1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Bowl America Incorporated is currently engaged in the operation of 17 bowling centers, with food and beverage service in each center. Nine 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 17 centers contain a total of 682 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 2019 ended June 30, 2019, and fiscal year 2018 ended July 1, 2018. Fiscal years 2019 and 2018 each 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 26, 2019. In August 2019 the Company redeemed $1,000,000 of its federal agency mortgage backed securities (Vanguard GNMA fund) to meet the August 2019 dividend payment.
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 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 policy
The Company’s performance obligations are generally limited to providing bowling services and food and beverage products at its centers. The obligations are generally incurred and satisfied in the same business day with payment received at the time the obligation is satisfied. Revenue is recognized at the time the performance obligation is satisfied, which generally occurs when the customer pays for games already bowled or receives their food or beverage order.
Merchandise sales are recorded as revenue when the merchandise is provided to the customer which generally is also the time payment is received. Merchandise can be returned 30 days from purchase for a full refund. Historically, merchandise returns have been minimal.
The Company does occasionally incur contractual obligations for group events that may either be prepaid or billed following the event as well as obligations for gift cards. Any prepayments for bowling events and for the sale of gift cards are recorded as deferred revenue. Revenue from gift cards are recognized as the gift card holder purchases services and expends the prepayment amount on the card. The gift cards have no expiration date. Any events that are billed subsequent to occurrence are recognized as revenue when the event has completed. The Company has $78,222 of billed and uncollected receivables related to events that have occurred which are included in Prepaid expenses and other on the accompanying consolidated balance sheet. Prepaid gift cards and prepaid events totaled $185,392 and are included in accrued expenses on the accompanying consolidated balance sheet.
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:
|
|
years
|
Bowling lanes and equipment
|
|
3
|
-
|
10
|
Building and building improvements
|
|
10
|
-
|
39
|
Leasehold improvements
|
|
5
|
-
|
15
|
Amusement games
|
|
3
|
-
|
5
|
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 30, 2019, and July 1, 2018, were $361,744 and $311,090, 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, for both fiscal years 2019 and 2018.
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 year ended July 1, 2018.
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 30, 2019 and July 1, 2018 other current liabilities included $300,920 and $296,774, respectively, in prize fund monies.
Reclassifications
Certain previous year amounts have been reclassified to conform with the current year presentation.
New Accounting Standards
In January 2016, the Financial Accounting Standards Board (FASB) issued guidance on equity securities that requires entities to recognize changes in unrealized gains and losses on equity securities in income in the current period unless the entity is recording the related investment under the equity method or consolidating the related entity. The Company adopted this standard effective July 2, 2018. The result was the reclassification of $2,102,745 (after adoption of ASU 2018-02) from accumulated other comprehensive income to retained earnings. The Company also reclassified all of its marketable equity securities as current assets on consolidated balance sheet.
The following table summarizes the impact of the adoption on accumulated other comprehensive earnings and retained earnings:
|
|
Amount
|
|
Accumulated other comprehensive earnings, 7/2/2018
|
|
$
|
2,102,745
|
|
Reclassification to retained earnings of cumulative effect adjustment to initially apply new accounting guidance for equity investments which were previously classified as available-for-sale, net of tax $1,394,695
|
|
|
(2,102,745
|
)
|
Accumulated other comprehensive earnings as adjusted, 7/2/2018
|
|
|
-
|
|
|
|
|
|
|
Retained earnings, 7/2/2018
|
|
|
14,010,725
|
|
Reclassification from accumulated other comprehensive income of cumulative effect adjustment to initially apply new accounting guidance for equity investments which were previously classified as available-for-sale, net of tax, $1,394,695
|
|
|
2,102,745
|
|
Retained earnings as adjusted, 7/2/2018
|
|
$
|
16,113,470
|
|
In February 2016, the FASB issued guidance on leases which requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new guidance also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. This amendment is effective for the Company’s fiscal year ending June 2020 with early adoption permitted. The Company has estimated that the adoption of this guidance will result in a right to use asset of $1,978,000 and a corresponding lease liability for the same amount being recorded on July 1, 2019. The adoption is expected to be done on a modified retrospective basis with no adjustments made to periods prior to July 1, 2019.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which creates a single, comprehensive revenue recognition model for all contracts with customers. Under this ASU and subsequently issued amendments, an entity should recognize revenue to reflect the transfer of promised
goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods and services. ASU 2014-9 may be adopted either retrospectively or on a modified retrospective basis. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The FASB permits early adoption of the standard, but not before the original effective date of December 15, 2016. The Company adopted the standard for its 2019 fiscal year. The impact of adopting the standard was not material.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. As part of the FASB's disclosure framework project, it has eliminated, amended and added disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements. Public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company does not believe it will materially impact the disclosures.
3. INVESTMENTS
The Company’s investments are categorized as available-for sale. The cost for marketable securities was determined using the specific identification method. The fair values of marketable investment securities are based on the quoted market price for those securities. At June 30, 2019, short-term investments consisted of a certificate of deposit and U. S. Treasury bills with maturities of generally three months to one year. The fair value of the short-term investments was $433,249. Equity securities consist primarily of telecommunications stocks. Mutual funds consist of federal agency mortgage backed securities (Ginnie Mae). At July 1, 2018, short-term investments consisted of a mutual fund that invests in mortgage backed securities and certificates of deposits with maturities of generally three months to one year, and the fair value of short-term investments was $2,157,875. Non-current investments at July 1, 2018 are marketable securities which primarily consist of telecommunications stocks. At June 30, 2019, unrealized gains and losses are reported as income in the current period. At July 1, 2018, unrealized gains and losses were reported as a component of accumulated other comprehensive earnings in Stockholders’ Equity.
As of June 30, 2019, $8,162 in gross unrealized gains were from its investments in federal agency mortgage backed securities which had a fair value of $1,929,575. As of July 1, 2018, the Company had $39,450 of gross unrealized losses from its investments in federal agency mortgage backed securities owned through a mutual fund which had a fair value of $1,824,846. In August 2019 the Company redeemed $1,000,000 of this fund to meet the August 2019 dividend payment.
The Company’s investments were as follows:
|
|
Original
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,279,914
|
|
|
$
|
3,837,143
|
|
|
$
|
(16,716
|
)
|
|
$
|
5,100,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
|
|
1,921,413
|
|
|
|
8,162
|
|
|
|
-
|
|
|
|
1,929,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits & Treasury bills
|
|
|
433,249
|
|
|
|
-
|
|
|
|
-
|
|
|
|
433,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,279,914
|
|
|
$
|
3,545,288
|
|
|
$
|
(8,398
|
)
|
|
$
|
4,816,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
|
|
1,864,296
|
|
|
|
-
|
|
|
|
(39,450
|
)
|
|
|
1,824,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
333,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,029
|
|
During fiscal 2019 and 2018, the Company had certain equity securities with cumulative unrealized losses of $16,716 and $8,398 respectively.
|
|
Less than 12 months
|
|
|
12 Months or greater
|
|
|
Total
|
|
June 30, 2019
|
|
Fair
Value
|
|
|
Unrealized
loss
|
|
|
Fair
Value
|
|
|
Unrealized
loss
|
|
|
Fair
Value
|
|
|
Unrealized
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
51,720
|
|
|
$
|
(6,523
|
)
|
|
$
|
525
|
|
|
$
|
(10,193
|
)
|
|
$
|
52,245
|
|
|
$
|
(16,716
|
)
|
|
|
Less than 12 months
|
|
|
12 Months or greater
|
|
|
Total
|
|
July 1, 2018
|
|
Fair
Value
|
|
|
Unrealized
loss
|
|
|
Fair
Value
|
|
|
Unrealized
loss
|
|
|
Fair
Value
|
|
|
Unrealized
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
711
|
|
|
$
|
(479
|
)
|
|
$
|
1,608
|
|
|
$
|
(7,919
|
)
|
|
$
|
2,319
|
|
|
$
|
(8,398
|
)
|
The equity securities portfolio includes the following stocks:
AT&T shares
|
|
|
82,112
|
|
Manulife shares
|
|
|
2,520
|
|
NCR shares
|
|
|
774
|
|
Teradata shares
|
|
|
774
|
|
Vodafone shares
|
|
|
6,471
|
|
CenturyLink shares
|
|
|
4,398
|
|
Frontier Communications shares
|
|
|
300
|
|
Sprint shares
|
|
|
40,000
|
|
Verizon shares
|
|
|
31,904
|
|
Windstream shares
|
|
|
135
|
|
Uniti shares
|
|
|
815
|
|
In February 2019 Windstream voluntarily filed for Chapter 11 bankruptcy to restructure. The company is continuing to operate during this process.
On May 25, 2018, Windstream completed a 1-for-5 reverse split reducing Bowl America’s holdings to 135 shares. On July 10, 2017 Frontier Communications completed a 1-for-15 reverse stock split reducing Bowl America’s holdings to 300 shares.
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 hierarchy 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 30, 2019 is as follows:
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
Unrealized
|
|
|
Cumulative
|
|
|
|
Price for
|
|
|
Other
|
|
|
Significant
|
|
|
gains/(losses)
|
|
|
Unrealized
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
for the
|
|
|
gains/(losses)
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Year Ended
|
|
|
as of
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
June 30, 2019
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
5,100,341
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
283,537
|
|
|
$
|
3,820,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
|
|
1,929,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,612
|
|
|
|
8,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
-
|
|
|
|
433,249
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL
|
|
$
|
7,029,916
|
|
|
$
|
433,249
|
|
|
|
-
|
|
|
$
|
331,149
|
|
|
$
|
3,828,589
|
|
The fair value of these assets as of July 1, 2018 was as follows:
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
Unrealized
|
|
|
Cumulative
|
|
|
|
Price for
|
|
|
Other
|
|
|
Significant
|
|
|
gains/(losses)
|
|
|
Unrealized
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
for the
|
|
|
gains/(losses)
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Year Ended
|
|
|
as of
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
July 1, 2018
|
|
|
July 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,816,804
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(455,514
|
)
|
|
$
|
3,536,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund
|
|
|
1,824,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(62,572
|
)
|
|
|
(39,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
-
|
|
|
|
333,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL
|
|
$
|
6,641,650
|
|
|
$
|
333,029
|
|
|
|
-
|
|
|
$
|
(518,086
|
)
|
|
$
|
3,497,440
|
|
The fair value of certificates of deposits is estimated using net present value techniques and comparing the values to certificates with similar terms.
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 positions at June 30, 2019 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 28, 2015 are still open to examination by those relevant taxing authorities.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes broad and complex changes to the U.S. tax code, including a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. The statutory tax rate of 21 percent applies to fiscal 2019 and beyond. For fiscal 2018, the Company recorded its income tax provision based on a blended U.S. statutory tax rate of 27.5 percent, which is based on a proration of the applicable tax rates before and after the effective date of the Tax Act.
During the second quarter of fiscal 2018, the Company recorded a provisional discrete tax benefit of $604,190 related to the Tax Act. The Company adjusted its U.S. deferred tax liabilities by $604,190 due to the reduction in the U.S. federal corporate tax rate. At July 1, 2018, the Company has finalized the reduction in deferred tax liabilities as $651,807 which increased the year to date earnings per share by approximately $.13 cents. This net reduction in deferred tax liabilities also included the estimated impact on the Company’s net state deferred tax liabilities.
The significant components of the Company's deferred tax assets and liabilities were as follows:
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
7,307
|
|
|
$
|
20,723
|
|
Total deferred tax assets
|
|
|
7,307
|
|
|
|
20,723
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Land, buildings, and equipment
|
|
|
447,848
|
|
|
|
418,254
|
|
Unrealized gain on available- for-sale securities
|
|
|
964,828
|
|
|
|
905,056
|
|
Prepaid expenses and other
|
|
|
(1,862
|
)
|
|
|
9,110
|
|
Total deferred tax liabilities
|
|
|
1,410,814
|
|
|
|
1,332,420
|
|
Net deferred income taxes
|
|
$
|
1,403,507
|
|
|
$
|
1,311,697
|
|
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:
|
|
For the Years Ended
|
|
|
|
2019
|
|
|
2018
|
|
Taxes computed at statutory rate
|
|
|
21.0
|
%
|
|
|
27.5
|
%
|
State income taxes, net of Federal income tax benefit
|
|
|
3.8
|
|
|
|
3.6
|
|
Dividends received exclusion
|
|
|
(0.9
|
)
|
|
|
(1.0
|
)
|
Tax rate adjustment for change in tax law
|
|
|
-
|
|
|
|
(14.8
|
)
|
All other net
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
Net effective rate
|
|
|
22.7
|
%
|
|
|
14.0
|
%
|