PART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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.
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 in downturns in business, to capitalize on opportunities for expansion and modernization, to provide a secure source of income and to provide a predictable return to its owners. 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 historically had 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. The Company considers that this diversity also provides a measure of safety of principal.
With the exception of 13,120 shares of Verizon, the 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 the 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 $5,300,000 in dividends, the majority of which were tax favored in the form of exclusion from federal taxable income. While the exclusion continues into this fiscal year the Tax Cuts and Jobs Act (“Tax Act”) reduces the percent excludable. These marketable securities are carried at their fair value on the last day of each reporting period. The value of the securities on September 29, 2019 was approximately $5.5 million. The value of securities held at June 30, 2019 was approximately $5.1 million. Effective July 2, 2018 these securities were reclassified to current assets from long-term marketable securities.
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 and has been viewed as a reserve source of income as stated above. The fund is carried at fair value on the last day of the reporting period. At September 29, 2019, the value was approximately $952,000. In August 2019 approximately $1,000,000 of the fund was redeemed to meet the August 2019 dividend payment.
Short-term investments including any Certificates of Deposits, Treasury Bills and cash and cash equivalents totaled $1,258,278 at September 29, 2019 compared to $703,093 at June 30, 2019.
The Company’s position in all the above investments is a source of capital for possible expansion. 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 and any use of this reserve at its quarterly meetings.
The Company closed its leased Mathis Avenue location in Manassas, Virginia, which had been operating with a negative cash flow, on July 28, 2019. Most of the equipment was transferred to our other locations.
During the three-month period ended September 29, 2019, the Company expended approximately $203,000 for the purchase of building, entertainment and restaurant equipment. The Company has no current plans to obtain additional 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 first quarter decreases in the categories of Prepaid expenses and other and of Accounts Payable were attributable primarily to the timing of the payments including compensation, insurance and taxes and for contributions to benefit plans.
Current liabilities generally increase during the first three quarters of the fiscal year as bowling leagues deposit prize fund monies with the Company throughout the league season. These funds are returned to the leagues at the end of the bowling season, generally in the fourth quarter. At September 29, 2019, league deposits of approximately $766,000 were included in the current liabilities category.
Cash flow provided by operating activities in the thirteen weeks ended September 29, 2019 was $661,000 which, along with cash on hand and the redemption of a portion of the GNMA fund, mentioned above, was sufficient to meet day-to-day cash needs and pay dividends. Cash dividends of approximately $903,170, or $.175 per share, were paid to shareholders during the three-month period ended September 29, 2019. In September 2019, the Company declared a regular quarterly dividend of $.175 per share, payable November 14, 2019. 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 future opportunities at such time.
Overview
The Company is in the entertainment business which, by its nature, has ups and downs based on consumer tastes and preferences. 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. While bowling has the advantage of being an entertainment that is close to home and relatively inexpensive, new forms of sports and entertainment are offered to the public continually creating 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. The Company operates primarily in the Washington, DC area where its business is vulnerable to sequestration or other downsizing of the federal government.
RESULTS OF OPERATIONS
The following table sets forth the items in our consolidated summary of operations for the fiscal quarters ended September 29, 2019 and September 30, 2018, and the dollar and percentage changes therein.
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Thirteen weeks ended
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September 29, 2019 and September 30, 2018
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Dollars in thousands
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2019
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2018
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Change
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% Change
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Operating Revenues:
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Bowling and other
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$
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3,610
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$
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3,833
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$
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(223
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)
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(5.8
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)
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Food, beverage and merchandise sales
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1,515
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1,608
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(93
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)
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(5.8
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)
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5,125
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5,441
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(316
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)
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(5.8
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)
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Operating Expenses:
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Employee Compensation and benefits
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2,736
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2,741
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(5
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)
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(0.2
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)
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Cost of bowling and other services
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1,602
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1,537
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65
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|
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4.2
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Cost of food, beverage and merchandise sales
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444
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483
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(39
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)
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(8.1
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)
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Depreciation and amortization
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235
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|
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232
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3
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1.3
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General and administrative
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|
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268
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|
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|
208
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|
|
|
60
|
|
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28.8
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|
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5,285
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5,201
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84
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1.6
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Operating (loss) income
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(160
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)
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240
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(400
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)
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(166.7
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)
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|
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|
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|
|
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|
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|
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Interest, dividend and other income
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106
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|
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|
105
|
|
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1
|
|
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0.1
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Change in market value of marketable securities
|
|
|
429
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|
|
|
238
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|
|
|
191
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|
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80.3
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Earnings before income taxes
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375
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583
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|
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(208
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)
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|
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(35.7
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)
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Income taxes
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90
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|
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143
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|
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(53
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)
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(37.1
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)
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Net Earnings
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$
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285
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$
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440
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$
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(155
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)
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(35.2
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)
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For the thirteen week period ended September 29, 2019, net earnings were $285,325, or $.06 per share and for the prior year period ended September 30, 2018 net earnings were $440,000 or $.09 per share. Eighteen locations were in operation in the first month of the current year quarter, before the Manassas closing mentioned above, and throughout the prior year quarter. Expenses related to closing were approximately $104,000 in the quarter. The bowling business is seasonal and the first quarter which includes summer months is typically the slowest. Management believes that good weather and rain free weekends throughout much of the first quarter of fiscal 2020 contributed to a decline in open play bowling. The operating results for the fiscal 2020 period included in this report are not necessarily indicative of results to be expected for the year.
Operating Revenues
Total operating revenues decreased 5.8% or $316,000 to $5,125,000 in the thirteen-week period ended September 29, 2019, compared to an increase of 3.3% or $177,000 to $5,441,000 in the three-month period ended September 30, 2018. Bowling and other revenue decreased $223,000 or 5.8% in the current year fiscal quarter compared to an increase of $85,000 or 2.3% in the comparable prior year quarter. Food, beverage and merchandise sales were down $93,000 or 5.8% in the current year quarter compared to an increase of $92,000 or 6.0% in the prior year comparable quarter. Cost of sales decreased $39,000 in the current year three-month period.
Operating Expenses
Operating expenses increased $84,000 or 1.6% to $5,285,000 in the three-month period ended September 29, 2019 compared to an increase of $133,000 or 2.6% to $5,201,000 in the prior year quarter ended September 30, 2018. Employee compensation and benefits were down $5,000 or 0.2% and up $57,000 or 2.1% in the fiscal first quarters of 2020 and 2019, respectively. 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 $65,000 or 4.2% in the quarter ended September 29, 2019 versus an increase of $69,000 or 4.7% in the comparable quarter ended September 30, 2018. Maintenance and repair costs increased $15,000 or 7.5% and $11,000 or 5.6% in the current year and prior year quarters, respectively. Both the current and prior year periods included roof and building repairs at several locations. Advertising costs decreased $19,000 or 18.4% in the quarter ended September 29, 2019. Utility costs were flat in the current period versus a decrease of $8,000 or 2.0% in the prior year quarter. Supplies and services expenses were up $26,000 or 15.8% in part related to closing costs at Manassas in the current year period and were flat in the prior period.
Depreciation and amortization expense increased $3,000 or 1.3% period ended September 29, 2019 due to increased capital purchases.
The quarter ended September 29, 2019 resulted in a net operating loss of $160,000 which includes approximately $104,000 in one-time expenses related to the closing of the Manassas location. Operating income was $240,000 in the prior year period.
Interest, Dividend and Other Income
Interest, dividend and other income increased $1,000 to $106,000 in the three month period ended September 29, 2019.
Income taxes
The Tax Act of December 2017 reduced the federal corporate tax rate from 34% to 21%. Taxes for both the current year and prior year quarters ended September 29, 2019 and September 30, 2018 reflect the reduced rate.
CRITICAL ACCOUNTING POLICIES
Management has identified accounting for marketable investment securities as a critical accounting policy due to the significance of the amounts included in the Company’s balance sheet under the captions of Short-term investments and Marketable investment securities. The Company exercises judgment in determining their fair value. The Company records these investments at their fair value with the unrealized gain or loss recorded in income or loss in the current period.
Management has identified accounting for the impairment of long-lived assets as a critical accounting policy due to the significance of the amounts included in the Company’s 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.