ITEM 1. BUSINESS
(a) General Development of Business
Bowl America Incorporated (herein referred to as the “Company”) was incorporated in 1958. The Company commenced business with one bowling center in 1958, and at the end fiscal year 2014, the Company and its wholly-owned subsidiaries operated 18 bowling centers. Bowl America Winter Park located in metropolitan Orlando, Florida, which operated with a negative cash flow, was sold for $2,850,000 on May 30, 2013.
(b) Financial Information about Industry Segments
The Company operates in one segment. Its principal source of revenue consists of fees charged for the use of bowling lanes and other facilities and from the sale of food and beverages for consumption on the premises. At the end of the fiscal year 2014, the Company had operating revenues from continuing operations of approximately $22.8 million, and approximately $34 million in total assets. Merchandise sales, including food and beverages, were approximately 29% of operating revenues. The balance of operating revenues (approximately 71%) represents fees for bowling and related services. Earnings per share for fiscal 2014 were $0.27.
(c) Narrative Description of Business
As of September 1, 2014 the Company operated 10 bowling centers in the greater metropolitan area of Washington, D.C., one bowling center in the greater metropolitan area of Baltimore, Maryland, three bowling centers in the greater metropolitan area of Jacksonville, Florida, and four bowling centers in the greater metropolitan area of Richmond, Virginia. These 18 bowling centers contain a total of 726 lanes.
These establishments are fully air-conditioned with facilities for service of food and beverages, game rooms, rental lockers, and meeting room facilities. All centers provide shoes for rental, and bowling balls are provided free. In addition, each center sells retail bowling accessories. Most locations are equipped for glow-in-the-dark bowling, popular for parties and non-league bowling.
The bowling equipment essential for the Company's operation is readily available. The Company’s major source of equipment is Brunswick Corporation.
The bowling business is a seasonal one, and most of the business takes place from October through May. It is highly competitive, but the Company has managed to maintain its position in the markets in which it operates. The principal method of competition is the quality of service furnished to the Company's customers. Its primary competitors are Brunswick Corporation, a large bowling equipment manufacturer, and Bowlmor AMF.
Compliance with federal, state and local environmental protection laws has not materially affected the Company.
The number of persons employed by the Company and its subsidiaries is approximately 500 including approximately 250 full time employees.
(d) Financial Information about Geographic Areas
The Company has no foreign operations.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns its general offices which are located at 6446 Edsall Road, Alexandria, Virginia 22312.
Two of the Company's bowling centers are located in leased premises, and the remaining sixteen centers are owned by the Company. The Company's leases expire in fiscal year 2020. The specific locations of the bowling centers are discussed under Item 1(c).
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine litigation incidental to the business.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The principal market on which the Company's Class A Common Stock is traded is the NYSE MKT. The Company's Class B Common Stock is not listed on any exchange and is not publicly traded. Each share of Class B Common Stock can be converted to one share of Class A Common Stock at any time.
The table below presents the high and low sales price of the Company's Class A Common Stock in each quarter of fiscal years 2014 and 2013.
Holders
As of July 15, 2014, the approximate number of holders of record of the Company's Class A Common Stock was 304 and of the Company's Class B Common Stock was 22.
Cash Dividends
The table below presents the quarterly cash dividends per share of Class A Common Stock and Class B Common Stock paid, and the quarter in which the payment was made during fiscal 2014 and 2013.
The Board of Directors decides the amount and timing of any dividend at its quarterly meetings based on its appraisal of the state of the business, the economic climate and estimate of future opportunities at such time.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information is set forth in the section of Exhibit 99(a) entitled "Selected Financial Data" on page 14 of this Form 10-K and is incorporated herein by reference. Such information should be read in conjunction with the audited financial statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information is set forth in the section of Exhibit 99(b) entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on Pages 9 through 12 of this Form 10-K and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto are set forth in Exhibit 99(c) on pages 15 through 27 of this Form 10-K and is incorporated herein by reference.
Supplementary data is not required.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by it in its periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Based on an evaluation of the Company’s disclosure controls and procedures conducted by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded that the Company's disclosure controls and procedures were effective as of June 29, 2014. Additionally, the Company’s officers concluded that the Company’s disclosure controls and procedures were effective as of June 29, 2014 to ensure that information required to be disclosed in the reports filed under the Exchange Act was accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Internal Control over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting
In accordance with Section 404(a) of the Sarbanes-Oxley Act of 2002 and Item 308(a) of Regulation S-K, the report of management on the Company’s internal control over financial reporting is set forth in Exhibit 99(d) in this Annual Report on Form 10-K and is included herein by reference.
(b) Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the fourth quarter ended June 29, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item regarding directors and executive officers is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following consolidated financial statements of Bowl America Incorporated and its subsidiaries are incorporated by reference in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets as of June 29, 2014 and June 30, 2013
Consolidated statements of earnings and comprehensive earnings - years ended June 29, 2014 and June 30, 2013
Consolidated statements of stockholders' equity - years ended June 29, 2014 and June 30, 2013
Consolidated statements of cash flows - years ended June 29, 2014 and June 30, 2013
Notes to the consolidated financial statements - years ended June 29, 2014 and June 30, 2013
(b) Exhibits:
3(i)a Articles of Incorporation of the Registrant and amendments through December 1994 thereto (Incorporated by reference from exhibit number 3 to the Annual Report for 1989 on Form 10-K for fiscal year ended July 2, 1995.)
3(i)b Amendment to and restatement of Article FIFTH (b) III 2.2 of the Registrant's Articles of Incorporation (Incorporated by reference from the Registrant's Form 8-K filed December 9, 1994.)
3(ii) By-laws of the Registrant (Incorporated by reference from exhibit 3 to the Registrant’s Annual Report on Form 10-K for fiscal year ended July 2, 1989.)
10.1 Amended Employment Agreement, dated as of June 18, 2013, between the Company and Leslie H. Goldberg (incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 19, 2013).
10.2 Amended Employment Agreement, dated as of October 19, 2012, between the Company and Cheryl A. Dragoo (incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 19, 2012).
20 Press release dated September 25, 2014
21 Subsidiaries of registrant (Incorporated by reference from exhibit number 1 to the Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 2002.)
31.1 Written statement of Chief Executive Officer (Rule 13a-14a Certification)
31.2 Written statement of Chief Financial Officer (Rule 13a-14a Certification)
32 Written statement of Chief Executive and Chief Financial Officers (Section 1350 Certifications)
99(a) Selected Financial Data (Item 6), set forth as page 14 hereof
99(b) Management’s Discussion & Analysis of Financial Condition and Results of Operations (Item 7), set forth as pages 9-12 hereof
99(c) Consolidated Financial Statements (Item 8), set forth as pages 15-27 hereof
99(d) Management’s Annual Report on Internal Control Over Financial Reporting, (Item 9 - A) set forth as page 8 hereof
101 Interactive files formatted in XBRL (Extensible Business Reporting Language)
BOWL AMERICA INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of 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.
BOWL AMERICA INCORPORATED
/s/ Leslie H. Goldberg
Leslie H. Goldberg
President
Chief Executive and Operating Officer
Date: September 25, 2014
/s/ Cheryl A. Dragoo
Cheryl A. Dragoo
Chief Financial Officer,
Senior Vice President
Principal Financial and Accounting Officer
Date: September 25, 2014
SIGNATURES
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 and the dates indicated.
Name, Title, Capacity
/s/ Leslie H. Goldberg
Leslie H. Goldberg
President, Principal Executive
& Operating Officer and Director
Date: September 25, 2014
/s/ Ruth Macklin
/s/ Cheryl A. Dragoo
Ruth Macklin
Cheryl A Dragoo
Senior Vice President, Secretary,
Senior Vice President, Principal Financial
Treasurer and Director
& Accounting Officer and Director
Date: September 25, 2014
Date: September 25, 2014
/s/ Warren T. Braham
/s/ Nancy Hull
Warren T. Braham
Nancy Hull
Director
Director
Date: September 25, 2014
Date: September 25, 2014
/s/ Allan L. Sher
/s/ Merle Fabian
Allan L. Sher
Merle Fabian
Director
Director
Date: September 25, 2014
Date: September 25, 2014
/s/ Arthur H. Bill
Arthur H. Bill
Director
Date: September 25, 2014
Exhibit 99(d) Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting
The following sets forth, in accordance with Section 404(a) of the Sarbanes-Oxley Act of 2002 and Item 308(a) of Regulation S-K, the annual report of management of the Company on the Company’s internal control over financial reporting.
1. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting in a process designed by, or under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
●
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
●
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
2. Management of the Company, in accordance with Rule 13a-15(d) under the Securities Exchange Act of 1934 and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of June 29, 2014. The framework on which management’s evaluation of the Company’s internal control over financial reporting is based is the “Internal Control-Integrated Framework” published in 1992 by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission.
3. Management has determined that the Company’s internal control over financial reporting, as of June 29, 2014, was effective. No material weaknesses in the Company’s internal control over financial reporting were identified by management. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
4. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to a permanent exemption for non-accelerated filers from the internal control audit requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
Exhibit 99(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report of Form 10-K contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business, our sales and the industry in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance or development and involve risks, uncertainties and other factors that are in some cases beyond our control. The forward-looking statements included in this Annual Report on Form 10-K are made as of the date hereof. We are under no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
OVERVIEW
The Company is in the entertainment business which, by its nature, has ups and downs based on consumer tastes and whims. Generally, promotional and open play bowling, which depends on the public’s discretionary budget dollars and their choices, accounts for more than half of our business. An unstable economy can lead many to participate in entertainment that is close to home and relatively inexpensive. Bowling has those advantages. However, the longer the economy remains unstable, the less willing people are to spend on other than necessities. Current economic conditions continue to create challenges, but our response is helped by having the resources to be able to promote the sport. Weather is also a factor, especially for casual bowlers. While extreme heat or rainy weather prompt people to look for indoor activities, heavy snow storms can keep customers from reaching the centers. Postponed league games are made up later in the season, but lost open play income is never recovered.
LIQUIDITY AND CAPITAL RESOURCES
The Company views a strong financial position as a major benefit to shareholders and emphasizes payment of dividends as part of its financial plan. A portion of earnings has consistently been invested to create a reserve to protect the Company during downturns in business, to capitalize on opportunities for expansion and modernization and to provide a secure source of income. For these reasons, the Company prefers a conservative approach to investing rather than taking greater risk for possible rapid growth. The Company balances market volatility by using both fixed income and equity investments in managing its reserve funds. Any equity security is subject to price fluctuation, however, the stocks held by the Company have relatively low volatility. The Company has long been invested in a Government National Mortgage Association (“Ginnie Mae”) fund and domestically domiciled stocks with the perceived potential of appreciation, primarily telecommunications stocks. This diversity also provides a measure of safety of principal.
During the year ended June 29, 2014, the Company purchased 5,000 shares of Verizon for $251,600 and received a special dividend from Vodafone consisting of 3,120 shares of Verizon valued at $150,000 and cash of $58,000. The Company’s holdings in LSI were purchased by Anago in a mandatory conversion to cash, resulting in a gain of $281. The remainder of common stocks in our portfolio have come from spin-offs, mergers and acquisitions of AT&T and United Telecommunications (now Sprint) purchased in 1979 and 1984 and one insurance company acquired at no cost when that company demutualized. While not all stocks in the portfolio are domestic American companies any longer, since the original purchases at an approximate cost of $630,000, we have received approximately $967,000 from mergers and sales and over $3,900,000 in dividends, the majority of which are tax favored in the form of exclusion from federal taxable income. These marketable securities are carried at their fair value on the last day of the year. The value of the securities on June 29, 2014 was approximately $5.4 million. The value of securities held at June 30, 2013 was approximately $5.0 million.
The Company’s original investment in the Vanguard GNMA bond fund began in 1988 with purchases of shares in the fund totaling approximately $1,400,000. Except for a one time sale of approximately $666,000 in 1991, all earnings have been reinvested. The fund is carried at fair value on the last day of the reporting period. At June 29, 2014, the value was approximately $3,605,000.
Short-term investments consisting mainly of Certificates of Deposits, and cash and cash equivalents totaled $2,295,000 at the end of fiscal 2014 compared to $4,388,000 at the end of fiscal 2013.
The Company's position in all the above investments is a source of expansion capital. Potential volatility in the trading prices of the marketable securities held by the Company could impact the Company’s opportunities for expansion. The Board of Directors reviews the portfolio weekly and any use of this reserve at its quarterly meetings. The Company has made no application for third party funding as cash and cash flows are currently sufficient to finance all contemplated purchases and to meet short-term purchase commitments and operating lease commitments.
The Company sold its Winter Park, Florida center, which had been operating with a negative cash flow, for $2,850,000 in May 2013. The gain on the sale, which included the land, building and equipment, was $2,768,000.
Cash flow provided by operating activities for the year ended June 29, 2014, was $2,053,000. Equipment purchases during fiscal year 2014 used approximately $261,000. Proceeds from Ginnie Mae dividends totaling approximately $91,600 in fiscal year 2014 were used to purchase additional shares in the fund. Short-term cash was used to meet the balance of $3,406,000 required to pay regular dividends during the fiscal year.
The Company paid cash dividends totaling approximately $3.4 million, or $.66 per share, to shareholders during the 2014 fiscal year, making this the forty-second consecutive year of increased regular dividends per share. In June 2014, the Company declared a quarterly $.17 per share dividend, paid in August 2014. The economic climate is part of the consideration at the Directors quarterly reviews of future estimates of cash flows. The Board of Directors decides the amount and timing of any dividend at its quarterly meeting based on its appraisal of the state of the business and estimate of opportunities at such time.
RESULTS OF OPERATIONS
The following table sets forth the items in our consolidated summary of operations for the fiscal years ended June 29, 2014 and June 30, 2013, respectively, and the dollar and percentage changes therein.
The following table sets forth the items in our consolidated summary of operations for the fiscal fourth quarters ended June 29, 2014 and June 30, 2013, respectively, and the dollar and percentage changes therein.
As noted above, the Bowl America Winter Park location was sold in May 2013, and its operations for the periods above have been shown separately under (Loss) gain from discontinued operations, net of tax. The information included in Operating Revenues and Operating Expenses below relates to the eighteen centers that were in operation for the fiscal years ended 2014 and 2013. Fiscal 2014 and fiscal 2013 each consisted of 52 weeks.
Operating Revenues
Total operating revenue decreased 4.8%, or $1,077,000, to $22.8 million in fiscal 2014 compared to a decrease of 2.0%, or $486,000, to $23.9 million in fiscal 2013. Bowling and other revenue decreased $820,000 in fiscal 2014 versus a decrease of $228,000 in fiscal 2013. Food, beverage and merchandise sales decreased $257,000 in fiscal 2014 and $258,000 in fiscal 2013.
Management believes that winter weather primarily in the third quarter of fiscal year 2014 resulted in the loss of open play business. Mild winter weather in fiscal 2013 caused few cancellations. Promotional pricing throughout the current year also depressed bowling revenue. Management also believes that the fragile economic recovery has adversely affected customers’ appetites for recreational spending for both league and open play games. The Company continues to review and adjust its budget in light of the current economic conditions.
Operating Expenses
As discussed in more detail below, total operating expenses decreased 2.3%, or $514,000, in fiscal year 2014 versus a decrease of 2.8%, or $647,000 in fiscal 2013. Costs for employee compensation and benefits were down 4.4% or $507,000 in fiscal 2014 versus a decrease of 1.6% or $187,000 in fiscal 2013. The Company continued to make scheduling adjustments resulting in a decrease in compensation. In addition, group health insurance costs declined primarily due to lower premiums and fewer participants. This category includes contributions to our two benefit plans, both of which are defined contribution plans. The contributions, which can only be made from profits, decreased for fiscal year 2014 by $151,500. The contributions for fiscal 2013 included a portion of the gain on the sale of the Winter Park location. There is no additional obligation beyond the current year contribution.
Cost of bowling and other services increased $14,000 or 0.2% in the year ended June 29, 2014 versus a decrease of $367,000 or 5.7% in the prior fiscal year. Maintenance expense rose 26.2% or $198,000 in fiscal year 2014 and declined 8% or $65,000 in the prior year. In fiscal 2014 the Company spent approximately $100,000 more in snow removal than in the prior year. Utility costs increased 2.9% in fiscal 2014 versus a decrease of 6% in fiscal 2013. Heating expense during the colder than usual winter months was the primary reason for the increase in fiscal 2014. Energy management and lower electric costs were primarily responsible for the decrease in fiscal year 2013. Supplies expense declined 5.9% in fiscal 2014 and was flat in fiscal 2013. Advertising costs decreased 2.4% in fiscal 2014 and 27% in the prior year period. Both years included updating interiors at several locations.
Cost of food, beverage and merchandise sales increased $41,000 or 2% in fiscal 2014, primarily the result of higher merchandise sales, and decreased $52,000 or 3% in fiscal 2013, primarily due to lower food and beverage sales.
Depreciation expenses decreased approximately $99,000 or 7% in fiscal 2014 as several large assets became fully depreciated and decreased $35,000 or 2% in fiscal year 2013.
Operating income from continuing operations decreased 31.5% or $555,000 to $1.2 million in fiscal year 2014 from $1.8 million in fiscal 2013.
Interest and Dividend Income
Interest and dividend income increased $228,000 or 52.4% in fiscal 2014 primarily due to the special Vodafone dividend mentioned above and increased holdings in Verizon. The same category declined 13% or $65,000 in fiscal 2013 due to lower balances and lower average interest rates on investments.
Income taxes
Effective income tax rates on continuing operations for the Company were 26.5% for fiscal 2014 and 32.4% for fiscal 2013, the difference from statutory rates is primarily due to the partial exclusion of dividends received on investments which, in fiscal 2014 was a higher portion of income than in the prior year.
Net Earnings
Net earnings from continuing operations in fiscal 2014 were $1.4 million, or $.27 per share, compared to $1.5 million, or $.29 per share in fiscal 2013.
(Loss) gain from discontinued operations - net of tax
Fiscal 2014 included a net of tax loss of $2,774 from the discontinued Winter Park, Florida location. Income from discontinued operations, net of tax in fiscal year 2013 was $1,669,449.
CRITICAL ACCOUNTING POLICIES
We have identified accounting for marketable investment securities as a critical accounting policy due to the significance of the amounts included in our balance sheet. The Company exercises judgment in determining the classification of its investment securities as available-for-sale and in determining their fair value. The Company records these investments at their fair value based on quoted market prices with the unrealized gain or loss recorded in accumulated other comprehensive income, a component of stockholders' equity, net of deferred taxes. Additionally, from time to time the Company must assess whether write-downs are necessary for other than temporary declines in value.
We have identified accounting for the impairment of long-lived assets as a critical accounting policy due to the significance of the amounts included in our balance sheet under the caption of Land, Buildings and Equipment. The Company reviews long-lived assets whenever events or changes indicate that the carrying amount of an asset may not be recoverable. In making such evaluations, the Company compares the expected future cash flows to the carrying amount of the assets. An impairment loss equal to the difference between the assets' fair value and carrying value is recognized when the estimated undiscounted future cash flows are less than the carrying amount. There were no impairment losses recorded in fiscal 2014 or 2013.
805 King Farm Boulevard
Rockville, Maryland 20850
Phone 301.231.6200
Fax 301.231.7630
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Bowl America Incorporated
Alexandria, Virginia
We have audited the accompanying Consolidated Balance Sheets of Bowl America Incorporated and Subsidiaries as of June 29, 2014 and June 30, 2013, and the related Consolidated Statements of Earnings and Comprehensive Earnings, Stockholders' Equity and Cash Flows for the years then ended. Bowl America Incorporated and Subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bowl America Incorporated and Subsidiaries as of June 29, 2014 and June 30, 2013, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Aronson, LLC
Aronson, LLC
Rockville, Maryland
September 25, 2014
Exhibit 99(a) Selected Financial Data
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Selected Financial Data
Exhibit 99(c) Consolidated Financial Statements
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Bowl America Incorporated is engaged in the operation of 18 bowling centers, with food and beverage service in each center. Ten centers are located in metropolitan Washington D.C., one center in metropolitan Baltimore, Maryland, four centers in metropolitan Richmond, Virginia, and three centers in metropolitan Jacksonville, Florida. These 18 centers contain a total of 726 lanes. The Company operates in one segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiary corporations. All significant inter-company items have been eliminated in the consolidated financial statements.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest to June 30. Fiscal year 2014 ended June 29, 2014, and fiscal year 2013 ended June 30, 2013. Both years consisted of 52 weeks.
Subsequent Events
The Company has evaluated subsequent events through the date of filing these financial statements with the Securities and Exchange Commission on September 25, 2014.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates include the deferred compensation liability for executives and key employees including survivor benefits, depreciation expense, cash surrender value of officers' life insurance, the Federal and State income taxes (current and deferred), and market assumptions used in estimating the fair value of certain assets such as marketable securities and long-lived assets.
Revenue Recognition
The Company records revenue for fees charged for use of bowling lanes and other facilities at the time the services are provided. Food, beverage and merchandise sales are recorded as revenue at the time the product is given to the customer.
Depreciation and Amortization
Depreciation and amortization for financial statement purposes are calculated by use of the straight-line method. Amortization of leasehold improvements is calculated over the estimated useful life of the asset or term of the lease, whichever is shorter. The categories of property, plant, and equipment and the ranges of estimated useful lives on which depreciation and amortization rates are based are as follows:
Maintenance and repairs and minor replacements are charged to expense when incurred. Major replacements and betterments are capitalized. The accounts are adjusted for the sale or other disposition of property, and the resulting gain or loss is credited or charged to income.
Impairment of Long-Lived Assets
The Company reviews long-lived assets whenever events or changes indicate that the carrying amount of an asset may not be recoverable. In making such evaluations, the Company compares the expected future cash flows to the carrying amount of the assets. An impairment loss, equal to the difference between the assets' fair value and carrying value, is recognized when the estimated undiscounted future cash flows are less than the carrying amount.
Dividends
It is the Company's policy to accrue a dividend liability at the time the dividends are declared.
Advertising Expense
It is the Company's policy to expense advertising expenditures as they are incurred. The Company's advertising expenses for the years ending June 29, 2014, and June 30, 2013, were $433,525 and $449,710, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist of resale merchandise including food and beverage and bowling supplies.
Income Taxes
Deferred income tax liabilities and assets are based on the differences between the financial statement and tax bases of assets and liabilities, using tax rates currently in effect. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
Investment Securities
All of the Company's readily marketable debt and equity securities are classified as available-for-sale. Accordingly, these securities are recorded at fair value with any unrealized gains and losses excluded from earnings and reported, net of deferred taxes, within a separate component of stockholders' equity until realized. Realized gains or losses on the sale of debt and equity securities are reported in earnings and determined using the adjusted cost of the specific security sold.
Earnings Per Share
Earnings per share basic and diluted, have been calculated using the weighted average number of shares of Class A and Class B common stock outstanding of 5,160,971, and 5,151,784, for fiscal years 2014 and 2013, respectively.
Comprehensive Earnings
A consolidated statement of comprehensive earnings reflecting the aggregation of net earnings and unrealized gain or loss on available-for-sale securities, the Company's principal components of other comprehensive earnings, has been presented for the years ended June 29, 2014 and June 30, 2013.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers money market funds and certificates of deposits, with original maturities of three months or less to be cash equivalents. The Company maintains cash accounts which may exceed federally insured limits during the year, but does not believe that this results in any significant credit risk.
Other Current Liabilities
Other current liabilities include prize fund monies held by the Company for bowling leagues. The funds are returned to the leagues at the end of the league bowling season. At June 29, 2014 and June 30, 2013 other current liabilities included $291,688 and $289,521, respectively, in prize fund monies.
Reclassifications
Certain previous year amounts have been reclassified to conform with the current year presentation.
Recently adopted accounting guidance
In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance enhancing disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. In January 2013, the FASB clarified that the scope of this guidance applies to derivatives, repurchase agreements, and securities lending arrangements that are either offset or subject to an enforceable master netting arrangement, or similar agreements. We adopted this new guidance beginning July 1, 2013. Adoption of this new guidance did not have a significant effect on the Company’s financial statements.
In February 2013, the FASB issued guidance on disclosure requirements for items reclassified out of Accumulated Other Comprehensive Earnings (AOCE). This new guidance requires entities to present (either on the face of the Statement of Earnings and Comprehensive Earnings or in the notes to financial statements) the effects on the line items of the Statement of Earnings and Comprehensive Earnings for amounts reclassified out of AOCE. We adopted this new guidance beginning July 1, 2013. Adoption of this new guidance did not have a significant effect on the Company’s financial statements.
Recent accounting guidance not yet adopted
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for the Company beginning July 1, 2017 and early adoption is not permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
The account balances at times exceed federally insured limits. The Company does not believe this poses any significant risk.
3. INVESTMENTS
The Company’s marketable securities are categorized as available-for-sale securities. The cost for marketable securities was determined using the specific identification method. The fair values of marketable securities are based on the quoted market price for those securities. Short-term investments consist of certificates of deposits with maturities of generally three months to one year. At June 29, 2014, the fair value of short-term investments was $1,453,326. At June 30, 2013, the fair value of short-term investments was $949,815. Non-current investments are marketable securities which primarily consist of telecommunications stocks and a mutual fund that invests in mortgage backed securities. Unrealized gains and losses are reported as a component of accumulated other comprehensive earnings in Stockholders’ Equity.
As of June 29, 2014, the Company had $100,125 of gross unrealized gains from its investments in federal agency mortgage backed securities which had a fair value of $3,605,513. As of June 30, 2013, $16,925 in gross unrealized gains were from its investments in federal agency mortgage backed securities which had a fair value of $3,430,670. The Company’s investments were as follows:
During fiscal 2014 and fiscal 2013, the Company had certain equity securities with cumulative unrealized losses of $1,171 and $1,623 respectively. Management believes the unrealized losses are temporary and the Company has the ability and intent to hold these securities long enough to recover its investment.
The equity securities portfolio includes the following stocks:
During the year ended June 29, 2014, the Company purchased 5,000 shares of Verizon. In addition the Company received 3,120 shares of Verizon as a result of Vodafone’s special dividend funded by its sale of Verizon Wireless. LSI was purchased by Anago in an all cash transaction resulting in a gain of $281 on the Company’s holdings of LSI. In the year ended June 30, 2013 there was an exchange of the Company’s shares of SuperMedia for shares of DexMedia as a result of the merger on April 30, 2013.
As stated in Note 1, the Company records its readily marketable debt and equity securities at fair value. These assets are valued in accordance with a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A financial instrument's level within the fair value heirarchy is based on the lowest level of any input that is significant to the fair value measurement.
The fair value of these assets as of June 29, 2014 is as follows:
The fair value of these assets as of June 30, 2013 was as follows:
The fair value of certificates of deposits is estimated using net present value techniques and comparing the values to certificates with similar terms.
4. LAND, BUILDINGS, AND EQUIPMENT
Land, buildings, and equipment, at cost, consisted of the following:
Depreciation and amortization expense for buildings and equipment for fiscal years 2014 and 2013 was $1,323,276, and $1,426,175, respectively. The Company includes construction in progress costs in the bowling lanes and equipment not yet in use category until completion of the project. Bowling lanes and equipment not yet in use are not depreciated.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company and its subsidiaries are obligated under long-term real estate lease agreements for two bowling centers. Certain of the Company's real estate leases provide for increases in real estate taxes.
In June 2014, the Company amended a lease for one location for a five year and 3 month period with an option for an additional five year period such that the lease including the five year option now expires in 2024.
At June 29, 2014, the minimum fixed rental commitments related to all non-cancelable leases, were as follows:
Net rent expense was as follows:
Purchase Commitments
The Company's purchase commitments at June 29, 2014 are for materials, supplies, services and equipment as part of the normal course of business.
6. PROFIT-SHARING AND ESOP PLAN
The Company has two defined contribution plans. The first is a profit-sharing plan which, generally, covers all employees who on the last day of the fiscal year or December 29 have been employed for one year with at least one thousand hours of service. The Plan provides for Company contributions as determined by the Board of Directors. For the years ended June 29, 2014 and June 30, 2013, contributions in the amounts of $48,000 and $124,000, respectively, were charged to operating expense.
Effective March 31, 1987, the Company adopted an Employee Stock Ownership Plan (ESOP) which generally covers all individuals who were employed at the end of the fiscal year and had one thousand or more hours of service during that fiscal year. The Plan provides for Company contributions as determined by the Board of Directors. The Company contributed $48,000 for fiscal year 2014. For fiscal year 2013, the Company contributed 9,500 shares of Bowl America common stock valued at $123,500, based on the market price on the date of contribution. The Company has no defined benefit plan or other post retirement plan.
7. INCOME TAXES
The Company is required to analyze all material positions it has taken or plans to take in all tax returns that have been filed or should have been filed with all taxing authorities for all years still subject to challenge by those taxing authorities. If the position taken is “more-likely-than-not” to be sustained by the taxing authority on its technical merits and if there is more than a 50% likelihood that the position would be sustained if challenged and considered by the highest court in the relevant jurisdiction, the tax consequences of that position should be reflected in the taxpayer’s financial statements.
The Company had no material unrecognized tax benefits at June 29, 2014 nor does it expect any significant change in that status during the next twelve months. No accrued interest or penalties on uncertain tax positions have been included on the consolidated statements of earnings and comprehensive earnings or the consolidated balance sheet. Should the Company adopt tax positions for which it would be appropriate to accrue interest and penalties, such costs would be reflected in the tax expense for the period in which such costs accrued. The Company is subject to U.S. Federal income tax and to several state jurisdictions. Returns filed for tax periods ending after June 27, 2010 are still open to examination by those relevant taxing authorities.
The significant components of the Company's deferred tax assets and liabilities were as follows:
Income tax expense differs from the amounts computed by applying the U.S. Federal income tax rate to income before tax for the following reasons:
Income tax expense from continuing operations differs from the amounts computed by applying the U.S. Federal income tax rate to income from continuing operations before tax for the following reasons:
8. STOCKHOLDERS' EQUITY
The Class A shares have one vote per share. The Class B shares may vote ten votes per share and are convertible to Class A shares at the option of the stockholder. In the year ended June 30, 2013, 53,945 shares of Class B stock were converted to Class A stock.
At June 29, 2014, and June 30, 2013, the Company had $39,093 in employee loans related to the issuance of shares. These loans are secured by the shares of the Company's common stock acquired and are full recourse notes. The notes bear interest at rates of 2% to 3.5% and are payable over a term of three years from the date of the agreements which range from 2012 to 2014. These employee loans have been recorded as a reduction of additional paid-in capital.
9. DEFERRED COMPENSATION
Deferred compensation payable was a total of $40,213 at June 29, 2014, and $45,236 at June 30, 2013. The current portion of these amounts is $6,125 at June 29, 2014, and $6,042 at June 30, 2013, and is included in accrued expenses.
10. DISCONTINUED OPERATIONS
On May 30, 2013 the Company consummated the sale of Bowl America Winter Park in Orlando, Florida for $2,850,000 resulting in a gain on the sale of the land, building and equipment of $2,768,066.
The location had been operating with negative cash flow. In the year ended June 30, 2013 revenues for this location were $295,611.