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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, 1998
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)
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DELAWARE 13-3873272
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 AMF DRIVE
RICHMOND, VIRGINIA 23111
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(804) 730-4000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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 Due 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 8, 1999, 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 Worlwide, Inc. ("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 40% of the world's current
installed base of such equipment. AMF is principally engaged in two business
segments: (i) the ownership or operation of bowling centers ("Bowling
Centers"), consisting, as of December 31, 1998, of 421 U.S. bowling centers and
124 international bowling centers including 15 centers operated by joint
ventures with third parties described below and (ii) the manufacture and sale
of bowling equipment such as automatic pinspotters, automatic scoring
equipment, bowling pins, lanes, ball returns, and certain spare and consumable
products, and the resale of allied products such as bowling balls, bags, shoes
and certain other spare and consumable products ("Bowling Products"). The
Bowling Products business consists of two categories: (a) New Center Packages
("NCPs") (all of the equipment necessary to outfit a new bowling center or
expand an existing bowling center); and (b) Modernization and Consumer Products
(which includes modernization equipment used to upgrade an existing center,
spare parts, supplies and consumable products essential to maintain operations
of an existing center). See "Note 16. Business Segments" in the Notes to
Consolidated Financial Statements.
Bowling Worldwide 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 Bowling, AMF Group Holdings and the Company
were incorporated in Delaware in 1996 by an investor group led by GS Capital
Partners II, L.P. (together with affiliated investment funds, "GSCP"), an
affiliate of Goldman, Sachs & Co. AMF Group Holdings acquired all of the
outstanding stock of the separate U.S. and foreign corporations that
constituted substantially all of the Company's predecessor (the "Predecessor
Company") for a total purchase price of approximately $1.37 billion (the
"Acquisition"). AMF Bowling conducts all of its business through subsidiaries
and has only limited management service operations of its own. AMF Group
Holdings is a holding company. The principal assets in each are comprised of
investments in subsidiaries.
Since May 1996, the Company has acquired 229 centers in the U.S. and, as
of February 28, 1999, owns or operates 421 U.S. centers. In addition, the
Company has acquired 33 centers in selected international markets and, as of
February 28, 1999, owns or operates 124 international centers, including 15
joint venture centers. In 1997, the Company entered into two joint ventures
which operate one bowling center in China and 14 bowling centers in Brazil and
Argentina, respectively. In addition, the Company's Michael Jordan Golf Company
currently operates two golf practice ranges. The Company has agreed to build or
acquire one additional golf practice range by the end of 1999. See "Item 6.
Selected Financial Data" and "Note 14. Acquisitions" in the Notes to
Consolidated Financial Statements.
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
421 bowling centers (as of February 28, 1999) in 40 states and Puerto Rico.
Outside the United States, AMF is also the largest operator of bowling centers,
with (as of February 28, 1999) 124 centers in ten countries: Australia (46),
the United Kingdom (37), Mexico (9), Japan (4), China (including Hong Kong)
(7), Argentina (2), Brazil (12), France (4), Spain (2), and Canada (1). Of the
U.S. centers, 207 were acquired as part of the Acquisition (17 of which were
subsequently closed), 229 were acquired thereafter and two were constructed. Of
the international centers, 78 were acquired as part of the Acquisition, 33 were
acquired thereafter, including 22 in the United Kingdom and ten in Australia,
one in Japan was closed, and one in Switzerland was sold. The international
centers include one in China, two in Argentina and 12 in Brazil, all of which
are operated as part of two joint ventures.
The Bowling Centers business derives its revenue and profits from three
principal sources: (i) bowling, (ii) food and beverage and (iii) other sources
such as shoe rental, amusement games, billiards and pro shops. In
1
1998, bowling, food and beverage and other revenue represented 58.8%, 27.2%,
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, tournament and recreational 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.
BOWLING PRODUCTS
The Company manufactures and sells bowling center equipment, including
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare and modernization parts, and resale products, such as
bowling balls, bags, shoes and other bowlers' aids, sold primarily through pro
shops. The bowling products business consists of two categories: (i) NCPs and
(ii) Modernization and Consumer Products.
NCPs include the bowling equipment necessary to outfit new or expand
existing bowling centers, such as lanes, pinspotters, automatic scoring
equipment, bowler seating, ball returns, masking units and bumpers. NCP sales
generally follow the trends in the growth of bowling. Traditionally, as bowling
has been introduced and becomes popular in new markets, the economics of
constructing and operating bowling centers become attractive and drive demand
for NCPs. For at least the last 15 years, the majority of NCP sales have been
to international markets. Until recently, this international trend was fueled
by the growth of bowling in several countries, particularly China, South Korea
and Taiwan. Current economic difficulties in Asia Pacific and other regions
have adversely affected NCP shipments and backlog. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Sales of Modernization and Consumer Products to bowling center operators
who manage the installed base of bowling equipment have traditionally provided
a somewhat more stable base of recurring revenue. These products include
modernization equipment, both proprietary and standard spare parts for existing
equipment and other products including pins, shoes and supplies. Some of these
products, such as bowling pins, should be replaced on approximately an annual
basis to maintain a center, while certain less frequent investments in other
equipment are necessary to modernize a center and are often required to
maintain a 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 (i) consolidate the U.S.
bowling center industry, (ii) build a nationally-recognized AMF brand of
bowling centers and (iii) manufacture, market and distribute its bowling
products on a global basis.
With respect to Bowling Centers, the Company's primary focus is on
improving center operations and financial performance which is fundamental to
its consolidation strategy. In connection with this effort, the Company is
implementing programs to (i) increase customer satisfaction, (ii) improve
training of center managers and staff, (iii) more effectively market and
promote bowling to increase bowling center traffic, and (iv) improve league
bowler recruitment and retention. While the primary focus is on bowling
revenues, Bowling Centers has increased non-bowling revenue by expanding and
improving its food and beverage product offerings along with other programs
aimed at growing ancillary revenues. While the Company's intention is to
continue its efforts to consolidate the U.S. bowling center industry by
purchasing additional bowling centers, the Company's acquisition pace has
recently been curtailed so that management can focus on improving financial
performance of its current centers. In the near term, however, the Company
continues to evaluate acquisitions on a more limited scale.
The Company's Bowling Products business markets and distributes bowling
products in global markets. Under current market conditions, Bowling Products
is reducing the cost structure associated with the Bowling Products business.
The Company has enacted a comprehensive cost reduction program that addresses
both manufacturing costs and global selling, general and administrative costs.
Its product development efforts are focused on
2
improving its current offerings and introducing new products that will appeal
to a worldwide base of center operators. These initiatives are designed to
expand the Company's presence in the relatively more stable Modernization and
Consumer Products markets.
SEASONALITY AND MARKET DEVELOPMENT CYCLES
Financial performance of Bowling Centers is seasonal in nature, with cash
flows typically peaking in the winter months and reaching their lows in the
summer months. While the geographic diversity of Bowling Centers operations has
historically helped to reduce this seasonality, the increase in U.S. centers
attributable to the Company's acquisition program has accentuated the
seasonality of financial performance of the Bowling Centers business.
Modernization and Consumer Products sales also display seasonality. The
U.S. market, which is the largest market for Modernization and Consumer
Products, is driven by the beginning of league play in the fall of each year.
While proprietors purchase Consumer Products throughout the year, they often
place larger orders during the summer in preparation for the fall start of
leagues. Summer is also often the peak period for modernization equipment.
Operators typically sign purchase orders for modernization equipment during the
first four months of the year after they receive winter league revenue
indications. Equipment is then shipped and installed during the summer when
leagues are generally less active. However, sales of some modernization
equipment such as automatic scoring and synthetic lanes are less predictable
and fluctuate from year to year because of the longer life cycle of these major
products.
NCP sales experience significant fluctuations due to changes in demand for
NCPs as certain markets experience high growth followed by market maturity, at
which times sales to that market decline, sometimes rapidly. Management
believes market cycles for individual countries have, in the past, spanned
several years, with periods of high demand for several markets (e.g., Japan,
South Korea, Taiwan) which, in AMF's experience, last five years or more.
Current economic difficulties in Asia Pacific and other regions have resulted
in the reduction in the shipments and backlog for NCPs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality and Market Development Cycles."
INDUSTRY AND COMPETITION
BOWLING CENTERS
Bowling is both a competitive sport and a recreational activity and faces
competition from numerous alternative activities. The success of AMF's bowling
operations is subject to consumers' continued interest in bowling, the
availability and cost of other sports, recreational and entertainment
alternatives and the amount of leisure time, as well as various other social
and economic factors over which AMF has no control.
The Company's centers also compete with other bowling centers. The Company
competes primarily through 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."
As shown in the table below, the U.S. bowling center industry is highly
fragmented, and consists of two relatively large bowling center operators, AMF
(which had 421 U.S. centers as of December 31, 1998) and Brunswick Corporation
("Brunswick") (which had approximately 115 U.S. centers as of December 31,
1998), three medium-sized chains, which together account for 54 bowling
centers, and over 5,000 bowling centers owned by single-center and small-chain
operators, which typically own four or fewer centers. The top five operators
(including AMF) account for approximately 10.4% of the total number of U.S.
bowling centers.
3
U.S. BOWLING CENTER INDUSTRY (a)
NUMBER OF
OPERATOR LOCATIONS % OF TOTAL
----------------------------------- ----------- -----------
AMF ...................................... 421 7.4%
Brunswick ................................ 115 2.0
Bowl America ............................. 23 0.4
Mark Voight .............................. 16 0.3
Bowl New England ......................... 15 0.3
--- -----
Subtotal............................... 590 10.4
Single-center and small-chain operators... 5,087 89.6
----- -----
Total ................................. 5,677 100.0%
===== =====
- ---------
(a) AMF estimate at December 31, 1998.
The international bowling center industry is also highly fragmented. There
are typically few chain operators in any one country and a large number of
single-center operators. AMF generally enjoys a relative size advantage (i.e.,
a larger number of lanes per center), and is competitively well positioned in
Australia, the United Kingdom and Mexico.
In the United States, the operation of bowling centers generally has been
characterized by slightly declining lineage (number of games bowled per lane
per day), offset by increasing average price per game. Total lineage, according
to an industry source, has declined despite an average annual increase in the
total number of people bowling since 1987. This trend is largely a result of a
decline in league participation, partially offset by an increase in
recreational (i.e., non-league) play, resulting in more people bowling, but
bowling less frequently. Bowling center operators have sought to offset the
decrease in overall lineage by increasing prices and creating additional
sources of income. Prior to 1998, AMF's U.S. lineage remained relatively stable
due to its ability to retain existing league bowlers and attract new league and
recreational bowlers. In 1998, however, the Company experienced a decline in
lineage which it was unable to offset with price increases. The Company is
focusing on improving the financial performance of its bowling centers. See
"-- Business Strategy." Internationally, although trends vary by country,
certain of the markets in which AMF operates experienced increasing competition
as they matured, resulting in declining lineage.
BOWLING PRODUCTS
AMF and Brunswick are the two largest manufacturers of bowling center
equipment, and are the only full-line manufacturers of bowling equipment and
supplies that compete on a global basis. The Company also competes with
smaller, often regionally focused companies in certain product lines.
Management estimates that AMF accounts for approximately 40% of the worldwide
installed base of bowling center equipment.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to the usual risks
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 and tariffs, value added taxes 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. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its international sales or on its
results of operations.
4
AMF has a history of operating in a number of international markets, in
some cases, for over 30 years. As in the case of other U.S.-based manufacturers
with export sales, local currency devaluation increases the cost of the
Company's bowling equipment in those markets. As a result, a strengthening U.S.
dollar exchange rate may adversely impact sales volume and profit margins
during such periods.
Economic difficulties in Asia Pacific and other regions contributed to a
reduction in the level of shipments for NCPs. The limited availability of
financing for customers to construct new bowling centers also contributed to
the reduction of orders. As of December 31, 1998, the NCP backlog was 1,078
which is a reduction of 37.5% compared to December 31, 1997. As of February 28,
1999, the NCP backlog was 865, which is a 19.8% reduction compared to December
31, 1998 and a 49.9% reduction compared to December 31, 1997.
NCP unit sales to China, Japan and other Asia Pacific markets represented
52.8% for the year ended December 31, 1998 compared to 72.7% for the year ended
December 31, 1997. NCP unit backlog related to China, Japan and other Asia
Pacific markets represented 70.6% of total NCP unit backlog at February 28,
1999 compared to 74.2% at December 31, 1998 and 70.4% at December 31, 1997.
Foreign currency exchange rates can also affect the translation of
operating results from international bowling centers. For the years ended
December 31, 1998 and 1997, revenue of international bowling centers
represented 15.6% and 14.6% of consolidated results, respectively. For the
years ended December 31, 1998 and 1997, EBITDA of international bowling centers
represented 24.3% and 16.0% of consolidated results, respectively.
In December 1996, China extended through June 1997 the concession allowing
foreign investment enterprises to import capital equipment without customs duty
or value added tax ("VAT"). From July 1997 to approximately June 1998, there
was sporadic enforcement of the new policy requiring full customs duty and VAT.
In addition, the nominal customs duty rate for bowling equipment was cut by
approximately 50% in 1997. Purchasers of bowling equipment used import
facilitators throughout this period to import at favorable duty and VAT rates.
In approximately July 1998, China significantly strengthened its import
restrictions and virtually eliminated the customs duty-free and VAT-free
importation of new and used capital goods. In the second half of 1998, the
customs authorities also began stringently enforcing a new policy passed
without advance notice in early 1998 forbidding the importation of used capital
equipment without permits. Permits for the importation of used bowling
equipment have proven quite difficult to obtain. During the second half of 1998
and the beginning of 1999, AMF customers used facilitators for importing AMF
equipment, but they have done so primarily as a vehicle for purchasing the
equipment in local currency and not as a means to reduce customs duties and
VAT.
Local Chinese companies are not subject to the same restrictions. In 1997,
a Chinese company, Shanghai Zhonglu Industrial Co., Ltd., began production of
locally-manufactured low-end bowling equipment and has experienced significant
acceptance by local customers. This equipment is not subject to the customs
duties that affect imported equipment.
5
EMPLOYEES
BOWLING CENTERS
As of December 31, 1998, Bowling Centers had approximately 14,489 full-
and part-time employees worldwide. The Company believes that its relations with
its Bowling Centers employees are satisfactory.
NUMBER OF
COUNTRY EMPLOYEES (a)
- --------------------------------------- --------------
United States ....................... 11,703
------
International:
Australia ........................... 1,255
United Kingdom ...................... 935
Mexico .............................. 240
China (including Hong Kong) ......... 143
France .............................. 97
Japan ............................... 61
Spain ............................... 33
Canada .............................. 22
------
Total International ................. 2,786
------
Total Worldwide ..................... 14,489
======
- ---------
(a) Numbers vary depending on the time of year.
BOWLING PRODUCTS
As of December 31, 1998, Bowling Products had approximately 986 full-time
employees worldwide. The Company believes that its relations with its Bowling
Products employees are satisfactory. Employees are divided along functional
lines as shown in the table below.
NUMBER OF
SEGMENT EMPLOYEES
- --------------------------- ----------
Manufacturing ............... 674
---
Sales:
Asia Pacific ............ 163
Europe .................. 83
Americas ................ 54
Australia ............... 12
---
Total Sales ........... 312
---
Total Worldwide ....... 986
===
CORPORATE
As of December 31, 1998, corporate had approximately 208 full-time
employees. The Company believes that its relations with its corporate employees
are satisfactory.
6
ITEM 2. PROPERTIES
BOWLING CENTERS
As of December 31, 1998, AMF operated 421 bowling centers and related
facilities in the United States and 124 centers in ten other countries. A
regional list of these facilities is set forth below:
U.S. CENTERS*
NUMBER OF NUMBER OF
REGION DISTRICTS LOCATIONS OWNED LEASED
- -------------------------- ----------- ----------- ------- -------
Northeast ............ 5 67 41 26
Mid-Atlantic ......... 6 66 42 24
Southeast ............ 5 66 45 21
Southwest ............ 6 73 57 16
Midwest .............. 5 67 46 21
West ................. 6 80 33 47
- -- -- --
Total ............... 33 419 264 155
== === === ===
- ---------
* 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 two golf practice ranges, one each
in Aurora, Illinois and Charlotte, North Carolina.
INTERNATIONAL CENTERS*
NUMBER OF
COUNTRY LOCATIONS OWNED LEASED
- -------------------------------------------- ----------- ------- -------
Australia .......................... 46 27 19
United Kingdom ..................... 37 14 23
Mexico ............................. 9 5 4
China, including Hong Kong ......... 6 0 6
Japan .............................. 4 0 4
France ............................. 4 1 3
Spain .............................. 2 0 2
Canada ............................. 1 1 0
-- -- --
Total ........................... 109 48 61
=== == ==
- ---------
* The table excludes one bowling center operated by the Company's Hong Leong
joint venture and 14 bowling centers operated by its Playcenter joint
venture. See "Business -- General Development of Business."
AMF's leases are subject to periodic renewal. Forty-two of the U.S.
centers have leases which expire during the next three years. Twenty-six of
such leases have renewal options. Sixteen of the international centers have
leases which expire during the next three years. Nine of such leases have
renewal options. The Company generally has not had difficulty renewing leases.
BOWLING PRODUCTS
As of December 31, 1998, 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 facilities
at 29 international locations which are used as offices or warehouses.
7
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
products, used pinspotters 54,000 Leased
Lowville, NY ......... Pins and wood lanes 121,000 Owned
50,000 Owned
Golden, CO ........... Lane maintenance equipment (Century) (1) 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
- ---------
(1) Relocated to Richmond, Virginia facility February 28, 1999.
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 400 Leased
Warehouse 2,100 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 8,888 Leased
Service Center 1,634 Leased
Seoul, South Korea ...................... Office 5,119 Leased
Warehouse 7,472 Leased
Mexico City, Mexico ..................... Office 1,300 Leased
Warehouse 11,431 Leased
Warsaw, Poland .......................... Office 209 Leased
Granna, Sweden .......................... Office 4,515 Leased
Warehouse 12,705 Leased
Hemel Hempstead, United Kingdom ......... Office 11,500 Leased
Warehouse 11,770 Leased
ITEM 3. LEGAL PROCEEDINGS
In June 1998, Harbin Hai Heng Bowling Entertainment Co. Ltd. ("Hai Heng")
filed an action against AMF Bowling Products, Inc. ("AMF Bowling Products"), an
indirect subsidiary of AMF Bowling, in the Harbin Intermediate People's Court
in Heilongjing, China. Hai Heng sought to recover $3 to $4 million in damages
relating to 38
8
NCPs purchased from AMF. Hai Heng asserted that the poor quality of the 38 NCPs
entitled Hai Heng to recover the purchase price and damages for lost profits
and the cost of storing the NCPs.
On November 6, 1998, the court awarded Hai Heng approximately $3.5
million. AMF Bowling Products appealed the award to the High People's Court of
Heilongjing Province (the "People's Court"). Prior to completion of the appeal
review, the President of the People's Court on February 11, 1999 issued a
judgment in favor of Hai Heng for approximately $2.8 million and ordered Hai
Heng to return 24 NCPs to AMF.
The Company believes Hai Heng's claim is a warranty issue and that Hai
Heng is not entitled to recover the purchase price, lost profits or the cost of
storage. The Company continues to believe that Hai Heng's claim is substantially
without merit, and furthermore, based on the advice of local legal counsel, the
Company believes that the judicial process leading up to the trial court award
and the judgment issued by the People's Court involved significant procedural
and other legal defects. Hai Heng has begun to exercise its rights to enforce
the collection of the judgment. The Company intends to continue to pursue all
available defenses. Among other things, AMF Bowling Products intends to seek an
appeal to the Supreme People's Court in Beijing (the "Supreme Court") and a stay
of the execution of the judgment. The granting of an appeal is discretionary
with the Supreme Court.
Due to a number of uncertainties inherent in the litigation process in
these jurisdictions, the Company can give no assurance on the likelihood of
success of its appeal efforts or the ultimate outcome of the Hai Heng
litigation. However, management does not believe that the outcome of the action
will have a material adverse impact on the financial position of the Company.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
employment discrimination claims, workers' compensation claims and personal
injury claims. In some actions, plaintiffs request punitive or other damages
that may not be covered by insurance. In management's opinion, the claims and
actions in which the Company is involved will not have a material adverse
impact on its financial position or results of operations. However, it is not
possible to assure the outcome of such claims and actions.
REGULATORY MATTERS
There are no unique federal or state regulations applicable to bowling
center operations or equipment manufacturing. State and local governments
require establishments to hold permits to sell alcoholic beverages, and,
although regulations vary from state to state, once permits are issued, they
generally remain in place indefinitely (except for routine renewals) without
burdensome reporting or supervision other than revenue tax reports.
ENVIRONMENTAL MATTERS
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. It is the opinion of management that the various asserted claims in
which the Company currently is involved are not likely to have a material
adverse impact on its financial position or results of operations. However, no
assurance can be given as to the ultimate outcome with respect to such claims.
AMF cannot predict with any certainty whether existing conditions or
future events, such as changes in existing laws and regulations, may give rise
to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing AMF's products,
or providing its services, or otherwise adversely affect the demand for its
products or services. 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.
9
PART II
ITEM 5. MARKET FOR AMF BOWLING WORLDWIDE COMMON EQUITY AND RELATED INVESTOR
MATTERS
The common stock, $.01 par value, of Bowling Worldwide is wholly-owned by
AMF Group Holdings. Bowling Worldwide intends to retain earnings, if any, for
use in the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years indicated
were derived from AMF Group Holdings' audited consolidated financial statements
for the years ended December 31, 1998 and December 31, 1997, the period ended
December 31, 1996, and the Predecessor Company's audited combined financial
statements for the four months ended April 30, 1996, and the years ended
December 31, 1995 and 1994. 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 income for the period ending
April 30, 1996, AMF Group Holdings' statement of operations from its inception
through December 31, 1996, and adjustments giving effect to the Acquisition
under the purchase method of accounting. See "Note 3. Pro Forma Results of
Operations" in the notes to consolidated financial statements of AMF Group
Holdings. 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" that appear elsewhere herein.
The comparability of the selected financial data is affected by 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 $232.7 million (including
amounts paid in 1998 for certain bowling centers included in the 1997 total).
In 1998, the Company acquired 83 bowling centers from a number of unrelated
sellers. The combined purchase price was $156.8 million. While the Company's
intention is to continue its efforts to consolidate the U.S. bowling center
industry by purchasing additional bowling centers, the Company recently has
curtailed the pace of its acquisitions so that management can focus on
improving the financial performance of its current centers. In the near term,
however, the Company continues to evaluate acquisitions on a more limited
scale. See "Item 1. Business -- General Development of Business" and "Note 13.
Supplemental Disclosures to the Consolidated Statements of Cash Flows" and
"Note 14. Acquisitions" in the Notes to Consolidated Financial Statements.
The selected financial data include operating results expressed in terms
of EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, and other income and expenses. EBITDA
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 Generally Accepted Accounting Principles.
10
FOUR MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------------------- APRIL 30,
(DOLLARS IN MILLIONS) ------------
AMF GROUP HOLDINGS, INC. PREDECESSOR
-------------------------------------------------- COMPANY
PREDECESSOR COMPANY ------------
------------------------ PRO FORMA
1994 1995 1996 (a) 1996 (b) 1997 1998 1996 (c)
------------ ----------- ----------- ------------ ------------ ---------------------------
INCOME STATEMENT DATA:
Operating revenue ....................... $ 517.8 564.9 $ 548.9 $ 384.8 $ 713.7 $ 738.1 $ 164.9
--------- ------ -------- -------- -------- -------- -------
Cost of goods sold ...................... 196.0 184.1 173.6 130.5 212.6 202.2 43.1
Bowling center operating expenses ....... 115.2 166.5 178.8 123.7 251.2 335.7 80.2
Selling, general and administrative
expenses ............................... 57.1 50.8 51.0 35.1 64.5 63.8 35.5
Depreciation and amortization ........... 24.8 39.1 73.5 49.4 102.5 120.3 15.1
--------- ------ -------- -------- -------- -------- -------
Operating income (loss) ................. 124.7 124.4 72.0 46.1 82.9 16.1 (9.0)
Interest expense, gross ................. 7.4 15.7 106.2 78.0 118.4 101.9 4.5
Other income (expense), net ............. (1.5) 0.2 3.6 3.7 (8.2) (5.5) (0.1)
---------- ------ -------- -------- -------- -------- -------
Income (loss) before income taxes ....... 115.8 108.9 (30.6) (28.2) (43.7) (91.3) (13.6)
Provision (benefit) for income taxes .... 16.5 12.1 (9.0) (8.6) (12.9) 7.3 (1.7)
---------- ------ -------- -------- -------- -------- -------
Net income (loss) before equity in loss
of joint ventures and extraordinary
items .................................. 99.3 96.8 (21.6) (19.6) (30.8) (98.6) (11.9)
Equity in loss of joint ventures,
net of tax ............................ -- -- -- -- (1.4) (8.2) --
---------- ------- -------- -------- -------- -------- -------
Net income (loss) before extraordinary
items .................................. 99.3 96.8 (21.6) (19.6) (32.2) (106.8) (11.9)
Extraordinary items, net of tax ......... -- -- -- -- (23.4) -- --
---------- ------- -------- -------- -------- -------- -------
Net income (loss) ....................... $ 99.3 $ 96.8 $ (21.6) $ (19.6) $ (55.6) $ (106.8) $ (11.9)
========== ========= ========= ========= ========= ========= ========
Ratio of earnings to fixed
charges (e) ............................ 10.3x 6.1x -- -- -- -- --
SELECTED DATA:
EBITDA .................................. $ 149.5 $ 163.5 $ 145.5 $ 95.5 $ 185.4 $ 136.4 $ 6.1
EBITDA margin ........................... 28.9% 28.9% 26.5% 24.8% 26.0% 17.6% 3.7%
AS OF DECEMBER 31,
---------------------------------------------------------
(DOLLARS IN MILLIONS)
PREDECESSOR COMPANY AMF GROUP HOLDINGS, INC.
---------------------- ----------------------------------
1994 1995 1996 1997 1998
BALANCE SHEET DATA: ---------- ----------- ---------- ----------- -----------
Working capital (d) .......... $ 16.9 $ 29.2 $ 7.9 $ 44.0 $ 59.5
Goodwill ..................... -- -- 771.1 772.3 772.7
Total assets ................. 410.2 400.4 1,593.9 1,831.8 1,956.0
Total debt ................... 186.1 167.4 1,091.3 1,060.6 1,047.1
Stockholder's equity ......... 132.4 161.5 408.7 653.9 803.9
Total capital ................ 318.5 328.9 1,500.0 1,714.5 1,851.0
- ---------
(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 plus fixed charges
and income taxes. Fixed charges consist of interest expense, amortization
of debt issuance costs, and the portion of rent expense considered to
represent interest. For the years ended December 31, 1998 and 1997, AMF
had a deficiency of earnings to fixed charges of $91.3 million and $43.7
million, respectively. For the year ended December 31, 1996, on a pro
forma basis, AMF had a deficiency of earnings to fixed charges of $30.6
million.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information in this report contains certain 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 the Company 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: (i) the Company's ability to integrate
acquired operations into its business, (ii) the Company's ability to execute
its long-term strategies, including to identify, finance and execute further
acquisitions, (iii) the development and growth of new bowling markets and the
Company's ability to identify those markets and to generate sales of products
in those markets, (iv) 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, (v) the Company's ability to hire and retain
experienced senior management, (vi) the ability of Bowling Worldwide and its
subsidiaries to generate sufficient cash flow in a timely manner to satisfy
principal and interest payments on their indebtedness, (vii) the popularity of
bowling as an activity in the United States and abroad, (viii) the continuation
or worsening of economic difficulties currently being experienced by certain
countries in Asia Pacific and other regions, (ix) fluctuations in currency
exchange rates which affect translation of operating results and (x) increased
competitive pressure from current competitors and future market entrants. In
addition, actual results may 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: (a) a decline in general
economic conditions and (b) an adverse judgment in pending or future
litigation. 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. The Company 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 Group Holdings'
Consolidated Financial Statements included elsewhere herein.
Management believes that comparison of the results of operations for the
years ended December 31, 1997, on a historical basis, and 1996, on a pro forma
basis, is appropriate. 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 in 1996 and from the increased
interest expense due to the debt incurred in connection with the Acquisition.
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 business segment
results presented below are before intersegment eliminations since the
Company's management believes that this provides a more accurate comparison of
performance by segment from year to year. The intersegment eliminations are not
material. Interest expense is presented on a gross basis.
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 1998, bowling, food
and beverage and other revenue represented 58.8%, 27.2% and 14.0% of total
Bowling Centers revenue, respectively.
12
The results shown below reflect both U.S. and international Bowling Centers
operations.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
(DOLLARS IN MILLIONS)
PRO FORMA
1996 (a) 1997 1998
---------- ------------ ------------
BOWLING CENTERS (before intersegment eliminations):
Operating revenue ..................................... $ 307.3 $ 429.1 $ 540.9
------- -------- --------
Cost of goods sold .................................... 27.5 39.9 54.5
Bowling center operating expenses ..................... 177.2 252.5 338.5
Selling, general and administrative expenses .......... 7.0 6.3 5.8
Depreciation and amortization ......................... 56.2 82.8 97.4
------- -------- --------
Operating income ...................................... $ 39.4 $ 47.6 $ 44.7
======= ======== ========
SELECTED DATA:
EBITDA ................................................ $ 95.6 $ 130.4 $ 142.1
EBITDA margin ......................................... 31.1% 30.4% 26.3%
Number of centers, end of period ...................... 341 470 545
Number of lanes, end of period ........................ 11,782 16,315 18,858
- ---------
(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.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Bowling Centers operating revenue increased $111.8 million, or 26.1%. An
increase of $133.6 million was attributable to new centers, of which $113.0
million was from U.S. centers, and $20.6 million was from international
centers. U.S. constant centers (centers in operation for at least one full
fiscal year) revenue decreased $9.2 million, or 3.7%, primarily as a result of
lower lineage, integrating newly acquired centers, nationally branded chain
development activities, record-setting hot weather which adversely affected
customer visits in the summer months and the later start of league play in
1998. International constant centers revenue decreased $7.8 million, or 8.4%,
primarily due to unfavorable currency translation of results. On a constant
exchange rate basis, international operating revenue would have increased $1.7
million, or 1.8%. A decrease in operating revenue of $4.8 million was primarily
attributable to the closing of nine U.S. centers in 1998.
Cost of goods sold increased $14.6 million, or 36.6%, primarily as a
result of the net increase in the number of centers.
Operating expenses increased $86.0 million, or 34.1%, of which
approximately $86.2 million was attributable to new centers, including $74.9
million attributable to U.S. centers and $11.3 million attributable to
international centers. As a percentage of its revenue, Bowling Centers
operating expenses were 58.8% for the year ended December 31, 1997 compared to
62.6% for the year ended December 31, 1998, primarily as a result of nationally
branded chain development activities.
A decrease of $0.5 million, or 7.9%, in selling, general and
administrative expenses was primarily attributable to expense management.
An increase of $11.7 million, or 9.0%, in EBITDA was attributable to new
centers. EBITDA margin in 1998 was 26.3% compared to 30.4% in 1997 primarily as
a result of nationally branded chain development activities.
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 revenue was primarily
a result of an increase in revenue in the Northeastern 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
13
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
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 a total of eight U.S. centers in May 1996, and February, May and
December 1997.
Cost of goods sold increased $12.4 million, or 45.1%, primarily as a
result of the net increase in the number of centers.
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.
BOWLING PRODUCTS
The results shown below reflect Bowling Products operations.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN MILLIONS)
PRO FORMA
1996 (a) 1997 1998
----------- ------------ ------------
BOWLING PRODUCTS (before intersegment eliminations):
Operating revenue .................................... $ 252.1 $ 299.3 $ 212.5
Cost of goods sold ................................... 153.3 185.7 159.6
------- -------- --------
Gross profit ......................................... 98.8 113.6 52.9
Selling, general and administrative expenses ......... 36.2 42.8 42.2
Depreciation and amortization ........................ 18.5 19.8 22.5
------- -------- --------
Operating income (loss) .............................. $ 44.1 $ 51.0 $ (11.8)
======= ======== =========
SELECTED DATA:
Gross profit margin .................................. 39.2% 38.0% 24.9%
EBITDA ............................................... $ 62.6 $ 70.8 $ 10.7
EBITDA margin ........................................ 24.8% 23.7% 5.0%
New Center Packages sold ............................. 3,029 4,576 2,466
New Center Packages backlog end of period (b) ........ 1,426 1,725 1,078
- ---------
(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.
(b) NCP orders included in the backlog are routinely cancelled by customers for
a number of reasons, including the unavailability of financing.
Accordingly, the Company has experienced, and, especially as a result of
economic difficulties experienced by certain markets, expects to continue
to experience, the cancellation of a portion of such orders. The backlog
as of February 28, 1999 was 865 units, which represents a reduction of
19.8% compared to a backlog of 1,078 units as of December 31, 1998. See
"-- Backlog; Recent NCP Sales."
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Bowling Products operating revenue decreased $86.8 million, or 29.0%, due to a
decrease of $74.6 million, or 45.2%, in NCP revenue,
14
and a decrease of $12.2 million, or 9.1%, in Modernization and Consumer
Products revenue. Operating results have been adversely impacted by current
economic difficulties in Asia Pacific and other regions which have reduced the
level of shipments for NCPs and Modernization and Consumer Products sales. The
strong U.S. dollar also unfavorably affected pricing and financial statement
translation. During the year ended December 31, 1998, Bowling Products recorded
NCP shipments of 2,466 units compared to shipments of 4,576 units for the year
ended December 31, 1997. The decrease in Modernization and Consumer Products
revenue is primarily due to decreased sales to Asia Pacific customers because
of adverse economic conditions and decreased Modernization sales to U.S.
customers due to delayed product introductions in 1998. Additionally, a new
low-cost competitor has gained new market share in China. See " -- Seasonality
and Market Development Cycles" and "Business -- International Operations."
Gross profit decreased by $60.7 million, or 53.4%. Gross profit margin was
38.0% in 1997 and 24.9% in 1998. Gross profit and gross profit margin declines
were primarily a result of lower levels of NCP shipments, the strong U.S.
dollar and competitive pricing as discussed above, lower margins on the 1998
Modernization and Consumer Products product mix and unabsorbed fixed overhead
resulting from low production levels. See " -- International Operations."
Bowling Products selling, general and administrative expenses decreased by
$0.6 million, or 1.4%, primarily as a result of a profit improvement plan. The
Bowling Products organization was streamlined as part of a cost reduction
program in order to further reduce manufacturing, selling, general and
administrative expenses to offset the impact of lower sales volume on EBITDA.
Savings from the cost reduction programs were partially offset by the increased
investment in the first half of 1998 in certain international markets with
long-term potential.
Bowling Products EBITDA decreased $60.1 million, or 84.9%, and EBITDA
margin decreased from 23.7% in 1997, to 5.0% in 1998 as a result of the lower
revenue and gross profit partially offset by decreased selling, general and
administrative expenses discussed above.
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.
CONSOLIDATED ITEMS
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 1998, depreciation and amortization
increased by $17.8 million, or 17.4%, over the same period in 1997, primarily
attributable to depreciation of property and equipment of centers acquired
during 1998 and incremental depreciation expense as a result of capital
expenditures.
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.
15
INTEREST EXPENSE
Gross interest expense decreased by $16.4 million, or 13.9%, in the year
ended December 31, 1998 compared with the same period in 1997. Interest savings
associated with the reduction of bank debt and the redemption of a portion of
Bowling Worldwide's Subsidiary Senior Subordinated Discount Notes with proceeds
of AMF Bowling's Initial Public Offering were partially offset by interest
incurred on increased levels of bank debt as a result of center acquisitions.
See " -- Liquidity" and " -- Capital Resources" for further discussion of the
bank debt. Cash interest paid by the Company for the year ended December 1998
totaled $76.5 million, while non-cash bond interest amortization totaled $24.0
million.
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.
NET LOSS
Net loss in the year ended December 31, 1998 was $106.8 million compared
to a net loss of $55.6 million in the year ended December 31, 1997. The
increase in net loss of $51.2 million was primarily a result of decreases in
Bowling Products revenue and EBITDA discussed above and the increase in
depreciation expense. Additionally, the Company recorded $8.2 million in equity
in loss of joint ventures in the year ended December 31, 1998 compared to a
loss of $1.4 million in the year ended December 31, 1997. The Company accounts
for its investments in its Hong Leong joint venture and Playcenter joint
venture by the equity method. See "Note 16. Joint Ventures" in the Notes to
Consolidated Financial Statements. The Company recorded a tax provision of $7.3
million in the year ended December 31, 1998 compared to a tax benefit of $12.8
million in the year ended December 31, 1997.
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 its Third
Amended and Restated Credit Agreement (the "Credit Agreement") with its
lenders, the premium paid to redeem a portion of the Subsidiary Senior
Subordinated Discount Notes with the proceeds of the Initial Public Offering
and the write-off of the portion of deferred financing costs attributable to
the Subsidiary Senior Subordinated Discount Notes redeemed. See "Note 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 closed 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 $3.6
million. Proceeds from the issuance of Subsidiary 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.
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. federal income
taxes. These elections permitted both of the affiliated companies to revalue
their assets to fair market value and treat any amortizable goodwill as tax
deductible over 15 years.
As of December 31, 1998, the Company had net operating losses of
approximately $175.5 million which will carry over to future years to offset
U.S. taxes. Net operating losses will begin to expire in the year 2011. The
16
Company has recorded a valuation reserve as of December 31, 1998 for $41.1
million related to net operating losses and foreign tax credits. Management
believes that there is a risk that certain of these net operating losses and
foreign tax credit carryforwards may expire unused and, accordingly, has
established a valuation allowance against them.
LIQUIDITY
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company's primary source of liquidity is cash provided by operations
and credit facilities as described below. Working capital on December 31, 1998
was $59.5 million compared to $44.0 million as of December 31, 1997, an
increase of $15.5 million. This increase in working capital was primarily
attributable to an increase of $8.2 million in inventory balances primarily due
to new product introductions and the increase in the number of bowling centers
as a result of acquisitions, an increase in $8.4 million in accounts receivable
primarily as a result of an increased amount of sales closer to the end of the
year in 1998 compared to the same period in 1997 and the timing of payments by
customers on new product sales, a decrease of $12.1 million in accounts payable
and accrued expenses and a net increase of $5.8 million in other current assets
and liabilities. The increase in working capital was offset by a decrease in
working capital caused by a decrease of $14.0 million in cash and an increase
of $5.0 million in the current portion of long-term debt.
Net cash flows provided by operating activities were $7.8 million for the
year ended December 31, 1998 compared to net cash flows provided of $47.7
million for the year ended December 31, 1997, a decrease of $39.9 million. A
decrease of $51.2 million was attributable to the net loss of $106.8 million
recorded in the year ended December 31, 1998 compared to a net loss of $55.6
million in the same period of 1997; a decrease of $27.1 million was caused by
decreased levels of accounts payable and accrued expenses; a decrease of $9.6
million was attributable to lower levels of bond amortization resulting from
the redemption of a portion of Bowling Worldwide's Subsidiary Senior
Subordinated Discount Notes in connection with the Initial Public Offering; and
a decrease of $6.8 million was attributable to the increase in other assets
primarily due to increases in deposits and other assets. These decreases were
offset by an increase of $20.0 million attributable to a decrease in the level
of deferred taxes; an increase of $15.9 million attributable to lower levels of
accounts receivable; an increase of $17.9 million in depreciation and
amortization; loss on the sale of property and equipment, net of $4.5 million
attributable to the closure of nine bowling centers and the sale of the
Company's Swiss bowling center in 1998; an increase of $9.9 million
attributable to lower inventory balances resulting from lower Bowling Products
sales volumes in 1998; a net increase of $3.2 million attributable to changes
in other operating activities and an increase in the equity in loss of joint
ventures of $6.8 million. Extraordinary items associated with the redemption of
debt in 1997 with proceeds from the Initial Public Offering totaled $23.4
million.
Net cash flows used in investing activities were $242.0 million for the
year ended December 31, 1998 compared to net cash flows used of $288.6 million
for the year ended December 31, 1997, a decrease of $46.6 million. Bowling
Center acquisition spending decreased by $41.2 million and purchases of
property and equipment increased by $9.9 million in the year ended December 31,
1998, compared to the same period in 1997. In the year ended December 31, 1998,
the Company purchased 83 centers compared to 122 centers in the same period in
1997. Investments in and advances to joint ventures totaled $5.6 million in the
year ended December 31, 1998 compared to investments in or advances to joint
ventures of $21.3 million in the same period of 1997. Other cash flows provided
from investing activities decreased $0.4 million. See "Note 14. Acquisitions"
in the Notes to Consolidated Financial Statements and " -- Capital
Expenditures" for additional discussion of these investing activities.
Net cash provided by financing activities was $217.4 million for the year
ended December 31, 1998 compared to the net cash provided of $235.7 million for
the year ended December 31, 1997, a decrease of $18.3 million. Proceeds from
long-term debt increased $24.1 million primarily as a result of borrowings under
the Credit Agreement used to fund center acquisitions and working capital.
Payments on long-term debt were lower by $2.7 million in 1998 compared to 1997.
In the year ended December 31, 1998, $255.5 million was provided by additional
capital contributions from AMF Bowling attributable to the issuance on May 12,
1998 by AMF Bowling, in a private placement, of $1,125,000,000 aggregate
principal amount at maturity of its Zero Coupon Convertible Debentures due 2018
(the "Debentures"). In the year ended December 31, 1997, $315.7 million was
provided by additional capital contributions from AMF Bowling attributable to
the sale of $36.6 million by AMF Bowling to its institutional stockholders and
net proceeds of $279.1 million from the Initial Public Offering. In the year
ended December 31, 1997, $14.6 million was used to pay the premium associated
with the redemption of a portion of the Subsidiary Senior Subordinated Discount
Notes with proceeds
17
from the Initial Public Offering and $0.5 million was used for a dividend to AMF
Bowling for the repurchase of AMF Bowling Common Stock. See "Note 9. Long-Term
Debt," "Note 12. Employee Benefit Plans," and "Note 14. Acquisitions" in the
Notes to Condensed Consolidated Financial Statements and " -- Capital
Resources."
As a result of the aforementioned, cash decreased by $13.9 million for the
year ended December 31, 1998 compared to a decrease of $7.8 million for the
year ended December 31, 1997.
The net proceeds of the sale of the Debentures discussed above were
approximately $273.0 million, of which $249.6 million was provided as a capital
contribution and was used to repay senior bank indebtedness under the Credit
Agreement and $23.4 million was used for general corporate purposes. As of
December 31, 1998, $163.0 million was outstanding under the Bank Facility (as
defined below) and $192.0 million was available for borrowing thereunder
primarily for working capital purposes. Effective September 30, 1998, the
Company renegotiated certain financial covenants under the Credit Agreement,
pursuant to Amendment No. 1 and Waiver to the Credit Agreement (the "Amendment
and Waiver"), with respect to the third and fourth quarters of 1998 and the
year ended December 31, 1999. The Amendment and Waiver also substantially
restricts the Company's ability to borrow to finance acquisitions and places
limits on the Company's ability to make capital expenditures, investments and
acquisitions. The financial covenants existing prior to the Amendment and
Waiver will be reinstated commencing the beginning of 2000. Based on current
performance, the Company will not meet the requirements of the financial
covenants that will be reinstated.
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.
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.
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 Company's Hong Leong joint venture and Playcenter joint venture
totaled $21.3 million, and other cash flows provided by investing activities
were $4.2 million attributable to proceeds from 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 (as defined below), 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
18
as additional capital contributions in connection with the acquisition of
centers. 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 Subsidiary 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's Common Stock, $.01 par value
("AMF Bowling Common Stock"). Funds were provided in 1997 by borrowings of
long-term debt totaling $240.4 million and $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" 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.
CAPITAL RESOURCES
The Company's total indebtedness is primarily a result of the financing of
the Acquisition and the Company's bowling center acquisition program. At
December 31, 1998, the Company's debt structure consisted of $583.9 million of
senior debt, $250.0 million of Subsidiary Senior Subordinated Notes and $213.2
million of Subsidiary Senior Subordinated Discount Notes. The Company's senior
debt consisted of $418.9 million of term loans, $163.0 million of revolving
credit advances under the Bank Facility (as defined below) and $2.0 million
represented by one mortgage note. At December 31, 1998, the Company was
capitalized with equity of $803.9 million.
In September 1997, certain stockholders of AMF Bowling purchased an
aggregate of 1,780,000 shares of Common Stock for $20.00 per share. The
aggregate $35.6 million capital contribution was used to fund acquisitions.
On November 3, 1997, the Company entered into the Third Amended and
Restated Credit Agreement, under which the previously existing acquisition
facility (the "Acquisition Facility") and a portion of the previously existing
term facilities were converted into a non-amortizing revolving bank facility
(the "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 Initial Public Offering. In 1998, the Company entered into the
Amendment and Waiver that amended or waived certain financial covenants of the
Credit Agreement and imposed certain restrictions on the Company's operations
through December 31, 1999. In addition, for 1999, borrowings to finance
acquisitions are substantially restricted and limits have been placed on the
Company's ability to make capital expenditures, investments and acquisitions.
The Company believes that it will be in compliance with the amended covenants
during 1999, but any downturn in the current performance of the Company could
result in non-compliance with these financial covenants. The financial
covenants existing prior to the amendment will be reinstated in the year
beginning 2000. However, based on current performance the Company will not meet
the requirements of the financial covenants that will be reinstated. Failure by
the Company to comply with its credit agreement covenants could result in an
event of default which, if not cured or waived, will have a material adverse
effect on the Company. Actual borrowing under the Credit Agreement must meet
certain financial tests under the Credit Agreement and the indentures governing
the Subsidiary Notes (the "Subsidiary Indentures"). The Company's leverage may
adversely affect its ability to meet these tests, and, as a result, to obtain
such financing. For the year ended December 31, 1998, additional borrowings
under the Bank Facility totaled $264.5 million, of which $249.6 million was
repaid from proceeds from the sale of the Debentures, and were used to fund the
acquisitions of centers and increases in working capital and for general
corporate purposes. As of December 31, 1998, $163.0 million was outstanding and
$192.0 million was available for borrowing under the Bank Facility.
In November 1997, AMF Bowling issued 15,525,000 shares of 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 Subsidiary Senior Subordinated Discount
Notes. See "Note 9. Long-Term Debt" in the Notes to Consolidated Financial
Statements.
On May 12, 1998, AMF Bowling completed the private placement of the
Debentures for net proceeds of $273.0 million.
19
The Company funded its cash needs through the Bank Facility as well as
cash flow from operations and existing cash balances. A substantial portion of
the Company's available cash will be applied to service outstanding
indebtedness. For the year ended December 31, 1998, the Company incurred cash
interest expense of $76.5 million, representing 56.1% of EBITDA of $136.4
million for the year. 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. 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 Subsidiary Indentures and 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, including the conditions of the debt and equity markets.
CAPITAL EXPENDITURES
For the year ended December 31, 1998, the Company's capital expenditures
were $66.6 million compared to $56.7 million for the year ended December 31,
1997, an increase of $9.9 million. Bowling Centers capital expenditures
increased $12.1 million, which was attributable to the higher number of the
Company's centers as a result of the Company's acquisition program; Bowling
Products capital expenditures decreased $0.2 million as a result of decreased
expenditures on certain new products; expenditures on Company-wide information
systems decreased $3.5 million and other expenditures increased $1.5 million.
For the year ended December 31, 1997, the Company's 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, information system
expenditures and construction of the Chelsea Piers center in New York City.
The Company conducts an ongoing modernization and maintenance program that
results in its centers having upgraded physical plants and generally attractive
appearances.
Bowling Products has relatively modest capital investment requirements,
and the Company follows 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 investment priority and has
focused on projects with projected payback periods of one to three years.
While the Company's intention is to continue its efforts to consolidate
the U.S. bowling center industry by purchasing additional bowling centers, the
Company recently curtailed its pace of acquisitions so that management can
focus on improving financial performance of its current centers. In the near
term, however, the Company continues to evaluate acquisitions on a more limited
scale. As of February 28, 1999, the Company has no formal commitments to build
or acquire centers. The Company has committed to build one Michael Jordan Golf
Center in 1999. See "Business -- Business Strategy."
The Company 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 issuances of common
equity. See "Note 14. Acquisitions" in the Notes to Consolidated Financial
Statements, " -- Liquidity" and " -- Capital Resources."
20
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, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998
---------------- --------------- -------------------- ------------------
Total Revenue ......... $ 78.0 $ 48.6 $ 46.7 $ 68.6
% of Total ............ 32.2% 20.1% 19.3% 28.4%
On a consolidated basis, revenue and EBITDA of the Company's businesses
are less seasonal and cyclical. The geographic diversity of the Company's
bowling centers, which operate across different regions of the U.S. and across
ten other countries, has historically decreased the seasonality of 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. 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. The increase in U.S. centers
attributable to the Company's acquisition program, however, has accentuated the
seasonality of financial performance of the Bowling Centers business. 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. While
proprietors purchase Consumer Products throughout the year, they often place
larger orders during the summer in preparation for the fall start of leagues.
Summer is also often the peak period for modernization equipment. Operators
typically sign purchase orders for modernization equipment during the first
four months of the year after they receive winter league revenue indications.
Equipment is then shipped and installed during the summer when leagues are
generally less active. However, sales of some modernization equipment such as
automatic scoring and synthetic lanes are less predictable and fluctuate from
year to year because of the longer life cycle of these major products.
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. Current economic difficulties in Asia Pacific and other regions have
resulted in the reduction in shipments and backlog for NCPs. See " -- Backlog;
Recent NCP Sales."
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 and tariffs, value added taxes 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. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its international sales or on its
results of operations.
AMF has a history of operating in a number of international markets, in
some cases, for over 30 years. As in the case of other U.S.-based manufacturers
with export sales, local currency devaluation increases the cost of the
Company's bowling equipment in those markets. As a result, a strengthening U.S.
dollar exchange rate may adversely impact sales volume and profit margins
during such periods.
21
Economic difficulties in Asia Pacific and other regions contributed to a
reduction in the level of shipments for NCPs. The limited availability of
financing for customers to construct new bowling centers also contributed to
the reduction of orders. As of December 31, 1998, the NCP backlog was 1,078
which is a reduction of 37.5% compared to December 31, 1997. As of February 28,
1999, the NCP backlog was 865, which is a 19.8% reduction compared to December
31, 1998 and a 49.9% reduction compared to December 31, 1997.
NCP unit sales to China, Japan and other Asia Pacific markets represented
52.8% for the year ended December 31, 1998 compared to 72.7% for the year ended
December 31, 1997. NCP unit backlog related to China, Japan and other Asia
Pacific markets represented 70.6% of total NCP unit backlog at February 28,
1999 compared to 74.2% at December 31, 1998 and 70.4% at December 31, 1997.
Foreign currency exchange rates can also affect the translation of
operating results from international bowling centers. For the years ended
December 31, 1998 and 1997, revenue of international bowling centers
represented 15.6% and 14.6% of consolidated results, respectively. For the
years ended December 31, 1998 and 1997, EBITDA of international bowling centers
represented 24.3% and 16.0% of consolidated results, respectively.
In December 1996, China extended through June 1997 the concession allowing
foreign investment enterprises to import capital equipment without customs duty
or VAT. From July 1997 to approximately June 1998, there was sporadic
enforcement of the new policy requiring full customs duty and VAT. In addition,
the nominal customs duty rate for bowling equipment was cut by approximately
50% in 1997. Purchasers of bowling equipment used import facilitators
throughout this period to import at favorable duty and VAT rates.
In approximately July 1998, China significantly strengthened its import
restrictions and virtually eliminated the customs duty-free and VAT-free
importation of new and used capital goods. In the second half of 1998, the
customs authorities also began stringently enforcing a new policy passed
without advance notice in early 1998 forbidding the importation of used capital
equipment without permits. Permits for the importation of used bowling
equipment have proven quite difficult to obtain. During the second half of 1998
and the beginning of 1999, AMF customers used facilitators for importing AMF
equipment, but they have done so primarily as a vehicle for purchasing the
equipment in local currency and not as a means to reduce customs duties and
VAT.
Local Chinese companies are not subject to the same restrictions. In 1997,
a Chinese company, Shanghai Zhonglu Industrial Co., Ltd., began production of
locally-manufactured low-end bowling equipment and has experienced significant
acceptance by local customers. This equipment is not subject to the customs
duties that affect imported equipment.
BACKLOG; RECENT NCP SALES
The total backlog of NCPs was 1,078 units as of December 31, 1998,
representing a reduction of 37.5% compared to 1,725 units as of December 31,
1997. As of February 28,1999, the NCP backlog was 865, which is a 19.8%
reduction compared to December 31, 1998 and a 49.9% reduction compared to
December 31, 1997. It is expected that NCP backlog will continue for the
foreseeable future at levels which are substantially lower than those
experienced in 1997. NCP orders included in the backlog are routinely cancelled
by customers for a number of reasons, including the unavailability of
financing. Accordingly, the Company has experienced, and, in large part as a
result of economic difficulties experienced by certain markets, particularly in
the Asia Pacific region, expects to continue to experience, the cancellation of
a portion of its NCP orders. NCP sales for the year ended December 31, 1998
totaled $90.5 million, a 45.2% decrease from the same period in 1997. NCP
shipments were 2,466 units for the year ended December 31, 1998, representing a
reduction of 46.1% compared to shipments of 4,576 units for the year ended
December 31, 1997, which was largely attributable to the recent economic
difficulties in the Asia Pacific region. See " -- Seasonality and Market
Development Cycles" and " -- International Operations."
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.
IMPACT OF INFLATION
There was no significant impact on the Company's operations as a result of
inflation during the years ended December 31, 1998 and 1997 and for the period
ended December 31, 1996.
22
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the fiscal year ended December 31, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Adoption of these standards did not have a
material impact on the Company's financial position or results of operations.
See "Note 2. Significant Accounting Policies -- Comprehensive Income" in the
Notes to Consolidated Financial Statements regarding adoption of SFAS No. 130.
Effective for the fiscal year ended December 31, 1999, the Company is
required to adopt Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Effective for the
quarter ended March 31, 2000, the Company is required to adopt SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." 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.
YEAR 2000 ISSUE
YEAR 2000
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the Year 2000 as "00" and may assume that the year is 1900 rather
than 2000. This could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures, and is in the process of preparing for the Year
2000.
The Company has evaluated its Year 2000 risk in three separate categories:
information technology systems ("IT"), non-IT systems ("Non-IT") and material
third party relationships ("Third Party Risk"). The Company has developed a
plan in which the risks in each of these categories are being reviewed and
addressed by the appropriate level of management as follows:
IT. The Company has a number of financial, retail and operational systems
worldwide. The retail systems in many of its bowling centers are already Year
2000 compliant. The Company is in the process of installing corrective measures
for those bowling centers that are not compliant and expects this effort to be
complete by the third quarter of 1999. The Company is installing new financial
and operational systems at several locations. In connection with this effort,
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.
The financial and operational systems have already been installed for U.S.
Bowling Centers and at the corporate level. The effort will be complete for
Bowling Products locations before year-end. Several locations have existing
systems that are being upgraded for Year 2000 compliance, which will be
completed by the end of the second quarter of 1999. For the years ended
December 31, 1997 and 1998, the Company spent approximately $12.6 million and
$4.1 million, respectively, on systems that are designed to be Year 2000
compliant. The Company expects to spend an additional $7.6 million to complete
the installation. These costs include normal system software and equipment
upgrades or replacements which the Company anticipated incurring and budgeted
in the normal course of business, separate from the Year 2000 issue.
NON-IT. Non-IT systems involve embedded technologies, such as
microcontrollers or microprocessors. Examples of Non-IT systems include
telephones, security systems and computer-controlled manufacturing equipment.
The Company sells automatic scoring that is computerized and has developed a
software program at a cost to the Company of approximately $50,000 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. To date, management believes the
Company's Non-IT risks are minimal. For the most part, costs of addressing
Non-IT risks are included in normal upgrade and replacement expenditures which
were planned outside of the Company's Year 2000 review.
THIRD PARTY RISK. The Company's review of its Third Party Risk includes
detailed reviews of critical relationships with vendors and certain business
partners. The Company is monitoring and assessing the progress of its vendors
and certain business partners to determine whether they will be able to
successfully interact with the Company in the Year 2000. The Company has
contacted and received oral or written responses from at least half of its
critical vendors, all of which are in various stages of addressing the Year
2000 issue, and is currently awaiting response from the remainder of its
critical vendors.
23
If the steps taken by the Company and its vendors and certain business
partners to be Year 2000 compliant are not successful, the Company could
experience various operational difficulties. These could include, among other
things, processing transactions to an incorrect accounting period, difficulties
in posting general ledger interfaces and lapse of certain services by vendors
to the Bowling Centers operations. If the Company's plan to install new systems
which effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed through the implementation of these new
systems and software development and by its critical vendors and certain
business partners and does not expect the Year 2000 issue to have a material
adverse impact on the financial position, results of operations or cash flows
of the Company in future periods. However, should the remaining review of the
Company's Year 2000 risks reveal potentially non-compliant computer systems or
material third parties, contingency plans will be developed at that time.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
FINANCIAL STATEMENTS
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
o Report of Independent Public Accountants .............................................. 26
o Consolidated Balance Sheets as of December 31, 1998 and 1997 .......................... 27
o Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997,
and the Period Ended December 31, 1996 ................................................ 28
o Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997,
and the Period Ended December 31, 1996 ................................................ 29
o Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1998
and 1997, and the Period Ended December 31, 1996 ...................................... 30
o Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 1998
and 1997, and the Period Ended December 31, 1996 ...................................... 31
o Notes to Consolidated Financial Statements ............................................ 32
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
o Selected Quarterly Data (unaudited) ................................................... 63
AMF BOWLING GROUP (PREDECESSOR COMPANY)
o Report of Independent Accountants ..................................................... 64
o Combined Balance Sheet as of April 30, 1996 ........................................... 65
o Combined Statement of Operations for the Four Months Ended April 30, 1996 ............. 66
o Combined Statement of Cash Flows for the Four Months Ended April 30, 1996 ............. 67
o Combined Statement of Changes in Stockholders' Equity for the Four Months
Ended April 30, 1996 .................................................................. 68
o Notes to Combined Financial Statements ................................................ 69
FINANCIAL STATEMENT SCHEDULES
AMF GROUP HOLDINGS INC.
o Report of Independent Public Accountants on Schedule I ................................ 108
o Schedule I -- Condensed Financial Information of AMF Group Holdings Inc ............... 109
AMF BOWLING GROUP (PREDECESSOR COMPANY)
o Schedule II -- Valuation and Qualifying Accounts and Reserves ......................... 113
25
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,
1998 and 1997, and the related consolidated statements of operations, cash
flows, stockholder's equity and comprehensive loss for the years ended December
31, 1998 and 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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 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 19, 1999
26
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31,
-----------------------------
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 21,847 $ 35,790
Accounts and notes receivable, net of allowance for doubtful accounts
of $6,492 and $5,012, respectively ......................................... 82,435 73,991
Inventories ................................................................. 64,735 56,568
Deferred taxes and other .................................................... 22,539 17,049
----------- -----------
Total current assets ....................................................... 191,556 183,398
Property and equipment, net .................................................. 873,985 750,885
Leasehold interests, net ..................................................... 42,863 47,180
Deferred financing costs, net ................................................ 16,997 18,911
Goodwill, net ................................................................ 772,744 772,348
Investments in and advances to joint ventures ................................ 17,436 19,999
Other assets ................................................................. 40,435 39,092
----------- -----------
Total assets ............................................................... $ 1,956,016 $ 1,831,813
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ............................................................ $ 33,900 $ 41,583
Accrued expenses ............................................................ 60,512 64,865
Income taxes payable ........................................................ 5,316 5,571
Current portion of long-term debt ........................................... 32,375 27,376
----------- -----------