1999.
EBITDA decreased $0.6 million, or 0.4%. Increases of $11.5 million from new
centers and $0.4 million from lower regional and district operating expenses
were partially offset by decreases of $12.4 million, or 9.2%, from constant
centers and $0.1 million from those centers that were closed or sold in 1999.
EBITDA margin in 1999 was 23.4% compared to 25.6% in 1998. The lower EBITDA
margin in 1999 was primarily attributable to AMF's operating initiatives to
improve customer traffic and the charges discussed above.
Bowling Products
Bowling Products' EBITDA included charges of $26.5 million in 2000
primarily related to the write-off of inventory and accounts receivable,
including the effects of closing an international sales office and termination
of certain distribution agreements. Bowling Products' EBITDA included charges of
$19.7 million in 1999 primarily related to the write-off of accounts receivable
and inventory. See "Note 9. Restructuring Charges, Asset Impairment Charges and
Special Charges" in the Notes to Consolidated Financial Statements and
"--Consolidated--Restructuring Charges, Asset Impairment Charges and Special
Charges" for additional information on these charges.
For the year ended December 31,
(dollars in millions)
1998 1999 2000
------------- ------------- -------------
Bowling Products (before intersegment eliminations):
Operating revenue $ 212.5 $ 169.3 $ 151.3
Cost of goods sold 159.6 137.0 128.3
------------- ------------- -------------
Gross profit 52.9 32.3 23.0
Selling, general and administrative expenses 42.2 44.0 41.6
Restructuring and asset impairment charges - 8.2 2.3
Refinancing charges - - 0.2
Depreciation and amortization 22.5 23.6 24.8
------------- ------------- -------------
Operating loss $ (11.8) $ (43.5) $ (45.9)
============= ============= =============
Selected Data:
Gross profit margin 24.9% 19.1% 15.2%
EBITDA $ 10.7 $ (11.7) $ (18.6)
EBITDA margin 5.0% -6.9% -12.3%
New Center Packages sold 2,466 1,343 1,513
2000 Compared to 1999. Bowling Products operating revenue decreased $18.0
million, or 10.6%. This decline is composed of decreases of $8.6 million, or
16.3%, in NCP revenue, and $9.4 million, or 8.1%, in Modernization and Consumer
Products revenue. The absence of a strong market, such as those of Korea, Taiwan
and China in prior years, and increased competition in general continue
to adversely impact results. Additionally, sales to North American customers and
AMF bowling centers decreased. In Europe, NCP and modernization equipment sales
improved and more than offset a decrease in consumer product sales in that
region. During 2000, Bowling Products recorded NCP shipments of 1,513 units
compared to shipments of 1,343 units for 1999. See "Business--International
Operations."
23
Gross profit decreased $9.3 million, or 28.8%. Gross profit margin was
15.2% in 2000 and 19.1% in 1999. In 1999 and 2000, charges were recorded to
reflect a revaluation of inventory levels in the context of current market
conditions. An assessment of saleability, obsolescence and valuation resulted in
the write down of certain equipment and parts that, in management's view, had a
low likelihood of future marketability. See "--International Operations."
Bowling Products selling, general and administrative expenses decreased
$2.4 million, or 5.5%, compared with 1999 results. In the fourth quarter of
2000, Bowling Products recorded charges of $5.0 million reflecting write-offs of
bad debts that were impacted by decisions to exit certain distributor
arrangements or markets in South America and China, $5.3 million reflecting the
reconciliation of certain intercompany differences and other charges of $1.2
million. In 1999, $10.8 million of special charges were recorded. Savings of
approximately $3.1 million achieved through cost reductions in 2000 were
partially offset by the increase in charges discussed above.
Bowling Products EBITDA was $(18.6) million in 2000 compared with $(11.7)
million in 1999. The increase in negative EBITDA in 2000 reflects the increase
in charges recorded in 2000 compared to 1999 as well as lower revenue and
related gross profit in 2000 compared with 1999 results.
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 revenue,
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 continued to adversely impact results. During 1999,
Bowling Products recorded NCP shipments of 1,343 units compared to shipments of
2,466 units for 1998. The decrease in Modernization and Consumer Products
revenue was primarily due to decreased sales to Asia Pacific customers because
of continued adverse economic conditions for sale of bowling products and lower
U.S. sales of modernization equipment. See "--Seasonality and Market Development
Cycles" and "Business--International Operations."
Gross profit decreased by $20.6 million, or 38.9%. Gross profit margin was
24.9% in 1998 and 19.1% 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
"--International Operations."
Bowling Products selling, general and administrative expenses increased by
$1.8 million, or 4.3%, primarily as a result of certain charges recorded in 1999
in excess of the favorable impact of an ongoing cost reduction program in which
the Bowling Products organization has been streamlined. Such cost reduction has
served to partially offset the impact of lower sales volume and unit pricing on
EBITDA.
Bowling Products EBITDA decreased $22.4 million in 1999 as a result of the
lower revenue and gross profit and special charges that exceeded the effect of
cost reductions.
Consolidated Items
Refinancing Charges
In the second half of 2000, Bowling Worldwide recorded $6.5 million of
refinancing charges related to the restructuring of its long-term debt. The
charges primarily include amounts paid to legal and financial advisors
representing the Company, the bank group, and bondholders.
Restructuring Charges, Asset Impairment Charges and Special Charges
2000. In the fourth quarter of 2000, the Company recorded restructuring
charges of approximately $3.4 million related to a plan to close the Bowling
Products Korean operations and sales office. The restructuring charges related
primarily to employee termination benefits, asset write-offs and contract
cancellations. The Company also recorded asset impairment charges of $1.6
million representing the difference between fair market value and carrying value
of impaired assets of the five U.S. bowling centers scheduled to be closed in
2001.
24
1999. 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 conjunction
with a strategic business assessment performed by Bain & Co. and was designed to
reduce the overall volatility of the Bowling Products business. The
restructuring charges relate primarily to employee termination benefits, asset
write-offs and contract cancellations.
In 1999, the Company recorded asset impairment charges of $8.1 million
representing the difference between fair market value and carrying value of
impaired assets. The asset impairment charges relate to under-performing bowling
center locations that under an approved plan were closed in the first half of
2000.
The strategic assessment by Bain & Co. discussed above led to programs
designed 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 were
non-cash, related primarily to receivables and inventory write-offs and were
included within selling, general and administrative expenses and cost of goods
sold.
See "Note 9. Refinancing Costs, Restructuring Charges, Asset Impairment
Charges and Special Charges" in the Notes to Consolidated Financial Statements
for additional discussion of these charges.
Depreciation and Amortization
For 2000, depreciation and amortization increased by $3.3 million, or 2.5%,
compared with 1999, and for 1999, depreciation and amortization increased by
$12.4 million, or 10.3%, compared with 1998. The increases were primarily
attributable to incremental depreciation expense as a result of capital
expenditures.
Interest Expense
Gross interest expense increased by $10.2 million, or 9.2%, in 2000
compared with 1999. Interest under the Credit Agreement 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 1999
Recapitalization Plan" in the Notes to Consolidated Financial Statements,
"--Liquidity" and "--Capital Resources" for further discussion of indebtedness
under the Credit Agreement. Cash interest expense for 2000 totaled $89.0 million
and includes $13.6 million not paid on the Senior Subordinated Notes on
September 15, 2000. Non-cash interest on the Senior Subordinated Discount Notes
amortization totaled $30.4 million.
Gross interest expense increased by $9.4 million, or 9.2%, in 1999 compared
with 1998. Interest under the Credit Agreement 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 1999
Recapitalization Plan" in the Notes to Consolidated Financial Statements,
"--Liquidity" and "--Capital Resources" for further discussion of the Credit
Agreement. Cash interest expense for 1999 totaled $81.8 million, while non-cash
bond interest amortization totaled $26.9 million.
Net Loss
Net loss in 2000 totaled $181.5 million, compared with a net loss of $201.0
million in 1999, a decrease of $19.5 million. In 2000, the Company recorded
$39.2 million in additional charges related to the write-down of inventories,
accounts receivable, and other assets and an increase in reserves, $6.5 million
in refinancing charges, and $5.0 million in restructuring and asset impairment.
In 1999, the Company recorded $43.1 million for restructuring charges, asset
impairment charges and Special Charges. The Company recorded $0.5 million in
equity in loss of joint ventures in 2000, compared with equity in loss of joint
ventures of $18.6 million in 1999. The higher amount in 1999 was primarily
attributable 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
assets. The sole bowling center of the Company's joint venture in Asia was sold
on November 30, 2000. Additionally, in December 2000, the Company purchased the
remaining 50% interest in its Brazilian joint venture. See "Note 15. Joint
Ventures" for a description of these transactions. The 2000 provision for income
tax was $2.3 million compared with $27.6 million in 1999 reflecting
25
the reserve for net tax benefits recorded in 1999. Depreciation and amortization
expense increased $3.3 million, interest expense increased $10.2 million and
other expense decreased $4.6 million.
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 increase
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 attributable 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 assets.
Income Taxes
As of December 31, 2000, the Company had net operating losses of
approximately $408.8 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, 2000 for $194.2 million related to net operating losses, foreign
tax credits and other deferred tax assets that the Company may not utilize prior
to their expirations. The tax provision recorded for 1999 reflects an increase
in the valuation allowance and certain international taxes.
Liquidity
The Company's principal source of liquidity is cash provided by operations.
Bowling Worldwide is in default under the Credit Agreement and the Senior
Subordinated Notes and such defaults could result in the acceleration of the
indebtedness under the Credit Agreement, Senior Subordinated Notes, Senior
Subordinated Discount Notes and certain other indebtedness of the Company. As a
result of such defaults, the Lenders, Subordinated Notes Holders and other
creditors could exercise rights and remedies against the Company or its assets,
including filing an involuntary bankruptcy proceeding and, in the case of the
Lenders, realization on collateral for the indebtedness. Until the restructuring
is completed, the adequacy of the Company's liquidity is and will remain
uncertain.
2000 Compared to 1999. Working capital on December 31, 2000 was $(1,107.1)
million compared with $7.1 million as of December 31, 1999, a decrease of
$1,114.2 million. In 2000, the entire balance of long-term debt of $1,136.6
million was classified as current and represents a $1,102.3 million decrease in
working capital. Additional decreases in working capital were attributable to a
decrease of $20.1 million in accounts receivable balances primarily due to lower
sales levels, improved credit collections and charges recorded in the fourth
quarter of 2000, a decrease of $1.7 million in deferred taxes and other current
assets, and an increase of $20.6 million in accounts payable and accrued
expenses that primarily reflect higher accrued interest. These decreases in
working capital were partially offset by increases in working capital
attributable to an increase of $26.2 million in cash, an increase of $2.2
million in inventory and a decrease of $2.1 million in income taxes payable.
Net cash flows provided by operating activities were $29.0 million for 2000
compared to net cash flows provided of $40.4 million for 1999, a decrease of
$11.4 million. A decrease of $18.1 million was attributable to a decrease in the
equity in loss of joint ventures, a decrease of $15.2 million was attributable
to higher Bowling Products inventory balances, loss on impairment of assets
decreased $6.6 million, a decrease of $4.1 million was associated with loss on
the sale of property and equipment, and a net decrease of $2.9 million was
attributable to changes in other operating activities. These decreases were
partially offset by an increase of $19.8 million attributable to lower levels of
accounts receivable, an increase of $19.5 million was attributable to the net
loss of $181.5 million recorded in 2000 compared with a net loss of $201.0
million in 1999, an increase of $9.8 million was caused by increased levels of
accounts payable and accrued expenses, bond amortization increased $3.5 million,
and depreciation and amortization increased $3.4 million. Additionally, in 1999,
the Company recorded a valuation allowance of $19.5 million against its net
deferred tax assets.
26
Net cash flows used in investing activities were $65.6 million for 2000
compared with net cash flows used of $51.5 million for 1999, an increase of
$14.1 million. Bowling Center acquisition spending increased by $7.1 million and
purchases of property and equipment increased by $14.4 million in 2000 compared
with 1999. In 2000, the Company purchased four centers (excluding the 13 joint
venture centers acquired in December 2000) compared with one center in 1999.
These increases were partially offset by an increase in proceeds from the sale
of property and equipment of $7.4 million in 2000 compared with 1999. See "Note
14. Acquisitions" and "Note 15. Joint Ventures" in the Notes to Consolidated
Financial Statements and "--Capital Expenditures" for additional discussion of
these investing activities.
Net cash provided by financing activities was $64.3 million for 2000
compared to the net cash provided of $9.1 million for 1999, an increase of $55.2
million. Proceeds from long-term debt, all borrowings under the Credit
Agreement, increased $6.0 million. Payments on long-term debt decreased $77.0
million. In accordance with the terms of the Credit Agreement, scheduled
principal payments in 2000 were $1.9 million higher than payments made in 1999.
Bowling Worldwide did not pay $12.8 million in principal due December 29, 2000.
Additionally, in 1999, $74.0 million was paid against amounts outstanding under
the Bank Facility. In 2000, AMF Bowling contributed $7.0 million as capital to
Bowling Worldwide in accordance with the cure provisions of the Credit
Agreement. In 1999, $34.7 million was provided by additional capital
contributions from AMF Bowling from part of the net proceeds of a rights
offering by AMF Bowling. See "Note 8. Long-Term Debt and 1999 Recapitalization
Plan", and "Note 14. Acquisitions" in the Notes to Consolidated Financial
Statements and "--Capital Resources."
As a result of the aforementioned, cash increased by $26.2 million in 2000
compared with a decrease of $1.3 million in 1999.
1999 Compared to 1998. Net cash flows provided by operating activities were
$40.4 million for 1999 compared with 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 property 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 receivable, 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, increased 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 attributable
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 with net cash flows used of $242.0 million for 1998, a decrease of
$190.5 million. Bowling Center acquisition spending decreased by $172.1 million
and purchases of property and equipment decreased by $14.6 millio