Attached files
file | filename |
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EX-32.2 - EX-32.2 - WINMARK CORP | wina-20180331ex32264edda.htm |
EX-32.1 - EX-32.1 - WINMARK CORP | wina-20180331ex3211bc7be.htm |
EX-31.2 - EX-31.2 - WINMARK CORP | wina-20180331ex312ae4c7d.htm |
EX-31.1 - EX-31.1 - WINMARK CORP | wina-20180331ex311b2c1b1.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 March 31, 2018
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 |
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41-1622691 |
(State or other jurisdiction of incorporation or organization) |
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(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ Non-accelerated filer ◻ |
(Do not check if a smaller reporting company)
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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, 3,849,506 shares outstanding as of April 24, 2018.
WINMARK CORPORATION AND SUBSIDIARIES
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6 |
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7 - 15 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 - 21 |
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2
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
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March 31, 2018 |
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December 30, 2017 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,800,600 |
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$ |
1,073,200 |
Restricted cash |
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105,000 |
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90,000 |
Receivables, less allowance for doubtful accounts of $1,200 and $400 |
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1,592,800 |
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1,796,000 |
Net investment in leases - current |
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15,597,200 |
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15,332,300 |
Income tax receivable |
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— |
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2,161,800 |
Inventories |
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79,700 |
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97,100 |
Prepaid expenses |
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653,300 |
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901,600 |
Total current assets |
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19,828,600 |
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21,452,000 |
Net investment in leases - long-term |
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26,309,300 |
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25,945,300 |
Property and equipment, net |
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581,200 |
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486,800 |
Goodwill |
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607,500 |
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607,500 |
Other assets |
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398,200 |
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350,400 |
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$ |
47,724,800 |
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$ |
48,842,000 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
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Current Liabilities: |
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Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900 |
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$ |
3,236,100 |
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$ |
3,236,100 |
Accounts payable |
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2,067,600 |
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2,073,000 |
Income tax payable |
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31,100 |
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— |
Accrued liabilities |
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2,101,900 |
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1,837,300 |
Discounted lease rentals |
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1,612,100 |
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570,800 |
Deferred revenue |
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3,016,900 |
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3,012,700 |
Total current liabilities |
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12,065,700 |
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10,729,900 |
Long-Term Liabilities: |
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Line of credit |
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24,600,000 |
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35,400,000 |
Notes payable, net of unamortized debt issuance costs of $93,000 and $96,500 |
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28,032,000 |
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28,841,000 |
Discounted lease rentals |
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2,679,700 |
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1,121,600 |
Deferred revenue |
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7,306,000 |
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7,297,500 |
Other liabilities |
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1,358,000 |
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845,000 |
Deferred income taxes |
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320,500 |
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320,500 |
Total long-term liabilities |
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64,296,200 |
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73,825,600 |
Shareholders’ Equity (Deficit): |
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Common stock, no par value, 10,000,000 shares authorized, 3,849,506 and 3,843,078 shares issued and outstanding |
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2,015,400 |
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1,476,200 |
Retained earnings (accumulated deficit) |
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(30,652,500) |
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(37,189,700) |
Total shareholders’ equity (deficit) |
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(28,637,100) |
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(35,713,500) |
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$ |
47,724,800 |
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$ |
48,842,000 |
The accompanying notes are an integral part of these financial statements.
3
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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March 31, 2018 |
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April 1, 2017 |
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Revenue: |
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Royalties |
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$ |
11,049,000 |
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$ |
10,454,000 |
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Leasing income |
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5,528,800 |
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5,859,600 |
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Merchandise sales |
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776,900 |
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748,300 |
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Franchise fees |
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400,900 |
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368,600 |
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Other |
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405,400 |
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380,400 |
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Total revenue |
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18,161,000 |
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17,810,900 |
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Cost of merchandise sold |
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742,500 |
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715,000 |
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Leasing expense |
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554,900 |
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1,271,400 |
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Provision for credit losses |
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95,000 |
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(1,400) |
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Selling, general and administrative expenses |
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6,694,400 |
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6,512,500 |
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Income from operations |
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10,074,200 |
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9,313,400 |
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Interest expense |
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(743,800) |
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(499,100) |
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Interest and other income (expense) |
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(1,000) |
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1,800 |
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Income before income taxes |
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9,329,400 |
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8,816,100 |
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Provision for income taxes |
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(2,369,000) |
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(3,265,300) |
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Net income |
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$ |
6,960,400 |
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$ |
5,550,800 |
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Earnings per share - basic |
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$ |
1.81 |
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$ |
1.33 |
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Earnings per share - diluted |
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$ |
1.69 |
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$ |
1.25 |
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Weighted average shares outstanding - basic |
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3,847,312 |
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4,167,132 |
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Weighted average shares outstanding - diluted |
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4,124,573 |
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4,450,495 |
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The accompanying notes are an integral part of these financial statements.
4
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended |
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March 31, 2018 |
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April 1, 2017 |
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Net income |
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$ |
6,960,400 |
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$ |
5,550,800 |
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Other comprehensive income (loss), before tax: |
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Unrealized holding net gains (losses) arising during period |
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— |
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7,600 |
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Other comprehensive income (loss), before tax |
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— |
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7,600 |
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Income tax (expense) benefit related to items of other comprehensive income: |
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Unrealized net gains/losses on marketable securities: |
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Unrealized holding net gains/losses arising during period |
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— |
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(2,800) |
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Income tax (expense) benefit related to items of other comprehensive income |
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— |
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(2,800) |
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Other comprehensive income (loss), net of tax |
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— |
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4,800 |
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Comprehensive income |
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$ |
6,960,400 |
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$ |
5,555,600 |
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The accompanying notes are an integral part of these financial statements.
5
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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March 31, 2018 |
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April 1, 2017 |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
6,960,400 |
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$ |
5,550,800 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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75,800 |
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98,500 |
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Provision for credit losses |
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95,000 |
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(1,400) |
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Compensation expense related to stock options |
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490,800 |
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477,000 |
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Deferred initial direct costs |
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(979,800) |
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(112,500) |
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Amortization of deferred initial direct costs |
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299,700 |
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125,600 |
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Tax benefits on exercised stock options |
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— |
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96,100 |
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Change in operating assets and liabilities: |
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Receivables |
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203,200 |
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(34,200) |
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Income tax receivable/payable |
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2,192,900 |
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3,031,100 |
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Inventories |
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17,400 |
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(18,700) |
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Prepaid expenses |
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248,300 |
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244,200 |
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Other assets |
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(47,800) |
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6,200 |
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Accounts payable |
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(5,400) |
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(442,200) |
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Accrued and other liabilities |
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774,400 |
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(156,900) |
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Rents received in advance and security deposits |
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(38,700) |
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(86,900) |
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Deferred revenue |
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12,700 |
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(53,000) |
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Net cash provided by operating activities |
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10,298,900 |
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8,723,700 |
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INVESTING ACTIVITIES: |
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Purchase of property and equipment |
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(170,200) |
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(11,900) |
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Purchase of equipment for lease contracts |
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(6,196,800) |
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(7,512,900) |
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Principal collections on lease receivables |
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5,881,000 |
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7,289,500 |
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Net cash used for investing activities |
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(486,000) |
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(235,300) |
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FINANCING ACTIVITIES: |
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Proceeds from borrowings on line of credit |
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— |
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1,900,000 |
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Payments on line of credit |
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(10,800,000) |
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(9,100,000) |
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Payments on notes payable |
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(812,500) |
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(500,000) |
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Proceeds from exercises of stock options |
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48,400 |
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88,600 |
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Dividends paid |
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(423,200) |
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(416,500) |
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Proceeds from discounted lease rentals |
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2,916,800 |
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— |
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Net cash used for financing activities |
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(9,070,500) |
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(8,027,900) |
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NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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742,400 |
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460,500 |
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Cash, cash equivalents and restricted cash, beginning of period |
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1,163,200 |
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1,292,900 |
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Cash, cash equivalents and restricted cash, end of period |
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$ |
1,905,600 |
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$ |
1,753,400 |
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SUPPLEMENTAL DISCLOSURES: |
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Cash paid for interest |
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$ |
758,100 |
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$ |
519,600 |
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Cash paid for income taxes |
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$ |
176,000 |
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$ |
138,107 |
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above: |
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Three Months Ended |
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March 31, 2018 |
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April 1, 2017 |
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Cash and cash equivalents |
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$ |
1,800,600 |
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$ |
1,723,400 |
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Restricted cash |
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105,000 |
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30,000 |
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Total cash, cash equivalents and restricted cash |
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$ |
1,905,600 |
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$ |
1,753,400 |
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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 three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year.
2. Organization and Business:
The Company offers licenses to operate franchises using the service marks Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore® and Music Go Round®. The Company uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks.
3. Recent Accounting Pronouncements:
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
Recently Adopted Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows, Restricted Cash which provides guidance on the presentation of restricted cash within an entity’s cash flow statement. The Company adopted ASU 2016-18 in the first quarter of 2018 on a retrospective basis. Restricted cash is now presented with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. As a result of this adoption, for the three months ended April 1, 2017, $10,000 that was previously reported as a cash inflow from operating activities related to a corresponding decrease in restricted cash is no longer presented within the net change in cash, cash equivalents and restricted cash.
7
In May 2014, the FASB issued 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 Company adopted ASU 2014-09 in the first quarter of 2018, using the full retrospective method.
The adoption of this guidance did not 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 were previously recognized upon the opening of a franchise, are deferred and recognized over the term of the estimated life of the franchise. The effect of the required deferral of initial franchise fees received in a given year was mitigated by the recognition of revenue from fees retrospectively deferred from prior years. The Company bills and collects marketing fees from its franchisees at various times throughout the year. This amount is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. Previously, marketing fees were recognized at the time of billing. In accordance with the new guidance, the Company recognizes marketing fee revenue on a straight line basis over the franchise duration. The Company previously recognized commission fees related to franchise agreement contracts as selling expenses when they were incurred. In accordance with the new guidance, the Company capitalizes the commission fees as costs of obtaining a contract and amortizes them over the franchise duration. (See Note 4 – Revenue Recognition)
Adoption of the standard using the full retrospective method also required the Company to restate certain previously reported results, as shown in the tables below:
Consolidated Statement of Operations: |
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Three Months Ended April 1, 2017 |
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As Previously Reported |
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Adjustments |
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As Restated |
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Revenue: |
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Franchise fees |
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$ |
269,300 |
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$ |
99,300 |
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$ |
368,600 |
Other |
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292,600 |
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87,800 |
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380,400 |
Selling, general and administrative expenses |
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6,503,400 |
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9,100 |
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6,512,500 |
Provision for income taxes |
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(3,221,700) |
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(43,600) |
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(3,265,300) |
Net income |
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5,416,400 |
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134,400 |
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5,550,800 |
Earnings per share - basic |
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$ |
1.30 |
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$ |
0.03 |
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$ |
1.33 |
Earnings per share - diluted |
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$ |
1.22 |
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$ |
0.03 |
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$ |
1.25 |
Consolidated Balance Sheet: |
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December 30, 2017 |
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As Previously Reported |
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Adjustments |
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As Restated |
ASSETS |
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Prepaid expenses |
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$ |
814,800 |
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$ |
86,800 |
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$ |
901,600 |
Other assets |
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— |
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350,400 |
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|
350,400 |
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|
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LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT): |
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Deferred revenue-Current |
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$ |
1,736,200 |
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$ |
1,276,500 |
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$ |
3,012,700 |
Deferred revenue-Long term |
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1,465,500 |
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|
5,832,000 |
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|
7,297,500 |
Deferred income taxes |
|
|
1,956,500 |
|
|
(1,636,000) |
|
|
320,500 |
Retained earnings (accumulated deficit) |
|
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(32,154,400) |
|
|
(5,035,300) |
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(37,189,700) |
8
4. Revenue Recognition: Franchising
The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Condensed Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 12 – “Segment Reporting”.
Royalties
The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned.
Merchandise Sales
Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees. Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from merchandise sales. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.
Franchise Fees
The Company collects initial franchise fees when franchise agreements are signed. The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement.
Marketing Fees
Marketing fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. The Company bills and collects annual marketing fees from its franchisees at various times throughout the year. The Company recognizes marketing fee revenue on a straight line basis over the franchise duration. The Company recognized $0.3 million of marketing fee revenue for each of the three months ended March 31, 2018 and April 1, 2017.
Software License Fees
Software license fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the franchisee. The Company recognizes software license fee revenue on a straight line basis over the franchise duration. The Company recognized $0.1 million of software license fee revenue for each of the three months ended March 31, 2018 and April 1, 2017.
9
Contract Liabilities
The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above. The table below presents the activity of the current and noncurrent deferred franchise revenue during the first three months of 2018 and 2017, respectively:
|
|
March 31, 2018 |
|
April 1, 2017 |
||
Balance at beginning of period |
|
$ |
10,310,200 |
|
$ |
10,408,500 |
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period |
|
|
486,000 |
|
|
380,500 |
Fees earned that were included in the balance at the beginning of the period |
|
|
(473,300) |
|
|
(433,400) |
Balance at end of period |
|
$ |
10,322,900 |
|
$ |
10,355,600 |
The following table illustrates future estimated revenue to be recognized for the remainder of 2018 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2018.
Contract Liabilities expected to be recognized in |
|
|
Amount |
||
2018 |
|
|
|
$ |
1,247,500 |
2019 |
|
|
|
|
1,634,700 |
2020 |
|
|
|
|
1,498,100 |
2021 |
|
|
|
|
1,359,300 |
2022 |
|
|
|
|
1,214,400 |
Thereafter |
|
|
|
|
3,368,900 |
|
|
|
|
$ |
10,322,900 |
Commission Fees
The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.5 million and $0.4 million are outstanding at March 31, 2018 and December 30, 2017, respectively and are included in Prepaid expenses and Other assets of the Consolidated Condensed Balance Sheets.
Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the quarters ended March 31, 2018 and April 1, 2017, the Company recognized $23,900 and $25,100 of commission fee expense, respectively.
5. Fair Value Measurements:
The Company defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses three levels of inputs to measure fair value:
· |
Level 1 – quoted prices in active markets for identical assets and liabilities. |
· |
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities. |
· |
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. |
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.
10
6. Investment in Leasing Operations:
Investment in leasing operations consists of the following:
|
|
March 31, 2018 |
|
December 30, 2017 |
||
Direct financing and sales-type leases: |
|
|
|
|
|
|
Minimum lease payments receivable |
|
$ |
42,599,200 |
|
$ |
36,119,700 |
Estimated residual value of equipment |
|
|
3,697,900 |
|
|
4,762,700 |
Unearned lease income net of initial direct costs deferred |
|
|
(8,222,800) |
|
|
(5,371,900) |
Security deposits |
|
|
(4,480,500) |
|
|
(4,526,000) |
Equipment installed on leases not yet commenced |
|
|
8,996,200 |
|
|
10,989,700 |
Total investment in direct financing and sales-type leases |
|
|
42,590,000 |
|
|
41,974,200 |
Allowance for credit losses |
|
|
(780,600) |
|
|
(711,200) |
Net investment in direct financing and sales-type leases |
|
|
41,809,400 |
|
|
41,263,000 |
Operating leases: |
|
|
|
|
|
|
Operating lease assets |
|
|
1,211,900 |
|
|
1,045,400 |
Less accumulated depreciation and amortization |
|
|
(1,114,800) |
|
|
(1,030,800) |
Net investment in operating leases |
|
|
97,100 |
|
|
14,600 |
Total net investment in leasing operations |
|
$ |
41,906,500 |
|
$ |
41,277,600 |
As of March 31, 2018, the $41.9 million total net investment in leases consists of $15.6 million classified as current and $26.3 million classified as long-term. As of December 30, 2017, the $41.3 million total net investment in leases consists of $15.3 million classified as current and $26.0 million classified as long-term.
As of March 31, 2018, leased assets with one customer approximated 27% of the Company’s total assets. A portion of the lease payments receivable from this customer is assigned as collateral in non-recourse financing with financial institutions. See Note 10 – “Discounted Lease Rentals”.
Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2018 and the full fiscal years thereafter as of March 31, 2018:
|
|
Direct Financing and Sales-Type Leases |
|
Operating Leases |
|
|||||
|
|
Minimum Lease |
|
Income |
|
Minimum Lease |
|
|||
Fiscal Year |
|
Payments Receivable |
|
Amortization |
|
Payments Receivable |
|
|||
2018 |
|
$ |
17,724,200 |
|
$ |
4,697,000 |
|
$ |
126,400 |
|
2019 |
|
|
19,073,800 |
|
|
3,247,400 |
|
|
76,900 |
|
2020 |
|
|
5,648,100 |
|
|
274,000 |
|
|
— |
|
2021 |
|
|
127,000 |
|
|
2,500 |
|
|
— |
|
2022 |
|
|
13,700 |
|
|
1,300 |
|
|
— |
|
Thereafter |
|
|
12,400 |
|
|
600 |
|
|
— |
|
|
|
$ |
42,599,200 |
|
$ |
8,222,800 |
|
$ |
203,300 |
|
The activity in the allowance for credit losses for leasing operations during the first three months of 2018 and 2017, respectively, is as follows:
|
|
March 31, 2018 |
|
April 1, 2017 |
|
||
Balance at beginning of period |
|
$ |
711,200 |
|
$ |
896,000 |
|
Provisions charged to expense |
|
|
95,000 |
|
|
(1,400) |
|
Recoveries |
|
|
(25,600) |
|
|
7,700 |
|
Deductions for amounts written-off |
|
|
— |
|
|
— |
|
Balance at end of period |
|
$ |
780,600 |
|
$ |
902,300 |
|
11
The Company’s investment in direct financing and sales-type leases (“Investment In Leases”) and allowance for credit losses by loss evaluation methodology are as follows:
|
|
March 31, 2018 |
|
December 30, 2017 |
||||||||
|
|
Investment |
|
Allowance for |
|
Investment |
|
Allowance for |
||||
|
|
In Leases |
|
Credit Losses |
|
In Leases |
|
Credit Losses |
||||
Collectively evaluated for loss potential |
|
$ |
42,590,000 |
|
$ |
780,600 |
|
$ |
41,974,200 |
|
$ |
711,200 |
Individually evaluated for loss potential |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Total |
|
$ |
42,590,000 |
|
$ |
780,600 |
|
$ |
41,974,200 |
|
$ |
711,200 |
The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss. The following table sets forth information regarding the Company’s accruing and non-accrual leases. Delinquent balances are determined based on the contractual terms of the lease.
|
|
March 31, 2018 |
|||||||||||||
|
|
0-60 Days |
|
61-90 Days |
|
Over 90 Days |
|
|
|
|
|
|
|||
|
|
Delinquent |
|
Delinquent |
|
Delinquent and |
|
|
|
|
|
|
|||
|
|
and Accruing |
|
and Accruing |
|
Accruing |
|
Non-Accrual |
|
Total |
|||||
Middle-Market |
|
$ |
41,434,300 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
41,434,300 |
Small-Ticket |
|
|
1,155,700 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,155,700 |
Total Investment in Leases |
|
$ |
42,590,000 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
42,590,000 |
|
|
December 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 |
|
$ |
40,657,500 |
|
$ |
133,700 |
|
$ |
— |
|
$ |
— |
|
$ |
40,791,200 |
Small-Ticket |
|
|
1,183,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,183,000 |
Total Investment in Leases |
|
$ |
41,840,500 |
|
$ |
133,700 |
|
$ |
— |
|
$ |
— |
|
$ |
41,974,200 |
7. Earnings Per Share:
The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):
|
|
Three Months Ended |
|
||
|
|
March 31, 2018 |
|
April 1, 2017 |
|
Denominator for basic EPS — weighted average common shares |
|
3,847,312 |
|
4,167,132 |
|
Dilutive shares associated with option plans |
|
277,261 |
|
283,363 |
|
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares |
|
4,124,573 |
|
4,450,495 |
|
Options excluded from EPS calculation — anti-dilutive |
|
15,929 |
|
14,125 |
|
12
8. Shareholders’ Equity (Deficit):
Dividends
On January 24, 2018, 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 February 7, 2018, which was paid on March 1, 2018.
Repurchase of Common Stock
In the first three months of 2018 the Company repurchased no shares of its common stock. Under the Board of Directors’ authorization, as of March 31, 2018, 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. As of March 31, 2018, the Company has authorized up to 700,000 shares of common stock to be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).
The Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”) and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.
Stock option activity under the 2001 Plan, 2010 Plan and Nonemployee Directors Plan (collectively, the “Option Plans”) as of March 31, 2018 was as follows:
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Number of |
|
Weighted Average |
|
Contractual Life |
|
|
|
|
|
|
Shares |
|
Exercise Price |
|
(years) |
|
|
Intrinsic Value |
|
Outstanding, December 30, 2017 |
|
658,184 |
|
$ |
72.33 |
|
5.87 |
|
$ |
37,723,800 |
Exercised |
|
(8,677) |
|
|
40.14 |
|
|
|
|
|
Outstanding, March 31, 2018 |
|
649,507 |
|
$ |
72.76 |
|
5.65 |
|
$ |
37,811,700 |
Exercisable, March 31, 2018 |
|
468,728 |
|
$ |
58.83 |
|
4.62 |
|
$ |
33,734,700 |
No options were granted during the three months ended March 31, 2018. The fair value of options granted under the Option Plans during the first three months of 2017 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:
|
|
|
|
|
|
|
|
April 1, 2017 |
|
|
|
Risk free interest rate |
|
|
2.05 |
% |
|
Expected life (years) |
|
|
6 |
|
|
Expected volatility |
|
|
27.12 |
% |
|
Dividend yield |
|
|
1.16 |
% |
|
Option fair value |
|
$ |
30.78 |
|
|
During the three months ended March 31, 2018, option holders surrendered 2,249 shares of previously owned common shares as payment for options shares exercised as provided for by the Option Plans. All unexercised options at March 31, 2018 have an exercise price equal to the fair market value on the date of the grant.
Compensation expense of $490,800 and $477,000 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first three months of 2018 and 2017, respectively. As of March 31, 2018, 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.
13
9. Debt:
Line of Credit
As of March 31, 2018, there was $24.6 million in borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA and BMO Harris Bank N.A. (the “Line of Credit”) bearing interest ranging from 3.72% to 4.75% leaving $25.4 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 March 31, 2018, the Company was in compliance with all of its financial covenants.
Notes Payable
As of March 31, 2018, the Company had $19.5 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $11.9 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under its Note Agreement with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”).
The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $1.0 million), but prepayments require payment of a Yield Maintenance Amount, as defined in the Note Agreement.
The Company’s obligations under the Note Agreement are secured by a lien against substantially all of the Company’s assets (as the notes rank pari passu with the Line of Credit), and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of fixed charge coverage and tangible net worth and maximum levels of leverage (all as defined within the Note Agreement). As of March 31, 2018, the Company was in compliance with all of its financial covenants.
In connection with the Note Agreement, the Company incurred debt issuance costs, of which unamortized amounts are presented as a direct deduction from the carrying amount of the related liability.
10. Discounted Lease Rentals:
The Company utilized certain lease receivables and underlying equipment as collateral to borrow from financial institutions at a weighted average rate of 6.19% at March 31, 2018 on a non-recourse basis. As of March 31, 2018, $1.6 million of the $4.3 million liability balance is current.
14
11. Income Taxes:
For the three months ended March 31, 2018 and April 1, 2017, the effective income tax rate was 25.4% and 37.0%, respectively. The lower effective income tax rate was primarily due to the enactment of the Tax Cuts and Jobs Act that reduced the federal corporate income tax rate from 35% to 21% beginning in 2018.
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 |
|
||||
|
|
March 31, 2018 |
|
April 1, 2017 |
|
||
Revenue: |
|
|
|
|
|
|
|
Franchising |
|
$ |
12,632,200 |
|
$ |
11,951,300 |
|
Leasing |
|
|
5,528,800 |
|
|
5,859,600 |
|
Total revenue |
|
$ |
18,161,000 |
|
$ |
17,810,900 |
|
|
|
|
|
|
|
|
|
Reconciliation to operating income: |
|
|
|
|
|
|
|
Franchising segment contribution |
|
$ |
6,792,500 |
|
$ |
6,320,500 |
|
Leasing segment contribution |
|
|
3,281,700 |
|
|
2,992,900 |
|
Total operating income |
|
$ |
10,074,200 |
|
$ |
9,313,400 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
Franchising |
|
$ |
57,200 |
|
$ |
75,800 |
|
Leasing |
|
|
18,600 |
|
|
22,700 |
|
Total depreciation and amortization |
|
$ |
75,800 |
|
$ |
98,500 |
|
|
|
As of |
||||
|
|
March 31, 2018 |
|
December 30, 2017 |
||
Identifiable assets: |
|
|
|
|
|
|
Franchising |
|
$ |
3,267,400 |
|
$ |
4,051,400 |
Leasing |
|
|
44,003,500 |
|
|
42,153,600 |
Unallocated |
|
|
453,900 |
|
|
2,637,000 |
Total |
|
$ |
47,724,800 |
|
$ |
48,842,000 |
15
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
As of March 31, 2018, we had 1,223 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands and had a leasing portfolio of $41.9 million. Management closely tracks the following financial criteria to evaluate current business operations and future prospects: royalties, leasing activity, and selling, general and administrative expenses.
Our most significant source of franchising revenue is royalties received from our franchisees. During the first three months of 2018, our royalties increased $0.6 million or 5.7% compared to the first three months of 2017.
Leasing income net of leasing expense during the first three months of 2018 was $5.0 million compared to $4.6 million in the same period last year. Fluctuations in period-to-period leasing income and leasing expense result primarily from the manner and timing in which leasing income and leasing expense is recognized over the term of each particular lease in accordance with accounting guidance applicable to leasing. For this reason, we believe that more meaningful levels of leasing activity are the purchases of equipment for lease customers and the medium- to long-term trend in the size of the leasing portfolio. During the first three months of 2018, we purchased $6.2 million in equipment for lease customers compared to $7.5 million in the first three months of 2017. Our leasing portfolio (net investment in leases — current and long-term) increased to $41.9 million at March 31, 2018 from $41.3 million at December 30, 2017.
Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include salaries, wages and benefits, advertising, travel, occupancy, legal and professional fees. During the first three months of 2018, selling, general and administrative expenses increased $0.2 million, or 2.8% compared to the first three months of 2017.
Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals. The following is a summary of our franchising activity for the first three months ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
AVAILABLE |
|
|
|
|
|
TOTAL |
|
|
|
|
|
TOTAL |
|
FOR |
|
COMPLETED |
|
|
|
12/30/2017 |
|
OPENED |
|
CLOSED |
|
3/31/2018 |