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 of the past fiscal year, the Company and its wholly- owned subsidiaries operated 19 bowling centers. The Company's newest location, a 40 lane center in metropolitan Richmond, Virginia, opened January 27, 2006.
(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. 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.
(c) Narrative Description of Business As of September 1, 2006 the Registrant and its subsidiaries operated 10 bowling centers in the greater metropolitan area of Washington, D.C., one bowling center in the greater metropolitan area of Baltimore, Maryland, one bowling center in Orlando, Florida, three bowling centers in the greater metropolitan area of Jacksonville, Florida, and four bowling centers in the greater metropolitan area of Richmond, Virginia. These 19 bowling centers contain a total of 756 lanes. These establishments are fully air-conditioned with facilities for service of food and beverages, game rooms, rental lockers, and playroom facilities. All centers provide shoes for rental, and bowling balls are provided free. In addition, each center retails 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 major source of its 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 field. The principal method of competition is the quality of service furnished to the Company's customers. Its primary competitors are two large bowling equipment manufacturers, Brunswick Corporation and AMF Bowling Worldwide, Inc. 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 750.
(d) Foreign Operations
The Company has no foreign operations.
Item 1A.
Item 1A. RISK FACTORS
General economic, social and political conditions may adversely impact revenue. The Company's revenues may be affected if customers' discretionary income declines as a result of a downturn in the economy. Competition from other forms of recreation can affect the popularity of bowling and could adversely affect revenues. Political events such as a terrorist attack could cause people to avoid public places where large crowds gather.
Adverse weather conditions can affect revenues. Especially during the busy winter months, revenues from open play bowling, generally on weekends and holidays, can be affected by severe weather conditions that limit customers' ability to travel.
High energy costs could adversely affect operating income as heating and air conditioning are a significant expense of center operations.
We depend on key personnel for our performance. Our performance significantly depends upon the continued contributions of our President and Chief Executive Officer, General Manager and certain other key employees. The loss or unavailability of any such persons, or the delay and disruption that could be associated in the event of a need to replace any such persons, could adversely affect us.
We may not be able to expand our operations. We are endeavoring to increase the number of our bowling centers through the acquisition or construction of new centers. No assurance can be given that we will be able to effect such expansion on terms favorable to us or that we will be able to profitably operate any such new centers.
We qualify as a "controlled company" under American Stock Exchange rules. We qualify as a "controlled company" under the rules of the AMEX as a result of the fact that our President and Chief Executive Officer and his family beneficially own shares possessing more than 50% of our outstanding shares' total voting power, and we are consequently exempt from certain AMEX corporate governance listing requirements. Furthermore, such controlling shareholders would be able to determine the outcome of certain matters that could be submitted for shareholder approval, rendering the minority shareholders unable to control such matters.
ITEM 2.
ITEM 2. PROPERTIES
The Company's general offices are located at 6446 Edsall Road, Alexandria, Virginia 22312.
Two of the Company's bowling centers are located in leased premises, and the remaining seventeen centers are owned by the Company. The Company's leases expire from 2009 through 2014. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter ended July 2, 2006.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The information set forth in the section entitled "Market Information", "Holders", and "Cash Dividends" under "Selected Financial Data" on page 3 of the Company's July 2, 2006 Annual Report is incorporated by reference herein. (b) Not applicable
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in the section entitled "Selected Financial Data" on page 3 of the Company's July 2, 2006 Annual Report is incorporated by reference herein. 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 set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 2 of the Company's July 2, 2006 Annual Report is incorporated by reference herein.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. Our short-term investments and certain cash equivalents are subject to interest rate risk. We manage this risk by maintaining an investment portfolio of available-for-sale instruments with high credit quality and relatively short average maturities. The fair value of marketable debt securities held was $7,990,636 and $11,273,191 at July 2, 2006 and July 3, 2005, respectively. The fair value of certain fixed rate debt securities will change depending on movements in interest rates. Declines in interest rates will affect our interest income. Based on our portfolio of debt securities at July 2, 2006, a 10% decline in the average yield would not have a material impact on our interest income.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related notes thereto, the Report of Independent Registered Public Accounting Firm and the Selected Quarterly Financial Data (unaudited), as contained on pages 2 through 11 of the Company's July 2, 2006 Annual Report, are incorporated by reference herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective based on their evaluation of such controls and procedures as of July 2, 2006. There was no change in the Company's internal control over financial reporting identified in connection with the evaluation that occurred during the fourth quarter of the Company's fiscal year ended July 2, 2006 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 AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item regarding directors 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
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)1. 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 - July 2, 2006 and July 3, 2005
Consolidated statements of earnings and comprehensive earnings - years ended July 2, 2006, July 3, 2005, and June 27, 2004
Consolidated statements of stockholders' equity - years ended July 2, 2006, July 3, 2005, and June 27, 2004
Consolidated statements of cash flows - years ended July 2, 2006, July 3, 2005, and June 27, 2004
Notes to the consolidated financial statements - years ended July 2, 2006, July 3, 2005, and June 27, 2004
(a)2. Exhibits: 3(a) Articles of Incorporation of the Registrant and amendments through December 1988 thereto (Incorporated by reference from exhibit number 3 to the Annual Report for 1989 on Form 10-K for fiscal year ended July 2, 1989.)
3(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(c) By-laws of the Registrant (Incorporated by reference from exhibit 3 to the Annual Report for 1989 on Form 10-K for fiscal year ended July 2, 1989.)
10(a) Extension of employment agreement with Leslie H. Goldberg (Incorporated by reference from the Registrant's Form 8-K filed June 22, 2006)
10(b) Employment agreement, dated December 31, 2005, between Registrant and Irvin Clark. (Incorporated by reference from Registrant's Form 8-K filed January 10, 2006)
10(c) Employment agreement, dated December 31, 2004, between Registrant and Cheryl A. Dragoo. (Incorporated by reference from Registrant's Form 8-K filed December 30, 2004)
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)
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
Leslie H. Goldberg President and Principal Executive & Operating Officer
Date: September 28, 2006
Cheryl A. Dragoo Chief Financial Officer, Assistant Treasurer and Controller Principal Accounting Officer
Date: September 28, 2006
BOWL AMERICA INCORPORATED 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
Leslie H. Goldberg President, Principal Executive & Operating Officer & Director
Date: September 28, 2006
Ruth Macklin A. Joseph Levy Senior Vice President-Treasurer Senior Vice President-Secretary and Director and Director
Date: September 28, 2006 Date: September 28, 2006
Warren T. Braham Stanley H. Katzman Director Director
Date: September 28, 2006 Date: September 28, 2006
Allan L. Sher Merle Fabian Director Director
Date: September 28, 2006 Date: September 28, 2006
Irvin Clark Director
Date: September 28, 2006
BOWL AMERICA INCORPORATED PRESIDENT'S LETTER
September 22, 2006
Dear Fellow Owners:
More and more people are coming to Bowl America. They are spending more money. Our sales for bowling related activities and food and beverages were higher than last year, even though we had one fewer fiscal week. This is true even without the sales at our new center.
But the earnings were not up. What we charged did not keep up with what we have to pay for the good and services we provide our customers. Economists say the pressure of rising costs is abating. If, like me, you go to a local grocery or hardware store, you are not as sanguine. If you have a light switch in your home, you know what is happening with energy costs. Just convert that to thousands of square feet in the bowling centers that must be brightly lit and ventilated almost year round. Watching our costs will have to be a top priority this year.
Also, some of our best business is done in locations that have been actively used for almost 50 years. This year, some of the oldest buildings required expensive and unpredicted repairs. These buildings, however, are well located for future growth. My guess is you would probably include almost all of our neighborhoods on your list if you were starting to build a new bowling chain. Think how often you read about economic growth and low unemployment in Fairfax and Loudoun Counties and in Richmond.
Another growing item is our dividend. This was the 34th consecutive year of increased dividends per share, which resulted in our being ranked 21st among 19,000 public companies in a recent survey. We are not prepared, however, to view our situation as static. Elsewhere you will see the photographs of our spectacular new Richmond, Virginia area facility. It is located in what we believe to be the fastest growing section of that city and the photos hardly do justice to its visual impact. This blend of the new with continued development of our existing properties is what is required to accomplish our objective of continuing to increase the real rewards of owning shares in our company. We have long argued that shareholders are best served if they can share in their companies' success without having to sell their stock.
Future success won't simply flow from bricks and mortar. It will be determined by the skills of our people and customs we have developed over the years. I am particularly reminded of this because of the recent death of Paul Mudd. Paul and I had actually worked together at the old Clarendon Bowling Center during World War II. When Bowl America was founded, Paul became its first manager, opening Shirley Bowl in January 1958. He continued with the company until his retirement in 1989. Paul's relationship with Bowl America will not, however, be limited by dates. Even today, when discussing the things that the best bowling center managers do, we always come back to talking about how Paul Mudd did it. In this respect, he was part of our past and will be part of our future.
Regards, Leslie H. Goldberg, President
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities in fiscal 2006 was $4,293,000 which was sufficient to meet day-to-day cash needs. Short- term investments consisting mainly of U.S. Government securities, cash and cash equivalents totaled $9,046,000 at the end of fiscal 2006 compared to $12,980,000 at the end of fiscal 2005. The decrease of approximately $3,934,000 is primarily the result of internally funding the building of Bowl America Short Pump which opened to the public on January 27, 2006.
During fiscal year 2006, the Company expended approximately $1,118,000 for the purchase of bowling equipment and restaurant equipment and amusement games, continuing to upgrade current facilities. Approximately $4,201,000 was expended in the fiscal year for building and equipping the new location. All contracts for the site were paid in full except a $10,000 balance due on one contract. In July 2006, the Company signed purchase agreements totaling approximately $290,000 for bowling pins and point-of-sale cash systems. In August 2006 all pins and equipment were delivered and payment in full was made.
The Company is actively seeking property for the development of new bowling centers. The Company has made no application for third party funding as cash and cash flows are sufficient to finance all contemplated purchases and to meet short-term purchase commitments and operating lease commitments. The table below summarizes these obligations as of July 2, 2006. The Company's holdings of marketable equity securities, primarily telecommunication stocks, are an additional source of expansion capital. These marketable securities are carried at their fair value on the last day of the year. The value of the securities on July 2, 2006 was approximately $4.5 million compared to $4.2 million at July 3, 2005.
CONTRACTUAL Total Less than 1-3 3-5 More than OBLIGATIONS 1 year years years 5 years ------------------------------------------------------------------------- Operating lease obligations $1,265,416 $ 272,459 $544,918 $191,372 $256,667
Purchase obligations 10,000 10,000 - - - ------------------------------------------------------------------------- Total $1,275,416 $ 282,459 $544,918 $191,372 $256,667 =========================================================================
Cash dividends of $.56 per share, totaling $2.9 million, were paid to shareholders during the 2006 fiscal year making this the thirty-fourth consecutive year of increased dividends per share. In June 2006, the Company declared a $.14 per share dividend to be paid in August 2006. While no factors requiring a change in the dividend rate are yet apparent, 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 future opportunities.
RESULTS OF OPERATIONS
With the opening of Bowl America Short Pump during the third quarter of fiscal year 2006, the number of locations in operation increased from eighteen to nineteen. Eighteen centers were in operation during both fiscal 2005 and 2004. Fiscal years 2006 and 2004 each consisted of 52 weeks. Fiscal year 2005 was a 53-week year. All comparisons in this discussion and throughout the report are affected by the change in the number of centers in operation in fiscal year 2006 and the additional week of business in fiscal year 2005.
Operating revenues increased $1,713,000 or about 6% in fiscal 2006 and $173,000 or about 1% in fiscal 2005. Bowling and other revenue increased $1,207,000 or 6% in fiscal 2006 and $274,000 or 1% in fiscal 2005. Food, beverage and merchandise sales rose $506,000 or 6% in the current fiscal year versus a decrease of 1% in fiscal 2005.
Total operating expense increased $1,975,000 or 8% in fiscal 2006 compared to a slight decline in fiscal 2005. Costs for employee compensation and benefits were up 6% in the current fiscal year and down less than 1% in the prior year period. In fiscal year 2006, health insurance costs increased 8%, up from a 2% increase in the prior year. The increase was primarily the result on higher premiums. Included in this category of expense are contributions to our two benefit plans, both of which are defined contribution plans. There is no additional obligation beyond the current year contribution.
Cost of bowling and other services increased 11% and 2% in the current and prior year periods, respectively. Maintenance expense increased $234,000 or 35% in fiscal 2006 due primarily to major plumbing repairs at several locations. In fiscal 2005 the same category was down 12% due primarily to fewer building and air conditioning repairs than in fiscal 2004. Supplies expense was up 8% in fiscal 2006 and flat in fiscal 2005.
Advertising costs increased $60,000 or 9% in the current year and $171,000 or 38% in the prior year period. Utility costs were up 17% in fiscal 2006 and 4% in fiscal 2005.
Rent expense was flat in fiscal year 2006 and decreased 4% in fiscal 2005. The prior year decline was primarily due to lower common area maintenance costs. Insurance expense, excluding health and life, declined 13% in fiscal 2006 and increased 10% in fiscal 2005.
Depreciation expenses increased $202,000 or 14%, primarily attributable to the purchase of assets for the new location, and decreased by $69,000 or 4% in fiscal 2005.
Operating income in fiscal 2006 decreased approximately 6% to $4.9 million from $5.2 million in fiscal 2005. Fiscal 2005 operating income increased 7% over fiscal year 2004 operating income of $4.9 million excluding the gain of $2.2 million on the sale of a facility.
Interest and dividend income increased 7% in the current year period and 47% in the prior year due to higher interest rates on investments. Investment balances in fiscal 2006 were lower than in fiscal 2005 as the new location was partially funded with these investments.
Investment earnings of $152,000 on the mandatory exchange of AT&T Wireless stock for cash from Cingular Wireless were recorded in fiscal 2005.
Effective income tax rates for the Company were 34.9% for fiscal 2006, 35.8% for fiscal 2005, and 37.4% for fiscal 2004, the difference from statutory rates being primarily for the partial exclusion of dividends received on investments and the state tax exemption for interest on U.S. Government obligations.
Net earnings in fiscal 2006 were $3.6 million or $.71 per share, compared to $3.8 million or $.75 per share in fiscal 2005, and $4.7 million or $.91 per share in fiscal 2004.
CRITICAL ACCOUNTING POLICIES
We have identified accounting for marketable investment securities under SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" as a critical accounting policy due to the significance of the amounts included in our balance sheet under the captions of Short- term investments and Marketable equity securities. 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 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 under SFAS 144 Accounting for the Impairment or Disposal 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 future cash flows are less than the carrying amount.
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Selected Financial Data
All share and per share amounts (excluding Net Book Value Per Share) have been adjusted to reflect the 5% stock dividend distributed on July 26, 2001.
Market Information The principal market on which the Company's Class A Common Stock is traded is the American Stock Exchange. The Company's Class B Common Stock is not listed on any exchange and is not traded. This stock can be converted to Class A Common Stock at any time. The table below presents the price range of the Company's Class A stock in each quarter of fiscal 2006 and 2005.
Holders The approximate number of holders of record of the Company's Class A Common Stock as of July 2, 2006 is 405 and of the Company's Class B Common Stock is 25.
Cash Dividends The table below presents the cash dividends per share of Class A and Class B stock paid, and the quarter in which the payment was made during fiscal 2006 and 2005.
BOWL AMERICA INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
BOWL AMERICA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS & 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 CASH FLOWS
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 19 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, one center in metropolitan Orlando, Florida, four centers in metropolitan Richmond, Virginia, and three centers in metropolitan Jacksonville, Florida. These 19 centers contain a total of 756 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 2006 ended July 2, 2006, fiscal year 2005 ended July 3, 2005, and fiscal year 2004 ended June 27, 2004. Fiscal years 2006 and 2004 each consisted of 52 weeks and fiscal year 2005 consisted of 53 weeks.
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:
Bowling lanes and equipment 3-10 years Building and building improvements 10-39 years Leasehold improvements 10 years Amusement games 3-5 years
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 future cash flows are less that 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 July 2, 2006, July 3, 2005 and June 27, 2004 were $681,994, $623,322 and $451,860, respectively.
Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market.
Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this method, 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 The Company accounts for its investments in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity 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 5,136,968, 5,137,773 and 5,138,559, for fiscal years 2006, 2005 and 2004, respectively.
Comprehensive Earnings In accordance with SFAS No. 130 "Reporting Comprehensive Income", 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 each of the three years in the period ended July 2, 2006.
Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers money market funds, certificates of deposits, and repurchase agreements 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 July 2, 2006, and July 3, 2005 other current liabilities included $375,332, and $369,317, respectively, in prize fund monies.
Reclassifications Certain previous year amounts have been reclassified to conform with the current year presentation.
New Accounting Standards In October 2005, the FASB issued FSP FAS No. 13-1, "Accounting for Rental Costs Incurred during a Construction Period" (FSP FAS No. 13-1). FSP FAS No. 13-1 requires that rental costs associated with ground or building operating leases incurred during a construction period be recognized as rental expense. The Company generally owns rather than leases land upon which new real estate projects are constructed. FSP FAS No. 13-1 is effective for the first reporting period beginning after December 15, 2005. The adoption of this statement did not have a material impact on the Company's consolidated financial statements.
2. CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following:
July 2, July 3, 2006 2005 Demand deposits and cash on hand $ 205,361 $ 316,380 Money market funds 175,645 175,645 Repurchase agreements 674,681 1,215,360 _________ _________ $1,055,687 $1,707,385
3. INVESTMENTS Short-term investments consist of certificates of deposits, U.S. Treasury securities and a mutual fund which invests in mortgage backed securities (maturities of generally three months to one year). At July 2, 2006, the fair value of short-term investments was $7,990,636 with an unrealized loss of $89,496. At July 3, 2005, the fair value of short-term investments was $11,273,191 with an unrealized gain of $30,617. Non-current investments are marketable equity securities which consist primarily of telecommunications stocks. The Company has classified all readily marketable debt and equity securities as available-for-sale. These available-for-sale securities are carried at fair value in accordance with the provisions of SFAS No. 115.
The following table summarizes the cost and approximate fair values of equity securities available-for-sale as of July 2, 2006, and July 3, 2005 as follows:
This portfolio includes the following telecommunications stocks:
220 shares of Agere 3,946 shares of Alltel 45,580 shares of AT&T 669 shares of Avaya 27,572 shares of Bell South 2,000 shares of Embarq 8,028 shares of Lucent Technologies 9,969 shares of Qwest 40,000 shares of Sprint Nextel 18,784 shares of Verizon 13,560 shares of Vodafone
There were no sales of available-for-sale securities in the year ended July 2, 2006. In the year ended July 3, 2005, the Company received $252,525 as merger compensation from Cingular Wireless for the mandatory exchange of 16,835 shares of AT&T Wireless stock held by the Company. In the year ended June 27, 2004, the Company received proceeds of approximately $1,000 from the conversion of a publicly traded company into a private enterprise. During the last twelve months ending July 2, 2006, the Company had $89,496 of gross unrealized losses from its investments in federal agency mortgage backed securities which had a fair value of $2,340,220. The unrealized losses on the Company's investment in the federal agency mortgage backed securities were caused by interest rate increases. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold this investment until a recovery to fair value, the Company does not consider these investments to be other- than-temporarily impaired at July 2, 2006.
4. LAND, BUILDINGS, AND EQUIPMENT Land, buildings, and equipment, as cost, consist of the following:
Depreciation and amortization expense for buildings and equipment for fiscal years 2006, 2005, and 2004 was $1,665,637, $1,463,188, and $1,532,587, 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 additional annual rents based upon total gross revenues and increases in real estate taxes and insurance.
At July 2, 2006, the minimum fixed rental commitments related to all non-cancelable leases, were as follows:
Year Ending 2007 $272,459 2008 272,459 2009 272,459 2010 103,372 2011 88,000 Thereafter 256,667 _________ Total minimum lease payments $1,265,416
Net rent expense was as follows: For the Years Ended July 2, July 3, June 27, 2006 2004 2004
Minimum rent under operating leases $270,296 $277,394 $283,721 Excess percentage rents 28,840 23,098 27,165 _______ _______ _______ $299,136 $300,492 $310,886
Purchase Commitments In December 2005, the Company signed a purchase order for the purchase of point-of-sale cash systems for approximately $180,000. Installation of all systems has been completed and payment in full was made in June 2006. Subsequent to July 2, 2006, the Company signed a purchase order for $49,000 for the purchase of point-of-sale cash systems to be installed during the second quarter of fiscal 2007. The purchase order was paid for in full in August 2006. In July 2006, a purchase order totaling $241,500 for bowling pins to be delivered in the first quarter of fiscal 2007 was signed. All pins have been delivered and payment in full was made in August 2006.
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 July 2, 2006, July 3, 2005, and June 27, 2004, contributions in the amount of $140,000, $150,000, and $188,000, 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 value of the Company's contributions to the Plan for fiscal years 2006, 2005, and 2004 was $140,000, $150,000, and $188,000, respectively.
The Company has no defined benefit plan or other post retirement plan.
7. INCOME TAXES The significant components of the Company's deferred tax assets and liabilities were as follows: July 2, July 3, 2006 2004 Deferred tax: Land, buildings, and equipment $1,357,001 $1,506,179 Unrealized gain on available- for-sale securities 1,371,666 1,287,270 Prepaid expenses and other (40,781) 142,647 _________ _________ Deferred tax liabilities $2,687,886 $2,936,096
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:
8. STOCKHOLDERS' EQUITY The Class A shares have one vote per share voting power. The Class B shares may vote ten votes per share and are convertible to Class A shares at the option of the stockholder.
At July 2, 2006, and July 3, 2005, the Company had $39,093 and $41,956, respectively, 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 3% to 3 1/2% and are payable over a term of three years from the date of the agreements which range from 2004 to 2005. These employee loans have been recorded as a reduction of additional paid-in capital.
9. RELATED PARTIES AND DEFERRED COMPENSATION At July 2, 2006, and July 3, 2005, the Company had recorded $20,020 in deferred compensation payable to one officer. Deferred compensation payable to non-related parties was a total of $57,766 at July 2, 2006 and $63,019 at July 3, 2005. The current portion of these amounts, $11,564 at July 2, 2006 and July 3, 2005, and is included in accrued expenses.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following summary represents the results of operations for each of the quarters in fiscal years 2006 and 2005 (dollars in thousands, except for earnings per share):
Aronson & Company 700 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 July 2, 2006 and July 3, 2005, and the related Consolidated Statements of Earnings and Comprehensive Earnings, Stockholders' Equity and Cash Flows for each of the three years in the period ended July 2, 2006. 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 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 financial statements are free of material misstatement. An audit includes 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management. 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 July 2, 2006 and July 3, 2005, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 2006 in conformity with accounting principles generally accepted in the United States of America.
Aronson & Company Rockville, Maryland September 8, 2006
EX-31.1 Exhibit 31.1 to Form 10-K Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) Or 15d-14(a) under the Securities Exchange Act of 1934
I, Leslie H. Goldberg, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bowl America Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting: and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 28, 2006
Leslie H. Goldberg Chief Executive Officer
Exhibit 31.2 Exhibit 31.2 to Form 10K
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) Or 15d-14(a) under the Securities Exchange Act of 1934
I, Cheryl A. Dragoo, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bowl America Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting: and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 28, 2006
Cheryl A. Dragoo Chief Financial Officer
Exhibit 32 Exhibit 32 to Form 10K
Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350
Solely for the purposes of complying with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of Bowl America Incorporated (the "Company"), hereby certify, based on our knowledge, that the Annual Report on Form 10-K of the Company for the year ended July 2, 2006, (the "Report") fully complies with the requirements of Section 13(a) of the Securities Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Leslie H. Goldberg Chief Executive Officer
Cheryl A. Dragoo Chief Financial Officer
Date: September 28, 2006