The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
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. More recent risks and uncertainties include the ongoing effects of the business disruption related to the current COVID-19 pandemic on revenues, operating income, the ability to keep locations open, governmental regulations to limit the spread of COVID-19 such as social distancing and enhanced safety measures, times of operation and reaction to increased cases of COVID-19. 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.
COVID-19
The Company closed all bowling centers on March 18, 2020, as required by the orders from state and federal governments, in an effort to mitigate the spread of COVID-19. The majority of bowling leagues chose to end their Spring 2020 season early as it became clear that a return to bowling would not be quick. Our three Florida locations reopened in May 2020, which provided the Company some revenue in the fourth quarter of fiscal 2020 while all other centers remained closed. All of our Virginia centers reopened in early July, one Maryland location opened July 22 and the last closed center was allowed to reopen on August 31, 2020 with a maximum of 50 customers at one time. Almost all locations are currently required to operate at only 50% capacity. We implemented social distancing and enhanced cleaning procedures and all areas in which we operate continue to mandate the wearing of masks in the centers except when eating or drinking. Our safety procedures are designed to keep employees and customers safe and have allowed us to offer league bowling. All center employees except the center manager were furloughed in March and the corporate staff was reduced to a minimum. Employees are returned to work as business requires and currently approximately 60% of pre-COVID employees have been returned to work. The Company maintained health insurance for all employees on the plan at the time of closure, paying the employee portion of premiums due for those furloughed.
Future developments in the continuously changing pandemic environment, whether new mandated closures or restrictions, a worsening of the global and local economy, high unemployment rates, reduced consumer discretionary spending and other factors can negatively affect our business, however it is difficult to determine with much accuracy what the longer term impact could be. Our fall league bowling season has begun better than expected in spite of the limitations, but we have been able to be creative in making maximum use of space while following social distancing requirements. However, revenues from parties and corporate events are currently non-existent.
Management believes the effects of the pandemic will continue to have an adverse effect on our revenues, financial condition and operating results for fiscal 2021 and potentially, some time after.
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 T-Mobile) 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 $5,500,000 in dividends, the majority of which were tax favored in the form of exclusion from federal taxable income. These marketable securities are carried at their fair value on the last day of each reporting period. The value of the securities on September 27, 2020 was approximately $4.9 million. The value of securities held at June 28, 2020 was approximately $4.7 million.
The Company’s original investment in the Vanguard GNMA bond fund began in 1988 with purchases of shares in the fund totaling approximately $1,400,000 and have been used as a source of cash when needed.. The fund is carried at fair value on the last day of the reporting period. At September 27, 2020, the value was approximately $490,000. In August 2019 approximately $1,000,000 of the fund was redeemed to meet the August 2019 dividend payment.
In March 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which is administered by the Small Business Administration was signed into law. The CARES Act established a Paycheck Protection Program (“PPP”) under which qualified businesses could apply for a loan to help fund payroll, rent and related costs. The Company applied for a PPP loan and on June 1, 2020 received $1,500,000 under a loan agreement which calls for interest of 1%. The loan repayment, after a seven month deferral, begins January 1, 2021 and final payment is due June 1, 2022. All or a portion of payments of principal and interest may be forgiven if used for covered, documented payroll costs, rent and utilities. We anticipate applying for loan forgiveness in the second quarter of fiscal 2021. Any amount not forgiven will be due at maturity. Any expenses paid with the loan and forgiven will not be deductible for federal tax purposes.
Short-term investments including any Certificates of Deposits, Treasury Bills and cash and cash equivalents totaled $1,254,714 at September 27, 2020 compared to $1,793,466 at June 28, 2020.
The Company’s position in all the above investments is a source of liquidity during downturns in business and in other times can serve as 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 27, 2020, the Company expended approximately $25,000 for the purchase of building, entertainment and restaurant equipment. The Company has no current plans to obtain additional third party funding for any equipment purchases as cash and cash flows are currently sufficient to finance all contemplated purchases and to meet short-term purchase commitments and operating lease commitments.
The 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 27, 2020, league deposits of approximately $402,000 were included in the current liabilities category.
Cash used in operating activities in the thirteen weeks ended September 27, 2020 was approximately $514,000. Cash flow and cash on hand were sufficient to meet day-to-day cash needs. In March 2020, the Company suspended quarterly dividends following the required shutdown of the Company’s bowling centers. 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
All seventeen of the Company’s bowling centers were closed on March 18, 2020, by government order due to the COVID-19 pandemic. Only our three Florida centers were open the entire 13 week period ended September 27, 2020, having reopened in late May 2020. Thirteen of the remaining locations opened in July 2020 and the last center reopened on August 31, 2020. All locations were mandated at 50% capacity or less during the quarter. While the bowling business is seasonal and the first or “summer” quarter is typically the slowest, the pandemic was the primary negative factor on revenues. All comparisons in this discussion are significantly impacted by the ongoing government mandates and public perception of the current state of the COVID-19 pandemic.
For the thirteen week period ended September 27, 2020, net loss was $737,723 or $.14 per share and for the period ended September 29, 2019, net earnings were $285,325 or $.06 per share.
The following table sets forth the items in our consolidated summary of operations for the fiscal quarters ended September 27, 2020, and September 29, 2019, and the dollar and percentage changes therein.
|
|
Thirteen weeks ended
|
|
|
|
September 27, 2020 and September 29, 2019
|
|
|
|
Dollars in thousands
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
% Change
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bowling and other
|
|
$
|
1,167
|
|
|
$
|
3,610
|
|
|
$
|
(2,443
|
)
|
|
|
(67.7
|
)
|
Food, beverage and merchandise sales
|
|
|
469
|
|
|
|
1,515
|
|
|
|
(1,046
|
)
|
|
|
(69.0
|
)
|
|
|
|
1,636
|
|
|
|
5,125
|
|
|
|
(3,489
|
)
|
|
|
(68.1
|
)
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and benefits
|
|
|
1,319
|
|
|
|
2,736
|
|
|
|
(1,417
|
)
|
|
|
(51.8
|
)
|
Cost of bowling and other services
|
|
|
944
|
|
|
|
1,602
|
|
|
|
(658
|
)
|
|
|
(41.1
|
)
|
Cost of food, beverage and merchandise sales
|
|
|
147
|
|
|
|
444
|
|
|
|
(297
|
)
|
|
|
(66.9
|
)
|
Depreciation and amortization
|
|
|
248
|
|
|
|
235
|
|
|
|
13
|
|
|
|
5.5
|
|
General and administrative
|
|
|
158
|
|
|
|
268
|
|
|
|
(110
|
)
|
|
|
(41.0
|
)
|
|
|
|
2,816
|
|
|
|
5,285
|
|
|
|
(2,469
|
)
|
|
|
(46.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,180
|
)
|
|
|
(160
|
)
|
|
|
(1,020
|
)
|
|
|
(637.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, dividend and other income
|
|
|
90
|
|
|
|
106
|
|
|
|
(16
|
)
|
|
|
(15.1
|
)
|
Change in market value of marketable securities
|
|
|
126
|
|
|
|
429
|
|
|
|
(303
|
)
|
|
|
(70.6
|
)
|
PPP Loan interest expense
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
100.0
|
|
(Loss) earnings before income taxes
|
|
|
(969
|
)
|
|
|
375
|
|
|
|
(1,344
|
)
|
|
|
(358.4
|
)
|
Income taxes
|
|
|
(231
|
)
|
|
|
90
|
|
|
|
(321
|
)
|
|
|
(356.7
|
)
|
Net Earnings
|
|
$
|
(738
|
)
|
|
$
|
285
|
|
|
$
|
(1,023
|
)
|
|
|
(359.0
|
)
|
Operating Revenues
Total operating revenues decreased 68.1% or $3,489,000 to $1,636,000 in the thirteen-week period ended September 27, 2020, compared to a decrease of 5.8% or $316,000 to $5,125,000 in the three-month period ended September 29, 2019. Bowling and other revenue decreased $2,443,000 or 67.7% in the current year fiscal quarter compared to a decrease of $223,000 or 5.8% in the comparable prior year quarter. Food, beverage and merchandise sales were down $1,046,000 or 69.0% in the current year quarter compared to a decrease of $93,000 or 5.8% in the prior year comparable quarter. Cost of sales decreased $297,000 or 66.9% in the current year three-month period.
Operating Expenses
Operating expenses decreased $2,469,000 or 46.7% to $2,816,000 in the three-month period ended September 27, 2020 compared to an increase of $84,000 or 1.6% to $5,285,000 in the prior year quarter ended September 29, 2019. Employee compensation and benefits were down $1,417,000 or 51.8% and down $5,000 or 0.2% in the fiscal first quarters of 2021 and 2020, 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 decreased $658,000 or 41.1% in the quarter ended September 27, 2020 versus an increase of $65,000 or 4.2% in the comparable quarter ended September 29, 2019. Maintenance and repair costs decreased $100,000 or 45.2% versus an increase of $15,000 or 7.5% in the current year and prior year quarters, respectively. Both the current and prior year periods included roof repairs and changeover to LED lightening in parking lots at several locations. Advertising costs decreased $51,000 or 60.8% in the quarter ended September 27, 2020. Utility costs were down $130,000 or 34.5% in the current period and were flat in the prior year quarter. Supplies and services expenses in the current year period declined $129,000 or 67.2% as locations had supplies on hand prior to the March 2020 shutdown. The same category was up $26,000 or 15.8% in part related to closing costs at Manassas in the prior year quarter. Bank and credit card processing fees were down $137,000 as a result of lower traffic. Food and beverage supplies expense declined $54,000 or 27.7% in the quarter ended September 27, 2020.
Depreciation and amortization expense increased $13,000 or 5.5% period ended September 27, 2020 due to increased capital purchases in the prior year.
The quarter ended September 27, 2020 resulted in a net operating loss of $1,180,000. Operating loss was $160,000 in the prior year period which includes approximately $104,000 in one-time expenses related to the closing of the Manassas location.
Interest, Dividend and Other Income
Interest, dividend and other income decreased $16,000 to $90,000 in the three month period ended September 27, 2020.
Income Taxes
The loss for the quarter ended September 27, 2020, resulted in a tax benefit of approximately $231,000.
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.