wina_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2019

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission File Number: 000-22012

 


WINMARK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-1622691

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

605 Highway 169 North, Suite 400, Minneapolis, MN 55441

(Address of principal executive offices)  (Zip Code)

 

(763) 520-8500

(Registrant’s telephone number, including area code)

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 ☒              No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒              No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer  

Non-accelerated filer   

 

 

Accelerated filer ☒ 

Smaller reporting company ☒

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐              No ☒

Common stock, no par value, 3,761,686 shares outstanding as of April 19, 2019.

 

 

 

 

 


 

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

PAGE

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

March 30, 2019 and December 29, 2018

3

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended March 30, 2019 and March 31, 2018

4

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT):

 

 

Three Months Ended March 30, 2019 and March 31, 2018

5

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended March 30, 2019 and March 31, 2018

6

 

 

 

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 - 14

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15 - 20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4. 

Controls and Procedures

21

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

22

 

 

 

Item 1A. 

Risk Factors

22

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 3. 

Defaults Upon Senior Securities

22

 

 

 

Item 4. 

Mine Safety Disclosures

22

 

 

 

Item 5. 

Other Information

22

 

 

 

Item 6. 

Exhibits

23

 

 

 

 

SIGNATURES

24

 

 

2


 

Table of Contents

PART I.          FINANCIAL INFORMATION

 

ITEM 1:   Financial Statements

 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

March 30, 2019

 

December 29, 2018

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,066,800

 

$

2,496,000

Restricted cash

 

 

65,000

 

 

80,000

Receivables, less allowance for doubtful accounts of $1,700 and $400

 

 

1,455,500

 

 

1,553,100

Net investment in leases - current

 

 

17,321,500

 

 

18,547,500

Income tax receivable

 

 

 —

 

 

565,500

Inventories

 

 

113,800

 

 

107,600

Prepaid expenses

 

 

954,100

 

 

901,600

Total current assets

 

 

20,976,700

 

 

24,251,300

Net investment in leases - long-term

 

 

17,786,000

 

 

20,455,500

Property and equipment, net

 

 

908,800

 

 

866,200

Operating lease right of use assets

 

 

6,056,100

 

 

 —

Goodwill

 

 

607,500

 

 

607,500

Other assets

 

 

496,700

 

 

482,600

 

 

$

46,831,800

 

$

46,663,100

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900

 

$

3,236,100

 

$

3,236,100

Accounts payable

 

 

1,717,800

 

 

1,351,800

Income tax payable

 

 

1,664,700

 

 

 —

Accrued liabilities

 

 

2,669,100

 

 

3,128,600

Discounted lease rentals

 

 

3,070,700

 

 

3,021,900

Deferred revenue

 

 

1,750,700

 

 

1,744,900

Total current liabilities

 

 

14,109,100

 

 

12,483,300

Long-Term Liabilities:

 

 

 

 

 

 

Line of credit

 

 

11,500,000

 

 

 —

Notes payable, net of unamortized debt issuance costs of $79,100 and $82,600

 

 

24,795,900

 

 

25,604,900

Discounted lease rentals

 

 

1,937,300

 

 

2,723,500

Deferred revenue

 

 

8,247,900

 

 

8,432,400

Operating lease liabilities

 

 

5,823,000

 

 

 —

Other liabilities

 

 

764,800

 

 

1,079,200

Deferred income taxes

 

 

1,148,900

 

 

1,148,300

Total long-term liabilities

 

 

54,217,800

 

 

38,988,300

Shareholders’ Equity (Deficit):

 

 

 

 

 

 

Common stock, no par value, 10,000,000 shares authorized, 3,759,186 and 3,907,686 shares issued and outstanding

 

 

 —

 

 

4,425,600

Retained earnings (accumulated deficit)

 

 

(21,495,100)

 

 

(9,234,100)

Total shareholders’ equity (deficit)

 

 

(21,495,100)

 

 

(4,808,500)

 

 

$

46,831,800

 

$

46,663,100

 

 

 

The accompanying notes are an integral part of these financial statements

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WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 30, 2019

    

March 31, 2018

    

Revenue:

 

 

 

 

 

 

 

Royalties

 

$

11,761,400

 

$

11,049,000

 

Leasing income

 

 

5,155,300

 

 

5,528,800

 

Merchandise sales

 

 

611,000

 

 

776,900

 

Franchise fees

 

 

391,800

 

 

400,900

 

Other

 

 

411,700

 

 

405,400

 

Total revenue

 

 

18,331,200

 

 

18,161,000

 

Cost of merchandise sold

 

 

571,500

 

 

742,500

 

Leasing expense

 

 

698,700

 

 

554,900

 

Provision for credit losses

 

 

10,100

 

 

95,000

 

Selling, general and administrative expenses

 

 

6,984,400

 

 

6,694,400

 

Income from operations

 

 

10,066,500

 

 

10,074,200

 

Interest expense

 

 

(442,200)

 

 

(743,800)

 

Interest and other income (expense)

 

 

(300)

 

 

(1,000)

 

Income before income taxes

 

 

9,624,000

 

 

9,329,400

 

Provision for income taxes

 

 

(2,351,800)

 

 

(2,369,000)

 

Net income

 

$

7,272,200

 

$

6,960,400

 

Earnings per share - basic

 

$

1.86

 

$

1.81

 

Earnings per share - diluted

 

$

1.73

 

$

1.69

 

Weighted average shares outstanding - basic

 

 

3,906,895

 

 

3,847,312

 

Weighted average shares outstanding - diluted

 

 

4,198,454

 

 

4,124,573

 

 

The accompanying notes are an integral part of these financial statements.

 

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WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

Common Stock

 

(Accumulated

 

 

 

 

    

Shares

    

Amount

    

Deficit)

    

Total

BALANCE, December 29, 2018

 

3,907,686

 

$

4,425,600

 

$

(9,234,100)

 

$

(4,808,500)

Repurchase of common stock

 

(150,000)

 

 

(5,081,000)

 

 

(18,947,100)

 

 

(24,028,100)

Stock options exercised

 

1,500

 

 

156,600

 

 

 —

 

 

156,600

Compensation expense relating to stock options

 

 —

 

 

498,800

 

 

 —

 

 

498,800

Cash dividends ($0.11 per share)

 

 —

 

 

 —

 

 

(586,100)

 

 

(586,100)

Comprehensive income (Net income)

 

 —

 

 

 —

 

 

7,272,200

 

 

7,272,200

BALANCE, March 30, 2019

 

3,759,186

 

$

 —

 

$

(21,495,100)

 

$

(21,495,100)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

Common Stock

 

(Accumulated

 

 

 

 

    

Shares

    

Amount

    

Deficit)

    

Total

BALANCE, December 31, 2017

 

3,843,078

 

$

1,476,200

 

$

(37,189,700)

 

$

(35,713,500)

Stock options exercised

 

6,428

 

 

48,400

 

 

 —

 

 

48,400

Compensation expense relating to stock options

 

 —

 

 

490,800

 

 

 —

 

 

490,800

Cash dividends ($0.15 per share)

 

 —

 

 

 —

 

 

(423,200)

 

 

(423,200)

Comprehensive income (Net income)

 

 —

 

 

 —

 

 

6,960,400

 

 

6,960,400

BALANCE, March 31, 2018

 

3,849,506

 

$

2,015,400

 

$

(30,652,500)

 

$

(28,637,100)

 

 

 

 

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WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 30, 2019

    

March 31, 2018

    

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

7,272,200

 

$

6,960,400

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

80,100

 

 

75,800

 

Provision for credit losses

 

 

10,100

 

 

95,000

 

Compensation expense related to stock options

 

 

498,800

 

 

490,800

 

Deferred income taxes

 

 

600

 

 

 —

 

Deferred initial direct costs

 

 

(14,200)

 

 

(979,800)

 

Amortization of deferred initial direct costs

 

 

209,500

 

 

299,700

 

Operating lease right of use asset amortization

 

 

102,300

 

 

 —

 

Tax benefits on exercised stock options

 

 

12,100

 

 

 —

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

97,600

 

 

203,200

 

Principal collections on lease receivables

 

 

4,662,800

 

 

 —

 

Income tax receivable/payable

 

 

2,218,100

 

 

2,192,900

 

Inventories

 

 

(6,200)

 

 

17,400

 

Prepaid expenses

 

 

(52,500)

 

 

248,300

 

Other assets

 

 

(14,100)

 

 

(47,800)

 

Accounts payable

 

 

366,000

 

 

(5,400)

 

Accrued and other liabilities

 

 

(1,105,000)

 

 

774,400

 

Rents received in advance and security deposits

 

 

6,500

 

 

(38,700)

 

Deferred revenue

 

 

(178,700)

 

 

12,700

 

Net cash provided by operating activities

 

 

14,166,000

 

 

10,298,900

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(122,700)

 

 

(170,200)

 

Purchase of equipment for lease contracts

 

 

(1,717,400)

 

 

(6,196,800)

 

Principal collections on lease receivables

 

 

 —

 

 

5,881,000

 

Net cash used for investing activities

 

 

(1,840,100)

 

 

(486,000)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

14,000,000

 

 

 —

 

Payments on line of credit

 

 

(2,500,000)

 

 

(10,800,000)

 

Payments on notes payable

 

 

(812,500)

 

 

(812,500)

 

Repurchases of common stock

 

 

(24,028,100)

 

 

 —

 

Proceeds from exercises of stock options

 

 

156,600

 

 

48,400

 

Dividends paid

 

 

(586,100)

 

 

(423,200)

 

Proceeds from discounted lease rentals

 

 

 —

 

 

2,916,800

 

Net cash used for financing activities

 

 

(13,770,100)

 

 

(9,070,500)

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(1,444,200)

 

 

742,400

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

2,576,000

 

 

1,163,200

 

Cash, cash equivalents and restricted cash, end of period

 

$

1,131,800

 

$

1,905,600

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

Cash paid for interest

 

$

417,000

 

$

758,100

 

Cash paid for income taxes

 

$

121,100

 

$

176,000

 

 

 

 

 

 

 

 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 30, 2019

    

March 31, 2018

    

Cash and cash equivalents

 

$

1,066,800

 

$

1,800,600

 

Restricted cash

 

 

65,000

 

 

105,000

 

Total cash, cash equivalents and restricted cash

 

$

1,131,800

 

$

1,905,600

 

The accompanying notes are an integral part of these financial statements.

 

 

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WINMARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1.  Management’s Interim Financial Statement Representation:

 

The accompanying consolidated condensed financial statements have been prepared by Winmark Corporation and subsidiaries (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  The Company has a 52/53 week year which ends on the last Saturday in December.  The information in the consolidated condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements.  The consolidated condensed financial statements and notes are presented in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q, and therefore do not contain certain information included in the Company’s annual consolidated financial statements and notes.  This report should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

 

Revenues and operating results for the three months ended March 30, 2019 are not necessarily indicative of the results to be expected for the full year.

 

Reclassifications

 

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity (deficit) as previously reported.

 

2.  Organization and Business:

 

The Company offers licenses to operate franchises using the service marks Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore® and Music Go Round®. The Company uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks. 

 

3.  Recent Accounting Pronouncements:

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.  This guidance will be effective for reporting periods beginning after December 15, 2019, with early adoption permitted.  The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which provides guidance on accounting for leases that supersedes existing lease accounting guidance.  The ASU’s core principle is that a lessee should recognize lease assets and lease liabilities for those leases classified as operating leases under existing lease accounting guidance.  The new standard also makes targeted changes to lessor accounting, as well as adding new disclosures for leasing activities.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard.  In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company used the prospective approach of adoption when the new guidance was adopted on December 30, 2018, the first day of fiscal 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward historical lease classification. Upon adoption, as a lessee, the Company recognized operating lease right-of-use assets of $6.0 million and operating lease liabilities of $6.3 million on its Consolidated Condensed Balance Sheets. The adoption of the standard did not have

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a material impact on its Consolidated Condensed Statements of Operations or Shareholders’ Equity (Deficit). As a lessor, the adoption of the new standard required the Company to present cash receipts from leases within operating activities in the Consolidated Condensed Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the three months ended March 30, 2019, principal collections on lease receivables were $4.7 million.

 

As a lessor, leasing income for direct financing leases is recognized under the effective interest method.  The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease.  For sales-type leases in which the equipment has a fair value greater or less than its carrying amount, selling profit/loss is recognized at commencement.  For subsequent periods or for leases in which the equipment’s fair value is equal to its carrying amount, the recording of income is consistent with the accounting for a direct financing lease.  For leases that are accounted for as operating leases, income is recognized on a straight-line basis when payments under the lease contract are due.

 

Additional information and disclosures required by this new standard for the Company as a lessee are contained in Note 11 – “Operating Leases”, and as a lessor in Note 6 – “Investment in Leasing Operations”.

 

 

4. Contract Liabilities:

 

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees.  The table below presents the activity of the current and noncurrent deferred franchise revenue during the first three months of 2019 and 2018, respectively:

 

 

 

 

 

 

 

 

 

    

March 30, 2019

    

March 31, 2018

Balance at beginning of period

 

$

10,177,300

 

$

10,310,200

Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period

 

 

292,000

 

 

486,000

Fees earned that were included in the balance at the beginning of the period

 

 

(470,700)

 

 

(473,300)

Balance at end of period

 

$

9,998,600

 

$

10,322,900

 

The following table illustrates future estimated revenue to be recognized for the remainder of 2019 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 30, 2019.

 

 

 

 

 

Contract Liabilities expected to be recognized in

 

Amount

2019

 

$

1,268,900

2020

 

 

1,630,600

2021

 

 

1,491,700

2022

 

 

1,346,800

2023

 

 

1,175,600

Thereafter

 

 

3,085,000

 

 

$

9,998,600

 

5.  Fair Value Measurements:

 

The Company defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Company uses three levels of inputs to measure fair value:

 

·

Level 1 – quoted prices in active markets for identical assets and liabilities.

·

Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.

·

Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

 

Due to their nature, the carrying value of cash equivalents, receivables, payables and debt obligations approximates fair value.

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6.  Investment in Leasing Operations:

 

Investment in leasing operations consists of the following:

 

 

 

 

 

 

 

 

 

    

March 30, 2019

    

December 29, 2018

Direct financing and sales-type leases:

 

 

 

 

 

 

Minimum lease payments receivable

 

$

35,791,700

 

$

40,822,400

Estimated unguaranteed residual value of equipment

 

 

4,431,300

 

 

4,741,200

Unearned lease income, net of initial direct costs deferred

 

 

(5,658,100)

 

 

(6,739,900)

Security deposits

 

 

(4,125,600)

 

 

(4,118,300)

Equipment installed on leases not yet commenced

 

 

5,283,100

 

 

5,094,800

  Total investment in direct financing and sales-type leases

 

 

35,722,400

 

 

39,800,200

Allowance for credit losses

 

 

(651,400)

 

 

(861,200)

  Net investment in direct financing and sales-type leases

 

 

35,071,000

 

 

38,939,000

Operating leases:

 

 

 

 

 

 

Operating lease assets

 

 

567,300

 

 

777,000

Less accumulated depreciation and amortization

 

 

(530,800)

 

 

(713,000)

  Net investment in operating leases

 

 

36,500

 

 

64,000

Total net investment in leasing operations

 

$

35,107,500

 

$

39,003,000

 

As of March 30, 2019, the $35.1 million total net investment in leases consists of $17.3 million classified as current and $17.8 million classified as long-term.  As of December 29, 2018, the $39.0 million total net investment in leases consists of $18.5 million classified as current and $20.5 million classified as long-term.

 

As of March 30, 2019, leased assets with two customers approximated 19% and 10%, respectively, of the Company’s total assets. A portion of the lease payments receivable from these customers are assigned as collateral in non-recourse financing with financial institutions. See Note 10 – “Discounted Lease Rentals”.

 

Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2019 and the full fiscal years thereafter as of March 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Financing and Sales-Type Leases

 

Operating Leases

 

 

    

Minimum Lease

    

Income

    

Minimum Lease

 

Fiscal Year

 

Payments Receivable

 

 Amortization

 

Payments Receivable

 

2019

 

$

18,871,400

 

$

3,994,900

 

$

44,000

 

2020

 

 

12,861,900

 

 

1,475,300

 

 

 —

 

2021

 

 

4,006,000

 

 

185,900

 

 

 —

 

2022

 

 

40,000

 

 

1,400

 

 

 —

 

2023

 

 

8,000

 

 

500

 

 

 —

 

Thereafter

 

 

4,400

 

 

100

 

 

 —

 

 

 

$

35,791,700

 

$

5,658,100

 

$

44,000

 

 

The activity in the allowance for credit losses for leasing operations during the first three months of 2019 and 2018, respectively, is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

March 30, 2019

    

March 31, 2018

    

Balance at beginning of period

 

$

861,200

 

$

711,200

 

Provisions charged to expense

 

 

10,100

 

 

95,000

 

Recoveries

 

 

4,200

 

 

(25,600)

 

Deductions for amounts written-off

 

 

(224,100)

 

 

 —

 

Balance at end of period

 

$

651,400

 

$

780,600

 

 

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The Company’s investment in direct financing and sales-type leases (“Investment In Leases”) and allowance for credit losses by loss evaluation methodology are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 30, 2019

 

December 29, 2018

 

    

Investment

    

Allowance for

    

Investment

    

Allowance for

 

 

In Leases

 

Credit Losses

 

In Leases

 

Credit Losses

Collectively evaluated for loss potential

 

$

35,722,400

 

 

651,400

 

$

39,800,200

 

$

861,200

Individually evaluated for loss potential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

35,722,400

 

$

651,400

 

$

39,800,200

 

$

861,200

 

The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss.  The following table sets forth information regarding the Company’s accruing and non-accrual leases.  Delinquent balances are determined based on the contractual terms of the lease.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 30, 2019

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

34,506,800

 

$

 —

 

$

 —

 

$

 —

 

$

34,506,800

Small-Ticket

 

 

1,215,600

 

 

 —

 

 

 —

 

 

 —

 

 

1,215,600

Total Investment in Leases

 

$

35,722,400

 

$

 —

 

$

 —

 

$

 —

 

$

35,722,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29, 2018

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

38,395,000

 

$

 —

 

$

 —

 

$

70,000

 

$

38,465,000

Small-Ticket

 

 

1,335,200

 

 

 —

 

 

 —

 

 

 —

 

 

1,335,200

Total Investment in Leases

 

$

39,730,200

 

$

 —

 

$

 —

 

$

70,000

 

$

39,800,200

 

 

 

 

The Company leases high-technology and other business-essential equipment to its leasing customers. Upon expiration of the initial term or extended lease term, depending on the structure of the lease, the customer may return the equipment, renew the lease for an additional term, or purchase the equipment. Due to the uncertainty of such outcome at the end of the lease term, the lease as recorded at commencement represents only the current terms of the agreement. As a lessor, the Company’s leases do not contain non-lease components. The residual values reflect the estimated amounts to be received at lease termination from sales or other dispositions of leased equipment to unrelated parties. The leased equipment residual values are based on the Company’s best estimate. The Company’s risk management strategy for its residual value includes the contractual obligations of customer to maintain, service, and insure the leased equipment, the use of third party remarketers as well as the analytical review of historical asset dispositions.

 

Leasing income as presented on the Consolidated Condensed Statements of Operations consists of the following:

 

 

 

 

 

 

 

 

Three Months Ended

 

    

March 30, 2019

    

Interest income on direct financing and sales-type leases

 

$

2,182,500

 

Selling profit (loss) at commencement of sales-type leases

 

 

873,500

 

Operating lease income

 

 

638,300

 

Income on sales of equipment under lease

 

 

1,225,600

 

Other

 

 

235,400

 

Leasing income

 

$

5,155,300

 

 

 

 

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7.  Earnings Per Share:

 

The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 30, 2019

    

March 31, 2018

    

Denominator for basic EPS — weighted average common shares

 

3,906,895

 

3,847,312

 

Dilutive shares associated with option plans

 

291,559

 

277,261

 

Denominator for diluted EPS — weighted average common shares and dilutive potential common shares

 

4,198,454

 

4,124,573

 

Options excluded from EPS calculation — anti-dilutive

 

5,280

 

15,929

 

 

 

8.  Shareholders’ Equity (Deficit):

 

Dividends

 

On January 23, 2019, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on February 6, 2019, which was paid on March 1, 2019.

 

Repurchase of Common Stock

 

In February 2019, the Company’s Board of Directors authorized the repurchase of up to 150,000 shares of our common stock for a price of $159.63 per share through a tender offer (the “Tender Offer”). The Tender Offer began on the date of the announcement, February 28, 2019 and expired on March 28, 2019. Upon expiration, the Company accepted for payment 150,000 shares for a total purchase price of approximately $24.0 million, including fees and expenses related to the Tender Offer. The Tender Offer was financed in part by net borrowings under the Line of Credit. (See Note 9 – “Debt”).

 

Under a previous Board of Directors’ authorization, as of March 30, 2019, the Company has the ability to repurchase an additional 130,604 shares of its common stock.  Repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing.

 

Stock Option Plans and Stock-Based Compensation

 

The Company had authorized up to 750,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2001 Stock Option Plan (the “2001 Plan”).  The 2001 Plan expired on February 20, 2011. As of March 30, 2019, the Company has authorized up to 700,000 shares of common stock to be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).

 

The Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”) and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.

 

Stock option activity under the 2001 Plan, 2010 Plan and Nonemployee Directors Plan (collectively, the “Option Plans”) as of March 30, 2019 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted Average

    

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Number of

 

Weighted Average

 

Contractual Life

 

 

 

 

 

Shares

 

Exercise Price

 

(years)

 

 

Intrinsic Value

Outstanding, December 29, 2018

 

639,380

 

$

84.12

 

5.61

 

$

47,808,100

Exercised

 

(1,500)

 

 

104.41

 

 

 

 

 

Outstanding, March 30, 2019

 

637,880

 

$

84.07

 

5.36

 

$

66,671,400

Exercisable, March 30, 2019

 

471,230

 

$

67.90

 

4.29

 

$

56,871,600

 

 

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No options were granted during the three months ended March 30, 2019 or the three months ended March 31, 2018. All unexercised options at March 30, 2019 have an exercise price equal to the fair market value on the date of the grant.

 

Compensation expense of $498,800 and $490,800 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first three months of 2019 and 2018, respectively.  As of March 30, 2019, the Company had $3.9 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.4 years.

 

9.  Debt:

 

Line of Credit

 

As of March 30, 2019, there was $11.5 million in borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA and BMO Harris Bank N.A. (the “Line of Credit”) bearing interest at 5.50% leaving $38.5 million available for additional borrowings.

 

The Line of Credit has been and will continue to be used for general corporate purposes.  During the first quarter of 2019, the Line of Credit was used to finance in part the Tender Offer (as indicated above). The Line of Credit, which terminates in July 2021, is secured by a lien against substantially all of the Company’s assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit).  As of March 30, 2019, the Company was in compliance with all of its financial covenants.

 

Notes Payable

 

As of March 30, 2019, the Company had $17.5 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $10.6 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under its Note Agreement with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”).

 

The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $1.0 million), but prepayments require payment of a Yield Maintenance Amount, as defined in the Note Agreement.

 

The Company’s obligations under the Note Agreement are secured by a lien against substantially all of the Company’s assets (as the notes rank pari passu with the Line of Credit), and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of fixed charge coverage and tangible net worth and maximum levels of leverage (all as defined within the Note Agreement). As of March 30, 2019, the Company was in compliance with all of its financial covenants.

 

In connection with the Note Agreement, the Company incurred debt issuance costs, of which unamortized amounts are presented as a direct deduction from the carrying amount of the related liability.

 

10. Discounted Lease Rentals:

 

The Company utilized certain lease receivables and underlying equipment as collateral to borrow from financial institutions at a weighted average rate of 6.43% at March 30, 2019 on a non-recourse basis. As of March 30, 2019,  $3.1 million of the $5.0 million liability balance is current.

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Table of Contents

 

11. Operating Leases:

 

As of March 30, 2019, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029 as well as satellite office space in California with an operating lease that expires in August 2022.  Our leases include both lease (fixed payments including rent) and non-lease components (common area or other maintenance costs and taxes) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.  The corporate headquarters lease provides us the option to extend the lease for two additional five year periods.  The California lease provides us an option to extend the lease for an additional three year period.  The lease renewal options are at our sole discretion; therefore, the renewals to extend the lease term are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise.  The weighted average remaining lease term for these leases is 10.5 years and the weighted average discount rate is 5.5%.  As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.  The Company recognized $365,600 and $286,200 of rent expense for the periods ended March 30, 2019 and March 31, 2018, respectively.

 

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2019 and full fiscal years thereafter as of March 30, 2019:

 

 

 

 

 

Operating Lease Liabilities expected to be recognized in

    

Amount

2019

 

$

321,800

2020

 

 

762,500

2021

 

 

783,600

2022

 

 

784,400

2023

 

 

763,300

Thereafter

 

 

5,042,900

Total lease payments

 

 

8,458,500

Less imputed interest

 

 

(2,045,100)

Present value of lease liabilities

 

$

6,413,400

 

Of the $6.4 million operating lease liability outstanding at March 30, 2019, $0.6 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Condensed Balance Sheets.

 

Supplemental cash flow information related to our operating leases is as follows for the period ended March 30, 2019:

 

 

 

 

 

 

 

Three Months Ended

 

    

March 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flow outflow from operating leases

 

$

172,100

 

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12.  Segment Reporting:

 

The Company currently has two reportable business segments, franchising and leasing. The franchising segment franchises value-oriented retail store concepts that buy, sell, trade and consign merchandise, as well as provides strategic consulting services related to franchising. The leasing segment includes (i) Winmark Capital Corporation, a middle-market equipment leasing business and (ii) Wirth Business Credit, Inc., a small ticket financing business. Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The Company’s internal management reporting is the basis for the information disclosed for its business segments and includes allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations, including cash, restricted cash, accounts receivable, prepaid expenses, inventory, property and equipment, investment in leasing operations and goodwill. Unallocated assets include corporate cash and cash equivalents, current and deferred tax amounts, operating lease right of use assets and other corporate assets. Inter-segment balances and transactions have been eliminated. The following tables summarize financial information by segment and provide a reconciliation of segment contribution to operating income:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 30, 2019

    

March 31, 2018

    

Revenue:

 

 

 

 

 

 

 

Franchising

 

$

13,175,900

 

$

12,632,200

 

Leasing

 

 

5,155,300

 

 

5,528,800

 

Total revenue

 

$

18,331,200

 

$

18,161,000

 

 

 

 

 

 

 

 

 

Reconciliation to operating income:

 

 

 

 

 

 

 

Franchising segment contribution

 

$

7,498,000

 

$

6,792,500

 

Leasing segment contribution

 

 

2,568,500

 

 

3,281,700

 

Total operating income

 

$

10,066,500

 

$

10,074,200

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

Franchising

 

$

62,500

 

$

57,200

 

Leasing

 

 

17,600

 

 

18,600

 

Total depreciation and amortization

 

$

80,100

 

$

75,800

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

March 30, 2019

    

December 29, 2018

Identifiable assets:

 

 

 

 

 

 

Franchising

 

$

4,081,800

 

$

5,208,400

Leasing

 

 

36,464,000

 

 

40,490,000

Unallocated

 

 

6,286,000

 

 

964,700

Total

 

$

46,831,800

 

$

46,663,100

 

 

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ITEM 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations 

Overview

 

As of March 30, 2019, we had 1,241  franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands and had a leasing portfolio of $35.1 million.  Management closely tracks the following financial criteria to evaluate current business operations and future prospects: royalties, leasing activity, and selling, general and administrative expenses.

 

Our most significant source of franchising revenue is royalties received from our franchisees.  During the first three months of 2019, our royalties increased $0.7 million or 6.4% compared to the first three months of 2018.

 

Leasing income net of leasing expense during the first three months of 2019 was $4.5 million compared to $5.0 million in the same period last year.  Fluctuations in period-to-period leasing income and leasing expense result primarily from the manner and timing in which leasing income and leasing expense is recognized over the term of each particular lease in accordance with accounting guidance applicable to leasing.  For this reason, we believe that more meaningful levels of leasing activity are the medium- to long-term trend in the purchases of equipment for lease customers and the size of the leasing portfolio.  During the first three months of 2019, we purchased $1.7 million in equipment for lease customers compared to $6.2 million in the first three months of 2018.  Our leasing portfolio (net investment in leases — current and long-term) decreased to $35.1 million at March 30, 2019 from $39.0 million at December 29, 2018.  The lower equipment purchases and the decrease in the size of the leasing portfolio were a direct result of lower equipment purchases by two customers during the first quarter compared to last year.

 

Management continually monitors the level and timing of selling, general and administrative expenses.  The major components of selling, general and administrative expenses include salaries, wages and benefits, advertising, travel, occupancy, legal and professional fees.  During the first three months of 2019, selling, general and administrative expenses increased $0.3 million, or 4.3% compared to the first three months of 2018.

 

Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals.  The following is a summary of our franchising activity for the first three months ended March 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVAILABLE

 

 

 

 

 

TOTAL

 

 

 

 

 

TOTAL

 

FOR

 

COMPLETED

 

 

    

12/29/2018

    

OPENED

    

CLOSED

    

3/30/2019

    

RENEWAL

    

RENEWALS

    

Plato’s Closet

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchises - US and Canada

 

480

 

 1

 

(1)

 

480

 

11

 

11

 

Once Upon A Child

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchises - US and Canada

 

379

 

 2

 

(1)

 

380

 

 8

 

 8

 

Play It Again Sports