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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 June 29, 2002
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
Number) |
4200 Dahlberg Drive, Suite 100
Golden Valley, MN 55422-4837
(Address of Principal Executive Offices, Zip
Code)
Registrant’s Telephone Number, Including Area Code 763-520-8500
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, and (2) has been
subject to such
filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, no par value, 5,717,197 shares outstanding as of August 5, 2002.
INDEX
| |
| PART I. |
|
FINANCIAL INFORMATION |
|
PAGE |
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| |
| Item 1. |
|
Financial Statements (Unaudited) |
|
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| |
| |
|
June 29, 2002 and December 29, 2001 |
|
3 |
| |
| |
|
Three Months Ended June 29, 2002 and June 30, 2001
Six Months Ended June 29, 2002 and June 30, 2001 |
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4 |
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| |
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Six Months Ended June 29, 2002 and June 30, 2001
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5 |
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| |
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6 -8 |
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| Item 2. |
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8 - 14 |
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| Item 3. |
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|
14 |
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| PART II. |
|
OTHER INFORMATION |
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PAGE |
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| |
| |
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Items 1 – 3 and 5 have been omitted since all items are inapplicable or answers negative. |
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| |
| Item 4. |
|
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|
15 |
| |
| Item 6. |
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|
15 |
| |
| (a.) Exhibits |
|
|
|
|
| |
|
99.1 Certification of Chief Executive Officer |
|
|
| |
|
99.2 Certification of principal financial and accounting officer |
|
|
| |
| (b.) Reports on Form 8-K |
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| |
|
On June 25, 2002, the Company filed an 8-K related to a change in Independent Auditors. |
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|
2
Item
1: Financial Statements
WINMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
(unaudited) June 29,
2002
|
|
|
December 29, 2001
|
| ASSETS |
|
|
|
|
|
|
|
| Current Assets: |
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
422,400 |
|
|
$ |
1,053,000 |
| Investments |
|
|
6,107,400 |
|
|
|
2,934,500 |
| Receivables, less allowance for doubtful accounts of $565,400 and $576,000 |
|
|
2,648,000 |
|
|
|
3,308,800 |
| Inventories |
|
|
921,600 |
|
|
|
1,084,100 |
| Prepaid expenses and other |
|
|
665,500 |
|
|
|
667,800 |
| Deferred income taxes |
|
|
1,598,000 |
|
|
|
1,598,000 |
| |
|
|
|
|
|
|
|
| Total current assets |
|
|
12,362,900 |
|
|
|
10,646,200 |
| |
| Notes receivable, net |
|
|
64,400 |
|
|
|
124,100 |
| Property and equipment, net |
|
|
489,900 |
|
|
|
738,100 |
| Other assets, net |
|
|
724,900 |
|
|
|
780,600 |
| |
|
|
|
|
|
|
|
| |
|
$ |
13,642,100 |
|
|
$ |
12,289,000 |
| |
|
|
|
|
|
|
|
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| Current Liabilities: |
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
1,290,600 |
|
|
$ |
1,794,700 |
| Accrued liabilities |
|
|
2,477,500 |
|
|
|
2,885,500 |
| Current maturities of long-term debt |
|
|
24,100 |
|
|
|
41,500 |
| Current deferred revenue |
|
|
765,600 |
|
|
|
515,600 |
| |
|
|
|
|
|
|
|
| Total current liabilities |
|
|
4,557,800 |
|
|
|
5,237,300 |
| |
| Long-term debt, less current maturities |
|
|
69,500 |
|
|
|
158,000 |
| |
| Deferred gain on sale of building |
|
|
181,700 |
|
|
|
273,300 |
| |
| Shareholders’ Equity: |
|
|
|
|
|
|
|
| Common stock, no par, 10,000,000 shares authorized, 5,602,197 and 5,383,354 shares issued and outstanding |
|
|
2,672,600 |
|
|
|
1,376,000 |
| Common stock warrants |
|
|
— |
|
|
|
822,000 |
| Other comprehensive income (loss) |
|
|
(61,800 |
) |
|
|
— |
| Retained earnings |
|
|
6,222,300 |
|
|
|
4,422,400 |
| |
|
|
|
|
|
|
|
| Total shareholders’ equity |
|
|
8,833,100 |
|
|
|
6,620,400 |
| |
|
|
|
|
|
|
|
| |
|
$ |
13,642,100 |
|
|
$ |
12,289,000 |
| |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 29, 2002
|
|
|
June 30, 2001
|
|
|
June 29, 2002
|
|
|
June 30, 2001
|
|
| REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Merchandise sales |
|
$ |
3,987,700 |
|
|
$ |
4,169,100 |
|
|
$ |
8,417,600 |
|
|
$ |
9,820,200 |
|
| Royalties |
|
|
4,055,400 |
|
|
|
3,920,500 |
|
|
|
8,471,100 |
|
|
|
7,895,000 |
|
| Franchise fees |
|
|
92,500 |
|
|
|
145,000 |
|
|
|
257,500 |
|
|
|
307,500 |
|
| Other |
|
|
199,200 |
|
|
|
240,700 |
|
|
|
399,800 |
|
|
|
604,900 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
8,334,800 |
|
|
|
8,475,300 |
|
|
|
17,546,000 |
|
|
|
18,627,600 |
|
| |
| COST OF MERCHANDISE SOLD |
|
|
3,238,600 |
|
|
|
3,410,600 |
|
|
|
6,916,800 |
|
|
|
8,261,900 |
|
| |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
|
|
3,966,800 |
|
|
|
3,828,800 |
|
|
|
7,748,400 |
|
|
|
7,832,600 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Income from operations |
|
|
1,129,400 |
|
|
|
1,235,900 |
|
|
|
2,880,800 |
|
|
|
2,533,100 |
|
| |
| INTEREST INCOME |
|
|
79,200 |
|
|
|
72,800 |
|
|
|
132,800 |
|
|
|
172,600 |
|
| |
| INTEREST EXPENSE |
|
|
(13,300 |
) |
|
|
(252,600 |
) |
|
|
(26,900 |
) |
|
|
(477,400 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
1,195,300 |
|
|
|
1,056,100 |
|
|
|
2,986,700 |
|
|
|
2,228,300 |
|
| |
| PROVISION FOR INCOME TAXES |
|
|
(471,300 |
) |
|
|
(414,000 |
) |
|
|
(1,186,800 |
) |
|
|
(873,500 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| NET INCOME |
|
$ |
724,000 |
|
|
$ |
642,100 |
|
|
$ |
1,799,900 |
|
|
$ |
1,354,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| NET INCOME PER COMMON SHARE – BASIC |
|
$ |
.13 |
|
|
$ |
.12 |
|
|
$ |
.33 |
|
|
$ |
.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC |
|
|
5,502,197 |
|
|
|
5,392,254 |
|
|
|
5,442,776 |
|
|
|
5,389,344 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| NET INCOME PER COMMON SHARE – DILUTED |
|
$ |
.12 |
|
|
$ |
.11 |
|
|
$ |
.30 |
|
|
$ |
.24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED |
|
|
6,122,741 |
|
|
|
5,631,313 |
|
|
|
6,056,986 |
|
|
|
5,554,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
|
Six Months Ended
|
|
| |
|
June 29, 2002
|
|
|
June 30, 2001
|
|
| OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Net income |
|
$ |
1,799,900 |
|
|
$ |
1,354,800 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
337,700 |
|
|
|
486,300 |
|
| Deferred gain on building sale |
|
|
(91,600 |
) |
|
|
(91,600 |
) |
| Deferred financing cost |
|
|
22,900 |
|
|
|
105,300 |
|
| Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Receivables |
|
|
720,500 |
|
|
|
2,680,400 |
|
| Inventories |
|
|
162,500 |
|
|
|
216,700 |
|
| Prepaid expenses and other |
|
|
43,500 |
|
|
|
(6,500 |
) |
| Accounts payable |
|
|
(504,100 |
) |
|
|
(1,433,000 |
) |
| Accrued liabilities |
|
|
(408,000 |
) |
|
|
114,000 |
|
| Deferred franchise fee revenue |
|
|
250,000 |
|
|
|
(17,500 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
2,333,300 |
|
|
|
3,408,900 |
|
| |
|
|
|
|
|
|
|
|
| |
| INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Purchase of investments |
|
|
(3,275,900 |
) |
|
|
— |
|
| Purchase of property and equipment (net) |
|
|
(56,700 |
) |
|
|
(26,200 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used for investing activities |
|
|
(3,332,600 |
) |
|
|
(26,200 |
) |
| |
|
|
|
|
|
|
|
|
| |
| FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Payments on long-term debt |
|
|
(105,900 |
) |
|
|
(1,048,300 |
) |
| Proceeds from stock option/warrant exercises |
|
|
474,600 |
|
|
|
22,900 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by (used for) financing activities |
|
|
368,700 |
|
|
|
(1,025,400 |
) |
| |
|
|
|
|
|
|
|
|
| |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(630,600 |
) |
|
|
2,357,300 |
|
| Cash and cash equivalents, beginning of period |
|
|
1,053,000 |
|
|
|
2,005,100 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
|
$ |
422,400 |
|
|
$ |
4,362,400 |
|
| |
|
|
|
|
|
|
|
|
| |
| SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
| Cash paid for interest |
|
$ |
14,500 |
|
|
$ |
375,100 |
|
| |
|
|
|
|
|
|
|
|
| Cash paid for income taxes |
|
$ |
824,000 |
|
|
$ |
755,500 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Management’s Interim Financial Statement Representation:
The accompanying condensed financial statements have been prepared by Winmark Corporation (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The
information in the 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. Although the Company
believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the
Company’s latest Annual Report on Form 10-K.
Revenues and operating results for the six months ended June 29, 2002 are not
necessarily indicative of the results to be expected for the full year.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130,
“Reporting Comprehensive Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for reporting in the financial statements all changes in equity during a period. For the company, comprehensive loss consists of unrealized
holding gains and losses from investments classified as “available for sale.”
Reclassification
Certain amounts in the June 30, 2001 financial statements have been reclassified to conform with the June 29, 2002 presentation.
These reclassifications have no effect on net income or shareholders’ equity as previously reported.
2. Organization and Business:
The Company offers licenses to operate retail stores using
the service marks Play it Again Sports®, Once Upon A Child®, Music Go Round® and Plato’s Closet®. In addition, the Company sells
inventory to its Play It Again Sports® franchisees through its buying group. The Company also
operates six Music Go Round® retail stores, one Plato’s Closet® retail store and one Once Upon A Child® retail store. The Company has a 52/53-week year which ends on the last Saturday in December.
3. Net Income Per Common Share:
The Company calculates net income per share in accordance with SFAS No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Net Income Per Common Share—Basic. The
Company calculates Net Income Per Share—Dilutive by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method. The
weighted average diluted outstanding shares is computed by adding the weighted average basic shares outstanding with the dilutive effect of 620,544 and 239,059 stock options and warrants for the quarters ended and 614,210 and 165,305 for the six
months ended June 29, 2002 and June 30, 2001, respectively.
6
4. New Accounting Pronouncements:
On June 29, 2001, the FASB approved for issuance, SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Intangible Assets.”
Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated
before July 1 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but tested for impairment annually, except in certain circumstances, and whenever
there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill is no longer subject to amortization.
The Company adopted SFAS No. 142 in the first quarter of its fiscal year ended December 28, 2002. The balance of goodwill, net of accumulated amortization, was
$486,200 as of January 1, 2002. The Company’s annual goodwill amortization was approximately $38,100, which ceased effective January 1, 2002 upon adoption of the new rules. The adoption of the impairment provisions of SFAS No. 142, did not have
an impact on the consolidated financial position or results of operations of the Company.
The following tables set forth pro forma net
income and earnings per share:
| |
|
Three Months Ended
|
|
Six Months Ended
|
| |
|
June 29, 2002
|
|
June 30, 2001
|
|
June 29, 2002
|
|
June 30, 2001
|
| Net Income as reported |
|
$ |
724,000 |
|
$ |
642,100 |
|
$ |
1,799,900 |
|
$ |
1,354,800 |
| Add back: Goodwill amortization (net of tax) |
|
|
— |
|
|
5,800 |
|
|
— |
|
|
11,600 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted net income |
|
$ |
724,000 |
|
$ |
647,900 |
|
$ |
1,799,900 |
|
$ |
1,366,400 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Reported net income |
|
$ |
.13 |
|
$ |
.12 |
|
$ |
.33 |
|
$ |
.25 |
| Goodwill amortization |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted net income |
|
$ |
.13 |
|
$ |
.12 |
|
$ |
.33 |
|
$ |
.25 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Reported net income |
|
$ |
.12 |
|
$ |
.11 |
|
$ |
.30 |
|
$ |
.24 |
| Goodwill amortization |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted net income |
|
$ |
.12 |
|
$ |
.11 |
|
$ |
.30 |
|
$ |
.24 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 supersedes previous guidance for financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The adoption of this
pronouncement on January 1, 2002 had no effect on the Company’s results of operations or financial position.
7
5. Other Contingencies:
In addition to the operating lease obligations disclosed in footnote 10 of the Company’s Form 10-K for the year ended December 29, 2001, the Company has
remained a guarantor on Company-owned retail stores that have been either sold or closed. As of June 29, 2002, the Company is contingently liable on these leases for up to an additional $163,800. These leases have various expiration dates through
2006. The Company believes it has adequate reserves for any future liability, along with the monthly reduction of exposure as leases are paid, expire or are renewed by the current operator of the location.
6. Subsequent Events:
On July 30, 2002 the Company executed a subscription agreement with Tomsten’s Inc., the parent company to “Archiver’s” retail chain. The agreement requires the Company to invest an aggregate of $6 million in the
purchase of 2 million shares of common stock of Tomsten’s over a period of time ending August 1, 2003. Upon completion of the $6 million investment, based on current ownership, the Company will own approximately 20% of the outstanding common
shares of Tomsten’s Inc. The investment will be recorded using the equity method of accounting, whereby the Company’s share of income or loss will be included in the statement of operations and increase or decrease the carrying value of
the investment. John L. Morgan, the Company’s Chief Executive Officer, has been appointed to the Board of Directors of Tomsten, Inc.
General
The Company is a franchise company that franchises retail brands that buy, sell, trade and consign
merchandise. Each brand operates in a different industry and provides the consumer with high value retailing by offering high-quality used merchandise at substantial savings from the price of new merchandise and by purchasing customers’ used
goods that have been outgrown or are no longer used. The stores also offer new merchandise.
Following is a summary of our franchising
and corporate retail store activity for the retail brands for the three months ended June 29, 2002:
| |
|
TOTAL 3/30/02
|
|
OPENED
|
|
CLOSED
|
|
|
TOTAL 6/29/02
|
| Play It Again Sports® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US and Canada |
|
476 |
|
0 |
|
(8 |
) |
|
468 |
| Other |
|
24 |
|
0 |
|
(0 |
) |
|
24 |
| |
| Once Upon A Child® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US and Canada |
|
230 |
|
0 |
|
(4 |
) |
|
226 |
| Corporate |
|
1 |
|
0 |
|
(0 |
) |
|
1 |
| |
| Music Go Round® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US |
|
57 |
|
0 |
|
(2 |
) |
|
55 |
| Corporate |
|
6 |
|
0 |
|
(0 |
) |
|
6 |
| |
| Plato’s Closet® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US |
|
51 |
|
7 |
|
(0 |
) |
|
58 |
| Corporate |
|
1 |
|
0 |
|
(0 |
) |
|
1 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
846 |
|
7 |
|
(14 |
) |
|
839 |
| |
|
|
|
|
|
|
|
|
|
8
Following is a summary of our franchising and corporate retail store activity for the retail brands for
the six months ended June 29, 2002:
| |
|
TOTAL 12/29/01
|
|
OPENED
|
|
CLOSED
|
|
|
TOTAL 6/29/02
|
| Play It Again Sports® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US and Canada |
|
478 |
|
2 |
|
(12 |
) |
|
468 |
| Other |
|
24 |
|
0 |
|
(0 |
) |
|
24 |
| |
| Once Upon A Child® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US and Canada |
|
229 |
|
4 |
|
(7 |
) |
|
226 |
| Corporate |
|
1 |
|
0 |
|
(0 |
) |
|
1 |
| |
| Music Go Round® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US |
|
57 |
|
0 |
|
(2 |
) |
|
55 |
| Corporate |
|
6 |
|
0 |
|
(0 |
) |
|
6 |
| |
| Plato’s Closet® |
|
|
|
|
|
|
|
|
|
| Franchised Stores – US |
|
45 |
|
13 |
|
(0 |
) |
|
58 |
| Corporate |
|
1 |
|
0 |
|
(0 |
) |
|
1 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
841 |
|
19 |
|
(21 |
) |
|
839 |
| |
|
|
|
|
|
|
|
|
|
Results of Operations
The following table sets forth for the periods indicated, certain income statement items as a percentage of total revenue and the percentage change in the dollar amounts from the prior
period:
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 29, 2002
|
|
|
June 30, 2001
|
|
|
June 29, 2002
|
|
|
June 30, 2001
|
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Merchandise sales |
|
47.8 |
% |
|
49.2 |
% |
|
48.0 |
% |
|
52.7 |
% |
| Royalties |
|
48.7 |
|
|
46.3 |
|
|
48.3 |
|
|
42.4 |
|
| Franchise fees |
|
1.1 |
|
|
1.7 |
|
|
1.4 |
|
|
1.7 |
|
| Other |
|
2.4 |
|
|
2.8 |
|
|
2.3 |
|
|
3.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
| |
| Cost of merchandise sold |
|
(38.8 |
) |
|
(40.2 |
) |
|
(39.4 |
) |
|
(44.4 |
) |
| Selling, general and administrative expenses |
|
(47.6 |
) |
|
(45.2 |
) |
|
(44.2 |
) |
|
(42.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income from operations |
|
13.6 |
|
|
14.6 |
|
|
16.4 |
|
|
13.6 |
|
| Interest and other income, net |
|
.8 |
|
|
(2.1 |
) |
|
.6 |
|
|
(1.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
14.4 |
|
|
12.5 |
|
|
17.0 |
|
|
12.0 |
|
| Provision for income taxes |
|
(5.7 |
) |
|
(4.9 |
) |
|
(6.8 |
) |
|
(4.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
8.7 |
% |
|
7.6 |
% |
|
10.2 |
% |
|
7.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
9
Comparison of Three Months Ended June 29, 2002 to Three Months Ended June 30, 2001
Revenues
Revenues for the quarter ended June 29, 2002 totaled $8.3 million compared to $8.5 million for the comparable period in 2001.
Merchandise sales consist of the sale of product to Play It Again Sports® franchisees
through the buying group and retail sales at the Company-owned stores. For the second quarter of 2002 and 2001 merchandise sales were as follows:
| |
|
2002
|
|
2001
|
| Buying Group |
|
$ |
2,698,200 |
|
$ |
2,818,800 |
| Retail Sales |
|
|
1,289,500 |
|
|
1,350,300 |
| |
|
|
|
|
|
|
| Merchandise Sales |
|
$ |
3,987,700 |
|
$ |
4,169,100 |
| |
|
|
|
|
|
|
The Play It Again Sports® buying group revenues decreased $120,600, or 4.3%, for the quarter ended June 29, 2002 compared to the second quarter last year. This is a
result of management’s strategic decision to have more Play It Again Sports® franchisees
purchase merchandise directly from vendors and having 33 fewer Play It Again Sports® stores open than
one year ago. Retail store sales decreased $60,800, or 4.5%, for the quarter ended June 29, 2002 compared to the second quarter last year. The revenue decline was due to closing three Company-owned stores in the first and second quarters of 2001.
Royalties increased to $4.1 million for the second quarter of 2002 from $3.9 million for the same period in 2001, an approximate 3.4%
increase. The increase is primarily due to having 58 franchised Plato’s Closet® Stores open at
June 29, 2002 compared to 31 at June 30, 2001.
Franchise fees decreased to $92,500 for the second quarter of 2002 compared to $145,000
for the second quarter of 2001. Seven franchised stores were opened in the second quarter of 2002 compared to nine franchised stores opened during the second quarter last year.
Other revenue decreased $41,500, or 17.2%, for the second quarter of 2002 compared to the second quarter of 2001. The decrease is primarily due to approximately $100,000 in fees received pursuant to
the consulting agreement with Hollis Technologies, LLC, in the second quarter of 2001.
Cost of Merchandise Sold
Cost of merchandise sold includes the cost of merchandise sold through the Play It Again Sports® buying group and at Company-owned retail stores. Cost of merchandise sold through the buying group as a percentage of the buying group revenue and cost of merchandise sold at Company-owned stores as a percentage of
Company-owned store retail revenue, respectively, for the second quarter of 2002 and 2001 were as follows:
| |
|
2002
|
|
|
2001
|
|
| Buying Group |
|
95.9 |
% |
|
95.3 |
% |
| Retail |
|
50.4 |
% |
|
53.6 |
% |
The 3.2 percentage point decrease in retail cost of goods sold is primarily due to better
inventory and margin management at the Company-owned retail stores.
10
Selling, General and Administrative
The $138,000, or 3.6%, increase in selling, general and administrative expenses in the quarter ended June 29, 2002 compared to the second quarter of 2001 is primarily due to the conferences for Once Upon A Child® and Plato’s Closet® taking place in the second quarter of 2002 compared to the third quarter in 2001.
Interest
During the second quarter of 2002, the Company had net interest income of $65,900 compared to
$179,800 of net expense in the second quarter of 2001. This decrease is primarily the result of reduced outstanding debt in the second quarter of 2002 compared to the same period last year.
Income Taxes
The provision for income taxes was calculated at
an effective rate of 39.4% and 39.2% for the second quarter of 2002 and 2001, respectively.
Comparison of Six Months Ended June
29, 2002 to Six Months Ended June 30, 2001
Revenues
Revenues for the six months ended June 29, 2002 were $17.5 million compared to $18.6 million for the comparable period in 2001.
Merchandise sales consist of the sale of product to Play It Again Sports® franchisees through the Play It Again Sports® buying group and retail sales at the Company-owned stores. For the first six months of 2002 and 2001 merchandise sales were as follows:
| |
|
2002
|
|
2001
|
| Buying Group |
|
$ |
5,805,100 |
|
$ |
7,014,500 |
| Retail Sales |
|
|
2,612,500 |
|
|
2,805,700 |
| |
|
|
|
|
|
|
| Merchandise Sales |
|
$ |
8,417,600 |
|
$ |
9,820,200 |
| |
|
|
|
|
|
|
The Play It Again Sports® buying group revenues decreased $1,209,400, or 17.2%, for the six months ended June 29, 2002 compared to the same period last year. This is a
result of management’s strategic decision to have more Play It Again Sports® franchisees
purchase merchandise directly from vendors and having 33 fewer stores open than one year ago. Retail store sales decreased $193,200, or 6.9%, for the six months ended June 29, 2002 compared to the same period last year. The revenue decline was due
to closing three Company-owned stores in the first and second quarters of 2001.
Royalties increased to $8.5 million for the first six
months of 2002 from $7.9 million for the first six months of 2001, a 7.3% increase. This increase is due to increased franchise store retail sales primarily in Play It Again Sports® and a result of having 58 franchised Plato’s Closet® stores open at June 29, 2002 compared to 31 at June 30, 2001.
Franchise fees decreased to $257,500 for the first six months of 2002 compared to $307,500 for the first six months of 2001.
11
Other revenue decreased $205,100, or 33.9%, for the first six months of 2002 compared to the first six months of 2001. The decrease is primarily
due to approximately $200,000 in fees received on the consulting agreement with Hollis Technologies, LLC in the first six months of 2001.
Cost of Merchandise Sold
Cost of merchandise sold includes the cost of merchandise sold through the Play
It Again Sports® buying group and at Company-owned retail stores. Cost of merchandise sold through
the buying group as a percentage of the buying group revenue and cost of merchandise sold at Company-owned stores as a percentage of Company-owned retail store revenue, respectively, for the first six months of 2002 and 2001 were as follows:
| |
|
2002
|
|
|
2001
|
|
| Buying Group |
|
96.0 |
% |
|
95.9 |
% |
| Retail |
|
51.4 |
% |
|
54.8 |
% |
The 3.4 percentage point decrease in retail cost of goods sold is primarily due to better
inventory and margin management at the Company-owned retail stores.
Selling, General and Administrative
The $84,200, or 1.1%, decrease in selling, general and administrative expenses in the first six months ended June 29, 2002 compared to the first six
months of 2001 is primarily due to closing three Company-owned stores in the first and second quarters of 2001 and elimination of related costs partially offset by increased conference, advertising production and development advertising expenses.
Interest
During the first six months of 2002, the Company had net interest income of $105,900 compared to $304,800 of net expense in the first six months of 2001. This decrease is primarily the result of reduced outstanding debt in the first
six months of 2002 compared to the same period last year. The decrease in interest income is primarily due to reduced finance charge income on the Play It Again Sports® buying group receivables. The receivable balance has decreased as a result of increased collection efforts combined with fewer stores using the
buying group central billing function.
Income Taxes
The provision for income taxes was calculated at an effective rate of 39.7% and 39.2% for the first six months of 2002 and 2001, respectively.
Liquidity and Capital Resources
The Company’s primary
sources of liquidity have historically been cash flow from operations and bank borrowings. The Company ended the second quarter of 2002 with $6.5 million in cash and investments and a current ratio of 2.71 to 1.0 compared to $4.4 million in cash and
a current ratio of 2.18 to 1.0 at the end of the second quarter of 2001.
12
Ongoing operating activities provided cash of $2.3 million for the first six months of 2002 compared to $3.4 million for the same period last
year. The higher level of cash provided in 2001 compared to 2002 was primarily due to increased efforts of collecting accounts receivable in 2001 partially offset by an increase in net income of $445,100 in the first six months of 2002. For the
first six months of 2002, components of the cash provided by operating assets and liabilities include a $720,500 decrease in accounts receivable as a result of improved collection performance and a reduction in buying group activity. Deferred
franchise fee revenue provided cash of $250,000 due to increased deposits on future store openings. Inventory provided cash of $162,500 due to reduced inventory levels at the Company-owned stores. Components of cash utilized by operating assets and
liabilities include a $504,100 decrease in accounts payable as a result of a reduction in buying group activity and a $408,000 decrease in accrued liabilities primarily due to lower bonus and payroll accruals.
Investing activities used $3.3 million of cash during the first six months of 2002 primarily related to the purchase of investments.
Financing activities provided $368,700 of cash during the first six months of 2002 principally from cash received on the exercise of options and warrants offset
by payments on long-term debt. The payments on long-term debt includes $82,800 to Tool Traders, Inc. as part of a full and final settlement and $23,100 on other notes.
On July 31, 2000, the Company entered into a credit agreement with Rush River Group, LLC, an affiliate of the Company, to provide a credit facility of up to $7.5 million dollars (“Rush River
Facility”). The credit agreement allows such amount to be drawn upon by the Company in one or more term loans. The initial term loan was $5.0 million dollars to be repaid by the Company over a seven-year period. The term loan was accruing
interest at 14% per year. New term loans will accrue interest at 8% per year. Once repaid, amounts may not be reborrowed. As of June 29, 2002 , there was no outstanding balance on the initial term loan. The Rush River Facility is secured by a lien
against substantially all of the Company’s assets. Rush River Group, LLC has agreed to subordinate its lien to any lien of a financial institution relating to financing not to exceed $2.5 million dollars. As June 29, 2002, the Company had
remaining borrowing availability of $2.5 million under the Rush River Facility.
Among other requirements, the Rush River Facility
currently requires that the Company maintain shareholders’ equity of at least $1,922,000. In addition, if there is a change of control as defined in the credit agreement governing the Rush River Facility, such change of control is an event of
default, and Rush River Group, LLC may declare all amounts outstanding under such term notes immediately due and payable. The Rush River Facility also contains an agreement allowing the Company to prepay any and all amounts outstanding under the
Rush River Facility without premium or penalty. In connection with the Rush River Facility, the Company issued to Rush River Group, LLC a warrant to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.00 per share.
The warrant was exercised on May 21, 2002.
On July 30, 2002 the Company executed a subscription agreement with Tomsten’s, Inc., the
parent company of the “Archiver’s” retail chain. The agreement requires the Company to invest a total of $6 million in the purchase of common stock of Tomsten’s, Inc. The initial $2 million was paid on July 30, 2002, with
additional $2 million increments due on February 1, 2003 and August 1, 2003.
The Company believes that the Rush River Facility, along
with cash generated from future operations and cash and investments on hand, will be adequate to meet the Company’s current obligations, including the investment in “Archiver’s”, and operating needs.
13
New Accounting Pronouncements
On June 29, 2001, the FASB approved for issuance, SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Intangible Assets.” Major provisions of these Statements are as follows: all business
combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated before July 1 2001; intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a
related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill
must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill is no longer subject to amortization.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes previous guidance for financial accounting and
reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The adoption of this pronouncement on January 1, 2002 had no effect on the Company’s results of operations or financial position.
Factors That May Affect Future Results
The statements contained in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not strictly historical fact, including without
limitation, our statement that we will have adequate capital reserves to meet our current and contingent obligations and operating needs are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform
Act. Such statements are based on management’s current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward
looking statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company incurs
financial markets risk in the form of interest rate risk. Management deals with such risk by negotiating fixed rate loan agreements. Accordingly, the Company is not exposed to cash flow risks related to interest rate changes. A one percent change in
interest rates would not have a significant impact on the Company’s fixed rate debt.
Approximately $2.7 million of our investments
at June 29, 2002 was invested in fixed income securities and $2.8 million in money market mutual funds, which are subject to the effects of market fluctuations in interest rates. A one percent change in interest rates would not have a significant
impact on the fair value of these investments.
PART II. OTHER INFORMATION
Items 1 – 3:
Not applicable.
14
Item 4: Submission of Matters to a Vote of Security-holders
At the Annual Shareholders
meeting held on May 1, 2002, the Company submitted to a vote of security-holders the following matters which received the indicated votes:
1. |
|
Approving setting the number of members of the Board of Directors at seven (7): |
| For: 3,983,904 |
|
Against: 4,846 |
|
Abstain: 5,245 |
2. |
|
Election of Directors: |
| |
|
For:
|
|
Withhold:
|
| John L. Morgan |
|
3,985,785 |
|
8,210 |
| Kirk A. MacKenzie |
|
3,986,985 |
|
7,010 |
| Paul C. Reyelts |
|
3,986,985 |
|
7,010 |
| William D. Dunlap, Jr. |
|
3,986,985 |
|
7,010 |
| Mark L. Wilson |
|
3,986,885 |
|
7,110 |
| Stephen M. Briggs |
|
3,985,585 |
|
8,410 |
| Jenele C. Grassle |
|
3,986,885 |
|
7,110 |
3. |
|
Ratifying the appointment of Arthur Andersen LLP as independent auditors for the current fiscal year: |
| For: 3,829,509 |
|
Against: 160,003 |
|
Abstain: 4,483 |
3. |
|
In their discretion, upon such other business as may properly come before the meeting or any adjournment thereof: |
| For: 3,864,837 |
|
Against: 12,667 |
|
Abstain: 116,491 |
Item 5:
Not applicable.
Item 6: Exhibits and Reports on Form 8-K
(a.) Exhibits
99.1 Certification of Chief Executive Officer.
99.2 Certification of
principal financial and accounting officer
(b.) Reports on Form 8-K
On June 25, 2002, the Company filed an 8-K related to a change in Independent Auditors.
15
SIGNATURES
Pursuant to
the requirements 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.
| |
|
WINMARK CORPORATION |
| |
|
|
| |
| Date: August 9, 2002 |
|
By: |
|
/s/ JOHN L. MORGAN
John L. Morgan Chairman of the Board and Chief Executive Officer |
| |
| Date: August 9, 2002 |
|
By: |
|
/s/ PAUL F. KELLY
Paul F. Kelly Vice President of Financial
Services (principal financial and accounting officer) |
16
EXHIBIT INDEX
WINMARK CORPORATION
FORM 10-Q FOR QUARTER ENDED JUNE 29, 2002
| Exhibit No.
|
|
Description
|
| 99.1 |
|
Certification of Chief Executive Officer |
| 99.2 |
|
Certification of principal financial and accounting officer |