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EX-32.2 - EX-32.2 - WINMARK CORPwina-20160924ex322857112.htm
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EX-31.2 - EX-31.2 - WINMARK CORPwina-20160924ex312208e6e.htm
EX-31.1 - EX-31.1 - WINMARK CORPwina-20160924ex311c41f3b.htm

 

 

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 September 24, 2016

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes ☒              No ☐

 

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

 

 

 

 

Large accelerated filer

Accelerated filer ☒

 

 

 

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

 

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, 4,122,037 shares outstanding as of October 7, 2016.

 

 

 

 

 


 

WINMARK CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

PAGE

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

September 24, 2016 and December 26, 2015

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended September 24, 2016 and September 26, 2015

 

 

Nine Months Ended September 24, 2016 and September 26, 2015

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Three Months Ended September 24, 2016 and September 26, 2015

 

 

Nine Months Ended September 24, 2016 and September 26, 2015

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

Nine Months Ended September 24, 2016 and September 26, 2015

 

 

 

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 - 13

 

 

 

Item 2. 

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

14 - 21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

21 

 

 

 

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


 

PART I.          FINANCIAL INFORMATION

 

ITEM 1:   Financial Statements

 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 24, 2016

 

December 26, 2015

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,120,900

 

$

1,006,700

 

Marketable securities

 

 

204,100

 

 

227,800

 

Receivables, less allowance for doubtful accounts of $2,300 and $200

 

 

1,555,300

 

 

1,416,900

 

Restricted cash

 

 

40,000

 

 

25,000

 

Net investment in leases - current

 

 

16,264,100

 

 

17,741,500

 

Income tax receivable

 

 

769,200

 

 

3,290,400

 

Inventories

 

 

95,600

 

 

45,200

 

Prepaid expenses

 

 

921,000

 

 

677,800

 

Total current assets

 

 

20,970,200

 

 

24,431,300

 

Net investment in leases - long-term

 

 

21,070,300

 

 

21,246,000

 

Property and equipment, net

 

 

847,700

 

 

1,121,500

 

Goodwill

 

 

607,500

 

 

607,500

 

 

 

$

43,495,700

 

$

47,406,300

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Notes payable, net of unamortized debt issuance costs of $10,000 and $10,000

 

$

1,990,000

 

$

1,990,000

 

Accounts payable

 

 

1,118,900

 

 

1,643,300

 

Accrued liabilities

 

 

2,644,500

 

 

1,875,700

 

Discounted lease rentals

 

 

 —

 

 

38,700

 

Deferred revenue

 

 

1,671,700

 

 

1,963,200

 

Total current liabilities

 

 

7,425,100

 

 

7,510,900

 

Long-Term Liabilities:

 

 

 

 

 

 

 

Line of credit

 

 

25,200,000

 

 

42,400,000

 

Notes payable, net of unamortized debt issuance costs of $76,000 and $83,500

 

 

20,424,000

 

 

21,916,500

 

Deferred revenue

 

 

1,451,200

 

 

1,421,600

 

Other liabilities

 

 

1,036,100

 

 

1,216,300

 

Deferred income taxes

 

 

3,676,900

 

 

3,614,800

 

Total long-term liabilities

 

 

51,788,200

 

 

70,569,200

 

Shareholders’ Equity (Deficit):

 

 

 

 

 

 

 

Common stock, no par value, 10,000,000 shares authorized, 4,122,037 and 4,124,767 shares issued and outstanding

 

 

859,200

 

 

406,500

 

Accumulated other comprehensive loss

 

 

(7,300)

 

 

(32,900)

 

Retained earnings (accumulated deficit)

 

 

(16,569,500)

 

 

(31,047,400)

 

Total shareholders’ equity (deficit)

 

 

(15,717,600)

 

 

(30,673,800)

 

 

 

$

43,495,700

 

$

47,406,300

 

 

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

3


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 24, 2016

    

September 26, 2015

    

September 24, 2016

    

September 26, 2015

    

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalties

 

$

11,311,000

 

$

11,286,100

 

$

32,140,800

 

$

31,226,700

 

Leasing income

 

 

4,174,000

 

 

3,247,000

 

 

12,839,000

 

 

16,919,900

 

Merchandise sales

 

 

520,000

 

 

762,300

 

 

1,882,400

 

 

2,182,300

 

Franchise fees

 

 

501,800

 

 

483,200

 

 

1,367,800

 

 

1,253,500

 

Other

 

 

227,500

 

 

220,900

 

 

984,400

 

 

917,900

 

Total revenue

 

 

16,734,300

 

 

15,999,500

 

 

49,214,400

 

 

52,500,300

 

COST OF MERCHANDISE SOLD

 

 

499,100

 

 

711,600

 

 

1,784,800

 

 

2,055,600

 

LEASING EXPENSE

 

 

646,200

 

 

173,400

 

 

2,010,400

 

 

4,941,300

 

PROVISION FOR CREDIT LOSSES

 

 

(29,700)

 

 

38,800

 

 

(52,000)

 

 

(123,400)

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

5,180,700

 

 

5,733,900

 

 

17,671,500

 

 

18,226,700

 

Income from operations

 

 

10,438,000

 

 

9,341,800

 

 

27,799,700

 

 

27,400,100

 

INTEREST EXPENSE

 

 

(552,300)

 

 

(687,700)

 

 

(1,786,800)

 

 

(1,142,900)

 

INTEREST AND OTHER INCOME (EXPENSE)

 

 

(6,300)

 

 

(12,400)

 

 

(7,300)

 

 

(61,800)

 

Income before income taxes

 

 

9,879,400

 

 

8,641,700

 

 

26,005,600

 

 

26,195,400

 

PROVISION FOR INCOME TAXES

 

 

(3,785,200)

 

 

(3,302,100)

 

 

(9,954,200)

 

 

(10,050,100)

 

NET INCOME

 

$

6,094,200

 

$

5,339,600

 

$

16,051,400

 

$

16,145,300

 

EARNINGS PER SHARE - BASIC

 

$

1.48

 

$

1.29

 

$

3.90

 

$

3.53

 

EARNINGS PER SHARE - DILUTED

 

$

1.41

 

$

1.23

 

$

3.72

 

$

3.39

 

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC

 

 

4,116,957

 

 

4,128,031

 

 

4,113,819

 

 

4,568,813

 

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED

 

 

4,328,168

 

 

4,338,230

 

 

4,320,284

 

 

4,758,158

 

 

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

 

4


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 24, 2016

    

September 26, 2015

    

September 24, 2016

    

September 26, 2015

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

6,094,200

 

$

5,339,600

 

$

16,051,400

 

$

16,145,300

 

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gains (losses) on marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains (losses) arising during period

 

 

6,800

 

 

(30,700)

 

 

41,100

 

 

8,000

 

Reclassification adjustment for net gains included in net income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,300)

 

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX

 

 

6,800

 

 

(30,700)

 

 

41,100

 

 

5,700

 

INCOME TAX (EXPENSE) BENEFIT RELATED TO ITEMS OF OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gains/losses on marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains/losses arising during period

 

 

(2,600)

 

 

11,600

 

 

(15,500)

 

 

(3,200)

 

Reclassification adjustment for net gains included in net income

 

 

 —

 

 

 —

 

 

 —

 

 

900

 

INCOME TAX (EXPENSE) BENEFIT RELATED TO ITEMS OF OTHER COMPREHENSIVE INCOME

 

 

(2,600)

 

 

11,600

 

 

(15,500)

 

 

(2,300)

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

4,200

 

 

(19,100)

 

 

25,600

 

 

3,400

 

COMPREHENSIVE INCOME

 

$

6,098,400

 

$

5,320,500

 

$

16,077,000

 

$

16,148,700

 

 

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

 

 

5


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 24, 2016

    

September 26, 2015

    

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

16,051,400

 

$

16,145,300

 

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

 

 

 

 

 

 

 

Depreciation

 

 

320,600

 

 

322,800

 

Provision for credit losses

 

 

(52,000)

 

 

(123,400)

 

Compensation expense related to stock options

 

 

1,324,400

 

 

1,255,100

 

Deferred income taxes

 

 

62,100

 

 

(3,329,900)

 

Loss on sale of marketable securities

 

 

12,600

 

 

22,800

 

Deferred initial direct costs

 

 

(421,300)

 

 

(332,900)

 

Amortization of deferred initial direct costs

 

 

356,200

 

 

491,700

 

Tax benefits on exercised stock options

 

 

(69,700)

 

 

(16,600)

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

(138,400)

 

 

14,000

 

Restricted cash

 

 

(15,000)

 

 

 —

 

Income tax receivable/payable

 

 

2,575,400

 

 

3,323,200

 

Inventories

 

 

(50,400)

 

 

33,900

 

Prepaid expenses

 

 

(243,200)

 

 

(290,100)

 

Other assets

 

 

 —

 

 

70,000

 

Accounts payable

 

 

(524,400)

 

 

(747,100)

 

Accrued and other liabilities

 

 

617,600

 

 

1,133,300

 

Rents received in advance and security deposits

 

 

392,300

 

 

6,600

 

Deferred revenue

 

 

(261,900)

 

 

184,900

 

Net cash provided by operating activities

 

 

19,936,300

 

 

18,163,600

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from sale of marketable securities

 

 

52,200

 

 

299,000

 

Purchase of marketable securities

 

 

 —

 

 

(75,800)

 

Purchase of property and equipment

 

 

(46,800)

 

 

(121,300)

 

Purchase of equipment for lease contracts

 

 

(16,432,200)

 

 

(18,516,900)

 

Principal collections on lease receivables

 

 

17,749,900

 

 

22,047,500

 

Net cash provided by investing activities

 

 

1,323,100

 

 

3,632,500

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

10,600,000

 

 

56,500,000

 

Payments on line of credit

 

 

(27,800,000)

 

 

(28,800,000)

 

Proceeds from borrowings on notes payable

 

 

 —

 

 

25,000,000

 

Payments on notes payable

 

 

(1,500,000)

 

 

(500,000)

 

Repurchases of common stock

 

 

(1,573,900)

 

 

(74,261,500)

 

Proceeds from exercises of stock options

 

 

170,900

 

 

159,000

 

Dividends paid

 

 

(1,111,900)

 

 

(939,200)

 

Tax benefits on exercised stock options

 

 

69,700

 

 

16,600

 

Net cash used for financing activities

 

 

(21,145,200)

 

 

(22,825,100)

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

114,200

 

 

(1,029,000)

 

Cash and cash equivalents, beginning of period

 

 

1,006,700

 

 

2,089,700

 

Cash and cash equivalents, end of period

 

$

1,120,900

 

$

1,060,700

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,778,400

 

$

830,400

 

Cash paid for income taxes

 

$

7,316,700

 

$

10,056,800

 

 

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

 

 

6


 

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 nine months ended September 24, 2016 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 also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks. 

 

3.  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.

 

The Company’s marketable securities were valued based on Level 1 inputs using quoted prices.

 

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

 

4.  Investments:

 

Marketable Securities

 

The following is a summary of marketable securities classified as available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 24, 2016

 

December 26, 2015

 

 

    

Cost

    

Fair Value

    

Cost

    

Fair Value

 

Equity securities

 

$

215,800

 

$

204,100

 

$

280,600

 

$

227,800

 

 

7


 

The Company’s unrealized gains and losses for marketable securities classified as available-for-sale securities in accumulated other comprehensive loss are as follows:

 

 

 

 

 

 

 

 

 

 

 

    

September 24, 2016

    

December 26, 2015

    

Unrealized gains

 

$

 —

 

$

 —

 

Unrealized losses

 

 

(11,700)

 

 

(52,800)

 

Net unrealized losses

 

$

(11,700)

 

$

(52,800)

 

 

The Company’s realized gains and losses recognized on sales of available-for-sale marketable securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 24, 2016

    

September 26, 2015

    

September 24, 2016

    

September 26, 2015

    

Realized gains

 

$

 —

 

$

 —

 

$

 —

 

$

13,400

 

Realized losses

 

 

 —

 

 

 —

 

 

(12,600)

 

 

(36,200)

 

Net realized losses

 

$

 —

 

$

 —

 

$

(12,600)

 

$

(22,800)

 

 

Amounts reclassified out of accumulated other comprehensive loss into earnings is determined by using the average cost of the security when sold.  Gross realized gains (losses) reclassified out of accumulated other comprehensive loss into earnings are included in Interest and Other Income (Expense) and the related tax benefits (expenses) are included in the Provision for Income Taxes lines of the Consolidated Condensed Statements of Operations.

 

5.  Investment in Leasing Operations:

 

Investment in leasing operations consists of the following:

 

 

 

 

 

 

 

 

 

 

    

September 24, 2016

    

December 26, 2015

 

Direct financing and sales-type leases:

 

 

 

 

 

 

 

Minimum lease payments receivable

 

$

35,780,200

 

$

37,181,600

 

Estimated residual value of equipment

 

 

4,442,900

 

 

4,511,000

 

Unearned lease income net of initial direct costs deferred

 

 

(5,351,700)

 

 

(4,999,700)

 

Security deposits

 

 

(4,054,300)

 

 

(3,640,500)

 

Equipment installed on leases not yet commenced

 

 

7,312,600

 

 

6,754,200

 

Total investment in direct financing and sales-type leases

 

 

38,129,700

 

 

39,806,600

 

Allowance for credit losses

 

 

(817,700)

 

 

(859,100)

 

Net investment in direct financing and sales-type leases

 

 

37,312,000

 

 

38,947,500

 

Operating leases:

 

 

 

 

 

 

 

Operating lease assets

 

 

1,001,700

 

 

1,083,300

 

Less accumulated depreciation and amortization

 

 

(979,300)

 

 

(1,043,300)

 

Net investment in operating leases

 

 

22,400

 

 

40,000

 

Total net investment in leasing operations

 

$

37,334,400

 

$

38,987,500

 

 

As of September 24, 2016, the $37.3 million total net investment in leases consists of $16.2 million classified as current and $21.1 million classified as long-term.  As of December 26, 2015, the $39.0 million total net investment in leases consists of $17.7 million classified as current and $21.3 million classified as long-term.

 

As of September 24, 2016, leased assets with two customers approximated 18% and 15%, respectively, of the Company’s total assets.

 

8


 

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 2016 and the full fiscal years thereafter as of September 24, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Financing and Sales-Type Leases

 

Operating Leases

 

 

    

Minimum Lease

    

Income

    

Minimum Lease

 

Fiscal Year

 

Payments Receivable

 

 Amortization

 

Payments Receivable

 

2016

 

$

6,594,500

 

$

1,297,400

 

$

14,200

 

2017

 

 

19,031,000

 

 

3,152,900

 

 

18,000

 

2018

 

 

8,444,600

 

 

843,600

 

 

 —

 

2019

 

 

1,682,100

 

 

54,800

 

 

 —

 

2020

 

 

8,400

 

 

1,500

 

 

 —

 

Thereafter

 

 

19,600

 

 

1,500

 

 

 —

 

 

 

$

35,780,200

 

$

5,351,700

 

$

32,200

 

 

The activity in the allowance for credit losses for leasing operations during the first nine months of 2016 and 2015, respectively, is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

September 24, 2016

    

September 26, 2015

    

Balance at beginning of period

 

$

859,100

 

$

386,000

 

Provisions charged to expense

 

 

(52,000)

 

 

(123,400)

 

Recoveries

 

 

39,800

 

 

628,700

 

Deductions for amounts written-off

 

 

(29,200)

 

 

(9,300)

 

Balance at end of period

 

$

817,700

 

$

882,000

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 24, 2016

 

December 26, 2015

 

 

    

Investment

    

Allowance for

    

Investment

    

Allowance for

 

 

 

In Leases

 

Credit Losses

 

In Leases

 

Credit Losses

 

Collectively evaluated for loss potential

 

$

38,129,700

 

$

817,700

 

$

39,806,600

 

$

859,100

 

Individually evaluated for loss potential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

38,129,700

 

$

817,700

 

$

39,806,600

 

$

859,100

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 24, 2016

 

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

 

Middle-Market

 

$

37,052,300

 

$

 —

 

$

 —

 

$

 —

 

$

37,052,300

 

Small-Ticket

 

 

1,077,400

 

 

 —

 

 

 —

 

 

 —

 

 

1,077,400

 

Total Investment in Leases

 

$

38,129,700

 

$

 —

 

$

 —

 

$

 —

 

$

38,129,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26, 2015

 

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

 

Middle-Market

 

$

38,616,600

 

$

 —

 

$

 —

 

$

 —

 

$

38,616,600

 

Small-Ticket

 

 

1,185,800

 

 

4,200

 

 

 —

 

 

 —

 

 

1,190,000

 

Total Investment in Leases

 

$

39,802,400

 

$

4,200

 

$

 —

 

$

 —

 

$

39,806,600

 

 

 

 

 

 

 

 

 

 

9


 

6.  Recent Accounting Pronouncements:

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition that supersedes existing revenue recognition guidance (but does not apply to nor supersede accounting guidance for lease contracts).  The ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The ASU also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASU is effective for reporting periods beginning after December 15, 2016, and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application.  In July 2015, the FASB affirmed its proposal to defer the effective date by one year.  The new standard will become effective for the Company beginning with the first quarter of fiscal 2018.  The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Statements – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income.  There will no longer be an available-for-sale classification for equity securities with readily determinable fair values.  The new guidance is effective for periods beginning after December 15, 2017, 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.

 

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.  This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted.  The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented.  The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits should be classified.  This guidance will be effective for reporting periods beginning after December 15, 2016, 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.

 

In June 2016, the FASB issued 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.

 

10


 

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

 

Nine Months Ended

 

 

    

September 24, 2016

    

September 26, 2015

    

September 24, 2016

    

September 26, 2015

 

Denominator for basic EPS — weighted average common shares

 

4,116,957

 

4,128,031

 

4,113,819

 

4,568,813

 

Dilutive shares associated with option plans

 

211,211

 

210,199

 

206,465

 

189,345

 

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

 

4,328,168

 

4,338,230

 

4,320,284

 

4,758,158

 

Options excluded from EPS calculation — anti-dilutive

 

12,868

 

5,309

 

18,348

 

16,961

 

 

 

8.  Shareholders’ Equity (Deficit):

 

Dividends

 

On January 27, 2016, the Company’s Board of Directors approved the payment of a $0.07 per share quarterly cash dividend to shareholders of record at the close of business on February 10, 2016, which was paid on March 1, 2016.

 

On April 27, 2016, the Company’s Board of Directors approved the payment of a $0.10 per share quarterly cash dividend to shareholders of record at the close of business on May 11, 2016, which was paid on June 1, 2016.

 

On July 27, 2016, the Company’s Board of Directors approved the payment of a $0.10 per share quarterly cash dividend to shareholders of record at the close of business on August 10, 2016, which was paid on September 1, 2016.

 

Repurchase of Common Stock

 

In the first nine months of 2016 the Company repurchased 17,194 shares of its common stock. Under the Board of Directors’ authorization, as of September 24, 2016, the Company has the ability to repurchase additional 142,988 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. The Company has authorized up to 500,000 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 September 24, 2016 was as follows:

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted Average

  

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

Number of

 

Weighted Average

 

Contractual Life

 

 

 

 

 

 

Shares

 

Exercise Price

 

(years)

 

 

Intrinsic Value

 

Outstanding, December 26, 2015

 

668,740

 

$

53.73

 

6.41

 

 

25,582,300

 

Granted

 

34,300

 

 

98.25

 

 

 

 

 

 

Exercised

 

(17,437)

 

 

26.84

 

 

 

 

 

 

Forfeited

 

(3,501)

 

 

80.31

 

 

 

 

 

 

Outstanding, September 24, 2016

 

682,102

 

$

56.52

 

5.96

 

$

33,470,500

 

Exercisable, September 24, 2016

 

473,817

 

$

44.82

 

4.92

 

$

28,790,800

 

 

 

The fair value of options granted under the Option Plans during the first nine months of 2016 and 2015 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

    

September 24, 2016

 

September 26, 2015

    

    

Risk free interest rate

 

 

1.52

%

 

1.68

%

 

Expected life (years)

 

 

6

 

 

6

 

 

Expected volatility

 

 

27.1

%

 

30.8

%

 

Dividend yield

 

 

1.38

%

 

1.34

%

 

Option fair value

 

$

23.78

 

$

25.48

 

 

 

During the nine months ended September 24, 2016, options holders surrendered 2,973 shares of previously owned common shares as payment for option shares exercised as provided for by the Option Plans.  All unexercised options at September 24, 2016 have an exercise price equal to the fair market value on the date of the grant.

 

Compensation expense of $1,324,400 and $1,255,100 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first nine months of 2016 and 2015, respectively.  As of September 24, 2016, the Company had $3.5 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 2.3 years.

 

9.  Debt:

 

Line of Credit

 

As of September 24, 2016, there were $25.2 million in borrowings outstanding under the Company’s Line of Credit with the PrivateBank and Trust Company and BMO Harris Bank N.A., bearing interest ranging from 2.78% to 3.50%, leaving $29.8 million available for additional borrowings.

 

The Line of Credit has been and will continue to be used for general corporate purposes.  The Line of Credit 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 September 24, 2016, the Company was in compliance with all of its financial covenants.

 

Notes Payable

 

As of September 24, 2016, the Company had $22.5 million in principal outstanding from the $25.0 million Note Agreement (the “Note Agreement”) entered into in May 2015 with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”).

12


 

 

The final maturity of the notes is 10 years. 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. The 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 September 24, 2016, 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.  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. 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, accounts receivable, prepaid expenses, inventory, property and equipment and investment in leasing operations. Unallocated assets include corporate cash and cash equivalents, marketable securities, current and deferred tax amounts 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

 

Nine Months Ended

 

 

    

September 24, 2016

    

September 26, 2015

    

September 24, 2016

    

September 26, 2015

    

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchising

 

$

12,560,300

 

$

12,752,500

 

$

36,375,400

 

$

35,580,400

 

Leasing

 

 

4,174,000

 

 

3,247,000

 

 

12,839,000

 

 

16,919,900

 

Total revenue

 

$

16,734,300

 

$

15,999,500

 

$

49,214,400

 

$

52,500,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchising segment contribution

 

$

8,058,800

 

$

7,827,500

 

$

20,833,600

 

$

19,679,000

 

Leasing segment contribution

 

 

2,379,200

 

 

1,514,300

 

 

6,966,100

 

 

7,721,100

 

Total operating income

 

$

10,438,000

 

$

9,341,800

 

$

27,799,700

 

$

27,400,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation: