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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 001-12131
AMF BOWLING WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3873272
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 AMF Drive
Richmond, Virginia 23111
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(804) 730-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
10 7/8% Series B Senior Subordinated Notes Due 2006 New York Stock Exchange
121/4% Series B Senior Subordinated Discount Notes Due 2006 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 23, 2001, 100 shares of Registrant's common stock, par value
$.01, were outstanding and held entirely by AMF Group Holdings Inc. None of the
Registrant's common stock was held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE: None.
PART I
ITEM 1. BUSINESS
General Development of Business
AMF Bowling Worldwide, Inc. ("Bowling Worldwide" and, together with its
subsidiaries, the "Company" or "AMF") is the largest owner of bowling centers in
the United States and worldwide. In addition, the Company is one of the world's
leading manufacturers of bowling center equipment, accounting for, management
believes, approximately 40% of the world's current installed base of such
equipment. AMF is principally engaged in two business segments: (i) the
ownership or operation of bowling centers, consisting of 408 U.S. bowling
centers and 117 international bowling centers ("Bowling Centers"), as of
December 31, 2000, and (ii) the manufacture and sale of bowling equipment such
as automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare parts, and the resale of allied products such as bowling
balls, bags, shoes, and certain other spare parts ("Bowling Products"). The
principal markets for bowling equipment are U.S. and international bowling
center operators. AMF also manufactures and sells the PlayMaster, Highland and
Renaissance brands of billiards tables, and owns the Michael Jordan Golf
Company, which operates two golf practice ranges.
Bowling Worldwide conducts all of its business through subsidiaries and
provides certain limited management service operations to its subsidiaries and
AMF Bowling, Inc. ("AMF Bowling"). Bowling Worldwide is a wholly-owned, direct
subsidiary of AMF Group Holdings Inc. ("AMF Group Holdings"). AMF Group Holdings
is a wholly-owned, direct subsidiary of AMF Bowling. AMF Bowling, AMF Group
Holdings and Bowling Worldwide are Delaware corporations. An investor group led
by affiliates of Goldman, Sachs & Co. acquired the Company in 1996 (the
"Acquisition").
Since the Acquisition and prior to December 31, 2000, the Company purchased
an aggregate of 280 bowling centers for a combined purchase price of
approximately $507.4 million. The Company has funded its acquisitions and new
center construction from internally generated cash, borrowings under the senior
secured revolving credit facility (the "Bank Facility") under its credit
agreement dated as of May 1, 1996, as amended and restated (the "Credit
Agreement"), issuances of AMF Bowling common stock (the "Common Stock") and AMF
Bowling's Zero Coupon Convertible Debentures due 2018 (the "Convertible
Debentures").
The Bowling Products business consists of two categories: (a) New Center
Packages ("NCPs") (all of the equipment necessary to outfit a new bowling center
or expand an existing bowling center) and (b) Modernization and Consumer
Products (modernization equipment used to upgrade an existing center, spare
parts, supplies and consumable products essential to maintain operations of an
existing center and resale products for bowlers).
See "Item 6. Selected Financial Data," and "Note 14. Acquisitions," "Note
16. Business Segments," and "Note 17. Geographic Segments" in the Notes to
Consolidated Financial Statements for discussions regarding acquisitions and
business and geographic segments.
Restructuring
In August 2000, AMF Bowling announced that Bowling Worldwide and Citibank,
N.A., Administrative Agent of Bowling Worldwide's senior secured lenders
(collectively, the "Lenders"), had amended (the "Amendment") the Credit
Agreement. Pursuant to the Amendment, Bowling Worldwide agreed, among other
things, to forbear from making the September 15, 2000 interest payment due on
its 10 7/8% Series B Senior Subordinated Notes (the "Senior Subordinated Notes")
and that it would begin exploring various alternatives to restructure and reduce
its long-term debt. As part of the Amendment, the Lenders agreed to waive any
default under the Credit Agreement resulting from the failure to make the
September 15, 2000 interest payment due on the Senior Subordinated Notes unless
the Company's other creditors commenced the exercise of remedies, which could
include the acceleration of the Company's debt obligations and an involuntary
bankruptcy filing. The Amendment further provided for the permanent termination
of $100.0 million of the otherwise available working capital commitments under
the Credit Agreement. Moreover, the Amendment waived Bowling Worldwide's
compliance with the financial covenants in the Credit Agreement through December
31, 2000. The Amendment also required that Bowling Worldwide deliver a
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preliminary plan containing the principal terms of a proposal to restructure the
Company's debt to the Lenders. Bowling Worldwide submitted a proposed
restructuring plan on September 30, 2000 and a majority of the Lenders indicated
by October 15, 2000 that the plan was generally satisfactory in form and
substance, subject to further approval of any definitive plan.
Bowling Worldwide did not make the cash interest payment of approximately
$13.6 million on the Senior Subordinated Notes required on September 15, 2000
and the 30 day period to cure the non-payment of interest under the related
indenture expired. Under the indenture, the Trustee on its own or the holders of
25% or more of the outstanding principal amount of the Senior Subordinated Notes
have had the right, by written notice, since the expiration of the cure period,
to declare all amounts owed under the indenture immediately due and payable. If
the indebtedness represented by the Senior Subordinated Notes is accelerated,
such acceleration would result in a default under the Credit Agreement, the
Company's 12 1/4% Series B Senior Subordinated Discount Notes (the "Senior
Subordinated Discount Notes"), the Convertible Debentures and certain other
Company indebtedness. In such event, the Company would not then be able to meet
its accelerated payment obligations. Bowling Worldwide also failed to make the
required cash interest payment of approximately $13.6 million on the Senior
Subordinated Notes due on March 15, 2001 and did not make such payment during
the 30 day period to cure. As of April 15, 2001, neither Bowling Worldwide nor
AMF Bowling has received notice that any of its indebtedness has been or will be
accelerated.
Bowling Worldwide did not make a scheduled principal payment to the Lenders
of $12.8 million that was due on December 29, 2000. Bowling Worldwide did pay
$3.0 million of the $14.7 million of interest then due under the Credit
Agreement on December 29, 2000. The remainder of the $14.7 million of interest
(at a non-default interest rate) due was paid on a weekly schedule during the
first quarter of 2001. In addition, the Lenders' waiver of the financial
covenants in the Credit Agreement expired on December 31, 2000. As a result of
the foregoing, Bowling Worldwide is in default under the Credit Agreement.
Bowling Worldwide did not make a scheduled principal payment under the
Credit Agreement of $12.8 million, which was due on March 30, 2001 but did make
a $16.4 million interest payment under the Credit Agreement on March 30, 2001.
This payment represented interest at the non-default interest rate and was
approximately $2.8 million less than the interest would have been at the default
rate. As explained above, Bowling Worldwide is in default under the Credit
Agreement and the Senior Subordinated Notes and such defaults could result in
the acceleration of the indebtedness under the Credit Agreement, the Senior
Subordinated Notes, the Senior Subordinated Discount Notes, the Convertible
Debentures and certain other indebtedness of the Company. However, as of April
15, 2001, neither AMF Bowling nor Bowling Worldwide has received notice that any
of its indebtedness has been or will be accelerated. The Company is also not
aware that a creditor, including the Lenders and the holders of Senior
Subordinated Notes and the Senior Subordinated Discount Notes (collectively, the
"Subordinated Note Holders"), has taken action, or notified the Company that it
will take action, to enforce their rights or remedies against the Company or its
assets as a result of the defaults described above.
Since January 2001, the Company has funded its day to day operating
expenses and requirements for capital expenditures from cash flow from
operations. During 2001, scheduled principal payments under the Credit Agreement
increase significantly and cash interest becomes payable on the Senior
Subordinated Discount Notes. Management anticipates that the Company will not
make such principal and interest payments.
During 2000, the New York Stock Exchange (the "NYSE") delisted the Common
Stock, the Senior Subordinated Notes and Senior Subordinated Discount Notes. The
NYSE's action was taken in part due to the Company's restructuring and in part
due to the fact that the Common Stock traded below the NYSE's continued listing
criteria relating to a minimum share price. Since November 22, 2000, the Common
Stock has traded in the over-the-counter market under the symbol "AMBW."
In mid 2000, Bowling Worldwide retained financial and legal advisors to
assist it in evaluating its restructuring and refinancing alternatives. At the
time, management believed the possible alternatives included a consensual,
negotiated restructuring, a reorganization under Chapter 11 of the U.S.
Bankruptcy Code, 11 U.S. ss. 101 et seq. ("Chapter 11") and/or other possible
methods for reducing the Company's long-term debt and improving its capital
structure. Any alternative selected would likely have a material adverse effect
on the ability of AMF Bowling's shareholders to recover their investment in the
Common Stock and on the ability of the Subordinated
3
Notes Holders and the holders of the Convertible Debentures and other Company
indebtedness to receive interest and principal payments due thereon.
Bowling Worldwide and its advisors have provided certain information to and
held substantive discussions with the steering committees for the Lenders and
the Subordinated Notes Holders. The Lenders and the Subordinated Notes Holders
have each retained their own separate legal and financial advisors.
Management now believes that a Chapter 11 filing is the most likely and
efficient means to complete the debt restructuring. The Company and the steering
committees for the Lenders and the Subordinated Notes Holders are continuing
discussions regarding the debt restructuring. The Company believes that these
discussions are constructive and progress is being made. Accordingly, at this
time management has not made a recommendation to the Board of Directors of
Bowling Worldwide (the "Board") with respect to a Chapter 11 filing and the
Board has not yet taken any action in this regard. Bowling Worldwide has also
begun discussions with the Lenders and the Subordinated Notes Holders about a
potential Chapter 11 filing as well as business and legal issues related to such
a filing in order to ensure an orderly proceeding with minimal impact on the
Company's operations, employees and customers.
In order to facilitate a restructuring in a Chapter 11 proceeding, Bowling
Worldwide has received proposals for a secured debtor-in-possession financing
facility (a "DIP Facility"). Although no assurances can be given, Bowling
Worldwide believes that it would have a commitment from the Lenders for a DIP
Facility at the time of filing for a reorganization under Chapter 11. Management
believes that the borrowing capacity under a DIP Facility, in addition to
available cash on hand of approximately $40.0 million as of April 13, 2001, will
be sufficient to meet the Company's current liquidity and capital expenditure
requirements during the period when the Company would be operating under Chapter
11, although no assurances can be given in this regard.
While it is diligently pursuing a financial restructuring, Bowling
Worldwide is unable to predict if it will be able to arrive at a restructuring
plan, acceptable to the Lenders and the Subordinated Notes Holders, before a
filing is made or during a Chapter 11 proceeding. Bowling Worldwide is unable to
predict whether it will be able to satisfactorily implement such a plan, or
whether, in the interim, the Lenders and the Subordinated Notes Holders will
continue to forbear from exercising any or all of the remedies available to
them, including acceleration of the Company's indebtedness, an involuntary
bankruptcy proceeding and, in the case of the Lenders, realization on collateral
for their indebtedness.
Because retention of key personnel and maintenance of employee morale is so
critical during a restructuring, in mid 2000, certain bonus, severance and
retention programs were approved. The programs extend to senior management,
bonus-eligible and stock option-eligible personnel, including all center
managers around the world. These retention programs are conditioned upon
continued employment to specific dates. In March 2001, after consultation with
its compensation advisor and financial advisor, the Board approved several
enhancements to the year 2001 incentive compensation plan designed to encourage
retention and motivate key personnel during the restructuring process.
Business Segments
Bowling Centers
In the United States, AMF owns 403 bowling centers (as of March 31, 2001)
in 40 states and Puerto Rico. Outside the United States, AMF owns (as of March
31, 2001) 118 centers in nine countries: Australia (48), the United Kingdom
(35), Brazil (12), Mexico (9), China (including Hong Kong) (4), France (4),
Japan (3), Spain (2) and Argentina (1). Of the U.S. centers, 207 were acquired
as part of the Acquisition, 234 were acquired thereafter and two were
constructed. AMF has closed 40 centers since the Acquisition. Of the
international centers, 78 were acquired as part of the Acquisition, 46 were
acquired thereafter, including 22 in the United Kingdom, ten in Australia, one
in France and 13 centers in Argentina and Brazil that were previously owned as
part of a joint venture with a Sao Paulo-based amusement and entertainment
company and one was constructed in Australia. One center each in China, Japan
and the United Kingdom was closed, and one center each in Canada, Switzerland,
China and the United Kingdom was sold. See "Note 14. Acquisitions" and "Note 15.
Joint Ventures" in the Notes to Consolidated Financial Statements for
discussions regarding acquisitions and joint ventures.
4
Bowling Centers derives its revenue from three principal sources: (i)
bowling, (ii) food and beverage and (iii) other sources such as shoe rental,
amusement machines, billiards and pro shops. In 2000, bowling, food and beverage
and other revenue represented 58.0%, 27.5% and 14.5% of total Bowling Centers
revenue, respectively.
Bowling revenue, the largest segment of a bowling center's revenue, is
derived from league, tournament and recreational play, which includes managed,
or scheduled (such as birthday or corporate parties), and open, or unscheduled,
play. Food and beverage sales are generally through snack bars that offer food,
soft drinks and, at most centers, alcoholic beverages. Other revenue is derived
from shoe rental, amusement machines, billiards and pro shops.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Note 16. Business Segments" and "Note 17.
Geographic Segments" in the Notes to Consolidated Financial Statements for
additional information regarding business and geographic segments.
Bowling Products
Bowling Products manufactures and sells bowling center equipment and
supplies, including automatic pinspotters, automatic scoring equipment, bowling
pins, lanes, ball returns, lane machines and chemicals and certain spare and
modernization parts. Bowling Products also resells products including bowling
balls, bags, shoes and other bowlers' aids, primarily through pro shops. Bowling
Products consists of two categories: (i) NCPs and (ii) Modernization and
Consumer Products.
NCPs include the bowling equipment necessary to outfit new or expand
existing bowling centers, such as lanes, pinspotters, automatic scoring
equipment, bowler seating, ball returns, masking units and bumpers. In addition,
Bowling Products also refurbishes and sells used pinspotters. Combined with new
automatic scoring, lanes, bowler seating, and other components, these used
pinspotters are sold as Factory Certified Packages ("FCPs"). FCP revenue is
included in the NCP category. Traditionally, as bowling is introduced and
becomes popular in new markets, the economics of constructing and operating
bowling centers become attractive and drive demand for NCPs. For over 20 years,
the majority of NCP sales have been to international markets. Until 1998, this
trend was fueled by the growth of bowling in several countries, particularly
China, Korea and Taiwan. Economic difficulties in the Asia Pacific region, as
well as the limited availability of construction financing for customers and the
lack of a significant emerging market to replace China, Korea and Taiwan, have
continued to keep demand for NCPs below peak levels achieved during 1997.
As an initial response to these soft market conditions, Bowling Products
entered into three-year joint distribution agreements with Shanghai Zhonglu
Industrial Corporation ("Zhonglu") in June 1999 whereby Zhonglu became the
exclusive distributor of AMF products in China and Bowling Products became the
exclusive distributor of Zhonglu's bowling products and parts outside of China.
In 1999 and 2000, Bowling Products purchased component parts from Zhonglu as
part of its long-term strategy to reduce manufacturing costs. However, sales of
both AMF products in China and Zhonglu products outside China were slower than
anticipated. In September 2000, the Company and Zhonglu amended the distribution
agreements to replace the exclusive sales relationship with a non-exclusive
relationship. Although the Company continues to purchase certain component parts
from Zhonglu under the revised agreements, both parties are pursuing alternative
sales channels. See "--Business Strategy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Bowling Products."
Sales of Modernization and Consumer Products to bowling center operators
have traditionally provided a somewhat more stable base of recurring revenue on
an annual basis. These products include modernization equipment, both
proprietary and standard spare parts for existing equipment and other products
including pins, shoes and supplies. Some of these products, such as bowling
pins, should be replaced on approximately an annual basis to maintain a center,
while certain less frequent investments in other equipment are necessary to
modernize a center and are often required to maintain customers. AMF also sells
products including balls, bags and apparel to pro shops and bowlers.
In addition to bowling equipment and supplies, AMF manufactures and sells
billiards tables under the PlayMaster, Highland and Renaissance brand names.
5
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Note 16. Business Segments" and "Note 17.
Geographic Segments" in the Notes to Consolidated Financial Statements for
additional information regarding business and geographic segments.
Business Strategy
U.S. Bowling Centers
Based upon an internal evaluation of the key drivers for successful center
performance, management has and will continue to focus on the following
initiatives: (i) improved training for center and facility managers; (ii)
enhanced incentive-based compensation for center managers and key staff; (iii)
more effective marketing programs; (iv) improved cost management of payroll
through better labor scheduling and (v) more efficient center purchasing through
a centralized program to reduce supplies expense. Management believes that there
is an opportunity for external growth through acquisition, construction and
eventual franchising of bowling centers. However, the Company's restructuring
precludes pursuit of these opportunities at this time.
Management believes that quality and experience of the center manager and
staff are the most important factors that differentiate the better performing
centers in the AMF system. Because a bowling center manager is responsible for a
wider range of functional areas than most retail managers, the quality and
experience of a center manager has a greater impact on the operations of the
center than a typical retail store manager. The Company is attempting to recruit
higher quality center managers and staff and to devote more resources to
training. During 2001, the Company will implement a comprehensive training
program that combines classroom and on-site training to improve overall center
performance and reduce turnover.
The Company recently established a more aggressive incentive compensation
plan to reward performance with an increased bonus potential for
over-achievement. Management believes that higher profitability should offset
the cost of this performance-based compensation. The new compensation system
should also help attract better manager candidates as well as reduce management
turnover.
The Company's national marketing team supports the bowling centers through
programs designed to increase awareness and visits to bowling centers across a
broad customer base. The Company's 2001 national marketing calendar will focus
on radio advertising supported by targeted mailing programs and special
promotions geared separately to league, open and managed play customers.
The Company will also focus on improving food and beverage revenue growth
through several initiatives expected to increase the speed and improve the
quality of food service. Implementation of better inventory and cost controls,
along with menu consolidations, should further improve food and beverage margin.
Management expects to improve cash flow margins with the help of certain
cost reduction initiatives. At the center level, a weekly payroll report and
payroll planning guide will help each center manager better schedule and manage
payroll, the largest category of a center's operating expenses. An automated
center purchasing program has been rolled out to all U.S. centers to leverage
the Company's size in order to increase purchasing efficiency. In late 2000,
management reduced the size of its field organization to eliminate certain
supervisory, monitoring and support services that did not add sufficient value.
Management also expects to improve center operating performance by driving more
decision-making and accountability to the center level.
International Bowling Centers
The Company's operating strategies vary by country, although in general,
local management is focused on operating initiatives similar to those described
for U.S. centers. As the Company expanded in the U.K. and Australia, the
turnover of center managers was generally less. A greater emphasis on training
has already been implemented in both the U.K. and Australia.
6
Bowling Products
In March 2001, the Company hired John Suddarth as Chief Operating Officer
for Bowling Products. His new management team intends to evaluate strategy,
operations and organization with the intent to put in motion a turnaround plan
to achieve profitability. The increased product and customer focus expected to
be achieved from reorganization will be complementary to recent strategic
initiatives focused on product quality enhancements and better management
information systems.
The Company believes that opportunities exist to reduce international order
fulfillment lead times while continuing to improve the accuracy and completeness
of shipments. The new management team is exploring regional distribution to
replace country-based inventory storage facilities. In addition, management will
continue to eliminate outdated and redundant stock keeping units ("SKUs").
The new management team will also implement a working capital management
program. With declining sales, working capital management has become more of a
challenge because of the broad product line and SKUs required to serve the
global markets. Bowling Products began establishing inventory and accounts
receivable targets in late 2000 as performance measures for some of its
international managers. In 2001, specific working capital targets will be used
as key operational measures in determining incentive compensation.
Seasonality
The financial performance of Bowling Centers operations is seasonal. Cash
flows typically peak in the winter and reach their lows in the summer. While the
geographic diversity of Bowling Centers operations helped reduce this
seasonality in the past, the increase in the number of U.S. centers owned and/or
operated by the Company resulting from acquisitions has accentuated the
seasonality of that business.
Modernization and Consumer Products sales also display seasonality. The
beginning of league play in the fall of each year drives the U.S. market, which
is the largest market for Modernization and Consumer Products. While operators
purchase consumer products throughout the year, they often place larger orders
during the summer in preparation for the start of league play in the fall.
Summer is also generally the peak period for installation of modernization
equipment. Operators typically sign purchase orders for modernization equipment
during the first four months of the year after they receive winter league
revenue indications. Equipment is then shipped and installed during the summer
when leagues are generally less active. However, sales of some modernization
equipment such as automatic scoring and synthetic lanes are less predictable and
fluctuate from year to year because of the longer life cycle of these major
products.
Industry and Competition
Bowling Centers
Bowling is both a competitive sport and a recreational entertainment
activity and faces competition from numerous alternative leisure activities. The
success of AMF's bowling operations is subject to continued interest in bowling,
the availability and affordability of other sports, and recreational and
entertainment alternatives, the amount of customer leisure time, as well as
various other social and economic factors over which AMF has no control.
The Company's centers also compete with other bowling centers. The Company
competes primarily through customer service as well as the quality of its
bowling equipment, location, facilities, food and beverage offerings and
marketing programs. See "--Business Strategy" and "Management's Discussion of
Financial Condition and Results of Operations--Bowling Centers."
7
As shown in the following table, the U.S. bowling center industry is highly
fragmented, and consists of two relatively large bowling center operators, AMF
(which had 408 U.S. centers as of December 31, 2000) and Brunswick Corporation
("Brunswick") (which had approximately 113 U.S. centers as of December 31,
2000), three medium-sized chains, which together account for 59 bowling centers,
and approximately 5,016 bowling centers owned by single-center and small-chain
operators, which typically own four or fewer centers. The top five operators
(including AMF) account for approximately 10.4% of the total number of U.S.
bowling centers.
U.S. BOWLING CENTER INDUSTRY (a)
Number of
Operator Locations % of Total
-------- --------- ----------
AMF 408 7.3 %
Brunswick 113 2.0
Bowl America 22 0.4
Community Bowling Centers 22 0.4
Bowl New England 15 0.3
-------- --------
Subtotal 580 10.4
Single-center and small-chain operators 5,016 89.6
-------- --------
Total 5,596 100.0 %
======== ========
- ---------------------------------------
(a) AMF estimate at December 31, 2000.
The international bowling center industry is also highly fragmented. There
are few chain operators in any one country and a large number of single-center
operators. AMF generally enjoys a relative size advantage (i.e., a larger number
of lanes per center), and is competitively well-positioned in Australia, the
United Kingdom and Mexico.
In the United States, the operation of bowling centers, including the
Company's, generally has been characterized by slightly declining lineage
(number of games bowled per lane per day). This decline has been primarily
caused by a decrease in the number of league bowlers. While more people are
bowling at AMF's bowling centers, they are bowling less often. As part of the
Company's recent efforts to improve the financial performance of the Company's
centers, AMF is seeking to improve lineage. However, there can be no assurances
that lineage will increase or that the lineage will not further decline. In 1999
and 2000, the U. S. constant centers (centers that have been operated by the
Company at least one full fiscal year) lineage declined slightly each year.
These decreases were offset with price increases yielding a net constant center
revenue growth. See "--Business Strategy" for a discussion of the Company's
business strategy for its bowling centers. Internationally, although trends vary
by country, certain of the markets in which AMF operates have experienced
increasing competition as they have matured, resulting in declining lineage.
Bowling Products
AMF and Brunswick are the two largest manufacturers of bowling center
equipment and are the only full-line manufacturers of bowling equipment and
supplies that compete on a global basis. The Company also competes with smaller,
focused companies in certain product lines. See "--International Operations" for
a discussion of additional factors that may affect the international operations
of Bowling Products. Management estimates that AMF accounts for approximately
40% of the worldwide installed base of bowling center equipment.
8
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, currency exchange
rate fluctuations, economic and political fluctuations and destabilization,
other disruption of markets, restrictive laws, tariffs and other actions by
foreign governments (such as restrictions on transfer of funds, import and
export duties and quotas, foreign customs, tariffs and value added taxes and
unexpected changes in regulatory environments), difficulty in obtaining
distribution and support for products, the risk of nationalization, the laws and
policies of the United States affecting trade, international investment and
loans, and foreign tax law changes.
The Company has operated in international markets for over 30 years. As in
the case of other U.S.-based manufacturers with export sales, local currency
devaluation increases the cost of the Company's bowling equipment and may
adversely impact sales volume and profit margins during such periods.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. Revenue and EBITDA of international
bowling centers represented 15.9% and 25.4% of consolidated revenue and EBITDA,
respectively, in 2000. Revenue and EBITDA of international bowling centers
represented 17.0% and 30.6% of consolidated revenue and EBITDA, respectively, in
1999.
The demand for NCPs remains below the peak levels achieved during 1997.
Management believes this was the result of economic difficulties in the Asia
Pacific region, as well as the failure of another international market to
develop the strong demand experienced in Asia Pacific in the early and mid
1990's and the limited availability of financing for customers who want to build
new centers.
In response to these market conditions as well as the strengthened
enforcement of import restrictions in China discussed below, Bowling Products
entered into three-year joint distribution agreements with Zhonglu in June 1999.
Under the terms of these agreements, Zhonglu became the exclusive distributor of
AMF products in China and Bowling Products became the exclusive distributor of
Zhonglu's bowling products and parts outside of China. In 1999 and 2000, Bowling
Products purchased component parts from Zhonglu as part of its long-term
strategy to reduce manufacturing costs. However, sales of both AMF products in
China and Zhonglu products outside China were slower than anticipated. In
September 2000, the Company and Zhonglu amended the distribution agreements to
replace the sales relationship with a non-exclusive arrangement. The Company
continues to source some component parts from Zhonglu under the revised
agreements, but both parties are pursuing alternative sales channels. Management
believes that in January, 2000, Zhonglu reached an agreement with Brunswick for
Brunswick to become the primary global sales organization for Zhonglu products.
Management is evaluating how this new relationship impacts the Company's ongoing
purchase of component parts from Zhonglu.
China has strengthened enforcement of its import restrictions by requiring
the payment of full customs duties and value-added taxes on the importation of
new and used capital goods. The Chinese government also prohibits importation of
used capital equipment without permits, which are very difficult to obtain.
Local Chinese companies, however, are not subject to the same restrictions. For
example, Zhonglu produces locally and sells bowling equipment that is not
subject to the customs duties or permit requirements that affect the Company's
imported equipment. Zhonglu has experienced significant acceptance by local
customers. Management believes that these import restrictions will continue for
the foreseeable future as a barrier against the sale of the Company's products.
Management is presently reviewing its alternatives for selling bowling products
in China.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 35.4% of total NCP unit sales in 2000 compared with 43.0% in
1999. Economic difficulties in the Asia Pacific region and increased competition
in general have both affected sales of NCPs. NCP sales totaled $44.0 million in
2000, representing a decrease of 16.3% from 1999. NCP shipments were 1,513 units
for 2000, representing an increase of 12.7% from 1999. NCP sales totaled $52.6
million in 1999, representing a decrease of 41.9% from 1998. NCP shipments were
1,343 units for 1999, representing a decrease of 45.5% from 1998. See
"--Seasonality and Market Development Cycles."
9
See "Note 16. Business Segments" and "Note 17. Geographic Segments" in the
Notes to Consolidated Financial Statements for additional financial information
concerning the Company's operations in different geographic areas.
Employees
Bowling Centers
As of December 31, 2000, Bowling Centers had approximately 16,386 full- and
part-time employees worldwide. The Company believes that its relations with its
Bowling Centers employees are satisfactory.
Number of
Country Employees (a
------- ------------
United States 13,715
-------
International:
Australia 1,111
United Kingdom 805
Mexico 272
China (including Hong Kong) 84
France 104
Japan 62
Spain 33
Argentina 17
Brazil 183
-------
Total International 2,671
-------
Total Worldwide 16,386
=======
- ---------------------------------------
(a) Numbers vary depending on the time of year.
Bowling Products
As of December 31, 2000, Bowling Products had approximately 757 full-time
employees worldwide. The Company believes that its relations with its Bowling
Products employees are satisfactory. Employees are divided along functional
lines as shown in the table below.
Number of
Segment Employees
------- ---------
Manufacturing 494
----
Sales:
Asia Pacific 75
Europe 88
Americas 80
Australia 9
Mexico 11
----
Total Sales 263
----
Total Worldwide 757
====
10
Corporate
As of December 31, 2000, corporate had approximately 137 full-time
employees. The Company believes that its relations with its corporate employees
are satisfactory.
ITEM 2. PROPERTIES
Bowling Centers
As of December 31, 2000, AMF operated 408 bowling centers and related
facilities in the United States and 117 centers in nine other countries. A
regional list of these facilities is set forth below:
U.S. CENTERS
Number of Number of
Region Districts Locations (a) Owned Leased
------ --------- ------------- ----- ------
East 12 144 91 53
Central 11 133 91 42
West 11 131 77 54
----- ------ ----- ------
Total 34 408 259 149
===== ====== ===== ======
- ----------------------------------------
(a) AMF owns and operates two golf practice ranges, one each in Aurora, Illinois
and Charlotte, North Carolina. The ranges are not included in the foregoing
table.
INTERNATIONAL CENTERS
Number of
Country Locations Owned Leased
-------
Australia 47 27 20
United Kingdom 35 12 23
Brazil 12 0 12
Mexico 9 5 4
China 4 0 4
France 4 0 4
Japan 3 0 3
Spain 2 0 2
Argentina 1 0 1
----- ---- ----
Total 117 44 73
===== ==== ====
AMF's leases are subject to periodic renewal. Fifty-one of the U.S. centers
have leases that expire during the next three years. Thirty-five of such leases
have renewal options. Twenty-two of the international centers have leases that
expire during the next three years. Three of such leases have renewal options.
For information concerning major encumbrances on AMF-owned real estate, see
"Note 8. Long-Term Debt and 1999 Recapitalization Plan" in the Notes to
Consolidated Financial Statements.
11
Bowling Products
As of December 31, 2000, AMF owned or leased facilities at three locations
in the United States, two of which are used for its Bowling Products business
and one of which is used for its billiards business. AMF also leased facilities
at 14 international locations that are used as offices or warehouses. For
information concerning major encumbrances on AMF-owned real estate, see "Note 8.
Long-Term Debt and 1999 Recapitalization Plan" in the Notes to Consolidated
Financial Statements.
U.S. Facilities
Approximate Owned/
Location Products Square Footage Leased
-------- -------- -------------- ------
Richmond, VA World headquarters, pinspotters, automatic scoring, synthetic lanes, 360,000 Owned
other capital equipment, consumer products, used pinspotters and 54,000 Leased
lane maintenance equipment
Lowville, NY Pins and wood lanes 171,000 Owned
Bland, MO Billiard tables (AMF Billiards and Games) 116,926 Owned
33,000 Leased
International Facilities
Approximate Owned/
Location Functions Square Footage Leased
-------- --------- -------------- ------
Emu Plains, Australia Office 400 Leased
Warehouse 10,100 Leased
Hong Kong Office 2,500 Leased
Shanghai, China Office 400 Leased
Beijing, China Warehouse 4,000 Leased
Levallois-Perret, France Office 984 Leased
Warehouse 1,470 Leased
Mainz-Kastel, Germany Office 656 Leased
Warehouse 1,650 Leased
Bangalore, India Office 1,050 Leased
New Delhi, India Office 2,000 Leased
Yokohama, Japan Office 4,626 Leased
Warehouse 8,888 Leased
Service Center 1,634 Leased
Seoul, South Korea Office 5,119 Leased
Warehouse 7,472 Leased
Mexico City, Mexico Office 1,300 Leased
Warehouse 11,431 Leased
Warsaw, Poland Office 209 Leased
Granna, Sweden Office 4,515 Leased
Warehouse 12,705 Leased
Hemel Hempstead, United Kingdom Office 11,500 Leased
Warehouse 11,770 Leased
12
ITEM 3. LEGAL PROCEEDINGS
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation against AMF Bowling, The Goldman Sachs Group, L.P., Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Cowen & Company, Schroder & Co., Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased
Common Stock in AMF Bowling's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, among other
things, damages and/or rescission against all defendants jointly and severally
pursuant to Sections 11, 12 and/or 15 of the Securities Act of 1933, as amended,
based on allegedly inaccurate and misleading disclosures in connection with and
following the Initial Public Offering. Management believes that the litigation
is without merit and intends to defend against it vigorously.
In June 1998, Harbin Hai Heng Bowling Entertainment Co. Ltd. ("Hai Heng")
filed an action against AMF Bowling Products, Inc. ("AMF Bowling Products"), an
indirect subsidiary of Bowling Worldwide, in the Harbin Intermediate People's
Court in Heilongjing, China. Hai Heng sought to recover $3 to $4 million in
damages relating to 38 NCPs purchased from AMF Bowling Products. Hai Heng
asserted that the poor quality of the 38 NCPs entitled Hai Heng to recover the
purchase price and damages for lost profits and the cost of storing the NCPs.
On November 6, 1998, the court awarded Hai Heng approximately $3.5 million.
AMF Bowling Products appealed the award to the High People's Court of
Heilongjing Province (the "People's Court"). Prior to completion of the appeal
review, the President of the People's Court on February 11, 1999 issued a
judgment in favor of Hai Heng for approximately $2.8 million and ordered Hai
Heng to return 24 NCPs to AMF Bowling Products. AMF Bowling Products filed an
appeal to the Supreme People's Court in Beijing (the "Supreme Court"). The
Supreme Court orally issued a stay of the execution of the judgment. AMF Bowling
Products has been advised that the Supreme Court has declined to review the case
and the People's Court judgment is now final.
On September 21, 2000, the United States Securities and Exchange Commission
(the "SEC") issued a subpoena to AMF Bowling seeking documents concerning the
Company's financial statements and accounting practices and policies. On
February 12, 2001, AMF Bowling received a notification from the staff of the SEC
stating that the investigation was terminated and that no enforcement action was
recommended to the SEC.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
environmental claims, discrimination claims, workers' compensation claims and
personal injury claims from customers of Bowling Centers. In some actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. Certain of these litigations will be subject to the automatic stay
upon a Chapter 11 filing. In management's opinion, these claims and actions in
which the Company is involved will not have a material adverse impact on its
financial position or results of operations. However, it is not possible to
predict the outcome of such claims and actions.
Regulatory Matters
There are no unique federal or state regulations applicable to bowling
center operations or equipment manufacturing. State and local governments
require establishments to hold permits to sell alcoholic beverages, and,
although regulations vary from state to state, once permits are issued, they
generally remain in place indefinitely (except for routine renewals) without
burdensome reporting or supervision other than revenue tax reports.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
13
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the outcome of such claims.
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing AMF's products, or
providing its services, or otherwise adversely affect the demand for its
products or services.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
PART II
ITEM 5. MARKET FOR BOWLING WORLDWIDE COMMON STOCK AND RELATED INVESTOR MATTERS
Common Stock
The outstanding common stock, $.01 par value, of Bowling Worldwide is
wholly owned by AMF Group Holdings. There is no established public trading
market for Bowling Worldwide's common stock. Bowling Worldwide did not pay any
cash dividends on its common stock during 1999 and 2000 and intends to retain
earnings, if any, for use in the Company's business.
Bowling Worldwide is prohibited under both the Credit Agreement and certain
indentures governing its Senior Subordinated Notes and Senior Subordinated
Discount Notes from upstreaming funds to AMF Bowling by dividends, loans or
otherwise to pay cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years indicated
were derived from AMF Group Holdings' audited consolidated financial statements
for the years ended December 31, 2000, 1999, 1998 and 1997, the period ended
December 31, 1996, and the audited combined financial statements of the
Company's predecessor (the "Predecessor Company") for the four months ended
April 30, 1996. The consolidated pro forma results set forth below for the year
ended December 31, 1996 are presented as if the Acquisition had occurred on
January 1, 1996, and are based on the Predecessor Company's statement of income
for the period ending April 30, 1996, AMF Group Holdings' statement of
operations from its inception through December 31, 1996, and adjustments giving
effect to the Acquisition under the purchase method of accounting. The data
should be read in conjunction with AMF Group Holdings' Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appear elsewhere herein.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Company's financial position, including the default on its debt
and the continuing losses from operations, raise substantial doubt about the
Company's ability to continue as a going concern. The appropriateness of
reporting on the going concern basis is dependent upon, among other things, a
prompt restructuring, refinancing or Chapter 11 relief, future profitable
operations, and the ability to generate sufficient cash from operations and
financing sources to meet obligations. As a result of the Company's current
circumstances, however, such realization of assets and liquidation of
liabilities are uncertain. Further, a plan of reorganization could materially
affect the assets and liabilities reported in the accompanying consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability of the value of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary as a consequence of this uncertainty.
The comparability of the selected financial data is affected by the
Company's bowling center acquisition program. In 1996, the Company, through AMF
Bowling Centers, Inc. ("AMF Bowling Centers"), a direct subsidiary of Bowling
Worldwide, acquired 57 bowling centers from unrelated sellers. The combined
purchase price was $108.0 million. In 1997, AMF Bowling Centers acquired 122
bowling centers from a number of unrelated sellers. The combined purchase price
was $232.7 million (including amounts paid in 1998 for certain bowling centers
included in the 1997 total). In 1998, AMF Bowling Centers acquired 83 bowling
centers from a number of unrelated sellers. The combined purchase price was
$156.8 million. In 1999, AMF Bowling Centers acquired one center for a purchase
price of $1.4 million. In 2000, AMF Bowling Centers acquired 4 centers
(excluding the 13 joint venture centers acquired in December 2000) for a
combined purchase price of $8.6 million. See "Item 1. Business--General
Development of Business" and "Note 13. Supplemental Disclosures to the
Consolidated Statements of Cash Flows" and "Note 14. Acquisitions" in the Notes
to Consolidated Financial Statements.
15
The selected financial data include operating results expressed in terms of
EBITDA, which represents earnings before net interest expense, income taxes,
depreciation and amortization, restructuring and asset impairment charges, and
refinancing charges. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
a company's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
For the year ended December 31, | Four Months
------------------------------------------------------- | Ended
(dollars in millions) | April 30,
AMF Group Holdings Inc. | -------------
------------------------------------------------------- | Predecessor
Pro Forma | Company
1996 (a) 1996 (b) 1997 1998 1999 2000 | 1996 (c)
--------- ------- ------- ------- ------- ------- | -------------
Income Statement Data: |
Operating revenue (d) $ 548.9 $ 384.8 $ 713.7 $ 736.4 $ 732.7 $ 715.0 | $ 164.9
Cost of goods sold 173.6 130.5 212.6 202.2 177.2 173.1 | 43.1
Bowling center operating expenses (d) 178.8 123.7 251.2 334.0 373.4 386.9 | 80.2
Selling, general and administrative expenses 51.0 35.1 64.5 63.8 71.5 64.5 | 35.5
Restructuring and asset impairment charges - - - - 16.6 5.0 | -
Refinancing charges - - - - - 6.5 | -
Depreciation and amortization 73.5 49.4 102.5 120.3 132.7 136.0 | 15.1
------- ------- ------- ------- ------- ------- | -------
Operating income (loss) 72.0 46.1 82.9 16.1 (38.7) (57.0) | (9.0)
Interest expense, gross 106.2 78.0 118.4 101.9 111.3 121.5 | 4.5
Other income (expense), net 3.6 3.7 (8.2) (5.5) (4.8) (0.2) | (0.1)
------- ------- ------- ------- ------- ------- | -------
Net loss before income taxes (30.6) (28.2) (43.7) (91.3) (154.8) (178.7) | (13.6)
Provision (benefit) for income taxes (9.0) (8.6) (12.9) 7.3 27.6 2.3 | (1.7)
------- ------- ------- ------- ------- ------- | -------
Net loss before equity in loss of |
joint ventures and extraordinary items (21.6) (19.6) (30.8) (98.6) (182.4) (181.0) | (11.9)
Equity in loss of joint ventures, net of tax - - (1.4) (8.2) (18.6) (0.5) | -
------- ------- ------- ------- ------- ------- | -------
Net loss before extraordinary items (21.6) (19.6) (32.2) (106.8) (201.0) (181.5) | (11.9)
Extraordinary items, net of tax - - (23.4) - - - | -
Net loss ------- ------- ------- ------- ------- ------- | -------
$ (21.6) $ (19.6) $ (55.6) $(106.8) $(201.0) $(181.5) | $ (11.9)
======= ======= ======= ======= ======= ======= | =======
Ratio of earning to fixed charges (e) - - - - - - | -
|
Selected Data: |
EBITDA (f) $ 145.5 $ 95.5 $ 185.4 $ 136.4 $ 110.6 $ 90.5 | $ 6.1
EBITDA margin 26.5% 24.8% 26.0% 18.5% 15.1% 12.7% | 3.7%
For the year ended December 31,
(dollars in millions)
AMF Group Holdings Inc.
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
Working capital (g) $ 7.9 $ 44.0 $ 59.5 $ 7.1 $ (1,107.1)
Goodwill 771.1 772.3 772.7 765.1 746.1
Total assets 1,593.9 1,831.8 1,956.0 1,805.4 1,726.3
Total debt 1,091.3 1,060.6 1,047.1 1,048.6 1,136.6
Stockholder's equity 408.7 653.9 803.9 641.7 453.9
Total capital 1,500.0 1,714.5 1,851.0 1,690.3 1,590.5
(a) Represents results of operations for the year ended December 31, 1996 as if
the Acquisition had occurred on January 1, 1996. AMF Group Holdings'
unaudited pro forma statement of income for the year ended December 31,
1996 is based on the Predecessor Company's statement of operations for the
four-month period ending April 30, 1996, AMF Group Holdings' statement of
operations for the period ended December 31, 1996, and the following
adjustments giving effect to the Acquisition under the purchase method of
accounting:
(i) To reflect the impact of AMF Group Holdings not acquiring in the
Acquisition the operations of one bowling center in Switzerland and
one bowling center in Spain.
16
(ii) To eliminate a one-time charge of $44.0 million for special bonuses
and payments made by the Predecessor Company owners in April 1996.
(iii)To reflect the increase in depreciation and amortization expense
resulting from the allocation of the purchase price to fixed assets
and goodwill and a change in the method of depreciation of fixed
assets. The Predecessor Company principally used the doubled declining
balance method. The amount of the pro forma adjustment for
depreciation was determined using the straight-line method over the
estimated lives of the assets acquired. Goodwill is being amortized
over 40 years.
(iv) To reflect the incremental interest expense associated with the
issuance of debt which partially funded the Acquisition.
(v) To give effect to the change in status of the U.S. and international
subsidiaries of AMF Bowling from S corporations to taxable
corporations under the U.S. federal tax laws upon consummation of the
Acquisition.
(b) For the period from the inception date of January 12, 1996 through December
31, 1996, which includes the results of operations of the acquired business
from May 1, 1996 through December 31, 1996.
(c) Represents results of operations from January 1, 1996 through April 30,
1996.
(d) Certain amounts have been reclassified to conform with current year
presentation.
(e) The ratio of earnings to fixed charges are computed by dividing earnings by
the fixed charges. Earnings consist of net income plus fixed charges and
income taxes. Fixed charges consist of interest expense, amortization of
debt issue costs, and the portion of rent expense considered to represent
interest. For the years ended December 31, 2000, 1999, and 1998, AMF had a
deficiency of earnings to fixed charges of $178.7 million, $154.8 million,
and $91.3 million.
(f) EBITDA includes charges primarily related to fixed assets, goodwill,
inventory and accounts receivable of $39.2 million in 2000 and $26.5
million in 1999.
(g) Working capital as of December 31, 2000 includes the classification of
$1,136.6 million of long-term debt as a current liability. See "Note 8.
Long-Term Debt and 1999 Recapitalization Plan" in the Notes to Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this report contain forward-looking
statements, which are statements other than historical information or statements
of current condition. Statements set forth in this report or statements
incorporated by reference from documents filed with the SEC are or may be
forward-looking statements, including possible or assumed future results of the
operations of the Company, including but not limited to (a) any statements
contained in this report concerning: (i) timing, execution and results of the
Company's restructuring process, (ii) the timing or amount of any changes in the
interest expense and/or principal repayment obligations of the Company's
indebtedness, including the timing of any acceleration of the Company's
indebtedness, and the timing of the pursuit of any remedies by the Company's
creditors, (iii) the Company's ability to generate cash flow to service its
indebtedness and meet its debt payment obligations, (iv) the results of the
Company's plans to improve its bowling centers operations, including revenue
enhancement and cost management programs, (v) the results of the Company's
efforts to improve the Bowling Products business (vi) the ability of the
Company's management to execute the Company's strategies, (vii) the results of
operations and initiatives engaged in with respect to the Company's Bowling
Products and Bowling Centers businesses, (viii) the results of the Company's
employee incentive and retention efforts, (ix) the outcome of existing or
potential litigation, (x) the amounts of capital expenditures needed to maintain
or improve the Company's bowling centers, (b) any statements preceded by,
followed by or including the words "believes," "expects," "predicts,"
"anticipates," "intends," "estimates," "should," "may" or similar expressions
and (c) other statements contained or incorporated in this report regarding
matters that are not historical facts.
These forward-looking statements relate to the plans and objectives of the
Company or future operations. In light of the risks and uncertainties inherent
in all future projections and the Company's financial position, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company that the objectives or plans of the Company will
be achieved. Many factors could cause the Company's actual results to differ
materially from those in the forward-looking statements, including: (i) the
ability of the Company to continue operating as a going concern and successfully
emerge from Chapter 11 pursuant to a feasible Chapter 11
17
reorganization plan that provides for the Company to remain substantially
intact, (ii) timing, execution and results of the Company's restructuring or
refinancing process, (iii) the Company's ability to avoid the acceleration of
its long term indebtedness, the resulting cross default under such indebtedness
and any resulting enforcement of remedies relating to such default, including
the filing of an involuntary bankruptcy petition and the foreclosure by the
Lenders on collateral for their indebtedness, (iv) the Company's ability, and
the ability of its management team, to carry out the Company's business
strategies, (v) the Company's ability to maintain liquidity and to have
sufficient funds to carry out its capital expenditure program, (vi) the
Company's ability to sell to existing bowling markets and identify and
participate in sales to new bowling markets in light of the current uncertainty
surrounding the Company's financial position, (vii) the continuation of adverse
financial results and substantial competition in the Company's Bowling Products
business, (viii) the Company's ability to retain and attract experienced bowling
center management and other key management personnel, (ix) the Company's ability
to successfully implement initiatives designed to improve and retain customer
traffic in its bowling centers, (x) the Company's ability to attract and retain
league bowlers in its bowling centers and customers in its Bowling Products
business, (xi) the risk of adverse political acts or developments in the
Company's existing and proposed international markets, (xii) fluctuations in
foreign currency exchange rates affecting the Company's translation of operating
results, (xiii) continued or increased competition, (xiv) the popularity of
bowling, (xv) the decline in general economic conditions, (xvi) adverse
judgments in pending or future litigation and (xvii) changes in interest and
exchange rates.
The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included elsewhere in this report. Bowling Worldwide undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Restructuring
In August 2000, AMF Bowling announced that Bowling Worldwide and the
Lenders had entered into the Amendment. Pursuant to the Amendment, Bowling
Worldwide agreed, among other things, to forbear from making the September 15,
2000 interest payment due on its Senior Subordinated Notes and that it would
begin exploring various alternatives to restructure and reduce its long-term
debt. As part of the Amendment, the Lenders agreed to waive any default under
the Credit Agreement resulting from the failure to make the September 15, 2000
interest payment due on the Senior Subordinated Notes unless the Company's other
creditors commenced the exercise of remedies, which could include the
acceleration of the Company's debt obligations and an involuntary bankruptcy
filing. The Amendment further provided for the permanent termination of $100.0
million of the otherwise available working capital commitments under the Credit
Agreement. Moreover, the Amendment waived Bowling Worldwide's compliance with
the financial covenants in the Credit Agreement through December 31, 2000. The
Amendment also required that Bowling Worldwide deliver a preliminary plan
containing the principal terms of a proposal to restructure the Company's debt
to the Lenders. Bowling Worldwide submitted such a proposed restructuring plan
on September 30, 2000 and a majority of the Lenders indicated by October 15,
2000 that the plan was generally satisfactory in form and substance, subject to
further approval of any definitive plan.
Bowling Worldwide did not make the cash interest payment of approximately
$13.6 million on its Senior Subordinated Notes required on September 15, 2000
and the 30 day period to cure the non-payment of interest under the related
indenture expired. Under the indenture, the Trustee on its own or the holders of
25% or more of the outstanding principal amount of the Senior Subordinated Notes
have had the right, by written notice, since the expiration of the cure period,
to declare all amounts owed under the indenture immediately due and payable. If
the indebtedness represented by the Senior Subordinated Notes is accelerated,
such acceleration would result in a default under the Credit Agreement, the
Senior Subordinated Discount Notes, the Convertible Debentures and certain other
Company indebtedness. In such event, the Company would not then be able to meet
its accelerated payment obligations. Bowling Worldwide also failed to make the
required cash interest payment of approximately $13.6 million on the Senior
Subordinated Notes due on March 15, 2001. Bowling Worldwide did not make such
payment during the 30 day period to cure. As of April 15, 2001, neither Bowling
Worldwide nor AMF Bowling has received notice that any of its indebtedness has
been or will be accelerated.
Bowling Worldwide did not make a scheduled principal payment to the Lenders
of $12.8 million that was due on December 29, 2000. Bowling Worldwide did pay
$3.0 million of the $14.7 million of interest then due under the
18
Credit Agreement bank debt of December 29, 2000. The remainder of the $14.7
million of interest (at a non-default interest rate) due was paid on a weekly
schedule during the first quarter of 2001. In addition, the Lenders' waiver of
the financial covenants in the Credit Agreement expired on December 31, 2000. As
a result of the foregoing, Bowling Worldwide is in default under the Credit
Agreement.
Bowling Worldwide did not make a scheduled principal payment under the
Credit Agreement $12.8 million which was due on March 30, 2001 but did make a
$16.4 million interest payment under the Credit Agreement on March 30, 2001.
This payment represented interest at the non-default interest rate and was
approximately $2.8 million less than the interest would have been at the default
rate. As explained above, Bowling Worldwide is in default under the Credit
Agreement and the Senior Subordinated Notes and such defaults could result in
defaults being declared and the acceleration of the indebtedness under the
Credit Agreement, the Senior Subordinated Notes, the Senior Subordinated
Discount Notes, the Convertible Debentures and certain other indebtedness of the
Company. However, as of April 15, 2001, neither AMF Bowling nor Bowling
Worldwide has received notice that any of its indebtedness has been or will be
accelerated. The Company is also not aware that a creditor, including the
Lenders and the holders of Senior Subordinated Notes and the Senior Subordinated
Discount Notes (collectively, the "Subordinated Note Holders"), has taken
action, or notified the Company that it will take action, to enforce their
rights or remedies against the Company or its assets as a result of the defaults
described above.
Since January 2001, the Company has funded its day to day operating
expenses and requirements for capital expenditures from cash flow from
operations. During 2001, scheduled principal payments under the Credit Agreement
increase significantly and cash interest becomes payable on the Senior
Subordinated Discount Notes. Management anticipates that the Company will not
make such principal and interest payments.
During 2000, the NYSE delisted the Common Stock, the Senior Subordinated
Notes and Senior Subordinated Discount Notes. The NYSE's action was taken in
part due to the Company's restructuring and in part due to the fact that the
Common Stock traded below the NYSE's continued listing criteria relating to a
minimum share price. Since November 22, 2000, the Common Stock has traded in the
over-the-counter market under the symbol "AMBW."
In mid 2000, Bowling Worldwide retained financial and legal advisors to
assist it in evaluating its restructuring and refinancing alternatives. At the
time, management believed the possible alternatives included a consensual,
negotiated restructuring, a reorganization under Chapter 11 and/or other
possible methods for reducing the Company's long-term debt and improving its
capital structure. Any alternative selected would likely have a material adverse
effect on the ability of AMF Bowling's shareholders to recover their investment
in the Common Stock and on the ability of the Subordinated Notes Holders and the
holders of the Convertible Debentures and other Company indebtedness to receive
interest and principal payments due thereon.
Bowling Worldwide and its advisors have provided certain information to and
have held substantive discussions with the steering committees for the Lenders
and the Subordinated Notes Holders. The Lenders and the Subordinated Notes
Holders have each retained their own separate legal and financial advisors.
Management now believes that a Chapter 11 filing is the most likely and
efficient means to complete the debt restructuring. The Company and the steering
committees for the Lenders and the Subordinated Notes Holders are continuing
discussions regarding the debt restructuring. The Company believes that these
discussions are constructive and progress is being made. Accordingly, at this
time management has not made a recommendation to the Board with respect to a
Chapter 11 filing and the Board has not yet taken any action in this regard.
Bowling Worldwide has also begun discussions with the Lenders and the
Subordinated Notes Holders about a potential Chapter 11 filing as well as
business and legal issues related to such a filing in order to ensure an orderly
proceeding with minimal impact on the Company's operations, employees and
customers.
In order to facilitate a restructuring in a Chapter 11 proceeding, Bowling
Worldwide has received proposals for a DIP Facility. Although no assurances can
be given, Bowling Worldwide believes that it would have a commitment from the
Lenders for a DIP Facility at the time of filing for a reorganization under
Chapter 11. Management believes that the borrowing capacity under a DIP
Facility, in addition to available cash on hand of approximately $40.0 million
as of April 13, 2001, will be sufficient to meet the Company's current liquidity
and
19
capital expenditures requirements during the period when the Company would be
operating under Chapter 11, although no assurances can be given in this regard.
While it is diligently pursuing a financial restructuring, Bowling
Worldwide is unable to predict if it will be able to arrive at a restructuring
plan, acceptable to the Lenders and the Subordinated Notes Holders, before a
filing is made or during a Chapter 11 proceeding. Bowling Worldwide is unable to
predict whether it will be able to satisfactorily implement such a plan or
whether, in the interim, the Lenders and the Subordinated Notes Holders will
continue to forbear from exercising any or all of the remedies available to
them, including acceleration of the Company's indebtedness an involuntary
bankruptcy proceeding and, in the case of the Lenders, realization on collateral
for their indebtedness.
Because retention of key personnel and maintenance of employee morale is so
critical during a restructuring, in mid 2000, certain bonus, severance and
retention programs were approved. The programs extend to senior management,
bonus-eligible and stock option-eligible personnel, including all center
managers around the world. These retention programs are conditioned upon
continued employment to specific dates. In March 2001, after consultation with
its compensation advisor and financial advisor, the Board approved several
enhancements to the year 2001 incentive compensation plan designed to encourage
retention and motivate key personnel during the restructuring process.
Background
This discussion should be read in conjunction with the information
contained under "Item 6. Selected Financial Data" and in AMF Group Holdings'
Consolidated Financial Statements and the notes thereto included elsewhere
herein. See also "Note 1. Business Description - Organization and Restructuring"
in the Notes to the Consolidated Financial Statements.
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company's operations, certain portions of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss results of Bowling Centers and Bowling Products separately.
The results of operations of Bowling Centers, Bowling Products and the
consolidated group of companies are set forth below. The business segment
results presented below are before intersegment eliminations since the Company's
management believes that this provides a more accurate comparison of performance
by segment from year to year. The intersegment eliminations are not material.
Interest expense is presented on a gross basis. The comparative results of
Bowling Centers for 2000 versus 1999 reflect the closing of 14 centers, the sale
of 4 centers and the acquisition of 4 centers. The comparative results of
Bowling Centers for 1999 versus 1998 reflect the closing of 5 centers, the sale
of 2 centers and the acquisition of 1 center.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Company's financial position, including the default on its debt
and the continuing losses from operations, raise substantial doubt about the
Company's ability to continue as a going concern. The appropriateness of
reporting on the going concern basis is dependent upon, among other things, a
prompt restructuring, refinancing or Chapter 11 relief, future profitable
operations, and the ability to generate sufficient cash from operations and
financing sources to meet obligations. As a result of the Company's current
circumstances, however, such realization of assets and liquidation of
liabilities are uncertain. Further, a plan of reorganization could materially
affect the assets and liabilities reported in the accompanying consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability of the value of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary as a consequence of this uncertainty.
20
Performance by Business Segment
Bowling Centers
The Bowling Centers results shown below reflect both U.S. and international
bowling centers operations. To facilitate a meaningful comparison, the constant
center results discussed below reflect the results of 507 centers that had been
in operation one full fiscal year as of December 31, 1999. The discussion of new
center results reflect the results of 5 centers that were either purchased since
January 1, 1999 or had been in operation less than one full fiscal year as of
December 31, 1999. Bowling Centers derives its revenue from three principal
sources: (i) bowling, (ii) food and beverage and (iii) other sources, such as
shoe rental, amusement machines, billiards and pro shops. In 2000, bowling, food
and beverage and other revenue represented 58.0%, 27.5% and 14.5% of total
Bowling Centers revenue, respectively. In 1999, bowling, food and beverage and
other revenue represented 58.4%, 27.3% and 14.3% of total Bowling Centers
revenue, respectively.
Bowling Centers' EBITDA included charges of $12.0 million in 2000 primarily
related to the write-off of goodwill and fixed assets in the U.K. and increased
reserves in the U.S. for center closures and insurance. Bowling Centers' EBITDA
included charges of $6.6 million in 1999 primarily related to special charges
taken in 1999. See "Note 9. Restructuring Charges, Asset Impairment Charges and
Special Charges" in the Notes to Consolidated Financial Statements and
"--Consolidated--Restructuring Charges, Asset Impairment Charges and Special
Charges" for additional information on these charges.
For the year ended December 31,
(dollars in millions)
1998 (a) 1999 2000
----------- ------------ -------------
Bowling Centers (before intersegment eliminations):
Operating revenue $ 539.2 $ 585.7 $ 580.4
----------- ------------ -------------
Cost of goods sold 54.5 61.1 60.1
Bowling center operating expenses 341.0 374.5 388.0
Selling, general and administrative expenses 5.8 12.8 6.7
Restructuring and asset impairment charges - 8.3 2.6
Refinancing charges - - 0.8
Depreciation and amortization 97.4 109.4 111.7
----------- ------------ -------------
Operating income 40.5 $ 19.6 $ 10.5
=========== ============ =============
Selected Data:
Selected Data:
EBITDA $ 137.9 $ 137.3 $ 125.6
EBITDA margin 25.6% 23.4% 21.6%
Number of centers, end of period 545 539 525
Number of lanes, end of period 18,858 18,654 18,228
- ----------
(a) Contains reclassifications to conform to current year presentation.
2000 Compared to 1999. Bowling Centers operating revenue decreased $5.3
million, or 0.9%, U.S. bowling center revenue increased $5.7 million, or 1.2%,
and international bowling center revenue, substantially impacted by negative
trends in foreign currency exchange rates, decreased $11.0 million, or 8.8%. An
increase of $2.5 million was attributable to new centers, of which $2.4 million
was from U.S. centers, and $0.1 million was from international centers. Constant
center operating revenue increased $1.4 million, or 0.2%. U.S. constant center
operating revenue increased $9.7 million, or 2.2%, primarily as a result of
increases in open play revenue, and food and beverage and ancillary revenue
associated with open play traffic. International constant center revenue
21
decreased $8.3 million, or 6.9% almost entirely caused by the negative impact of
changes in foreign currency exchange rates. A decrease in operating revenue of
$9.2 million was primarily attributable to the closing of 12 U.S. centers and
two international centers and the sale of two international centers all in 2000.
Bowling Centers cost of goods sold decreased $1.0 million, or 1.6%.
Constant centers cost of goods sold decreased $0.5 million, or 0.8%. U.S.
constant centers cost of goods sold increased $0.3 million, or 0.7%, primarily
as a result of costs associated with the increase in food and beverage and
ancillary revenue discussed above. International constant centers cost of goods
sold decreased $0.8 million, or 6.7%. A decrease in cost of goods sold of $0.9
million was associated with the centers closed or sold in 2000. An increase of
$0.4 million was attributable to new centers primarily in the U.S.
Bowling Centers operating expenses increased $13.5 million, or 3.6%. An
increase of $2.0 million was attributable to new centers and an increase of
$15.9 million was attributable to constant centers. An increase of $3.2 million
was attributable to higher regional and district operating expenses resulting
from new field level positions that were added in 1999 and national advertising
campaigns. These increases were partially offset by a decrease of $7.6 million
attributable to centers closed or sold in 2000. As a percentage of revenue,
Bowling Centers operating expenses were 66.9% for 2000 compared with 63.9% for
1999. In the fourth quarter of 2000, Bowling Centers recorded charges totaling
$12.0 million to reflect: (i) the net present value of leases related to centers
scheduled to be closed ($2.8 million), (ii) the write down of U.K. property,
equipment and goodwill no longer in service ($6.2 million), (iii) the increase
in insurance claims experience that resulted from the enhancement of benefits to
U.S. bowling center employees and the occurrence of certain unusual claims ($2.2
million) and (iv) statutory audit adjustments to the French bowling centers
results ($0.8 million). Without these additional fourth quarter charges, Bowling
Centers operating expenses were $376.0 million, or 64.8% of its revenue.
Bowling Centers selling, general and administrative expenses decreased $6.1
million, or 47.7%. Constant centers selling, general and administrative expenses
were lower in 2000 by $6.0 million primarily attributable to charges recorded in
1999 related to center closures in the U.S. As a percentage of revenue, Bowling
Centers selling, general and administrative expenses were 1.2% for 2000 and 2.2%
for 1999.
Bowling Centers EBITDA decreased $11.7 million, or 8.5%. A decrease of $8.0
million in constant centers EBITDA primarily reflected the increase in charges
recorded in 2000 compared to 1999 and the decrease in operating revenue as
discussed above. Additionally, increased regional and district operating
expenses caused a decrease of $3.2 million, and a decrease of $0.9 million was
attributable to those centers that were closed or sold in 2000. These decreases
were partially offset by an increase of $0.3 million from new centers. EBITDA
margin in 2000 was 21.6% compared to a 23.4% margin in 1999.
1999 Compared to 1998. Bowling Centers operating revenue increased $46.5
million, or 8.6%. An increase of $40.9 million was attributable to new centers,
of which $31.6 million was from U.S. centers and $9.3 million was from
international centers. Constant centers revenue increased $10.6 million, or
2.3%. U.S. constant centers operating revenue increased $9.1 million, or 2.5%,
primarily as a result of an increase in open play revenue and food and beverage
and ancillary revenue associated with open play traffic. International constant
centers operating revenue increased $1.5 million, or 1.6%. The increase in new
and constant centers operating revenue was partially offset by a decrease in
operating revenue of $5.0 million, which was primarily attributable to the
closing of five U.S. centers and the sale of two international centers in 1999.
Cost of goods sold increased $6.6 million, or 12.1%. An increase of $4.7
million was attributable to new centers, of which $3.8 million was from U.S.
centers, and $0.9 million was from international centers. Constant centers cost
of goods sold increased $1.4 million, or 3.1%. U.S. constant centers cost of
goods sold increased $1.3 million, or 3.7%, primarily as a result of costs
associated with the increase in food and beverage and ancillary revenue
discussed above. International constant centers cost of goods sold increased
$0.1 million, or 1.0%. The overall increase in cost of goods sold was partially
offset by a decrease in cost of goods sold of $0.4 million associated with those
centers that were closed or sold in 1999.
Operating expenses increased $33.5 million, or 9.8%. An increase of $24.7
million was attributable to new centers and an increase of $13.7 million was
attributable to constant centers. A decrease of $0.4 million was attributable to
lower regional and district operating expenses and a decrease of $4.5 million
was attributable to those
22
centers that were closed or sold in 1999. As a percentage of revenue, Bowling
Centers operating expenses were 63.2% for 1998 compared with 63.9% for 1999.
An increase of $7.0 million, or 120.7%, in selling, general and
administrative expenses was primarily attributable to charges recorded in 1999
related to center closures and an increase in costs associated with growth
experienced in Australia and Europe as a result of acquisitions made in prior
years. As a percentage of its revenue, Bowling Centers selling, general and
administrative expenses were 1.1% for 1998 compared with 2.2% for 1999.
EBITDA decreased $0.6 million, or 0.4%. Increases of $11.5 million from new
centers and $0.4 million from lower regional and district operating expenses
were partially offset by decreases of $12.4 million, or 9.2%, from constant
centers and $0.1 million from those centers that were closed or sold in 1999.
EBITDA margin in 1999 was 23.4% compared to 25.6% in 1998. The lower EBITDA
margin in 1999 was primarily attributable to AMF's operating initiatives to
improve customer traffic and the charges discussed above.
Bowling Products
Bowling Products' EBITDA included charges of $26.5 million in 2000
primarily related to the write-off of inventory and accounts receivable,
including the effects of closing an international sales office and termination
of certain distribution agreements. Bowling Products' EBITDA included charges of
$19.7 million in 1999 primarily related to the write-off of accounts receivable
and inventory. See "Note 9. Restructuring Charges, Asset Impairment Charges and
Special Charges" in the Notes to Consolidated Financial Statements and
"--Consolidated--Restructuring Charges, Asset Impairment Charges and Special
Charges" for additional information on these charges.
For the year ended December 31,
(dollars in millions)
1998 1999 2000
------------- ------------- -------------
Bowling Products (before intersegment eliminations):
Operating revenue $ 212.5 $ 169.3 $ 151.3
Cost of goods sold 159.6 137.0 128.3
------------- ------------- -------------
Gross profit 52.9 32.3 23.0
Selling, general and administrative expenses 42.2 44.0 41.6
Restructuring and asset impairment charges - 8.2 2.3
Refinancing charges - - 0.2
Depreciation and amortization 22.5 23.6 24.8
------------- ------------- -------------
Operating loss $ (11.8) $ (43.5) $ (45.9)
============= ============= =============
Selected Data:
Gross profit margin 24.9% 19.1% 15.2%
EBITDA $ 10.7 $ (11.7) $ (18.6)
EBITDA margin 5.0% -6.9% -12.3%
New Center Packages sold 2,466 1,343 1,513
2000 Compared to 1999. Bowling Products operating revenue decreased $18.0
million, or 10.6%. This decline is composed of decreases of $8.6 million, or
16.3%, in NCP revenue, and $9.4 million, or 8.1%, in Modernization and Consumer
Products revenue. The absence of a strong market, such as those of Korea, Taiwan
and China in prior years, and increased competition in general continue
to adversely impact results. Additionally, sales to North American customers and
AMF bowling centers decreased. In Europe, NCP and modernization equipment sales
improved and more than offset a decrease in consumer product sales in that
region. During 2000, Bowling Products recorded NCP shipments of 1,513 units
compared to shipments of 1,343 units for 1999. See "Business--International
Operations."
23
Gross profit decreased $9.3 million, or 28.8%. Gross profit margin was
15.2% in 2000 and 19.1% in 1999. In 1999 and 2000, charges were recorded to
reflect a revaluation of inventory levels in the context of current market
conditions. An assessment of saleability, obsolescence and valuation resulted in
the write down of certain equipment and parts that, in management's view, had a
low likelihood of future marketability. See "--International Operations."
Bowling Products selling, general and administrative expenses decreased
$2.4 million, or 5.5%, compared with 1999 results. In the fourth quarter of
2000, Bowling Products recorded charges of $5.0 million reflecting write-offs of
bad debts that were impacted by decisions to exit certain distributor
arrangements or markets in South America and China, $5.3 million reflecting the
reconciliation of certain intercompany differences and other charges of $1.2
million. In 1999, $10.8 million of special charges were recorded. Savings of
approximately $3.1 million achieved through cost reductions in 2000 were
partially offset by the increase in charges discussed above.
Bowling Products EBITDA was $(18.6) million in 2000 compared with $(11.7)
million in 1999. The increase in negative EBITDA in 2000 reflects the increase
in charges recorded in 2000 compared to 1999 as well as lower revenue and
related gross profit in 2000 compared with 1999 results.
1999 Compared to 1998. Bowling Products operating revenue decreased $43.2
million, or 20.3%, due to a decrease of $37.9 million, or 41.9%, in NCP revenue,
and a decrease of $5.3 million, or 4.3%, in Modernization and Consumer Products
revenue. Economic difficulties in certain Asia Pacific markets and increased
competition in general continued to adversely impact results. During 1999,
Bowling Products recorded NCP shipments of 1,343 units compared to shipments of
2,466 units for 1998. The decrease in Modernization and Consumer Products
revenue was primarily due to decreased sales to Asia Pacific customers because
of continued adverse economic conditions for sale of bowling products and lower
U.S. sales of modernization equipment. See "--Seasonality and Market Development
Cycles" and "Business--International Operations."
Gross profit decreased by $20.6 million, or 38.9%. Gross profit margin was
24.9% in 1998 and 19.1% in 1999. Gross profit and gross profit margin declines
were primarily a result of lower levels of NCP shipments, lower pricing and
unabsorbed fixed overhead resulting from low production levels. See
"--International Operations."
Bowling Products selling, general and administrative expenses increased by
$1.8 million, or 4.3%, primarily as a result of certain charges recorded in 1999
in excess of the favorable impact of an ongoing cost reduction program in which
the Bowling Products organization has been streamlined. Such cost reduction has
served to partially offset the impact of lower sales volume and unit pricing on
EBITDA.
Bowling Products EBITDA decreased $22.4 million in 1999 as a result of the
lower revenue and gross profit and special charges that exceeded the effect of
cost reductions.
Consolidated Items
Refinancing Charges
In the second half of 2000, Bowling Worldwide recorded $6.5 million of
refinancing charges related to the restructuring of its long-term debt. The
charges primarily include amounts paid to legal and financial advisors
representing the Company, the bank group, and bondholders.
Restructuring Charges, Asset Impairment Charges and Special Charges
2000. In the fourth quarter of 2000, the Company recorded restructuring
charges of approximately $3.4 million related to a plan to close the Bowling
Products Korean operations and sales office. The restructuring charges related
primarily to employee termination benefits, asset write-offs and contract
cancellations. The Company also recorded asset impairment charges of $1.6
million representing the difference between fair market value and carrying value
of impaired assets of the five U.S. bowling centers scheduled to be closed in
2001.
24
1999. In 1999, the Company recorded restructuring charges of approximately
$8.5 million that were related primarily to a plan to reorganize and downsize
the Bowling Products business in response to market weakness in the Asia Pacific
region and increased competition which has negatively and materially impacted
NCP sales and profitability. The restructuring plan was developed in conjunction
with a strategic business assessment performed by Bain & Co. and was designed to
reduce the overall volatility of the Bowling Products business. The
restructuring charges relate primarily to employee termination benefits, asset
write-offs and contract cancellations.
In 1999, the Company recorded asset impairment charges of $8.1 million
representing the difference between fair market value and carrying value of
impaired assets. The asset impairment charges relate to under-performing bowling
center locations that under an approved plan were closed in the first half of
2000.
The strategic assessment by Bain & Co. discussed above led to programs
designed to improve product line profitability and quality in the Company. This
assessment was a catalyst to the Company's recording certain charges. These
charges, along with additional reserves (collectively, the "Special Charges")
recorded by the Company, totaled $26.5 million. The Special Charges were
non-cash, related primarily to receivables and inventory write-offs and were
included within selling, general and administrative expenses and cost of goods
sold.
See "Note 9. Refinancing Costs, Restructuring Charges, Asset Impairment
Charges and Special Charges" in the Notes to Consolidated Financial Statements
for additional discussion of these charges.
Depreciation and Amortization
For 2000, depreciation and amortization increased by $3.3 million, or 2.5%,
compared with 1999, and for 1999, depreciation and amortization increased by
$12.4 million, or 10.3%, compared with 1998. The increases were primarily
attributable to incremental depreciation expense as a result of capital
expenditures.
Interest Expense
Gross interest expense increased by $10.2 million, or 9.2%, in 2000
compared with 1999. Interest under the Credit Agreement increased as the impact
of higher average borrowing rates more than offset the effect of a decrease in
certain average amounts outstanding. See "Note 8. Long-Term Debt and 1999
Recapitalization Plan" in the Notes to Consolidated Financial Statements,
"--Liquidity" and "--Capital Resources" for further discussion of indebtedness
under the Credit Agreement. Cash interest expense for 2000 totaled $89.0 million
and includes $13.6 million not paid on the Senior Subordinated Notes on
September 15, 2000. Non-cash interest on the Senior Subordinated Discount Notes
amortization totaled $30.4 million.
Gross interest expense increased by $9.4 million, or 9.2%, in 1999 compared
with 1998. Interest under the Credit Agreement increased as the impact of higher
average borrowing rates more than offset the effect of a decrease in certain
average amounts outstanding. See "Note 8. Long-Term Debt and 1999
Recapitalization Plan" in the Notes to Consolidated Financial Statements,
"--Liquidity" and "--Capital Resources" for further discussion of the Credit
Agreement. Cash interest expense for 1999 totaled $81.8 million, while non-cash
bond interest amortization totaled $26.9 million.
Net Loss
Net loss in 2000 totaled $181.5 million, compared with a net loss of $201.0
million in 1999, a decrease of $19.5 million. In 2000, the Company recorded
$39.2 million in additional charges related to the write-down of inventories,
accounts receivable, and other assets and an increase in reserves, $6.5 million
in refinancing charges, and $5.0 million in restructuring and asset impairment.
In 1999, the Company recorded $43.1 million for restructuring charges, asset
impairment charges and Special Charges. The Company recorded $0.5 million in
equity in loss of joint ventures in 2000, compared with equity in loss of joint
ventures of $18.6 million in 1999. The higher amount in 1999 was primarily
attributable to the acceleration of the amortization schedule for the excess of
the Company's investment over its equity in its Brazilian joint venture's net
assets. The sole bowling center of the Company's joint venture in Asia was sold
on November 30, 2000. Additionally, in December 2000, the Company purchased the
remaining 50% interest in its Brazilian joint venture. See "Note 15. Joint
Ventures" for a description of these transactions. The 2000 provision for income
tax was $2.3 million compared with $27.6 million in 1999 reflecting
25
the reserve for net tax benefits recorded in 1999. Depreciation and amortization
expense increased $3.3 million, interest expense increased $10.2 million and
other expense decreased $4.6 million.
Net loss in 1999 totaled $201.0 million, compared with a net loss of $106.8
million in 1998. The increased loss of $94.2 million was primarily a result of
restructuring charges, asset impairment charges and Special Charges of $8.5
million, $8.1 million and $26.5 million, respectively, an increase in the tax
provision of $20.3 million reflecting an increase in the reserve for net tax
benefits, the increase in depreciation expense of $12.4 million and the increase
in interest expense of $9.4 million. The Company recorded $18.6 million in
equity in loss of joint ventures in 1999, compared with equity in loss of joint
ventures of $8.2 million in 1998. The increase was primarily attributable to the
acceleration of the amortization schedule for the excess of the Company's
investment over its equity in its Brazilian joint venture's net assets.
Income Taxes
As of December 31, 2000, the Company had net operating losses of
approximately $408.8 million and foreign tax credits of $11.5 million that will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company has recorded a valuation reserve as of
December 31, 2000 for $194.2 million related to net operating losses, foreign
tax credits and other deferred tax assets that the Company may not utilize prior
to their expirations. The tax provision recorded for 1999 reflects an increase
in the valuation allowance and certain international taxes.
Liquidity
The Company's principal source of liquidity is cash provided by operations.
Bowling Worldwide is in default under the Credit Agreement and the Senior
Subordinated Notes and such defaults could result in the acceleration of the
indebtedness under the Credit Agreement, Senior Subordinated Notes, Senior
Subordinated Discount Notes and certain other indebtedness of the Company. As a
result of such defaults, the Lenders, Subordinated Notes Holders and other
creditors could exercise rights and remedies against the Company or its assets,
including filing an involuntary bankruptcy proceeding and, in the case of the
Lenders, realization on collateral for the indebtedness. Until the restructuring
is completed, the adequacy of the Company's liquidity is and will remain
uncertain.
2000 Compared to 1999. Working capital on December 31, 2000 was $(1,107.1)
million compared with $7.1 million as of December 31, 1999, a decrease of
$1,114.2 million. In 2000, the entire balance of long-term debt of $1,136.6
million was classified as current and represents a $1,102.3 million decrease in
working capital. Additional decreases in working capital were attributable to a
decrease of $20.1 million in accounts receivable balances primarily due to lower
sales levels, improved credit collections and charges recorded in the fourth
quarter of 2000, a decrease of $1.7 million in deferred taxes and other current
assets, and an increase of $20.6 million in accounts payable and accrued
expenses that primarily reflect higher accrued interest. These decreases in
working capital were partially offset by increases in working capital
attributable to an increase of $26.2 million in cash, an increase of $2.2
million in inventory and a decrease of $2.1 million in income taxes payable.
Net cash flows provided by operating activities were $29.0 million for 2000
compared to net cash flows provided of $40.4 million for 1999, a decrease of
$11.4 million. A decrease of $18.1 million was attributable to a decrease in the
equity in loss of joint ventures, a decrease of $15.2 million was attributable
to higher Bowling Products inventory balances, loss on impairment of assets
decreased $6.6 million, a decrease of $4.1 million was associated with loss on
the sale of property and equipment, and a net decrease of $2.9 million was
attributable to changes in other operating activities. These decreases were
partially offset by an increase of $19.8 million attributable to lower levels of
accounts receivable, an increase of $19.5 million was attributable to the net
loss of $181.5 million recorded in 2000 compared with a net loss of $201.0
million in 1999, an increase of $9.8 million was caused by increased levels of
accounts payable and accrued expenses, bond amortization increased $3.5 million,
and depreciation and amortization increased $3.4 million. Additionally, in 1999,
the Company recorded a valuation allowance of $19.5 million against its net
deferred tax assets.
26
Net cash flows used in investing activities were $65.6 million for 2000
compared with net cash flows used of $51.5 million for 1999, an increase of
$14.1 million. Bowling Center acquisition spending increased by $7.1 million and
purchases of property and equipment increased by $14.4 million in 2000 compared
with 1999. In 2000, the Company purchased four centers (excluding the 13 joint
venture centers acquired in December 2000) compared with one center in 1999.
These increases were partially offset by an increase in proceeds from the sale
of property and equipment of $7.4 million in 2000 compared with 1999. See "Note
14. Acquisitions" and "Note 15. Joint Ventures" in the Notes to Consolidated
Financial Statements and "--Capital Expenditures" for additional discussion of
these investing activities.
Net cash provided by financing activities was $64.3 million for 2000
compared to the net cash provided of $9.1 million for 1999, an increase of $55.2
million. Proceeds from long-term debt, all borrowings under the Credit
Agreement, increased $6.0 million. Payments on long-term debt decreased $77.0
million. In accordance with the terms of the Credit Agreement, scheduled
principal payments in 2000 were $1.9 million higher than payments made in 1999.
Bowling Worldwide did not pay $12.8 million in principal due December 29, 2000.
Additionally, in 1999, $74.0 million was paid against amounts outstanding under
the Bank Facility. In 2000, AMF Bowling contributed $7.0 million as capital to
Bowling Worldwide in accordance with the cure provisions of the Credit
Agreement. In 1999, $34.7 million was provided by additional capital
contributions from AMF Bowling from part of the net proceeds of a rights
offering by AMF Bowling. See "Note 8. Long-Term Debt and 1999 Recapitalization
Plan", and "Note 14. Acquisitions" in the Notes to Consolidated Financial
Statements and "--Capital Resources."
As a result of the aforementioned, cash increased by $26.2 million in 2000
compared with a decrease of $1.3 million in 1999.
1999 Compared to 1998. Net cash flows provided by operating activities were
$40.4 million for 1999 compared with net cash flows provided of $7.8 million for
1998, an increase of $32.6 million. A decrease of $94.2 million was attributable
to the net loss of $201.0 million recorded in 1999 compared to a net loss of
$106.8 million in 1999; a decrease of $6.4 million was attributable to loss on
the sale of property and equipment, net and a decrease of $2.9 million was
attributable to the change in income taxes payable. These decreases were offset
by an increase of $20.7 million attributable to a decrease in the level of
deferred tax assets, an increase of $21.6 million attributable to lower levels
of accounts receivable, an increase of $12.4 million in depreciation and
amortization, loss on impairment of assets of $8.1 million attributable to the
closure of certain bowling centers, an increase of $18.0 million attributable to
lower inventory balances resulting from lower Bowling Products sales volumes in
1999, increased bond amortization of $2.9 million, an increase of $19.5 million
caused by increased levels of accounts payable and accrued expenses, an increase
of $22.1 million attributable to a decrease in other assets primarily related to
decreases in deposits and other assets, an increase of $0.5 million attributable
to changes in other operating activities and an increase of $10.4 million in
equity in loss of joint ventures.
Net cash flows used in investing activities were $51.5 million for 1999
compared with net cash flows used of $242.0 million for 1998, a decrease of
$190.5 million. Bowling Center acquisition spending decreased by $172.1 million
and purchases of property and equipment decreased by $14.6 million in 1999
compared with 1998. In 1999, the Company purchased one center compared with 83
centers in 1998. There were no investments in or advances to joint ventures in
1999 compared with $5.6 million in 1998. Proceeds from the sale of property and
equipment decreased $1.8 million in 1999 compared with 1998. See "Note 14.
Acquisitions" in the Notes to Consolidated Financial Statements and "--Capital
Expenditures" for additional discussion of these investing activities.
Net cash provided by financing activities was $9.1 million for 1999
compared with $217.4 million (net cash) for 1998, a decrease of $208.3 million.
Proceeds from long term debt decreased $183.5 million. Borrowings under the
Credit Agreement decreased $183.5 million as a result of the curtailment of the
pace of acquisitions. Payments on long-term debt decreased $195.6 million. In
1998, $249.6 million of the proceeds from the issuance of AMF Bowling's
Convertible Debentures were used to pay down the Bank Facility under the Credit
Agreement. In accordance with the terms of the Credit Agreement, scheduled
principal payments in 1999 were $5.0 million higher than payments made in 1998.
Additionally, in 1999, $74.0 million was paid against amounts outstanding under
the Bank Facility. In 1999, $34.7 million was provided by additional capital
contributions from AMF Bowling from part of the net proceeds of a rights
offering by AMF Bowling. In the year ended December 31, 1998, $255.6 million was
provided by additional capital contributions from AMF Bowling attributable to
the issuance of the Debentures. See
27
"Note 8. Long-Term Debt and 1999 Recapitalization Plan," and "Note 14.
Acquisitions" in the Notes to Consolidated Financial Statements and "--Capital
Resources."
As a result of the aforementioned, cash decreased by $1.3 million in 1999
compared with a decrease of $13.9 million in 1998.
Capital Resources
Bowling Worldwide is in default under the Credit Agreement and the Senior
Subordinated Notes and such defaults could result in the acceleration of the
indebtedness under the Credit Agreement, Senior Subordinated Notes, Senior
Subordinated Discount Notes and certain other indebtedness of the Company. As a
result of such defaults, the Lenders, Subordinated Notes Holders and other
creditors could exercise rights and remedies against the Company or its assets,
including filing an involuntary bankruptcy petition and, in the case of the
Lenders, realization on the collateral for the indebtedness. Until the
restructuring is completed, the adequacy of the Company's capital resources is
and will remain uncertain.
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, 2000, the Company's debt consisted of $614.1 million of borrowings
under the Credit Agreement and a mortgage in principal amount of $2.0 million
(collectively, the "Senior Debt"), $250.0 million of Senior Subordinated Notes
and $270.5 million of Senior Subordinated Discount Notes. At December 31, 2000,
the Company's Senior Debt consisted of $365.1 million of term loans, $249.0
million outstanding under the Bank Facility and $2.0 million represented by one
mortgage note.
During 2000, the Company funded its cash needs through cash flows from
operations, cash balances and the Bank Facility. Bowling Worldwide incurred cash
interest expense of $89.0 million in 2000, including $13.6 million not paid on
the Senior Subordinated Notes on September 15, 2000 and representing 98.3% of
EBITDA of $90.5 million for the year. Bowling Worldwide incurred cash interest
expense of $81.8 million in 1999, representing 74.0% of EBITDA of $110.6 million
for the year. Bowling Worldwide incurred cash interest expense of $76.5 million
in 1998, representing 56.1% of EBITDA of $136.4 million for the year.
As of December 31, 2000, the Company had no available borrowing capacity
under the Credit Agreement with $249.0 million outstanding and $9.7 million of
standby and documentary letters of credit. See "Note 1. Business
Description--Organization and Restructuring" and "Note 8. Long-Term Debt and
1999 Recapitalization Plan" in the Notes to Consolidated Financial Statements.
Capital Expenditures
Bowling Worldwide historically funded its capital expenditures and
construction and acquisition of new centers with internally-generated cash, the
Bank Facility and issuances of Common Stock and Convertible Debentures by AMF
Bowling. Bowling Worldwide is in default under the Credit Agreement and the
Senior Subordinated Notes and such defaults could result in the acceleration of
the indebtedness under the Credit Agreement, Senior Subordinated Notes, Senior
Subordinated Discount Notes and certain other indebtedness of the Company. As a
result of such defaults, the Lenders, Subordinated Notes Holders and other
creditors could exercise rights and remedies against the Company or its assets,
including filings on involuntary bankruptcy petition and, in the case of the
Lenders, realization on the collateral for the indebtedness. Until the
restructuring is completed, the Company's ability to fund capital expenditures
is and will remain uncertain.
The Company's capital expenditures were $66.5 million in 2000 compared with
$52.1 million in 1999, an increase of $14.4 million. Bowling Centers maintenance
and modernization expenditures increased $12.8 million. Bowling Products
expenditures increased $3.4 million. Company-wide information systems
expenditures decreased $6.9 million. Investments in Xtreme(TM) bowling equipment
at various AMF bowling centers increased by $5.7 million. Capital expenditures
for new centers decreased $0.6 million.
The Company's capital expenditures were $52.1 million in 1999 compared with
$66.6 million in 1998, a decrease of $14.5 million. Bowling Centers maintenance
and modernization expenditures decreased $2.2 million. Bowling Products
expenditures decreased $2.6 million. Company-wide information systems
expenditures increased
28
$3.0 million. Investments in Xtreme(TM) bowling equipment at various AMF bowling
centers decreased by $0.1 million. Capital expenditures for new centers were
$9.5 million higher in 1998 due to the construction of a Michael Jordan Golf
Center in 1998 and a decrease in center acquisitions during 1999. In 1999, other
expenditures decreased $3.1 million.
Seasonality and Market Development Cycles
The following table sets forth AMF's U.S. constant center revenue for the
four quarters of 2000:
Quarter Ending (dollars in millions)
--------------------------------------------------------------------------------
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- ------------- ------------------ -----------------
Total Revenue $ 139.8 $ 97.1 $ 97.9 $ 125.6
% of Total 30.4% 21.1% 21.3% 27.2%
The financial performance of Bowling Centers is seasonal. Cash flows
typically peak in the winter and reach their lows in the summer. While the
geographic diversity of Bowling Centers has helped reduce this seasonality in
the past, the increase in the number of U.S. centers owned by the Company
resulting from acquisitions has accentuated the seasonality of that business.
Modernization and Consumer Products sales also display seasonality. The
beginning of league play in the fall of each year drives the U.S. market, which
is the largest market for Modernization and Consumer Products. While operators
purchase consumer products throughout the year, they often place larger orders
during the summer in preparation for the start of league play in the fall.
Summer is also generally the peak period for installation of modernization
equipment. Operators typically sign purchase orders for modernization equipment
during the first four months of the year after they receive winter league
revenue indications. Equipment is then shipped and installed during the summer
when leagues are generally less active. However, sales of some modernization
equipment, such as automatic scoring and synthetic lanes, are less predictable
and fluctuate from year to year because of the longer life cycle of these major
products.
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, currency exchange
rate fluctuations, economic and political fluctuations and destabilization,
other disruption of markets, restrictive laws, tariffs and other actions by
foreign governments (such as restrictions on transfer of funds, import and
export duties and quotas, foreign customs, tariffs and value added taxes and
unexpected changes in regulatory environments), difficulty in obtaining
distribution and support for products, the risk of nationalization, the laws and
policies of the United States affecting trade, international investment and
loans, and foreign tax law changes.
The Company has a history of operating in a number of international
markets, in some cases, for over 30 years. As in the case of other U.S.-based
manufacturers with export sales, local currency devaluation increases the cost
of the Company's bowling equipment in that market. As a result, a strengthening
U.S. dollar exchange rate may adversely impact sales volume and profit margins
during such periods.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. Revenue and EBITDA of international
bowling centers represented 15.9% and 25.4% of consolidated revenue and EBITDA,
respectively, in 2000. Revenue and EBITDA of international bowling centers
represented 17.0% and 30.6% of consolidated revenue and EBITDA, respectively, in
1999.
The demand for NCPs remains below the peak levels achieved during 1997.
Management believes this is the result of continued economic difficulties in the
Asia Pacific region, as well as the limited availability of construction
financing for customers and the lack of a significant emerging market to replace
China, Korea and Taiwan.
29
In an initial response to these soft market conditions as well as the
strengthened enforcement of import restrictions in China discussed below,
Bowling Products entered into three-year joint distribution agreements with
Zhonglu in June 1999. Under the terms of these agreements, Zhonglu became the
exclusive distributor of AMF products in China and Bowling Products became the
exclusive distributor of Zhonglu's bowling products and parts outside of China.
In 1999 and 2000, Bowling Products purchased component parts from Zhonglu as
part of its long-term strategy to reduce manufacturing costs. However, sales of
both AMF products in China and Zhonglu products outside China were slower than
anticipated. In September 2000, the Company and Zhonglu amended the distribution
agreements to replace the exclusive sales relationship with a non-exclusive
relationship. The Company continues to source some component parts from Zhonglu
under the revised agreements, but both parties are pursuing alternative sales
channels. Management believes that in January 2000, Zhonglu reached an agreement
with Brunswick for Brunswick to become the primary global sales organization for
Zhonglu products. Management is evaluating how this new relationship impacts the
Company's purchase of component parts from Zhonglu.
China has strengthened enforcement of its import restrictions by requiring
the payment of full customs duties and value-added taxes on the importation of
new and used capital goods. The Chinese government also prohibits importation of
used capital equipment without permits. Permits for the importation of used
bowling equipment are very difficult to obtain. Local Chinese companies,
however, are not subject to the same restrictions. For example, in addition to
being a distributor of AMF products, Zhonglu produces locally and sells bowling
equipment that is not subject to the customs duties or permit requirements that
affect the Company's imported equipment. Zhonglu has experienced significant
acceptance by local customers. Management believes that these import
restrictions will continue for the foreseeable future as a barrier against the
sale of the Company's products. Management is presently reviewing its
alternatives for selling bowling products in China.
NCP unit sales to China, Japan and other countries in the Asia Pacific
region represented 35.4% of total NCP unit sales in 2000 compared with 43.0% in
1999. Economic difficulties in the Asia Pacific region and increased competition
in general have both affected sales of NCPs. NCP sales totaled $44.0 million in
2000, representing a decrease of 16.3% from 1999. NCP shipments were 1,513 units
for 2000, representing an increase of 12.7% from 1999. NCP sales totaled $52.6
million in 1999, representing a decrease of 41.9% from 1998. NCP shipments were
1,343 units for 1999, representing a decrease of 45.5% from 1998. See
"--Seasonality and Market Development Cycles."
Impact of Inflation
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have a
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow. There
was no significant impact on the Company's operations as a result of inflation
during 2000, 1999 and 1998.
Recent Accounting Pronouncements
Effective for the quarter ended March 31, 2001, the Company is required to
adopt Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities." The Company does not expect that
adoption of this standard will have a material impact on the Company's financial
position or results of operations.
ITEM 7A. MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could impact its results of operations
and financial condition. The Company manages its exposure to these risks through
its normal operating and financing activities and through the use of interest
rate cap agreements with respect to interest rates. There were no other material
derivative instrument transactions during any of the periods presented.
The Company has generally accepted the exposure to exchange rate movements
relative to its investment in foreign operations without using derivative
financial instruments to manage this risk. However, as in the case of
30
other U.S.-based manufacturers with export sales, local currency devaluation
increases the cost of the Company's bowling equipment in that market. As a
result, a strengthening U.S. dollar exchange rate may adversely impact sales
volume and profit margins during such periods. Foreign currency exchange rates
also impact the translation of operating results from international bowling
centers. Revenue and EBITDA of international bowling centers represented 15.9%
and 25.4% of consolidated revenue and EBITDA, respectively, in 2000. Revenue and
EBITDA of international bowling centers represented 17.0% and 30.6% of
consolidated revenue and EBITDA, respectively, in 1999.
The Company uses interest rate cap agreements to mitigate the effect of
changes in interest rates on variable rate borrowings under its Credit
Agreement. While the Company is exposed to credit risk in the event of
non-performance by the counterparty to interest rate swap agreements, in all
cases such counterparty is a highly-rated financial institution and the Company
does not anticipate non-performance. The Company does not hold or issue
derivative financial instruments for trading purposes. The following table
provides information about the Company's fixed and variable-rate debt, weighted
average interest rates and respective maturity dates (dollar amount in
millions).
Weighted Weighted
Average Variable Average
Fixed Interest Rate Interest
Maturity Rate Debt Rate Debt Rate(a)
--------- ----------- ---------- ---------- --------------
2001 (b) $ 522.5 11.58% $ 614.1 14.20 %
----------- ----------
Total $ 522.5 $ 614.1
=========== ==========
-------------------------------------
(a) The weighted average interest rate is calculated using the default
rates of interest that increases the original weighted average interest
rate by 2.0%
(b) As a result of Bowling Worldwide's defaults under the Senior
Subordinated Notes and the Credit Agreement, all long-term debt of the
Company has been classified as currently due.
During March 2000 and September 2000, Bowling Worldwide entered into two
interest rate cap agreements with Goldman Sachs Credit Partners, L.P. (the
"Counterparty") to reduce the interest rate risk of certain amounts borrowed
under its Credit Agreement. The table below summarizes the interest rate cap
agreements at December 31, 2000:
Notional
Amount
Expiration Date (in millions) Cap Rate (a)
--------------------- --------------- --------------
April 1, 2001 $ 200.0 7.7800 %
October 2, 2001 15.0 7.5000
-------------------------------------
(a) The cap rate is the 3 month U.S. Dollar-London Interbank Offer Rate
("USD-LIBOR") quoted by the Counterparty.
Bowling Worldwide paid a fixed fee of $160,000 and $7,000, respectively,
for the two interest rate caps. Bowling Worldwide will receive quarterly
payments from the Counterparty if the quoted 3 month USD-LIBOR on the quarterly
floating rate reset dates is above the respective cap rates.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
----
Financial Statements
Report of Independent Public Accountants................................................................ 33
Consolidated Balance Sheets as of December 31, 2000 and 1999............................................ 34
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998.............. 35
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998.............. 36
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and
1998................................................................................................. 37
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2000, 1999 and
1998................................................................................................. 38
Notes to Consolidated Financial Statements.............................................................. 39
Selected Quarterly Financial Data (unaudited)........................................................... 74
Financial Statement Schedules
Report of Independent Public Accountants on Schedule I.................................................. 95
Schedule I--Condensed Financial Information of AMF Group Holdings Inc................................... 96
32
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, 2000
and 1999, and the related consolidated statements of operations, cash flows,
stockholders' equity and comprehensive loss for each of the three years in the
period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in default under its Credit Agreement and
Senior Subordinated Notes and currently expects that a restructuring will be
made through a reorganization under Chapter 11 of the U.S. Bankruptcy Code,
which raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
ARTHUR ANDERSEN LLP
Richmond, Virginia
April 15, 2001
33
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of December 31,
------------------------------
2000 1999
------------- ------------
Assets
------
Current assets:
Cash and cash equivalents $ 46,759 $ 20,515
Accounts and notes receivable, net of allowance for doubtful
accounts of $9,608 and $9,531, respectively 43,070 63,175
Inventories 55,697 53,499
Other current assets 12,789 14,451
------------- ------------
Total current assets 158,315 151,640
Property and equipment, net 755,588 806,425
Other assets 66,331 82,199
Goodwill, net 746,050 765,092
------------- ------------
Total assets $ 1,726,284 $ 1,805,356
============= ============
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Accounts payable $ 26,215 $ 36,481
Accrued expenses 101,383 70,441
Income taxes payable 1,260 3,377
Current portion of long-term debt 1,136,558 34,250
------------- ------------
Total current liabilities 1,265,416 144,549
Long-term debt, less current portion - 1,014,352
Other long-term liabilities 6,963 4,804
------------- ------------
Total liabilities 1,272,379 1,163,705
------------- ------------
Commitments and contingencies
Stockholder's equity:
Common stock (par value $.01 per share, 100 shares authorized,
issued and outstanding) - -
Paid-in capital 1,047,529 1,040,529
Retained deficit (565,030) (383,554)
Accumulated other comprehensive loss (28,594) (15,324)
------------- ------------
Total stockholder's equity 453,905 641,651
------------- ------------
Total liabilities and stockholder's equity $ 1,726,284 $ 1,805,356
============= ============
The accompanying notes are an integral part of these consolidated
balance sheets.
34
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2000 1999 1998
------------- ------------- -------------
Operating revenue $ 715,001 $ 732,752 $ 736,373
------------- ------------- -------------
Operating expenses:
Cost of goods sold 173,098 177,204 202,224
Bowling center operating expenses 386,944 373,434 333,965
Selling, general, and administrative expenses 64,461 71,561 63,769
Restructuring and asset impairment charges 5,046 16,658 -
Refinancing charges, primarily legal and
advisory services 6,539 - -
Depreciation and amortization 136,001 132,647 120,296
------------- ------------- -------------
Total operating expenses 772,089 771,504 720,254
------------- ------------- -------------
Operating income (loss) (57,088) (38,752) 16,119
Nonoperating expenses (income):
Interest expense 121,499 111,237 101,930
Other expenses, net 1,623 6,640 7,326
Interest income (1,514) (1,889) (1,811)
------------- ------------- -------------
Total nonoperating expenses 121,608 115,988 107,445
------------- ------------- -------------
Loss before income taxes (178,696) (154,740) (91,326)
Provision for income taxes 2,256 27,625 7,294
------------- ------------- -------------
Net loss before equity in loss of joint
ventures (180,952) (182,365) (98,620)
Equity in loss of joint ventures (524) (18,648) (8,207)
------------- ------------- -------------
Net loss $ (181,476) $ (201,013) $ (106,827)
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
35
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (181,476) $ (201,013) $ (106,827)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 136,001 132,647 120,296
Equity in loss of joint ventures 524 18,648 8,207
Deferred income taxes - 20,467 (243)
Amortization of bond discount 30,352 26,874 23,965
(Gain) loss on the sale of property and equipment, net (1,601) 2,561 8,948
Impairment of assets 1,559 8,118 -
Changes in assets and liabilities:
Accounts and notes receivable, net 31,273 11,403 (10,153)
Inventories (4,312) 10,912 (7,069)
Other assets 1,698 2,442 (19,684)
Accounts payable and accrued expenses 19,892 10,115 (9,381)
Income taxes payable (1,738) (3,141) (214)
Other long-term liabilities (3,158) 377 (73)
------------ ------------ ------------
Net cash provided by operating activities 29,014 40,410 7,772
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (8,477) (1,414) (173,492)
Investments in and advances to joint ventures - - (5,643)
Purchases of property and equipment (66,545) (52,087) (66,639)
Proceeds from the sale of property and equipment 9,400 2,028 3,811
------------ ------------ ------------
Net cash used in investing activities (65,622) (51,473) (241,963)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 87,000 81,000 264,500
Payment on long-term debt (29,407) (106,373) (301,985)
Payments of noncompete obligations (307) (289) (677)
Capital contributions from AMF Bowling 7,000 34,731 255,587
------------ ------------ ------------
Net cash provided by financing activities 64,286 9,069 217,425
------------ ------------ ------------
Effect of exchange rates on cash (1,434) 662 2,823
------------ ------------ ------------
Net increase (decrease) in cash 26,244 (1,332) (13,943)
Cash and cash equivalents at beginning of period 20,515 21,847 35,790
------------ ------------ ------------
Cash and cash equivalents at end of period $ 46,759 $ 20,515 $ 21,847
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
36
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
Foreign
Currency Total
Common Paid-in Retained Translation Stockholder's
Stock Capital Deficit Adjustment Equity
---------------- ---------------- ---------------- ---------------- ----------------
Balance December 31, 1997 $ - $ 749,149 $ (75,714) $ (19,573) $ 653,862
---------------- ---------------- ---------------- ---------------- ----------------
Capital contribution by stockholder - 256,649 - - 256,649
Net loss - - (106,827) - (106,827)
Foreign currency translation adjustment - - - 248 248
---------------- ---------------- ---------------- ---------------- ----------------
Balance December 31, 1998 - 1,005,798 (182,541) (19,325) 803,932
---------------- ---------------- ---------------- ---------------- ----------------
Capital contribution by stockholder - 34,731 - - 34,731
Net loss - - (201,013) - (201,013)
Foreign currency translation adjustment - - - 4,001 4,001
---------------- ---------------- ---------------- ---------------- ----------------
Balance December 31, 1999 - 1,040,529 (383,554) (15,324) 641,651
---------------- ---------------- ---------------- ---------------- ----------------
Capital contribution by stockholder - 7,000 - - 7,000
Net loss - - (181,476) - (181,476)
Foreign currency translation adjustment - - - (13,270) (13,270)
---------------- ---------------- ---------------- ---------------- ----------------
Balance December 31, 2000 $ - $ 1,047,529 $ (565,030) $ (28,594) $ 453,905
================ ================ ================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
37
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss $ (181,476) $ (201,013) $ (106,827)
Foreign currency translation adjustment (13,270) 4,001 248
------------ ------------ ------------
Total comprehensive loss $ (194,746) $ (197,012) $ (106,579)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
38
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS DESCRIPTION - ORGANIZATION AND RESTRUCTURING
Organization
AMF Bowling Worldwide, Inc. ("Bowling Worldwide") and its subsidiaries
(collectively, the "Company" or "AMF") are principally engaged in two business
segments: (i) the ownership or operation of bowling centers, consisting of 408
U.S. bowling centers and 117 international bowling centers ("Bowling Centers"),
as of December 31, 2000, and (ii) the manufacture and sale of bowling equipment
such as automatic pinspotters, automatic scoring equipment, bowling pins, lanes,
ball returns, certain spare parts, and the resale of allied products such as
bowling balls, bags, shoes, and certain other spare parts ("Bowling Products").
The principal markets for bowling equipment are U.S. and international bowling
center operators. AMF also manufactures and sells the PlayMaster, Highland and
Renaissance brands of billiards tables, and owns the Michael Jordan Golf
Company, which operates two golf practice ranges.
Bowling Worldwide is a wholly owned, direct subsidiary of AMF Group
Holdings Inc. ("AMF Group Holdings"). AMF Group Holdings is a wholly owned,
direct subsidiary of AMF Bowling, Inc. ("AMF Bowling"). AMF Bowling, AMF Group
Holdings and Bowling Worldwide are Delaware corporations. AMF Bowling and AMF
Group Holdings are holding companies. The principal assets in each are comprised
of investments in subsidiaries. An investor group led by affiliates of Goldman,
Sachs & Co. acquired the Company in 1996 (the "Acquisition").
Since the Acquisition and prior to December 31, 2000, the Company has
acquired 280 bowling centers for a combined purchase price of $507.4 million,
and it has constructed two bowling centers and one Michael Jordan Golf practice
range as part of its capital expenditure program. The Company has funded its
acquisitions and new center construction from internally generated cash,
borrowings under the senior secured revolving credit facility (the "Bank
Facility") under the Credit Agreement (as defined in "Note 8.--Long-Term Debt
and 1999 Recapitalization Plan"), issuances of AMF Bowling common stock (the
"Common Stock") and AMF Bowling's Zero Coupon Convertible Debentures due 2018
(the "Convertible Debentures"). See "Note 14.--Acquisitions."
Restructuring
In August 2000, AMF Bowling announced that Bowling Worldwide and Citibank,
N.A., Administrative Agent of Bowling Worldwide's senior secured lenders
(collectively, the "Lenders"), had amended (the "Amendment") the Credit
Agreement. Pursuant to the Amendment, Bowling Worldwide agreed, among other
things, to forbear from making the September 15, 2000 interest payment due on
its 10 7/8% Series B Senior Subordinated Notes (the "Senior Subordinated Notes")
and that it would begin exploring various alternatives to restructure and reduce
its long-term debt. As part of the Amendment, the Lenders agreed to waive any
default under the Credit Agreement resulting from the failure to make the
September 15, 2000 interest payment due on the Senior Subordinated Notes unless
the Company's other creditors commenced the exercise of remedies, which could
include the acceleration of the Company's debt obligations and an involuntary
bankruptcy filing. The Amendment further provided for the permanent termination
of $100.0 million of the otherwise available working capital commitments under
the Credit Agreement. Moreover, the Amendment waived Bowling Worldwide's
compliance with the financial covenants in the Credit Agreement through December
31, 2000. The Amendment also required that Bowling Worldwide deliver a
preliminary plan containing the principal terms of a proposal to restructure the
Company's debt to the Lenders. The Company submitted such a proposed
restructuring plan on September 30, 2000 and a majority of the lenders indicated
by October 15, 2000 that the plan was generally satisfactory in form and
substance, subject to further approval of any definitive plan.
In light of ongoing discussions with its banks and bondholders related to a
financial restructuring plan, the Company decided not to request a further
modification of the Credit Agreement or an extension of the waiver beyond
December 31, 2000. Bowling Worldwide is in default under the Senior Subordinated
Notes, Senior Subordinated Discount Notes and Credit Agreement, and is operating
without available capacity to borrow.
39
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Bowling Worldwide did not make the cash interest payment of approximately
$13.6 million on the Senior Subordinated Notes required on September 15, 2000
and the 30 day period to cure the non-payment of interest under the related
indenture expired. Under the indenture, the Trustee on its own or the holders of
25% or more of the outstanding principal amount of the Senior Subordinated Notes
have had the right, by written notice, since the expiration of the cure period,
to declare all amounts owed under the indenture immediately due and payable. If
the indebtedness represented by the Senior Subordinated Notes is accelerated,
such acceleration would result in a default under the Credit Agreement, the
Company's 12 1/4% Series B Senior Subordinated Discount Notes (the "Senior
Subordinated Discount Notes"), the Convertible Debentures and certain other
Company indebtedness. In such event, the Company would not then be able to meet
its accelerated payment obligations. Bowling Worldwide also failed to make the
required cash interest payment of approximately $13.6 million on the Senior
Subordinated Notes due on March 15, 2001 and did not make such payment during
the 30 day period to cure. As of April 15, 2001, neither Bowling Worldwide nor
AMF Bowling has received notice that any of its indebtedness has been or will be
accelerated.
Bowling Worldwide did not make a scheduled principal payment to the Lenders
of $12.8 million that was due on December 29, 2000. Bowling Worldwide did pay
$3.0 million of the $14.7 million of interest then due under the Credit
Agreement on December 29, 2000. The remainder of the $14.7 million of interest
(at a non-default interest rate) due was paid on a weekly schedule during the
first quarter of 2001. In addition, the Lenders' waiver of the financial
covenants in the Credit Agreement expired on December 31, 2000. As a result of
the foregoing, Bowling Worldwide is in default under the Credit Agreement.
Bowling Worldwide did not make a scheduled principal payment under the
Credit Agreement of $12.8 million, which was due on March 30, 2001 but did make
a $16.4 million interest payment under the Credit Agreement on March 30, 2001.
This payment represented interest at the non-default interest rate and was
approximately $2.8 million less than the interest would have been at the
default rate. As explained above, Bowling Worldwide is in default under the
Credit Agreement and the Senior Subordinated Notes and such defaults could
result in the acceleration of the indebtedness under the Credit Agreement, the
Senior Subordinated Notes, the Senior Subordinated Discount Notes, the
Convertible Debentures and certain other indebtedness of the Company. However,
as of April 15, 2001, neither AMF Bowling nor Bowling Worldwide has received
notice that any of its indebtedness has been or will be accelerated. The Company
is also not aware that a creditor, including the Lenders and the holders of
Senior Subordinated Notes and the Senior Subordinated Discount Notes
(collectively, the "Subordinated Note Holders"), has taken action, or notified
the Company that it will take action, to enforce their rights or remedies
against the Company or its assets as a result of the defaults described above.
Since January 2001, the Company has funded its day to day operating
expenses and requirements for capital expenditures from cash flow from
operations. During 2001, scheduled principal payments under the Credit Agreement
increase significantly and cash interest becomes payable on the Senior
Subordinated Discount Notes. Management anticipates that the Company will not
make such principal and interest payments.
In mid 2000, Bowling Worldwide retained financial and legal advisors to
assist it in evaluating its restructuring and refinancing alternatives. At the
time, management believed the possible alternatives included a consensual,
negotiated restructuring, a reorganization under Chapter 11 of the U.S.
Bankruptcy Code, 11 U.S.C. ss. 101 et seq. ("Chapter 11") and/or other possible
methods for reducing the Company's long-term debt and improving its capital
structure. Any alternative selected would likely have a material adverse effect
on the ability of AMF Bowling's shareholders to recover their investment in the
Common Stock and on the ability of the Subordinated Notes Holders and the
holders of the Convertible Debentures and other Company indebtedness to receive
interest and principal payments due thereon.
Bowling Worldwide and its advisors have provided certain information to and
held substantive discussions with the steering committees for the Lenders and
the Subordinated Notes Holders. The Lenders and the Subordinated Notes Holders
have each retained their own separate legal and financial advisors.
40
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management now believes that a Chapter 11 filing is the most likely and
efficient means to complete the debt restructuring. The Company and the steering
committees for the Lenders and the Subordinated Notes Holders are continuing
discussions regarding the debt restructuring. The Company believes that these
discussions are constructive and progress is being made. Accordingly, at this
time management has not made a recommendation to the Board of Directors of
Bowling Worldwide (the "Board") with respect to a Chapter 11 filing and the
Board has not yet taken any action in this regard. Bowling Worldwide has also
begun discussions with the Lenders and the Subordinated Notes Holders about a
potential Chapter 11 filing as well as business and legal issues related to such
a filing in order to ensure an orderly proceeding with minimal impact on the
Company's operations, employees and customers.
In order to facilitate a restructuring in a Chapter 11 proceeding, Bowling
Worldwide has received proposals for a secured debtor-in-possession financing
facility (a "DIP Facility"). Although no assurances can be given, Bowling
Worldwide believes that it would have a commitment from the Lenders for a DIP
Facility at the time of filing for a reorganization under Chapter 11. Management
believes that the borrowing capacity under a DIP Facility, in addition to
available cash on hand of approximately $40.0 million as of April 13, 2001, will
be sufficient to meet the Company's current liquidity and capital expenditure
requirements during the period when the Company would be operating under Chapter
11, although no assurances can be given in this regard.
While it is diligently pursuing a financial restructuring, Bowling
Worldwide is unable to predict if it will be able to arrive at a restructuring
plan, acceptable to the Lenders and the Subordinated Notes Holders, before a
filing is made or during a Chapter 11 proceeding. Bowling Worldwide is unable to
predict whether it will be able to satisfactorily implement such a plan, or
whether, in the interim, the Lenders and the Subordinated Notes Holders will
continue to forbear from exercising any or all of the remedies available to
them, including acceleration of the Company's indebtedness, an involuntary
bankruptcy proceeding and, in the case of the Lenders, realization on collateral
for their indebtedness.
Because retention of key personnel and maintenance of employee morale is so
critical during a restructuring, in mid 2000, certain bonus, severance and
retention programs were approved. The programs extend to senior management,
bonus-eligible and stock option-eligible personnel, including all center
managers around the world. These retention programs are conditioned upon
continued employment to specific dates. In March 2001, after consultation with
its compensation advisor and financial advisor, the Board approved several
enhancements to the year 2001 incentive compensation plan designed to encourage
retention and motivate key personnel during the restructuring process.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Company's financial position, including the default on its debt
and the continuing losses from operations, raise substantial doubt about the
Company's ability to continue as a going concern. The appropriateness of
reporting on the going concern basis is dependent upon, among other things, a
prompt restructuring, refinancing or Chapter 11 relief, future profitable
operations, and the ability to generate sufficient cash from operations and
financing sources to meet obligations. As a result of the Company's current
circumstances, however, such realization of assets and liquidation of
liabilities are uncertain. Further, a plan of reorganization could materially
affect the assets and liabilities reported in the accompanying consolidated
financial statements. The consolidated financial statements do not include any
adjustments relating to the recoverability of the value of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary as a consequence of this uncertainty.
41
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
All significant intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements. All dollar amounts are in
thousands, except where otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. The more significant estimates made by management include
allowances for obsolete inventory, uncollectible accounts receivable,
realization of goodwill, long-lived assets, deferred taxes and other deferred
assets, litigation and claims, product warranty costs, and self-insurance costs.
Actual results could differ from those estimates.
Revenue Recognition
For Bowling Products, revenue is generally recognized at the time the
products are shipped. In certain countries, with respect to new center packages
("NCP" or "NCPs") (which include all the equipment necessary to outfit a new
bowling center or expand an existing bowling center) orders, revenue is
recognized upon installation. For larger contract orders, Bowling Products
generally requires that customers submit a deposit as a condition of accepting
the order. For a significant portion of international sales, Bowling Products
generally requires the customer to obtain a letter of credit prior to shipment.
Warranty Costs
Bowling Products warrants all new products for certain periods up to one
year. Bowling Products charges to income an estimated amount for future warranty
obligations, and also offers customers the option to purchase extended
warranties on certain products. Warranty expense aggregated $1,386 for 2000,
$5,681 for 1999, and $5,391 for 1998, and is included in cost of goods sold in
the accompanying consolidated statements of operations.
Cash and Cash Equivalents
The Company classifies all highly liquid fixed-income investments purchased
with an original maturity of three months or less as cash equivalents.
Inventories
Bowling Products' inventory is valued at the lower of cost or market, cost
being determined using the first-in, first-out ("FIFO") method. Bowling Centers'
inventory is valued at the lower of cost or market, with the cost being
determined using the average cost method. (See "Note 3.--Inventories.")
Long-Lived Assets
The carrying value of long-lived assets and certain identifiable
intangibles, including goodwill, is reviewed by the Company for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, and an estimate of future undiscounted cash
flows is less than the carrying amount of the asset.
42
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs which do not improve or extend the life
of an asset are charged to expense as incurred; major renewals or improvements
are capitalized. Upon retirement or sale of an asset, its cost and related
accumulated depreciation are removed from property and equipment, and any gain
or loss is recognized.
Property and equipment are depreciated over their estimated useful lives
using the straight-line method. Estimated useful lives of property and equipment
are as follows:
Buildings and improvements 5-40 years
Leasehold improvements lesser of the estimated
useful life or term of the
lease
Bowling and related equipment 5-10 years
Manufacturing equipment 2-7 years
Furniture and fixtures 3-8 years
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 14. Acquisitions," and in accordance with the purchase method
of accounting used for all acquisitions, the Company recorded goodwill
representing the excess of the purchase price of such bowling centers over the
allocation among the acquired assets and liabilities in accordance with
estimates of fair market value on the dates of acquisition. Goodwill is being
amortized over 40 years. Amortization expense was $20,861 in 2000, $21,384 in
1999 and $20,403 in 1998. Accumulated amortization of goodwill was $95,545 and
$74,684, respectively, at December 31, 2000 and 1999.
Leasehold Interests
Leasehold interests are included in other assets net of accumulated
amortization of $27,923 and $22,346 at December 31, 2000 and 1999, respectively.
Leasehold interests represent favorable lease terms, which are comprised of the
difference between amounts due under the contractual lease rate compared to the
market rate for that lease. Leasehold interests are being amortized over the
life of each lease. Amortization expense was $5,577 in 2000, $4,976 in 1999 and
$4,500 in 1998.
Income Taxes
The U.S. and international subsidiaries of AMF Group Holdings are taxable
corporations under the Internal Revenue Code ("IRC"). Income taxes are accounted
for using the asset and liability method under which deferred income taxes are
recognized for the tax consequences on future years of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities.
Research and Development Costs
Expenditures relating to the development of new products, including
significant improvements and refinements to existing products, are expensed as
incurred. Amounts expensed were approximately $120 in 2000, $342 in 1999 and
$121 in 1998 and are included in cost of goods sold in the accompanying
consolidated statements of operations.
43
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Advertising Costs
Costs incurred for producing and communicating advertising are expensed
when incurred. The amounts expensed were approximately $26,898 in 2000, $27,291
in 1999 and $33,432 in 1998, with $20,873, $20,756 and $20,571, respectively,
included in bowling center operating expenses for Bowling Centers, and $6,025,
$6,535 and $12,861, respectively, included in selling, general and
administrative expenses for Bowling Products and Corporate in the accompanying
consolidated statements of operations.
Foreign Currency Translation
All assets and liabilities of AMF Group Holdings' international operations
are translated from foreign currencies into U.S. dollars at year-end exchange
rates. Adjustments resulting from the translation of financial statements of
international operations into U.S. dollars are included in the foreign currency
translation adjustment on the accompanying consolidated balance sheets,
statements of stockholders' equity and statements of comprehensive loss. Revenue
and expenses of international operations are translated using average exchange
rates that existed during the year and reflect currency exchange gains and
losses resulting from transactions conducted in other than local currencies.
Transactions in foreign currencies resulted in net losses of $2,338 for 2000,
and of $2,432 for 1999 and net gains of $2,450 for 1998, and are included in
other expenses in the accompanying consolidated statements of operations.
Fair Value of Financial Instruments
The carrying value of financial instruments, including cash and cash
equivalents and short-term debt, approximate fair value at December 31, 2000 and
1999, because of the short maturity of these instruments. At December 31, 2000
and 1999, fair value of the interest rate cap agreements (to reduce the interest
rate risk of its floating rate debt) was approximately $0 and $16, respectively.
The interest rate cap agreements are valued using the estimated amount that the
Company would receive to terminate the cap agreements as of December 31, 2000
and 1999, based on a quote from the counterparty, taking into account current
interest rates and the credit worthiness of the counterparty. The fair value of
the term facilities under the Bank Debt, as defined in "Note 8. Long-Term Debt
and 1999 Recapitalization Plan," at December 31, 2000 and 1999, was
approximately $284,772 and $347,849, respectively, based on the trading value at
December 31, 2000 and 1999. The fair value of the Senior Subordinated Notes and
Senior Subordinated Discount Notes at December 31, 2000 and 1999 was
approximately $90,575 and $196,410, respectively, based on the trading value at
December 31, 2000 and 1999.
Non-compete Agreements
The Company has non-compete agreements with various individuals. The assets
are recorded at cost or at the present value of payments to be made under these
agreements, discounted at annual rates ranging from 8 percent to 10 percent. The
assets are included in other assets on the accompanying consolidated balance
sheets and are amortized on a straight-line basis over the terms of the
agreements. Non-compete agreements at December 31, 2000 and 1999, net of
accumulated amortization, totaled approximately $1,525 and $2,390, respectively.
The Company also has non-compete obligations with various individuals which
are included in other liabilities on the accompanying consolidated balance
sheets. Annual maturities on non-compete obligations as of December 31, 2000 are
as follows: 2001--$307; 2002--$202; 2003--$207; 2004--$200; 2005--$129;
thereafter--$480.
44
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Self-Insurance Programs
The Company is self-insured up to certain levels for general and product
liability, workers' compensation, certain health care coverage, and property
damage. The cost of these self-insurance programs is accrued based upon
estimated settlements for known and anticipated claims. The Company has recorded
an estimated amount to cover known claims and claims incurred but not reported
as of December 31, 2000 and 1999, which is included in accrued expenses in the
accompanying consolidated balance sheets.
Comprehensive Loss
For 2000, 1999 and 1998, comprehensive loss represents net loss and the
change in foreign currency translation adjustment. Accumulated other
comprehensive loss consists of the foreign currency translation adjustment on
the accompanying consolidated balance sheets and statements of stockholders'
equity.
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current year presentation.
NOTE 3. INVENTORIES
Inventories at December 31, 2000 and 1999, consist of the following:
2000 1999
----------- -----------
Bowling Products, at FIFO:
Raw materials $ 13,142 $ 14,285
Work in progress 821 1,562
Finished goods and spare parts 32,824 28,789
Bowling Centers, at average cost:
Merchandise and spare parts 8,910 8,863
----------- -----------
$ 55,697 $ 53,499
=========== ===========
NOTE 4. OTHER CURRENT ASSETS
The components of other current assets at December 31, 2000 and 1999,
consist of the following:
2000 1999
----------- -----------
Advances or deposits $ 11,127 $ 11,982
Other 1,662 2,469
----------- -----------
$ 12,789 $ 14,451
=========== ===========
45
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net at December 31, 2000 and 1999, consists of the
following:
2000 1999
------------ ------------
Land $ 132,041 $ 133,953
Buildings and improvements 374,081 357,365
Equipment, furniture, and fixtures 623,096 588,342
Other 7,821 5,537
------------ ------------
1,137,039 1,085,197
Less: accumulated depreciation and amortization (381,451) (278,772)
------------ ------------
$ 755,588 $ 806,425
============ ============
Depreciation and amortization expense related to property and equipment was
$104,608 for 2000, $99,934 for 1999 and $89,080 for 1998.
NOTE 6. OTHER LONG-TERM ASSETS
Other long-term assets are primarily composed of leasehold interests,
long-term rent deposits, long-term portion of non-compete assets, and notes
receivable.
NOTE 7. ACCRUED EXPENSES
Accrued expenses at December 31, 2000 and 1999, consist of the following:
2000 1999
------------ ------------
Accrued compensation $ 13,142 $ 13,609
Accrued interest 32,858 8,293
League bowling accounts 14,972 15,847
Other 40,411 32,692
------------ ------------
$ 101,383 $ 70,441
============ ============
46
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. LONG-TERM DEBT AND 1999 RECAPITALIZATION PLAN
As discussed in "Note 1. Business Description - Organization and
Restructuring" the Company is in default on all of its long-debt. As a result
all of the Company's debt has been classified as current as of December 31,
2000. The repayment of the debt is subject to acceleration by the Lenders. Debt
at December 31, 2000 and 1999, consists of the following:
2000 1999
------------- -------------
Bank debt $ 614,093 $ 556,499
Subsidiary senior subordinated notes 250,000 250,000
Subsidiary senior subordinated discount notes 270,472 240,111
Mortgage and equipment note 1,993 1,992
------------- -------------
Total debt 1,136,558 1,048,602
Current maturities (1,136,558) (34,250)
------------- -------------
Total long-term debt $ - $ 1,014,352
============= =============
Bank Debt
The Company's bank debt (the "Bank Debt") is governed by a credit agreement
(the "Credit Agreement") to which Bowling Worldwide is a party with Goldman
Sachs, their affiliate Goldman Sachs Credit Partners, L.P., Citibank, N.A.
("Citibank") and its affiliates Citicorp Securities, Inc. and Citicorp USA, Inc.
and certain other banks, financial institutions and institutional lenders
(collectively, the "Lenders") and provides for (i) senior secured term loan
facilities aggregating $365.1 million (the "Term Facilities") and (ii) the Bank
Facility of up to $255.0 million (together with the Term Facilities, the "Senior
Facilities"). In connection with such financing, Goldman Sachs Credit Partners,
L.P. acted as Syndication Agent, Goldman Sachs Credit Partners, L.P. and
Citicorp Securities, Inc. acted as Arrangers, and Citibank is acting as
Administrative Agent. As of December 31, 2000, the Company had no available
borrowing under the Bank Facility with $249.0 million outstanding and $9.7
million of standby and documentary letters of credit.
The Senior Facilities
The Term Facilities consist of the following three tranches: (i) a Term
Loan Facility of $52.5 million, (ii) an Amortization Extended Loan ("AXELsSM")
Series A Facility of $181.5 million and (iii) an AXELsSM Series B Facility of
$131.1 million. The Term Loan Facility bears interest, at Bowling Worldwide's
option, at Citibank's customary base rate or at Citibank's Eurodollar rate, in
each case plus a margin which varies in accordance with a performance pricing
grid which is based on the Total Debt/EBITDA Ratio (as defined below) for the
Rolling Period (as defined below) then most recently ended.
The margin applicable to loans bearing interest based on the base rate will
range from 1.50% to 2.75% for advances under the Term Loan Facility, and is
fixed at 3.25% for advances under the AXELsSM Series A Facility and 3.75% for
advances under the AXELsSM Series B Facility. The margin applicable to loans
bearing interest based on the Eurodollar rate ranges from 2.50% to 3.75% for
advances under the Term Loan Facility, and is fixed at 4.25% for advances under
AXELsSM Series A Facility and 4.75% for advances under the AXELsSM Series B
Facility.
47
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Bank Facility has an aggregate, maximum amount of $255.0 million, is
fully revolving until its final maturity and bears interest, at Bowling
Worldwide's option, at Citibank's customary base rate or at Citibank's
Eurodollar rate, in each case, plus a margin which varies in accordance with a
performance pricing grid which is based on a total debt to EBITDA ratio ("Total
Debt/EBITDA Ratio") for the trailing twelve-month period (the "Rolling Period")
then most recently ended. The margin applicable to advances under the Bank
Facility bearing interest based on the base rate ranges from 1.50% to 2.75% and
the margin applicable to advances under the Bank Facility bearing interest based
on the Eurodollar rate ranges from 2.50% to 3.75%.
As a result of the Default under the Credit Agreement, the Term Facilities
and the Bank Facility interest rates have been increased by 2% per annum above
the rates described in the preceding paragraphs. In addition, while the Company
is in default under the Credit Agreement, it is unable to borrow under the
Eurodollar rate option.
At December 31, 2000, the applicable margin based on Citibank's customary
base rate, the applicable margin based on Citibank's Eurodollar rate, and the
actual interest rate for advances under each of the Senior Facilities were as
follows:
Base Rate Eurodollar Rate Interest
Margin Margin Rate (a)
------------ ----------------- ----------
Term Loan Facility 2.75 % 3.75 % 14.45 %
AXELsSM Series A Facility 3.25 4.25 14.95
AXELsSM Series B Facility 3.75 4.75 15.46
Bank Facility 2.75 3.75 12.94
- ----------
(a) The interest rate is calculated using the default rates of interest
that increases the original interest rate by 2.0%.
Maturity dates, average amounts outstanding, and average borrowing rates for
2000, were as follows:
Outstanding Average Average
December 31, Amounts Borrowing
Maturity Dates 2000 Outstanding Rates
---------------- -------------- ------------- -----------
Term Loan Facility March 31, 2002 $ 52,500 $ 60,123 10.14 %
AXELsSM Series A Facility March 31, 2003 181,500 182,496 10.68
AXELsSM Series B Facility March 31, 2004 131,092 132,012 11.18
Bank Facility March 31, 2002 249,000 204,488 10.27
In addition, Bowling Worldwide is required to make prepayments which
permanently reduce the availability under the Senior Facilities under certain
circumstances, including upon certain asset sales and issuances of debt by
Bowling Worldwide and its subsidiaries and public issuance of equity securities
of AMF Bowling. Bowling Worldwide is also required to make prepayments that
permanently or temporarily reduce the availability under the Term Facilities and
Bank Facility if the Company achieves certain financial targets as defined in
the Credit Agreement.
48
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Senior Facilities are guaranteed by AMF Group Holdings and by each of
Bowling Worldwide's present and future domestic subsidiaries and are secured by
all of the stock of Bowling Worldwide and Bowling Worldwide's present and future
domestic subsidiaries and second-tier subsidiaries, by 66% of the stock of
Bowling Worldwide's present and future international subsidiaries and by
substantially all of Bowling Worldwide's and its present and future domestic
subsidiaries' present and future property and assets.
The Credit Agreement contains certain financial covenants, as well as
additional affirmative and negative covenants, constraining Bowling Worldwide.
Under the terms currently in effect, Bowling Worldwide must maintain a minimum
Modified Consolidated EBITDA and a Cash Interest Coverage Ratio and a Total Debt
to EBITDA Ratio (as defined in the Credit Agreement). Negative covenants under
the Senior Facilities prohibit Bowling Worldwide and its Subsidiaries from (i)
incurring certain liens, (ii) entering into certain debt, (iii) incurring
certain obligations under capital leases, (iv) entering into certain mergers,
(v) entering into certain investments and (vi) making certain material changes
in the nature of its business. The negative covenants also relate to the payment
of dividends, prepayments of, and amendments of the terms of, other debt
(including the Subordinated Notes), amendment of Related Documents (as defined
in the Credit Agreement), ownership changes, negative pledges, partnerships,
speculative transactions, capital expenditures and payment restrictions
affecting subsidiaries. Bowling Worldwide is also subject to certain financial
and other reporting requirements.
As discussed in Note 1, Bowling Worldwide is in default on its debt and
will not be in compliance with the financial covenants under its Credit
Agreement in 2001. The Amendment had waived the Company's compliance with the
financial covenants in the Credit Agreement through December 31, 2000.
As Bowling Worldwide is in default of the covenants contained in the Credit
Agreement, it may not (i) declare and pay dividends in common stock, (ii)
declare and pay cash dividends to the extent necessary to make payments under
certain non-compete agreements with owners of the Predecessor Company, (iii)
declare and pay cash dividends for general administrative expenses not to exceed
$0.25 million and (iv) declare and pay cash dividends not to exceed $2.0 million
for the repurchase of Common Stock.
Subordinated Notes
Bowling Worldwide's Senior Subordinated Notes will mature on March 15,
2006. Interest accrues from the date of issuance at an annual rate of 10.875%
and is payable in cash semiannually in arrears on March 15 and September 15 of
each year.
Bowling Worldwide's Senior Subordinated Discount Notes will mature on March
15, 2006, at a fully-accreted value of $277.0 million and will result in an
effective yield of 12.25% per annum, computed on a semiannual bond equivalent
basis. No interest is payable prior to March 15, 2001. Commencing March 15,
2001, interest will accrue and be payable in cash semiannually in arrears on
March 15 and September 15 of each year beginning with September 15, 2001.
The Senior Subordinated Notes and the Senior Subordinated Discount Notes
(together, the "Subordinated Notes") are jointly and severally guaranteed on a
senior subordinated basis by AMF Group Holdings and each of Bowling Worldwide's
current and future subsidiaries identified below in "Note 20. Condensed
Consolidating Financial Statements" (collectively, the "Guarantors").
49
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The guarantees of the Subordinated Notes are subordinated to the guarantees
of the Bank Debt and the mortgage and equipment note outstanding at December 31,
2000. The Subordinated Notes are general, unsecured obligations of Bowling
Worldwide, are subordinated in right of payment to all of the Bank Debt and rank
pari passu with all existing and future subordinated debt of Bowling Worldwide.
The claims of the holders of the Subordinated Notes will be effectively
subordinated to all other indebtedness and other liabilities (including trade
payables and capital lease obligations) of Bowling Worldwide's subsidiaries that
are not Guarantors and through which Bowling Worldwide will conduct a portion of
its operations. See "Note 20. Condensed Consolidating Financial Statements."
The indenture governing the Senior Subordinated Notes and the indenture
governing the Senior Subordinated Discount Notes (together, the "Subordinated
Note Indentures") contain certain covenants that, among other things, limit the
ability of Bowling Worldwide and its Restricted Subsidiaries (as defined
therein) to incur additional indebtedness and issue Disqualified Stock (as
defined therein), pay dividends or distributions or make investments or make
certain other Restricted Payments (as defined therein) enter into certain
transactions with affiliates, dispose of certain assets, incur liens securing
pari passu and subordinated indebtedness of Bowling Worldwide and engage in
mergers and consolidations.
As discussed in Note 1, Bowling Worldwide is in default on the Subordinated
Notes and did not make scheduled interest payments of $13.6 million on the
Senior Subordinated Notes on September 15, 2000 and March 15, 2001. The
indentures for the Subordinated Notes stipulates an increase by 1% on overdue
principal and interest.
Annual Maturities
The entire amount of long-term debt has been classified as current and
represents amounts that would be due in the next 12 months if acceleration of
the Company's debt obligations occurs as described above. Scheduled annual
maturities of long-term debt, including accretion of the Senior Subordinated
Discount Notes, as of December 31, 2000, are as follows:
December 31,
------------
2001 $ 95,844
2002 355,000
2003 116,408
2004 46,839
2005 -
Thereafter 528,993
------------
1,143,084
============
1999 Recapitalization Plan
As part of a recapitalization plan (the "Recapitalization Plan") and in
conjunction with the Fourth Amended and Restated Credit Agreement dated as of
June 14, 1999, AMF Bowling completed on July 28, 1999 an offering of rights to
purchase its Common Stock and a tender offer for a portion of its Convertible
Debentures at a discount to carrying value. In the rights offering, AMF Bowling
raised $120.0 million of gross proceeds in equity capital and issued 24.0
million additional shares of Common Stock at the subscription price of $5.00 per
share. AMF Bowling purchased $514,286 in aggregate principal amount at maturity
of its Convertible Debentures in the tender offer at a price of $140 per $1,000
principal amount at maturity. AMF Bowling used approximately $72.0 million of
the proceeds from the rights offering to fund the purchase of the Convertible
Debentures. Proceeds from the rights offering of $30.0 million were contributed
as equity by AMF Bowling to Bowling Worldwide, which repaid amounts due under
its Bank Facility. AMF Bowling used a portion of the remainder of the proceeds
to pay expenses of the rights offering and the tender offer and is using the
balance remaining for general corporate purposes.
50
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest Rate Cap Agreements
During March 2000 and September 2000, Bowling Worldwide entered into
interest rate cap agreements with Goldman Sachs Capital Markets, L.P. to reduce
the interest rate risk of its Bank Debt. The notional amounts of these caps were
$200 million and $15 million, respectively, at December 31, 2000. Interest
expense for interest rate cap agreements was $167 in 2000, $140 in 1999 and
$1,608 in 1998. Bowling Worldwide is exposed to credit-related loss in the event
of non-performance by the counterparty. Bowling Worldwide believes its exposure
to potential loss due to counterparty non-performance is minimized primarily due
to the relatively strong credit rating of the counterparty.
Deferred Financing Costs
Costs incurred to obtain bank financing and issue bond financing are
amortized over the lives of the various types of debt using the effective
interest rate method. Amortization expense for financing costs was $2,229 in
2000, $2,227 in 1999 and $3,097 in 1998.
NOTE 9. REFINANCING COSTS, RESTRUCTURING CHARGES, ASSET IMPAIRMENT CHARGES AND
SPECIAL CHARGES
Refinancing Costs
In the second half of 2000, the Company recorded $6.5 million of
refinancing charges related to proposed restructuring of long-term debt. The
charges primarily include amounts paid for legal and advisory services. See
"Note 1 - Business Description - Organization and Restructuring " for a
description of the refinancing activities.
Restructuring Charges
In the fourth quarter of 2000, the Company recorded restructuring charges
of approximately $3.4 million primarily related to a plan to close the Bowling
Products Korean operations and sales office. The restructuring charges relate
primarily to employee termination benefits and contract cancellations. As of
December 31, 2000, the Company had a remaining reserve related to restructuring
charges of $2.5 million and expects that the restructuring activities will be
completed in 2001.
In 1999, the Company recorded restructuring charges of approximately $8.5
million that were related primarily to a plan to reorganize and downsize the
Bowling Products business in response to market weakness in the Asia Pacific
region and increased competition which has negatively impacted sales and
profitability of NCPs. The restructuring plan was developed in conjunction with
a strategic business assessment performed by Bain & Co. and was designed to
reduce the overall volatility of the Bowling Products business. Actions taken
included closing one plant in the U.S., one plant in Korea, three warehouses in
China, one warehouse in Taiwan, four sales offices in China and one sales office
in Belgium. Additionally, sales offices were downsized in four other countries.
The restructuring charges relate primarily to employee termination benefits,
asset write-offs and contract cancellations. As of December 31, 2000, the
Company had no remaining reserve related to the restructuring charges taken in
1999.
51
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Asset Impairment Charges
In 2000, the Company recorded asset impairment charges of approximately
$1.6 million representing the difference between fair market value and carrying
value of impaired assets. The asset impairment charges relate to
under-performing bowling center locations that under a formal plan are scheduled
to be closed in 2001. Fair market value is generally determined based on the
average sales proceeds from previous sales of idle AMF bowling center locations.
In 1999, the Company recorded asset impairment charges of approximately
$8.1 million representing the difference between fair market value and carrying
value of impaired assets. The asset impairment charges relate to
under-performing bowling center locations that under a formal plan were closed
in 2000.
The following table summarizes the nature of the restructuring charges and
asset impairment charges:
Bowling Bowling
Centers Products Corporate Total
------------ ------------ ------------ ------------
Year Ended December 31, 2000
- ----------------------------
Restructuring Charges $ 1.0 $ 2.3 $ 0.1 $ 3.4
Asset Impairment Charges 1.6 - - 1.6
------------ ------------ ------------ ------------
Total charges $ 2.6 $ 2.3 $ 0.1 $ 5.0
============ ============ ============ ============
Year Ended December 31, 1999
- ----------------------------
Restructuring charges $ 0.2 $ 8.2 $ 0.1 $ 8.5
Asset impairment charges 8.1 - - 8.1
------------ ------------ ------------ ------------
Total charges $ 8.3 $ 8.2 $ 0.1 $ 16.6
============ ============ ============ ============
Special Charges and Other
In 1999 the strategic assessment by Bain & Co. discussed above led to
programs designed to improve product line profitability and quality in the
Company. This assessment was a catalyst to the Company recording certain
charges. These charges, along with additional reserves (collectively, the
"Special Charges") recorded by the Company totaled $26.5 million. The Special
Charges are non-cash, relate primarily to receivables and inventory and are
included within operating expenses.
The Special Charges are summarized as follows:
Bowling Bowling
Centers Products Corporate Total
------------ ------------ ------------ ------------
Year Ended December 31, 1999
- ----------------------------
Special Charges $ 6.6 $ 19.7 $ 0.2 $ 26.5
============ ============ ============ ============
52
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In the fourth quarter of 2000, the Company recorded certain charges
totaling $39.2 million to reflect: (i) revaluation of inventory levels in the
context of current Bowling Products business conditions ($12.0 million), (ii)
the write down of U.K. property and equipment no longer in service ($6.2
million), (iii) reconciliation of certain intercompany differences ($5.3
million), (iv) costs associated with the exit of certain distributor
arrangements or markets ($5.0 million), (v) the impact of the net present value
of leases related to centers scheduled to be closed ($2.8 million) (vi) the
increase in insurance claims experience that resulted from the enhancement of
benefits to U.S. bowling center employees and the occurrence of certain unusual
incidents at some bowling centers ($2.2 million) and (vii) other charges ($5.7
million).
NOTE 10. INCOME TAXES
Loss before income taxes for the years ended December 31, 2000, 1999 and
1998, consists of the following:
2000 1999 1998
---------- ---------- ---------
U.S. $ (141,319) $ (142,747) $ (93,066)
International (37,901) (11,993) 1,740
---------- ---------- ---------
$ (179,220) $ (154,740) $ (91,326)
========== ========== =========
The income tax provision at December 31, 2000, 1999 and 1998, consists of
the following:
2000 1999 1998
---------- ----------- ----------
Current income tax provision
U.S. Federal $ - $ - $ -
State and local - - -
International 2,256 6,209 7,294
---------- ----------- ----------
Total current provision 2,256 6,209 7,294
---------- ----------- ----------
Deferred tax provision
U.S. Federal - 18,861 -
State and local - 2,555 -
International - - -
---------- ----------- ----------
Total deferred provision - 21,416 -
---------- ----------- ----------
Total provision $ 2,256 $ 27,625 $ 7,294
========== =========== ==========
53
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax effects of temporary differences and carry-forwards that give rise
to deferred tax assets and liabilities at December 31, 2000 and 1999, are as
follows:
2000 1999
------------- ------------
Deferred income tax assets
Current assets
Reserves not deductible for tax purposes $ 14,183 $ 22,864
------------- ------------
Noncurrent assets
Net operating losses 159,042 108,129
Foreign tax credits 11,487 11,487
Interest expense on high yield debt 44,907 29,972
Depreciation on property and equipment 2,323 -
Other 8,411 10,533
------------- ------------
Total noncurrent deferred tax assets 226,170 160,121
------------- ------------
Deferred tax assets before valuation allowance 240,353 182,985
Valuation allowance (194,153) (126,281)
------------- ------------
Total deferred tax assets 46,200 56,704
------------- ------------
Deferred income tax liabilities
Goodwill amortization 46,200 32,924
Depreciation on property and equipment - 23,780
------------- ------------
Total noncurrent deferred tax liabilities 46,200 56,704
------------- ------------
Net deferred tax assets $ - $ -
============= ============
Realization of deferred tax assets associated with the net operating losses
("NOLs") and foreign tax credit carryforwards is dependent upon generating
sufficient taxable income prior to their expiration. Management believes that
there is a risk that certain of these NOLs and foreign tax credit carryforwards
may expire unused and, accordingly, has established a valuation allowance
against them.
The Company is included in the consolidated federal income tax return filed
by AMF Bowling. As of December 31, 2000, the Company had net operating losses of
approximately $408.8 million and foreign tax credits of $11.5 million that will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company has recorded a valuation reserve as of
December 31, 2000 for $194.2 million related to net operating losses, foreign
tax credits and other deferred tax assets that the Company may not utilize prior
to their expirations. The tax provision recorded for 2000 reflects certain
international taxes only.
54
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The gross amount of NOLs the Company may utilize on future tax returns is
$408.8 million. The NOLs expire as follows:
Year NOLs
---- ------------
2011 $ 13,799
2012 80,233
2018 87,848
2019 69,958
2020 157,011
------------
$ 408,849
============
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory rate of 35 percent for 2000, 1999 and 1998 to loss
before taxes. The principal reasons for these differences are as follows:
2000 1999 1998
------------- --------------- --------------
U.S. Federal, at statutory rate $ (62,727) $ (54,159) $ (31,964)
Increase resulting from:
Permanent Items 2,252 2,182 2,208
Valuation allowance 67,872 80,698 45,583
Other, net (5,141) (1,096) (8,533)
------------- --------------- --------------
Total $ 2,256 $ 27,625 $ 7,294
============= =============== ==============
NOTE 11. COMMITMENTS AND CONTINGENCIES
Bowling Centers and Bowling Products lease certain facilities and equipment
under operating leases, which expire at various dates through 2016. Bowling
Centers has certain ground leases, associated with several centers, which expire
at various dates through 2058. These leases generally contain renewal options
and require payments of taxes, insurance, maintenance, and other expenses in
addition to the minimum annual rentals. Certain leases require contingent
payments based on usage of equipment above certain specified levels. Such
contingent rentals amounted to $1,838 in 2000, $2,430 in 1999 and $1,733 in
1998. Total rent expense under operating leases aggregated approximately $34,384
in 2000, $32,892 in 1999 and $31,061 in 1998.
Future minimum rental payments under the operating lease agreements as of
December 31, 2000 are as follows:
Year Ending
December 31,
------------
2001 $ 28,996
2002 25,691
2003 23,106
2004 20,491
2005 18,976
Thereafter 116,271
-------------
$ 233,531
=============
55
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Litigation and Claims
On April 22, 1999, a putative class action was filed in the United States
District Court for the Southern District of New York by Vulcan International
Corporation against AMF Bowling, The Goldman Sachs Group, L.P., Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Cowen & Company, Schroder & Co., Inc.,
Richard A. Friedman and Douglas J. Stanard. The complaint has subsequently been
amended to, among other things, include additional named plaintiffs. The
plaintiffs, as putative class representatives for all persons who purchased the
Common Stock in the AMF Bowling's initial public offering of Common Stock (the
"Initial Public Offering") or within 25 days of the effective date of the
registration statement related to the Initial Public Offering, seek, among other
things, damages and/or rescission against all defendants jointly and severally
pursuant to Sections 11, 12 and/or 15 of the Securities Act of 1933, as amended,
based on allegedly inaccurate and misleading disclosures in connection with and
following the Initial Public Offering. Management believes that the litigation
is without merit and intends to defend against it vigorously.
In June 1998, Harbin Hai Heng Bowling Entertainment Co. Ltd. ("Hai Heng")
filed an action against AMF Bowling Products, Inc. ("AMF Bowling Products"), an
indirect subsidiary of 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 NCPs purchased from AMF Bowling Products. Hai Heng asserted that
the poor quality of the 38 NCPs entitled Hai Heng to recover the purchase price
and damages for lost profits and the cost of storing the NCPs.
On November 6, 1998, the court awarded Hai Heng approximately $3.5 million.
AMF Bowling Products appealed the award to the High People's Court of
Heilongjing Province (the "People's Court"). Prior to completion of the appeal
review, the President of the People's Court on February 11, 1999 issued a
judgment in favor of Hai Heng for approximately $2.8 million and ordered Hai
Heng to return 24 NCPs to AMF Bowling Products. AMF Bowling Products filed an
appeal to the Supreme People's Court in Beijing (the "Supreme Court"). The
Supreme Court orally issued a stay of the execution of the judgment. AMF Bowling
Products has been advised that the Supreme Court has declined to review the case
and the People's Court judgment is now final.
On September 21, 2000, the United States Securities and Exchange Commission
(the "SEC") issued a subpoena to AMF Bowling seeking documents concerning the
Company's financial statements and accounting practices and policies. On
February 12, 2001, AMF Bowling received a notification from the staff of the SEC
stating that the investigation was terminated and that no enforcement action was
recommended to the SEC.
In addition, the Company currently and from time to time is subject to
claims and actions arising in the ordinary course of its business, including
environmental claims, discrimination claims, workers' compensation claims and
personal injury claims from customers of Bowling Centers. In some actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. Certain of these litigations will be subject to the automatic stay in
a Chapter 11 filing. In management's opinion, the claims and actions in which
the Company is involved will not have a material adverse impact on its financial
position or results of operations. However, it is not possible to predict the
outcome of such claims and actions.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan to which U.S. employees
may make voluntary contributions based on their compensation. Under the
provisions of the plan, beginning on January 1, 1999, the Company matches 100%
of the first 3% and 50% of the next 2% of employee contributions. Prior to
January 1, 1999, the Company could, at its option, match a discretionary
percentage of employee contributions. The Company may make an additional
profit-sharing contribution as determined by the Board of Directors. Employer
contributions made prior to January 1, 1999 vest 100 percent on the fifth
anniversary of employment. Employer contributions made subsequent to December
31, 1998 vest 100 percent immediately. The amounts charged to expense under this
plan were $1,948 in 2000, $2,174 in 1999 and $0 in 1998.
56
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Certain of the Company's international operations have employee benefit
plans covering selected employees. These plans vary as to the funding, including
local government, employee, and employer funding. Each international operation
has provided for pension expense and made contributions to these plans in
accordance with the requirements of the plans and local country practices. The
amounts that were charged to expense under these plans aggregated $884 in 2000,
$875 in 1999 and $974 in 1998.
The Company has employment agreements with certain executives that provide
for salaries and bonuses if certain operational and financial targets are met
(the "Executive Employment Agreements"). The Executive Employment Agreements
provide for payment of accrued compensation, continuation of certain benefits,
severance payments, payment of a portion of the executive's bonus and vesting of
options to purchase shares of Common Stock ("Stock Options") following
termination of employment by Bowling Worldwide under certain circumstances. No
amounts were committed for future salaries at December 31, 2000.
1996 Stock Incentive Plan
In connection with the Acquisition, AMF Bowling adopted a stock incentive
plan (the "1996 Plan") under which AMF Bowling may grant incentive awards in the
form of shares of Common Stock, options to purchase Common Stock (the "Stock
Options"), and stock appreciation rights to certain officers, employees,
consultants, and non-employee directors ("Participants") of AMF Bowling and its
affiliates. The total number of shares of Common Stock reserved and available
for grant under the 1996 Plan is 1,767,151. A committee of AMF Bowling's Board
of Directors (the "Committee") is authorized to make grants and various other
decisions under the 1996 Plan and to make determinations as to a number of the
terms of awards granted under the 1996 Plan. In 1999, the Company did not grant
any Stock Options under the 1996 Plan. In 1998 and 1997, the Committee granted
Stock Options to Participants to purchase a total of 32,000 and 702,000 shares
of Common Stock, respectively. The 1998 Stock Options were granted at an
exercise price of $1.00 per share. The 1997 Stock Options were granted at an
exercise price of $10.00 per share. The Stock Options granted in 1998 vest on
the one-year anniversary of the grant date. With respect to the 1997 Stock
Options, twenty percent of the options vest on each of the first five
anniversaries of the grant dates. Stock Options are nontransferable (except
under certain limited circumstances) and, unless otherwise determined by the
Committee, have a term of ten years.
The number of Stock Options outstanding to all employees (including members
of senior management), and directors under the 1996 Plan at December 31, 2000,
1999 and 1998 total 1,124,750, 1,185,650 and 1,307,250, respectively. Of the
total Stock Options awarded under the 1996 Plan, 799,350 were exercisable during
2000 and 591,150 were exercisable during 1999. Of the exercisable Stock Options,
none were exercised in 2000 and 1999, and 67,550 were exercised in 1998.
Forfeited Stock Options totaled 60,900, 121,600 and 229,200 in 2000, 1999 and
1998, respectively.
The 1996 Plan will terminate ten years after its effective date; however,
awards outstanding as of such date will not be affected or impaired by such
termination. AMF Bowling's Board of Directors (the "Board") and the Committee
have authority to amend the 1996 Plan and awards granted thereunder, subject to
the terms of the 1996 Plan.
The weighted-average fair value of 1996 Plan options granted during 1998
and 1997 is $7.07 and $6.78 per option, respectively. The 1,124,750 options
outstanding at December 31, 2000 have a weighted-average exercise price of $9.74
and a weighted-average remaining contractual life of 6.0 years.
57
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1998 Stock Incentive Plan
Under the 1998 Stock Incentive Plan (the "1998 Plan"), AMF Bowling may
grant to employees of the Company and its affiliates incentive awards ("Awards")
in the form of Stock Options, stock appreciation rights and shares of Common
Stock that are subject to certain terms and conditions. The total number of
shares of Common Stock reserved and available for grant under the 1998 Plan is
four million. In addition, shares of Common Stock that have been reserved but
not issued under the 1996 Plan, and shares which are subject to awards under the
1996 Plan that expire or otherwise terminate, may be granted as Awards pursuant
to the 1998 Plan. There are 513,951 shares of Common Stock under the 1996 Plan
available for grant of awards under that plan.
Shares allocated to Awards granted under the 1998 Plan which are later
forfeited, expire or otherwise terminate (including shares subject to Stock
Appreciation Rights that are exercised for cash) may again be used for Awards
under the 1998 Plan. No more than 200,000 shares of Common Stock may be
allocated to the Awards granted under the 1998 Plan to a Participant in any one
year.
In 2000, 1999 and 1998, 107,500, 1,523,000 and 950,400 Stock Options,
respectively were granted as Awards under the 1998 Plan. Twenty percent of the
Stock Options vest on each of the first five anniversaries of the grants. The
number of Stock Options outstanding to senior management, other employees, and
directors under the 1998 Plan at December 31, 2000 and 1999 total 1,889,528 and
2,266,150, respectively. Of the total Stock Options awarded under the 1998 Plan,
562,336 were exercisable in 2000, 156,030 were exercisable in 1999 and none were
exercisable during 1998. Forfeited Stock Options totaled 484,122 in 2000,
151,500 in 1999 and 55,750 in 1998.
In 1999, the chief executive officer of the Company was granted Stock
Options to purchase 1,000,000 shares of Common Stock (the "CEO Stock Options").
The CEO Stock Options were not granted pursuant to the 1996 Plan or the 1998
Plan but are subject to the terms of the 1998 Plan. The CEO Stock Options were
granted at an exercise price of $5.28 per share. Twenty percent of the CEO Stock
Options vested on the grant date and twenty percent vest on each of the first
four anniversaries of the grant date.
The weighted-average fair value of 1998 Plan Stock Options and CEO Stock
Options granted during 2000, 1999 and 1998 is $2.28, $3.08 and $4.87 per option,
respectively. The 2,889,528 options outstanding at December 31, 2000 have a
weighted-average exercise price of $6.58 and a weighted-average remaining
contractual life of 8.4 years.
The 1998 Plan will terminate ten years after its effective date; however,
awards outstanding as of such date will not be affected or impaired by such
termination. The Board and the Committee have authority to amend the 1998 Plan
and awards granted thereunder, subject to the terms of the 1998 Plan.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants in 1998, 1999 and 2000:
Risk-Free Dividend Time of
Rate Yield Exercise Volatility
----------- ---------- ---------- -----------
1998 5.12% 0.00% 5 years 27.50%
1999 6.48% 0.00% 5 years 49.57%
2000 5.46% 0.00% 5 years 200.00%
58
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 1999, the Company granted to one executive of the Company 100,000
restricted shares of Common Stock (the "Restricted Stock") at a cost of $1,000
to the executive. The Restricted Stock was granted pursuant to and is governed
by the 1998 Plan and is subject to the Stockholders Agreement. One-third of the
Restricted Stock vests on each of the first three anniversaries of the grant.
The Company will record compensation expense related to the issuance of this
Common Stock over the vesting period.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," and elected to account for its stock options under APB Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for Stock Options granted under the 1996 Plan and 1998 Plan and the CEO
Stock Options been determined consistent with SFAS No. 123, the Company's net
losses for 2000, 1999 and 1998 would have been increased to $185,609, $203,029
and $126,108, respectively.
NOTE 13. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes in 2000, 1999 and 1998 was as
follows:
2000 1999 1998
------------- ------------- -------------
Interest $ 75,426 $ 81,779 $ 76,464
Income taxes 4,318 5,495 5,213
Net cash used for business acquisitions in 2000, 1999 and 1998 consisted of
the following:
2000 1999 1998
------------- ------------- --------------
Working Capital, other than cash acquired $ 2,420 $ 54 $ 2,822
Plant and equipment (7,802) (1,422) (151,765)
Purchase price in excess of the net assets acquired (2,434) - (18,286)
Other assets (1,726) (46) (6,263)
Non-current liabilities 1,065 - -
------------- ------------- --------------
Net cash used for business acquisitions $ (8,477) $ (1,414) $ (173,492)
============= ============= ==============
Number of centers acquired 17 1 83
============= ============= ==============
Non-cash financing activities in 2000, 1999 and 1998 were as follows:
2000 1999 1998
------------- ------------- --------------
Issuance of AMF Bowling Common Stock in connection with an
acquisition $ - $ - $ 1,209
59
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14. ACQUISITIONS
Since the Acquisition and prior to December 31, 2000, AMF Bowling Centers
purchased an aggregate of 280 bowling centers for a combined net purchase price
of approximately $507.4 million. See "Note 13. Supplemental Disclosures to the
Consolidated Statements of Cash Flows" for acquisition activity by year.
Subsequent to December 31, 2000, the Company has not acquired any bowling
centers.
NOTE 15. JOINT VENTURES
In April 1997, the Company entered into a joint venture with Hong Leong
Corporation Limited, a Singapore-based conglomerate ("Hong Leong"), to build and
operate bowling centers in the Asia Pacific region. The joint venture ("Hong
Leong Joint Venture") is owned 50% by the Company and 50% by Hong Leong. The
Hong Leong Joint Venture opened its only bowling center during November 1997 in
Tianjin, China. Due to the economic difficulties in the Asia Pacific region,
future development of bowling centers in that region through the Hong Leong
Joint Venture will not be pursued.
In December 2000, the Hong Leong Joint Venture sold its bowling center in
Tianjin, China and is now in the process of winding up its affairs. At the
completion of this process, the Company expects that the Hong Leong Joint
Venture will be terminated.
In August 1997, the Company entered into a joint venture with Playcenter
S.A., a Sao Paulo-based amusement and entertainment company ("Playcenter") to
build and operate bowling centers in Brazil and Argentina. In December 2000, the
Company purchased the remaining 50% interest in the Playcenter Joint Venture for
nominal consideration and accounted for the acquisition using purchase
accounting. The Company is now the sole owner of the twelve centers in Brazil
and one center in Argentina.
60
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company accounted for its investments in Hong Leong Joint Venture and
Playcenter Joint Venture by the equity method prior to their respective
dispositions as previously discussed. The joint ventures' operations and the
Company's equity in earnings of the joint ventures are presented below (in
thousands, unaudited):
Joint Venture
------------------------
Joint Venture Operations Hong Leong Playcenter Total
- ------------------------ ---------- ---------- ---------
Year Ended December 31, 1998:
Operating revenue $ 1,658 $ 16,082 $ 17,740
Operating loss (969) (4,851) (5,820)
Loss before income taxes (1,159) (8,637) (9,796)
Net loss after income taxes (1,159) (8,661) (9,820)
Year Ended December 31, 1999:
Operating revenue $ 967 $ 9,456 $ 10,423
Operating loss (686) (3,424) (4,110)
Loss before income taxes (861) (14,558) (15,419)
Net loss after income taxes (861) (14,560) (15,421)
Year Ended December 31, 1999:
Operating revenue $ 379 $ 5,692 $ 6,071
Operating loss (449) (2,376) (2,825)
Loss before income taxes (1,047) (6,336) (7,383)
Net loss after income taxes (1,047) (6,805) (7,852)
Joint Venture
------------------------
AMF Equity in Earnings Hong Leong Playcenter Total
- ---------------------- ---------- ---------- ---------
Balance December 31, 1997 $ (354) $ (1,008) $ (1,362)
---------- ---------- ---------
AMF equity in loss (579) (4,330) (4,909)
Amortization of excess investment - (3,298) (3,298)
---------- ---------- ---------
Balance December 31, 1998 (933) (8,636) (9,569)
---------- ---------- ---------
AMF equity in loss (431) (7,280) (7,711)
Amortization of excess investment - (10,937) (10,937)
---------- ---------- ---------
Balance December 31, 1999 $ (1,364) $ (26,853) $ (28,217)
========= ========== =========
61
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The joint ventures' financial position as of December 31, 1999, and the
Company's investments in the joint ventures and amounts due from Playcenter
Joint Venture as of December 31, 1999, are presented below (in thousands,
unaudited):
Joint Venture Financial Position 1999
- -------------------------------- ----------
Current assets $ 1,387
Non-current assets 17,035
Current liabilities 5,600
Non-current liabilities 30,363
Stockholders' equity (deficit) (17,540)
Investments/Amounts due from Joint Ventures 1999
- ------------------------------------------- ----------
Investments in joint ventures $ (14,130)
Notes receivable due from joint ventures 4,085
Loan to joint venture 10,493
----------
Total investment/due from joint ventures $ 448
==========
The note receivable due from and loan to the Playcenter Joint Venture
represented the balance due for sales of equipment to the Joint Venture through
a Brazilian distributor.
62
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16. BUSINESS SEGMENTS
The Company operates in two major lines of business: operation of bowling
centers and manufacturing and sale of bowling and related products. Information
concerning operations in these business segments for 2000, 1999 and 1998 is
presented below (in millions):
Bowling Centers Bowling Products
------------------------------------ ------------------------------------
Inter- Sub- Inter- Sub-
U.S. national total U.S. national total
------- -------- ------- ------ -------- -------
Year Ended December 31, 2000:
Revenue from unaffiliated customers $ 466.7 $ 113.7 $ 580.4 $ 68.0 $ 66.6 $ 134.6
Intersegment sales - - - 12.7 4.0 16.7
Operating income (loss) 10.4 0.1 10.5 (35.5) (10.4) (45.9)
Identifiable assets 781.5 296.8 1,078.3 574.1 60.7 634.8
Depreciation and amortization 88.8 22.9 111.7 23.7 1.1 24.8
Capital expenditures 42.7 11.7 54.4 9.5 1.1 10.6
Research and development expense - - - 0.1 - 0.1
Year Ended December 31, 1999:
Revenue from unaffiliated customers $ 461.0 $ 124.7 $ 585.7 $ 68.1 $ 78.9 $ 147.0
Intersegment sales - - - 18.1 4.2 22.3
Operating income (loss) 11.0 8.6 19.6 (33.4) (10.1) (43.5)
Identifiable assets 810.4 315.8 1,126.2 607.6 64.3 671.9
Depreciation and amortization 84.2 25.2 109.4 22.2 1.4 23.6
Capital expenditures 34.1 9.4 43.5 7.9 0.4 8.3
Research and development expense - - - 0.3 - 0.3
Year Ended December 31, 1998:
Revenue from unaffiliated customers (a) $ 423.8 $ 115.4 $ 539.2 $ 83.2 $ 114.0 $ 197.2
Intersegment sales - - - 10.9 4.4 15.3
Operating income (loss) (a) 32.6 12.1 44.7 (7.8) (4.0) (11.8)
Identifiable assets 883.3 350.1 1,233.4 625.4 80.7 706.1
Depreciation and amortization 77.8 19.6 97.4 21.1 1.4 22.5
Capital expenditures 46.9 10.0 56.9 8.5 1.0 9.5
Research and development expense - - - 0.1 - 0.1
Elim-
Corporate inations Total
Year Ended December 31, 2000:
Revenue from unaffiliated customers $ - $ - $ 715.0
Intersegment sales - (16.7) -
Operating income (loss) (23.0) 1.4 (57.0)
Identifiable assets 8.3 4.9 1,726.3
Depreciation and amortization 1.2 (1.7) 136.0
Capital expenditures 1.5 - 66.5
Research and development expense - - 0.1
Year Ended December 31, 1999:
Revenue from unaffiliated customers $ - $ - $ 732.7
Intersegment sales - (22.3) -
Operating income (loss) (16.1) 1.3 (38.7)
Identifiable assets 3.8 3.5 1,805.4
Depreciation and amortization 1.3 (1.6) 132.7
Capital expenditures 0.3 - 52.1
Research and development expense - - 0.3
Year Ended December 31, 1998:
Revenue from unaffiliated customers (a) $ - $ - $ 736.4
Intersegment sales - (15.3) -
Operating income (loss) (a) (17.8) 1.0 16.1
Identifiable assets 14.3 2.2 1,956.0
Depreciation and amortization 2.0 (1.6) 120.3
Capital expenditures 0.2 - 66.6
Research and development expense - - 0.1
(a) Certain amounts have been reclassified to conform to current year presentation.
63
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 17. GEOGRAPHIC SEGMENTS
Information about the Company's operations in different geographic areas
for 2000, 1999 and 1998, and identifiable assets at December 31, 2000 and 1999,
are presented below:
Operating Revenue Operating Income (Loss)
---------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
--------- --------- --------- --------- --------- ---------
United States $ 547,400 $ 547,200 $ 517,900 $ (48,100) $ (38,500) $ 7,000
Australia 44,400 54,800 48,900 (200) 6,300 6,400
Canada 200 3,000 800 - 200 (200)
China, including Hong Kong 5,300 19,500 33,500 (7,900) (5,700) (3,200)
Japan 26,600 22,400 34,200 100 (800) (200)
Korea 3,100 3,500 6,400 (100) (1,600) (900)
Latin America 11,800 12,200 10,700 - 1,600 1,600
Middle East 1,200 1,300 700 (500) (400) (200)
Other European countries 31,300 29,000 32,400 (1,400) (1,500) (1,200)
Sweden 7,900 7,900 6,500 500 700 500
United Kingdom 52,500 54,200 59,700 (800) (300) 5,700
Eliminations (16,700) (22,300) (15,300) 1,400 1,300 1,000
--------- --------- --------- --------- --------- --------
$ 715,000 $ 732,700 $ 736,400 $ (57,000) $ (38,700) $ 16,300
========= ========= ========= ========= ========= ========
Indentifiable Assets
---------------------------
2000 1999
----------- -----------
United States $ 1,363,900 $ 1,421,800
Australia 98,100 109,900
Canada - 2,300
China, including Hong Kong 12,500 21,300
Japan 23,400 24,200
Korea 5,500 8,100
Latin America 29,200 14,800
Middle East 600 700
Other European countries 35,300 31,500
Sweden 5,100 3,300
United Kingdom 147,800 164,000
Eliminations 4,900 3,500
----------- -----------
$ 1,726,300 $ 1,805,400
=========== ===========
Operating revenue for the U.S. Bowling Products operation has been reduced
by $42,341 in 2000, $42,185 in 1999 and $75,991 in 1998 to reflect the
elimination of intra-company sales between the U.S. Bowling products operation
and the Bowling Products international sales and service branches. Operating
income for the U.S. Bowling Products operation has been decreased by $173 in
2000 and increased by $1,488 in 1999 and $148 in 1998 to reflect the elimination
of intra-company gross profit between the U.S. Bowling Products operations and
the Bowling Products international sales and service branches. Identifiable
assets for the international sales and service branches have been reduced by
$1,722 at December 31, 2000 and $1,549 at December 31, 1999 to reflect the
elimination of intra-company gross profit in inventory between the U.S. Bowling
Products operations and the Bowling Products international sales and service
branches.
NOTE 18. RELATED PARTIES
Goldman Sachs and its affiliates have certain interests in the Company.
Goldman Sachs and its affiliates together currently beneficially own a majority
of the outstanding voting equity of AMF Bowling. Goldman Sachs also owns 870,000
warrants to purchase shares of Common Stock. The warrants were issued in
connection with the Acquisition at an exercise price of $0.01 per share and
expire in May 2006. In addition, Goldman Sachs was the initial purchaser of the
Senior Subordinated Notes and Senior Subordinated Discount Notes (together, the
"Subordinated Notes") of the Company in connection with the Acquisition. Richard
A. Friedman and Terence M. O'Toole, each of whom is a Managing Director of
Goldman Sachs, and Peter M. Sacerdote, who is a limited partner of The Goldman
Sachs Group, L.P., are directors of AMF Bowling, AMF Group Holdings and Bowling
Worldwide. Goldman Sachs, thus, is deemed to be an "affiliate" of the Company.
Goldman Sachs received an underwriting discount of approximately $19.0 million
in connection with the purchase and resale of the Subordinated Notes in 1996. In
addition, Goldman Sachs was reimbursed its expenses and is indemnified in
connection with its services.
64
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under the Credit Agreement, Goldman Sachs Credit Partners, L.P., acted as
Syndication Agent; Goldman Sachs Credit Partners, L.P., and Citicorp Securities,
Inc., acted as Arrangers; Citibank, N.A. is acting as Administrative Agent and
Citicorp USA, Inc. is acting as Collateral Agent. Goldman Sachs Credit Partners,
L.P., was also a lender under the bank credit agreement. Total fees and
reimbursable expenses payable to Goldman Sachs Credit Partners, L.P. in
connection with its services under the Credit Agreement aggregated approximately
$10.7 million, and such entity was reimbursed for expenses in connection with
such services.
NOTE 19. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company will be required to adopt Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." The Company does not expect that adoption of this
standard will have a material impact on the Company's financial position or
results of operations.
NOTE 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating information presents:
. Condensed consolidating balance sheets as of December 31, 2000 and
1999, and condensed consolidating statements of operations and cash
flows for 2000, 1999 and 1998.
. Elimination entries necessary to combine the entities comprising AMF
Group Holdings.
The Subordinated Notes are jointly and severally guaranteed on a full and
unconditional basis by the Guarantors. Third-tier subsidiaries of Bowling
Worldwide, all of which are wholly owned subsidiaries of AMF Worldwide Bowling
Centers Holdings Inc., a second-tier subsidiary of Bowling Worldwide, have not
provided guarantees (the "Non-Guarantors").
65
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2000
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
------------- ---------- ------------ -------------
Assets
------
Current Assets:
Cash and cash equivalents $ 37,088 $ 9,671 $ - $ 46,759
Accounts and notes receivable, net of allowance
for doubtful accounts 42,590 480 - 43,070
Accounts receivable - intercompany 5,422 13,941 (19,363) -
Inventories 54,295 1,402 - 55,697
Other 10,071 2,718 - 12,789
------------- ---------- ----------- -------------
Total current assets 149,466 28,212 (19,363) 158,315
Notes receivable - intercompany 49,944 5,663 (55,607) -
Property and equipment, net 711,792 42,374 1,422 755,588
Investment in subsidiaries 7,784 - (7,784) -
Goodwill and other assets 796,478 15,903 - 812,381
------------- ---------- ----------- -------------
Total assets $ 1,715,464 $ 92,152 $ (81,332) $ 1,726,284
============= ========== =========== =============
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable 24,798 1,382 35 26,215
Accounts payable - intercompany 13,941 5,422 (19,363) -
Accrued expenses 95,886 5,497 - 101,383
Income taxes payable (3,860) 5,120 - 1,260
Current portion of long-term debt 1,119,555 17,003 - 1,136,558
------------- ---------- ----------- -------------
Total current liabilities 1,250,320 34,424 (19,328) 1,265,416
Long-term debt, less current portion - - - -
Notes payable - intercompany 5,663 49,944 (55,607) -
Other long-term liabilities 6,963 - - 6,963
------------- ---------- ----------- -------------
Total liabilities 1,262,946 84,368 (74,935) 1,272,379
------------- ---------- ----------- -------------
Commitments and contingencies
Stockholder's equity:
Common stock - - - -
Paid-in capital 1,045,525 24,321 (22,317) 1,047,529
Retained deficit (564,413) (3,830) 3,213 (565,030)
Accumulated other comprehensive income (28,594) (12,707) 12,707 (28,594)
------------- ---------- ----------- -------------
Total stockholder's equity 452,518 7,784 (6,397) 453,905
------------- ---------- ----------- -------------
Total liabilities and stockholder's equity $ 1,715,464 $ 92,152 $ (81,332) $ 1,726,284
============= ========== =========== =============
66
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 1999
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
------------- ---------- ------------ -------------
Assets
------
Current Assets:
Cash and cash equivalents $ 18,632 $ 1,883 $ - $ 20,515
Accounts and notes receivable, net of allowance
for doubtful accounts 62,795 380 - 63,175
Accounts receivable - intercompany 4,659 9,452 (14,111) -
Inventories 52,404 1,095 - 53,499
Other 9,567 4,884 - 14,451
------------- ---------- ----------- -------------
Total current assets 148,057 17,694 (14,111) 151,640
Notes receivable - intercompany 48,194 5,663 (53,857) -
Property and equipment, net 747,672 57,451 1,302 806,425
Investment in subsidiaries 17,234 - (17,234) -
Goodwill and other assets 825,991 21,300 - 847,291
------------- ---------- ----------- -------------
Total assets $ 1,787,148 $ 102,108 $ (83,900) $ 1,805,356
============= ========== =========== =============
Liabilities and Stockholder's Equity
- ------------------------------------
Current liabilities:
Accounts payable 35,158 1,323 - 36,481
Accounts payable - intercompany 9,452 4,659 (14,111) -
Accrued expenses 62,878 7,563 - 70,441
Income taxes payable (1,821) 5,198 - 3,377
Current portion of long-term debt 34,250 - - 34,250
------------- ---------- ----------- -------------
Total current liabilities 139,917 18,743 (14,111) 144,549
Long-term debt, less current portion 997,349 17,003 - 1,014,352
Notes payable - intercompany 5,663 48,194 (53,857) -
Other long-term liabilities 3,870 934 - 4,804
------------- ---------- ----------- -------------
Total liabilities 1,146,799 84,874 (67,968) 1,163,705
------------- ---------- ----------- -------------
Commitments and contingencies
Stockholder's equity:
Common stock - - - -
Paid-in capital 1,038,525 24,321 (22,317) 1,040,529
Retained deficit (382,852) 1,637 (2,339) (383,554)
Accumulated other comprehensive income (15,324) (8,724) 8,724 (15,324)
------------- ---------- ----------- -------------
Total stockholder's equity 640,349 17,234 (15,932) 641,651
------------- ---------- ----------- -------------
Total liabilities and stockholder's equity $ 1,787,148 $ 102,108 $ (83,900) $ 1,805,356
============= ========== =========== =============
67
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ------------ ------------ ------------
Operating revenue $ 657,956 $ 57,881 $ (836) $ 715,001
-------------- ------------ ------------ ------------
Operating expenses:
Cost of goods sold 167,359 6,462 (723) 173,098
Bowling center operating expenses 349,480 37,824 (360) 386,944
Selling, general, and administrative expenses 59,925 4,536 - 64,461
Restructuring and asset impairment charges 5,046 - - 5,046
Refinancing charges, primarily legal and
advisory services 6,461 78 - 6,539
Depreciation and amortization 126,687 9,436 (122) 136,001
-------------- ------------ ------------ ------------
Total operating expenses 714,958 58,336 (1,205) 772,089
-------------- ------------ ------------ ------------
Operating loss (57,002) (455) 369 (57,088)
Nonoperating expenses (income):
Interest expense 119,869 1,630 - 121,499
Other expenses, net 452 1,171 - 1,623
Interest income (3,594) (5) 2,085 (1,514)
Equity in loss (income) of subsidiaries 3,350 - (3,350) -
-------------- ------------ ------------ ------------
Total nonoperating expenses 120,077 2,796 (1,265) 121,608
-------------- ------------ ------------ ------------
Loss before income taxes (177,079) (3,251) 1,634 (178,696)
Provision for income taxes 2,157 99 - 2,256
-------------- ------------ ------------ ------------
Net loss before equity in loss
of joint ventures and extraordinary item (179,236) (3,350) 1,634 (180,952)
Equity in loss of joint ventures (524) - - (524)
-------------- ------------ ------------ ------------
Net loss $ (179,760) $ (3,350) $ 1,634 $ (181,476)
============== ============ ============ ============
68
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ------------ ------------ ------------
Operating revenue $ 673,071 $ 60,776 $ (1,095) $ 732,752
-------------- ------------ ------------ ------------
Operating expenses:
Cost of goods sold 171,173 6,764 (733) 177,204
Bowling center operating expenses 340,098 33,696 (360) 373,434
Selling, general, and administrative expenses 67,403 4,158 - 71,561
Restructuring and asset impairment charges 16,658 - 16,658
Depreciation and amortization 121,272 11,497 (122) 132,647
-------------- ------------ ------------ ------------
Total operating expenses 716,604 56,115 (1,215) 771,504
-------------- ------------ ------------ ------------
Operating income (loss) (43,533) 4,661 120 (38,752)
Nonoperating expenses (income):
Interest expense 109,780 1,457 - 111,237
Other expenses, net 3,241 3,399 - 6,640
Interest income (1,869) (20) - (1,889)
Equity in loss of subsidiaries 3,849 - (3,849) -
-------------- ------------ ------------ ------------
Total nonoperating expenses 115,001 4,836 (3,849) 115,988
-------------- ------------ ------------ ------------
Loss before income taxes (158,534) (175) 3,969 (154,740)
Provision for income taxes 23,951 3,674 - 27,625
-------------- ------------ ------------ ------------
Net loss before equity in loss of joint ventures
of joint ventures (182,485) (3,849) 3,969 (182,365)
Equity in loss of joint ventures (18,648) - - (18,648)
-------------- ------------ ------------ ------------
Net loss $ (201,133) $ (3,849) $ 3,969 $ (201,013)
============== ============ ============ ============
69
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ------------ ------------ ------------
Operating revenue $ 681,032 $ 56,087 $ (746) $ 736,373
-------------- ------------ ------------ ------------
Operating expenses:
Cost of goods sold 196,376 6,347 (499) 202,224
Bowling center operating expenses 302,571 31,641 (247) 333,965
Selling, general, and administrative expenses 60,738 3,031 - 63,769
Depreciation and amortization 113,558 6,910 (172) 120,296
-------------- ------------ ------------ ------------
Total operating expenses 673,243 47,929 (918) 720,254
-------------- ------------ ------------ ------------
Operating income 7,789 8,158 172 16,119
Nonoperating expenses (income):
Interest expense 100,804 1,126 - 101,930
Other expenses, net 4,851 2,475 - 7,326
Interest income (1,689) (122) - (1,811)
Equity in income of subsidiaries (249) - 249 -
-------------- ------------ ------------ ------------
Total nonoperating expenses 103,717 3,479 249 107,445
-------------- ------------ ------------ ------------
Income (loss) before income taxes (95,928) 4,679 (77) (91,326)
Provision for income taxes 2,864 4,430 - 7,294
-------------- ------------ ------------ ------------
Net income (loss) before equity in loss of joint ventures (98,792) 249 (77) (98,620)
Equity in loss of joint ventures (8,207) - - (8,207)
-------------- ------------ ------------ ------------
Net income (loss) $ (106,999) $ 249 $ (77) $ (106,827)
============== ============ ============ ============
70
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2000
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------- --------- ------------ ------------
Cash flows from operating activities:
Net loss $ (179,760) $ (3,350) $ 1,634 $ (181,476)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 126,687 9,436 (122) 136,001
Equity in loss of joint ventures 524 - - 524
Extraordinary item - - - -
Deferred income taxes (3) 3 - -
Amortization of bond discount 30,352 - - 30,352
Equity in loss of subsidiaries 3,350 - (3,350) -
(Gain) loss on the sale of property and equipment, net (5,984) 4,383 - (1,601)
Impairment of assets 1,559 - - 1,559
Changes in assets and liabilities:
Accounts and notes receivable, net 31,388 (115) - 31,273
Receivables and payables - affiliates (1,719) 1,719 - -
Inventories (3,928) (384) - (4,312)
Other assets (2,727) 4,674 (249) 1,698
Accounts payable and accrued expenses 21,865 (1,973) - 19,892
Income taxes payable (2,113) 375 - (1,738)
Other long-term liabilities (3,158) - - (3,158)
------------ ---------- ------------ ------------
Net cash provided by operating activities 16,333 14,768 (2,087) 29,014
------------ ---------- ------------ ------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (8,477) - - (8,477)
Purchases of property and equipment (61,246) (5,301) 2 (66,545)
Proceeds from sale of property and equipment 6,743 2,657 - 9,400
------------ ---------- ------------ ------------
Net cash used in investing activities (62,980) (2,644) 2 (65,622)
------------ ---------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 87,000 - - 87,000
Payment on long-term debt (29,407) - - (29,407)
Payments of noncompete obligations (307) - - (307)
Capital contributions from AMF Bowling 7,000 - - 7,000
Dividends paid - (2,085) 2,085 -
------------ ---------- ------------ ------------
Net cash provided by (used in) financing activities 64,286 (2,085) 2,085 64,286
------------ ---------- ------------ ------------
Effect of exchange rates on cash 817 (2,251) - (1,434)
------------ ---------- ------------ ------------
Net increase in cash 18,456 7,788 - 26,244
Cash and cash equivalents at beginning of period 18,632 1,883 - 20,515
------------ ---------- ------------ ------------
Cash and cash equivalents at end of period $ 37,088 $ 9,671 $ - $ 46,759
============ ========== ============ ============
71
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1999
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------- --------- ------------ ------------
Cash flows from operating activities:
Net loss $ (201,133) $ (3,849) $ 3,969 $ (201,013)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 121,272 11,497 (122) 132,647
Equity in loss of joint ventures 18,648 - - 18,648
Deferred income taxes 20,557 (90) - 20,467
Amortization of bond discount 26,874 - - 26,874
Equity in loss of subsidiaries 3,849 - (3,849) -
Loss on the sale of property and equipment, net 2,561 - - 2,561
Loss on impairment of assets 8,118 - - 8,118
Changes in assets and liabilities:
Accounts and notes receivable, net 11,389 14 - 11,403
Receivables and payables - affiliates 664 (664) - -
Inventories 11,038 (126) - 10,912
Other assets 14,594 (12,152) - 2,442
Accounts payable and accrued expenses 14,008 (3,893) - 10,115
Income taxes payable (4,574) 1,433 - (3,141)
Other long-term liabilities 377 - - 377
----------- --------- ------------ ------------
Net cash provided by (used in) operating activities 48,242 (7,830) (2) 40,410
----------- --------- ------------ ------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (1,414) - - (1,414)
Purchases of property and equipment (48,867) (3,222) 2 (52,087)
Proceeds from sale of property and equipment 1,117 911 - 2,028
----------- --------- ------------ ------------
Net cash used in investing activities (49,164) (2,311) 2 (51,473)
----------- --------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 81,000 - - 81,000
Payment on long-term debt (106,373) - - (106,373)
Payments of noncompete obligations (289) - - (289)
Capital contribution from AMF Bowling 34,731 - - 34,731
----------- --------- ------------ ------------
Net cash provided by financing activities 9,069 - - 9,069
----------- --------- ------------ ------------
Effect of exchange rates on cash 1,797 (1,135) - 662
----------- --------- ------------ ------------
Net increase (decrease) in cash 9,944 (11,276) - (1,332)
Cash and cash equivalents at beginning of period 8,688 13,159 - 21,847
----------- --------- ------------ ------------
Cash and cash equivalents at end of period $ 18,632 $ 1,883 $ - $ 20,515
=========== ========= ============ ============
72
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
(Unaudited)
(In Thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------- --------- ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (106,999) $ 249 $ (77) $ (106,827)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 113,558 6,910 (172) 120,296
Equity loss in joint ventures 8,207 8,207
Deferred income taxes (243) - - (243)
Amortization of bond discount 23,965 - - 23,965
Equity in loss of subsidiaries (249) - 249 -
Loss on the sale of property and equipment, net 8,953 (5) - 8,948
Changes in assets and liabilities:
Accounts and notes receivable (11,129) 976 - (10,153)
Receivables and payables - affiliates (22,873) 22,873 - -
Inventories (6,982) (87) - (7,069)
Other assets (12,912) (6,772) - (19,684)
Accounts payable and accrued expenses (14,474) 5,093 - (9,381)
Income taxes payable (1,875) 1,661 - (214)
Other long-term liabilities (73) - - (73)
----------- --------- ------------ ------------
Net cash (used in) provided by operating activities (23,126) 30,898 - 7,772
----------- --------- ------------ ------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (124,054) (49,438) - (173,492)
Investments in and advances to joint ventures (5,643) - - (5,643)
Purchases of property and equipment (62,872) (3,767) - (66,639)
Proceeds from sale of property and equipment 3,811 - - 3,811
----------- --------- ------------ ------------
Net cash used in investing activities (188,758) (53,205) - (241,963)
----------- --------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 224,500 40,000 264,500
Payment on long-term debt (278,988) (22,997) - (301,985)
Capital contribution from AMF Bowling 255,587 - - 255,587
Payments of noncompete obligations (677) - - (677)
----------- --------- ------------ ------------
Net cash provided by financing activities 200,422 17,003 - 217,425
----------- --------- ------------ ------------
Effect of exchange rates on cash (2,152) 4,975 - 2,823
----------- --------- ------------ ------------
Net decrease in cash (13,614) (329) - (13,943)
Cash and cash equivalents at beginning of period 33,457 2,333 - 35,790
----------- --------- ------------ ------------
Cash and cash equivalents at end of period $ 19,843 $ 2,004 $ - $ 21,847
=========== ========= ============ ============
73
AMF GROUP HOLDINGS INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
(dollars in millions)
-------------------------------------------
Quarters Ended Mar 31 Jun 30 Sep 30 Dec 31
------- ------- ------- -------
Operating Revenue 2000 $ 209.5 $ 160.7 $ 162.1 $ 182.7
1999 202.6 161.1 182.8 186.2
1998 187.3 161.8 172.1 215.2
Operating income (loss) 2000 $ 23.9 $ (14.4) $ (17.9) $ (48.6)
1999 23.3 (13.5) (53.5) 5.0
1998 26.3 (11.7) (9.7) 11.2
Net loss 2000 $ (5.6) $ (46.3) $ (52.2) $ (77.4)
1999 (12.1) (46.5) (103.7) (38.7)
1998 (0.6) (32.2) (31.4) (42.6)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP has served as the Company's independent public
accountants since 1996.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The Board of Directors (the "Board") consists of nine members, each of whom
is elected to serve a one-year term or until his successor is duly elected and
qualified or until his earlier death, resignation or removal. Except for Mr.
Smith, who has been a director since 1999, each present director has served on
the Board since 1996. The persons listed below are the directors of Bowling
Worldwide, each of whom is also a director of AMF Bowling.
Richard A. Friedman, 43, is the Chairman of the Board. Mr. Friedman has
been a Managing Director of Goldman, Sachs & Co. ("Goldman Sachs"), an
investment firm, since 1996. He joined Goldman Sachs in 1981. Mr. Friedman
serves on the Boards of Directors of Carmike Cinemas, Inc., Polo Ralph Lauren
Corporation and Orion Power Holdings.
Roland C. Smith, 46, has been President and Chief Executive Officer of AMF
Bowling and Bowling Worldwide since joining the Company in April 1999. Prior to
joining the Company, Mr. Smith was President and Chief Executive Officer of the
Triarc Restaurant Group ("Triarc"), a restaurant franchiser which conducts its
business through Arby's, Inc., from 1997 to 1999. Mr. Smith joined Triarc in
1994 as vice president of international marketing.
Stephen E. Hare, 47, has been an Executive Vice President and the Chief
Financial Officer of AMF Bowling and Bowling Worldwide since joining the Company
in May 1996. Mr. Hare also served as Acting President and Chief Executive
Officer of the Company from November 1998 until Mr. Smith's employment with the
Company began in April 1999. Mr. Hare served as Senior Vice President and Chief
Financial Officer of James River Corporation of Virginia, a manufacturer and
marketer of paper products and other related consumer goods, from 1992 to 1996.
Terence M. O'Toole, 42, is a Managing Director of Goldman Sachs, an
investment firm. He joined Goldman Sachs in 1983. Mr. O'Toole serves on the
Boards of Directors of Western Wireless Corporation, Voice Stream Wireless
Corporation and Orion Power Holdings.
Peter M. Sacerdote, 63, is an Advisory Director of Goldman Sachs, an
investment firm. He joined Goldman Sachs in 1964 and served as a General Partner
from 1973 to 1990 and as a Limited Partner from 1990 to 1999. Mr. Sacerdote
serves on the Boards of Directors of Franklin Resources, Inc., QUALCOMM, Inc.
and Hexcel Corporation.
Charles M. Diker, 66, has been a non-managing Principal of Weiss, Peck &
Greer, an investment management firm, since 1975. He has been Chairman of the
Board of Cantel Industries, Inc. since 1986. Mr. Diker also serves on the Boards
of Directors of International Specialty Products and Chyron Corporation.
Paul B. Edgerley, 45, has been Managing Director of Bain Capital, Inc., an
investment firm, since 1993. From 1990 to 1993 he was a General Partner of Bain
Venture Capital, and from 1988 to 1990 he was a principal of Bain Capital
Partners. He serves on the Boards of Directors of GS Industries, Inc., Sealy
Mattress Company, Maxim Crane Midwest of Cannon Falls and Walco International.
Howard A. Lipson, 37, is Senior Managing Director of The Blackstone Group
L.P., an investment firm, and has been involved in that firm's principal
activities since 1988. He serves on the Boards of Directors of Allied Waste
Industries, Inc., Rose Hills Company, Ritvik Toys, Inc., Volume Services
America, Inc., Graham Packaging Company and Universal Studios Orlando.
Thomas R. Wall, IV, 42, joined Kelso & Company, L.P., an investment firm,
in 1983 and has served as a Managing Director since 1990. Mr. Wall serves on the
Boards of Directors of Citation Corporation, Consolidated
75
Vision Group, Inc., Cygnus Publishing, Inc., iXL Enterprises, Inc., Key
Components, Inc., Mitchell Supreme Fuel Company, Mosler Inc., Peebles, Inc.,
TransDigm Inc. and 21st Century Newspapers, Inc.
EXECUTIVE OFFICERS
The following table sets forth information concerning the executive
officers of Bowling Worldwide. Each of the executive officers, except for Mr.
Suddarth, is also an executive officer of AMF Bowling.
Name Age Position
---- --- --------
Roland C. Smith............... 46 Director; President and Chief Executive Officer
Stephen E. Hare............... 47 Director; Executive Vice President; Chief Financial
Officer and Treasurer
Timothy N. Scott.............. 41 Senior Vice President, Marketing
John B. Suddarth.............. 41 Senior Vice President
Roland C. Smith has been President and Chief Executive Officer of AMF
Bowling and Bowling Worldwide since joining the Company in April 1999. Prior to
joining the Company, Mr. Smith was President and Chief Executive Officer of the
Triarc Restaurant Group ("Triarc"), a restaurant franchiser which conducts its
business through Arby's, Inc., from 1997 to 1999. Mr. Smith joined Triarc in
1994 as Vice President of international marketing.
Stephen E. Hare has been an Executive Vice President and the Chief
Financial Officer of AMF Bowling and Bowling Worldwide since joining the Company
in May 1996. Mr. Hare also served as Acting President and Chief Executive
Officer of the Company from November 1998 until Mr. Smith's employment with the
Company began in April 1999. Mr. Hare served as Senior Vice President and Chief
Financial Officer of James River Corporation of Virginia, a manufacturer and
marketer of paper products and other related consumer goods, from 1992 to 1996.
Timothy N. Scott has been a Senior Vice President, Marketing of AMF Bowling
and Bowling Worldwide since joining the Company in November, 1999. Prior to
joining the Company, Mr. Scott served as Vice President, Marketing and
Advertising, during 1999, and Vice President, Creative Services, from 1997 to
1998, of Long John Silver's Restaurants, a restaurant franchiser. Mr. Scott also
served as Senior Vice President, Account Director of Young & Rubicam
Advertising, an advertising agency, in 1996.
John B. Suddarth has been a Senior Vice President of Bowling Worldwide
since April 12, 2001. He was employed by AMF Bowling Products as its Chief
Operating Officer on March 15, 2001. Prior to joining the Company, Mr. Suddarth
was the Chief Operating Officer of Morse Controls, a privately held controls
company, from 1997 to 2000 and, from 1994 to 1997, Mr. Suddarth served as the
Chief Operating Officer of AMF Reece, Inc., a privately held industrial sewing
machine company.
Section 16(a) Beneficial Ownership Reporting Compliance
All 100 shares of Bowling Worldwide's common stock, which is not registered
pursuant to Section 12 of the Securities Exchange Act of 1934, are held by AMF
Group Holdings.
76
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for each of the three years ended December 31,
1998, 1999, and 2000, compensation paid or accrued by AMF Bowling or the Company
to Bowling Worldwide's Chief Executive Officer and each of Bowling Worldwide's
four other most highly compensated executive officers (the "Named Executive
Officers").
Annual Compensation
------------------- Long-Term
Compensation
Awards
------
Securities
Underlying All Other
Stock Options Compensation
Name and Principal Position Year Salary($) Bonus($) (#)(a) ($)(b)
--------------------------- ---- --------- -------- -------- -------
Roland C. Smith 2000 599,997 224,999 -- --
President & Chief Executive Officer 1999 387,019(c) 931,250(d) 1,000,000 231,148(e)
1998 -- -- -- --
Stephen E. Hare(f) 2000 370,805 112,700 -- 8,446
Executive Vice President, Chief 1999 360,000 108,000 150,000 10,000
Financial Officer 1998 330,000 -- -- --
John P. Watkins 2000 107,740 -- -- 306,886(g)
Executive Vice President/President of U.S.
Bowling Centers 1999 300,000 -- -- 14,556(h)
1998 101,743 49,038 100,000 --
J. Randolph V. Daniel, IV 2000 203,134 -- -- 245,815(j)
President, Bowling Products 1999 191,667(i) 45,000 50,000 6,982
1998 125,000 -- 15,000 --
Timothy N. Scott 2000 207,836 57,959 -- 66,435(e)
1999 38,923(k) -- 100,000 1,604(e)
1998 -- -- -- --
- ----------
(a) Options to purchase shares of the Common Stock.
(b) Unless otherwise indicated, All Other Compensation represents matching and
profit-sharing contributions made by AMF Bowling or the Company under a tax
qualified 401(k) plan.
(c) Mr. Smith's employment with the Company began on April 28, 1999. His
annualized rate of salary for 1999 was $575,000.
(d) Represents a signing bonus of $500,000 and a $431,250 bonus for 1999. See
"--Employment Agreements."
(e) Represents reimbursement of relocation expenses.
(f) Mr. Hare became Acting President and Chief Executive Officer of Bowling
Worldwide on November 2, 1998 and served in that capacity until Mr. Smith's
employment with Bowling Worldwide began on April 28,1999.
(g) This amount includes a total cash severance benefit of $304,000 paid to Mr.
Watkins upon his termination of employment on April 10, 2000.
(h) Includes $12,000 for automobile allowance.
(i) Mr. Daniel was promoted to President, AMF Bowling Products, on March 1,
1999, and his annualized rate of salary was set at $200,000.
(j) This amount includes a total cash severance payment of $240,000 due to
Mr. Daniel upon his termination of employment on November 16, 2000.
Of this amount, $27,789 was paid in 2000, with the remaining $212,211 to
be paid in 2001.
(k) Mr. Scott's employment with the Company started in November, 1999. His
annualized rate of salary for 1999 was $200,000.
77
Stock Option Grants/SAR in Last Fiscal Year
Bowling Worldwide does not have a stock option plan. Bowling Worldwide did
not grant any stock options or stock appreciation rights during 2000. In 2000,
AMF Bowling granted 120,000 stock options pursuant to AMF Bowling's 1998 Stock
Incentive Plan (the "1998 Plan"), none of which were granted to the Named
Executive Officers. No stock appreciation rights were granted to any employees
of the Company in 2000.
Aggregated Stock Option Exercises and Fiscal Year-End Option Value
The following table provides information regarding the number and value of
unexercised stock options of AMF Bowling at December 31, 2000 for the Named
Executive Officers. No Named Executive Officer exercised any stock options in
fiscal year 2000.
Number of Securities Underlying Value of Unexercised In-the
------------------------------- ---------------------------
Unexercised Stock Options at Money Stock Options at
---------------------------- ----------------------
December 31, 2000 (#) December 31, 2000 ($)(6)
--------------------- ------------------------
Name Exercisable Unexercisable Excercisable Unexercisable
------------ ----------- ------------- ------------ -------------
Roland C. Smith (1)............... 400,000 600,000 $ 0 $ 0
Stephen E. Hare (2)............... 123,000 147,000 0 0
John P. Watkins (3)............... 0 0 0 0
J. Randolph V. Daniel, IV (4)..... 42,000 0 0 0
Timothy N. Scott (5).............. 20,000 80,000 0 0
(1) The exercise price of all exercisable and unexercisable options is $5.28
per share.
(2) The exercise price is $10.00 per share with respect to 93,000 exercisable
stock options, $4.93 with respect to 30,000 exercisable stock options,
$10.00 per share with respect to 27,000 unexercisable stock options and
$4.93 per share with respect to 120,000 unexercisable options.
(3) Mr. Watkins's employment with the Company terminated on April 10, 2000. All
of Mr. Watkins stock options were cancelled in 2000.
(4) The exercise price is $4.93 per share with respect to 30,000 exercisable
stock options and $16.19 per share with respect to 12,000 exercisable stock
options. Mr. Daniel's exercisable stock options were cancelled in
accordance with the 1998 Plan in 2001.
(5) The exercise price is $3.50 per share with respect to all exercisable and
unexercisable stock options.
(6) At December 29, 2000, the last trading day of the year, the exercise prices
of all stock options for all Named Executive Officers exceeded the last
sales price of the Common Stock in the over-the-counter market of $0.0625
per share.
Employment Agreements
Mr. Smith entered into an employment agreement dated April 28, 1999 (the
"Smith Employment Agreement") with AMF Bowling for an employment period ending
April 29, 2002 (the "Employment Period"). Under the Smith Employment Agreement,
Mr. Smith holds the positions of President and Chief Executive Officer of AMF
Bowling and Bowling Worldwide. Mr. Smith's annual base salary under the Smith
Employment Agreement is $630,000 for 2001. He is eligible to receive a bonus of
75% of his base salary of which 50% is based on discretionary objectives and 50%
is based on operational and financial targets as set by the Compensation
Committee of the Board of Directors of AMF Bowling. For 2001, the Board approved
that Mr. Smith will receive 50% of his target bonus if Mr. Smith remains
employed through the first quarter of 2002. Mr. Smith received a signing bonus
of $500,000 and was guaranteed a $431,250 bonus for 1999.
The Smith Employment Agreement provides for payment of accrued compensation
and benefits as well as payment of an annual bonus following termination of his
employment by AMF Bowling under certain circumstances. The Smith Employment
Agreement further provides for continued payment of annual base salary and
continuation of welfare benefits through the remainder of the Employment Period
and for 12 months thereafter. If all or substantially all of the Common Stock or
assets of AMF Bowling are sold or disposed of to an unaffiliated third party,
under certain circumstances, Mr. Smith will have the right to resign within nine
months of the sale or
78
disposition, and be entitled to receive accrued salary and benefits, annual
bonus and continued payment of Mr. Smith's annual base salary and continuation
of welfare benefits through the remainder of the Employment Period and for 12
months thereafter.
Under the Smith Employment Agreement, Mr. Smith was granted stock options
on April 28, 1999 to purchase 1,000,000 shares of the Common Stock. The stock
options were not granted pursuant to the 1996 Plan or the 1998 Plan but are
subject to the terms of the 1998 Plan. Unless sooner exercised or forfeited as
provided, Mr. Smith's stock options expire on April 28, 2009. Twenty percent of
the options vest on the grant date and on each anniversary of the grant date. In
the event of a Change of Control (as defined in the 1998 Plan), any unvested
stock options will immediately vest. In the event of a termination of Mr.
Smith's employment by AMF Bowling under the circumstances, the portion of stock
options that would have vested during the two-year period following the date of
termination will immediately vest.
Mr. Hare entered into an employment agreement dated August 4, 1999 (the
"Hare Employment Agreement") with AMF Bowling for an employment period ending on
August 4, 2002. Under the Hare Employment Agreement, Mr. Hare holds the
positions of Executive Vice President and Chief Financial Officer of AMF Bowling
and Bowling Worldwide. Mr. Hare's annual base salary under the Hare Employment
Agreement was $375,666 in 2000 and has recently been increased to $394,450 . The
Hare Employment Agreement provides for the payment of an annual bonus of 60% of
base salary if certain operational, financial and other objectives, determined
by the Chief Executive Officer of AMF Bowling, are attained. For 2001, the Board
approved that Mr. Hare will receive 50% of his target bonus if Mr. Hare remains
employed through the first quarter of 2002.
The Hare Employment Agreement provides for payment of accrued compensation,
continuation of certain benefits and payment of his bonus following termination
of his employment by AMF Bowling under certain circumstances. The Hare
Employment Agreement further provides for continued payment of annual base
salary for 12 months if termination of his employment is not due to death or
disability. If all or substantially all of the stock or assets of AMF Bowling
are sold or disposed of to an unaffiliated third party, under certain
circumstances, Mr. Hare will have the right to resign during his employment
period, within nine months of the sale or disposition, and be entitled to
receive accrued salary, continuation of benefits, allocated portion of bonus
and, if applicable, severance payments under certain circumstances.
Under the Hare Employment Agreement, AMF Bowling was to grant 100,000
restricted shares of the Common Stock (the "Restricted Stock") at a cost of
$1,000 to Mr. Hare. The grant was to be pursuant to and governed by the 1998
Plan and subject to the Stockholders Agreement. No Restricted Stock has been
granted under the Hare Employment Agreement. Under the Hare Employment
Agreement, Mr. Hare was granted options to purchase 150,000 shares of the Common
Stock. Unless sooner exercised or forfeited as provided, Mr. Hare's stock
options expire on August 4, 2009. To the extent not inconsistent with the Hare
Employment Agreement, such stock options are governed by the 1998 Plan. Twenty
percent of the options vest on each anniversary of the August 4, 1999 grant
date.
As of November 9, 2000, both the Smith Employment Agreement and the Hare
Employment Agreement were assigned to and assumed by Bowling Worldwide; AMF
Bowling Centers, Inc., AMF Bowling Products, AMF Bowling Centers (Aust.)
International, Inc., and AMF Worldwide Bowling Centers Holdings, Inc. also
became parties to both agreements. In addition, the Board approved securing the
obligations of Bowling Worldwide and the other companies to Mr. Smith and Mr.
Hare by a letter of credit, the amount of which is to reduce quarterly as the
remaining obligations under the employment agreements are satisfied.
The Board also approved a Senior Executives Retention Plan (the "Senior
Executives Plan") covering Mr. Smith and Mr. Hare. In addition to providing for
the assumption of the Smith Employment Agreement and the Hare Employment
Agreement, the Senior Executives Plan provides for a fiscal year 2000 bonus to
be paid on March 31, 2001 in a fixed amount equal to 50% of the year 2000 bonus
target; a cash payment equal to 25% of annual base salary in lieu of stock
option grants for calendar year 2000, also to be paid on March 31, 2001; and a
cash retention bonus equal to 200% of base annual salary payable upon approval
of the restructuring plan. If the restructuring plan is not approved by June 1,
2001, 50% of the payment will be made on June 1, 2001, and the remainder will be
paid upon approval. All payments are conditioned upon employment at the date of
the payment.
79
Under a previous employment agreement with AMF Bowling, Mr. Hare purchased
150,000 shares of the Common Stock (the "Purchased Stock") for $500,000 in cash
plus a non-recourse promissory note for $1,000,000, payable to AMF Bowling and
secured by the Purchased Stock which has been pledged pursuant to a stock pledge
agreement between Mr. Hare and AMF Bowling. Under the Hare Employment Agreement,
the Committee adjusted the value of Mr. Hare's non-recourse promissory note from
$1,000,000 to $493,750 in 1999 for the purchase of 100,000 shares of the Common
Stock to reflect the market price of such shares on the date of the new
employment agreement. The Committee also adjusted the interest rate applicable
to the note from 7% per annum to 6% per annum in 1999. No principal payments
were made on the original note or the adjusted note in 1999. Under a previous
employment agreement, Mr. Hare was also granted stock options to purchase
105,000 shares of the Common Stock. Unless sooner exercised or forfeited as
provided, Mr. Hare's stock options expire on May 28, 2006. To the extent not
inconsistent with the previous employment agreement, such stock options are
governed by the 1996 Plan. Twenty percent of Mr. Hare's stock options vested on
May 28, of each of 1997, 1998, 1999 and 2000 and twenty percent will vest on May
28, 2001. If any successor to AMF Bowling or Bowling Worldwide acquires all or
substantially all of the business and/or assets of AMF Bowling or Bowling
Worldwide, AMF Bowling may purchase all of the Purchased Stock held by Mr. Hare
for its fair market value, and any stock options then held by him for the fair
market value of the underlying Common Stock less the exercise price of the
stock options.
Mr. Watkins had an employment agreement with AMF Bowling and received
compensation consisting of salary and an annual bonus if certain financial
targets, determined by the Chief Executive Officer, were met. Mr. Watkins'
annual base salary under his employment agreement was $300,000. Mr. Watkins was
granted stock options to purchase 100,000 shares of the Common Stock on the same
vesting schedule as other employees. The employment agreement further provided
for a severance payment equal to one year of base salary if AMF Bowling
terminated Mr. Watkins' employment for any reason other than cause. Effective
with the termination of his employment on April 10, 2000, Mr. Watkins entered
into a letter agreement with AMF Bowling that provided for a cash severance
payment of $300,000, payment of base salary through April 21, 2000 and two weeks
of unused vacation, $4,000 in lieu of outplacement services, and full payment of
health benefit premiums for eighteen months or, if sooner, until he becomes
employed by another employer that offers similar health coverage. These payments
were in lieu both of any bonus or incentive compensation for 2000 and of the
severance benefits otherwise payable under his employment agreement.
Mr. Daniel had a severance agreement with AMF Bowling Products dated April
16, 1999, that called for severance pay of $200,000 (or the amount of his base
salary at the date of termination, if different) plus an allocable portion of
any annual bonus otherwise payable to him for the year. In accordance with that
agreement, upon his termination of employment effective November 16, 2000, he
signed a letter release in exchange for his severance benefits under the
agreement and for certain outplacement services.
Mr. Scott has an employment agreement dated November 12, 1999 with Bowling
Worldwide and receives compensation consisting of salary and an annual bonus of
up to 50% of base salary if certain targets based on annual performance
objectives are attained. Mr. Scott's annual base salary is currently $216,300.
For 2001, 50% of the bonus is guaranteed if Mr. Scott remains employed through
the first quarter of 2002. In accordance with the employment agreement, Mr.
Scott was also granted stock options on November 12, 1999, to purchase 100,000
shares of the Common Stock under the 1998 Plan. Twenty percent of the options
vest on each anniversary of the November 12, 1999 grant date. The employment
agreement provides for payment of accrued compensation, an allocable portion of
bonus (if applicable objectives are later met), and continued payment of annual
base salary for 12 months following termination of his employment by Bowling
Worldwide for any reason other than death, disability or cause.
During 2000, the Board and certain other affiliated companies approved a
Bonus, Severance and Retention Program for Certain Employees (the "Retention
Program") containing several separate provisions. This Retention Program
implemented an enhanced severance plan (the "Severance Plan") for certain
executives providing for a payment of up to 12 months of annual base salary
following termination of employment by the Company under certain circumstances.
This Severance Plan will remain in effect for one year following completion of
the restructuring.
80
The Retention Program also changed the target for payment of fiscal year
2000 bonuses for all bonus eligible employees and provided for cash payments in
lieu of calendar year 2000 stock option grants for all option eligible
employees; payments in each case were to be made on March 31, 2001 to eligible
employees employed on that date. Mr. Scott was covered by these provisions. In
addition, the Retention Program implemented a key management retention bonus
plan for senior managers selected by the Chief Executive Officer, including Mr.
Scott. The amount of the retention payment for each executive is based on a
percentage of the executive's annual base salary and is payable upon the
approval of the restructuring plan. If the restructuring plan is not approved by
June 1, 2001, 50% of the payment will be made on June 1, 2001, and the remainder
will be paid upon approval. All payments are conditioned upon employment at the
date of the payment.
Compensation of Directors
Each director of Bowling Worldwide who is also a director of AMF Bowling
receives compensation as discussed below. Directors who are officers or
employees of AMF Bowling, Bowling Worldwide or affiliated with Goldman Sachs
receive no compensation for service as members of the Board or the Board of
Directors of AMF Bowling or committees thereof. Directors who are not officers
or employees of AMF Bowling, Bowling Worldwide or affiliated with Goldman Sachs
receive a $2,000 fee for attending each meeting of the Board of Directors of AMF
Bowling and a $1,000 fee for attending each committee meeting thereof. All
directors' reasonable expenses for attending such board and committee meetings
and related duties are reimbursed by AMF Bowling or Bowling Worldwide.
Pursuant to an option agreement (the "Diker Option Agreement"), dated May
1, 1996, Mr. Diker, a director of AMF Bowling and Bowling Worldwide, was granted
nonqualified stock options to purchase 100,000 shares of the Common Stock at an
exercise price of $10.00 per share pursuant to the 1996 Plan. All of Mr. Diker's
stock options vested on May 1, 1998. If any successor to AMF Bowling acquires
all or substantially all of the business and/or assets of AMF Bowling, AMF
Bowling may purchase all of the stock options then held by Mr. Diker for the
fair market value of the underlying Common Stock minus the exercise price of the
stock options. Mr. Diker is a party to the Stockholders Agreement and any shares
of the Common Stock held by Mr. Diker are subject to the terms of the
Stockholders Agreement, as well as the terms of the Diker Option Agreement. See
"Certain Relationships and Related Transactions--Stockholders Agreement."
Compensation Committee Interlocks and Insider Participation
Bowling Worldwide does not have a compensation committee. The compensation
for the executive officers of Bowling Worldwide was set by the Compensation
Committee of AMF Bowling. The Compensation Committee of AMF Bowling consists of:
Richard A. Friedman (Chairman), Charles M. Diker and Thomas R. Wall, IV. Mr.
Friedman was President and Chief Executive Officer of AMF Bowling and Bowling
Worldwide until July 31, 1997, which period was prior to the Initial Public
Offering. Mr. Friedman did not receive any compensation for such services. None
of the members of the Compensation Committee of AMF Bowling was an officer or an
employee of AMF Bowling, Bowling Worldwide or their subsidiaries during the last
completed fiscal year. No interlocking relationship currently exists between any
member of the Compensation Committee of AMF Bowling and any member of any other
company's board of directors or compensation committee, nor did any such
interlocking relationship exist during 2000.
81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All 100 shares of Bowling Worldwide common stock are held by AMF Group
Holdings. The table below reflects the number of shares of the Common Stock
beneficially owned as of March 31, 2001 by (i) each director of AMF Bowling,
(ii) each Named Executive Officer of AMF Bowling, (iii) the directors and
executive officers as a group and (iv) each person who is known by AMF Bowling
to own beneficially more than 5% of the Common Stock. Unless otherwise noted,
each individual has sole voting power and sole investment power with respect to
securities beneficially owned. Unless otherwise noted, the address of the
beneficial owner is c/o AMF Bowling, Attn: Corporate Secretary, 8100 AMF Drive,
Richmond, Virginia 23111.
Number of
Shares
Beneficially
Owned as of
March 5, Percent of
Name of Beneficial Owner 2001 (1) Class
------------------------ -------- -----
Richard A. Friedman(2).................................................. -- *
Terence M. O'Toole(3)................................................... -- *
Peter M. Sacerdote(4)................................................... -- *
Charles M. Diker(5)..................................................... 113,854 *
Paul B. Edgerley(6)..................................................... -- *
Howard A. Lipson(7)..................................................... -- *
Thomas R. Wall, IV(8)................................................... -- *
Roland C. Smith(9)...................................................... 400,000 *
Stephen E. Hare(10)..................................................... 279,000 *
Timothy N. Scott(11).................................................... 20,000 *
All directors and executive officers as a group (10 persons)(12)........ 812,854 *
The Goldman Sachs Group, Inc.(13)....................................... 44,932,619 53.2%
Blackstone Group (as hereinafter defined)(14)........................... 8,473,581 10.1%
Kelso (as hereinafter defined)(15)...................................... 8,473,581 10.1%
- -----------
* Less than 2%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of the Common Stock subject to options and warrants held by that
person that are currently exercisable or are exercisable within 60 days are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of any other person. The
table above does not include the Convertible Debentures which are
convertible, at the option of the holder at any time prior to maturity
(unless previously redeemed or otherwise purchased by AMF Bowling), into
the Common Stock at the rate of 9.1469 shares per $1,000 principal amount
at maturity of the Convertible Debentures.
(2) Mr. Friedman, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares owned by The Goldman Sachs Group and its
affiliates, except to the extent of his pecuniary interest therein.
(3) Mr. O'Toole, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares owned by The Goldman Sachs Group and its
affiliates, except to the extent of his pecuniary interest therein.
(4) Mr. Sacerdote, who is an Advisory Director of The Goldman Sachs Group,
disclaims beneficial ownership of the shares owned by The Goldman Sachs
Group and its affiliates, except to the extent of his pecuniary interest
therein.
(5) Includes 100,000 shares which may be acquired upon the exercise of stock
options within 60 days. Includes 13,854 shares held by a non-profit
charitable foundation, as to which he disclaims beneficial ownership.
(6) Mr. Edgerley, who is (i) a Managing Director of the general partner of Bain
Capital Fund V, L.P. and Bain Capital Fund V-B, L.P. and (ii) a general
partner of BCIP Associates and BCIP Trust Associates, L.P., disclaims
beneficial ownership of the shares owned by those entities (collectively,
"Bain"). Bain Capital Fund V, L.P. owns 594,634 shares, Bain Capital Fund
V-B, L.P. owns 1,548,420 shares, BCIP Associates owns 283,832 shares and
BCIP Trust Associates, L.P. owns 115,191 shares.
82
(7) Mr. Lipson, who is a member of the limited liability company which acts as
the general partner of Blackstone Capital Partners II Merchant Banking Fund
L.P., Blackstone Offshore Capital Partners II L.P. and Blackstone Family
Investment Partnership II L.P. (collectively, "Blackstone Group"),
disclaims beneficial ownership of the shares owned by Blackstone Group.
(8) Mr. Wall, who is (i) a general partner of Kelso Partners V, L.P., the
general partner of Kelso Investment Associates V, L.P. ("KIA V") and (ii) a
general partner of Kelso Equity Partners V, L.P.("KEP V," and together with
KIA V, "Kelso"), disclaims beneficial ownership of the shares owned by KIA
V and KEP V.
(9) Represents 400,000 shares, which may be acquired upon the exercise of AMF
Bowling stock options within 60 days.
(10) Includes 123,000 shares, which may be acquired upon the exercise of AMF
Bowling stock options within 60 days. Under the Hare Employment Agreement,
Mr. Hare was granted 100,000 shares of AMF Bowling restricted stock. Such
shares have not yet been issued. See "Item 11. Executive
Compensation--Employment Agreements."
(11) Represents 20,000 shares, which may be acquired upon the exercise of AMF
Bowling stock options within 60 days.
(12) Includes an aggregate of 623,000 shares, which may be acquired upon the
exercise of AMF Bowling stock options within 60 days.
(13) Of the total number of shares which may be deemed to be beneficially owned
by The Goldman Sachs Group, 28,404,248 are owned by GS Capital Partners II,
L.P., 11,291,852 shares are owned by GS Capital Partners II Offshore, L.P.,
1,047,698 shares are owned by Goldman Sachs & Co. Verwaltungs GmbH, as
nominee for GS Capital Partners II (Germany) Civil Law Partnership, 664,502
shares are owned by Stone Street Fund 1995, L.P., 1,136,093 shares are
owned by Stone Street Fund 1996, L.P., 747,762 shares are owned by Bridge
Street Fund 1995, L.P. and 770,465 shares are owned by Bridge Street Fund
1996, L.P. (collectively, "GSCP"). In addition, The Goldman Sachs Group
beneficially owns warrants to purchase 870,000 shares of the Common Stock,
which were issued upon the closing of the Acquisition. The Common Stock
deemed to be beneficially owned by The Goldman Sachs Group does not include
3,651,222 shares of the Common Stock issuable upon the conversion of
$399,176,000 in aggregate principal amount at maturity of Convertible
Debentures owned by The Goldman Sachs Group. GS Capital Partners II, L.P.,
GS Capital Partners II Offshore, L.P., GS Capital Partners II (Germany),
C.L.P., Stone Street Fund 1995, L.P., Stone Street Fund 1996, L.P., Bridge
Street Fund 1995, L.P. and Bridge Street Fund 1996, L.P., are investment
partnerships. Affiliates of The Goldman Sachs Group are the general,
managing general or managing partners of all such partnerships and have
full voting and investment power with respect to the holding of such
partnerships. Excludes certain shares of the Common Stock (i) owned by the
Goldman Sachs Group that were acquired in the ordinary course of market
making transactions or (ii) in client accounts managed by Goldman Sachs
(the "Managed Accounts"). Each of Goldman Sachs and The Goldman Sachs Group
disclaims beneficial ownership of the Common Stock in the Managed Accounts.
The address of The Goldman Sachs Group is 85 Broad Street, New York, New
York 10004.
(14) Of the total number of shares beneficially owned by Blackstone Group,
6,090,010 shares are owned by Blackstone Capital Partners II Merchant
Banking Fund L.P., 1,779,677 shares are owned by Blackstone Offshore
Capital Partners II L.P. and 603,894 shares are owned by Blackstone Family
Investment Partnership II L.P. The address of Blackstone Group is 345 Park
Avenue, New York, New York 10154.
(15) Of the total number of shares beneficially owned by Kelso, 7,954,779 shares
are owned by KIA V and 518,802 are owned by KEP V. The Common Stock deemed
to be beneficially owned by Kelso does not include 351,085 shares of the
Common Stock issuable upon the conversion of $38,383,000 in aggregate
principal amount at maturity of Debentures owned by Kelso. The address of
each such shareholder is c/o Kelso & Company, Inc., 320 Park Avenue, 24th
Floor, New York, New York 10022. Due to their common control, KIA V and KEP
V could be deemed to beneficially own each other's shares, but each
disclaims such beneficial ownership. Joseph S. Schuchert, Frank T. Nickell,
Thomas R. Wall, IV, George E. Matelich, Michael B. Goldberg, David I.
Wahrhaftig, Frank K. Bynum, Jr. and Philip E. Berney may be deemed to share
beneficial ownership of shares beneficially owned of record by KIA V and
KEP V, by virtue of their status as general partners of the general partner
of KIA V and as general partners of KEP V. Messrs. Schuchert, Nickell,
Wall, Matelich, Goldberg, Wahrhaftig, Bynum and Berney share investment and
voting power with respect to securities owned by KIA V and KEP V, but
disclaim beneficial ownership of such securities.
83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement
On April 30, 1996, AMF Bowling, GSCP, Blackstone Group, Kelso, Bain (Bain,
together with Blackstone Group and Kelso, the "Governance Investors"), Citicorp
North America, Inc. ("Citicorp"), Mr. Diker (Mr. Diker, together with Blackstone
Group, Kelso, Bain and Citicorp, the "Investors"), certain current and former
members of management (the "Management Investors," and, with GSCP and the
Investors, the "Stockholders") entered into a Stockholders Agreement, which
regulates the relationship among AMF Bowling and the Stockholders. Subsequently,
Mr. Hare and other members of management who received stock option awards under
the 1996 Plan and certain other members of management have become parties to the
Stockholders Agreement as additional Management Investors and Stockholders. The
following discussion summarizes the terms of the Stockholders Agreement that AMF
Bowling and the Company believes are material to holders of the Common Stock and
securityholders of Bowling Worldwide. This summary is qualified in its entirety
by reference to the full text of the Stockholders Agreement, which was filed
with the Securities and Exchange Commission on November 3, 1997 as an exhibit to
AMF Bowling's Registration Statement on Form S-1 (Registration No. 333-34099).
The Stockholders Agreement confers on GSCP the right to increase or
decrease the Board of Directors of AMF Bowling from its initial size of nine
members. GSCP has the right to nominate five directors and to nominate a
majority (not limited to a simple majority) of the members of the Board of
Directors of AMF Bowling, so long as GSCP and its Permitted Transferees (as
hereinafter defined), as they currently do, hold a majority of the outstanding
shares of the Common Stock. Each Governance Investor has the right to nominate,
subject to GSCP consent, one member of the Board of Directors of AMF Bowling, so
long as the number of shares of the Common Stock held by it and certain of its
permitted transferees under the Stockholders Agreement, as it currently is, is
equal to at least one-half of the sum of (i) the number of shares initially
purchased by it and its Permitted Transferees plus (ii) the number of additional
shares that the Governance Investor was required to purchase pursuant to the
"overcall" provisions of the Stockholders Agreement (in each case, subject to
appropriate adjustments). If a Governance Investor is no longer entitled to
nominate a director, the director is required to resign or be subject to removal
by the shareholders. Each of GSCP and each Governance Investor has the right to
recommend removal, with or without cause, of any director nominated by it, in
which case such director is required to resign immediately or be subject to
removal by the shareholders. In the event of death, removal or resignation of a
director nominated by a Governance Investor, so long as the Governance Investor
continues to have the right to nominate a director for such position, the
Governance Investor has the right to nominate (subject to GSCP consent) a
director to fill the vacancy created. A quorum may be constituted by a majority
of the number of directors then in office, but not less than one-third of the
whole Board of Directors of AMF Bowling, including at least one GSCP director.
The Stockholders Agreement provides for the continual existence of an
Executive Committee, consisting of two GSCP-nominated directors and the
President and Chief Executive Officer of AMF Bowling. The Executive Committee
may exercise all the powers and authority of the Board of Directors of AMF
Bowling (subject to any restrictions under Delaware law) except with respect to
those actions requiring a Special Vote (as defined below) and, in the case of
matters which under the Stockholders Agreement require a prior meeting of the
Board of Directors of AMF Bowling, only after such meeting has occurred. A
"Special Vote" is required for (i) the issuance of capital stock of AMF Bowling
below fair market value, (ii) the grant or issuance of options or warrants
exercisable or exchangeable for more than 2,877,151 shares of the Common Stock,
(iii) entering into certain transactions with affiliates of GSCP and (iv)
amendments to the Stockholders Agreement, the Certificate of Incorporation or
By-Laws of AMF Bowling, which would adversely affect the rights and obligations
of Blackstone
84
Group or Kelso; provided, that any amendment affecting a Stockholder differently
from any other Stockholder requires such Stockholder's approval. Matters
requiring a Special Vote must be approved by a majority of the GSCP directors
who are partners or employees of Goldman Sachs and who are not employees of AMF
Bowling and its subsidiaries, and at least one director nominated by Blackstone
Group or Kelso (if there is one serving at such time.)
Pursuant to the Stockholders Agreement, each of the Stockholders has agreed
(i) to appear in person or by proxy at any shareholder meeting of AMF Bowling
for the purpose of obtaining a quorum, (ii) to vote its shares of the Common
Stock, at any shareholder meeting called for the purpose of voting on the
election or removal of directors, in favor of the election or removal of
directors, as applicable, in accordance with the provisions described in the
second preceding paragraph, (iii) otherwise to vote its shares of the Common
Stock at shareholder meetings in a manner not inconsistent with the Stockholders
Agreement, (iv) not to grant any proxy or enter into any voting trust with
respect to the Common Stock it holds or enter into any shareholder agreement or
arrangement inconsistent with the provisions of the Stockholders Agreement and
(v) not to act as a member of a group or in concert with others in connection
with the acquisition, disposition or voting of shares of the Common Stock in any
manner inconsistent with the Stockholders Agreement.
The Stockholders Agreement provides that in the event a Stockholder
determines to sell its shares of the Common Stock (subject to certain
exceptions, including sales of shares made through a broker under Securities and
Exchange Commission Rule 144), such Stockholder must give the other Stockholders
notice thereof and such other Stockholders must have the opportunity to sell a
pro rata share of their Common Stock in such a sale. Moreover, in the event
Stockholders owning 51% or more of the outstanding Common Stock propose to sell
all of the Common Stock held by such Stockholders pursuant to a stock sale,
merger, business combination, recapitalization, consolidation, reorganization,
restructuring or similar transaction, such Stockholders will have the right,
under certain circumstances, to require the other Stockholders to sell the
equity securities of AMF Bowling held by such other Stockholders in such sale on
the same terms and conditions and at the same price as the Stockholders
proposing to sell.
The foregoing rights and obligations will terminate upon the first to occur
of: (i) GSCP, the Investors and their permitted transferees under the
Stockholders Agreement (the "Permitted Transferees") holding in the aggregate
less than 50% of the sum of (a) the number of shares of the Common Stock
outstanding, on a fully diluted basis, immediately after giving effect to the
transactions contemplated by the subscription agreement (the "Subscription
Agreement") entered into on the same date and by the same parties as the
Stockholders Agreement, except for the Management Investors, and (b) the number
of additional shares of the Common Stock, if any, issued pursuant to the
"overcall" provisions of the Stockholders Agreement and (ii) GSCP, the Investors
and their Permitted Transferees holding in the aggregate less than 40% of the
fully diluted shares of the Common Stock then outstanding. Notwithstanding these
provisions, in the event of any merger, recapitalization, consolidation,
reorganization or other restructuring of AMF Bowling as a result of which the
stockholders and their Permitted Transferees own less than a majority of the
outstanding voting power of the entity surviving such transaction, the
Stockholders Agreement will terminate.
Registration Rights Agreement
AMF Bowling and the Stockholders entered into a Registration Rights
Agreement on April 30, 1996 (the "Registration Rights Agreement"). Pursuant to
the Registration Rights Agreement, (i) each of the Blackstone Group (as a
group), Kelso (as a group) and Bain (as a group) may make one demand (subject to
certain exceptions) of AMF Bowling to register shares of the Common Stock held
by such group and (ii) GSCP may make up to five demands (subject to certain
exceptions) of AMF Bowling to register shares of the Common Stock held by it, in
each case, so long as (a) the aggregate offering price for the shares to be sold
is a least $50 million and (b) shares representing at least 5% of the sum of (1)
the number of shares of the Common Stock purchased by GSCP prior to execution of
the Subscription Agreement, (2) the number of shares of the Common Stock issued
pursuant to the Subscription Agreement and (3) the number of shares (subject to
adjustment) of the Common Stock purchased by Stockholders pursuant to the
"overcall" provisions of the Stockholders Agreement are being registered. Upon a
demand for registration by any of GSCP, Blackstone Group, Kelso or Bain, each of
the other Stockholders is to be given the opportunity to participate on a pro
rata basis in the registration demanded. The Registration Rights Agreement also
provides the Stockholders with piggyback registration rights
85
which allow each of them to include all or a portion of their shares of the
Common Stock under a registration statement filed by AMF Bowling, subject to
certain exceptions and limitations.
Transactions with Management and Others; Certain Business Relationships
Messrs. Friedman and O'Toole, each of whom is a Managing Director of
Goldman Sachs, and Mr. Sacerdote, who is a limited partner of The Goldman Sachs
Group, are directors of AMF Bowling, Group Holdings and Bowling Worldwide. Mr.
Friedman is also Chairman of the Board of AMF Bowling and Bowling Worldwide.
Goldman Sachs and its affiliates together currently beneficially own a majority
of the outstanding shares of the Common Stock. See "Item 12. Security Ownership
of Certain Beneficial Owners and Management". Goldman Sachs and its affiliates
were the initial purchasers of the debt issued by Bowling Worldwide in
connection with financing the Acquisition. Goldman Sachs also served as
financial advisor to the owners of AMF Bowling's predecessor in connection with
the Acquisition.
Goldman Sachs acted as AMF Bowling's lead underwriter in connection with
the Initial Public Offering. Underwriting discounts paid to the entire
underwriting syndicate in the Initial Public Offering totaled $18,940,500.
Under the Credit Agreement, Goldman Sachs Credit Partners, L.P. acted as
Syndication Agent, Goldman Sachs Credit Partners, L.P. and Citicorp Securities,
Inc. acted as Arrangers, and Citibank, N.A. is acting as Administrative Agent
and Citicorp USA, Inc., is acting as Collateral Agent with respect to a
revolving credit and term loan facility extended to Bowling Worldwide in an
amount up to $810.3 million. In 2000, total fees paid to Goldman Sachs Credit
Partners, L.P. for services under the Credit Agreement were approximately $50
thousand. Such entity was also reimbursed for expenses incurred in connection
with its services.
Bowling Worldwide and Goldman Sachs are parties to an engagement letter
pursuant to which Goldman Sachs was retained as Bowling Worldwide's financial
advisor to provide investment banking and financial advisory services, including
in connection with any acquisitions, dispositions or financings. Pursuant to the
engagement, Bowling Worldwide has agreed to reimburse Goldman Sachs for its
out-of-pocket expenses and indemnify Goldman Sachs in connection with its
services arising under the engagement.
Bowling Worldwide also entered into two interest rate cap agreements with
Goldman Sachs Capital Markets, L.P. ("GSCM"), an affiliate of Goldman Sachs,
both of which were executed to hedge Bowling Worldwide's exposure to
fluctuations in the interest rates applicable to borrowings under the Credit
Agreement. Bowling Worldwide paid a fee of $160,000 to GSCM in connection with
the first of these transactions executed in March 2000, which capped 3-month
LIBOR on $200 million principal amount of debt at 7.78% until April 1, 2001.
Bowling Worldwide paid a fee of $7,000 to GSCM in respect of the second
transaction executed in September 2000, which capped 3-month LIBOR on $150
million in debt at 7.5% until October 2, 2001. See "Item 7A. Market Risk" for a
discussion of these agreements.
See "Item 11. Executive Compensation--Employment Agreements" for a
discussion of arrangements under which AMF Bowling loaned money to Mr. Hare on a
non-recourse basis to enable him to purchase shares of the Common Stock.
86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) Financial Statements and Schedules
Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Comprehensive Loss for the Years Ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data (unaudited)
Financial Statement Schedules
Report of Independent Public Accountants on Schedule I
Schedule I--Condensed Financial Information of AMF Group Holdings Inc.
(B) Reports on Form 8-K
1. Current Report on Form 8-K dated November 16, 2000 and filed November
17, 2000, announcing changes in the organization of AMF Bowling, Inc.
2. Current Report on Form 8-K dated and filed December 29, 2000,
announcing developments concerning the repayment of principal and
interest on Bowling Worldwide's bank debt and the status of Bowling
Worldwide's Credit Agreement.
(C) Exhibits
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company.(2)
3.3 Certificate of Amendment to Certificate of Incorporation of the Company.
(3)
87
4.1 Certificate of Incorporation of the Company, as amended (see Exhibit 3.1).
4.2 By-Laws of the Company (see Exhibit 3.2).
4.3 Certificate of Amendment to Certificate of Incorporation of the Company
(see Exhibit 3.3).
4.4 Indenture, dated as of March 21, 1996, as supplemented, by and among AMF
Group Inc. (a predecessor of the Company), the parties listed on Exhibit C
thereto, as guarantors, and IBJ Schroder Bank & Trust Company with respect
to the Senior Subordinated Notes.(4)
4.5 Indenture, dated as of March 21, 1996, as supplemented, by and among AMF
Group Inc., the parties listed on Exhibit C thereto, as guarantors, and
American Bank National Association with respect to the Subsidiary Senior
Subordinated Discount Notes.(5)
4.6 Form of Senior Subordinated Note.(6)
4.7 Form of Senior Subordinated Discount Note.(7)
4.8 Purchase Agreement dated May 6, 1998, among AMF Bowling, Inc., the
Designated Subsidiaries named herein and the Initial Purchasers named
therein.(8)
4.9 Indenture dated as of May 12, 1998, between AMF Bowling, Inc. and the Bank
of New York.(9)
4.10 Registration Rights Agreement dated as of May 12, 1998, among AMF Bowling,
Inc. the Designated Subsidiaries named therein and the Initial Purchasers
named therein.(10)
4.11 Form of the AMF Bowling, Inc.'s Zero Coupon Convertible Debenture due
2018.(11)
10.1 Registration Rights Agreement, dated as of March 21, 1996, by and among AMF
Bowling, Inc., the Guarantors and Goldman, Sachs & Co.(12)
10.2 Third Amended and Restated Credit Agreement among AMF Group Inc. and the
Initial Lenders and Initial Issuing Banks and Goldman, Sachs & Co., as
Syndication Agent, and Citibank, N.A., as Administrative Agent.(13)
10.3 AMF Holdings Inc. (a predecessor of AMF Bowling, Inc.) 1996 Stock Incentive
Plan.(14)*
88
10.4 Stockholders Agreement, dated as of April 30, 1996, by and among AMF
Bowling, Inc. and the Stockholders.(15)
10.5 Amendment No. 1, dated as of May 28, 1996, to the Stockholders
Agreement.(16)
10.6 Amendment No. 2, dated as of May 31, 1996, to the Stockholders
Agreement.(17)
10.7 Amendment No. 3, dated as of January 17, 1997, to the Stockholders
Agreement.(18)
10.8 Amendment No. 4, dated as of January 17, 1997, to the Stockholders
Agreement.(19)
10.9 Amendment No. 5, dated as of July 31, 1997, to the Stockholders
Agreement.(20)
10.10 Amendment No. 6, dated as of December 31, 1997, to the Stockholders
Agreement.(21)
10.11 Amendment No. 7, dated as of January 1, 1998, to the Stockholders
Agreement.(22)
10.12 Registration Rights Agreement, dated as of April 30, 1996, by and among
AMF Bowling, Inc. and the Stockholders.(23)
10.13 Amendment No. 1, dated as of May 28, 1996, to the Registration Rights
Agreement.(24)
10.14 Amendment No. 2, dated as of January 17, 1997, to the Registration Rights
Agreement.(25)
10.15 Amendment No. 3, dated as of January 17, 1997, to the Registration Rights
Agreement.(26)
10.16 Amendment No. 4, dated as of July 31, 1997, to the Registration Rights
Agreement.(27)
10.17 Amendment No. 5, dated as of September 30, 1997, to the Registration
Rights Agreement.(28)
10.18 Warrant Agreement, dated as of May 1, 1996, between AMF Bowling, Inc. and
The Goldman Sachs Group, L.P.(29)
10.19 Stock Option Agreement, dated as of May 1, 1996, between AMF Bowling, Inc.
and Charles M. Diker.(30)*
10.20 Employment Agreement, dated as of May 28, 1996, by and among AMF Bowling,
Inc., AMF Group Inc. and Stephen E. Hare.(31)*
10.21 Stock Subscription Agreement, dated as of October 9, 1996, by and among
AMF Bowling, Inc. and the Purchasers (as defined therein).(32)
10.22 Waiver and Amendment No. 1, dated as of March 24, 1997, to Amended and
Restated Credit Agreement dated as of December 20, 1996.(33)
10.23 Amendment No. 2 to the Amended and Restated Credit Agreement, dated as of
June 30, 1997.(34)
10.24 Interest Rate Cap Agreement, dated July 2, 1997.(35)
10.25 AMF Bowling, Inc. 1998 Stock Incentive Plan.(36)*
10.26 Amendment No. 1 and Waiver to the Third Amended and Restated Credit
Agreement dated as of September 30, 1998.(37)
10.27 Termination and Release Agreement, dated as of November 2, 1998, by and
among AMF Bowling, Inc., AMF Bowling Worldwide, Inc., and Douglas J.
Stanard.(38)*
10.28 Employment Agreement, dated as of September 8, 1998, by and among AMF
Bowling, Inc. and John P. Watkins.(39)*
10.29 Amendment to the AMF Bowling, Inc. 1998 Stock Incentive Plan.(40)*
10.30 Employment Agreement, dated as of April 28, 1999, between AMF Bowling,
Inc. and Roland Smith.(41)*
10.31 Stock Option Agreement, dated as of April 28, 1999, between AMF Bowling,
Inc. and Roland Smith.(42)*
10.32 Amendment No. 2 and Waiver to the Third Amended and Restated Credit
Agreement, and the Fourth Amended and Restated Credit Agreement, dated as
of June 14, 1999 among AMF Bowling Worldwide, Inc., the Initial Lenders,
the Initial Issuing Banks, Goldman Sachs Credit Partners L.P., as
Syndication Agent, Citibank, N.A., as Administrative Agent and Citicorp USA
Inc., as Collateral Agent.(43)
10.33 Employment Agreement, dated as of August 4, 1999, between AMF Bowling,
Inc. and Stephen E. Hare.(44)*
10.34 Amendment No. 1 to Fourth Amended and Restated Credit Agreement dated as
of August 12, 2000. (45)
10.35 Severance Agreement, effective April 16, 1999, between AMF Bowling
Products, Inc. and J. Randolph V. Daniel, IV (filed herewith).*
10.36 Employment Agreement, effective November 12, 1999, between AMF Bowling
Worldwide, Inc. and Timothy N. Scott (filed herewith).*
10.37 Termination Agreement, dated April 10, 2000, between AMF Bowling, Inc. and
John P. Watkins (filed herewith).*
89
10.38 AMF Bowling Worldwide, Inc. Bonus, Severance and Retention Program for
Certain Employees, approved November 9, 2000 (filed herewith).*
10.39 Assumption Agreement, dated as of November 9, 2000, by and between AMF
Bowling Worldwide, Inc. and Roland C. Smith (filed herewith).*
10.40 Assumption Agreement, dated as of November 9, 2000, by and between AMF
Bowling Worldwide, Inc. and Stephen E. Hare (filed herewith).*
10.41 Form of Employment Retention Agreement, effective November 9, 2000, among
AMF Bowling Worldwide, Inc., AMF Bowling Products, Inc., AMF Bowling
Centers, Inc., AMF Bowling Centers (Aust.) International, Inc. and AMF
Worldwide Bowling Centers Holdings, Inc. and certain executives (filed
herewith).*
10.42 Release and Severance Agreement, dated November 13, 2000, between AMF
Bowling, Inc. and J. Randolph V. Daniel, IV (filed herewith).*
10.43 Employment Agreement, effective March 15, 2001, between AMF Bowling
Products, Inc. and John Suddarth (filed herewith).*
12.1 Computation of ratio of earnings to fixed charges (filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed herewith).
90
Notes to Exhibits:
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K
of AMF Bowling Worldwide, Inc. for the fiscal year ended December 31, 2000
(File No. 001-12131).
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(3) Incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K
of AMF Bowling Worldwide, Inc. for the fiscal year ended December 31, 2000
(File No. 001-12131).
91
(4) Incorporated by reference to Exhibit 4.1 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(5) Incorporated by reference to Exhibit 4.2 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(6) Incorporated by reference to Exhibit 4.3 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(7) Incorporated by reference to Exhibit 4.4 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(8) Incorporated by reference to Exhibit 4.6 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(9) Incorporated by reference to Exhibit 4.7 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(10) Incorporated by reference to Exhibit 4.8 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(11) Incorporated by reference to Exhibit 4.9 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(12) Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(13) Incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K
of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File No.
001-13539).
(14) Incorporated by reference to Exhibit 10.3 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(15) Incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(16) Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(17) Incorporated by reference to Exhibit 10.6 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(18) Incorporated by reference to Exhibit 10.7 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(19) Incorporated by reference to Exhibit 10.8 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(20) Incorporated by reference to Exhibit 10.9 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(21) Incorporated by reference to Exhibit 10.10 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(22) Incorporated by reference to Exhibit 10.11 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(23) Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(24) Incorporated by reference to Exhibit 10.11 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(25) Incorporated by reference to Exhibit 10.12 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(26) Incorporated by reference to Exhibit 10.13 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
92
(27) Incorporated by reference to Exhibit 10.14 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(28) Incorporated by reference to Exhibit 10.17 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(29) Incorporated by reference to Exhibit 10.6 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(30) Incorporated by reference to Exhibit 10.9 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(31) Incorporated by reference to Exhibit 10.10 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(32) Incorporated by reference to Exhibit 10.14 to the Annual Report on Form
10-K of AMF Group Inc. for the fiscal year ended December 31, 1996 (File
No. 001-12131).
(33) Incorporated by reference to Exhibit 10.16 to Post-Effective Amendment No.
2 to the Registration Statement on Form S-4 of AMF Group Inc. (File No.
333-4877).
(34) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Group Inc. for the quarterly period ended June 30, 1997 (File
No. 001-12131).
(35) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q of AMF Group Inc. for the quarterly period ended June 30, 1997 (File
No. 001-12131).
(36) Incorporated by reference to Exhibit 10.30 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(37) Incorporated by reference to Exhibit 10.1 of AMF Bowling, Inc.'s Current
Report on Form 8-K dated September 30, 1998 (File No. 001-13539).
(38) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended September 30, 1998
(File No. 001-13539).
(39) Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended September 30, 1998
(File No. 001-13539).
(40) Incorporated by reference to Exhibit 10.34 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1998 (File
No. 001-13529).
(41) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended March 31, 1999
(File No. 001-13539).
(42) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended March 31, 1999
(File No. 001-13539).
(43) Incorporated by reference to Exhibit 99.1 AMF Bowling, Inc.'s Current
Report on Form 8-K dated June 28, 1999 (File No. 001-13539).
(44) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended September 30, 1999
(File No. 001-13539).
(45) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Bowling Worldwide, Inc. for the quarterly period ended
September 30, 2000 (File No. 001-12131).
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 16th day of
April, 2001.
AMF BOWLING WORLDWIDE, INC.
By: /s/ ROLAND C. SMITH
--------------------
Roland C. Smith
Director/President and
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of the 16th day of April, 2001.
Signature Title
--------- -----
/s/ RICHARD A. FRIEDMAN Director/Chairman of the Board
- -----------------------
Richard A. Friedman
/s/ TERENCE M. O'TOOLE Director
- ----------------------
Terence M. O'Toole
/s/ PETER M. SACERDOTE Director
- ----------------------
Peter M. Sacerdote
/s/ CHARLES M. DIKER Director
- --------------------
Charles M. Diker
/s/ PAUL B. EDGERLEY Director
- --------------------
Paul B. Edgerley
/s/ HOWARD A. LIPSON Director
- --------------------
Howard A. Lipson
/s/ THOMAS R. WALL, IV Director
- ----------------------
Thomas R. Wall, IV
/s/ ROLAND C. SMITH Director/President and Chief Executive Officer
- ------------------- (principal executive officer)
Roland C. Smith
/s/ STEPHEN E. HARE Director/ Executive Vice-President and Chief
- ------------------- Financial Officer (principal financial
Stephen E. Hare officer),Chief Accounting Officer (principal
accounting officer)
94
AMF GROUP HOLDINGS INC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE I
TO THE BOARD OF DIRECTORS OF
AMF GROUP HOLDINGS INC.:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements included in the Form 10-K Annual Report of
AMF Group Holdings Inc. and subsidiaries as of December 31, 2000 and 1999 and
for each of the three years in the period ended December 31, 2000, and have
issued our report thereon dated April 15, 2001. Our report on the financial
statements includes an explanatory paragraph calling attention to a going
concern issue. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedule I filed as part of the
Company's Form 10-K Annual Report is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
April 15, 2001
95
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF AMF GROUP HOLDINGS INC.
CONDENSED BALANCE SHEETS
(in thousands)
As of December 31,
--------------------------------
2000 1999
------------ ------------
Assets
Current assets........................................................ $ 17 $ 50
Investment in subsidiary.............................................. 454,485 642,181
Other noncurrent assets............................................... - 17
--------------------------------
Total assets....................................................... $ 454,502 $ 642,248
================================
Liabilities and Stockholder's Equity
Current liabilities................................................... $ 450 $ 400
Other long-term liabilities........................................... - 50
Stockholder's equity.................................................. 454,052 641,798
--------------------------------
Total liabilities and stockholder's equity......................... $ 454,502 $ 642,248
================================
The accompanying notes are an integral part of these condensed balance sheets.
96
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF AMF GROUP HOLDINGS INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2000 1999 1998
------------ ------------ -------------
Operating expenses:
Amortization................................. $ 50 $ 50 $ 50
------------ ------------ -------------
Operating loss.................................. (50) (50) (50)
Nonoperating expense:
Other expenses............................... - - 33
------------ ------------ -------------
Loss before equity in loss of subsidiary........ (50) (50) (83)
Equity in loss of subsidiary.................... (181,426) (200,963) (106,744)
------------ ------------ -------------
Net loss........................................ $ (181,476) $ (201,013) $ (106,827)
============ ============ =============
The accompanying notes are an integral part of these condensed financial
statements.
97
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF AMF GROUP HOLDINGS INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net Loss........................................................................ $ (181,476) $ (201,013) $ (106,827)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization................................................................... 50 50 50
Equity in loss of subsidiary................................................... 181,426 200,963 106,744
Change in assets and liabilities: - 33
------------ ------------ ------------
Net cash provided by operating activities...................................... - - -
------------ ------------ ------------
Net cash used in investing activities:
Investment in subsidiary....................................................... (7,000) (34,731) (255,587)
------------ ------------ ------------
Net cash provided by financing activities:
Capital contributions.......................................................... 7,000 34,731 255,587
------------ ------------ ------------
Net cash provided by financing activities...................................... 7,000 34,731 255,587
------------ ------------ ------------
Net change in cash and cash equivalents........................................ - - -
Cash and cash equivalents at beginning of period............................... - - -
------------ ------------ ------------
Cash and cash equivalents at end of period..................................... $ - $ - $ -
============ ============ ============
The accompanying notes are an integral part of these condensed
financial statements.
98
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF AMF GROUP HOLDINGS INC.
NOTES TO AMF GROUP HOLDINGS INC. CONDENSED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION:
These notes to the AMF Group Holdings Inc. ("AMF Group Holdings") condensed
financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements of AMF Group Holdings and subsidiaries
included in Part II, Item 8 of the Form 10-K Annual Report (the "Notes"). AMF
Bowling Worldwide, Inc., ("Bowling Worldwide") is a wholly owned subsidiary of
AMF Group Holdings. AMF Group Holdings is a wholly owned subsidiary of AMF
Bowling, Inc. ("AMF Bowling"). All dollar amounts are in thousands, except where
otherwise indicated.
2. GUARANTEES:
The Senior Subordinated Notes and Senior Subordinated Discount Notes (as
defined and discussed in "Note 1. Organization - Business Description and
Restructuring" in the Notes), are jointly and severally guaranteed on a full and
unconditional basis by AMF Group Holdings and by the first and second-tier
subsidiaries of Bowling Worldwide.
3. RESTRICTED ASSETS OF AMF GROUP HOLDINGS AND BOWLING WORLDWIDE:
The credit agreement (the "Credit Agreement") to which Bowling Worldwide is
a party with Goldman Sachs, their affiliate Goldman Sachs Credit Partners, L.P.,
Citibank, N.A. ("Citibank") and its affiliates Citicorp Securities, Inc. and
Citicorp USA, Inc. and certain other banks, financial institutions and
institutional lenders contains certain financial covenants, as well as
additional affirmative and negative covenants, constraining Bowling Worldwide.
Under the terms currently in effect, Bowling Worldwide must maintain a minimum
Modified Consolidated EBITDA and a Cash Interest Coverage Ratio and a Total Debt
to EBITDA Ratio (as defined in the Credit Agreement). Negative covenants under
the Senior Facilities prohibit Bowling Worldwide and its Subsidiaries from (i)
incurring certain liens, (ii) entering into certain debt, (iii) incurring
certain obligations under capital leases, (iv) entering into certain mergers,
(v) entering into certain investments and (vi) making certain material changes
in the nature of its business. The negative covenants also relate to the payment
of dividends, prepayments of, and amendments of the terms of, other debt
(including the Subordinated Notes), amendment of Related Documents (as defined
in the Credit Agreement), ownership changes, negative pledges, partnerships,
speculative transactions, capital expenditures and payment restrictions
affecting subsidiaries. Bowling Worldwide is also subject to certain financial
and other reporting requirements.
As Bowling Worldwide is in default of the financial covenants contained in
the Credit Agreement, it may not (i) declare and pay dividends in common stock,
(ii) declare and pay cash dividends to the extent necessary to make payments
under certain non-compete agreements with owners of the Predecessor Company,
(iii) declare and pay cash dividends for general administrative expenses not to
exceed $0.25 million and (iv) declare and pay cash dividends not to exceed $2.0
million for the repurchase of Common Stock.
4. TOTAL ASSETS AND LIABILITIES:
At December 31, 2000 and 1999, assets represent AMF Group Holdings'
investment in Bowling Worldwide, and other assets related to commitments under
non-compete agreements. At December 31, 2000 and 1999, liabilities represent
accrued expenses primarily related to commitments under non-compete agreements.
5. AMF BOWLING OPERATIONS:
In the year ended December 31, 1998, the Company began allocating certain
corporate, general and administrative expenses to AMF Bowling based on the
percentage of resources specifically used in administrative activities of AMF
Bowling.
99
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company.(2)
3.3 Certificate of Amendment to Certificate of Incorporation of the Company.(3)
4.1 Certificate of Incorporation of the Company, as amended (see Exhibit 3.1).
4.2 By-Laws of the Company (see Exhibit 3.2).
100
4.3 Certificate of Amendment to Certificate of Incorporation of the Company
(see Exhibit 3.3).
4.4 Indenture, dated as of March 21, 1996, as supplemented, by and among AMF
Group Inc. (a predecessor of the Company), the parties listed on Exhibit C
thereto, as guarantors, and IBJ Schroder Bank & Trust Company with respect
to the Senior Subordinated Notes.(4)
4.5 Indenture, dated as of March 21, 1996, as supplemented, by and among AMF
Group Inc., the parties listed on Exhibit C thereto, as guarantors, and
American Bank National Association with respect to the Subsidiary Senior
Subordinated Discount Notes.(5)
4.6 Form of Senior Subordinated Note.(6)
4.7 Form of Senior Subordinated Discount Note.(7)
4.8 Purchase Agreement dated May 6, 1998, among AMF Bowling, Inc., the
Designated Subsidiaries named herein and the Initial Purchasers named
therein.(8)
4.9 Indenture dated as of May 12, 1998, between AMF Bowling, Inc. and the Bank
of New York.(9)
4.10 Registration Rights Agreement dated as of May 12, 1998, among AMF Bowling,
Inc. the Designated Subsidiaries named therein and the Initial Purchasers
named therein.(10)
4.11 Form of the AMF Bowling, Inc.'s Zero Coupon Convertible Debenture due
2018.(11)
10.1 Registration Rights Agreement, dated as of March 21, 1996, by and among
AMF Bowling, Inc., the Guarantors and Goldman, Sachs & Co.(12)
10.2 Third Amended and Restated Credit Agreement among AMF Group Inc. and the
Initial Lenders and Initial Issuing Banks and Goldman, Sachs & Co., as
Syndication Agent, and Citibank, N.A., as Administrative Agent.(13)
10.3 AMF Holdings Inc. (a predecessor of AMF Bowling, Inc.) 1996 Stock
Incentive Plan.(14)*
10.4 Stockholders Agreement, dated as of April 30, 1996, by and among AMF
Bowling, Inc. and the Stockholders.(15)
10.5 Amendment No. 1, dated as of May 28, 1996, to the Stockholders
Agreement.(16)
10.6 Amendment No. 2, dated as of May 31, 1996, to the Stockholders
Agreement.(17)
10.7 Amendment No. 3, dated as of January 17, 1997, to the Stockholders
Agreement.(18)
10.8 Amendment No. 4, dated as of January 17, 1997, to the Stockholders
Agreement.(19)
10.9 Amendment No. 5, dated as of July 31, 1997, to the Stockholders
Agreement.(20)
10.10 Amendment No. 6, dated as of December 31, 1997, to the Stockholders
Agreement.(21)
10.11 Amendment No. 7, dated as of January 1, 1998, to the Stockholders
Agreement.(22)
10.12 Registration Rights Agreement, dated as of April 30, 1996, by and among
AMF Bowling, Inc. and the Stockholders.(23)
10.13 Amendment No. 1, dated as of May 28, 1996, to the Registration Rights
Agreement.(24)
10.14 Amendment No. 2, dated as of January 17, 1997, to the Registration Rights
Agreement.(25)
10.15 Amendment No. 3, dated as of January 17, 1997, to the Registration Rights
Agreement.(26)
10.16 Amendment No. 4, dated as of July 31, 1997, to the Registration Rights
Agreement.(27)
10.17 Amendment No. 5, dated as of September 30, 1997, to the Registration
Rights Agreement.(28)
10.18 Warrant Agreement, dated as of May 1, 1996, between AMF Bowling, Inc. and
The Goldman Sachs Group, L.P.(29)
10.19 Stock Option Agreement, dated as of May 1, 1996, between AMF Bowling, Inc.
and Charles M. Diker.(30)*
10.20 Employment Agreement, dated as of May 28, 1996, by and among AMF Bowling,
Inc., AMF Group Inc. and Stephen E. Hare.(31)*
10.21 Stock Subscription Agreement, dated as of October 9, 1996, by and among
AMF Bowling, Inc. and the Purchasers (as defined therein).(32)
10.22 Waiver and Amendment No. 1, dated as of March 24, 1997, to Amended and
Restated Credit Agreement dated as of December 20, 1996.(33)
10.23 Amendment No. 2 to the Amended and Restated Credit Agreement, dated as of
June 30, 1997.(34)
10.24 Interest Rate Cap Agreement, dated July 2, 1997.(35)
10.25 AMF Bowling, Inc. 1998 Stock Incentive Plan.(36)*
10.26 Amendment No. 1 and Waiver to the Third Amended and Restated Credit
Agreement dated as of September 30, 1998.(37)
10.27 Termination and Release Agreement, dated as of November 2, 1998, by and
among AMF
101
Bowling, Inc., AMF Bowling Worldwide, Inc., and Douglas J. Stanard.(38)*
10.28 Employment Agreement, dated as of September 8, 1998, by and among AMF
Bowling, Inc. and John P. Watkins.(39)*
10.29 Amendment to the AMF Bowling, Inc. 1998 Stock Incentive Plan.(40)*
10.30 Employment Agreement, dated as of April 28, 1999, between AMF Bowling,
Inc. and Roland Smith.(41)*
10.31 Stock Option Agreement, dated as of April 28, 1999, between AMF Bowling,
Inc. and Roland Smith.(42)*
10.32 Amendment No. 2 and Waiver to the Third Amended and Restated Credit
Agreement, and the Fourth Amended and Restated Credit Agreement, dated as
of June 14, 1999 among AMF Bowling Worldwide, Inc., the Initial Lenders,
the Initial Issuing Banks, Goldman Sachs Credit Partners L.P., as
Syndication Agent, Citibank, N.A., as Administrative Agent and Citicorp
USA Inc., as Collateral Agent.(43)
10.33 Employment Agreement, dated as of August 4, 1999, between AMF Bowling,
Inc. and Stephen E. Hare.(44)*
10.34 Amendment No. 1 to Fourth Amended and Restated Credit Agreement dated as
of August 12, 2000.(45)
10.35 Severance Agreement, effective April 16, 1999, between AMF Bowling
Products, Inc. and J. Randolph V. Daniel, IV (filed herewith).*
10.36 Employment Agreement, effective November 12, 1999, between AMF Bowling
Worldwide, Inc. and Timothy N. Scott (filed herewith).*
10.37 Termination Agreement, dated April 10, 2000, between AMF Bowling, Inc. and
John P. Watkins (filed herewith).*
10.38 AMF Bowling Worldwide, Inc. Bonus, Severance and Retention Program for
Certain Employees, approved November 9, 2000 (filed herewith).*
10.39 Assumption Agreement, dated as of November 9, 2000, by and between AMF
Bowling Worldwide, Inc. and Roland C. Smith (filed herewith).*
10.40 Assumption Agreement, dated as of November 9, 2000, by and between AMF
Bowling Worldwide, Inc. and Stephen E. Hare (filed herewith).*
10.41 Form of Employment Retention Agreement, effective November 9, 2000, among
AMF Bowling Worldwide, Inc., AMF Bowling Products, Inc., AMF Bowling
Centers, Inc., AMF Bowling Centers (Aust.) International, Inc. and AMF
Worldwide Bowling Centers Holdings, Inc. and certain executives (filed
herewith).*
10.42 Release and Severance Agreement, dated November 13, 2000, between AMF
Bowling, Inc. and J. Randolph V. Daniel, IV (filed herewith).*
10.43 Employment Agreement, effective March 15, 2001, between AMF Bowling
Products, Inc. and John Suddarth (filed herewith).*
12.1 Computation of ratio of earnings to fixed charges (filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed herewith).
102
Notes to Exhibits:
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K
of AMF Bowling Worldwide, Inc. for the fiscal year ended December 31, 2000
(File No. 001-12131).
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(3) Incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K
of AMF Bowling Worldwide, Inc. for the fiscal year ended December 31, 2000
(File No. 001-12131).
103
(4) Incorporated by reference to Exhibit 4.1 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(5) Incorporated by reference to Exhibit 4.2 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(6) Incorporated by reference to Exhibit 4.3 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(7) Incorporated by reference to Exhibit 4.4 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(8) Incorporated by reference to Exhibit 4.6 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(9) Incorporated by reference to Exhibit 4.7 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(10) Incorporated by reference to Exhibit 4.8 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(11) Incorporated by reference to Exhibit 4.9 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-60959).
(12) Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(13) Incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K
of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File No.
001-13539).
(14) Incorporated by reference to Exhibit 10.3 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(15) Incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
104
(16) Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(17) Incorporated by reference to Exhibit 10.6 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(18) Incorporated by reference to Exhibit 10.7 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(19) Incorporated by reference to Exhibit 10.8 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(20) Incorporated by reference to Exhibit 10.9 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(21) Incorporated by reference to Exhibit 10.10 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(22) Incorporated by reference to Exhibit 10.11 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(23) Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(24) Incorporated by reference to Exhibit 10.11 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(25) Incorporated by reference to Exhibit 10.12 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(26) Incorporated by reference to Exhibit 10.13 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(27) Incorporated by reference to Exhibit 10.14 to the Registration Statement on
Form S-1 of AMF Bowling, Inc. (File No. 333-34099).
(28) Incorporated by reference to Exhibit 10.17 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(29) Incorporated by reference to Exhibit 10.6 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(30) Incorporated by reference to Exhibit 10.9 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(31) Incorporated by reference to Exhibit 10.10 to the Registration Statement on
Form S-4 of AMF Group Inc. (File No. 333-4877).
(32) Incorporated by reference to Exhibit 10.14 to the Annual Report on Form
10-K of AMF Group Inc. for the fiscal year ended December 31, 1996 (File
No. 001-12131).
(33) Incorporated by reference to Exhibit 10.16 to Post-Effective Amendment No.
2 to the Registration Statement on Form S-4 of AMF Group Inc. (File No.
333-4877).
(34) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Group Inc. for the quarterly period ended June 30, 1997 (File
No. 001-12131).
(35) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q of AMF Group Inc. for the quarterly period ended June 30, 1997 (File
No. 001-12131).
(36) Incorporated by reference to Exhibit 10.30 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1997 (File
No. 001-13539).
(37) Incorporated by reference to Exhibit 10.1 of AMF Bowling, Inc.'s Current
Report on Form 8-K dated September 30, 1998 (File No. 001-13539).
(38) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended September 30, 1998
(File No. 001-13539).
(39) Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended September 30, 1998
(File No. 001-13539).
(40) Incorporated by reference to Exhibit 10.34 to the Annual Report on Form
10-K of AMF Bowling, Inc. for the fiscal year ended December 31, 1998 (File
No. 001-13529).
(41) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended March 31, 1999
(File No. 001-13539).
(42) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended March 31, 1999
(File No. 001-13539).
(43) Incorporated by reference to Exhibit 99.1 AMF Bowling, Inc.'s Current
Report on Form 8-K dated June 28, 1999 (File No. 001-13539).
105
(44) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Bowling, Inc. for the quarterly period ended September 30, 1999
(File No. 001-13539).
(45) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of AMF Bowling Worldwide, Inc. for the quarterly period ended
September 30, 2000 (File No. 001-12131).
106