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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997
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
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10 7/8 Series B Senior Subordinated Notes Due 2006 New York Stock Exchange
12 1/4% Series B Senior Subordinated Discount Notes New York Stock Exchange
Due 2006
Securities registered pursuant to Section 12 (g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
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. [X]
As of March 23, 1998, 100 shares of Registrant's common stock, par value
$.01, were outstanding and held entirely by AMF Group Holdings Inc. None of the
Registrant's common stock was held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
Item 1. Business
General Development of Business
AMF Bowling Worldwide, Inc. ("AMF Bowling Worldwide" and, together with
its subsidiaries, the "Company" or "AMF") is the largest owner or operator of
bowling centers in the United States and worldwide. In addition, the Company is
one of the world's leading manufacturers of bowling center equipment,
accounting for, management believes, approximately 41% 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, as
of December 31, 1997, 370 U.S. bowling centers and 100 international bowling
centers ("Bowling Centers") including 14 centers operated by joint ventures
with third parties described below and (ii) the manufacture and sale of bowling
equipment such as automatic pinspotters, automatic scoring equipment, bowling
pins, lanes, ball returns, and certain spare and consumable products, and the
resale of allied products such as bowling balls, bags, shoes and certain other
spare and consumable products ("Bowling Products"). The Bowling Products
business consists of two categories: (i) New Center Packages ("NCPs") (all of
the equipment necessary to outfit a new bowling center or expand an existing
bowling center); and (ii) Modernization and Consumer Products (which includes
modernization equipment used to upgrade an existing center, spare parts,
supplies and consumable products essential to maintain operations of an
existing center). See "Note 16. Business Segments" in the Notes to Consolidated
Financial Statements.
The Company is a wholly owned subsidiary of AMF Group Holdings Inc. ("AMF
Group Holdings"). AMF Group Holdings is a wholly owned subsidiary of AMF
Bowling, Inc. ("AMF Bowling"). AMF Group Holdings and the Company were
incorporated in Delaware in 1996 by an investor group led by GS Capital
Partners II, L.P. (together with affiliated investment funds, "GSCP"), an
affiliate of Goldman, Sachs & Co. Holdings acquired all of the outstanding
stock of the separate U.S. and foreign corporations that constituted
substantially all of the Company's predecessor (the "Predecessor Company") for
a total purchase price of approximately $1.37 billion (the "Acquisition"). AMF
Bowling and AMF Group Holdings are holding companies. The principal assets in
each are comprised of investments in subsidiaries.
In 1996, AMF acquired 57 bowling centers from five unrelated sellers,
including 50 bowling centers from Charan Industries, Inc. ("Charan"). The
combined purchase price, net of cash acquired, was approximately $108.0
million, and was funded with approximately $40.0 million from a capital
contribution by AMF Bowling attributable to the sale of equity by AMF Bowling
to its institutional stockholders and one of its directors and approximately
$68.0 million from available borrowings under an acquisition facility (the
"Acquisition Facility") under the bank credit agreement that was in effect from
the closing of the Acquisition until October 1997.
In 1997, the Company acquired 122 bowling centers from a number of
unrelated sellers, including 43 centers from American Recreation Centers, Inc.,
and fifteen centers from the Conbow Corporation. The 1997 acquisitions included
seven centers in the United Kingdom and two centers in Australia. The combined
purchase price for the 1997 acquisitions, net of cash acquired, was
approximately $214.8 million, and was funded with borrowings under the
Acquisition Facility and the Working Capital Facility (the "Bank Facility")
under the Third Amended and Restated Credit Agreement described below (the
"Credit Agreement"), and from capital contributions by AMF Bowling attributable
to the sale of equity by AMF Bowling to its institutional stockholders and the
Initial Public Offering (as hereinafter defined).
From January 1, 1998 through March 13, 1998, the Company acquired 24
centers in the United States, two centers in the United Kingdom and one center
in Australia from unrelated sellers, including fifteen bowling centers in the
U.S. from Active West, Inc. ("Active West"). The aggregate purchase price for
these acquisitions was approximately $36.5 million, including $35.3 million
funded with borrowings under the Bank Facility and, with respect to the Active
West acquisition, 50,000 shares of AMF Bowling Common Stock valued at the
closing price of $24 3/16 per share on the New York Stock Exchange on the date
of acquisition.
In April 1997, the Company entered into a joint venture with Hong Leong
Corporation Limited, a Singapore-based conglomerate ("Hong Leong"), to build
and operate bowling centers in the Asia Pacific region. The joint venture
("Hong Leong JV") is owned 50% by the Company and 50% by Hong Leong. The Hong
Leong JV opened its first bowling center during November 1997 in Tianjin,
China. Additional sites are being evaluated for future development.
1
In August 1997, the Company entered into a joint venture with Playcenter
S.A., a Sao Paulo-based amusement and entertainment company ("Playcenter") to
build and operate bowling centers in Brazil and Argentina. The joint venture
("Playcenter JV") is owned 50% by the Company and 50% by Playcenter. As of
December 31, 1997, the Playcenter JV operated eleven centers in Brazil and two
centers in Argentina.
The Company accounts for its investments in Hong Leong JV and Playcenter
JV by the equity method. As of December 31, 1997, the Company's investments in
Hong Leong JV and Playcenter JV were $1.1 million and $8.7 million,
respectively. See "Note 15. Joint Ventures" in the Notes to Consolidated
Financial Statements.
On October 20, 1997, the Company acquired Michael Jordan Golf Company,
Inc. ("Michael Jordan Golf Company"), a company formed to operate golf practice
ranges in the U.S. Michael Jordan Golf Company currently operates one golf
practice range. The Company agreed to build or acquire two additional golf
practice ranges by the end of 1999.
As a result of the foregoing acquisitions and joint ventures and after
giving effect to the construction of one center and the closing of eight U.S.
centers and one center in Japan since the Acquisition, the Company operated 394
U.S. bowling centers and 103 international bowling centers as of March 13,
1998.
In November 1997, AMF Bowling issued 15,525,000 shares of its common stock
at $19.50 per share pursuant to an initial public offering (the "Initial Public
Offering"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources."
Business Segments
Bowling Centers
In the United States, AMF is the largest operator of bowling centers, with
394 bowling centers (as of March 13, 1998) in 39 states and Puerto Rico.
Outside the United States, AMF is also the largest operator of bowling centers,
with (as of March 13, 1998) 103 bowling centers in eleven countries: Australia
(39), the United Kingdom (24), Mexico (9), Japan (4), China (including Hong
Kong) (7), Argentina (2), Brazil (11), France (3), Spain (2), Switzerland (1),
and Canada (1). Of the U.S. centers, 207 were acquired as part of the
Acquisition (eight of which were subsequently closed), 194 were acquired
thereafter and one was constructed. Of the international centers, 78 were
acquired as part of the Acquisition, twelve were acquired thereafter, including
nine in the United Kingdom and three in Australia, and one in Japan was closed.
The foregoing numbers include one center in China, two centers in Argentina and
eleven centers in Brazil which are operated as part of Hong Leong JV and
Playcenter JV, respectively.
The Company's number of U.S. centers, regional clustering (56 clusters)
and average size (an average of 38 lanes per U.S. center versus an industry
average of 21 lanes per U.S. center) provide both additional revenue
opportunities and economies of scale. These revenue opportunities include (i)
scheduling flexibility, which improves lane utilization, (ii) the ability to
support an expanded food and beverage operation and (iii) more concourse space
for food and beverage offerings, amusement games, billiards and pro shops. Cost
savings resulting from the economies of scale include (a) the ability to
distribute operating and corporate overhead costs (including marketing and
advertising costs) over a larger revenue base and (b) attractive terms from
certain of the Company's suppliers.
Internationally, AMF's centers also are, on average, larger than those of
its competitors. As with its U.S. operations, the number of centers, geographic
clustering and size result in additional revenue opportunities and economies of
scale.
The geographic diversity of AMF's Bowling Centers operations across
different regions of the U.S. and across eleven other countries has
historically provided stability to AMF's annual cash flows. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality and Market Development Cycles".
The Company has an ongoing modernization program that results in its
bowling centers having more upgraded physical plants and attractive appearances
than those of other operators. Management believes that its historical spending
level of approximately 3.7% of Bowling Centers revenue is adequate to cover
routine capital expenditures. Management estimates that approximately 2% of
Bowling Centers revenue is required for nondiscretionary capital expenditures.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Expenditures".
2
The Bowling Centers business derives its revenue and profits from three
principal sources: (i) bowling, (ii) food and beverage and (iii) other sources
such as shoe rental, amusement games, billiards and pro shops. In 1997,
bowling, food and beverage and other revenue represented 60.6%, 25.4%, and
14.0% of total Bowling Centers revenue, respectively.
Bowling revenue, the largest portion of a bowling center's revenue and
profitability, is derived from league, recreational and tournament play. Food
and beverage sales occur primarily through snack bars that offer snack foods,
soft drinks and, at many centers, alcoholic beverages. AMF has acquired several
centers with large sports bars that provide a large portion of such centers'
revenue. Other revenue is derived from shoe rental and the operation of
amusement games, billiards and pro shops. The shoe rental business is driven
primarily by recreational bowlers who usually do not own bowling shoes.
Recreational bowlers and non-bowling customers are also the primary users of
amusement games and billiards tables.
Bowling Products
The Company manufactures and sells bowling center equipment, including
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, and certain spare and modernization parts, and resale products, such
as bowling balls, bags, shoes and other bowlers' aids, sold primarily through
pro shops. The bowling products business consists of two categories: (i) NCPs
and (ii) Modernization and Consumer Products.
New Center Packages include the bowling equipment necessary to outfit new
or expand existing bowling centers, such as lanes, pinspotters, automatic
scoring, bowler seating, ball returns, masking units and bumpers. AMF is
focused on sales of NCPs into countries with demonstrated strong demand for the
construction of new bowling centers. In addition, AMF believes that certain
markets in South America, Asia Pacific and Eastern Europe hold the potential
for high growth over the next several years, but are currently in the early
stages of the industry's development. As bowling is introduced into a market
and becomes more popular, local developers and entrepreneurs build new bowling
centers which drives demand for NCPs. To stimulate this development cycle, AMF
has entered into the joint ventures with Hong Leong and Playcenter described
under " -- General Development of Business". See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Backlog; Recent
NCP Sales".
The potential customers for Modernization and Consumer Products include
all bowling centers in operation today. The number of potential customers will
continue to grow as the number of centers increases. In order for a bowling
center to remain competitive and to satisfy its customers, the center operator
must periodically make investments in the center's equipment. Some of these
investments, such as replacing pins, must be made on approximately an annual
basis. These annual investments represent relatively modest expenditures
necessary to maintain the center. Other equipment, such as automatic scoring,
replacement lanes and upgraded automated lane maintenance equipment, require
less frequent but more significant investments by center operators. Management
believes that many of these modernizations are necessary for a center to
maintain its existing customer base.
In addition to bowling equipment and supplies, AMF manufactures and sells
billiards tables under the Renaissance and PlayMaster brand names.
Business Strategy
The Company is pursuing a three-part strategy to consolidate the U.S.
bowling center industry, to build a nationally recognized AMF brand of superior
bowling-based family recreation centers, and to capitalize on the demand for
bowling products and centers in certain international markets.
The Company's acquisition program is designed to acquire additional U.S.
bowling centers from single-center and small and medium-sized chain operators.
Following an acquisition, the Company improves the profitability of the
acquired centers by cost reduction initiatives and programs to increase
revenue. The Company often makes capital and other improvements to upgrade the
acquired centers in order to generate increased revenue.
The Company is developing a nationally recognized brand of superior
bowling and entertainment centers. These centers generally offer
state-of-the-art bowling equipment including many of the products manufactured
by its Bowling Products business including the Xtreme(TM) package for
glow-in-the-dark bowling, the AMF 8800 Gold
3
pinspotter, high scoring HPL synthetic lanes, BOSS NT automatic scoring system
with animated computer graphics, Options furniture package for concourse and
settee areas, and Durabowl(TM) bumpers that ensure young bowlers knock down
pins.
In 1997, the Company launched AMF CARES!, a comprehensive customer
appreciation and rewards system, to deliver a consistent quality, fun
recreational experience to customers of AMF centers throughout the United
States. This program concentrates on customer-focused operating standards,
employee awards and recognition, loyalty-driven marketing programs, enhanced
food and beverage operations and stronger brand identity with new signage and
employee uniforms. To support this program, the Company commits capital
expenditures to modernize its centers and to build new showcase centers such as
Chelsea Piers in 1997, the first new bowling center in Manhattan in thirty
years, and Marina City in Chicago, which is scheduled to open in 1998.
The Company's well-established brand name, high quality product lines, and
global sales and service network position AMF to take advantage of the
international growth in bowling. New Center Packages, which represented 55.2%
of 1997 Bowling Products sales, were primarily sold to international markets
such as China, Malaysia, Japan, United Kingdom, Germany, Brazil and Argentina.
The Company also focuses on development of selected international markets with
large populations which are in the early stage of growth in the construction of
bowling centers such as India, Poland and Russia. The Company will acquire or
build bowling centers to expand its competitive position in certain
international markets and to serve as a showcase for the sale of its bowling
products in these countries.
Modernization and Consumer Products, which represented 44.5% of 1997
Bowling Products sales, were sold primarily to more established bowling markets
including the United States, Japan and Western Europe. Leadership in
introducing innovative new products, combined with its established direct sales
force and distribution, positions the Company to service the large worldwide
installed base of AMF-equipped centers and to grow with the increased
popularity of bowling.
Seasonality and Market Development Cycles
On a consolidated basis, revenue and EBITDA of the Company's businesses
are neither highly seasonal nor highly cyclical. The geographic diversity of
the Company's bowling centers, which operate across different regions of the
U.S. and across eleven other countries, provides stability to the Company's
annual cash flows. Although financial performance of Bowling Centers operations
is seasonal in nature in many countries, with cash flows typically peaking in
the winter months and reaching their lows in the summer months, the geographic
diversity of the Company's bowling centers has helped reduce this seasonality
as bowling centers in certain countries in which AMF operates exhibit different
seasonal sales patterns. As a result of the growing number of U.S. centers
attributable to the Company's acquisition program, however, seasonality may
become more accentuated.
Modernization and Consumer Products sales display seasonality. The U.S.
market, which is the largest market for Modernization and Consumer Products, is
driven by the beginning of league play in the fall of each year. The NCP
category of bowling products experiences significant fluctuations due to
changes in demand for NCPs as certain markets experience high growth followed
by market maturity, at which time sales to that market decline, sometimes
rapidly. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality and Market Development Cycles" and "Note
16. Business Segments" in the Notes to Consolidated Financial Statements.
Industry and Competition
Bowling Centers
Bowling is both a competitive sport and a recreational activity, and faces
competition from numerous alternative activities. The ongoing success of the
Bowling Centers operation is subject to the level of interest in bowling, the
availability and relative cost of other sports, recreational and entertainment
alternatives, the amount of leisure time available to potential players, 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 the quality, appearance and location of its
facilities and through the range of amenities and service level offered. See
"Management's Discussion of Financial Condition and Results of Operations --
Bowling Centers."
4
The U.S. bowling center industry is highly fragmented, and consists of two
relatively large bowling center operators, AMF (which had 370 U.S. centers as
of December 31, 1997) and Brunswick Corporation ("Brunswick") (which had
approximately 111 U.S. centers as of December 31, 1997), four medium-sized
chains, which together account for 70 bowling centers, and over 5,300 bowling
centers owned by single-center and small-chain operators, which typically own
four or fewer centers. The top six operators (including AMF) account for less
than 10% of the total number of U.S. bowling centers.
The international bowling center industry is also highly fragmented. There
are typically few chain operators in any one country and a large number of
single-center operators. AMF generally enjoys a relative size advantage (i.e.,
a larger number of lanes per center), and is competitively well positioned in
countries such as the United Kingdom and Australia.
In the United States, the operation of bowling centers is a mature
industry characterized by slightly decreasing lineage (games per lane per day)
offset by increasing average price per game and revenue from food and beverage
and other ancillary sources. Management believes that AMF's U.S. lineage has
remained relatively stable in recent years due to AMF's ability to better
maintain existing league bowlers and attract new recreational bowlers.
U.S. Bowling Center Industry (a)
- ---------------------------------------------------------------
Number of
Operator Locations % of Total
- ------------------------------------------------- ----------- -----------
AMF ............................................. 370 6.3%
Brunswick ....................................... 111 1.9
Bowl America .................................... 23 0.4
Active West (b) ................................. 16 0.3
Mark Voight ..................................... 16 0.3
Bowl New England ................................ 15 0.2
--- -----
Subtotal ....................................... 551 9.4
Single-center and small-chain operators ......... 5,302 90.6
----- -----
Total .......................................... 5,853 100.0%
===== =====
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(a) AMF estimate at December 31, 1997.
(b) On February 13, 1998, the Company acquired fifteen centers from Active
West. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Expenditures" and "Note 14. Acquisitions" in
the Notes to Consolidated Financial Statements.
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, often regionally focused companies in certain product lines.
Management estimates that AMF accounts for approximately 41% of the worldwide
installed base of bowling center equipment.
Because of bowling equipment's relatively long useful life, used equipment
can be refurbished and sold, often to builders of new centers. The Company
actively purchases and resells its used equipment in order to compete with
refurbishers who often are U.S. based.
NCP sales follow the trends in the growth of bowling. As bowling is
introduced and becomes popular in new markets, the economics of constructing
and operating bowling centers become attractive to local market developers and
entrepreneurs. Consequently, new bowling center construction drives demand for
NCPs. For at least the last 15 years, the majority of NCP sales has been to
international markets. In recent years, this trend has been fueled by the
growth of bowling in several countries, such as China, Taiwan and South Korea.
Sales of Modernization and Consumer Products to bowling center operators
who manage the growing installed base of bowling equipment provide a stable
base of recurring revenue. 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
5
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 a customer base.
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments
(such as restrictions on transfer of funds, import and export duties and
quotas, foreign customs, tariffs and VATs and unexpected changes in regulatory
environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
AMF has a history of operating in a number of international markets, in
some cases, for over thirty years. Similar to other U.S.-based manufacturers
with export sales, local currency devaluation increases the cost of the
Company's bowling equipment in that market. As a result, a strengthening U.S.
dollar exchange rate may adversely impact sales volume and profit margins
during such periods.
Current economic difficulties in certain markets of the Asia Pacific
region have resulted in a reduction in the order rate and backlog for NCPs.
Management believes that many Asia Pacific customers are delaying purchases of
NCP and Modernization equipment as they await economic stability in their
regions. As of March 13, 1998, the NCP backlog was 1,765 which is flat compared
to the same period last year.
For the year ended December 31, 1997, NCP sales and backlog to China,
Japan and other Asia Pacific markets represented 72.7% and 70.4% of total NCP
unit sales and backlog, respectively.
Foreign currency exchange rates also can affect the translation of
operating results from international bowling centers, but for the year ended
December 31, 1997, such exchange rates did not materially impact operating
results. For 1997, revenue and EBITDA of international bowling centers
represented 14.6% and 16.0% of consolidated results, respectively.
Over the longer term, management continues to believe that international
markets, including Asia Pacific, represent attractive opportunities for bowling
equipment sales and bowling center operations. Accordingly, management
continues to pursue its strategy in international markets.
Employees
Bowling Centers
As of December 31, 1997, Bowling Centers had approximately 18,415 full-
and part-time employees worldwide. The Company believes that its relations with
its Bowling Centers employees are satisfactory.
Country Number of Employees (a)
- -------------------------------------- ------------------------
United States 16,226
------
International:
Australia ........................... 1,202
United Kingdom ...................... 440
Mexico .............................. 240
China (including Hong Kong) ......... 120
Japan ............................... 47
France .............................. 75
Spain ............................... 32
Switzerland ......................... 9
Canada .............................. 24
------
Total International ............... 2,189
------
Total Worldwide ................... 18,415
======
- ---------
(a) Numbers vary depending on the time of year.
6
Bowling Products
As of December 31, 1997, Bowling Products had approximately 1,125 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.
Segment Number of Employees
- ----------------------------- --------------------
Manufacturing ............... 760
---
Sales:
Australia .................. 8
Americas ................... 48
Europe ..................... 89
Asia Pacific ............... 123
Japan ...................... 97
---
Total Sales .............. 365
---
Total Worldwide .......... 1,125
=====
Corporate
As of December 31, 1997, corporate had approximately 170 full-time
employees. The Company believes that its relations with its corporate employees
are satisfactory.
Item 2. Properties
Bowling Centers
As of December 31, 1997, AMF operated 370 bowling centers and related
facilities in the United States and 100 centers in eleven other countries. A
regional list of these facilities is set forth below:
U.S. Centers*
Number of Number of
Region Clusters Locations Owned Leased
- ------------------------------ ----------- ----------- ------- -------
Texas ........................ 6 34 28 6
Baltimore/Washington ......... 3 24 15 9
Northeast .................... 8 60 34 26
Mid-Atlantic ................. 7 48 31 17
Southern ..................... 11 59 43 16
Great Lakes .................. 7 51 39 12
Midwest ...................... 6 37 27 10
Pacific ...................... 8 55 24 31
-- -- -- --
Total ....................... 56 368 241 127
== === === ===
* AMF operates two centers for an unrelated party. These centers are neither
owned nor leased by AMF and, therefore, are not included in the foregoing
table. In addition, the Company operates a golf practice range in Aurora,
Illinois.
7
International Centers *
Number of
Country Locations Owned Leased
- ------------------------------------ ----------- ------- -------
Australia .......................... 38 23 15
United Kingdom ..................... 22 5 17
Mexico ............................. 9 5 4
China, including Hong Kong ......... 6 0 6
Japan .............................. 4 0 4
France ............................. 3 0 3
Spain .............................. 2 0 2
Switzerland ........................ 1 0 1
Canada ............................. 1 1 0
-- -- --
Total ........................... 86 34 52
== == ==
* The table excludes one bowling center operated by the Hong Leong JV and
thirteen bowling centers operated by the Playcenter JV. See "Business --
General Development of Business".
AMF's leases are subject to periodic renewal. Sixty of the U.S. centers
have leases which expire during the next three years. Forty-one of such leases
have renewal options. Twenty-two of the international centers have leases which
expire during the next three years. Six of such leases have renewal options.
The Company generally does not have difficulty renewing leases.
8
Bowling Products
As of December 31, 1997, AMF owned or leased facilities at five locations
in the United States, four of which are used for its Bowling Products business
and one of which is used for its billiards business. AMF also leased the
following facilities at 29 international locations which are used as offices or
warehouses.
U.S. Facilities
Approximate Owned/
Location Products Square Footage Leased
- ---------------------- ----------------------------------------------------- ---------------- -------
Richmond, VA ......... World headquarters, pinspotters, automatic scoring, 360,000 Owned
synthetic lanes, other capital equipment, consumer 54,000 Leased
products, used pinspotters
Lowville, NY ......... Pins and wood lanes 121,000 Owned
50,000 Owned
Golden, CO ........... Lane maintenance equipment (Century) 50,000 Leased
Bland, MO ............ Billiards tables (AMF Billiards and Games) 37,210 Owned
33,373 Leased
32,000 Owned
24,000 Owned
16,000 Owned
11,000 Leased
Miami, FL ............ Office 200 Leased
International Facilities
Approximate Owned/
Location Functions Square Footage Leased
- ---------------------------------------- ---------------- ---------------- -------
Emu Plains, Australia ................. Office 400 Leased
Warehouse 10,100 Leased
Brussels, Belgium ..................... Office 1,000 Leased
Toronto, Canada ....................... Office 2,100 Leased
Warehouse 400 Leased
Beijing, China ........................ Office 390 Leased
Guangzhou, China ...................... Office 380 Leased
Warehouse 1,650 Leased
Hong Kong ............................. Office 2,500 Leased
Office 1,125 Leased
Shanghai, China ....................... Office 400 Leased
Levallois-Perret, France .............. Office 984 Leased
Warehouse 1,470 Leased
Mainz-Kastel, Germany ................. Office 656 Leased
Warehouse 1,650 Leased
Bangalore, India ...................... Office 1,050 Leased
New Delhi, India ...................... Office 2,000 Leased
Yokohama, Japan ....................... Office 4,626 Leased
Warehouse 8,808 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
9
Item 3. Legal Proceedings
The Company currently and from time to time is subject to claims and
actions arising in the ordinary course of its business, including employment
discrimination claims, workers' compensation claims and personal injury claims
from customers of Bowling Centers. In some actions, plaintiffs request punitive
or other damages that may not be covered by insurance. In management's opinion,
the claims and actions in which the Company is involved will not have a
material adverse effect on its financial position or results of operations.
However, it is not possible to assure the outcome of such claims and actions.
On March 5, 1996, the defendant in an action entitled Northland Bowl and
Sports Center, Inc. and Recreation Association, II v. Golden Giant, Inc., d/b/a
Golden Giant Building Systems, Court of Common Pleas, Centre County,
Pennsylvania, asserted a third-party claim against AMF Bowling Products, Inc.,
a wholly-owned, indirect subsidiary of AMF Bowling Worldwide ("AMF Bowling
Products"), and other parties. The defendant, Golden Giant, Inc. ("Golden
Giant"), a construction company, was originally named as the sole defendant by
a bowling center (not owned or operated by the Company) in connection with the
collapse of the bowling center's roof in 1994. Golden Giant named AMF Bowling
Products as a defendant, and charged AMF with negligence and breach of implied
warranty for installing scoring monitors (four years before the roof collapsed)
in a portion of the building that allegedly could not adequately support the
additional weight of the monitors. The plaintiff claimed damages in excess of
$2.9 million. Golden Giant asserted that, if the plaintiff is entitled to any
recovery, it should come in whole or in part from AMF Bowling Products. On
March 25, 1997, the court dismissed AMF Bowling Products from the lawsuit,
which continues against the other defendants. The plaintiff appealed the order
dismissing AMF Bowling Products. In October 1997, the appellate court dismissed
the plaintiff's appeal as premature.
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.
Environmental Matters
AMF'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. AMF believes that its operations are in material compliance with
the terms of all applicable environmental laws and regulations as currently
interpreted.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the claims currently asserted against the
Company are not likely to have a material adverse effect on its financial
position or results of operations. However, it is not possible to assure the
ultimate outcome of such claims. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Environmental Matters".
Item 4. Submission of Matters to a Vote of Security Holders.
None.
10
PART II
Item 5. Market for AMF Bowling Worldwide Common Equity and Related Investor
Matters
Common Stock
The Company's common stock is wholly owned by AMF Group Holdings. There is
no public trading market for the Company's common stock.
Debt Securities
The following debt securities are registered with the Securities and
Exchange Commission and listed on the New York Stock Exchange:
o 10 7/8% Series B Senior Subordinated Notes Due 2006
o 12 1/4% Series B Subordinated Discount Notes Due 2006
The senior subordinated notes and the senior subordinated discount notes
(collectively, the "Exchange Notes") are subordinated to the guarantees of the
Company's senior debt of $621.3 million outstanding at December 31, 1997. The
indentures governing the Exchange Notes contain certain covenants that, among
other things, restrict declaration of dividends and require maintenance of
certain financial ratios. See "Note 9. Long-Term Debt" in the Notes to
Consolidated Financial Statements for discussion of guarantees and covenants.
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 year ended December 31, 1997, and the period ended December 31, 1996,
and the audited combined financial statements for the four months ended April
30, 1996, and the years ended December 31, 1995, 1994, and 1993, of the AMF
Bowling Group which represented the Bowling Centers and Bowling Products
businesses of the Predecessor Company. The consolidated pro forma results set
forth below are presented as if the Acquisition had occurred on January 1,
1996, and are based on the Predecessor Company's statement of operations for
the period ended April 30, 1996, AMF Group Holdings' statement of income from
its inception through December 31, 1996 and adjustments giving effect to the
Acquisition under the purchase method of accounting. See "Note 3. Pro Forma
Results of Operations" in the Notes to Consolidated Financial Statements. 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".
The comparability of the selected financial data is impacted based on the
Company's bowling center acquisition program. In 1996, the Company acquired 57
bowling centers from unrelated sellers. The combined purchase price was $108.0
million. In 1997, the Company acquired 122 bowling centers from a number of
unrelated sellers. The combined purchase price was $214.8 million. See "Item 1.
Business -- General Development of Business".
The selected financial data include operating results expressed in terms
of EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, and other income and expenses. EBITDA
information is included because the Company understands that such information
is a standard measure commonly reported and widely used by certain investors
and analysts. 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 GAAP.
11
Four Months
Ended
For the year ended December 31, April 30,
---------------------------------------------------------------------- ------------
(dollars in millions)
Pro Forma
AMF Group
Holdings Predecessor
Predecessor Company Inc. AMF Group Holdings Inc. Company
----------------------------------- ---------- ----------------------- ------------
1993 1994 1995 1996(a) 1996(b) 1997 1996(c)
----------- ----------- ----------- ---------- ----------- ----------- ------------
Income Statement Data:
Operating revenue ............... $ 427.6 $ 517.8 $ 564.9 $ 548.9 $ 384.8 $ 713.7 $ 164.9
------- ------- ------- ------- ------- ------- -------
Cost of goods sold .............. 153.2 196.0 184.1 173.6 130.5 212.6 43.1
Bowling center operating
expenses ...................... 108.5 115.2 166.5 178.8 123.7 251.2 80.2
Selling, general and adminis-
trative expenses .............. 41.9 57.1 50.8 51.0 35.1 64.5 35.5
Depreciation and
amortization .................. 21.4 24.8 39.1 73.5 49.4 102.5 15.1
------- ------- ------- ------- ------- ------- -------
Operating income (loss) ......... 102.6 124.7 124.4 72.0 46.1 82.9 (9.0)
Interest expense, gross ......... 5.0 7.4 15.7 106.2 78.0 118.4 4.5
Other income (expense),
net ........................... (0.1) (1.5) 0.2 3.6 3.7 (8.2) (0.1)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes ......................... 97.5 115.8 108.9 (30.6) (28.2) (43.7) (13.6)
Provision (benefit) for income
taxes ......................... 15.1 16.5 12.1 (9.0) (8.6) (12.9) (1.7)
------- ------- ------- ------- ------- ------- -------
Net income (loss) before
equity in loss of joint
ventures and extraordinary
items ......................... 82.4 99.3 96.8 (21.6) (19.6) (30.8) (11.9)
Equity in loss of joint
ventures ...................... -- -- -- -- -- (1.4) --
------- ------- ------- ------- ------- ------- -------
Net income (loss) before
extraordinary items ........... 82.4 99.3 96.8 (21.6) (19.6) (32.2) (11.9)
Extraordinary items, net of
tax ........................... -- -- -- -- -- (23.4) --
------- ------- ------- ------- ------- ------- -------
Net income (loss) ............... $ 82.4 $ 99.3 $ 96.8 $ (21.6) $ (19.6) $ (55.6) $ (11.9)
======= ======= ======= ======= ======= ======= =======
Ratio of earnings
to fixed changes (e) .......... 11.0x 10.3x 6.1x -- -- -- --
Selected Data:
EBITDA .......................... $ 124.0 $ 149.5 $ 163.5 $ 145.5 $ 95.5 $ 185.4 $ 6.1
EBITDA margin ................... 29.0% 28.9% 28.9% 26.5% 24.8% 26.0% 3.7%
As of December 31,
---------------------------------------------------------------
(dollars in millions)
Predecessor Company AMF Group Holdings Inc.
------------------------------------ ------------------------
1993 1994 1995 1996 1997
Balance Sheet Data: ---------- ---------- ---------- ----------- ----------
Working capital (d) .......... $ 18.9 $ 16.9 $ 29.2 $ 7.9 $ 44.0
Goodwill, net ................ -- -- -- 771.1 772.3
Total assets ................. 228.2 410.2 400.4 1,593.9 1,831.8
Total debt ................... 75.7 186.1 167.4 1,091.3 1,060.6
Stockholder's equity ......... 88.6 132.4 161.5 408.7 653.9
Total capital ................ 164.3 318.5 328.9 1,500.0 1,714.5
- ---------
(a) Represents results of operations from January 1, 1996 through December 31,
1996 on a pro forma basis. See "Note 3. Pro Forma Results of Operations"
in the Notes to Consolidated Financial Statements.
(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) Predecessor Company amounts reflect elimination of affiliate receivables
and payables.
(e) The ratios of earnings to fixed charges are computed by dividing earnings
by the fixed charges. Earnings consist of net income to which has been
added fixed charges and income taxes. Fixed charges consist of interest
expense, amortization of debt issuance costs, and the portion of rent
expense considered to represent interest. For the year ended December 31,
1997, AMF had a deficiency of earnings to fixed charges of
12
$43.7 million. For the year ended December 31, 1996, on a pro forma basis,
AMF had a deficiency of earning to fixed charges of $30.6 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information in this report contains forward-looking statements, which are
statements other than historical information or statements of current
condition. Some forward-looking statements may be identified by use of terms
such as "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans and objectives of the Company
for future operations. In light of the risks and uncertainties inherent in all
future projections, the inclusion of forward-looking statements in this report
should not be regarded as a representation by AMF or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the
forward-looking statements, including, among other things: (i) the Company's
ability to successfully execute acquisition opportunities and to integrate
acquired operations into its business, (ii) the continued development and
growth of new bowling markets and the Company's ability to continue to identify
those markets and to generate sales of products in those markets before market
saturation, (iii) the risk of adverse political acts or developments in the
Company's existing or proposed markets for its products or in which it operates
its bowling centers, (iv) the Company's ability to retain experienced senior
management, (v) the ability of AMF and its subsidiaries to generate sufficient
cash flow in a timely manner to satisfy principal and interest payments on
their indebtedness and (vi) the popularity of bowling as an activity in the
United States and abroad. In addition, actual results may also differ
materially from forward-looking statements in this report as a result of
factors generally applicable to companies in similar businesses, including,
among other things: (i) a decline in general economic conditions, (ii) an
adverse judgment in pending or future litigation and (iii) increased
competitive pressure from current competitors and future market entrants. The
foregoing review of important factors should not be construed as exhaustive and
should be read in conjunction with other cautionary statements that are
included elsewhere in this report. AMF undertakes no obligation to release
publicly the results of any future revisions it may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Background
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and in AMF's Consolidated Financial
Statements included elsewhere herein.
Management believes that comparisons of the results of operations for the
years ended December 31, 1997 and 1996, on a pro forma basis, and December 31,
1996, on a pro forma basis, and 1995, are more meaningful than comparisons on
an historical basis. This is due primarily to significant changes in
depreciation and amortization that result from the application of the purchase
method of accounting for the Acquisition and from the increased interest
expense due to the debt incurred related to the Acquisition. Discussion of the
results of the Company's operations for the year ended December 31, 1997, is on
an historical basis. Discussion of the results of the Predecessor Company's
operations for the year ended December 31, 1995, is on an historical basis. See
"Note 3. Pro Forma Results of Operations" in the Notes to 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 two European centers
that were not acquired by the Company as part of the Acquisition, as discussed
in "Note 1. Organization" in the Notes to Consolidated Financial Statements,
are included in the 1996 actual Predecessor Company results and excluded from
1996 pro forma results. The two centers have no material impact on the
Company's financial statements or on the information presented in this section.
For 1995, Bowling Centers adopted a calendar year end; accordingly, the
Bowling Centers results of operations for the year ended December 31, 1995
includes the results of U.S. operations for the period from December 26, 1994
through December 31, 1995. Total revenue for the period from December 26, 1994
through December 31, 1994 was approximately $2.0 million.
13
The business segment results presented below are before intersegment
eliminations since the Company's management believes that this will provide a
more accurate comparison of performance by segment from year to year. The
intersegment eliminations are not material. Interest expense is presented on a
gross basis.
Performance by Business Segment
Bowling Centers
Bowling Centers derives its revenue and profits from three principal
sources: (i) bowling, (ii) food and beverage and (iii) other sources, such as
shoe rental, amusement games, billiards and pro shops. In 1997, bowling, food
and beverage and other revenue represented 60.6%, 25.4% and 14.0% of total
Bowling Centers revenue, respectively.
The results shown below reflect both U.S. and international Bowling
Centers operations.
For the year ended December 31,
--------------------------------------------
(dollars in millions)
Pro Forma
Predecessor AMF Group AMF Group
Company Holdings Inc. Holdings Inc.
------------- --------------- --------------
1995 1996(a) 1997
------------- --------------- --------------
Bowling Centers (before intersegment eliminations):
Operating revenue ..................................... $ 292.3 $ 307.3 $ 429.1
------- ------- -------
Cost of goods sold .................................... 26.3 27.5 39.9
Bowling center operating expenses ..................... 168.7 177.2 252.5
Selling, general and administrative expenses .......... 10.5 7.0 6.3
Depreciation and amortization ......................... 36.6 56.2 82.8
------- ------- -------
Operating income ...................................... $ 50.2 $ 39.4 $ 47.6
======= ======= =======
Selected Data:
EBITDA ................................................ $ 86.8 $ 95.6 $ 130.4
EBITDA margin ......................................... 29.7% 31.1% 30.4%
Number of centers, end of period ...................... 286 341 470
Number of lanes, end of period ........................ 9,430 11,782 16,315
- ---------
(a) Represents pro forma results of operations from January 1, 1996 through
December 31, 1996. See "Note 3. Pro Forma Results of Operations" in the
Notes to Consolidated Financial Statements. The pro forma 1996 amount of
selling, general and administrative expenses has been adjusted to reflect a
reallocation to corporate of certain general and administrative expenses
previously allocated to the Bowling Centers segment. The 1995 amounts have
not been restated to reflect this change.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Bowling Centers operating revenue increased $121.8 million, or 39.6%. An
increase of $125.8 million was attributable to new centers, of which $116.5
million was from U.S. centers, and $9.3 million was from international centers.
An increase of $1.1 million, or 0.4%, in constant centers (centers in operation
for at least one full fiscal year) revenue was primarily a result of an
increase in revenue in the Northeast region of the United States, a region in
which the Company has a large number of centers and which experienced severe
weather conditions during the first quarter of 1996. The increase in constant
centers revenue for the year ended December 31, 1997 compared to the same
period in 1996 was net of $1.0 million additional revenue in 1996 due to leap
year, a $3.0 million decrease in revenue from the Japanese centers in 1997,
which was primarily caused by recent poor economic conditions in Japan, and a
decrease of $1.0 million in operating revenue in the third quarter of 1997
compared to the same period in 1996 which resulted from pricing specials used
in the U.S. and international centers to overcome lower lineage (defined as
games per lane per day) which resulted from the hot, dry weather in these
regions. Excluding these special items, constant center revenue would have
increased $6.1 million, or 2.2%, in the year ended December 31, 1997 compared
to the same period in 1996. A decrease in operating revenue of $5.1 million was
primarily attributable to the closing of eight U.S. centers in May 1996, and
February, May and December 1997, respectively.
Cost of goods sold increased $12.4 million, or 45.1%, primarily as a
result of the net increase in the number of centers.
14
Operating expenses increased $75.3 million, or 42.5%, of which
approximately $74.6 million was attributable to new centers, including $69.6
million attributable to U.S. centers and $5.0 million attributable to
international centers. As a percentage of its revenue, Bowling Centers
operating expenses were 57.7% for the year ended December 31, 1996, on a pro
forma basis, versus 58.8% for the year ended December 31, 1997.
A decrease of $0.7 million, or 10.0%, in selling, general and
administrative expenses was attributable to cost controls implemented in
international centers in response to lower lineage discussed above and savings
associated with closed centers, partially offset by additional expenses due to
new centers.
An increase of $34.8 million, or 36.4%, in EBITDA was attributable to new
centers. EBITDA margin in 1997 was 30.4% compared to 31.1% in 1996, on a pro
forma basis.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Operating revenue increased $15.0 million, or 5.1%. Increases of $19.0 million
attributable to the addition of 57 new centers purchased during the last two
quarters of 1996 and $0.5 million attributable to increases at constant centers
were offset by decreases of $2.2 million attributable to the two bowling
centers which were not acquired as part of the Acquisition and $2.3 million
attributable to the closure of seven of the 106 bowling centers originally
purchased by the Predecessor Company from Fair Lanes. The constant center
revenue increase was attributable to an increase in international revenue of
$2.4 million, offset by a decrease in U.S. constant centers revenue of $1.9
million. The decrease in U.S. constant centers revenue was largely a result of
a decrease in revenue due to the severe weather conditions in the Northeast, a
region in which the Company has a large number of centers, during the first
quarter of 1996. An increase in bowling prices in the U.S. during 1996 was
partially offset by a decrease in U.S. lineage. The increase in international
revenue was primarily a result of an increase in average price per game and
increased food and beverage revenue.
Cost of goods sold increased $1.2 million, or 4.6%, primarily as a result
of new centers.
Bowling Centers operating expenses increased by $8.5 million, or 5.0%. An
increase of $10.0 million attributable to new centers and a net increase of
$2.2 million attributable to constant centers were offset by a decrease of $3.7
million primarily attributable to the two centers not acquired in the
Acquisition and the closure of seven Fair Lanes centers. The net increase in
constant centers operating expenses was a result of an increase of $4.1 million
in international centers due to increased rents and payroll expenses, and a
decrease of $1.9 million in U.S. centers resulting from the implementation of
cost reduction plans developed by management after assessing the impact of the
severe weather conditions during the first quarter of 1996. As a percentage of
total revenue, Bowling Centers operating expenses remained constant at 57.7%
during 1996 and 1995.
Of the $3.5 million decrease in selling, general and administrative
expenses, $3.6 million is due to a reallocation to corporate of certain
selling, general and administrative expenses previously allocated to the
Bowling Centers segment.
An increase of $8.8 million, or 10.1%, in EBITDA was attributable to new
centers. EBITDA margin in 1996 was 31.1% compared to 29.7% in 1995.
15
Bowling Products
The results shown below reflect Bowling Products operations.
For the year ended December 31,
--------------------------------------------
(dollars in millions)
Pro Forma
Predecessor AMF Group AMF Group
Company Holdings Inc. Holdings Inc.
------------- --------------- --------------
1995 1996(a) 1997
------------- --------------- --------------
Bowling Products
(before intersegment eliminations):
Operating revenue ................................ $ 286.5 $ 252.1 $ 299.3
Cost of goods sold ............................... 166.9 153.3 185.7
------- ------- -------
Gross profit ..................................... 119.6 98.8 113.6
Selling, general and administrative expenses ..... 40.3 36.2 42.8
Depreciation and amortization .................... 3.6 18.5 19.8
------- ------- -------
Operating income ................................. $ 75.7 $ 44.1 $ 51.0
======= ======= =======
Selected Data:
Gross profit margin .............................. 41.7% 39.2% 38.0%
EBITDA ........................................... $ 79.3 $ 62.6 $ 70.8
EBITDA margin .................................... 27.7% 24.8% 23.7%
New Center Packages sold ......................... 4,437 3,029 4,576
New Center Packages backlog
end of period (b) ............................... 940 1,426 1,725
- ---------
(a) Represents results of operations from January 1, 1996 through December
31, 1996 on a pro forma basis. See "Note 3. Pro Forma Results of Operations"
in the Notes to Consolidated Financial Statements. The pro forma 1996 amount
of selling, general and administrative expenses has been adjusted to reflect
a reallocation to corporate of certain overhead expenses previously
allocated to the Bowling Products segment. The 1995 amounts have not been
restated to reflect this change.
(b) NCP orders included in the backlog are sometimes cancelled by customers
in the normal course of business. Accordingly, the Company has experienced,
and expects to continue to experience, the cancellation of a portion of such
orders. The backlog as of March 13, 1998 is 1,765 units which is flat
compared to the same period last year. See " -- Backlog; Recent NCP Sales".
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Bowling Products operating revenue increased $47.2 million, or 18.7%, primarily
due to an increase of $44.7 million, or 37.1%, in NCP revenue, and an increase
of $1.5 million, or 1.1%, in Modernization and Consumer Products revenue. The
increase in NCP revenue was due to an overall increase in NCP sales of 1,547
units which occurred primarily in Asia Pacific, Europe, South America and the
Middle East. See " -- Seasonality and Market Development Cycles".
Gross profit increased by $14.8 million, or 15.0%. Gross profit margin was
39.2% in 1996, on a pro forma basis, and 38.0% in 1997. Competitive pricing
pressure in certain markets and higher cost of sales, both experienced in the
third and fourth quarter, and unfavorable exchange rates experienced in certain
markets in the fourth quarter, resulted in lower year-to-date margins in 1997.
See " -- International Operations".
Bowling Products selling, general and administrative expenses increased by
$6.6 million, or 18.2%, primarily as a result of a $4.3 million increase
attributable to payroll and facilities expenses related to opening and staffing
certain of the Company's international sales and service offices, and an
increase of $3.7 million attributable to advertising and promotion expenses.
These increases were offset by a $1.4 million decrease in payroll, facilities
and related expenses at U.S. locations.
EBITDA increased $8.2 million, or 13.1%, and EBITDA margin decreased from
24.8% in 1996, to 23.7% in 1997. The margin decline was impacted by the pricing
pressure and unfavorable exchange rates discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Operating revenue decreased by $34.4 million, or 12.0%, primarily due to a
decrease of $35.3 million, or 22.7%, in NCP revenue offset by an
16
increase of $0.9 million, or 0.7%., in Modernization and Consumer Products
revenue. The decrease in NCP revenue was due to an overall decrease in NCP
sales by 1,408 units in 1996 compared to 1995, particularly for maturing
markets including South Korea and Taiwan, offset in part by an increase in NCP
revenue from sales to China. From 1995 to 1996, total NCP sales to South Korea
decreased by 1,165 units and to Taiwan decreased by 1,323 units. Additionally,
there was a moderate increase in NCP units sold in the Americas and southern
Europe during 1996. The increase in sales to China occurred during the last six
months of 1996. See " -- Seasonality and Market Development Cycles". The
increase in Modernization and Consumer Products revenue was due in part to
increased sales of synthetic lanes and automatic scoring in the United States.
Gross profit decreased by $20.8 million, or 17.4%. Gross profit margin was
41.7% in 1995 and 39.2% in 1996. Of this 2.5% decrease, 0.8% was attributable
to an increase in certain inventory and warranty reserves in the Modernization
and Consumer Products categories of $2.1 million, and 1.7% was attributable to
the lower margins on decreased revenues, particularly in Japan, due to price
cuts implemented by the Company's management in response to stiffer competition
in the Modernization and Consumer Products category.
Of the $4.1 million decrease in selling, general and administrative
expenses, $4.2 million was due to a reallocation to corporate of certain
overhead expenses previously allocated to the Bowling Products segment.
EBITDA decreased $16.7 million, or 21.1%, and EBITDA margin decreased from
27.7% in 1995, to 24.8% in 1996, primarily due to the decreased NCP revenue and
gross profit discussed above.
Consolidated Items
Depreciation and Amortization. For the year ended December 31, 1997,
depreciation and amortization increased by $29.0 million, or 39.5%, over the
same period in 1996, primarily due to depreciation of property and equipment of
centers acquired since May, 1996 and incremental depreciation expense as a
result of capital expenditures.
For the year ended December 31, 1996, depreciation and amortization
increased by $34.4 million, or 88.0%, over the same period in 1995, primarily
as a result of recording fixed assets at fair market value and goodwill in
accordance with the purchase accounting method applied for the Acquisition.
Interest Expense. Gross interest expense increased by $12.2 million, or
11.5%, in the year ended December 31, 1997 compared with the same period in
1996, primarily due to interest paid on increased levels of bank debt as a
result of center acquisitions. See " -- Liquidity" and " -- Capital Resources".
Cash interest paid by the Company for the year ended December 1997 totaled
$83.2 million, while non-cash bond interest amortization totaled $33.6 million.
For the year ended December 31, 1996, gross interest expense increased by
$90.5 million, or 576.4%, compared with the same period in 1995 due to interest
paid on debt incurred to finance the Acquisition and interest on the
Acquisition Facility. Cash interest paid by the Company for the year ended
December 31, 1996 totaled $44.5 million, while non-cash bond interest
amortization totaled $24.7 million.
Net Income (Loss). Net loss increased $34.0 million, or 157.4%, for the
year ended December 31, 1997 compared with the same period in 1996. Increases
of $39.9 million in EBITDA discussed above on a segment basis and income tax
benefit of $3.9 million were offset by increases of $29.0 million in
depreciation and amortization expense, $12.2 million in interest expense, $23.4
million of extraordinary charges recorded in the fourth quarter as described
below, $11.8 million in other expenses and $1.4 million of equity in loss of
joint ventures.
The Company incurred after-tax extraordinary charges totaling $23.4
million in the fourth quarter of 1997 as a result of entering into the Third
Amended and Restated Credit Agreement (the "Credit Agreement"), the premium
paid to redeem a portion of the senior subordinated discount notes with the
proceeds of the Initial Public Offering and the write-off of the portion of
deferred financing costs attributable to the senior subordinated discount notes
redeemed. See "Note 9. Long-Term Debt" in the Notes to Consolidated Financial
Statements and "Selected Quarterly Data" included elsewhere herein.
Of the $11.8 million increase in other expenses, $3.6 million is
attributable to the write down of seven U.S. centers closed in 1997 and three
U.S. centers which the Company will close in 1998, $1.6 million is attributable
to an increase in losses recorded on sales of property and equipment and $3.0
million represents an increase in losses on foreign exchange transactions. In
addition to the increases in these expenses, interest income decreased
17
$3.6 million. Proceeds from the issuance of senior subordinated notes and
senior subordinated discount notes which were used to partially fund the
Acquisition were received by the Company in March 1996, and earned interest
income until May 1, 1996, the date of Acquisition.
The Company accounts for its investments in Hong Leong JV and Playcenter
JV by the equity method. For the year ended December 31, 1997, the Company
incurred a loss of $1.4 million as equity in loss of joint ventures. See "Note
15. Joint Ventures" in the Notes to Consolidated Financial Statements.
The decline of $118.4 million, or 122.3%, in net income from $96.8 million
in 1995 to a net loss of $(21.6) million in 1996, on a pro forma basis, was
primarily attributable to a decrease in Bowling Products EBITDA resulting from
the decline in NCP revenue and higher depreciation and amortization and
interest expense resulting from the Acquisition after allowing for an $9.0
million tax benefit.
Income Taxes. Prior to the Acquisition, certain of the companies within
the Predecessor Company elected S corporation status under the Internal Revenue
Code of 1986, as amended (the "Code"). Upon consummation of the Acquisition,
those companies became taxable corporations under the Code.
In connection with the Acquisition, the two principal subsidiaries of the
Company elected under Section 338(h)(10) of the Code to treat the stock
purchase as a deemed asset acquisition for the purposes of U.S. income taxes.
These elections permitted both of the affiliated companies to revalue their
assets to fair market value and to treat any amortizable goodwill as tax
deductible over fifteen years.
As of December 31, 1997, the Company had net operating losses of
approximately $110.0 million and foreign tax credits of $12.4 million which will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company had not recorded a valuation reserve as of
December 31, 1997 because the Company expects to utilize these net operating
losses and foreign tax credits prior to their expiration.
Liquidity
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following discussion compares AMF's results for the year ended
December 31, 1997 with the period ended December 31, 1996, on an historical
basis.
The Company's primary source of liquidity is cash provided by operations
and credit facilities as described below. Working capital on December 31, 1996
was $7.9 million compared with $44.0 million as of December 31, 1997, an
increase of $36.1 million. Accounts receivable increased $31.3 million
primarily as a result of increased NCP revenue, inventory increased $15.6
million in advance of future shipments, deferred taxes and other current assets
increased $5.9 million and the current portion of long-term debt decreased
$15.0 million as a result of principal payments on the Credit Agreement. These
increases in working capital were offset by an increase of $10.0 million in
accounts payable attributable to an increase in production in advance of future
shipments, an increase of $13.9 million caused by changes in other current
liabilities and a decrease in cash of $7.8 million primarily attributable to
payments on debt under the Credit Agreement and internal funding of certain
bowling center acquisitions.
Net cash flows provided by operating activities were $73.8 million for the
period ended December 31, 1996 compared with net cash provided of $47.7 million
for the year ended December 31, 1997, a decrease of $26.1 million. Net cash was
provided from an increase of $53.1 million in depreciation and amortization as
a result of incremental depreciation recorded on bowling center acquisitions
and capital expenditures of the Company, an increase of $8.8 million which
resulted from amortization of the discount related to the bonds used to
partially fund the Acquisition and an increase of $4.0 million attributable to
loss recorded on the sale of property and equipment. In 1997, net cash of $1.4
million was provided by the equity in loss of joint ventures and $23.4 million
was provided by the after-tax extraordinary charges discussed above. Net cash
used resulted from an increase of $36.1 million in net loss, an increase of
$19.6 million in the change in accounts receivable primarily resulting from the
increased levels of NCP sales compared with the same period in 1996, an
increase of $18.8 million in the change in inventory primarily reflecting the
increased backlog of NCP orders to be shipped after December 31, 1997, an
increase in the change in other assets of $8.9 million, an increase in the
change in net deferred income tax assets of $6.2 million and a decrease of
$27.2 million in the change in accounts payable and other liabilities.
18
Net cash flows used in investing activities were $1,467.1 million for the
period ended December 31, 1996 compared with net cash flows used of $288.6
million for the year ended December 31, 1997. During the period ended December
31, 1996, cash flows used for acquisitions of operating units, net of cash
acquired, including the Acquisition, totaled $1,450.9 million, capital spending
was $16.9 million and other investing cash flows provided were $0.7 million.
During the year ended December 31, 1997, acquisitions of bowling centers
totaled $214.8 million, capital spending was $56.7 million, investments in and
advances to the Hong Leong JV and Playcenter JV totaled $21.3 million, and
other cash flows provided by investing activities were $4.2 million
attributable to proceeds form the sale of property. See "Note 14. Acquisitions"
in the "Notes to Consolidated Financial Statements" and " -- Capital
Expenditures".
Net cash provided by financing activities was $1,438.3 million for the
period ended December 31, 1996 compared with net cash provided of $235.7
million for the year ended December 31, 1997. During the period ended December
31, 1996, the Company had borrowings, net of deferred financing costs, of
$1,059.3 million from debt incurred to finance the Acquisition and from the
Acquisition Facility, and made payments of $38.9 million on this debt.
Additionally, a total of $420.8 million was received as capital contributions
by the institutional stockholders of AMF Bowling and certain of its officers
and directors. Of the total capital contributed, $380.8 million was for the
initial capitalization of the Company and the Acquisition, and $40.0 million
was received as additional capital contributions in connection with the
acquisition of centers from Charan. During 1997, funds were used primarily for
the payment of long-term debt totaling $304.6 million, $14.6 million was
attributable to the premium paid in connection with the redemption of a portion
of the senior subordinated discount notes discussed above, $0.7 million was
attributable to payments on non-compete obligations and $0.5 million was used
for a dividend to AMF Bowling for the repurchase of AMF Bowling Common Stock.
Funds were provided in 1997 by borrowings of long-term debt totaling $240.4
million, $315.7 million of additional capital contributions from AMF Bowling
attributable to the sale of $36.6 million to its institutional stockholders and
net proceeds of $279.1 million from the Initial Public Offering. See "Note 9.
Long-Term Debt" and "Note 12. Employee Benefit Plans" in the Notes to
Consolidated Financial Statements.
As a result of the aforementioned, cash increased by $43.6 million for the
period ended December 31, 1996 compared to a decrease of $7.8 million for the
year ended December 31, 1997.
Year Ended December 31, 1996 Compared to year Ended December 31, 1995.
The following discussion compares AMF Bowling's results for the period
ended December 31, 1996, with the Predecessor Company's results for the year
ended December 31, 1995, on an historical basis.
Net cash flows from operating activities decreased $51.0 million from
$124.8 million for the year ended December 31, 1995 to $73.8 million for the
period ended December 31, 1996. This decrease was primarily due to the decrease
in net income from $96.8 million for the year ended December 31, 1995 to a net
loss of $(19.6) million for the period ended December 31, 1996 and higher
depreciation, amortization and interest expenses as a result of the
Acquisition.
Net cash flows used in investing activities were $28.3 million for the
year ended December 31, 1995 compared with net cash flows used of $1,467.1
million for the period ended December 31, 1996. The change was due primarily to
the Acquisition. During the year ended December 31, 1995, capital spending was
$30.0 million and other investing cash flows provided were $1.7 million. During
the period ended December 31, 1996, acquisitions of operating units, net of
cash acquired, including the Acquisition, totaled $1,450.9 million, capital
spending was $16.9 million, and other cash flows provided by investing
activities were $0.7 million.
Net cash used for financing activities was $94.7 million for the year
ended December 31, 1995 compared with net cash provided of $1,438.3 million for
the period ended December 31, 1996. This change primarily resulted from the
issuance of debt and capital contributions related to the Acquisition. During
1995, the Predecessor Company made distributions to its owners of $71.9
million, net payments on notes payable to its owners of $3.8 million, net
payments on credit note agreements and long-term debt of $21.3 million and a
payment for redemption of stock of $4.0 million. Additionally, cash of $8.3
million was received as capital contributions by stockholders.
During the period ended December 31, 1996, the Company had borrowings, net
of deferred financing costs, of $1,059.3 million from debt incurred to finance
the Acquisition and from the Acquisition Facility, and made payments of $38.9
million on this debt. Additionally, a total of $420.8 million was received as
capital contributions by
19
the institutional stockholders of AMF Bowling and certain of its officers and
directors. Of the total capital contributed, $380.8 million was for the initial
capitalization of the Company and the Acquisition, and $40.0 million was
received as additional capital contributions in connection with the acquisition
of centers from Charan. See "Business -- General Development of Business".
As a result of the aforementioned, cash increased by $1.6 million for the
year ended December 31, 1995 compared with an increase of $43.6 million for the
period ended December 31, 1996.
Capital Resources
As a result of the Acquisition, the Company's total indebtedness increased
substantially. At December 31, 1997, the Company's debt structure consisted of
$621.3 million of senior debt, $250.0 million of senior subordinated notes and
$189.3 million of senior subordinated discount notes. The Company's senior debt
consisted of $446.2 million of term loans, $173.1 million of revolving credit
advances under the Bank Facility and $2.0 million represented by one mortgage
note. At December 31, 1997, the Company was capitalized with equity of $654.0
million.
The Company has the ability to borrow for general corporate purposes and
for acquisitions pursuant to the $355.0 million Bank Facility, subject to
certain conditions. Between December 31, 1997 and March 13, 1998, additional
borrowings under the Bank Facility totaled $47.0 million and were used to fund
the acquisitions of centers and increases in working capital. At March 13,
1998, $220.1 million was outstanding under the Bank Facility.
In September 1997, certain current stockholders of AMF Bowling purchased
an aggregate of 1,780,000 shares of AMF Bowling Common Stock for $20.00 per
share. The aggregate $35.6 million capital contribution was used to fund
acquisitions.
In November 1997, AMF Bowling issued 15,525,000 shares of AMF Bowling
Common Stock at $19.50 per share pursuant to the Initial Public Offering. The
net proceeds of the Initial Public Offering were approximately $279.1 million
after deducting the underwriting discount and expenses payable by AMF Bowling,
and were used to repay $150.8 million of indebtedness under the Credit
Agreement and to redeem $118.9 million in principal of the senior subordinated
discount notes. See "Note 9. Long-Term Debt" in the Notes to Consolidated
Financial Statements.
The Company funds its cash needs through cash flow from operations,
existing cash balances and the Bank Facility. A substantial portion of the
Company's available cash will be applied to service outstanding indebtedness.
For the year ended December 31, 1997, the Company incurred cash interest
expense of $83.0 million, representing 44.8% of EBITDA of $185.4 million for
the year. For the period from the inception date of January 12, 1996 through
December 31, 1996, the Company incurred cash interest expense of $53.0 million,
representing 55.5% of EBITDA of $95.5 million for the period.
The Indentures for the senior subordinated notes and the senior
subordinated discount notes and the provisions of the Credit Agreement contain
financial and operating covenants and significant restrictions on the ability
of the Company to pay dividends, incur indebtedness, make investments and take
certain other corporate actions. See "Note 9. Long-Term Debt" in the Notes to
Consolidated Financial Statements.
The Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance its indebtedness depends on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. Based upon the current level of operations and anticipated growth,
management believes that available cash flow, together with available
borrowings under the Credit Agreement and other sources of liquidity, will be
adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures, scheduled payments of principal of, and interest
on, its senior debt, and interest on the senior subordinated notes and senior
subordinated discount notes. There can be no assurance, however, that the
Company's business will generate sufficient cash flow from operations or that
future borrowings will be available in an amount sufficient to enable the
Company to service its indebtedness or that any refinancing would be available
on commercially reasonable terms or at all.
On November 7, 1997, the Company's bank credit agreement was amended and
restated as the Third Amended and Restated Credit Agreement, under which the
Acquisition Facility and a portion of the term facilities under the Credit
Agreement were converted into a non-amortizing revolving Bank Facility, the
aggregate size of which was increased to $355.0 million, and a portion of such
revolving credit indebtedness was repaid with proceeds of the
20
Initial Public Offering. Borrowings under the Bank Facility will provide the
Company the ability to finance acquisitions or new center construction.
Capital Expenditures
For the year ended December 31, 1997, the Company's actual capital
expenditures were $56.7 million (excluding acquisitions) compared with $23.8
million for the year ended December 31, 1996, on a pro forma basis (capital
expenditures of the acquired business from January 1, 1996 through December 31,
1996.) The increase was primarily due to an ongoing modernization program in
Bowling Centers, a new point-of-sale information system in U.S. Bowling
Centers, new Company-wide information systems, and construction of a new 40
lane, state-of-the-art bowling and family entertainment center at Chelsea Piers
in New York City.
For the period ended December 31, 1996, the Company's capital expenditures
were $23.8 million. For the year ended December 31, 1995, the Company's capital
expenditures were $30.0 million, including $9.7 million for the construction of
three new centers. The 1996 expenditures level was lower than the 1995 level in
part because in 1995 three new bowling centers were constructed.
The Company conducts an ongoing modernization and maintenance program that
results in its centers having upgraded physical plants and generally attractive
appearances. Management believes that its historical spending level of
approximately 3.7% of Bowling Centers revenue is fully adequate to cover all
modernization and maintenance capital expenditures. Management estimates that
approximately 2.0% of Bowling Centers revenue is required for nondiscretionary
capital expenditures.
Bowling Products has relatively modest capital investment requirements,
and the Company has followed a relatively conservative approach to capital
investment. Maintenance and replacement investments have been made when clearly
needed, but as close to the end of the useful lives of assets as possible.
Investment in new product development has received the highest investment
priority and has focused on projects with projected payback periods of one to
three years.
The Company has the opportunity to acquire and build additional bowling
centers, both in the U.S. and internationally. The Company is prepared to
acquire or build additional bowling centers as opportunities arise and is
engaged in ongoing evaluations of and discussions with third parties regarding
possible acquisitions. Management plans to acquire centers with funding
provided under the Credit Agreement to the extent available. Under the Bank
Facility, as of December 31, 1997, the Company had the ability to borrow up to
an additional $181.9 million for acquisitions or to finance new center
construction, subject to certain conditions. Management's plans to expand the
Bowling Centers operations are subject to the continuation of favorable
economic and financial conditions, which are generally not within the Company's
control.
Currently, the Company has entered into purchase agreements to acquire 5
U.S. centers from several unrelated single-center operators. The Company has
committed to build a bowling center in Chicago's Marina City development and
the Michael Jordan Golf Center in Charlotte, North Carolina in 1998.
The Company has funded its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new
centers, internally generated cash, the Bank Facility, and capital
contributions by AMF Bowling attributable to issuances of common equity by AMF
Bowling. See "Note 14. Acquisitions" in the Notes to Consolidated Financial
Statements, " -- Liquidity" and " -- Capital Resources."
Seasonality and Market Development Cycles
The U.S. bowling center operations are seasonal. The following table sets
forth AMF's U.S. constant centers revenue for the last four quarters:
Quarter Ending (dollars in millions)
------------------------------------------------------------------------------
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
---------------- --------------- -------------------- ------------------
Total Revenue ......... $ 58.1 $ 41.1 $ 38.4 $ 50.6
% of Total ............ 30.9% 21.8% 20.4% 26.9%
On a consolidated basis, however, revenue and EBITDA of the Company's
businesses are neither highly seasonal nor highly cyclical. The geographic
diversity of the Company's bowling centers, which operate across different
regions of the U.S. and across eleven other countries, has provided stability
to the Company's annual cash
21
flows. Although financial performance of Bowling Centers operations is seasonal
in nature in many countries, with cash flows typically peaking in the winter
months and reaching their lows in the summer months, the geographic diversity
of the Company's bowling centers has helped reduce this seasonality as bowling
centers in certain countries in which AMF operates exhibit different seasonal
sales patterns. As a result of the growing number of U.S. centers attributable
to the Company's acquisition program, however, the seasonality described above
may be accentuated. In Australia, where AMF has its largest number of
international centers, the reversal of seasons relative to the U.S. helps
mitigate the seasonality in worldwide operations. AMF's cash flows are further
stabilized by the location of many centers in regions where the climates have
high average temperatures and high humidity. In the U.S., during the summer
months when league bowling is generally less active, bowling centers in the
southern U.S. continue to show strong performance. Similarly, in regions with
warm summer climates such as Hong Kong and Mexico, where bowling in
air-conditioned centers may be more attractive than outdoor activities, bowling
centers show strong performance. See "Note 16. Business Segments" in the Notes
to Consolidated Financial Statements.
Modernization and Consumer Products sales display seasonality. The U.S.
market, which is the largest market for Modernization and Consumer Products, is
driven by the beginning of league play in the fall of each year. Operators
typically sign purchase orders, particularly for replacement equipment, during
the first four months of the year, after they receive winter league revenue
indications. Equipment is shipped and installed during the summer months, when
leagues are generally less active. Sales of modernization equipment, such as
automatic scoring and synthetic lane overlays, are less predictable and
fluctuate more than the replacement equipment because of the four to ten year
life cycles of these major products.
The NCP category of bowling products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
South Korea and Taiwan) which, in the Company's experience, last five years or
more. These growth patterns do not seem to be closely tied to general economic
cycles.
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments
(such as restrictions on transfer of funds, import and export duties and
quotas, foreign customs, tariffs and VATs and unexpected changes in regulatory
environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
AMF has a history of operating in a number of international markets, in
some cases, for over thirty years. Similar to other U.S.-based manufacturers
with export sales, local currency devaluation increases the cost of the
Company's bowling equipment in that market. As a result, a strengthening U.S.
dollar exchange rate may adversely impact sales volume and profit margins
during such periods.
Current economic difficulties in certain markets of the Asia Pacific
region have resulted in a reduction in the order rate and backlog for NCPs.
Management believes that many Asia Pacific customers are delaying purchases of
NCP and Modernization equipment as they await economic stability in their
regions. As of March 13, 1998, the NCP backlog was 1,765 which is flat compared
to the same period last year.
For the year ended December 31, 1997, NCP sales and backlog to China,
Japan and other Asia Pacific markets represented 72.7% and 70.4% of total NCP
unit sales and backlog, respectively.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the year ended December 31,
1997, revenue and EBITDA of international bowling centers represented 14.6% and
16.0% of consolidated results, respectively.
Over the longer term, management continues to believe that international
markets, including Asia Pacific, represent attractive opportunities for bowling
equipment sales and bowling center operations. Accordingly, management
continues to pursue its strategy in international markets.
Backlog; Recent NCP Sales
The total backlog of NCPs (which include all of the bowling equipment
necessary to outfit one new bowling lane) as of December 31, 1997 was 1,725
units and 1,765 units as of March 13, 1998. The current backlog is flat
22
compared to the same period last year. NCP orders included in the backlog are
sometimes cancelled by customers in the normal course of business. Accordingly,
the Company has experienced, and expects to continue to experience, the
cancellation of a portion of its NCP orders.
NCP sales for the year ended December 31, 1997 totaled $165.1 million, a
37.1% increase over the same period in 1996. Management believes that the
significant increase was attributable to the market development and sales
programs implemented in mid-1996 which were designed to increase NCP sales
activity in certain markets around the world. While China currently represents
the largest market for NCP sales and backlog, other markets in North and South
America, Asia, Europe and the Middle East are being developed.
The NCP backlog of approximately 1,426 units as of December 31, 1996
represented an increase of 486 units from the backlog of 940 units at December
31, 1995. This increase was primarily composed of increases in the backlogs in
China, the United States and Malaysia, partially offset by decreases in the
backlogs in Korea and Taiwan.
Impact of Inflation
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have an
adverse effect on the Company to the extent that increased borrowing costs for
floating rate debt may not be offset by increases in cash flow.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse effect on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
Recent Accounting Pronouncements
Effective for the fiscal year ended December 31, 1998, the Company is
required to adopt Statement of Financial Accounting Standard ("SFAS") No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information." The Company does not expect that
adoption of these standards will have a material impact on the Company's
financial position or results of operations. The adoption of SFAS No. 130 will
require reporting comprehensive income, which includes the foreign currency
translation adjustment, in an alternative format prescribed by the standard.
Year 2000 Issue
The Company is currently developing and installing new worldwide
financial, information, retail and operational systems. Worldwide system
implementation is expected to be complete by December 31, 1999. In connection
with this implementation, system programs have been designed so that the year
2000 will be recognized as a valid date and will not affect the processing of
date-sensitive information. As of December 31, 1997, the Company spent a total
of $12.6 million on systems installation. The Company expects to spend an
additional $7.6 million to complete the installation. In addition, the Company
sells automatic scoring that is computerized and has developed a software
program for approximately $50 thousand that will address the year 2000 issue in
its automatic scoring. This software will be made available to customers with
service contracts at no cost and will be sold to customers without service
contracts. The Company believes that the year 2000 issue has been appropriately
addressed through the implementation of these new systems and software
development and does not expect the year 2000 issue to have a material adverse
impact on the financial position, results of operations or cash flows in future
periods.
23
Item 8. Financial Statements and Supplemental Data
INDEX
Financial Statements
Page
-----
AMF Group Holdings Inc. and Subsidiaries
o Report of Independent Public Accountants ....................................................... 25
o Consolidated Balance Sheets as of December 31, 1997 and 1996 ................................... 26
o Consolidated Statements of Income for the Year Ended December 31, 1997, and the Period Ended
December 31, 1996 .............................................................................. 27
o Consolidated Statements of Cash Flows for the Year Ended December 31, 1997, and the Period
Ended December 31, 1996 ........................................................................ 28
o Consolidated Statements of Stockholder's Equity for the Year Ended December 31, 1997, and the
Period Ended December 31, 1996 ................................................................. 29
o Notes to Consolidated Financial Statements ..................................................... 30
AMF Bowling Group (Predecessor Company)
o Report of Independent Accountants .............................................................. 60
o Combined Balance Sheets as of April 30, 1996 and December 31, 1995 ............................. 61
o Combined Statements of Operations for the Four Months Ended April 30, 1996, and the Year Ended
December 31, 1995 .............................................................................. 62
o Combined Statements of Cash Flows for the Four Months Ended April 30, 1996, and the Year Ended
December 31, 1995 .............................................................................. 63
o Combined Statements of Changes in Stockholders' Equity for the Four Months Ended April 30, 1996,
and the Year Ended December 31, 1995 ........................................................... 64
o Notes to Combined Financial Statements ......................................................... 65
AMF Group Holdings Inc. and Subsidiaries
o Selected Quarterly Data (unaudited) ............................................................ 94
Financial Statement Schedules
AMF Group Holdings Inc.
o Report of Independent Public Accountants on Schedule I ......................................... 112
o Schedule I -- Condensed Financial Information of AMF Group Holdings Inc. ....................... 113
AMF Bowling Group (Predecessor Company)
o Schedule II -- Valuation and Qualifying Accounts and Reserves .................................. 117
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
AMF GROUP HOLDINGS INC.:
We have audited the accompanying consolidated balance sheets of AMF Group
Holdings Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholder's
equity, and cash flows for the year ended December 31, 1997, and the period
from inception (January 12, 1996) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AMF Group Holdings Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997, and the
period from inception (January 12, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
February 20, 1998
25
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of December 31,
-------------------------------
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 35,790 $ 43,568
Accounts and notes receivable, net of allowance for
doubtful accounts of $5,012 and $4,492, respectively .................. 73,991 42,625
Inventories ............................................................. 56,568 41,001
Deferred taxes and other ................................................ 17,049 11,178
----------- -----------
TOTAL CURRENT ASSETS .................................................. 183,398 138,372
Property and equipment, net .............................................. 750,885 579,308
Leasehold interests, net ................................................. 47,180 51,488
Deferred financing costs, net ............................................ 18,911 40,595
Goodwill, net ............................................................ 772,348 771,146
Investments in and advances to joint ventures ............................ 19,999 --
Other assets ............................................................. 39,092 12,964
----------- -----------
TOTAL ASSETS .......................................................... $ 1,831,813 $ 1,593,873
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................ $ 41,583 $ 31,563
Accrued expenses ........................................................ 64,865 54,357
Income taxes payable .................................................... 5,571 2,220
Long-term debt, current portion ......................................... 27,376 42,376
----------- -----------
TOTAL CURRENT LIABILITIES ............................................. 139,395 130,516
Long-term debt, less current portion ..................................... 1,033,223 1,048,877
Other long-term liabilities .............................................. 5,333 1,851
Deferred income taxes .................................................... -- 3,895
----------- -----------
TOTAL LIABILITIES ..................................................... 1,177,951 1,185,139
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock (par value $.01 per share, 100 shares authorized, issued and
outstanding at December 31, 1997 and 1996) ............................ -- --
Paid-in capital ......................................................... 749,149 429,450
Retained deficit ........................................................ (75,714) (19,565)
Equity adjustment from foreign currency translation ..................... (19,573) (1,151)
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TOTAL STOCKHOLDER'S EQUITY ............................................ 653,862 408,734
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ............................ $ 1,831,813 $ 1,593,873
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
26
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Year Ended Period Ended