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EX-32.2 - EX-32.2 - WINMARK CORPc315-20200328ex322dda851.htm
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EX-31.2 - EX-31.2 - WINMARK CORPc315-20200328ex312173115.htm
EX-31.1 - EX-31.1 - WINMARK CORPc315-20200328ex311433b25.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 28, 2020

 

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)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Common Stock, no par value per share

WINA

Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒              No ☐

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

Yes ☒              No ☐

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

 

 

 

Large accelerated filer  

Non-accelerated filer   

 

 

Accelerated filer ☒ 

Smaller reporting company ☒

Emerging growth company 

 

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

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

 

Yes ☐              No ☒

Common stock, no par value,  3,655,021 shares outstanding as of April 17, 2020.

 

 

 

 

 

WINMARK CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

PAGE

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

March 28, 2020 and December 28, 2019

3

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended March 28, 2020 and March 30, 2019

4

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT):

 

 

Three Months Ended March 28, 2020 and March 30, 2019

5

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended March 28, 2020 and March 30, 2019

6

 

 

 

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 - 13

 

 

 

Item 2. 

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

14 - 20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4. 

Controls and Procedures

20

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

21

 

 

 

Item 1A. 

Risk Factors

21

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 3. 

Defaults Upon Senior Securities

22

 

 

 

Item 4. 

Mine Safety Disclosures

22

 

 

 

Item 5. 

Other Information

22

 

 

 

Item 6. 

Exhibits

23

 

 

 

 

SIGNATURES

24

 

 

2

PART I.          FINANCIAL INFORMATION

 

ITEM 1:   Financial Statements

 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

March 28, 2020

 

December 28, 2019

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,347,000

 

$

25,130,300

Restricted cash

 

 

50,000

 

 

50,000

Receivables, less allowance for doubtful accounts of $2,100 and $1,900

 

 

980,500

 

 

1,669,500

Net investment in leases - current

 

 

12,422,200

 

 

12,800,100

Income tax receivable

 

 

 —

 

 

497,900

Inventories

 

 

105,200

 

 

86,000

Prepaid expenses

 

 

1,221,900

 

 

968,100

Total current assets

 

 

43,126,800

 

 

41,201,900

Net investment in leases - long-term

 

 

8,921,700

 

 

12,505,500

Property and equipment, net

 

 

2,680,700

 

 

2,772,600

Operating lease right of use assets

 

 

3,403,100

 

 

3,595,200

Goodwill

 

 

607,500

 

 

607,500

Other assets

 

 

496,100

 

 

492,500

Deferred income taxes

 

 

655,900

 

 

667,000

 

 

$

59,891,800

 

$

61,842,200

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

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

 

$

3,986,100

 

$

3,736,100

Accounts payable

 

 

1,071,200

 

 

1,015,000

Income tax payable

 

 

1,635,600

 

 

 —

Accrued liabilities

 

 

2,342,000

 

 

2,783,100

Discounted lease rentals

 

 

2,436,300

 

 

2,680,700

Deferred revenue

 

 

1,714,400

 

 

1,717,000

Total current liabilities

 

 

13,185,600

 

 

11,931,900

Long-Term Liabilities:

 

 

 

 

 

 

Line of credit

 

 

40,000,000

 

 

 —

Notes payable, net of unamortized debt issuance costs of $65,200 and $68,700

 

 

20,809,700

 

 

21,868,800

Discounted lease rentals

 

 

1,341,400

 

 

836,900

Deferred revenue

 

 

7,765,600

 

 

7,858,500

Operating lease liabilities

 

 

5,625,100

 

 

5,846,100

Other liabilities

 

 

1,012,600

 

 

1,051,700

Total long-term liabilities

 

 

76,554,400

 

 

37,462,000

Shareholders’ Equity (Deficit):

 

 

 

 

 

 

Common stock, no par value, 10,000,000 shares authorized, 3,650,753 and 3,947,858 shares issued and outstanding

 

 

 —

 

 

11,929,300

Retained earnings (accumulated deficit)

 

 

(29,848,200)

 

 

519,000

Total shareholders’ equity (deficit)

 

 

(29,848,200)

 

 

12,448,300

 

 

$

59,891,800

 

$

61,842,200

 

 

 

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

 

 

    

March 28, 2020

    

March 30, 2019

    

Revenue:

 

 

 

 

 

 

 

Royalties

 

$

11,172,500

 

$

11,761,400

 

Leasing income

 

 

5,871,200

 

 

5,155,300

 

Merchandise sales

 

 

754,100

 

 

611,000

 

Franchise fees

 

 

387,400

 

 

391,800

 

Other

 

 

414,800

 

 

411,700

 

Total revenue

 

 

18,600,000

 

 

18,331,200

 

Cost of merchandise sold

 

 

717,700

 

 

571,500

 

Leasing expense

 

 

1,416,200

 

 

698,700

 

Provision for credit losses

 

 

615,400

 

 

10,100

 

Selling, general and administrative expenses

 

 

5,748,900

 

 

6,984,400

 

Income from operations

 

 

10,101,800

 

 

10,066,500

 

Interest expense

 

 

(525,200)

 

 

(442,200)

 

Interest and other income (expense)

 

 

5,900

 

 

(300)

 

Income before income taxes

 

 

9,582,500

 

 

9,624,000

 

Provision for income taxes

 

 

(2,265,500)

 

 

(2,351,800)

 

Net income

 

$

7,317,000

 

$

7,272,200

 

Earnings per share - basic

 

$

1.97

 

$

1.86

 

Earnings per share - diluted

 

$

1.87

 

$

1.73

 

Weighted average shares outstanding - basic

 

 

3,711,597

 

 

3,906,895

 

Weighted average shares outstanding - diluted

 

 

3,911,751

 

 

4,198,454

 

 

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

 

4

 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

Common Stock

 

(Accumulated

 

 

 

 

    

Shares

    

Amount

    

Deficit)

    

Total

BALANCE, December 28, 2019

 

3,947,858

 

 

11,929,300

 

$

519,000

 

$

12,448,300

Repurchase of common stock

 

(300,000)

 

 

(12,215,500)

 

 

(36,772,000)

 

 

(48,987,500)

Stock options exercised

 

2,895

 

 

145,900

 

 

 —

 

 

145,900

Compensation expense relating to stock options

 

 —

 

 

140,300

 

 

 —

 

 

140,300

Cash dividends ($0.25 per share)

 

 —

 

 

 —

 

 

(912,200)

 

 

(912,200)

Comprehensive income (Net income)

 

 —

 

 

 —

 

 

7,317,000

 

 

7,317,000

BALANCE, March 28, 2020

 

3,650,753

 

 

 —

 

 

(29,848,200)

 

 

(29,848,200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

Common Stock

 

(Accumulated

 

 

 

 

    

Shares

    

Amount

    

Deficit)

    

Total

BALANCE, December 29, 2018

 

3,907,686

 

$

4,425,600

 

$

(9,234,100)

 

$

(4,808,500)

Repurchase of common stock

 

(150,000)

 

 

(5,081,000)

 

 

(18,947,100)

 

 

(24,028,100)

Stock options exercised

 

1,500

 

 

156,600

 

 

 —

 

 

156,600

Compensation expense relating to stock options

 

 —

 

 

498,800

 

 

 —

 

 

498,800

Cash dividends ($0.11 per share)

 

 —

 

 

 —

 

 

(586,100)

 

 

(586,100)

Comprehensive income (Net income)

 

 —

 

 

 —

 

 

7,272,200

 

 

7,272,200

BALANCE, March 30, 2019

 

3,759,186

 

 

 —

 

 

(21,495,100)

 

 

(21,495,100)

 

 

 

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

 

 

 

 

5

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 28, 2020

    

March 30, 2019

    

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

7,317,000

 

$

7,272,200

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

123,100

 

 

80,100

 

Provision for credit losses

 

 

615,400

 

 

10,100

 

Compensation expense related to stock options

 

 

140,300

 

 

498,800

 

Deferred income taxes

 

 

11,100

 

 

600

 

Deferred initial direct costs

 

 

(8,500)

 

 

(14,200)

 

Amortization of deferred initial direct costs

 

 

37,200

 

 

209,500

 

Operating lease right of use asset amortization

 

 

192,100

 

 

102,300

 

Tax benefits on exercised stock options

 

 

87,000

 

 

12,100

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

689,000

 

 

97,600

 

Principal collections on lease receivables

 

 

4,988,400

 

 

4,662,800

 

Income tax receivable/payable

 

 

2,046,500

 

 

2,218,100

 

Inventories

 

 

(19,200)

 

 

(6,200)

 

Prepaid expenses

 

 

(253,800)

 

 

(52,500)

 

Other assets

 

 

(3,600)

 

 

(14,100)

 

Accounts payable

 

 

56,200

 

 

366,000

 

Accrued and other liabilities

 

 

(674,200)

 

 

(1,105,000)

 

Rents received in advance and security deposits

 

 

(885,300)

 

 

6,500

 

Deferred revenue

 

 

(95,500)

 

 

(178,700)

 

Net cash provided by operating activities

 

 

14,363,200

 

 

14,166,000

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(31,200)

 

 

(122,700)

 

Purchase of equipment for lease contracts

 

 

(1,706,000)

 

 

(1,717,400)

 

Net cash used for investing activities

 

 

(1,737,200)

 

 

(1,840,100)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

45,700,000

 

 

14,000,000

 

Payments on line of credit

 

 

(5,700,000)

 

 

(2,500,000)

 

Payments on notes payable

 

 

(812,500)

 

 

(812,500)

 

Repurchases of common stock

 

 

(48,987,500)

 

 

(24,028,100)

 

Proceeds from exercises of stock options

 

 

145,900

 

 

156,600

 

Dividends paid

 

 

(912,200)

 

 

(586,100)

 

Proceeds from discounted lease rentals

 

 

1,157,000

 

 

 —

 

Net cash used for financing activities

 

 

(9,409,300)

 

 

(13,770,100)

 

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

 

 

3,216,700

 

 

(1,444,200)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

25,180,300

 

 

2,576,000

 

Cash, cash equivalents and restricted cash, end of period

 

$

28,397,000

 

$

1,131,800

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

Cash paid for interest

 

$

460,600

 

$

417,000

 

Cash paid for income taxes

 

$

120,900

 

$

121,100

 

 

 

 

 

 

 

 

 

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

 

 

Three Months Ended

 

 

    

March 28, 2020

    

March 30, 2019

    

Cash and cash equivalents

 

$

28,347,000

 

$

1,066,800

 

Restricted cash

 

 

50,000

 

 

65,000

 

Total cash, cash equivalents and restricted cash

 

$

28,397,000

 

$

1,131,800

 

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

 

 

6

WINMARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1.  Management’s Interim Financial Statement Representation:

 

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

 

Revenues and operating results for the three months ended March 28, 2020 are not necessarily indicative of the results to be expected for the full year.

 

Reclassifications

 

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

 

2.  Organization and Business:

 

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

 

3.  Recent Accounting Pronouncements:

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.  This guidance was to be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for the Company, as a smaller reporting company, until fiscal year 2023. The Company currently plans to adopt the guidance at the beginning of fiscal 2023. The Company is continuing to assess the impact of the standard on its consolidated financial statements.

 

 

4.  Contract Liabilities:

 

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees.  The table below presents the activity of the current and noncurrent deferred franchise revenue during the first three months of 2020 and 2019, respectively:

 

 

 

 

 

 

 

 

 

    

March 28, 2020

    

March 30, 2019

Balance at beginning of period

 

$

9,575,500

 

$

10,177,300

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

 

 

372,500

 

 

292,000

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

 

 

(468,000)

 

 

(470,700)

Balance at end of period

 

$

9,480,000

 

$

9,998,600

7

The following table illustrates future estimated revenue to be recognized for the remainder of 2020 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 28, 2020.

 

 

 

 

 

Contract Liabilities expected to be recognized in

 

Amount

2020

 

$

1,259,000

2021

 

 

1,612,900

2022

 

 

1,468,000

2023

 

 

1,296,700

2024

 

 

1,099,000

Thereafter

 

 

2,744,400

 

 

$

9,480,000

 

 

5.  Fair Value Measurements:

 

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

 

·

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

·

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

·

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

 

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

 

6.  Investment in Leasing Operations:

 

Investment in leasing operations consists of the following:

 

 

 

 

 

 

 

 

 

    

March 28, 2020

    

December 28, 2019

Direct financing and sales-type leases:

 

 

 

 

 

 

Minimum lease payments receivable

 

$

22,936,500

 

$

26,001,200

Estimated unguaranteed residual value of equipment

 

 

3,974,000

 

 

4,109,800

Unearned lease income, net of initial direct costs deferred

 

 

(2,677,600)

 

 

(4,039,400)

Security deposits

 

 

(2,990,300)

 

 

(3,852,000)

Equipment installed on leases not yet commenced

 

 

1,283,700

 

 

3,437,800

  Total investment in direct financing and sales-type leases

 

 

22,526,300

 

 

25,657,400

Allowance for credit losses

 

 

(1,197,500)

 

 

(580,600)

  Net investment in direct financing and sales-type leases

 

 

21,328,800

 

 

25,076,800

Operating leases:

 

 

 

 

 

 

Operating lease assets

 

 

408,600

 

 

820,700

Less accumulated depreciation and amortization

 

 

(393,500)

 

 

(591,900)

  Net investment in operating leases

 

 

15,100

 

 

228,800

Total net investment in leasing operations

 

$

21,343,900

 

$

25,305,600

 

As of March 28, 2020, the $21.3 million total net investment in leases consists of $12.4 million classified as current and $8.9 million classified as long-term.  As of December 28, 2019, the $25.3 million total net investment in leases consists of $12.8 million classified as current and $12.5 million classified as long-term.

 

As of March 28, 2020, there were no customers with leased assets greater than 10% of the Company’s total assets.

8

Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2020 and the full fiscal years thereafter as of March 28, 2020:

 

 

 

 

 

 

 

 

 

 

 

Direct Financing and Sales-Type Leases

 

 

    

Minimum Lease

    

Income

 

Fiscal Year

 

Payments Receivable

 

 Amortization

 

2020

 

$

12,473,400

 

$

1,824,700

 

2021

 

 

8,578,400

 

 

764,500

 

2022

 

 

1,826,600

 

 

84,100

 

2023

 

 

33,400

 

 

2,500

 

2024

 

 

13,900

 

 

1,400

 

Thereafter

 

 

10,800

 

 

400

 

 

 

$

22,936,500

 

$

2,677,600

 

 

The activity in the allowance for credit losses for leasing operations during the first three months of 2020 and 2019, respectively, is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

March 28, 2020

    

March 30, 2019

    

Balance at beginning of period

 

$

580,600

 

$

861,200

 

Provisions charged to expense

 

 

615,400

 

 

10,100

 

Recoveries

 

 

1,500

 

 

4,200

 

Deductions for amounts written-off

 

 

 —

 

 

(224,100)

 

Balance at end of period

 

$

1,197,500

 

$

651,400

 

 

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 28, 2020

 

December 28, 2019

 

    

Investment

    

Allowance for

    

Investment

    

Allowance for

 

 

In Leases

 

Credit Losses

 

In Leases

 

Credit Losses

Collectively evaluated for loss potential

 

$

22,526,300

 

 

1,197,500

 

$

25,657,400

 

$

580,600

Individually evaluated for loss potential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

22,526,300

 

$

1,197,500

 

$

25,657,400

 

$

580,600

 

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 28, 2020

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

21,238,900

 

$

 —

 

$

 —

 

$

146,700

 

$

21,385,600

Small-Ticket

 

 

1,140,700

 

 

 —

 

 

 —

 

 

 —

 

 

1,140,700

Total Investment in Leases

 

$

22,379,600

 

$

 —

 

$

 —

 

$

146,700

 

$

22,526,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 28, 2019

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

24,546,300

 

$

 —

 

$

 —

 

$

 

 

$

24,546,300

Small-Ticket

 

 

1,111,100

 

 

 —

 

 

 —

 

 

 —

 

 

1,111,100

Total Investment in Leases

 

$

25,657,400

 

$

 —

 

$

 —

 

$

 —

 

$

25,657,400

 

 

 

 

The Company leases high-technology and other business-essential equipment to its leasing customers. Upon expiration of the initial term or extended lease term, depending on the structure of the lease, the customer may return the

9

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

 

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

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 28, 2020

    

March 30, 2019

Interest income on direct financing and sales-type leases

$

1,128,600

 

$

2,182,500

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

 

313,200

 

 

873,500

Operating lease income

 

435,400

 

 

638,300

Income on sales of equipment under lease

 

3,261,300

 

 

1,225,600

Other

 

732,700

 

 

235,400

Leasing income

$

5,871,200

 

$

5,155,300

 

 

 

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 28, 2020

    

March 30, 2019

    

Denominator for basic EPS — weighted average common shares

 

3,711,597

 

3,906,895

 

Dilutive shares associated with option plans

 

200,154

 

291,559

 

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

 

3,911,751

 

4,198,454

 

Options excluded from EPS calculation — anti-dilutive

 

2,192

 

5,280

 

 

 

8.  Shareholders’ Equity (Deficit):

 

Dividends

 

On January 29, 2020, the Company’s Board of Directors approved the payment of a $0.25 per share quarterly cash dividend to shareholders of record at the close of business on February 12, 2020, which was paid on March 2, 2020.

 

Repurchase of Common Stock

 

In December 2019, the Company’s Board of Directors authorized the repurchase of up to 300,000 shares of our common stock for a price of $163.00 per share through a tender offer (the “2020 Tender Offer”). The 2020 Tender Offer began on the date of the announcement, December 17, 2019 and expired on January 16, 2020. Upon expiration, the Company purchased 300,000 shares for a total purchase price of approximately $49.0 million, including fees and expenses related to the Tender Offer. The 2020 Tender Offer was financed in part by net borrowings of $19.2 million under the Line of Credit. (See Note 9 – “Debt”).

 

Under a previous Board of Directors’ authorization, as of March 28, 2020, the Company has the ability to repurchase an additional 130,604 shares of its common stock.  Repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing.

 

10

Stock Option Plans and Stock-Based Compensation

 

Stock option activity under the Company’s option plans as of March 28, 2020 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted Average

    

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Number of

 

Weighted Average

 

Contractual Life

 

 

 

 

 

Shares

 

Exercise Price

 

(years)

 

 

Intrinsic Value

Outstanding, December 28, 2019

 

479,558

 

$

101.78

 

5.79

 

$

45,283,200

Exercised

 

(2,895)

 

 

50.40

 

 

 

 

 

Forfeited

 

(23,000)

 

 

148.16

 

 

 

 

 

Outstanding, March 28, 2020

 

453,663

 

$

99.76

 

5.42

 

$

16,967,200

Exercisable, March 28, 2020

 

341,838

 

$

83.42

 

4.46

 

$

16,657,100

 

 

No options were granted during the three months ended March 28, 2020 or the three months ended March 30, 2019. All unexercised options at March 28, 2020 have an exercise price equal to the fair market value on the date of the grant.

 

Compensation expense of $140,300 and $498,800 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first three months of 2020 and 2019, respectively.  As of March 28, 2020, the Company had $2.9 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.4 years.

 

9.  Debt:

 

Line of Credit

 

As of March 28, 2020, there was $40.0 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 3.25% to 3.60% leaving $5.0 million available for additional borrowings.

 

The Line of Credit has been and will continue to be used for general corporate purposes.   During the first quarter of 2020, the Line of Credit was used to finance in part the 2020 Tender Offer (as indicated above). The Line of Credit, which terminates in July 2021, is secured by a lien against substantially all of the Company’s assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit).  As of March 28, 2020, the Company was in compliance with all of its financial covenants.

 

Notes Payable

 

As of March 28, 2020, the Company had $15.5 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $9.4 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

11

and maximum levels of leverage (all as defined within the Note Agreement). As of March 28, 2020, the Company was in compliance with all of its financial covenants.

 

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

 

10. Discounted Lease Rentals:

 

The Company utilized certain lease receivables and underlying equipment as collateral to borrow from financial institutions at a weighted average rate of 6.43% at March 28, 2020 on a non-recourse basis. As of March 28, 2020,  $2.4 million of the $3.8 million liability balance is current.

 

11. Operating Leases:

 

As of March 28, 2020, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029.  The weighted average remaining lease term for these leases is 9.75 years and the weighted average discount rate is 5.5%.  The Company recognized $300,400 and $365,600 of rent expense for the periods ended March 28, 2020 and March 30, 2019, respectively.

 

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2020 and full fiscal years thereafter as of March 28, 2020:

 

 

 

 

 

Operating Lease Liabilities expected to be recognized in

    

Amount

2020

 

$

529,400

2021

 

 

723,100

2022

 

 

742,900

2023

 

 

763,300

2024

 

 

784,400

Thereafter

 

 

4,258,600

Total lease payments

 

 

7,801,700

Less imputed interest

 

 

(1,767,400)

Present value of lease liabilities

 

$

6,034,300

 

Of the $6.0 million operating lease liability outstanding at March 28, 2020, $0.4 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Condensed Balance Sheets.

 

Supplemental cash flow information related to our operating leases is as follows for the period ended March 28, 2020:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 28, 2020

    

March 30, 2019

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

 

 

 

 

 

 

Operating cash flow outflow from operating leases

 

$

174,300

 

$

172,100

 

 

12.  Segment Reporting:

 

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

12

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 28, 2020

    

March 30, 2019

    

Revenue:

 

 

 

 

 

 

 

Franchising

 

$

12,728,800

 

$

13,175,900

 

Leasing

 

 

5,871,200

 

 

5,155,300

 

Total revenue

 

$

18,600,000

 

$

18,331,200

 

 

 

 

 

 

 

 

 

Reconciliation to operating income:

 

 

 

 

 

 

 

Franchising segment contribution

 

$

7,211,400

 

$

7,498,000

 

Leasing segment contribution

 

 

2,890,400

 

 

2,568,500

 

Total operating income

 

$

10,101,800

 

$

10,066,500

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

Franchising

 

$

72,600

 

$

62,500

 

Leasing

 

 

50,500

 

 

17,600

 

Total depreciation and amortization

 

$

123,100

 

$

80,100

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

March 28, 2020

    

December 28, 2019

Identifiable assets:

 

 

 

 

 

 

Franchising

 

$

3,206,800

 

$

3,736,000

Leasing

 

 

22,731,300

 

 

26,596,700

Unallocated

 

 

33,953,700

 

 

31,509,500

Total

 

$

59,891,800

 

$

61,842,200

 

 

 

 

13.  Subsequent Events:

 

The Company is closely monitoring the impact of the coronavirus (COVID-19) pandemic on all aspects of its business, including that of its franchisees and leasing customers.  The COVID-19 pandemic adversely affected the Company’s financial results and business operations in the Company’s first fiscal quarter ended March 28, 2020, and uncertainties regarding the pandemic continue to result in serious economic disruptions including the temporary closing of many of our franchisee’s stores.  Governmental authorities in the United States and Canada have taken and may continue to take measures in order to combat the spread of disease including forced closures of retail stores and other business establishments.  The full impact of the COVID-19 outbreak is unknown, resulting in a high degree of uncertainty for potentially extended periods of time.  At this time, neither the duration nor scope of the disruption can be predicted, therefore, the negative impact on our financial position and operating results cannot be reasonably estimated.

 

 

13

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

 

COVID-19 Pandemic

 

The emergence of the coronavirus (COVID-19) around the world, and particularly in the United States and Canada, presents significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. The COVID-19 pandemic adversely affected the Company’s financial results and business operations in the Company’s first fiscal quarter ended March 28, 2020, as noted below, and economic and health conditions in the United States and across most of the globe have continued to change since the end of the quarter. Notably, a substantial number of the Company’s franchised store locations are temporarily closed to in-store consumer activities.  Such temporary store closings may continue and customer traffic at those locations still operational may continue to be greatly reduced and may not return to historical levels in the near term depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties.

 

The COVID-19 pandemic is affecting the Company’s operations in the second quarter, and may continue to do so indefinitely thereafter. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, its franchisees and leasing customers, customer and consumer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.

 

Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three-month period ended March 28, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.  Management cannot predict the full impact of the COVID-19 pandemic on the Company’s franchisees or leasing customers nor to economic conditions generally, including the effects on consumer spending. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.

 

Overview

 

As of March 28, 2020, we had 1,256  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 $21.3 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 2020, our royalties decreased $0.6 million or 5.0% compared to the first three months of 2019.

 

Leasing income net of leasing expense during the first three months of 2020 was $4.5 million compared to $4.5 million in the same period last year.  Fluctuations in period-to-period leasing income and leasing expense can result from the manner and timing in which leasing income and leasing expense is recognized over the term of each particular lease in accordance with accounting guidance applicable to leasing.  For this reason, we believe that more meaningful levels of leasing activity are the medium- to long-term trend in the purchases of equipment for lease customers and the size of the leasing portfolio.  During the first three months of 2020, we purchased $1.7 million in equipment for lease customers compared to $1.7 million in the first three months of 2019 and $6.2 million in the first three months of 2018.  Our leasing portfolio (net investment in leases — current and long-term) was $21.3 million at March 28, 2020 compared to $25.3 million at December 28, 2019 and $35.1 million at March 30, 2019.  The lower equipment purchases and the decrease in the size of the portfolio across these periods were a direct result of a decrease in the number of customers installing equipment.  We continue to explore ways to grow leased assets and add new customers to our leasing portfolio; however, continued low levels of equipment purchases for lease customers and decreases in the size of our portfolio will impact the long-term operating income of our leasing segment. 

 

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,

14

occupancy, legal and professional fees.  During the first three months of 2020, selling, general and administrative expenses decreased $1.2 million, or 17.7% compared to the first three months of 2019.

 

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 28, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVAILABLE