10-K 1 rf10k607.txt FORM 10-K AND ANNUAL REPORT FOR PERIOD ENDED JULY 1, 2007 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 1, 2007 Commission file Number 1-7829 BOWL AMERICA INCORPORATED (Exact name of registrant as specified in its charter.) MARYLAND 54-0646173 (State of Incorporation) (I.R.S. Employer Identification No.) 6446 Edsall Road, Alexandria, Virginia 22312 (Address of principal executive offices) (Zip Code) (703)941-6300 Registrant's telephone number, including area code Securities Registered Pursuant to Section 12(b) of the Act: Title of Class Name of Exchange on which registered Common stock (par value $.10) American Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES[ ] NO [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, Section 229.405 of this Chapter, is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. YES [X] NO [ ] Indicate by check mark whether the registrant is a large accelerated filer an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X] Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange act). YES [ ] NO [X] As of December 31, 2006, which was the last business day of the registrant's most recently completed second quarter, 3,668,386 Class A common shares were outstanding, and the aggregate market value of the common shares (based upon the closing price of these shares on the American Stock Exchange) of Bowl America Incorporated held by nonaffiliates of the registrant was approximately $37 million. As of that date 1,468,462 Class B common shares were outstanding. Class B common shareholders have the right to convert their Class B common to Class A common stock on a share for share basis. If the Class B shares were converted to Class A shares as of December 31, 2006, the total aggregate market value for both classes of common stock held by nonaffiliates would be approximately $40 million. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practical date: Shares outstanding at September 1, 2007 Class A Common Stock $.10 par value 3,667,228 Class B Common Stock $.10 par value 1,468,462 DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's definitive proxy statements, which will be filed with the Commission not later than 120 days after July 1, 2007 are incorporated into Part III of this Form 10-K. Portions of Bowl America's 2007 Annual Report to shareholders are incorporated by reference in Part II, Items 5,6,7 and 8. BOWL AMERICA INCORPORATED INDEX TO FISCAL 2007 10-K FILING PART I Page Cover Page Documents Incorporated by Reference Index ITEM 1. Business (a) General Development of Business 1 (b) Financial Information about Industry Segments 1 (c) Narrative Description of Business 1 (d) Financial Information about Geographic Areas 1 ITEM 1A. Risk Factors 1 ITEM 2. Properties 2 ITEM 3. Legal Proceedings 2 ITEM 4. Submission of Matters to a Vote of Security Holders 2 PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 2 ITEM 6. Selected Financial Data 2 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3 ITEM 7a. Quantitative and Qualitative Disclosure About Market Risk 3 ITEM 8. Financial Statements and Supplementary Data 3 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 3 ITEM 9A. Controls and Procedures 3 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 3 ITEM 11. Executive Compensation 3 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (a) Security Ownership of Certain Beneficial Owners 3 (b) Security Ownership of Management 3 (c) Changes in Control 3 (d) Securities Authorized for Issuance Under Equity Compensation Plans 3 BOWL AMERICA INCORPORATED INDEX TO FISCAL 2007 10-K FILING PART III (Continued) Page ITEM 13. Certain Relationships and Related Transactions, and Director Independence (a) Transactions with Related Persons 4 (b) Review, Approval and Ratification of Transactions with Related Persons 4 (c) Promoters and Certain Control Persons 4 (d) Directors Independence 4 ITEM 14. Principal Accountant Fees and Services 4 PART IV ITEM 15. Exhibits and Financial Statement Schedules (a)1. Financial Statements 4-5 (a)3. Exhibits 4-5 Signatures 5-6 PART I 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 location in Falls Church, Virginia, was closed in February 2007, due to damage from an ice storm. Repairs are underway and the center is currently expected to reopen in the second quarter of fiscal 2008. (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 28% of operating revenues. The balance of operating revenues (approximately 72%) represents fees for bowling and related services. (c) Narrative Description of Business As of September 1, 2007 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 meeting room 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) Financial Information about Geographic Areas The Company has no foreign operations. 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 may not be able to reopen the Falls Church bowling center in the second quarter of fiscal 2008. Repairs are currently underway at our Falls Church bowling center. No assurance can be given that the center will be able to reopen as scheduled in the second quarter of fiscal 2008. The delayed opening of such center could adversely affect us. 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. 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. LEGAL PROCEEDINGS There are no material pending legal proceedings other than ordinary routine litigation incidental to the business. 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 1, 2007. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) The information set forth in the section entitled "Market Information", "Holders", and "Cash Dividends" under "Selected Financial Data" on page 4 of the Company's July 1, 2007 Annual Report is incorporated by reference herein. (b) Not applicable (c) Not applicable ITEM 6. SELECTED FINANCIAL DATA The information set forth in the section entitled "Selected Financial Data" on page 4 of the Company's July 1, 2007 Annual Report is incorporated by reference herein. Such information should be read in conjunction with the audited financial statements. -2- 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 1, 2007 Annual Report is incorporated by reference herein. 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 $9,945,104 and $7,990,636 at July 1, 2007 and July 2, 2006, 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 1, 2007, a 10% decline in the average yield would not have a material impact on our interest income. 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 4 through 13 of the Company's July 1, 2007 Annual Report, are incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 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 1, 2007. 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 1, 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item regarding directors 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. 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. 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. -3- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 14. 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. 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 1, 2007 and July 2, 2006 Consolidated statements of earnings and comprehensive earnings - years ended July 1, 2007, July 2, 2006, and July 3, 2005 Consolidated statements of stockholders' equity - years ended July 1, 2007, July 2, 2006, and July 3, 2005 Consolidated statements of cash flows - years ended July 1, 2007, July 2, 2006, and July 3, 2005 Notes to the consolidated financial statements - years ended July 1, 2007, July 2, 2006, and July 3, 2005 (a)2. Exhibits: 3(i)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(i)b Amendment to and restatement of Article FIFTH (b) III 2.2 of the Registrant's Articles of Incorporation (Incorporated by reference from the Registrant's Form 8-K filed December 9, 1994.) 3(ii) By-laws of the Registrant (Incorporated by reference from exhibit 3 to the 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 20, 2007) 10(b) Employment agreement, dated December 5, 2006, between Registrant and Irvin Clark. (Incorporated by reference from Registrant's Form 8-K filed December 7, 2006) -4- 10(c) Employment agreement, dated December 5, 2006, between Registrant and Cheryl A. Dragoo. (Incorporated by reference from Registrant's Form 8-K filed December 7, 2006) 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 Chief Executive and Operating Officer Date: September 27, 2007 Cheryl A. Dragoo Chief Financial Officer, Assistant Treasurer and Controller Principal Accounting Officer Date: September 27, 2007 -5- 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 27, 2007 Ruth Macklin A. Joseph Levy Senior Vice President-Treasurer Senior Vice President-Secretary and Director and Director Date: September 27, 2007 Date: September 27, 2007 Irvin Clark Senior Vice President - General Manager Director Date: September 27, 2007 Warren T. Braham Stanley H. Katzman Director Director Date: September 27, 2007 Date: September 27, 2007 Allan L. Sher Merle Fabian Director Director Date: September 27, 2007 Date: September 27, 2007 -6- BOWL AMERICA INCORPORATED PRESIDENT'S LETTER "cumulative dividends on that single $2.00 share will exceed $100.00" September 20, 2007 Dear Fellow Owners: Bowl America Shirley, the first Bowl America bowling center, will celebrate its 50th anniversary January 22, 2008. It opened in 1958 as Shirley Tenpin Bowl, the first modern tenpin bowling center in the metropolitan Washington area. Before that, Virginia, Maryland and Washington, DC had been almost exclusively duckpins, which are bowled with a smaller ball and smaller pins. Bowling centers tended to be single proprietor operations, mostly because the biggest management function was soliciting and recruiting temporary workers on a daily basis to serve as pin boys. American Machine and Foundry developed an automatic pinsetter for tenpins, which was the national game. However, they had no market in the duckpin territory because their machine was not adaptable. Enter C. Edward Goldberg. My father had been the founding force of a duckpin center in Clarendon, Virginia in 1940. He became active in the local proprietors association, headed it, and later became Chairman of the duckpin department of the Bowling Proprietors Association of America, the national tenpin organization. He also became, for many matters, its Washington representative, driving to Capitol Hill and knocking on doors to present the industry's point of view to our Congressmen. In those days, the BPAA could not afford a "professional lobbyist". These activities brought him into contact with the management of AMF. A deal was struck to introduce tenpins and the new AMF machines to the Washington, DC area. AMF built Shirley Tenpin Bowl for the Clarendon investing group and leased it to us for two years with an option to purchase. Eventually that center formed the basis for a public stock offering. Three hundred thousand shares of the new Bowl America stock were sold to the public at $2.00 per share. In addition to the current fiscal year being a birthday for the bowling center, it will also mark the year in which the cumulative dividends on that single $2.00 share will exceed $100.00. Those original investors who were smart enough not to sell their original shares now have 11.3 shares of Bowl America stock. Bowl America was not the only company that capitalized on the arrival of the automatic pinsetters to create bowling chains. Many of them went public in the late 1950's and 1960's. We are, however, the only one of those companies surviving today. We went public in order to finance expansion. We were bowling people, not stock market people, and our objective was to create a secure profitable bowling company to generate income for our families' futures. We, therefore, valued survival of the company as our top priority. We proudly reported paying off each mortgage. We bought two of our most profitable leased centers so that in the event of a downturn we would never again face rental demands when money was short. We selected dividend payments as the most equitable way of treating each stockholder the same when it came to the rewards of the business. I am often reminded of a magazine piece I read in the early 1970's. The author talked about being the richest family in town but living like paupers. It seems an ancestor invested in the company that became IBM. On his death bed, he made the family swear to never sell the IBM stock. Its market price exploded but IBM had paid no dividends at that time. The value of the family asset increased, but the real standard of living of its members was unchanged. That wasn't for us. The nature of our product - entertainment - requires discipline to protect our dividend paying ability. Our customers pay for entertainment with what is left between what they earn (or expect to earn) and mandatory expenses such as food, taxes, housing, health care and transportation. This discretionary component is under pressure from both ends. We first noticed the impact on our traffic in June, and it continues into the new fiscal year. It's a nice time for our "old" company to have a nest egg. 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 2007 was $6,101,000 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 $11,492,000 at the end of fiscal 2007 compared to $9,046,000 at the end of fiscal 2006. The increase of approximately $2,446,000 resulted primarily from operations including our newest bowling center in Richmond, Virginia, that opened in January 2006. In the prior year the Company internally funded the building of the new location. In the third quarter of fiscal 2007, a location in Falls Church, Virginia, was temporarily closed due to roof damage caused by an ice storm. The building remains closed while repairs are being made. The Company carries business interruption insurance that is expected to provide recovery for at least $440,000 of lost revenues. During fiscal year 2006, the Company expended approximately $802,000 for the purchase of entertainment and restaurant equipment, primarily upgrading current facilities. In July 2007, the Company purchased and received bowling pins totaling approximately $242,000. 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 1, 2007. CONTRACTUAL Total Less than 1-3 3-5 More than OBLIGATIONS 1 year years years 5 years ------------------------------------------------------------------------- Operating lease obligations $ 993,982 $ 272,951 $376,364 $176,000 $168,667 Purchase obligations - - - - - ------------------------------------------------------------------------- Total $ 993,982 $ 272,951 $376,364 $176,000 $168,667 ========================================================================= 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 1, 2007 was approximately $6.1 million compared to $4.5 million at July 2, 2006. Cash dividends of $.57 per share, totaling $2.9 million, were paid to shareholders during the 2007 fiscal year making this the thirty- fifth consecutive year of increased dividends per share. In June 2007, the Company declared a quarterly $.145 per share dividend to be paid in August 2007. 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 The Company opened a new bowling center in January 2006 and temporarily closed an existing bowling center in February 2007 when its roof was damaged by an ice storm. The center remains closed for repairs, currently in progress. However the date of reopening is uncertain. Management has not completed its analysis of expected insurance recovery, but the Company believes it will recover at least $440,000 of lost revenues for the period February 19, 2007 through July 1, 2007. Nineteen locations were in operation for the period February 2006 through February 19, 2007. Eighteen centers were in operation during the remainder of fiscal 2007, 2006 and all of fiscal 2005. Fiscal years 2007 and 2006 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 years 2007 and 2006 and the additional week of business in fiscal year 2005. Operating revenues increased $1,654,000 or about 5% in fiscal 2007 and $1,713,000 or about 6% in fiscal 2006. Bowling and other revenue increased $1,241,000 or 6% in fiscal 2007 and $1,207,000 or 6% in fiscal 2006. Food, beverage and merchandise sales rose $413,000 or 5% in the current fiscal year and $506,000 or 6% in fiscal 2006. Total operating expense increased $1,071,000 or 4% in fiscal 2007 and $1,975,000 or 8% in fiscal 2006. Costs for employee compensation and benefits were up 5% in the current fiscal year and up 6% in the prior year period. 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 3% and 11% in the current and prior year periods, respectively. Maintenance expense increased 4% in fiscal 2007. In fiscal 2006 the increase was $234,000 or 35% due primarily to major plumbing repairs at several locations. Supplies expense was up 17% in fiscal 2007. Items relating to recently installed point-of-sale systems and entertainment supplies were responsible for the majority of the increase. The same category was up 8% in fiscal 2006. Advertising costs decreased $91,000 or 13% in fiscal 2007 compared to an increase of $60,000 or 9% in fiscal 2006 that included advertsing for the new center. Utility costs were up 4% in fiscal 2007 and 17% in fiscal 2006. Rent expense was up 7% fiscal year 2007 primarily as a result of increased percentage rent at a leased location, and was flat in fiscal year 2006. Insurance expense, excluding health and life, declined 6% in fiscal 2007 and 13% in fiscal 2006 as the market continued to soften. -2- Depreciation expenses increased $253,000 or 15% in fiscal year 2007 and $202,000 or 14% in the prior fiscal year, primarily attributable to the new location and new point-of-sale systems. Operating income in fiscal 2007 increased approximately 12% to $5.5 million from $4.9 million in fiscal 2006. Fiscal 2006 operating income decreased 6% from fiscal year 2005 operating income of $5.2 million. Interest and dividend income increased 32%, in part from a one-time dividend on a telecom stock and also because investment balances were higher. The prior year increase of 7% was due to higher interest rates on investments. Investment balances in fiscal 2006 were lower 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 34.4% for fiscal 2007, 34.9% for fiscal 2006, and 35.8% for fiscal 2005, 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 2007 were $4.2 million or $.82 per share compared to $3.6 million or $.71 per share in fiscal 2006, and $3.8 million or $.75 per share in fiscal 2005. The Company expects a decline in earnings for the fiscal 2008 first quarter as a result of a decrease in traffic during the summer months compared to the prior year first quarter. 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. -3- BOWL AMERICA INCORPORATED AND SUBSIDIARIES CONSOLIDATED SUMMARY OF OPERATIONS Selected Financial Data
For the Years Ended July 1, July 2, July 3, June 27, June 29, 2007 2006 2005 2004 2003 __________________________________________________________ Operating Revenues $31,974,336 $30,320,251 $28,607,145 $28,433,689 $29,375,692 Operating Expenses 26,481,388 25,410,113 23,435,145 23,539,032 24,262,944 Interest and dividend Income 863,983 655,818 609,963 413,738 475,598 Investment (Loss) Earnings (3,613) - 151,817 - - Gain on Sale of Land, Buildings and Equipment 15,557 23,028 65,531 2,201,240 - __________ __________ __________ __________ __________ Earnings before pro- vision for income taxes 6,368,875 5,588,984 5,999,311 7,509,635 5,588,346 Provision for income taxes 2,179,932 1,949,409 2,150,030 2,807,896 2,005,000 __________ __________ __________ __________ __________ Net Earnings $ 4,188,943 $ 3,639,575 $ 3,849,281 $ 4,701,739 $ 3,583,346 Weighted Average Shares Outstanding Basic & Diluted 5,136,499 5,136,968 5,137,773 5,138,559 5,145,934 Earnings Per Share Basic & Diluted $.82 $.71 $.75 $.91 $.70 Net Cash Provided by Operating Activities $6,101,075 $4,292,512 $5,503,187 $5,501,857 $5,450,867 Cash Dividends Paid $2,927,853 $2,876,696 $2,774,419 $2,672,062 $2,470,081 Cash Dividends Paid Per Share-Class A $.57 $.56 $.54 $.52 $.48 -Class B $.57 $.56 $.54 $.52 $.48 Total Assets $45,834,730 $43,130,385 $42,548,998 $40,579,581 $37,536,507 Stockholders' Equity $39,337,237 $37,088,954 $36,191,662 $34,896,581 $32,953,150 Net Book Value Per Share $7.66 $7.22 $7.04 $6.79 $6.41 Net Earnings as a % of Beginning Stock- holders' Equity 11.3% 10.1% 11.0% 14.3% 11.0% Lanes in Operation 756 756 716 716 716 Centers in Operation 19 19 18 18 18
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 2007 and 2006.
2007 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr _________________________________________________________ High 14.68 15.85 16.80 17.05 Low 14.35 14.31 15.75 16.52
2006 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr _______________________________________________________ High 14.36 13.73 14.60 14.79 Low 13.37 13.03 13.50 14.40
Holders The approximate number of holders of record of the Company's Class A Common Stock as of July 1, 2007 is 392 and of the Company's Class B Common Stock is 26. 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 2007 and 2006.
Class A Common Stock Quarter 2007 2006 ____________________________________________ First 14 cents 14 cents Second 14 cents 14 cents Third 14.5 cents 14 cents Fourth 14.5 cents 14 cents
Class B Common Stock Quarter 2007 2006 _____________________________________________ First 14 cents 14 cents Second 14 cents 14 cents Third 14.5 cents 14 cents Fourth 14.5 cents 14 cents
-4- BOWL AMERICA INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
July 1, 2007 July 2, 2006 ASSETS Current Assets Cash and cash equivalents (Note 2) $ 1,547,345 $ 1,055,687 Short-term investments (Note 3) 9,945,104 7,990,636 Inventories 581,705 625,467 Prepaid expenses and other 1,067,523 1,046,203 Income taxes refundable 36,555 172,873 Current deferred income taxes (Note 7) 29,154 46,910 __________ __________ Total Current Assets 13,207,386 10,937,776 Land, Buildings and Equipment, Net (Note 4) 25,887,241 27,053,704 Other Assets Marketable equity securities (Note 3) 6,141,324 4,540,061 Cash surrender value-officers'life insurance 502,099 505,664 Other 96,680 93,180 __________ __________ Total Other Assets 6,740,103 5,138,905 ---------- ---------- TOTAL ASSETS $45,834,730 $43,130,385 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 919,297 $ 910,550 Accrued expenses 1,067,203 1,214,780 Dividends payable 744,679 719,165 Other current liabilities 330,372 395,919 __________ __________ Total Current Liabilities 3,061,551 3,240,414 Long-Term Deferred Compensation 59,224 66,221 Non-current Deferred Income Taxes (Note 7) 3,376,718 2,734,796 __________ __________ TOTAL LIABILITIES 6,497,493 6,041,431 __________ __________ Commitments and Contingencies (Note 5) Stockholders' Equity (Note 8) Preferred stock, par value $10 a share Authorized and unissued 2,000,000 shares Common stock, par value $.10 per share Authorized 10,000,000 shares Class A outstanding 3,667,254 and 3,668,430 366,725 366,843 Class B outstanding 1,468,462 shares 146,846 146,846 Additional paid-in capital 7,478,876 7,480,615 Accumulated other comprehensive earnings- Unrealized gain on available-for-sale securities, net of tax 3,368,192 2,338,565 Retained earnings 27,976,598 26,756,085 __________ __________ TOTAL STOCKHOLDERS' EQUITY $39,337,237 $37,088,954 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,834,730 $43,130,385 =========== ========== The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
-5- BOWL AMERICA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS & COMPREHENSIVE EARNINGS
For the Years Ended July 1, 2007 July 2, 2006 July 3, 2005 ______________________________________________ Operating Revenues Bowling and other $22,876,620 $21,635,492 $20,428,291 Food, beverage and merchandise sales 9,097,716 8,684,759 8,178,854 __________ __________ __________ 31,974,336 30,320,251 28,607,145 Operating Expenses Compensation and benefits 14,016,650 13,355,702 12,617,207 Cost of bowling and other 6,956,702 6,743,507 6,058,703 Cost of food, beverage and merchandise sales 2,673,667 2,707,000 2,492,677 Depreciation and amortization 1,918,595 1,665,637 1,463,188 General and administrative 915,774 938,267 803,370 __________ __________ __________ 26,481,388 25,410,113 23,435,145 Operating Income 5,492,948 4,910,138 5,172,000 Interest and dividend income 863,983 655,818 609,963 Investment (loss) earnings (3,613) - 151,817 Gain on sale of land, buildings and equipment 15,557 23,028 65,531 __________ __________ __________ Earnings before provision for income taxes 6,368,875 5,588,984 5,999,311 Provision for income taxes(Note 7) Current 2,118,337 2,281,996 2,060,514 Deferred 61,595 (332,587) 89,516 _________ __________ __________ 2,179,932 1,949,409 2,150,030 Net Earnings $ 4,188,943 $ 3,639,575 $ 3,849,281 Other Comprehensive Gain (Loss) Net of Tax Unrealized gain on available-for-sale securities 1,027,254 143,851 334,483 Reclassification adjustment for loss (gain) included in net income 2,373 - (88,687) _________ _________ _________ Comprehensive Earnings 5,218,570 3,783,426 4,095,077 Earnings Per Share-Basic & Diluted $.82 $.71 $.75
The accompanying notes to the consolidated financial statements are an integral part of these financial statements. -6-
BOWL AMERICA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY COMMON STOCK Accumulated _______________________________________ Additional Other Class A Class A Class B Class B Paid-In Comprehensive Retained Shares Amount Shares Amount Capital Earnings(1) Earnings _________________________________________________________________________________________________________________________ Balance June 27, 2004 3,669,311 $366,932 1,468,462 $146,846 $7,479,072 $1,948,918 $24,954,813 Cash dividends paid - - - - - - (2,080,819) Accrued dividends declared June 21, 2005, payable August 17, 2005 - - - - - - (719,177) Change in unrealized gain on available-for-sale securities (shown net of tax) - - - - - 334,483 - Less: Reclassification adjustment for gain included in net income, net of tax - - - - - (88,687) - Net earnings for the year - - - - - - 3,849,281 ________________________________________________________________________________________________________________________ Balance, July 3, 2005 3,669,311 $366,932 1,468,462 $146,846 $7,479,072 $2,194,714 $26,004,098 Purchase of stock (881) (89) - - (1,302) - (10,904) Cash dividends paid - - - - - - (2,157,519) Accrued dividends declared June 20, 2006, payable August 9, 2006 - - - - - - (719,165) Change in unrealized gain on available-for-sale securities (shown net of tax) - - - - - 143,851 - Repayment of employee loan - - - - 2,845 - - Net earnings for the year - - - - - - 3,639,575 _______________________________________________________________________________________________________________________ Balance, July 2, 2006 3,668,430 $366,843 1,468,462 $146,846 $7,480,615 $2,338,565 $26,756,085 Purchase of stock (1,176) (118) - - (1,739) - (15,063) Cash dividends paid - - - - - - (2,208,688) Accrued dividends declared June 19, 2007, payable August 10, 2007 - - - - - - (744,679) Change in unrealized gain on available-for-sale securities (shown net of tax) - - - - - 1,027,254 - Reclassification adjustment for loss included in net income, net of tax - - - - - 2,373 - Net earnings for the year - - - - - - 4,188,943 _______________________________________________________________________________________________________________________ Balance, July 1, 2007 3,667,254 $366,725 1,468,462 $146,846 $7,478,876 $3,368,192 $27,976,598 (1)Unrealized gains and losses are shown net of tax The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
-7- BOWL AMERICA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
July 1, July 2, July 3, 2007 2006 2005 Cash Flows From Operating Activities Net earnings $4,188,943 $3,639,575 $3,849,281 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,918,595 1,665,637 1,463,188 Increase (decrease) in deferred income tax 61,595 (332,587) 89,516 Gain on disposition of assets-net (15,557) (23,028) (65,531) Loss (gain) on sale of available-for-sale securities 3,613 - (151,817) Changes in assets and liabilities: Decrease (increase) in inventories 43,762 985 (42,986) (Increase) decrease in prepaid expenses and other (20,615) (476,642) 103,813 Decrease (increase) in income taxes refundable 136,318 (40,406) (132,467) Increase in other long-term assets (4,205) (26,429) (26,322) Increase (decrease) in accounts payable 8,747 (219,467) 324,205 (Decrease) increase in accrued expenses (147,577) 87,141 236,350 Decrease in income taxes payable - - (179,855) (Decrease) increase in other current liabilities (65,547) 22,987 38,615 Decrease in long-term deferred compensation (6,997) (5,254) (2,803) _________ _________ _________ Net cash provided by operating activities $6,101,075 $4,292,512 $5,503,187 _________ _________ _________ Cash Flows from Investing Activities Expenditures for land,buildings,equipment (802,065) (5,319,123) (3,184,491) Sale of assets 59,650 63,075 109,488 (Purchases) sales and maturities of short-term investments (1,944,740) 3,179,143 529,097 Decrease (increase) in cash surrender value 3,565 10,584 (48,645) Proceeds from sale of marketable securities 18,946 - 252,525 _________ _________ _________ Net cash used in investing activities (2,664,644) (2,066,321) (2,342,026) _________ _________ _________ Cash Flows from Financing Activities Payment of cash dividends (2,927,853) (2,876,696) (2,774,419) Purchase of Class A Common Stock (16,920) (1,193) - _________ _________ _________ Net cash used in financing activities (2,944,773) (2,877,889) (2,774,419) _________ _________ _________ Net Increase (Decrease) in Cash and Cash Equivalents 491,658 (651,698) 386,742 Cash and Cash Equivalents, Beginning of Year 1,055,687 1,707,385 1,320,643 _________ _________ _________ Cash and Cash Equivalents, End of Year $1,547,345 $1,055,687 $1,707,385 Supplemental Disclosures of Cash Flow Information Cash paid during the year for Income taxes $1,993,078 $2,322,802 $2,284,987 Non-cash Investing and Financing Activities Settlement of employee stock loan by acquisition of employee-owned stock - $2,845 - Repayment of employee stock loans by acquisition of employee-owned stock - $8,257 - The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
-8- 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 2007 ended July 1, 2007, fiscal year 2006 ended July 2, 2006, and fiscal year 2005 ended July 3, 2005. Fiscal years 2007 and 2006 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 5-10 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 1, 2007, July 2, 2006 and July 3, 2005 were $590,767, $681,994 and $623,322, 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 5,136,499, 5,136,968 and 5,137,773, for fiscal years 2007, 2006 and 2005, 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 1, 2007. -9- 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 1, 2007, and July 2, 2006 other current liabilities included $317,973, and $375,332, respectively, in prize fund monies. Reclassifications Certain previous year amounts have been reclassified to conform with the current year presentation. New Accounting Standards Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes was issued in July 2006 and interprets FASB Statement of Financial Accouting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 requires all taxpayers to analyze all material positions they have taken or plan 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 relevent jurisdiction, the tax consequences of that position should be reflected in the taxpayer's GAAP financial statements. The new interpretation becomes effective for the Company July 2, 2007 and, consequently, does not affect the Company's July 1, 2007 financial statements. However, the cumulative effect of applying the new requirements must be reflected as adjustments to the Company's retained earnings as shown on the opening balance sheet for the fiscal year 2008. The Company is analyzing its material tax positions and assessing the impact that the implementation of FIN 48 will have on its future financial statements. As of July 1, 2007, the Company is not aware of any material tax positions whose recognition would be different upon implementation of this new standard. 2. CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following: July 1, July 2, 2007 2006 Demand deposits and cash on hand $ 482,667 $ 205,361 Money market funds 175,645 175,645 Repurchase agreements 889,033 674,681 _________ _________ $1,547,345 $1,055,687 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 1, 2007, the fair value of short-term investments was $9,945,104 with an unrealized loss of $81,216. At July 2, 2006, the fair value of short-term investments was $7,990,636 with an unrealized loss of $89,496. 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 1, 2007, and July 2, 2006 as follows:
Original Unrealized Fair Cost Gain Value July 1, 2007 Securities available-for-sale $734,496 $5,406,828 $6,141,324 July 2, 2006 Securities available-for-sale $757,054 $3,783,007 $4,540,061
This portfolio includes the following telecommunications stocks: 3,946 shares of Alltel 82,112 shares of AT&T 669 shares of Avaya 2,000 shares of Embarq 939 shares of Idearc 475 shares of LSI 9,969 shares of Qwest 40,000 shares of Sprint Nextel 18,784 shares of Verizon 11,865 shares of Vodafone 4,079 shares of Windstream In the year ended July 1, 2007, the Company sold its holdings in Lucent Technologies for a pre-tax loss of $3,613. 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. -10- As of July 1, 2007, the Company had $81,216 of gross unrealized losses from its investments in federal agency mortgage backed securities which had a fair value of $2,483,060. As of July 2, 2006, $89,496 gross unrealized losses were 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 fluctuation in market value is attributable to changes in interest rates and not credit quality and this decrease has been eliminated, since July 1, 2007, the Company does not consider these investments to be other-than-temporarily impaired. 4. LAND, BUILDINGS, AND EQUIPMENT Land, buildings, and equipment, as cost, consist of the following:
July 1, July 2, 2007 2006 Buildings $17,541,393 $17,503,396 Leasehold and building improvements 6,787,535 6,650,271 Bowling lanes and equipment 21,884,653 21,604,873 Land 10,590,450 10,590,450 Amusement games 814,345 814,073 Bowling lanes and equipment not yet in use 150,107 266,812 __________ __________ 57,768,483 57,429,875 Less accumulated depreciation and amortization 31,881,242 30,376,171 __________ __________ $25,887,241 $27,053,704
Depreciation and amortization expense for buildings and equipment for fiscal years 2007, 2006, and 2005 was $1,918,595, $1,665,637, and $1,463,188, 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 In February 2007, the Company temporarily closed an existing bowling center in Falls Church, Virginia when its roof was damaged by an ice storm. The center remains closed for repairs which are currently in progress. The date of reopening remains uncertain. The Company has business interruption insurance that management believes will cover the lost income of the center while repairs are being made. At July 1, 2007, no final settlement of the loss has taken place. The Company believes that a reasonable estimate for the amount to be recovered is at least $440,000 from the date of the roof damage through July 1, 2007. This amount has been recognized as revenue evenly over the time period and a receivable for that amount is included in Prepaid expenses and other on the Consolidated Balance Sheets at July 1, 2007. The estimate was based on the average yearly percentage change in revenues between 2007 fiscal year and 2006 fiscal year multiplied by the prior year earnings of that center and subtracting the year to date earnings up until the roof collapse. 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 1, 2007, the minimum fixed rental commitments related to all non-cancelable leases, were as follows: Year Ending 2008 $272,951 2009 272,951 2010 103,413 2011 88,000 2012 88,000 Thereafter 168,667 _________ Total minimum lease payments $ 993,982 Net rent expense was as follows: For the Years Ended July 1, July 2, July 3, 2007 2006 2005 Minimum rent under operating leases $272,704 $270,296 $277,394 Excess percentage rents 46,562 28,840 23,098 _______ _______ _______ $319,266 $299,136 $300,492 Purchase Commitments The Company's purchase committments at July 1, 2007 are for materials, supplies, services and equipment as part of the normal course of business. 6. PROFIT-SHARING AND ESOP PLAN The Company has two defined contribution plans. The first is a profit- sharing plan which, generally, covers all employees who on the last day of the fiscal year or December 29 have been employed for one year with at least one thousand hours of service. The Plan provides for Company contributions as determined by the Board of Directors. For the years ended July 1, 2007, July 2, 2006, and July 3, 2005, contributions in the amount of $140,000, $140,000, and $150,000, 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 2007, 2006, and 2005 was $140,000, $140,000, and $150,000, respectively. The Company has no defined benefit plan or other post retirement plan. -11- 7. INCOME TAXES The significant components of the Company's deferred tax assets and liabilities were as follows: July 1, July 2, 2007 2006 Deferred tax: Land, buildings, and equipment $1,412,809 $1,357,001 Unrealized gain on available- for-sale securities 1,969,749 1,371,666 Prepaid expenses and other (34,994) (40,781) _________ _________ Deferred tax liabilities $3,347,564 $2,687,886 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 2007 2006 2005 Taxes computed at statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal income tax benefit 2.0 2.3 2.8 Dividends received exclusion (.9) (.7) (.6) All other-net (.7) (.7) (.4) ____ ____ _____ 34.4% 34.9% 35.8%
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 1, 2007, and July 2, 2006, the Company had $39,093 in employee loans related to the issuance of shares. These loans are secured by the shares of the Company's common stock acquired and are full recourse notes. The notes bear interest at rates of 3 1/2% to 5% and are payable over a term of three years from the date of the agreements which range from 2005 to 2007. These employee loans have been recorded as a reduction of additional paid-in capital. 9. RELATED PARTIES AND DEFERRED COMPENSATION Deferred compensation payable to non-related parties was a total of $59,224 at July 1, 2007 and $57,766 at July 2, 2006. The current portion of these amounts is $7,272 at July 1, 2007 and $11,564 at July 2, 2006, 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 2007 and 2006 (dollars in thousands, except for earnings per share):
Earnings Operating Operating Before Earnings Revenues Income Income Net Per Taxes Earnings Share 2007 July 1, 2007 $6,940 $ 771 $1,008 $ 718 $.14 April 1, 2007 9,615 2,545 2,762 1,778 .35 December 31, 2006 8,277 1,548 1,813 1,179 .23 October 1, 2006 7,142 629 786 514 .10 2006 July 2, 2006 $7,036 $ 687 $ 884 $ 623 $.12 April 2, 2006 9,351 2,517 2,697 1,699 .33 January 1, 2006 7,556 1,412 1,558 1,020 .20 October 2, 2005 6,377 294 450 298 .06
-12- 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 1, 2007 and July 2, 2006, 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 1, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 1, 2007 and July 2, 2006, and the results of their operations and their cash flows for each of the three years in the period ended July 1, 2007 in conformity with accounting principles generally accepted in the United States of America. Aronson & Company Rockville, Maryland September 14, 2007 -12- 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 27, 2007 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 27, 2007 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 1, 2007, (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 27, 2007