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EX-31.2 - EX-31.2 - WINMARK CORPwina-20170930ex31287c6d8.htm
EX-32.2 - EX-32.2 - WINMARK CORPwina-20170930ex32260b37d.htm
EX-32.1 - EX-32.1 - WINMARK CORPwina-20170930ex32111759d.htm
EX-31.1 - EX-31.1 - WINMARK CORPwina-20170930ex311f5af63.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 30, 2017

 

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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer  

Non-accelerated filer   

 

(Do not check if a smaller reporting company)

 

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, 3,821,528 shares outstanding as of October 17, 2017.

 

 

 

 

 


 

WINMARK CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

PAGE

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

September 30, 2017 and December 31, 2016

3

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended September 30, 2017 and September 24, 2016

 

 

Nine Months Ended September 30, 2017 and September 24, 2016

4

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Three Months Ended September 30, 2017 and September 24, 2016

 

 

Nine Months Ended September 30, 2017 and September 24, 2016

5

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

Nine Months Ended September 30, 2017 and September 24, 2016

6

 

 

 

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 - 14

 

 

 

Item 2. 

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

15 - 22

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4. 

Controls and Procedures

23

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

24

 

 

 

Item 1A. 

Risk Factors

24

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3. 

Defaults Upon Senior Securities

24

 

 

 

Item 4. 

Mine Safety Disclosures

25

 

 

 

Item 5. 

Other Information

25

 

 

 

Item 6. 

Exhibits

26

 

 

 

 

SIGNATURES

27

 

 

 

2


 

PART I.          FINANCIAL INFORMATION

 

ITEM 1:   Financial Statements

 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,060,700

 

$

1,252,900

Marketable securities

 

 

 —

 

 

199,900

Receivables, less allowance for doubtful accounts of $1,700 and $2,100

 

 

1,708,100

 

 

1,479,200

Restricted cash

 

 

40,000

 

 

40,000

Net investment in leases - current

 

 

16,311,000

 

 

17,004,800

Income tax receivable

 

 

1,721,500

 

 

1,678,800

Inventories

 

 

67,000

 

 

87,500

Prepaid expenses

 

 

865,400

 

 

1,050,700

Total current assets

 

 

21,773,700

 

 

22,793,800

Net investment in leases - long-term

 

 

24,249,500

 

 

24,410,700

Property and equipment, net

 

 

547,700

 

 

769,600

Goodwill

 

 

607,500

 

 

607,500

 

 

$

47,178,400

 

$

48,581,600

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Notes payable, net of unamortized debt issuance costs of $13,900 and $10,000

 

$

3,236,100

 

$

1,990,000

Accounts payable

 

 

1,474,600

 

 

1,692,000

Accrued liabilities

 

 

2,906,100

 

 

1,811,100

Deferred revenue

 

 

1,649,300

 

 

1,864,700

Total current liabilities

 

 

9,266,100

 

 

7,357,800

Long-Term Liabilities:

 

 

 

 

 

 

Line of credit

 

 

41,900,000

 

 

23,400,000

Notes payable, net of unamortized debt issuance costs of $99,900 and $73,500

 

 

29,650,100

 

 

19,926,500

Deferred revenue

 

 

1,458,200

 

 

1,423,800

Other liabilities

 

 

808,400

 

 

993,600

Deferred income taxes

 

 

3,485,300

 

 

3,331,900

Total long-term liabilities

 

 

77,302,000

 

 

49,075,800

Shareholders’ Equity (Deficit):

 

 

 

 

 

 

Common stock, no par value, 10,000,000 shares authorized, 3,821,528 and 4,165,769 shares issued and outstanding

 

 

 —

 

 

2,976,100

Accumulated other comprehensive income (loss)

 

 

 —

 

 

(9,900)

Retained earnings (accumulated deficit)

 

 

(39,389,700)

 

 

(10,818,200)

Total shareholders’ equity (deficit)

 

 

(39,389,700)

 

 

(7,852,000)

 

 

$

47,178,400

 

$

48,581,600

 

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 30, 2017

    

September 24, 2016

    

September 30, 2017

    

September 24, 2016

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

Royalties

 

$

12,316,700

 

$

11,311,000

 

$

33,865,100

 

$

32,140,800

Leasing income

 

 

3,915,800

 

 

4,174,000

 

 

13,722,000

 

 

12,839,000

Merchandise sales

 

 

773,100

 

 

520,000

 

 

2,058,500

 

 

1,882,400

Franchise fees

 

 

317,800

 

 

501,800

 

 

1,262,500

 

 

1,367,800

Other

 

 

244,500

 

 

227,500

 

 

1,033,100

 

 

984,400

Total revenue

 

 

17,567,900

 

 

16,734,300

 

 

51,941,200

 

 

49,214,400

COST OF MERCHANDISE SOLD

 

 

728,300

 

 

499,100

 

 

1,942,400

 

 

1,784,800

LEASING EXPENSE

 

 

792,000

 

 

646,200

 

 

2,724,000

 

 

2,010,400

PROVISION FOR CREDIT LOSSES

 

 

(13,300)

 

 

(29,700)

 

 

(26,200)

 

 

(52,000)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

6,208,900

 

 

5,180,700

 

 

19,179,400

 

 

17,671,500

Income from operations

 

 

9,852,000

 

 

10,438,000

 

 

28,121,600

 

 

27,799,700

INTEREST EXPENSE

 

 

(613,900)

 

 

(552,300)

 

 

(1,559,300)

 

 

(1,786,800)

INTEREST AND OTHER INCOME (EXPENSE)

 

 

28,000

 

 

(6,300)

 

 

29,900

 

 

(7,300)

Income before income taxes

 

 

9,266,100

 

 

9,879,400

 

 

26,592,200

 

 

26,005,600

PROVISION FOR INCOME TAXES

 

 

(3,547,100)

 

 

(3,785,200)

 

 

(9,683,600)

 

 

(9,954,200)

NET INCOME

 

$

5,719,000

 

$

6,094,200

 

$

16,908,600

 

$

16,051,400

EARNINGS PER SHARE - BASIC

 

$

1.42

 

$

1.48

 

$

4.09

 

$

3.90

EARNINGS PER SHARE - DILUTED

 

$

1.33

 

$

1.41

 

$

3.83

 

$

3.72

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC

 

 

4,024,692

 

 

4,116,957

 

 

4,131,269

 

 

4,113,819

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED

 

 

4,314,412

 

 

4,328,168

 

 

4,416,185

 

 

4,320,284

 

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 30, 2017

    

September 24, 2016

    

September 30, 2017

    

September 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

5,719,000

 

$

6,094,200

 

$

16,908,600

 

$

16,051,400

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains (losses) arising during period

 

 

(700)

 

 

6,800

 

 

15,900

 

 

41,100

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX

 

 

(700)

 

 

6,800

 

 

15,900

 

 

41,100

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

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains/losses arising during period

 

 

300

 

 

(2,600)

 

 

(6,000)

 

 

(15,500)

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

 

 

300

 

 

(2,600)

 

 

(6,000)

 

 

(15,500)

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

(400)

 

 

4,200

 

 

9,900

 

 

25,600

COMPREHENSIVE INCOME

 

$

5,718,600

 

$

6,098,400

 

$

16,918,500

 

$

16,077,000

 

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 30, 2017

    

September 24, 2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

16,908,600

 

$

16,051,400

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

 

 

 

 

 

 

Depreciation and amortization

 

 

275,700

 

 

320,600

Provision for credit losses

 

 

(26,200)

 

 

(52,000)

Compensation expense related to stock options

 

 

1,462,500

 

 

1,324,400

Deferred income taxes

 

 

153,400

 

 

62,100

(Gain) Loss on sale of marketable securities

 

 

(1,400)

 

 

12,600

Deferred initial direct costs

 

 

(369,200)

 

 

(421,300)

Amortization of deferred initial direct costs

 

 

345,300

 

 

356,200

Tax benefits on exercised stock options

 

 

592,800

 

 

69,700

Change in operating assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

(228,900)

 

 

(138,400)

Restricted cash

 

 

 —

 

 

(15,000)

Income tax receivable/payable

 

 

(641,500)

 

 

2,505,700

Inventories

 

 

20,500

 

 

(50,400)

Prepaid expenses

 

 

185,300

 

 

(243,200)

Accounts payable

 

 

(217,400)

 

 

(524,400)

Accrued and other liabilities

 

 

867,000

 

 

617,600

Rents received in advance and security deposits

 

 

92,800

 

 

392,300

Deferred revenue

 

 

(181,000)

 

 

(261,900)

Net cash provided by operating activities

 

 

19,238,300

 

 

20,006,000

INVESTING ACTIVITIES:

 

 

 

 

 

 

Proceeds from sale of marketable securities

 

 

217,200

 

 

52,200

Purchase of property and equipment

 

 

(53,800)

 

 

(46,800)

Purchase of equipment for lease contracts

 

 

(19,253,300)

 

 

(16,432,200)

Principal collections on lease receivables

 

 

20,078,100

 

 

17,749,900

Net cash provided by investing activities

 

 

988,200

 

 

1,323,100

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

46,900,000

 

 

10,600,000

Payments on line of credit

 

 

(28,400,000)

 

 

(27,800,000)

Proceeds from borrowings on notes payable

 

 

12,500,000

 

 

 —

Payments on notes payable

 

 

(1,500,000)

 

 

(1,500,000)

Repurchases of common stock

 

 

(49,904,100)

 

 

(1,573,900)

Proceeds from exercises of stock options

 

 

1,329,200

 

 

170,900

Dividends paid

 

 

(1,343,800)

 

 

(1,111,900)

Net cash used for financing activities

 

 

(20,418,700)

 

 

(21,214,900)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(192,200)

 

 

114,200

Cash and cash equivalents, beginning of period

 

 

1,252,900

 

 

1,006,700

Cash and cash equivalents, end of period

 

$

1,060,700

 

$

1,120,900

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

Cash paid for interest

 

$

1,349,500

 

$

1,778,400

Cash paid for income taxes

 

$

9,514,800

 

$

7,316,700

 

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 30, 2017 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.  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 30, 2017

 

December 31, 2016

 

 

    

Cost

    

Fair Value

    

Cost

    

Fair Value

 

Equity securities

 

$

 —

 

$

 —

 

$

215,800

 

$

199,900

 

 

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 30, 2017

    

December 31, 2016

Unrealized gains

 

$

 —

 

$

 —

Unrealized losses

 

 

 —

 

 

(15,900)

Net unrealized gains (losses)

 

$

 —

 

$

(15,900)

 

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 30, 2017

    

September 24, 2016

    

September 30, 2017

    

September 24, 2016

Realized gains

 

$

10,300

 

$

 —

 

$

10,300

 

$

 —

Realized losses

 

 

(8,900)

 

 

 —

 

 

(8,900)

 

 

(12,600)

Net realized gains (losses)

 

$

1,400

 

$

 —

 

$

1,400

 

$

(12,600)

 

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 30, 2017

    

December 31, 2016

Direct financing and sales-type leases:

 

 

 

 

 

 

Minimum lease payments receivable

 

$

39,565,600

 

$

37,839,800

Estimated residual value of equipment

 

 

4,797,600

 

 

4,754,200

Unearned lease income net of initial direct costs deferred

 

 

(5,734,900)

 

 

(5,844,500)

Security deposits

 

 

(4,504,700)

 

 

(4,424,400)

Equipment installed on leases not yet commenced

 

 

7,113,000

 

 

9,961,600

Total investment in direct financing and sales-type leases

 

 

41,236,600

 

 

42,286,700

Allowance for credit losses

 

 

(883,600)

 

 

(896,000)

Net investment in direct financing and sales-type leases

 

 

40,353,000

 

 

41,390,700

Operating leases:

 

 

 

 

 

 

Operating lease assets

 

 

1,494,000

 

 

800,700

Less accumulated depreciation and amortization

 

 

(1,286,500)

 

 

(775,900)

Net investment in operating leases

 

 

207,500

 

 

24,800

Total net investment in leasing operations

 

$

40,560,500

 

$

41,415,500

 

As of September 30, 2017, the $40.6 million total net investment in leases consists of $16.3 million classified as current and $24.3 million classified as long-term.  As of December 31, 2016, the $41.4 million total net investment in leases consists of $17.0 million classified as current and $24.4 million classified as long-term.

 

As of September 30, 2017, leased assets with two customers approximated 26% and 10%, respectively, of the Company’s total assets.

 

As of September 30, 2017, the Company had no future minimum lease payments receivable for operating leases. Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial

8


 

direct costs deferred, is as follows for the remainder of fiscal 2017 and the full fiscal years thereafter as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Direct Financing and Sales-Type Leases

 

 

    

Minimum Lease

    

Income

 

Fiscal Year

 

Payments Receivable

 

 Amortization

 

2017

 

$

6,461,600

 

$

1,341,400

 

2018

 

 

19,175,400

 

 

3,300,600

 

2019

 

 

11,561,600

 

 

1,017,200

 

2020

 

 

2,343,000

 

 

74,000

 

2021

 

 

12,800

 

 

1,200

 

Thereafter

 

 

11,200

 

 

500

 

 

 

$

39,565,600

 

$

5,734,900

 

 

The activity in the allowance for credit losses for leasing operations during the first nine months of 2017 and 2016, respectively, is as follows:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

September 24, 2016

Balance at beginning of period

 

$

896,000

 

$

859,100

Provisions charged to expense

 

 

(26,200)

 

 

(52,000)

Recoveries

 

 

13,800

 

 

39,800

Deductions for amounts written-off

 

 

 —

 

 

(29,200)

Balance at end of period

 

$

883,600

 

$

817,700

 

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 30, 2017

 

December 31, 2016

 

    

Investment

    

Allowance for

    

Investment

    

Allowance for

 

 

In Leases

 

Credit Losses

 

In Leases

 

Credit Losses

Collectively evaluated for loss potential

 

$

41,236,600

 

$

883,600

 

$

42,286,700

 

$

896,000

Individually evaluated for loss potential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

41,236,600

 

$

883,600

 

$

42,286,700

 

$

896,000

 

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 30, 2017

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

40,058,900

 

$

93,200

 

$

 —

 

$

 —

 

$

40,152,100

Small-Ticket

 

 

1,084,500

 

 

 —

 

 

 —

 

 

 —

 

 

1,084,500

Total Investment in Leases

 

$

41,143,400

 

$

93,200

 

$

 —

 

$

 —

 

$

41,236,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

41,299,600

 

$

 —

 

$

 —

 

$

 —

 

$

41,299,600

Small-Ticket

 

 

987,100

 

 

 —

 

 

 —

 

 

 —

 

 

987,100

Total Investment in Leases

 

$

42,286,700

 

$

 —

 

$

 —

 

$

 —

 

$

42,286,700

 

 

 

 

 

 

 

 

 

9


 

6.  Recent Accounting Pronouncements:

 

Recently Issued 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 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.  The new standard will become effective for the Company beginning with the first quarter of fiscal 2018.  During 2016, the FASB issued four clarifications on specific topics within the new revenue recognition guidance that did not change the core principles of the guidance originally issued in May 2014.  The Company is continuing to evaluate the impact of the adoption of this ASU on the Company’s consolidated financial statements, information technology systems, processes, internal controls and the expected method of adoption.  Based on a preliminary assessment, the adoption of this guidance is not expected to impact the Company’s recognition of leasing revenues or revenue from royalties that are based on a percentage of franchisee sales. Upon adoption, initial franchise fees, which are currently recognized upon the opening of a franchise, are expected to be deferred and recognized over the term of the underlying franchise agreement. The effect of the required deferral of initial franchise fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively deferred from prior years.

 

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 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


 

Recently Adopted Accounting Pronouncements

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for stock based compensation, including excess tax benefits and deficiencies, forfeiture estimates and classification in the statements of cash flows.  Upon adoption, any future excess tax benefits or deficiencies are recorded to the provision for income taxes in the consolidated statements of operations instead of recorded to equity in the consolidated balance sheets.  This reclassification can have a material impact on the Company’s provision for income taxes and effective tax rate, depending in part on whether significant stock option exercises occur.  In addition, when applying the treasury stock method for computing diluted weighted average common shares, the assumed proceeds available for hypothetical repurchase of shares do not include any windfall tax benefits under the new ASU.  As a result, outstanding option awards have a more dilutive effect on earnings per share.  The Company adopted ASU 2016-09 in the first quarter of 2017, using a prospective approach.  As a result of adopting the ASU, for the three months and nine months ended September 30, 2017, the Company recognized $74,800 and $592,800, respectively,  of excess tax benefits as a discrete tax benefit.  The treatment of forfeitures has not changed as the Company will continue to estimate the number of forfeitures at the time of the option grant; therefore, there is no cumulative effect on retained earnings.  The Company has elected to present the cash flows on a retrospective transition method with prior periods adjusted, which resulted in a reclassification of excess tax benefits for the nine months ended September 24, 2016 of $69,700 from cash flows from financing activities to cash flows from operating activities.

 

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 30, 2017

    

September 24, 2016

    

September 30, 2017

    

September 24, 2016

Denominator for basic EPS — weighted average common shares

 

4,024,692

 

4,116,957

 

4,131,269

 

4,113,819

Dilutive shares associated with option plans

 

289,720

 

211,211

 

284,916

 

206,465

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

 

4,314,412

 

4,328,168

 

4,416,185

 

4,320,284

Options excluded from EPS calculation — anti-dilutive

 

10,753

 

12,868

 

16,057

 

18,348

 

 

8.  Shareholders’ Equity (Deficit):

 

Dividends

 

On January 25, 2017, 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 February 8, 2017, which was paid on March 1, 2017.

 

On April 26, 2017, the Company’s Board of Directors approved the payment of a $0.11 per share quarterly cash dividend to shareholders of record at the close of business on May 10, 2017, which was paid on June 1, 2017.

 

On July 26, 2017, the Company’s Board of Directors approved the payment of a $0.11 per share quarterly cash dividend to shareholders of record at the close of business on August 9, 2017, which was paid on September 1, 2017.

 

Repurchase of Common Stock

 

In July 2017, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of our common stock for a price of $124.48 per share through a tender offer (the “Tender Offer”). The Tender Offer began on the date of the announcement, July 19, 2017 and expired on August 16, 2017. Upon expiration, the Company accepted for payment

11


 

400,000 shares for a total purchase price of approximately $49.9 million, including fees and expenses related to the Tender Offer.

 

Under a previous Board of Directors’ authorization, as of September 30, 2017, the Company has the ability to repurchase an 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.  At the April 26, 2017 Annual Shareholders meeting, the Company’s shareholders approved an increase in the shares of common stock available for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”) by 200,000 shares, from 500,000 to 700,000.  

 

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 30, 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted Average

    

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Number of

 

Weighted Average

 

Contractual Life

 

 

 

 

 

Shares

 

Exercise Price

 

(years)

 

 

Intrinsic Value

Outstanding, December 31, 2016

 

673,670

 

$

62.11

 

6.11

 

$

43,139,100

Granted

 

36,000

 

 

122.19

 

 

 

 

 

Exercised

 

(58,686)

 

 

28.96

 

 

 

 

 

Forfeited

 

(4,750)

 

 

95.28

 

 

 

 

 

Outstanding, September 30, 2017

 

646,234

 

$

68.23

 

5.84

 

$

41,050,600

Exercisable, September 30, 2017

 

456,953

 

$

54.68

 

4.82

 

$

35,215,600

 

 

The fair value of options granted under the Option Plans during the first nine months of 2017 and 2016 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 30, 2017

 

September 24, 2016

 

Risk free interest rate

 

 

1.90

%

 

1.52

%

Expected life (years)

 

 

 6

 

 

 6

 

Expected volatility

 

 

26.93

%

 

27.10

%

Dividend yield

 

 

1.14

%

 

1.38

%

Option fair value

 

$

31.38

 

$

23.78

 

 

During the nine months ended September 30, 2017, options holders surrendered 2,927 shares of previously owned common shares as payment for option shares exercised as provided for by the Option Plans.  All unexercised options at September 30, 2017 have an exercise price equal to the fair market value on the date of the grant.

 

Compensation expense of $1,462,500 and $1,324,400 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 2017 and 2016, respectively.  As of September 30, 2017, the Company had $3.8 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.

 

12


 

A reconciliation of common shares outstanding and total equity (deficit) from December 31, 2016 to September 30, 2017 is as follows: 

 

 

 

 

 

 

 

 

 

Common

 

 

Total Equity

 

    

Shares

    

 

(Deficit)

BALANCE, December 31, 2016

 

4,165,769

 

$

(7,852,000)

Repurchase of common stock

 

(400,000)

 

 

(49,904,100)

Stock options exercised, net of shares surrendered

 

55,759

 

 

1,329,200

Compensation expense relating to stock options

 

 —

 

 

1,462,500

Cash dividends

 

 —

 

 

(1,343,800)

Comprehensive income

 

 —

 

 

16,918,500

BALANCE, September 30, 2017

 

3,821,528

 

$

(39,389,700)

 

 

9.  Debt:

 

Line of Credit

 

In July 2017, the Company’s Line of Credit with CIBC Bank USA (as successor by merger to the PrivateBank and Trust Company) and BMO Harris Bank N.A. was amended to, among other things:

 

·

Provide the consent of the lenders for the Tender Offer;

·

Extend the termination date from April 14, 2019 to July 19, 2021;

·

Amend the tangible net worth covenant calculation to remove the effect of the Tender Offer;

·

Reduce the applicable margin on interest rate options in connection with LIBOR loans under the Line of Credit;

·

Permit the Company to sell up to $15.0 million in term notes to one or more affiliates or managed accounts of Prudential to partially fund the Tender Offer.

 

During the first nine months of 2017, the Line of Credit was used to finance in part the Tender Offer and 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 30, 2017, the Company was in compliance with all of its financial covenants.  There were $41.9 million in borrowings outstanding under the line of credit bearing interest ranging from 3.23% to 4.25%, leaving $8.1 million available for additional borrowings.

 

Notes Payable

 

In July 2017, the Note Agreement with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”) was amended to, among other things:

 

·

Provide the consent of Prudential for the Tender Offer;

·

Amend the tangible net worth covenant calculation to remove the effect of the Tender Offer;

·

Provide for a new $12.5 million term loan to partially fund the Tender Offer.

 

In August 2017, the Company issued $12.5 million of Series B notes to finance in part the Tender Offer.  As of September 30, 2017, with the $20.5 million in principal outstanding from the $25.0 million of Series A notes issued in May 2015, the aggregate principal outstanding under the Note Agreement was $33.0 million.

 

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.

 

13


 

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 30, 2017, 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 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, 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 30, 2017

    

September 24, 2016

    

September 30, 2017

    

September 24, 2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Franchising

 

$

13,652,100

 

$

12,560,300

 

$

38,219,200

 

$

36,375,400

Leasing

 

 

3,915,800

 

 

4,174,000

 

 

13,722,000

 

 

12,839,000

Total revenue

 

$

17,567,900

 

$

16,734,300

 

$

51,941,200

 

$

49,214,400

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to operating income:

 

 

 

 

 

 

 

 

 

 

 

 

Franchising segment contribution

 

$

8,145,400

 

$

8,058,800

 

$

21,500,200

 

$

20,833,600

Leasing segment contribution

 

 

1,706,600

 

 

2,379,200

 

 

6,621,400

 

 

6,966,100

Total operating income

 

$

9,852,000

 

$

10,438,000

 

$

28,121,600

 

$

27,799,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Franchising

 

$

66,300

 

$

79,700

 

$

211,200

 

$

248,200

Leasing

 

 

20,700

 

 

23,600

 

 

64,500

 

 

72,400

Total depreciation and amortization

 

$

87,000

 

$

103,300

 

$

275,700

 

$

320,600

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

September 30, 2017

    

December 31, 2016

Identifiable assets: