The Line of Credit allows us to choose between two interest rate options in connection with our borrowings. The interest rate options are the Base Rate (as defined) and the LIBOR Rate (as defined) plus an applicable margin of 0% and 2.0% respectively. Interest periods for LIBOR borrowings can be one, two, three, six or twelve months, as selected by us. The Line of Credit also provides for non-utilization fees of 0.25% per annum on the daily average of the unused commitment.
We have a Note Agreement (the “Note Agreement”) with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”) that was entered into in May 2015.
In July 2017, the Note Agreement was amended to, among other things:
|
·
|
|
Provide the consent of Prudential for the 2017 Tender Offer;
|
|
·
|
|
Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer;
|
|
·
|
|
Provide for a new $12.5 million term loan to partially fund the 2017 Tender Offer.
|
In August 2017, we issued $12.5 million of Series B notes to finance in part the 2017 Tender Offer. As of December 30, 2017, with the $20.0 million in principal outstanding from the $25.0 million of Series A notes issued in May 2015, the aggregate principal outstanding under the Note Agreement was $32.2 million.
The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at our option, 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.
Our obligations under the Note Agreement are secured by a lien against substantially all of our assets, 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 December 30, 2017, we were in compliance with all of the financial covenants under the Line of Credit and Note Agreement.
We incurred increased indebtedness in connection with the purchase of shares in the Tender Offer and, as a result, are more leveraged. We expect to generate the cash necessary to pay our expenses, finance our leasing business and to pay the principal and interest on all of our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate. Our ability to pay our expenses, finance our leasing business and meet our debt service obligations depends on our future performance, which may be affected by financial, business, economic, and other factors including the risk factors described under Item 1A of this report. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or raise equity. In such an event, we may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us or at all. Also, our ability to carry out any of these activities on favorable terms, if at all, may be further impacted by any financial or credit crisis which may limit access to the credit markets and increase our cost of capital.
We may utilize discounted lease financing to provide funds for a portion of our leasing activities. Rates for discounted lease financing reflect prevailing market interest rates and the credit standing of the lessees for which the payment stream of the leases are discounted. We believe that discounted lease financing will continue to be available to us at competitive rates of interest through the relationships we have established with financial institutions.
We believe that the combination of our cash on hand, the cash generated from our franchising business, cash generated from discounting sources and our Line of Credit will be adequate to fund our planned operations through 2018.
Critical Accounting Policies
The Company prepares the consolidated financial statements of Winmark Corporation and Subsidiaries in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Winmark Corporation and Subsidiaries
Index to Consolidated Financial Statements
WINMARK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,073,200
|
|
$
|
1,252,900
|
|
Marketable securities
|
|
|
—
|
|
|
199,900
|
|
Receivables, less allowance for doubtful accounts of $400 and $2,100
|
|
|
1,796,000
|
|
|
1,479,200
|
|
Restricted cash
|
|
|
90,000
|
|
|
40,000
|
|
Net investment in leases - current
|
|
|
15,332,300
|
|
|
17,004,800
|
|
Income tax receivable
|
|
|
2,161,800
|
|
|
1,678,800
|
|
Inventories
|
|
|
97,100
|
|
|
87,500
|
|
Prepaid expenses
|
|
|
814,800
|
|
|
1,050,700
|
|
Total current assets
|
|
|
21,365,200
|
|
|
22,793,800
|
|
Net investment in leases — long-term
|
|
|
25,945,300
|
|
|
24,410,700
|
|
Property and equipment:
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
|
2,895,200
|
|
|
2,866,600
|
|
Building and building improvements
|
|
|
1,447,200
|
|
|
1,447,200
|
|
Less - accumulated depreciation and amortization
|
|
|
(3,855,600)
|
|
|
(3,544,200)
|
|
Property and equipment, net
|
|
|
486,800
|
|
|
769,600
|
|
Goodwill
|
|
|
607,500
|
|
|
607,500
|
|
|
|
$
|
48,404,800
|
|
$
|
48,581,600
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Notes payable, net of unamortized debt issuance costs of $13,900 and $10,000
|
|
$
|
3,236,100
|
|
$
|
1,990,000
|
|
Accounts payable
|
|
|
2,073,000
|
|
|
1,692,000
|
|
Accrued liabilities
|
|
|
1,837,300
|
|
|
1,811,100
|
|
Discounted lease rentals
|
|
|
570,800
|
|
|
—
|
|
Deferred revenue
|
|
|
1,736,200
|
|
|
1,864,700
|
|
Total current liabilities
|
|
|
9,453,400
|
|
|
7,357,800
|
|
Long-term Liabilities:
|
|
|
|
|
|
|
|
Line of credit
|
|
|
35,400,000
|
|
|
23,400,000
|
|
Notes payable, net of unamortized debt issuance costs of $96,500 and $73,500
|
|
|
28,841,000
|
|
|
19,926,500
|
|
Discounted lease rentals
|
|
|
1,121,600
|
|
|
—
|
|
Deferred revenue
|
|
|
1,465,500
|
|
|
1,423,800
|
|
Other liabilities
|
|
|
845,000
|
|
|
993,600
|
|
Deferred income taxes
|
|
|
1,956,500
|
|
|
3,331,900
|
|
Total long-term liabilities
|
|
|
69,629,600
|
|
|
49,075,800
|
|
Commitments and Contingencies
|
|
|
—
|
|
|
—
|
|
Shareholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
Common stock, no par value, 10,000,000 shares authorized, 3,843,078 and 4,165,769 shares issued and outstanding
|
|
|
1,476,200
|
|
|
2,976,100
|
|
Accumulated other comprehensive loss
|
|
|
—
|
|
|
(9,900)
|
|
Retained earnings (accumulated deficit)
|
|
|
(32,154,400)
|
|
|
(10,818,200)
|
|
Total shareholders' equity (deficit)
|
|
|
(30,678,200)
|
|
|
(7,852,000)
|
|
|
|
$
|
48,404,800
|
|
$
|
48,581,600
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WINMARK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
45,643,500
|
|
$
|
43,994,900
|
|
$
|
41,908,000
|
|
Leasing income
|
|
|
18,470,200
|
|
|
17,283,600
|
|
|
21,565,700
|
|
Merchandise sales
|
|
|
2,572,200
|
|
|
2,216,900
|
|
|
2,816,900
|
|
Franchise fees
|
|
|
1,529,700
|
|
|
1,624,800
|
|
|
1,788,100
|
|
Other
|
|
|
1,530,300
|
|
|
1,460,100
|
|
|
1,369,100
|
|
Total revenue
|
|
|
69,745,900
|
|
|
66,580,300
|
|
|
69,447,800
|
|
COST OF MERCHANDISE SOLD
|
|
|
2,432,600
|
|
|
2,101,400
|
|
|
2,653,100
|
|
LEASING EXPENSE
|
|
|
3,269,100
|
|
|
2,323,800
|
|
|
5,759,300
|
|
PROVISION FOR CREDIT LOSSES
|
|
|
9,000
|
|
|
18,500
|
|
|
(149,700)
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
25,250,600
|
|
|
23,835,600
|
|
|
24,094,400
|
|
Income from operations
|
|
|
38,784,600
|
|
|
38,301,000
|
|
|
37,090,700
|
|
INTEREST EXPENSE
|
|
|
(2,366,400)
|
|
|
(2,342,800)
|
|
|
(1,802,200)
|
|
INTEREST AND OTHER INCOME (EXPENSE)
|
|
|
12,900
|
|
|
(12,200)
|
|
|
(63,700)
|
|
Income before income taxes
|
|
|
36,431,100
|
|
|
35,946,000
|
|
|
35,224,800
|
|
PROVISION FOR INCOME TAXES
|
|
|
(11,866,000)
|
|
|
(13,728,400)
|
|
|
(13,425,100)
|
|
NET INCOME
|
|
$
|
24,565,100
|
|
$
|
22,217,600
|
|
$
|
21,799,700
|
|
EARNINGS PER SHARE - BASIC
|
|
$
|
6.06
|
|
$
|
5.39
|
|
$
|
4.89
|
|
EARNINGS PER SHARE - DILUTED
|
|
$
|
5.66
|
|
$
|
5.13
|
|
$
|
4.69
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
|
|
|
4,056,049
|
|
|
4,122,854
|
|
|
4,458,927
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED
|
|
|
4,339,944
|
|
|
4,330,490
|
|
|
4,651,527
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WINMARK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive I
ncome
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
24,565,100
|
|
$
|
22,217,600
|
|
$
|
21,799,700
|
|
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gains (losses) on marketable securities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding net gains (losses) arising during period
|
|
|
15,900
|
|
|
36,900
|
|
|
9,300
|
|
Reclassification adjustment for net gains included in net income
|
|
|
—
|
|
|
—
|
|
|
(2,300)
|
|
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
|
|
|
15,900
|
|
|
36,900
|
|
|
7,000
|
|
INCOME TAX (EXPENSE) BENEFIT RELATED TO ITEMS OF OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gains/losses on marketable securities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding net gains/losses arising during period
|
|
|
(6,000)
|
|
|
(13,900)
|
|
|
(3,700)
|
|
Reclassification adjustment for net gains included in net income
|
|
|
—
|
|
|
—
|
|
|
900
|
|
INCOME TAX (EXPENSE) BENEFIT RELATED TO ITEMS OF OTHER COMPREHENSIVE INCOME
|
|
|
(6,000)
|
|
|
(13,900)
|
|
|
(2,800)
|
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
|
|
9,900
|
|
|
23,000
|
|
|
4,200
|
|
COMPREHENSIVE INCOME
|
|
$
|
24,575,000
|
|
$
|
22,240,600
|
|
$
|
21,803,900
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WINMARK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity (Deficit)
Fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income (Loss)
|
|
Total
|
|
BALANCE, December 27, 2014
|
|
4,998,512
|
|
$
|
422,400
|
|
$
|
21,224,200
|
|
$
|
(37,100)
|
|
$
|
21,609,500
|
|
Repurchase of common stock
|
|
(881,518)
|
|
|
(2,010,600)
|
|
|
(72,843,100)
|
|
|
—
|
|
|
(74,853,700)
|
|
Stock options exercised and related tax benefits
|
|
7,773
|
|
|
299,900
|
|
|
—
|
|
|
—
|
|
|
299,900
|
|
Compensation expense relating to stock options
|
|
—
|
|
|
1,694,800
|
|
|
—
|
|
|
—
|
|
|
1,694,800
|
|
Cash dividends
|
|
—
|
|
|
—
|
|
|
(1,228,200)
|
|
|
—
|
|
|
(1,228,200)
|
|
Comprehensive income
|
|
—
|
|
|
—
|
|
|
21,799,700
|
|
|
4,200
|
|
|
21,803,900
|
|
BALANCE, December 26, 2015
|
|
4,124,767
|
|
|
406,500
|
|
|
(31,047,400)
|
|
|
(32,900)
|
|
|
(30,673,800)
|
|
Repurchase of common stock
|
|
(17,194)
|
|
|
(1,112,300)
|
|
|
(461,600)
|
|
|
—
|
|
|
(1,573,900)
|
|
Stock options exercised and related tax benefits
|
|
58,196
|
|
|
1,905,300
|
|
|
—
|
|
|
—
|
|
|
1,905,300
|
|
Compensation expense relating to stock options
|
|
—
|
|
|
1,776,600
|
|
|
—
|
|
|
—
|
|
|
1,776,600
|
|
Cash dividends
|
|
—
|
|
|
—
|
|
|
(1,526,800)
|
|
|
—
|
|
|
(1,526,800)
|
|
Comprehensive income
|
|
—
|
|
|
—
|
|
|
22,217,600
|
|
|
23,000
|
|
|
22,240,600
|
|
BALANCE, December 31, 2016
|
|
4,165,769
|
|
|
2,976,100
|
|
|
(10,818,200)
|
|
|
(9,900)
|
|
|
(7,852,000)
|
|
Repurchase of common stock
|
|
(400,000)
|
|
|
(5,766,200)
|
|
|
(44,136,300)
|
|
|
—
|
|
|
(49,902,500)
|
|
Stock options exercised
|
|
77,309
|
|
|
2,309,700
|
|
|
—
|
|
|
—
|
|
|
2,309,700
|
|
Compensation expense relating to stock options
|
|
—
|
|
|
1,956,600
|
|
|
—
|
|
|
—
|
|
|
1,956,600
|
|
Cash dividends
|
|
—
|
|
|
—
|
|
|
(1,765,000)
|
|
|
—
|
|
|
(1,765,000)
|
|
Comprehensive income
|
|
—
|
|
|
—
|
|
|
24,565,100
|
|
|
9,900
|
|
|
24,575,000
|
|
BALANCE, December 30, 2017
|
|
3,843,078
|
|
$
|
1,476,200
|
|
$
|
(32,154,400)
|
|
$
|
—
|
|
$
|
(30,678,200)
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WINMARK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,565,100
|
|
$
|
22,217,600
|
|
$
|
21,799,700
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
355,400
|
|
|
420,500
|
|
|
432,600
|
|
Provision for credit losses
|
|
|
9,000
|
|
|
18,500
|
|
|
(149,700)
|
|
Compensation expense related to stock options
|
|
|
1,956,600
|
|
|
1,776,600
|
|
|
1,694,800
|
|
Deferred income taxes
|
|
|
(1,375,400)
|
|
|
(282,900)
|
|
|
(2,142,100)
|
|
(Gain) loss on sale of marketable securities
|
|
|
(1,400)
|
|
|
12,600
|
|
|
22,800
|
|
Loss from disposal of property and equipment
|
|
|
—
|
|
|
—
|
|
|
100
|
|
Deferred initial direct costs
|
|
|
(416,300)
|
|
|
(535,800)
|
|
|
(416,600)
|
|
Amortization of deferred initial direct costs
|
|
|
447,700
|
|
|
471,100
|
|
|
587,300
|
|
Tax benefits on exercised stock options
|
|
|
882,300
|
|
|
599,400
|
|
|
26,300
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(316,800)
|
|
|
(62,300)
|
|
|
(88,700)
|
|
Restricted cash
|
|
|
(50,000)
|
|
|
(15,000)
|
|
|
(25,000)
|
|
Income tax receivable/payable
|
|
|
(1,371,300)
|
|
|
1,597,700
|
|
|
870,700
|
|
Inventories
|
|
|
(9,600)
|
|
|
(42,300)
|
|
|
48,300
|
|
Prepaid expenses
|
|
|
235,900
|
|
|
(372,900)
|
|
|
(210,400)
|
|
Other assets
|
|
|
—
|
|
|
—
|
|
|
70,000
|
|
Accounts payable
|
|
|
381,000
|
|
|
48,700
|
|
|
(312,200)
|
|
Accrued and other liabilities
|
|
|
(174,400)
|
|
|
(253,400)
|
|
|
(147,100)
|
|
Rents received in advance and security deposits
|
|
|
126,700
|
|
|
759,900
|
|
|
370,600
|
|
Deferred revenue
|
|
|
(86,800)
|
|
|
(96,300)
|
|
|
(105,600)
|
|
Net cash provided by operating activities
|
|
|
25,157,700
|
|
|
26,261,700
|
|
|
22,325,800
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
217,200
|
|
|
52,200
|
|
|
299,000
|
|
Purchase of marketable securities
|
|
|
—
|
|
|
—
|
|
|
(75,800)
|
|
Purchase of property and equipment
|
|
|
(72,600)
|
|
|
(68,600)
|
|
|
(133,900)
|
|
Purchase of equipment for lease contracts
|
|
|
(25,403,200)
|
|
|
(26,211,100)
|
|
|
(22,192,800)
|
|
Principal collections on lease receivables
|
|
|
25,343,800
|
|
|
23,006,800
|
|
|
26,603,000
|
|
Net cash provided by (used for) investing activities
|
|
|
85,200
|
|
|
(3,220,700)
|
|
|
4,499,500
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on line of credit
|
|
|
51,900,000
|
|
|
18,800,000
|
|
|
62,300,000
|
|
Payments on line of credit
|
|
|
(39,900,000)
|
|
|
(37,800,000)
|
|
|
(38,400,000)
|
|
Proceeds from borrowings on notes payable
|
|
|
12,500,000
|
|
|
—
|
|
|
25,000,000
|
|
Payments on notes payable
|
|
|
(2,312,500)
|
|
|
(2,000,000)
|
|
|
(1,000,000)
|
|
Repurchases of common stock
|
|
|
(49,902,500)
|
|
|
(1,573,900)
|
|
|
(74,853,700)
|
|
Proceeds from exercises of stock options
|
|
|
2,309,700
|
|
|
1,305,900
|
|
|
273,600
|
|
Dividends paid
|
|
|
(1,765,000)
|
|
|
(1,526,800)
|
|
|
(1,228,200)
|
|
Proceeds from discounted lease rentals
|
|
|
1,747,700
|
|
|
—
|
|
|
—
|
|
Net cash used for financing activities
|
|
|
(25,422,600)
|
|
|
(22,794,800)
|
|
|
(27,908,300)
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(179,700)
|
|
|
246,200
|
|
|
(1,083,000)
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,252,900
|
|
|
1,006,700
|
|
|
2,089,700
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,073,200
|
|
$
|
1,252,900
|
|
$
|
1,006,700
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,176,100
|
|
$
|
2,296,000
|
|
$
|
1,492,500
|
|
Cash paid for income taxes
|
|
$
|
13,585,200
|
|
$
|
11,801,400
|
|
$
|
14,647,400
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
1. Organization and Business:
Winmark Corporation and subsidiaries (the Company) offers licenses to operate franchises using the service marks Plato’s Closet®, Play It Again Sports®, Once Upon A Child®, Style Encore® and Music Go Round®. In addition, the Company sells point-of-sale system hardware to its franchisees and certain merchandise to its Play It Again Sports franchisees. 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. The Company has a 52/53-week fiscal year that ends on the last Saturday in December. Fiscal years 2017 and 2015 were 52-week fiscal years, while 2016 was a 53-week fiscal year.
Following is a summary of our franchising activity for the fiscal year ended December 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2016
|
|
OPENED
|
|
CLOSED
|
|
12/30/2017
|
|
Plato’s Closet
|
|
|
|
|
|
|
|
|
|
Franchises - US and Canada
|
|
468
|
|
14
|
|
(6)
|
|
476
|
|
Once Upon A Child
|
|
|
|
|
|
|
|
|
|
Franchises - US and Canada
|
|
348
|
|
18
|
|
(6)
|
|
360
|
|
Play It Again Sports
|
|
|
|
|
|
|
|
|
|
Franchises - US and Canada
|
|
283
|
|
6
|
|
(8)
|
|
281
|
|
Style Encore
|
|
|
|
|
|
|
|
|
|
Franchises - US and Canada
|
|
52
|
|
11
|
|
(2)
|
|
61
|
|
Music Go Round
|
|
|
|
|
|
|
|
|
|
Franchises - US
|
|
35
|
|
—
|
|
(2)
|
|
33
|
|
Total Franchised Stores
|
|
1,186
|
|
49
|
|
(24)
|
|
1,211
|
|
2. Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Winmark Capital Corporation, Wirth Business Credit, Inc. and Grow Biz Games, Inc. All material inter-company transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. Cash equivalents are stated at cost, which approximates fair value. As of December 30, 2017 and December 31, 2016, the Company had $8,700 and $149,700 of cash located in Canadian banks. The Company holds its cash and cash equivalents with financial institutions and at times, such balances may be in excess of insurance limits.
Receivables
The Company provides an allowance for doubtful accounts on trade receivables. The allowance for doubtful accounts was $400 and $2,100 at December 30, 2017 and December 31, 2016, respectively. If receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the year the determination is made. Trade receivables are written off when they become uncollectible (which generally occurs when the franchise terminates and there is no reasonable expectation of collection), and payments subsequently received on such receivable are credited to the allowance for doubtful accounts. Historically, receivables balances written off have not exceeded allowances provided.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
Restricted Cash
The Company is required by certain states to maintain initial franchise fees in a restricted bank account until the franchise opens. The use of these funds by the Company is restricted until the franchise opens. Cash held in escrow totaled $90,000 and $40,000 at December 30, 2017 and December 31, 2016, respectively.
Investment in Leasing Operations
The Company uses the direct finance method of accounting to record income from direct financing leases. At the inception of a lease, the Company records the minimum future lease payments receivable, the estimated residual value of the leased equipment and the unearned lease income. Initial direct costs related to lease originations are deferred as part of the investment and amortized over the lease term. Unearned lease income is the amount by which the total lease receivable plus the estimated residual value exceeds the cost of the equipment.
Leasing Income Recognition
Leasing income for direct financing leases is recognized under the effective interest method. The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. Generally, when a lease is more than 90 days delinquent (when more than three monthly payments are owed), the lease is classified as being on non-accrual and the Company stops recognizing leasing income on that date. Payments received on leases in non-accrual status generally reduce the lease receivable. Leases on non-accrual status remain classified as such until there is sustained payment performance that, in the Company’s judgment, would indicate that all contractual amounts will be collected in full.
In certain circumstances, the Company may re-lease equipment in its existing portfolio. As this equipment may have a fair value greater than its carrying amount when re-leased, the Company may be required to account for the lease as a sales-type lease. At inception of a sales-type lease, revenue is recorded that consists of the present value of the future minimum lease payments discounted at the rate implicit in the lease. In subsequent periods, the recording of income is consistent with the accounting for a direct financing lease.
For leases that are accounted for as operating leases, income is recognized on a straight-line basis when payments under the lease contract are due.
Leasing Expense
Leasing expense includes the cost of financing equipment purchases, the cost of equipment sales as well as depreciation expense for operating lease assets. Additionally, at inception of a sales-type lease, cost is recorded that consists of the equipment’s book value, less the present value of its residual and is included in leasing expense.
Initial Direct Costs
The Company defers initial direct costs incurred to originate its leases in accordance with applicable accounting guidance
.
The initial direct costs deferred are part of the investment in leasing operations and are amortized using the effective interest method. Initial direct costs include commissions and costs associated with credit evaluation, recording guarantees and other security arrangements, documentation and transaction closing.
Lease Residual Values
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.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
Allowance for Credit Losses
The Company maintains an allowance for credit losses at an amount that it believes to be sufficient to absorb losses inherent in its existing lease portfolio as of the reporting dates. Leases are collectively evaluated for potential loss. The Company’s methodology for determining the allowance for credit losses includes consideration of the level of delinquencies and non-accrual leases, historical net charge-off amounts and review of any significant concentrations.
A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level. If the actual results are different from the Company’s estimates, results could be different. The Company’s policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.
Inventories
The Company values its inventories at the lower of cost, as determined by the weighted average cost method, or market. Inventory consists of computer hardware and related accessories.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount of the asset exceeds expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization for financial reporting purposes is provided on the straight-line method. Estimated useful lives used in calculating depreciation and amortization are: three to five years for computer and peripheral equipment, five to seven years for furniture and equipment and the shorter of the lease term or useful life for leasehold improvements. Major repairs, refurbishments and improvements which significantly extend the useful lives of the related assets are capitalized. Maintenance and repairs, supplies and accessories are charged to expense as incurred.
Goodwill
The Company reviews its goodwill for impairment at its fiscal year end or whenever events or changes in circumstances indicate that there has been impairment in the value of its goodwill. No impairment was noted during the years ended December 30, 2017 and December 31, 2016. Goodwill of $607,500 in the consolidated balance sheets at December 30, 2017 and December 31, 2016 is all attributable to the Franchising segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted U.S. accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The ultimate results could differ from those estimates. The most significant estimates relate to allowance for credit losses. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.
Advertising
Advertising costs are charged to operating expenses as incurred. Advertising costs were $307,700, $200,300 and $199,300 for fiscal years 2017, 2016 and 2015, respectively.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
Accounting for Stock-Based Compensation
The Company recognizes the cost of all share-based payments to employees, including grants of employee stock options, in the consolidated financial statements based on the grant date fair value of those awards. This cost is recognized over the period for which an employee is required to provide service in exchange for the award.
The Company estimates the fair value of options granted using the Black-Scholes option valuation model. The Company estimates the volatility of its common stock at the date of grant based on its historical volatility rate. The Company’s decision to use historical volatility was based upon the lack of actively traded options on its common stock. The Company estimates the expected term based upon historical option exercises. The risk-free interest rate assumption is based on observed interest rates for the expected term. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, the Company amortizes the fair value on a straight-line basis. All options are amortized over the vesting periods, which are generally four years beginning from the date of grant.
Revenue Recognition - Franchising
The Company collects royalties from each retail franchise based on a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned. The Company collects initial franchise fees when franchise agreements are signed and recognizes the initial franchise fees as revenue when the franchise is opened, which is when the Company has performed substantially all initial services required by the franchise agreement. The Company had deferred franchise fee revenue of $1,267,100 and $1,545,900 at December 30, 2017 and December 31, 2016, respectively. The Company recognizes deferred software license fees over the 10-year life of the initial franchise agreement. The Company had deferred software license fees of $1,779,600 and $1,672,500 at December 30, 2017 and December 31, 2016, respectively. Merchandise sales are recognized when the product has been shipped to the franchisee.
Sales Tax
The Company’s accounting policy is to present taxes collected from customers and remitted to government authorities on a net basis.
Discounted Lease Rentals
The Company may utilize its lease rentals receivable and underlying equipment as collateral to borrow from financial institutions at fixed rates on a non-recourse basis. In the event of a default by a customer, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Company. Proceeds from discounting are recorded on the balance sheet as discounted lease rentals. As customers make payments, lease income and interest expense are recorded and discounted lease rentals are reduced by the effective interest method.
Earnings Per Share
The Company calculates earnings per share by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Earnings Per Share — Basic. The Company calculates Earnings Per Share — Diluted by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the potential exercise of stock options using the treasury stock method.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Denominator for basic EPS — weighted average common shares
|
|
4,056,049
|
|
4,122,854
|
|
4,458,927
|
|
Dilutive shares associated with option plans
|
|
283,895
|
|
207,636
|
|
192,600
|
|
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares
|
|
4,339,944
|
|
4,330,490
|
|
4,651,527
|
|
Options excluded from EPS calculation — anti-dilutive
|
|
24,516
|
|
31,590
|
|
22,459
|
|
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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which provides guidance for revenue recognition that supersedes existing revenue recognition guidance (but does not apply to nor supersede accounting guidance for lease contracts). The ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The new standard will become effective for the Company beginning with the first quarter of fiscal 2018.
During 2016, the FASB issued four clarifications on specific topics within the new revenue recognition guidance that did not change the core principles of the guidance originally issued in May 2014.
The adoption of this guidance is not expected to impact the Company’s recognition of leasing revenues or revenue from royalties that are based on a percentage of franchisee sales. Upon adoption, initial franchise fees, which are currently recognized upon the opening of a franchise, are expected to be deferred and recognized over the term of the underlying franchise agreement. The effect of the required deferral of initial franchise fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively deferred from prior years. The Company presently expects to use the retrospective method of adoption when the new guidance is adopted in the first quarter of 2018. Upon adoption, the Company expects to recognize the deferral on its balance sheet of approximately $7 million in revenue from franchise fees, with a corresponding adjustment to retained earnings, net of deferred taxes.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which provides guidance on accounting for leases that supersedes existing lease accounting guidance. The ASU’s core principle is that a lessee should recognize lease assets and lease liabilities for those leases classified as operating leases under existing lease accounting guidance. The new standard also makes targeted changes to lessor accounting. This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented. The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments
, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance will be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
,
which simplifies several aspects of accounting for stock based compensation, including excess tax benefits and deficiencies, forfeiture estimates and classification in the statements of cash flows. Upon adoption, any future excess tax benefits or deficiencies are recorded to the provision for income taxes in the consolidated statements of operations instead of recorded to equity in the consolidated balance sheets. This reclassification can have a material impact on the Company’s provision for income taxes and effective tax rate, depending in part on whether significant stock option exercises occur. In addition, when applying the treasury stock method for computing diluted weighted average common shares, the assumed proceeds available for hypothetical repurchase of shares do not include any windfall tax benefits under the new ASU. As a result, outstanding option awards have a more dilutive effect on earnings per share. The Company adopted ASU 2016-09 in the first quarter of 2017, using a prospective approach. As a result of adopting the ASU, for the year ended December 30, 2017, the Company recognized $793,400 of excess tax benefits as a discrete tax benefit. The treatment of forfeitures has not changed as the Company will continue to estimate the number of forfeitures at the time of the option grant; therefore, there is no cumulative effect on retained earnings. The Company has elected to present the cash flows on a retrospective transition method with prior periods adjusted, which resulted in a reclassification of excess tax benefits for the years ended December 31, 2016 and December 26, 2015 of $599,400 and $26,300, respectively, from cash flows from financing activities to cash flows from operating activities.
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.
3. Investments:
Marketable Securities
The following is a summary of marketable securities classified as available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Equity securities
|
|
$
|
—
|
|
$
|
—
|
|
$
|
215,800
|
|
$
|
199,900
|
|
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
The Company’s unrealized gains and losses for marketable securities classified as available-for-sale securities in accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Unrealized gains
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Unrealized losses
|
|
|
—
|
|
|
(15,900)
|
|
|
(52,800)
|
|
Net unrealized losses
|
|
$
|
—
|
|
$
|
(15,900)
|
|
$
|
(52,800)
|
|
The Company’s realized gains and losses recognized on sales of available-for-sale marketable securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Realized gains
|
|
$
|
10,300
|
|
$
|
—
|
|
$
|
13,400
|
|
Realized losses
|
|
|
(8,900)
|
|
|
(12,600)
|
|
|
(36,200)
|
|
Net realized gains (losses)
|
|
$
|
1,400
|
|
$
|
(12,600)
|
|
$
|
(22,800)
|
|
Amounts reclassified out of accumulated other comprehensive income (loss) into earnings is determined by using the average cost of the security when sold. Gross realized gains (losses) reclassified out of accumulated other comprehensive loss into earnings are included in Interest and Other Income (Expense) and the related tax benefits (expenses) are included in the Provision for Income Taxes lines of the Consolidated Statements of Operations.
4. Investment in Leasing Operations:
Investment in leasing operations consists of the following:
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Direct financing and sales-type leases:
|
|
|
|
|
|
|
Minimum lease payments receivable
|
|
$
|
36,119,700
|
|
$
|
37,839,800
|
Estimated residual value of equipment
|
|
|
4,762,700
|
|
|
4,754,200
|
Unearned lease income net of initial direct costs deferred
|
|
|
(5,371,900)
|
|
|
(5,844,500)
|
Security deposits
|
|
|
(4,526,000)
|
|
|
(4,424,400)
|
Equipment installed on leases not yet commenced
|
|
|
10,989,700
|
|
|
9,961,600
|
Total investment in direct financing and sales-type leases
|
|
|
41,974,200
|
|
|
42,286,700
|
Allowance for credit losses
|
|
|
(711,200)
|
|
|
(896,000)
|
Net investment in direct financing and sales-type leases
|
|
|
41,263,000
|
|
|
41,390,700
|
Operating leases:
|
|
|
|
|
|
|
Operating lease assets
|
|
|
1,045,400
|
|
|
800,700
|
Less accumulated depreciation and amortization
|
|
|
(1,030,800)
|
|
|
(775,900)
|
Net investment in operating leases
|
|
|
14,600
|
|
|
24,800
|
Total net investment in leasing operations
|
|
$
|
41,277,600
|
|
$
|
41,415,500
|
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 December 31, 2016, the $41.4 million total net investment in leases consists of $17.0 million classified as current and $24.4 million classified as long-term.
As of December 30, 2017, leased assets with one customer approximated 26% of the Company’s total assets. As of December 31, 2016, leased assets with two customers approximated 19% and 17%, respectively, of the Company’s total assets.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows as of December 30, 2017:
|
|
|
|
|
|
|
|
|
|
Direct Financing and Sales-Type Leases
|
|
|
|
Minimum Lease
|
|
Income
|
|
Fiscal Year
|
|
Payments Receivable
|
|
Amortization
|
|
2018
|
|
$
|
20,679,500
|
|
$
|
3,946,100
|
|
2019
|
|
|
12,413,200
|
|
|
1,296,900
|
|
2020
|
|
|
2,982,900
|
|
|
124,700
|
|
2021
|
|
|
18,000
|
|
|
2,300
|
|
2022
|
|
|
13,700
|
|
|
1,300
|
|
Thereafter
|
|
|
12,400
|
|
|
600
|
|
|
|
$
|
36,119,700
|
|
$
|
5,371,900
|
|
The activity in the allowance for credit losses for leasing operations during 2017, 2016 and 2015, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Balance at beginning of period
|
|
$
|
896,000
|
|
$
|
859,100
|
|
$
|
386,000
|
|
Provisions charged to expense
|
|
|
9,000
|
|
|
18,500
|
|
|
(149,700)
|
|
Recoveries
|
|
|
8,600
|
|
|
47,700
|
|
|
632,200
|
|
Deductions for amounts written-off
|
|
|
(202,400)
|
|
|
(29,300)
|
|
|
(9,400)
|
|
Balance at end of period
|
|
$
|
711,200
|
|
$
|
896,000
|
|
$
|
859,100
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
Investment
|
|
Allowance for
|
|
Investment
|
|
Allowance for
|
|
|
In Leases
|
|
Credit Losses
|
|
In Leases
|
|
Credit Losses
|
Collectively evaluated for loss potential
|
|
$
|
41,974,200
|
|
$
|
711,200
|
|
$
|
42,286,700
|
|
$
|
896,000
|
Individually evaluated for loss potential
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Total
|
|
$
|
41,974,200
|
|
$
|
711,200
|
|
$
|
42,286,700
|
|
$
|
896,000
|
The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss. The following table sets forth information regarding the Company’s accruing and non-accrual leases. Delinquent balances are determined based on the contractual terms of the lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
0-60 Days
|
|
61-90 Days
|
|
Over 90 Days
|
|
|
|
|
|
|
|
|
Delinquent
|
|
Delinquent
|
|
Delinquent and
|
|
|
|
|
|
|
|
|
and Accruing
|
|
and Accruing
|
|
Accruing
|
|
Non-Accrual
|
|
Total
|
Middle-Market
|
|
$
|
41,299,600
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
41,299,600
|
Small-Ticket
|
|
|
987,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
987,100
|
Total Investment in Leases
|
|
$
|
42,286,700
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
42,286,700
|
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
5. Receivables:
The Company’s current receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
Trade
|
|
$
|
9,800
|
|
$
|
12,200
|
|
Royalty
|
|
|
1,574,500
|
|
|
1,302,700
|
|
Other
|
|
|
211,700
|
|
|
164,300
|
|
|
|
$
|
1,796,000
|
|
$
|
1,479,200
|
|
The activity in the allowance for doubtful accounts for trade receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Balance at beginning of year
|
|
$
|
2,100
|
|
$
|
200
|
|
$
|
1,600
|
|
Provisions charged to expense
|
|
|
(1,600)
|
|
|
2,800
|
|
|
1,500
|
|
Deductions for amounts written-off
|
|
|
(100)
|
|
|
(900)
|
|
|
(2,900)
|
|
Balance at end of year
|
|
$
|
400
|
|
$
|
2,100
|
|
$
|
200
|
|
As part of its normal operating procedures, the Company requires Standby Letters of Credit as collateral for a portion of its trade receivables.
6. Shareholders’ Equity (Deficit):
Dividends
In 2017, the Company declared and paid quarterly cash dividends totaling $0.43 per share ($1.8 million).
In 2016, the Company declared and paid quarterly cash dividends totaling $0.37 per share ($1.5 million).
In 2015, the Company declared and paid quarterly cash dividends totaling $0.27 per share ($1.2 million).
Repurchase of Common Stock
In July 2017, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of our common stock for a price of $124.48 per share through a tender offer (the “2017 Tender Offer”). The 2017 Tender Offer began on the date of the announcement, July 19, 2017 and expired on August 16, 2017. Upon expiration, the Company accepted for payment 400,000 shares for a total purchase price of approximately $49.9 million, including fees and expenses related to the 2017 Tender Offer. The 2017 Tender Offer was financed by net borrowings under the Line of Credit and Notes Payable. (See Note 7 – “Debt”).
In 2016 the Company purchased 17,194 shares of our common stock for an aggregate purchase price of $1.6 million or $91.54 per share.
In April 2015, the Company’s Board of Directors authorized the repurchase of up to 875,000 shares of our common stock for a price of $84.72 per share through a tender offer (the “2015 Tender Offer”). The 2015 Tender Offer began on the date of the announcement, April 15, 2015 and expired on May 13, 2015. Upon expiration, the Company accepted for payment 875,000 shares for a total purchase price of approximately $74.3 million, including fees and expenses related to the 2015 Tender Offer. The 2015 Tender Offer was financed by a combination of cash on hand as well as net borrowings under the Line of Credit and Notes Payable. (See Note 7 – “Debt”).
In addition to the 2015 Tender Offer, during 2015, the Company repurchased 6,518 shares for an aggregate purchase price of $0.6 million or $90.85 per share.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
Under a previous Board of Directors’ authorization, as of December 30, 2017 the Company has the ability to repurchase an additional 142,988 shares of its common stock. Repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing.
Stock Option Plans and Stock-Based Compensation
The Company had authorized up to 750,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2001 Stock Option Plan (the “2001 Plan”). The 2001 Plan expired on February 20, 2011. At the April 26, 2017 Annual Shareholders meeting, the Company’s shareholders approved an increase in the shares of common stock available for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”) by 200,000 shares, from 500,000 to 700,000.
Grants under the 2001 Plan and 2010 Plan are made by the Compensation Committee of the Board of Directors at a price of not less than 100% of the fair market value on the date of grant. If an incentive stock option is granted to an individual who owns more than 10% of the voting rights of the Company’s common stock, the option exercise price may not be less than 110% of the fair market value on the date of grant. The term of the options may not exceed 10 years, except in the case of nonqualified stock options, whereby the terms are established by the Compensation Committee. Options may be exercisable in whole or in installments, as determined by the Compensation Committee.
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 December 30, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Number of
|
|
Weighted Average
|
|
Contractual Life
|
|
|
|
|
|
Shares
|
|
Exercise Price
|
|
(years)
|
|
Intrinsic Value
|
Outstanding, December 27, 2014
|
|
597,700
|
|
$
|
48.50
|
|
6.93
|
|
$
|
20,973,700
|
Granted
|
|
79,400
|
|
|
91.46
|
|
|
|
|
|
Exercised
|
|
(8,360)
|
|
|
38.46
|
|
|
|
|
|
Outstanding, December 26, 2015
|
|
668,740
|
|
|
53.73
|
|
6.41
|
|
|
25,582,300
|
Granted
|
|
69,600
|
|
|
112.07
|
|
|
|
|
|
Exercised
|
|
(61,169)
|
|
|
26.21
|
|
|
|
|
|
Forfeited
|
|
(3,501)
|
|
|
80.31
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
673,670
|
|
|
62.11
|
|
6.11
|
|
|
43,139,100
|
Granted
|
|
69,500
|
|
|
128.00
|
|
|
|
|
|
Exercised
|
|
(80,236)
|
|
|
33.41
|
|
|
|
|
|
Forfeited
|
|
(4,750)
|
|
|
95.28
|
|
|
|
|
|
Outstanding, December 30, 2017
|
|
658,184
|
|
$
|
72.33
|
|
5.87
|
|
$
|
37,723,800
|
Exercisable, December 30, 2017
|
|
476,780
|
|
$
|
58.41
|
|
4.84
|
|
$
|
33,845,900
|
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
The fair value of options granted under the Option Plans during 2017, 2016 and 2015 were estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Risk free interest rate
|
|
|
2.05
|
%
|
|
1.80
|
%
|
|
1.71
|
%
|
Expected life (years)
|
|
|
6
|
|
|
6
|
|
|
6
|
|
Expected volatility
|
|
|
25.64
|
%
|
|
27.13
|
%
|
|
30.15
|
%
|
Dividend yield
|
|
|
1.10
|
%
|
|
1.23
|
%
|
|
1.36
|
%
|
Option fair value
|
|
$
|
32.07
|
|
$
|
28.54
|
|
$
|
24.88
|
|
The total intrinsic value of options exercised during 2017, 2016 and 2015 was $7.7 million, $4.8 million and $0.4 million, respectively. The total fair value of shares vested during 2017, 2016 and 2015 was $7.3 million, $6.9 million and $6.2 million, respectively.
During 2017, 2016 and 2015, option holders surrendered 2,927 shares, 2,973 shares and 587 shares, respectively, of previously owned common stock as payment for option shares exercised as provided for by the Option Plans. All unexercised options at December 30, 2017 have an exercise price equal to the fair market value on the date of the grant.
Compensation expense of $1,956,600, $1,776,600 and $1,694,800 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in 2017, 2016 and 2015, respectively. As of December 30, 2017, the Company had $4.3 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 2.6 years.
7. Debt:
Line of Credit
As of December 30, 2017 there was $35.4 million in borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA
(as successor by merger to The PrivateBank and Trust Company)
and BMO Harris Bank N.A. (the “Line of Credit”) bearing interest ranging from 3.42% to 4.50%.
In April 2015, the Line of Credit was amended to, among other things:
|
·
|
|
Provide the consent of the lenders for the 2015 Tender Offer;
|
|
·
|
|
Increase the aggregate commitments to partially fund the 2015 Tender Offer;
|
|
·
|
|
Extend the termination date from February 28, 2018 to May 14, 2019;
|
|
·
|
|
Amend certain financial covenant calculations to remove the effect of the 2015 Tender Offer; and
|
|
·
|
|
Permit the Company to sell up to $30 million in term notes to Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”) to partially fund the 2015 Tender Offer.
|
In July 2017, the Line of Credit was amended to, among other things:
|
·
|
|
Provide the consent of the lenders for the 2017 Tender Offer;
|
|
·
|
|
Extend the termination date from May 14, 2019 to July 19, 2021;
|
|
·
|
|
Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer;
|
|
·
|
|
Reduce the applicable margin on interest rate options in connection with LIBOR loans under the Line of Credit; and
|
|
·
|
|
Permit the Company to sell up to $15.0 million in term notes to one or more affiliates or managed accounts of Prudential to partially fund the 2017 Tender Offer.
|
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
The Line of Credit has been and will continue to be used for general corporate purposes. During 2017 and 2015, the Line of Credit was used to finance in part the 2017 and 2015 Tender Offers (as indicated above). Borrowings under the Line of Credit are subject to certain borrowing base limitations, and 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). In July 2019 and each subsequent July thereafter through the term of the facility, the aggregate commitments under the Line of Credit automatically reduce by $5.0 million. As of December 30, 2017, the Company was in compliance with all of its financial covenants and the Company’s additional borrowing availability under the Line of Credit was $14.6 million.
The Line of Credit allows the Company to choose between two interest rate options in connection with its borrowings. The interest rate options are the Base Rate (as defined) and the LIBOR Rate (as defined) plus an applicable margin of 0% and 2.0%, respectively. Interest periods for LIBOR borrowings can be one, two, three, six or twelve months, as selected by the Company. The Line of Credit also provides for non-utilization fees of 0.25% per annum on the daily average of the unused commitment.
Notes Payable
In May 2015, the Company entered into a $25.0 million Note Agreement (the “Note Agreement”) with Prudential. Proceeds from the Note Agreement of $25.0 million were used to finance in part the 2015 Tender Offer (as indicated above).
In July 2017, the Note Agreement was amended to, among other things:
|
·
|
|
Provide the consent of Prudential for the 2017 Tender Offer:
|
|
·
|
|
Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer:
|
|
·
|
|
Provide for a new $12.5 million term loan to partially fund the 2017 Tender offer.
|
In August 2017, the Company issued $12.5 million of Series B notes to finance in part the 2017 Tender Offer. As of December 30, 2017, with the $20.0 million in principal outstanding from the $25.0 million of Series A notes issued in May 2015, the aggregate principal outstanding under the Note Agreement was $32.2 million.
The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $1.0 million), but prepayments require payment of a Yield Maintenance Amount, as defined in the Note Agreement.
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 December 30, 2017, the Company was in compliance with all of its financial covenants.
In connection with the Note Agreement, the Company incurred debt issuance costs, of which unamortized amounts are presented as a direct deduction from the carrying amount of the related liability.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
8. Accrued Liabilities:
Accrued liabilities at December 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
Accrued compensation and benefits
|
|
$
|
970,200
|
|
$
|
1,011,900
|
|
Deferred rent
|
|
|
241,400
|
|
|
234,000
|
|
Accrued interest
|
|
|
357,100
|
|
|
253,500
|
|
Other
|
|
|
268,600
|
|
|
311,700
|
|
|
|
$
|
1,837,300
|
|
$
|
1,811,100
|
|
9. 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 6.00% at December 30, 2017 on a non-recourse basis. As of December 30, 2017, $0.6 million of the $1.7 million liability balance is current
.
10. Income Taxes:
A reconciliation of the expected federal income tax expense based on the federal statutory tax rate to the actual income tax expense is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Federal income tax expense at statutory rate (35%)
|
|
$
|
12,750,900
|
|
$
|
12,581,100
|
|
$
|
12,328,700
|
|
Change in valuation allowance
|
|
|
7,500
|
|
|
13,800
|
|
|
(4,400)
|
|
State and local income taxes, net of federal benefit
|
|
|
1,056,500
|
|
|
1,021,600
|
|
|
956,000
|
|
Permanent differences, including stock option expenses
|
|
|
(628,400)
|
|
|
84,300
|
|
|
158,100
|
|
Adjustment to uncertain tax positions
|
|
|
77,800
|
|
|
2,900
|
|
|
10,400
|
|
Rate change
|
|
|
(1,540,300)
|
|
|
—
|
|
|
—
|
|
Other, net
|
|
|
142,000
|
|
|
24,700
|
|
|
(23,700)
|
|
Actual income tax expense
|
|
$
|
11,866,000
|
|
$
|
13,728,400
|
|
$
|
13,425,100
|
|
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,143,400
|
|
$
|
12,016,000
|
|
$
|
13,486,500
|
|
State
|
|
|
1,732,100
|
|
|
1,598,700
|
|
|
1,654,800
|
|
Foreign
|
|
|
365,900
|
|
|
396,600
|
|
|
425,900
|
|
Current provision
|
|
|
13,241,400
|
|
|
14,011,300
|
|
|
15,567,200
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,405,000)
|
|
|
(274,600)
|
|
|
(1,983,200)
|
|
State
|
|
|
29,600
|
|
|
(8,300)
|
|
|
(158,900)
|
|
Deferred provision
|
|
|
(1,375,400)
|
|
|
(282,900)
|
|
|
(2,142,100)
|
|
Total provision for income taxes
|
|
$
|
11,866,000
|
|
$
|
13,728,400
|
|
$
|
13,425,100
|
|
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
The tax effects of temporary differences that give rise to the net deferred income tax assets and liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Accounts receivable and lease reserves
|
|
$
|
179,800
|
|
$
|
347,400
|
|
Non-qualified stock option expense
|
|
|
1,800,600
|
|
|
2,370,700
|
|
Deferred franchise and software license fees
|
|
|
561,800
|
|
|
817,500
|
|
Trademarks
|
|
|
44,300
|
|
|
76,800
|
|
Lease deposits
|
|
|
1,110,000
|
|
|
1,674,300
|
|
Loss from and impairment of equity and note investments
|
|
|
2,634,500
|
|
|
4,065,200
|
|
Valuation allowance
|
|
|
(2,634,500)
|
|
|
(4,065,200)
|
|
Other
|
|
|
190,600
|
|
|
413,100
|
|
Total deferred tax assets
|
|
|
3,887,100
|
|
|
5,699,800
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Lease revenue and initial direct costs
|
|
|
(5,707,000)
|
|
|
(8,802,800)
|
|
Depreciation and amortization
|
|
|
(136,600)
|
|
|
(228,900)
|
|
Total deferred tax liabilities
|
|
|
(5,843,600)
|
|
|
(9,031,700)
|
|
Total net deferred tax liabilities
|
|
$
|
(1,956,500)
|
|
$
|
(3,331,900)
|
|
On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was signed into law. The Tax Act makes changes to the U.S. tax code that affected our income tax rate in 2017, notably the reduction of the U.S. federal corporate income tax rate from 35% to 21% beginning in 2018. Accounting guidance applicable to income taxes requires us to recognize the impact of the change in tax rate on our existing deferred tax assets and liabilities as of the date that the Tax Act was signed into law. We recorded a reduction in our 2017 income tax expense of $1.5 million and a corresponding reduction in our net deferred income tax liabilities as a result of the decrease in the federal income tax rate.
During the years ended December 30, 2017, December 31, 2016 and December 26, 2015, $0, $599,400 and
$26,300
,
respectively, was directly credited to stockholders’ equity to account for excess tax benefits related to stock option exercises. (See Note 2 – “Recently Adopted Accounting Pronouncements”)
The Company has assessed its taxable earnings history and prospective future taxable income. Based upon this assessment, the Company has determined that it is more likely than not that its deferred tax assets will be realized in future periods and no valuation allowance is necessary, except for the deferred tax assets related to the loss from and impairment of equity and note investments (which are capital losses for tax purposes). As a result, valuation allowances of $2.6 million and $4.1 million as of December 30, 2017 and December 31, 2016, respectively, have been recorded.
The amount of unrecognized tax benefits, including interest and penalties, as of December 30, 2017 and December 31, 2016, was $583,100 and $502,000, respectively, primarily for potential state taxes.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense for all periods presented. The Company had accrued approximately $32,000 and $22,500 for the payment of interest and penalties at December 30, 2017 and December 31, 2016, respectively.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
Total
|
|
Balance at December 26, 2015
|
|
$
|
469,900
|
|
Increases related to current year tax positions
|
|
|
128,500
|
|
Subtractions for tax positions of prior years
|
|
|
(5,300)
|
|
Expiration of the statute of limitations for the assessment of taxes
|
|
|
(113,600)
|
|
Balance at December 31, 2016
|
|
|
479,500
|
|
Increases related to current year tax positions
|
|
|
192,900
|
|
Subtractions for tax positions of prior years
|
|
|
(8,300)
|
|
Expiration of the statute of limitations for the assessment of taxes
|
|
|
(113,000)
|
|
Balance at December 30, 2017
|
|
$
|
551,100
|
|
The Company and its subsidiaries file income tax returns in the U.S. federal, numerous state and certain foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2013. The Internal Revenue Service concluded its examination of our U.S. federal tax return for the fiscal year ended 2014 in 2017. We expect various statutes of limitation to expire during the next 12 months. Due to the uncertain response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.
11. Commitments and Contingencies:
Employee Benefit Plan
The Company provides a 401(k) Savings Incentive Plan which covers substantially all employees. The plan provides for matching contributions and optional profit-sharing contributions at the discretion of the Board of Directors. Employee contributions are fully vested; matching and profit sharing contributions are subject to a five-year service vesting schedule. Company contributions to the plan for 2017, 2016 and 2015 were $319,700, $309,800 and $324,600, respectively.
Operating Leases
As of December 30, 2017, the Company rents its corporate headquarters in a facility with a lease that expires in August 2019 as well as satellite office space in California with a lease that expires in January 2019. These leases require the Company to pay maintenance, insurance, taxes and other expenses in addition to minimum annual rent. Total rent expense under operating leases, inclusive of maintenance, insurance, taxes and other expenses, was $1,102,000 in 2017, $1,066,500 in 2016 and $1,063,900 in 2015. As of December 30, 2017, minimum rental commitments under noncancelable operating leases, exclusive of maintenance, insurance, taxes and other expenses, are as follows:
|
|
|
|
|
2018
|
|
$
|
718,800
|
|
2019
|
|
|
451,100
|
|
2020
|
|
|
—
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,169,900
|
|
For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or other liabilities, as appropriate.
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
Cash or lease incentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or other liabilities, as appropriate.
At December 30, 2017 and December 31, 2016, total deferred rent included in our consolidated balance sheets was $0.4 million and $0.6 million, respectively, of which $0.2 million and $0.4 million, respectively was included in other liabilities.
Litigation
The Company is exposed to a number of asserted and unasserted legal claims encountered in the normal course of business. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
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, accounts receivable, prepaids, inventory, property and equipment and investment in leasing operations. Unallocated assets include corporate cash and cash equivalents, marketable securities, long-term investments, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Franchising
|
|
$
|
51,275,700
|
|
$
|
49,296,700
|
|
$
|
47,882,100
|
|
Leasing
|
|
|
18,470,200
|
|
|
17,283,600
|
|
|
21,565,700
|
|
Total revenue
|
|
$
|
69,745,900
|
|
$
|
66,580,300
|
|
$
|
69,447,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to operating income:
|
|
|
|
|
|
|
|
|
|
|
Franchising segment contribution
|
|
$
|
29,493,500
|
|
$
|
28,650,400
|
|
$
|
26,891,000
|
|
Leasing segment contribution
|
|
|
9,291,100
|
|
|
9,650,600
|
|
|
10,199,700
|
|
Total operating income
|
|
$
|
38,784,600
|
|
$
|
38,301,000
|
|
$
|
37,090,700
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
Franchising
|
|
$
|
271,300
|
|
$
|
325,200
|
|
$
|
341,600
|
|
Leasing
|
|
|
84,100
|
|
|
95,300
|
|
|
91,000
|
|
Total depreciation and amortization
|
|
$
|
355,400
|
|
$
|
420,500
|
|
$
|
432,600
|
|
Table of Contents
WINMARK CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 30, 2017, December 31, 2016 and December 26, 2015
|
|
|
|
|
|
|
|
|
As of
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Identifiable assets:
|
|
|
|
|
|
|
Franchising
|
|
$
|
3,614,200
|
|
$
|
3,141,300
|
Leasing
|
|
|
42,153,600
|
|
|
42,735,600
|
Unallocated
|
|
|
2,637,000
|
|
|
2,704,700
|
Total
|
|
$
|
48,404,800
|
|
$
|
48,581,600
|
Revenues are all generated from United States operations other than franchising revenues from Canadian operations of $3.8 million, $3.3 million and $2.9 million in each of fiscal 2017, 2016 and 2015, respectively. All long-lived assets are located within the United States.
13. Quarterly Financial Data (Unaudited):
The Company’s unaudited quarterly results for the years ended December 30, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
17,623,800
|
|
$
|
16,749,500
|
|
$
|
17,567,900
|
|
$
|
17,804,700
|
|
$
|
69,745,900
|
|
Income from Operations
|
|
|
9,135,400
|
|
|
9,134,200
|
|
|
9,852,000
|
|
|
10,663,000
|
|
|
38,784,600
|
|
Net Income
|
|
|
5,416,400
|
|
|
5,773,200
|
|
|
5,719,000
|
|
|
7,656,500
|
|
|
24,565,100
|
|
Net Income Per Common Share — Basic
|
|
$
|
1.30
|
|
$
|
1.37
|
|
$
|
1.42
|
|
$
|
2.00
|
|
$
|
6.06
|
|
Net Income Per Common Share — Diluted
|
|
$
|
1.22
|
|
$
|
1.29
|
|
$
|
1.33
|
|
$
|
1.86
|
|
$
|
5.66
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
16,180,300
|
|
$
|
16,299,800
|
|
$
|
16,734,300
|
|
$
|
17,365,900
|
|
$
|
66,580,300
|
|
Income from Operations
|
|
|
8,038,600
|
|
|
9,323,100
|
|
|
10,438,000
|
|
|
10,501,300
|
|
|
38,301,000
|
|
Net Income
|
|
|
4,562,900
|
|
|
5,394,300
|
|
|
6,094,200
|
|
|
6,166,200
|
|
|
22,217,600
|
|
Net Income Per Common Share — Basic
|
|
$
|
1.11
|
|
$
|
1.31
|
|
$
|
1.48
|
|
$
|
1.49
|
|
$
|
5.39
|
|
Net Income Per Common Share — Diluted
|
|
$
|
1.06
|
|
$
|
1.25
|
|
$
|
1.41
|
|
$
|
1.41
|
|
$
|
5.13
|
|
The total of basic and diluted earnings per common share by quarter may not equal the totals for the year as there are changes in the weighted average number of common shares outstanding each quarter and basic and diluted earnings per common share are calculated independently for each quarter.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Winmark Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Winmark Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of December 30, 2017 and December 31, 2016, the related consolidated statements of operations, comprehensive income, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 30, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 30, 2017, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 9, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2006.
/s/ GRANT THORNTON LLP
|
|
|
|
Minneapolis, Minnesota
|
|
March 9, 2018
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Winmark Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Winmark Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of December 30, 2017, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 30, 2017, and our report dated March 9, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
|
|
|
|
Minneapolis, Minnesota
|
|
March 9, 2018
|
|