10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2019

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 ☒

As of October  11, 2019, there were 3,830,850 shares of the registrant’s common stock, no par value, outstanding.

WINMARK CORPORATION AND SUBSIDIARIES

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	CONSOLIDATED CONDENSED BALANCE SHEETS
	September  28, 2019 and December 29, 2018	3
	CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
	Three Months Ended September  28, 2019 and September 29, 2018
	Nine Months Ended September  28, 2019 and September 29, 2018	4
	CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT):
	Three Months Ended September  28, 2019 and September 29, 2018
	Nine Months Ended September  28, 2019 and September 29, 2018	5
	CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
	Nine Months Ended September 28, 2019 and September 29, 2018	6
	NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	7 - 14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 - 22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
	SIGNATURES	25

2

PART I.          FINANCIAL INFORMATION

ITEM 1:   Financial Statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

	September 28, 2019		December 29, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	7,487,200	$	2,496,000
Restricted cash		75,000		80,000
Receivables, less allowance for doubtful accounts of $900 and $400		1,594,400		1,553,100
Net investment in leases - current		14,352,800		18,547,500
Income tax receivable		391,700		565,500
Inventories		69,700		107,600
Prepaid expenses		1,012,500		901,600
Total current assets		24,983,300		24,251,300
Net investment in leases - long-term		15,644,900		20,455,500
Property and equipment, net		2,863,700		866,200
Operating lease right of use assets		3,734,400		—
Goodwill		607,500		607,500
Other assets		501,200		482,600
Deferred income taxes		172,500		—
	$	48,507,500	$	46,663,100
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900	$	3,486,100	$	3,236,100
Accounts payable		1,185,300		1,351,800
Accrued liabilities		2,980,000		3,128,600
Discounted lease rentals		3,012,900		3,021,900
Deferred revenue		1,730,900		1,744,900
Total current liabilities		12,395,200		12,483,300
Long-Term Liabilities:
Notes payable, net of unamortized debt issuance costs of $72,200 and $82,600		22,927,800		25,604,900
Discounted lease rentals		1,354,000		2,723,500
Deferred revenue		8,031,900		8,432,400
Operating lease liabilities		5,953,100		—
Other liabilities		971,500		1,079,200
Deferred income taxes		—		1,148,300
Total long-term liabilities		39,238,300		38,988,300
Shareholders’ Equity (Deficit):
Common stock, no par value, 10,000,000 shares authorized, 3,822,978 and 3,907,686 shares issued and outstanding		3,851,000		4,425,600
Retained earnings (accumulated deficit)		(6,977,000)		(9,234,100)
Total shareholders’ equity (deficit)		(3,126,000)		(4,808,500)
	$	48,507,500	$	46,663,100

The accompanying notes are an integral part of these financial statements

3

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Revenue:
Royalties	$	13,808,800	$	12,865,900	$	38,223,400	$	35,735,900
Leasing income		4,375,500		4,608,600		12,733,800		14,994,500
Merchandise sales		704,500		858,400		2,037,300		2,340,200
Franchise fees		377,400		383,300		1,183,100		1,162,300
Other		414,700		402,300		1,238,700		1,206,400
Total revenue		19,680,900		19,118,500		55,416,300		55,439,300
Cost of merchandise sold		671,700		811,500		1,924,400		2,235,000
Leasing expense		572,400		718,500		1,642,000		1,769,200
Provision for credit losses		(55,500)		(55,600)		23,900		148,400
Selling, general and administrative expenses		6,217,600		6,208,800		19,637,900		19,702,500
Income from operations		12,274,700		11,435,300		32,188,100		31,584,200
Interest expense		(406,200)		(576,900)		(1,348,700)		(1,978,600)
Interest and other income (expense)		500		(1,000)		(5,900)		(13,300)
Income before income taxes		11,869,000		10,857,400		30,833,500		29,592,300
Provision for income taxes		(2,755,200)		(2,493,100)		(7,145,600)		(7,124,600)
Net income	$	9,113,800	$	8,364,300	$	23,687,900	$	22,467,700
Earnings per share - basic	$	2.39	$	2.15	$	6.19	$	5.81
Earnings per share - diluted	$	2.24	$	2.01	$	5.76	$	5.43
Weighted average shares outstanding - basic		3,808,863		3,886,473		3,829,329		3,864,077
Weighted average shares outstanding - diluted		4,065,301		4,164,339		4,112,318		4,140,816

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

4

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

					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 ($0.15 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)
Stock options exercised	22,153		788,800		—		788,800
Compensation expense relating to stock options	—		516,800		—		516,800
Cash dividends ($0.25 per share)	—		—		(942,800)		(942,800)
Comprehensive income (Net income)	—		—		7,301,900		7,301,900
BALANCE, June 29, 2019	3,781,339		1,305,600		(15,136,000)		(13,830,400)
Stock options exercised	41,639		2,049,600		—		2,049,600
Compensation expense relating to stock options	—		495,800		—		495,800
Cash dividends ($0.25 per share)	—		—		(954,800)		(954,800)
Comprehensive income (Net income)	—		—		9,113,800		9,113,800
BALANCE, September 28, 2019	3,822,978	$	3,851,000	$	(6,977,000)	$	(3,126,000)

					Retained
					Earnings
	Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total
BALANCE, December 30, 2017	3,843,078	$	1,476,200	$	(37,189,700)	$	(35,713,500)
Stock options exercised	6,428		48,400		—		48,400
Compensation expense relating to stock options	—		490,800		—		490,800
Cash dividends ($0.11 per share)	—		—		(423,200)		(423,200)
Comprehensive income (Net income)	—		—		6,960,400		6,960,400
BALANCE, March 31, 2018	3,849,506		2,015,400		(30,652,500)		(28,637,100)
Stock options exercised	19,020		798,100		—		798,100
Compensation expense relating to stock options	—		516,100		—		516,100
Cash dividends ($0.15 per share)	—		—		(577,900)		(577,900)
Comprehensive income (Net income)	—		—		7,143,000		7,143,000
BALANCE, June 30, 2018	3,868,526		3,329,600		(24,087,400)		(20,757,800)
Repurchase of common stock	(3,770)		(558,200)		—		(558,200)
Stock options exercised	36,446		1,325,100		—		1,325,100
Compensation expense relating to stock options	—		500,900		—		500,900
Cash dividends ($0.15 per share)	—		—		(583,000)		(583,000)
Comprehensive income (Net income)	—		—		8,364,300		8,364,300
BALANCE, September 29, 2018	3,901,202	$	4,597,400	$	(16,306,100)	$	(11,708,700)

The accompanying notes are an integral part of these financial statements

5

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 28, 2019		September 29, 2018
OPERATING ACTIVITIES:
Net income	$	23,687,900	$	22,467,700
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		276,700		233,700
Provision for credit losses		23,900		148,400
Compensation expense related to stock options		1,511,400		1,507,800
Deferred income taxes		(1,320,800)		105,300
Deferred initial direct costs		(87,400)		(1,198,600)
Amortization of deferred initial direct costs		492,800		809,500
Operating lease right of use asset amortization		285,000		—
Tax benefits on exercised stock options		580,700		297,900
Change in operating assets and liabilities:
Receivables		(41,300)		39,100
Principal collections on lease receivables		14,407,300		—
Income tax receivable/payable		(406,900)		2,766,700
Inventories		37,900		(31,100)
Prepaid expenses		(110,900)		(173,800)
Other assets		(18,600)		(90,100)
Accounts payable		(166,500)		(628,000)
Accrued and other liabilities		(519,300)		1,775,800
Rents received in advance and security deposits		(149,500)		(376,000)
Deferred revenue		(414,500)		(35,700)
Net cash provided by operating activities		38,067,900		27,618,600
INVESTING ACTIVITIES:
Purchase of property and equipment		(135,200)		(472,400)
Purchase of equipment for lease contracts		(7,936,600)		(20,219,800)
Principal collections on lease receivables		—		16,303,500
Net cash used for investing activities		(8,071,800)		(4,388,700)
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit		18,800,000		7,300,000
Payments on line of credit		(18,800,000)		(32,600,000)
Payments on notes payable		(2,437,500)		(2,437,500)
Repurchases of common stock		(24,028,100)		(558,200)
Proceeds from exercises of stock options		2,995,000		2,171,600
Dividends paid		(2,483,700)		(1,584,100)
Proceeds from discounted lease rentals		944,400		4,557,300
Net cash used for financing activities		(25,009,900)		(23,150,900)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		4,986,200		79,000
Cash, cash equivalents and restricted cash, beginning of period		2,576,000		1,163,200
Cash, cash equivalents and restricted cash, end of period	$	7,562,200	$	1,242,200
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	1,322,800	$	2,015,000
Cash paid for income taxes	$	8,292,700	$	3,954,700
Non-cash landlord leasehold improvements	$	2,139,000	$	—
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:
	Nine Months Ended
	September 28, 2019		September 29, 2018
Cash and cash equivalents	$	7,487,200	$	1,187,200
Restricted cash		75,000		55,000
Total cash, cash equivalents and restricted cash	$	7,562,200	$	1,242,200

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

6

WINMARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.  Management’s Interim Financial Statement Representation:

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

Revenues and operating results for the nine months ended September  28, 2019 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 will be effective for reporting periods beginning after December 15, 2019, with early adoption permitted.  While the Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements, at this time it does not believe the adoption of the ASU will have a material impact on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

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, as well as adding new disclosures for leasing activities.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard.  In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842):Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company used the prospective approach of adoption when the new guidance was adopted on December 30, 2018, the first day of fiscal 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward historical lease classification. Upon adoption, as a lessee, the Company recognized operating lease right-of-use assets of $6.0 million and operating

7

lease liabilities of $6.3 million on its Consolidated Condensed Balance Sheets. The adoption of the standard did not have a material impact on its Consolidated Condensed Statements of Operations or Shareholders’ Equity (Deficit). As a lessor, the adoption of the new standard required the Company to present cash receipts from leases within operating activities in the Consolidated Condensed Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the nine months ended September  28, 2019, principal collections on lease receivables were $14.4 million.

As a lessor, 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.  For sales-type leases in which the equipment has a fair value greater or less than its carrying amount, selling profit/loss is recognized at commencement.  For subsequent periods or for leases in which the equipment’s fair value is equal to its carrying amount, 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.

Additional information and disclosures required by this new standard for the Company as a lessee are contained in Note 11 – “Operating Leases”, and as a lessor in Note 6 – “Investment in Leasing Operations”.

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 third nine months of 2019 and 2018, respectively:

	September 28, 2019		September 29, 2018
Balance at beginning of period	$	10,177,300	$	10,310,200
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		979,700		1,354,500
Fees earned that were included in the balance at the beginning of the period		(1,394,200)		(1,390,200)
Balance at end of period	$	9,762,800	$	10,274,500

The following table illustrates future estimated revenue to be recognized for the remainder of 2019 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2019.

Contract Liabilities expected to be recognized in	Amount
2019	$	433,200
2020		1,693,100
2021		1,554,300
2022		1,409,400
2023		1,238,100
Thereafter		3,434,700
	$	9,762,800

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.

8

6.  Investment in Leasing Operations:

Investment in leasing operations consists of the following:

	September 28, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	31,375,800	$	40,822,400
Estimated unguaranteed residual value of equipment		4,289,200		4,741,200
Unearned lease income, net of initial direct costs deferred		(4,765,000)		(6,739,900)
Security deposits		(3,900,600)		(4,118,300)
Equipment installed on leases not yet commenced		3,645,700		5,094,800
Total investment in direct financing and sales-type leases		30,645,100		39,800,200
Allowance for credit losses		(676,800)		(861,200)
Net investment in direct financing and sales-type leases		29,968,300		38,939,000
Operating leases:
Operating lease assets		665,800		777,000
Less accumulated depreciation and amortization		(636,400)		(713,000)
Net investment in operating leases		29,400		64,000
Total net investment in leasing operations	$	29,997,700	$	39,003,000

As of September 28, 2019, the $30.0 million total net investment in leases consists of $14.4 million classified as current and $15.6 million classified as long-term.  As of December 29, 2018, the $39.0 million total net investment in leases consists of $18.5 million classified as current and $20.5 million classified as long-term.

As of September  28, 2019, leased assets with one customer approximated 12% of the Company’s total assets. A portion of the lease payments receivable from this customer were assigned as collateral in non-recourse financing with financial institutions. See Note 10 – “Discounted Lease Rentals”.

Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2019 and the full fiscal years thereafter as of September 28, 2019:

	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2019	$	5,214,200	$	1,291,400
2020		17,273,500		2,782,500
2021		7,999,300		661,400
2022		876,300		29,100
2023		8,100		500
Thereafter		4,400		100
	$	31,375,800	$	4,765,000

The activity in the allowance for credit losses for leasing operations during the first nine months of 2019 and 2018, respectively, is as follows:

	September 28, 2019		September 29, 2018
Balance at beginning of period	$	861,200	$	711,200
Provisions charged to expense		23,900		148,400
Recoveries		15,700		210,700
Deductions for amounts written-off		(224,000)		(101,100)
Balance at end of period	$	676,800	$	969,200

9

The Company’s investment in direct financing and sales-type leases (“Investment In Leases”) and allowance for credit losses by loss evaluation methodology are as follows:

	September 28, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	30,645,100		676,800	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	30,645,100	$	676,800	$	39,800,200	$	861,200

The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss.  The following table sets forth information regarding the Company’s accruing and non-accrual leases.  Delinquent balances are determined based on the contractual terms of the lease.

	September 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	$	29,409,600	$	—	$	—	$	—	$	29,409,600
Small-Ticket		1,235,500		—		—		—		1,235,500
Total Investment in Leases	$	30,645,100	$	—	$	—	$	—	$	30,645,100

	December 29, 2018
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	38,395,000	$	—	$	—	$	70,000	$	38,465,000
Small-Ticket		1,335,200		—		—		—		1,335,200
Total Investment in Leases	$	39,730,200	$	—	$	—	$	70,000	$	39,800,200

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 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		Nine Months Ended
	September 28, 2019		September 28, 2019
Interest income on direct financing and sales-type leases	$	1,856,000	$	6,066,800
Selling profit (loss) at commencement of sales-type leases		1,098,100		1,971,600
Operating lease income		702,600		1,908,700
Income on sales of equipment under lease		496,600		2,268,500
Other		222,200		518,200
Leasing income	$	4,375,500	$	12,733,800

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7.  Earnings Per Share:

The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):

	Three Months Ended		Nine Months Ended
	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Denominator for basic EPS — weighted average common shares	3,808,863	3,886,473	3,829,329	3,864,077
Dilutive shares associated with option plans	256,438	277,866	282,989	276,739
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,065,301	4,164,339	4,112,318	4,140,816
Options excluded from EPS calculation — anti-dilutive	7,146	6,116	6,782	15,428

8.  Shareholders’ Equity (Deficit):

Dividends

On January 23, 2019, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on February 6, 2019, which was paid on March 1, 2019.

On April 24, 2019, 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 May 8, 2019, which was paid on June 1, 2019.

On July 24, 2019, 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 August 7, 2019, which was paid on September 3, 2019.

Repurchase of Common Stock

In February 2019, the Company’s Board of Directors authorized the repurchase of up to 150,000 shares of our common stock for a price of $159.63 per share through a tender offer (the “Tender Offer”). The Tender Offer began on the date of the announcement, February 28, 2019 and expired on March 28, 2019. Upon expiration, the Company accepted for payment 150,000 shares for a total purchase price of approximately $24.0 million, including fees and expenses related to the Tender Offer. The Tender Offer was financed in part by net borrowings under the Line of Credit. (See Note 9 – “Debt”).

Under a previous Board of Directors’ authorization, as of September 28, 2019, 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.

Stock Option Plans and Stock-Based Compensation

The Company had authorized up to 750,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2001 Stock Option Plan (the “2001 Plan”).  The 2001 Plan expired on February 20, 2011. As of September 29, 2019, the Company has authorized up to 700,000 shares of common stock to be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).

The Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”) and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.

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Stock option activity under the 2001 Plan, 2010 Plan and Nonemployee Directors Plan (collectively, the “Option Plans”) as of September 28, 2019 was as follows:

				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)		Intrinsic Value
Outstanding, December 29, 2018	639,380	$	84.12	5.61	$	47,808,100
Granted	29,250		164.84
Exercised	(65,292)		45.87
Outstanding, September 28, 2019	603,338	$	92.17	5.37	$	50,698,600
Exercisable, September 28, 2019	440,813	$	74.76	4.28	$	44,717,900

The fair value of options granted under the Option Plans during the first nine months of 2019 and 2018 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

	Nine Months Ended
	September 28, 2019			September 29, 2018
Risk free interest rate		1.98	%		2.73	%
Expected life (years)		6			6
Expected volatility		20.30	%		20.40	%
Dividend yield		1.26	%		1.17	%
Option fair value	$	32.65		$	31.44

All unexercised options at September 28, 2019 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of $1,511,400 and $1,507,800 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first nine months of 2019 and 2018, respectively.  As of September 28, 2019, the Company had $3.8 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.4 years.

9.  Debt:

Line of Credit

As of September  28, 2019, there were no borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA and BMO Harris Bank N.A. (the “Line of Credit”), leaving $45.0 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 2019, the Line of Credit was used to finance in part the 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 September  28, 2019, the Company was in compliance with all of its financial covenants.

Notes Payable

As of September  28, 2019, the Company had $16.5 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $10.0 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

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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 September  28, 2019, 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 6.39% at September  28, 2019 on a non-recourse basis. As of September  28, 2019,  $3.0 million of the $4.4 million liability balance is current.

11. Operating Leases:

As of September  28, 2019, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029 as well as satellite office space in California with an operating lease that expires in August 2022.  Our leases include both lease (fixed payments including rent) and non-lease components (common area or other maintenance costs and taxes) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.  The corporate headquarters lease provides us the option to extend the lease for two additional five year periods.  The California lease provides us an option to extend the lease for an additional three year period.  The lease renewal options are at our sole discretion; therefore, the renewals to extend the lease term are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise.  The weighted average remaining lease term for these leases is 10.1 years and the weighted average discount rate is 5.5%.  As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.  The Company recognized $1,047,600 and $913,800 of rent expense for the periods ended September  28, 2019 and September 29, 2018, respectively.

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2019 and full fiscal years thereafter as of September  28, 2019:

Operating Lease Liabilities expected to be recognized in	Amount
2019	$	14,300
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total lease payments		8,151,000
Less imputed interest		(1,870,900)
Present value of lease liabilities	$	6,280,100

Of the $6.3 million operating lease liability outstanding at September  28, 2019, $0.3 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Condensed Balance Sheets.

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Supplemental cash flow information related to our operating leases is as follows for the period ended September  28, 2019:

	Nine Months Ended
	September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	479,600

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-segment balances and transactions have been eliminated. The following tables summarize financial information by segment and provide a reconciliation of segment contribution to operating income:

	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Revenue:
Franchising	$	15,305,400	$	14,509,900	$	42,682,500	$	40,444,800
Leasing		4,375,500		4,608,600		12,733,800		14,994,500
Total revenue	$	19,680,900	$	19,118,500	$	55,416,300	$	55,439,300
Reconciliation to operating income:
Franchising segment contribution	$	9,895,700	$	9,064,900	$	25,844,500	$	23,264,900
Leasing segment contribution		2,379,000		2,370,400		6,343,600		8,319,300
Total operating income	$	12,274,700	$	11,435,300	$	32,188,100	$	31,584,200
Depreciation and amortization:
Franchising	$	79,000	$	60,300	$	208,900	$	178,200
Leasing		31,700		18,300		67,800		55,500
Total depreciation and amortization	$	110,700	$	78,600	$	276,700	$	233,700

	As of
	September 28, 2019		December 29, 2018
Identifiable assets:
Franchising	$	3,841,400	$	5,208,400
Leasing		31,771,400		40,490,000
Unallocated		12,894,700		964,700
Total	$	48,507,500	$	46,663,100

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

Overview

As of September  28, 2019, we had 1,255  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 $30.0 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 nine months of 2019, our royalties increased $2.5 million or 7.0% compared to the first nine months of 2018.

Leasing income net of leasing expense during the first nine months of 2019 was $11.1 million compared to $13.2 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 nine months of 2019, we purchased $7.9 million in equipment for lease customers compared to $20.2 million in the first nine months of 2018.  Our leasing portfolio (net investment in leases — current and long-term) decreased to $30.0 million at September  28, 2019 from $39.0 million at December 29, 2018.  The lower equipment purchases and the decrease in the size of the leasing portfolio were a direct result of a decrease in the number of customers installing equipment during the first nine months compared to last year. 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, occupancy, legal and professional fees.  During the first nine months of 2019, selling, general and administrative expenses decreased $0.1 million, or 0.3% compared to the first nine months of 2018.

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 nine months ended September  28, 2019:

					AVAILABLE
	TOTAL			TOTAL	FOR	COMPLETED
	12/29/2018	OPENED	CLOSED	9/28/2019	RENEWAL	RENEWALS
Plato’s Closet
Franchises - US and Canada	480	5	(3)	482	27	25
Once Upon A Child
Franchises - US and Canada	379	9	(2)	386	20	20
Play It Again Sports
Franchises - US and Canada	281	4	(1)	284	11	11
Style Encore
Franchises - US and Canada	67	5	(2)	70	—	—
Music Go Round
Franchises - US	34	—	(1)	33	4	4
Total Franchised Stores	1,241	23	(9)	1,255	62	60

Renewal activity is a key focus area for management.  Our franchisees sign 10-year agreements with us.  The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties.  During the first nine months of 2019, we renewed 60 of the 62 franchise agreements available for renewal.

Our ability to grow our operating income is dependent on our ability to: (i) effectively support our franchise partners so that they produce higher revenues, (ii) open new franchises, (iii) increase lease originations and minimize write-offs in our leasing portfolio, and (iv) control our selling, general and administrative expenses.

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Results of Operations

The following table sets forth selected information from our Consolidated Condensed Statements of Operations expressed as a percentage of total revenue:

	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Revenue:
Royalties	70.2	%	67.3	%	69.0	%	64.5	%
Leasing income	22.2		24.1		23.0		27.0
Merchandise sales	3.6		4.5		3.7		4.2
Franchise fees	1.9		2.0		2.1		2.1
Other	2.1		2.1		2.2		2.2
Total revenue	100.0		100.0		100.0		100.0
Cost of merchandise sold	(3.4)		(4.2)		(3.5)		(4.0)
Leasing expense	(2.9)		(3.8)		(3.0)		(3.2)
Provision for credit losses	0.3		0.3		—		(0.3)
Selling, general and administrative expenses	(31.6)		(32.5)		(35.4)		(35.5)
Income from operations	62.4		59.8		58.1		57.0
Interest expense	(2.1)		(3.0)		(2.4)		(3.6)
Interest and other income (expense)	—		—		—		—
Income before income taxes	60.3		56.8		55.7		53.4
Provision for income taxes	(14.0)		(13.0)		(12.9)		(12.9)
Net income	46.3	%	43.8	%	42.8	%	40.5	%

Comparison of Three Months Ended September  29, 2018 to Three Months Ended September  28, 2019

Revenue

Revenues for the quarter ended September  28, 2019 totaled $19.7 million compared to $19.1 million for the comparable period in 2018.

Royalties and Franchise Fees

Royalties increased to $13.8 million for the third quarter of 2019 from $12.9 million for the third quarter of 2018, a 7.3% increase.  The increase is primarily from higher franchisee retail sales and from having additional franchise stores in the third quarter of 2019 compared to the same period last year.

Franchise fees of $0.4 million for the third quarter of 2019 were comparable to $0.4 million for the third quarter of 2018.

Leasing Income

Leasing income decreased to $4.4 million for the third quarter of 2019 compared to $4.6 million for the same period in 2018.  The decrease is due to a smaller lease portfolio.

Merchandise Sales

Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”).  Direct Franchisee Sales were  $0.7 million for the third quarter of 2019 compared to $0.9 million in the same period of 2018.   The decrease is due to a decrease in technology purchases by our franchisees.   

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Cost of Merchandise Sold

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales.  Cost of merchandise sold was $0.7 million for the third quarter of 2019 compared to $0.8 million in the same period of 2018.   The decrease is due to the decrease in Direct Franchise Sales discussed above.   Cost of merchandise sold as a percentage of Direct Franchisee Sales for the third quarter of 2019 and 2018 was 95.3% and 94.5%, respectively.

Leasing Expense

Leasing expense of  $0.6 million for the third quarter of 2019 was comparable to $0.7 million for the third quarter of 2018.

Provision for Credit Losses

Provision for credit losses of  $(0.1) million for the third quarter of 2019 was comparable to $(0.1) million for the third quarter of 2018. 

Selling, General and Administrative

Selling, general and administrative expenses of  $6.2 million in the third quarter of 2019 were comparable to $6.2 million in the same period of 2018.

Interest Expense

Interest expense decreased to $0.4 million for the third quarter of 2019 compared to $0.6 million for the third quarter of 2018.  The decrease is primarily due to lower average corporate borrowings when compared to the same period last year.

Income Taxes

The provision for income taxes was calculated at an effective rate of 23.2% and 23.0% for the third quarter of 2019 and 2018, respectively.

Comparison of Nine Months Ended September  28, 2019 to Nine Months Ended September 29, 2018

Revenue

Revenues for the first nine  months of 2019 totaled $55.4 million compared to $55.4 million for the comparable period in 2018.

Royalties and Franchise Fees

Royalties increased to $38.2 million for the first nine months of 2019 from $35.7 million for the first nine months of 2018, a 7.0% increase.  The increase in royalties is primarily from higher franchisee retail sales and from having additional franchise stores in the first nine months of 2019 compared to the same period last.

Franchise fees of $1.2 million for the first nine months of 2019 were comparable to $1.2 million for the first nine months of 2018.

 

Leasing Income

Leasing income decreased to $12.7 million for the first nine months of 2019 compared to $15.0 million for the same period in 2018. The decrease is due to a smaller portfolio.

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Merchandise Sales

Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales were  $2.0 million for the first nine months of 2019  compared to $2.3 million in the same period of 2018. The decrease is due to a decrease in technology purchases by our franchisees.

Cost of Merchandise Sold

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold was  $1.9 million for the first nine months of 2019 compared to $2.2 million in the same period of 2018. The decrease is due to the decrease in Direct Franchisee Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first nine months of 2019 and 2018 was 94.5% and 95.5%, respectively.

Leasing Expense

Leasing expense of  $1.6 million for the first nine months of 2019 was comparable to $1.8 million for the first nine months of 2018.  

Provision for Credit Losses

Provision for credit losses was  $23,000 for the first nine months of 2019 compared to $0.1 million for the first nine months of 2018.

Selling, General and Administrative

Selling, general and administrative expenses of  $19.6 million in the first nine months of 2019 were comparable to $19.7 million in the same period of 2018.  

Interest Expense

Interest expense decreased to $1.3 million for the first nine months of 2019 compared to $2.0 million for the first nine months of 2018. The decrease is primarily due to lower average corporate borrowings when compared to the same period last year.

Income Taxes

The provision for income taxes was calculated at an effective rate of 23.2% and 24.1% for the first nine months of 2019 and 2018, respectively. The decrease is primarily due to tax benefits on the exercise of non-qualified stock options 

Segment Comparison of Three Months Ended September  28, 2019 to Three Months Ended September 29, 2018

Franchising Segment Operating Income

The franchising segment’s operating income for the third quarter of 2019 increased by $0.8 million to $9.9 million from $9.1 million for the third quarter of 2018.  The increase in segment contribution was primarily due to increased royalty revenues.

Leasing Segment Operating Income

The leasing segment’s operating income for the third quarter of 2019 of  $2.4 million was comparable to $2.4 million for the third quarter of 2018.

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Segment Comparison of Nine Months Ended September  28, 2019 to Nine Months Ended September 29, 2018

Franchising Segment Operating Income

The franchising segment’s operating income for the first nine months of 2019 increased by $2.6 million to $25.8 million from $23.3 million for the first nine months of 2018.  The increase in segment contribution was primarily due to increased royalty revenues.

Leasing Segment Operating Income

The leasing segment’s operating income for the first nine months of 2019 decreased by $2.0 million to $6.3 million from $8.3 million for the first nine months of 2018.  The decrease in segment contribution was due to a decrease in leasing income net of leasing expense.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been cash flow from operations and borrowings.  The components of the consolidated condensed statements of operations that reduce our net income but do not affect our liquidity include non-cash items for depreciation and compensation expense related to stock options.

We ended the third quarter of 2019 with $7.6 million in cash, cash equivalents and restricted cash compared to $1.2 million in cash, cash equivalents and restricted cash at the end of the third quarter of 2018.

Operating activities provided $38.1 million of cash during the first nine months of 2019 compared to $27.6 million provided during the same period last year.  The increase in cash provided by operating activities in the first nine months of 2019 compared to 2018 was primarily due to the classification of principal collections on lease receivables of $14.4 million as operating activities in 2019, where such collections in 2018 were classified as investing activities. (See Note 3 – “Recent Accounting Pronouncements”).

Investing activities used $8.1 million of cash during the first nine months of 2019.  The 2019 activities consisted primarily of the purchase of equipment for lease customers of $7.9 million.

Financing activities used $25.0 million of cash during the first nine months of 2019.  Our most significant financing activities during the first nine months of 2019 consisted of $24.0 million to repurchase 150,000 shares of our common stock in the Tender Offer (including fees and expenses),  $2.5 million for the payment of dividends and payments on notes payable of $2.4 million; partially offset by $3.0 million of proceeds from exercise of stock options and $0.9 million in proceeds received from discounted lease rentals.  (See Note 8 — “Shareholders’ Equity (Deficit),” Note 9 — “Debt” and Note 10 — “Discounted Lease Rentals”).

As of September  28, 2019, we had no off balance sheet arrangements.

As of September  28, 2019, our borrowing availability under our Line of Credit was $45.0 million (the lesser of the borrowing base or the aggregate line of credit).  There were no borrowings outstanding at September  28, 2019 under the Line of Credit leaving $45.0 million available for additional borrowings.

During the first nine months of 2019, the Line of Credit was used to finance in part the Tender Offer and has been and will continue to be used for general corporate purposes.   In July 2019, the aggregate commitments under the Line of Credit automatically reduced by $5.0 million and will automatically reduce by the same amount each subsequent July thereafter through the term of the facility.  The Line of Credit is secured by a lien against substantially all of our assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit).

As of September  28, 2019, we had $16.5 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $10.0 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under our Note Agreement with 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

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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 September  28, 2019, we were in compliance with all of the financial covenants under the Line of Credit and Note Agreement.

We expect to generate the cash necessary to pay our expenses, finance our leasing business and to pay the principal and interest on 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 our Form 10-K for the fiscal year ended December 29, 2018.  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 2020.

Critical Accounting Policies

The Company prepares the consolidated condensed 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 make certain estimates, judgments and assumptions that it believes are reasonable based on information available.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.  There can be no assurance that actual results will not differ from these estimates.  The critical accounting policies that the Company believes are most important to aid in fully understanding and evaluating the reported financial results include the following:

Revenue Recognition — Royalty Revenue and Franchise Fees

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.  At the end of each accounting period, estimates of royalty amounts due are made based on applying historical weekly sales information to the number of weeks of unreported franchisee sales.  If there are significant changes in the actual performance of franchisees versus the Company’s estimates, its royalty revenue would be impacted.  During the first nine months of 2019, the Company collected $27,100 less than it estimated at December 29, 2018.  As of September  28, 2019, the Company’s royalty receivable was $1,424,400.

The Company collects initial franchise fees when franchise agreements are signed and recognizes the initial franchise fees as revenue over the estimated life of the franchise, beginning when the franchise is opened. Franchise fees collected from franchisees but not yet recognized as income are recorded as deferred revenue in the liability section of the consolidated condensed balance sheet.  As of September  28, 2019, deferred franchise fee revenue was $7,784,700.

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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.  

For sales-type leases in which the equipment has a fair value greater or less than its carrying amount, selling profit/loss is recognized at commencement.  For subsequent periods or for leases in which the equipment’s fair value is equal to its carrying amount, 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.

Generally, when a lease is more than 90 days delinquent (where 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.

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.  (See Note 6 — “Investment in Leasing Operations”).

Stock-Based Compensation

The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock options.  The determination of the fair value of the awards on the date of grant using an option-pricing model is affected by stock price as well as assumptions regarding a number of complex and subjective variables.  These variables include implied volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

The Company evaluates the assumptions used to value awards on an annual basis.  If factors change and the Company employs different assumptions for estimating stock-based compensation expense in future periods or if the Company decides to use a different valuation model, the future periods may differ significantly from what it has recorded in the current period and could materially affect operating income, net income and earnings per share.

Forward Looking Statements

The statements contained in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not strictly historical fact, including without limitation, the Company’s belief that it will have adequate capital and reserves to meet its current and contingent obligations and operating needs, as well as its disclosures regarding market rate risk are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act.  Such statements are based on management’s current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward looking statements.  Investors are cautioned to consider these forward looking statements in light of important factors which may result in material variations between results contemplated by such forward looking statements and actual results and conditions.  See the section appearing in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 entitled “Risk Factors” and Part II, Item 1A in this Report for a more complete discussion of certain factors that may cause the Company’s actual results to differ from those in its forward looking

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statements.  You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made.  The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

ITEM 3:   Quantitative and Qualitative Disclosures About Market Risk

The Company incurs financial market risk in the form of interest rate risk.  Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates.  At September  28, 2019, the Company had available a $45.0 million line of credit with CIBC Bank USA and BMO Harris Bank, N.A.  The interest rates applicable to this agreement are based on either the bank’s base rate or LIBOR for short-term borrowings (twelve months or less).  The Company had no debt outstanding at September  28, 2019 under this line of credit. The Company’s earnings would be affected by changes in these short-term interest rates only in the event that it were to borrow amounts under this facility. With the Company’s borrowings at September  28, 2019, a one percent increase in short-term rates would have no impact on annual pretax earnings.  The Company had no interest rate derivatives in place at September  28, 2019.

None of the Company’s cash and cash equivalents at September  28, 2019 was invested in money market mutual funds, which are subject to the effects of market fluctuations in interest rates.

Foreign currency transaction gains and losses were not material to the Company’s results of operations for the nine months ended September  28, 2019.   During fiscal 2018, less than 6% of the Company’s total revenues and 1% of expenses were denominated in a foreign currency.  Based upon these revenues and expenses, a 10% increase or decrease in the foreign currency exchange rates would impact annual pretax earnings by approximately $430,000.  To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

ITEM 4:   Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based upon, and as of the date of that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  There was no change in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

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PART II.OTHER INFORMATION

ITEM 1:  Legal Proceedings

We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.

ITEM 1A:  Risk Factors

In addition to the other information set forth in this report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended December 29, 2018.  If any of those factors were to occur, they could materially adversely affect our financial condition or future results, and could cause our actual results to differ materially from those expressed in its forward-looking statements in this report.  Except as noted below, we are aware of no material changes to the Risk Factors discussed in our Annual Report on Form 10-K for the year ended December 29, 2018.

If we are unable to add new leasing customers and grow leased assets, our leasing portfolio will decrease in size and our leasing income will be impacted.

In our leasing business, our ability to grow and maintain our leasing portfolio is dependent upon successfully adding new leasing customers and sustaining leased equipment purchases for existing customers.  If we are unable to effectively accomplish these undertakings, our leasing portfolio will decrease and the operating income of our leasing segment will decline.

ITEM 2:  Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarized the Company’s common stock repurchase during the third quarter of 2019. No shares were purchased during the quarter.

				Total Number of	Maximum Number
				Shares Purchased as	of Shares that may
	Total Number of	Average Price		Part of a Publicly	yet be Purchased
Period	Shares Purchased	Paid Per Share		Announced Plan(1)	Under the Plan
June 30, 2019 to August 3, 2019	—	$	—	—	130,604
August 4, 2019 to August 31, 2019	—	$	—	—	130,604
September 1, 2019 to September 28, 2019	—	$	—	—	130,604

(1) The Board of Directors’ authorization for the repurchase of shares of the Company’s common stock was originally approved in 1995 with no expiration date.  The total shares approved for repurchase has been increased by additional Board of Directors’ approvals and is currently limited to 5,000,000 shares, of which 130,604 may still be repurchased.

ITEM 3:  Defaults Upon Senior Securities

None.

ITEM 4:  Mine Safety Disclosures

Not applicable.

ITEM 5:  Other Information

All information required to be reported in a report on Form 8-K during the period covered by this Form 10-Q has been reported.

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ITEM 6:   Exhibits

3.1	Articles of Incorporation, as amended (Exhibit 3.1)(1)
3.2	By-laws, as amended and restated to date (Exhibit 3.2)(2)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T: Financial statements from the quarterly report on Form 10-Q of Winmark Corporation and Subsidiaries for the quarter ended September  28, 2019, formatted in XBRL: (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Operations, (iii) Consolidated Condensed Statements of Shareholders’ Equity (Deficit), (iv) Consolidated Condensed Statements of Cash Flows, and (v) Notes to Consolidated Condensed Financial Statements.

*Filed Herewith

(1) Incorporated by reference to the specified exhibit to the Registration Statement on Form S-1, effective August 24, 1993 (Reg. No. 333-65108).

(2) Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WINMARK CORPORATION
Date: October  22, 2019	By:	/s/ Brett D. Heffes
		Brett D. Heffes Chief Executive Officer and Director (principal executive officer)
Date: October  22, 2019	By:	/s/ Anthony D. Ishaug
		Anthony D. Ishaug Executive Vice President Chief Financial Officer and Treasurer (principal financial and accounting officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brett D. Heffes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Winmark Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October  22, 2019	/s/  Brett D. Heffes
	Brett D. Heffes Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Anthony D. Ishaug, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Winmark Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

E
Date:  October  22, 2019	Signature:	/s/  Anthony D. Ishaug
		Anthony D. Ishaug Executive Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Winmark Corporation (the “Company”) on Form 10-Q for the quarter ended September  28, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Brett D. Heffes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Winmark Corporation and will be retained by Winmark Corporation and furnished to the Securities and Exchange Commission upon request.

Date:  October  22, 2019	/s/  Brett D. Heffes
	Brett D. Heffes Chief Executive Officer and Director

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Winmark Corporation (the “Company”) on Form 10-Q for the quarter ended September  28, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Anthony D. Ishaug, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Winmark Corporation and will be retained by Winmark Corporation and furnished to the Securities and Exchange Commission upon request.

Date:  October  22, 2019	/s/  Anthony D. Ishaug
	Anthony D. Ishaug Executive Vice President, Chief Financial Officer and Treasurer

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Discounted Lease Rentals:

9 Months Ended

Sep. 28, 2019

Discounted Lease Rentals:

Discounted Lease Rentals:

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 6.39% at September 28, 2019 on a non-recourse basis. As of September 28, 2019, $3.0 million of the $4.4 million liability balance is current.

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Investment in Leasing Operations:

9 Months Ended

Sep. 28, 2019

Investment in Leasing Operations:

Investment in Leasing Operations:

6.  Investment in Leasing Operations:

Investment in leasing operations consists of the following:

	September 28, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	31,375,800	$	40,822,400
Estimated unguaranteed residual value of equipment		4,289,200		4,741,200
Unearned lease income, net of initial direct costs deferred		(4,765,000)		(6,739,900)
Security deposits		(3,900,600)		(4,118,300)
Equipment installed on leases not yet commenced		3,645,700		5,094,800
Total investment in direct financing and sales-type leases		30,645,100		39,800,200
Allowance for credit losses		(676,800)		(861,200)
Net investment in direct financing and sales-type leases		29,968,300		38,939,000
Operating leases:
Operating lease assets		665,800		777,000
Less accumulated depreciation and amortization		(636,400)		(713,000)
Net investment in operating leases		29,400		64,000
Total net investment in leasing operations	$	29,997,700	$	39,003,000

As of September 28, 2019, the $30.0 million total net investment in leases consists of $14.4 million classified as current and $15.6 million classified as long-term.  As of December 29, 2018, the $39.0 million total net investment in leases consists of $18.5 million classified as current and $20.5 million classified as long-term.

As of September 28, 2019, leased assets with one customer approximated 12% of the Company’s total assets. A portion of the lease payments receivable from this customer were assigned as collateral in non-recourse financing with financial institutions. See Note 10 – “Discounted Lease Rentals”.

Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2019 and the full fiscal years thereafter as of September 28, 2019:

	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2019	$	5,214,200	$	1,291,400
2020		17,273,500		2,782,500
2021		7,999,300		661,400
2022		876,300		29,100
2023		8,100		500
Thereafter		4,400		100
	$	31,375,800	$	4,765,000

The activity in the allowance for credit losses for leasing operations during the first nine months of 2019 and 2018, respectively, is as follows:

	September 28, 2019		September 29, 2018
Balance at beginning of period	$	861,200	$	711,200
Provisions charged to expense		23,900		148,400
Recoveries		15,700		210,700
Deductions for amounts written-off		(224,000)		(101,100)
Balance at end of period	$	676,800	$	969,200

The Company’s investment in direct financing and sales-type leases (“Investment In Leases”) and allowance for credit losses by loss evaluation methodology are as follows:

	September 28, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	30,645,100		676,800	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	30,645,100	$	676,800	$	39,800,200	$	861,200

The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss.  The following table sets forth information regarding the Company’s accruing and non-accrual leases.  Delinquent balances are determined based on the contractual terms of the lease.

	September 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	$	29,409,600	$	—	$	—	$	—	$	29,409,600
Small-Ticket		1,235,500		—		—		—		1,235,500
Total Investment in Leases	$	30,645,100	$	—	$	—	$	—	$	30,645,100

	December 29, 2018
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	38,395,000	$	—	$	—	$	70,000	$	38,465,000
Small-Ticket		1,335,200		—		—		—		1,335,200
Total Investment in Leases	$	39,730,200	$	—	$	—	$	70,000	$	39,800,200

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 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		Nine Months Ended
	September 28, 2019		September 28, 2019
Interest income on direct financing and sales-type leases	$	1,856,000	$	6,066,800
Selling profit (loss) at commencement of sales-type leases		1,098,100		1,971,600
Operating lease income		702,600		1,908,700
Income on sales of equipment under lease		496,600		2,268,500
Other		222,200		518,200
Leasing income	$	4,375,500	$	12,733,800

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Shareholders' Equity (Deficit): Stock Option Plans and Stock-Based Compensation (Details) - Stock options - USD ($)	9 Months Ended		12 Months Ended
	Sep. 28, 2019	Sep. 29, 2018	Dec. 29, 2018	Feb. 20, 2011
Number of Shares
Outstanding at the beginning of the period (in shares)	639,380
Granted (in shares)	29,250
Exercised (in shares)	(65,292)
Outstanding at the end of the period (in shares)	603,338		639,380
Exercisable at the end of the period (in shares)	440,813
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 84.12
Granted (in dollars per share)	164.84
Exercised (in dollars per share)	45.87
Outstanding at the end of the period (in dollars per share)	92.17		$ 84.12
Exercisable at the end of the period (in dollars per share)	$ 74.76
Weighted Average Remaining Contractual Life (years)
Outstanding	5 years 4 months 13 days		5 years 7 months 10 days
Exercisable at the end of the period	4 years 3 months 11 days
Intrinsic Value
Outstanding	$ 50,698,600		$ 47,808,100
Exercisable at the end of the period	$ 44,717,900
Weighted average assumptions and results used in estimation of fair value of options granted
Risk free interest rate (as a percent)	1.98%	2.73%
Expected life (years)	6 years	6 years
Expected volatility (as a percent)	20.30%	20.40%
Dividend yield (as a percent)	1.26%	1.17%
Option fair value (in dollars per share)	$ 32.65	$ 31.44
Additional disclosures
Compensation expense	$ 1,511,400	$ 1,507,800
Total unrecognized compensation expense	$ 3,800,000
Weighted average period for recognition of unrecognized compensation expense	2 years 4 months 24 days
2001 Plan
Stock Option Plans
Number of shares authorized for issuance				750,000
2010 Plan
Stock Option Plans
Number of shares authorized for issuance	700,000
Nonemployee Directors Plan
Stock Option Plans
Number of shares authorized for issuance	350,000

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Investment in Leasing Operations: Summary of Leasing Operations (Details) - USD ($)	Sep. 28, 2019	Dec. 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$ 31,375,800
Minimum lease payments receivable		$ 40,822,400
Estimated unguaranteed residual value of equipment	4,289,200
Estimated unguaranteed residual value of equipment		4,741,200
Unearned lease income net of initial direct costs deferred	(4,765,000)
Unearned lease income net of initial direct costs deferred		(6,739,900)
Security deposits	(3,900,600)
Security deposits		(4,118,300)
Equipment installed on leases not yet commenced	3,645,700
Equipment installed on leases not yet commenced		5,094,800
Total investment in direct financing and sales-type leases	30,645,100
Total investment in direct financing and sales-type leases		39,800,200
Allowance for credit losses	(676,800)
Allowance for credit losses		(861,200)
Net investment in direct financing and sales-type leases	29,968,300
Net investment in direct financing and sales-type leases		38,939,000
Operating leases:
Operating lease assets	665,800
Less accumulated depreciation and amortization	(636,400)
Net investment in operating leases	29,400
Total net investment in leasing operations	29,997,700
Operating lease assets		777,000
Less accumulated depreciation and amortization		(713,000)
Net investment in operating leases		64,000
Total net investment in leasing operations		39,003,000
Net investment in leases - current	14,352,800
Net investment in leases - long-term	$ 15,644,900
Net investment in leases - current		18,547,500
Net investment in leases - long-term		$ 20,455,500

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Investment in Leasing Operations: Investment Aging (Details) - USD ($)	Sep. 28, 2019	Dec. 29, 2018
Investment in leasing operations
0-60 Days Delinquent and Accruing	$ 30,645,100	$ 39,730,200
Non-Accrual		70,000
Total investment in direct financing and sales-type leases	30,645,100
Total investment in direct financing and sales-type leases		39,800,200
Middle-Market
Investment in leasing operations
0-60 Days Delinquent and Accruing	29,409,600	38,395,000
Non-Accrual		70,000
Total investment in direct financing and sales-type leases	29,409,600
Total investment in direct financing and sales-type leases		38,465,000
Small-Ticket
Investment in leasing operations
0-60 Days Delinquent and Accruing	1,235,500	1,335,200
Total investment in direct financing and sales-type leases	$ 1,235,500
Total investment in direct financing and sales-type leases		$ 1,335,200

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Debt: Notes Payable (Details) - Prudential Investment Management, Inc - USD ($)	9 Months Ended
	Sep. 28, 2019	Aug. 31, 2017	May 31, 2015
Notes Payable
Notes Payable
Minimum prepayment	$ 1,000,000
Series A Notes
Notes Payable
Principal amount outstanding	$ 16,500,000
Note payable, face amount			$ 25,000,000
Term of notes payable	10 years
Interest rate (as a percent)	5.50%
Quarterly principal payment, first five years	$ 500,000
Quarterly principal payment, thereafter	750,000
Series B Notes
Notes Payable
Principal amount outstanding	$ 10,000,000
Note payable, face amount		$ 12,500,000
Term of notes payable	10 years
Interest rate (as a percent)	5.10%
Quarterly principal payment	$ 312,500

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Sep. 28, 2019	Dec. 29, 2018
CONSOLIDATED CONDENSED BALANCE SHEETS
Receivables, allowance for doubtful accounts	$ 900	$ 400
Unamortized debt issuance costs - Current	13,900	13,900
Unamortized debt issuance costs - Noncurrent	$ 72,200	$ 82,600
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	3,822,978	3,907,686
Common stock, shares outstanding	3,822,978	3,907,686

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CONSOLIDATED STATEMENTS OF CASH FLOWS - Supplemental Dislcosures - USD ($)	9 Months Ended
	Sep. 28, 2019	Sep. 29, 2018
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$ 1,322,800	$ 2,015,000
Cash paid for income taxes	8,292,700	3,954,700
Non-cash landlord leasehold improvements	2,139,000
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	7,487,200	1,187,200
Restricted cash	75,000	55,000
Total cash, cash equivalents and restricted cash	$ 7,562,200	$ 1,242,200

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Segment Reporting: (Tables)

9 Months Ended

Sep. 28, 2019

Segment Reporting:

Schedule of financial information by segment and reconciliation of segment contribution to operating income

	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Revenue:
Franchising	$	15,305,400	$	14,509,900	$	42,682,500	$	40,444,800
Leasing		4,375,500		4,608,600		12,733,800		14,994,500
Total revenue	$	19,680,900	$	19,118,500	$	55,416,300	$	55,439,300
Reconciliation to operating income:
Franchising segment contribution	$	9,895,700	$	9,064,900	$	25,844,500	$	23,264,900
Leasing segment contribution		2,379,000		2,370,400		6,343,600		8,319,300
Total operating income	$	12,274,700	$	11,435,300	$	32,188,100	$	31,584,200
Depreciation and amortization:
Franchising	$	79,000	$	60,300	$	208,900	$	178,200
Leasing		31,700		18,300		67,800		55,500
Total depreciation and amortization	$	110,700	$	78,600	$	276,700	$	233,700

	As of
	September 28, 2019		December 29, 2018
Identifiable assets:
Franchising	$	3,841,400	$	5,208,400
Leasing		31,771,400		40,490,000
Unallocated		12,894,700		964,700
Total	$	48,507,500	$	46,663,100

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Investment in Leasing Operations: (Tables)

9 Months Ended

Sep. 28, 2019

Investment in Leasing Operations:

Schedule of investment in leasing operations

	September 28, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	31,375,800	$	40,822,400
Estimated unguaranteed residual value of equipment		4,289,200		4,741,200
Unearned lease income, net of initial direct costs deferred		(4,765,000)		(6,739,900)
Security deposits		(3,900,600)		(4,118,300)
Equipment installed on leases not yet commenced		3,645,700		5,094,800
Total investment in direct financing and sales-type leases		30,645,100		39,800,200
Allowance for credit losses		(676,800)		(861,200)
Net investment in direct financing and sales-type leases		29,968,300		38,939,000
Operating leases:
Operating lease assets		665,800		777,000
Less accumulated depreciation and amortization		(636,400)		(713,000)
Net investment in operating leases		29,400		64,000
Total net investment in leasing operations	$	29,997,700	$	39,003,000

Schedule of future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred

	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2019	$	5,214,200	$	1,291,400
2020		17,273,500		2,782,500
2021		7,999,300		661,400
2022		876,300		29,100
2023		8,100		500
Thereafter		4,400		100
	$	31,375,800	$	4,765,000

Schedule of activity in the allowance for credit losses for leasing operations

	September 28, 2019		September 29, 2018
Balance at beginning of period	$	861,200	$	711,200
Provisions charged to expense		23,900		148,400
Recoveries		15,700		210,700
Deductions for amounts written-off		(224,000)		(101,100)
Balance at end of period	$	676,800	$	969,200

Schedule of investment in direct financing and sales-type leases (investment in leases) and allowance for credit losses by loss evaluation methodology

	September 28, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	30,645,100		676,800	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	30,645,100	$	676,800	$	39,800,200	$	861,200

Schedule of information regarding accruing and non-accrual leases

	September 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	$	29,409,600	$	—	$	—	$	—	$	29,409,600
Small-Ticket		1,235,500		—		—		—		1,235,500
Total Investment in Leases	$	30,645,100	$	—	$	—	$	—	$	30,645,100

	December 29, 2018
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	38,395,000	$	—	$	—	$	70,000	$	38,465,000
Small-Ticket		1,335,200		—		—		—		1,335,200
Total Investment in Leases	$	39,730,200	$	—	$	—	$	70,000	$	39,800,200

Schedule of components of leasing income

	Three Months Ended		Nine Months Ended
	September 28, 2019		September 28, 2019
Interest income on direct financing and sales-type leases	$	1,856,000	$	6,066,800
Selling profit (loss) at commencement of sales-type leases		1,098,100		1,971,600
Operating lease income		702,600		1,908,700
Income on sales of equipment under lease		496,600		2,268,500
Other		222,200		518,200
Leasing income	$	4,375,500	$	12,733,800

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Contract Liabilities - Performance Obligations (Details)	Sep. 28, 2019 USD ($)
Contract Liabilities:
Revenue, remaining peformance obligation	$ 9,762,800
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-09-29
Contract Liabilities:
Revenue, remaining peformance obligation	$ 433,200
Future estimated revenue to be recognised related to performance obligations
Duration of expected recognition period for remaining performance obligation	3 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-12-29
Contract Liabilities:
Revenue, remaining peformance obligation	$ 1,693,100
Future estimated revenue to be recognised related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-12-27
Contract Liabilities:
Revenue, remaining peformance obligation	$ 1,554,300
Future estimated revenue to be recognised related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-12-26
Contract Liabilities:
Revenue, remaining peformance obligation	$ 1,409,400
Future estimated revenue to be recognised related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-01-01
Contract Liabilities:
Revenue, remaining peformance obligation	$ 1,238,100
Future estimated revenue to be recognised related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-12-31
Contract Liabilities:
Revenue, remaining peformance obligation	$ 3,434,700
Future estimated revenue to be recognised related to performance obligations
Duration of expected recognition period for remaining performance obligation

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Discounted Lease Rentals: (Details) - USD ($)	Sep. 28, 2019	Dec. 29, 2018
Discounted Lease Rentals
Discounted lease rentals, current	$ 3,012,900	$ 3,021,900
Discounted lease rentals	$ 4,400,000
Secured Debt
Discounted Lease Rentals
Weighted average interest rate on a non-recourse basis (as a percent)	6.39%

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CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 28, 2019	Dec. 29, 2018
Current Assets:
Cash and cash equivalents	$ 7,487,200	$ 2,496,000
Restricted cash	75,000	80,000
Receivables, less allowance for doubtful accounts of $900 and $400	1,594,400	1,553,100
Net investment in leases - current	14,352,800
Net investment in leases - current		18,547,500
Income tax receivable	391,700	565,500
Inventories	69,700	107,600
Prepaid expenses	1,012,500	901,600
Total current assets	24,983,300	24,251,300
Net investment in leases - long-term	15,644,900
Net investment in leases - long-term		20,455,500
Property and equipment, net	2,863,700	866,200
Operating lease right-of-use assets	3,734,400
Goodwill	607,500	607,500
Other assets	501,200	482,600
Deferred income taxes	172,500
Total assets	48,507,500	46,663,100
Current Liabilities:
Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900	3,486,100	3,236,100
Accounts payable	1,185,300	1,351,800
Accrued liabilities	2,980,000	3,128,600
Discounted lease rentals	3,012,900	3,021,900
Deferred revenue	1,730,900	1,744,900
Total current liabilities	12,395,200	12,483,300
Long-Term Liabilities:
Notes payable, net of unamortized debt issuance costs of $72,200 and $82,600	22,927,800	25,604,900
Discounted lease rentals	1,354,000	2,723,500
Deferred revenue	8,031,900	8,432,400
Operating lease liabilities	5,953,100
Other liabilities	971,500	1,079,200
Deferred income taxes		1,148,300
Total long-term liabilities	39,238,300	38,988,300
Shareholders' Equity (Deficit):
Common stock, no par value, 10,000,000 shares authorized, 3,822,978 and 3,907,686 shares issued and outstanding	3,851,000	4,425,600
Retained earnings (accumulated deficit)	(6,977,000)	(9,234,100)
Total shareholders' equity (deficit)	(3,126,000)	(4,808,500)
Total liabilities and shareholders' equity (deficit)	$ 48,507,500	$ 46,663,100

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Sep. 28, 2019	Sep. 29, 2018
OPERATING ACTIVITIES:
Net Income	$ 23,687,900	$ 22,467,700
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	276,700	233,700
Provision for credit losses	23,900	148,400
Compensation expense related to stock options	1,511,400	1,507,800
Deferred income taxes	(1,320,800)	105,300
Deferred initial direct costs	(87,400)	(1,198,600)
Amortization of deferred initial direct costs	492,800	809,500
Operating lease right of use asset amortization	285,000
Tax benefits on exercised stock options	580,700	297,900
Change in operating assets and liabilities:
Receivables	(41,300)	39,100
Principal collections on lease receivables	14,407,300
Income tax receivable/payable	(406,900)	2,766,700
Inventories	37,900	(31,100)
Prepaid expenses	(110,900)	(173,800)
Other assets	(18,600)	(90,100)
Accounts payable	(166,500)	(628,000)
Accrued and other liabilities	(519,300)	1,775,800
Rents received in advance and security deposits	(149,500)	(376,000)
Deferred revenue	(414,500)	(35,700)
Net cash provided by operating activities	38,067,900	27,618,600
INVESTING ACTIVITIES:
Purchase of property and equipment	(135,200)	(472,400)
Purchase of equipment for lease contracts	(7,936,600)	(20,219,800)
Principal collections on lease receivables		16,303,500
Net cash used for investing activities	(8,071,800)	(4,388,700)
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit	18,800,000	7,300,000
Payments on line of credit	(18,800,000)	(32,600,000)
Payments on notes payable	(2,437,500)	(2,437,500)
Repurchases of common stock	(24,028,100)	(558,200)
Proceeds from exercises of stock options	2,995,000	2,171,600
Dividends paid	(2,483,700)	(1,584,100)
Proceeds from discounted lease rentals	944,400	4,557,300
Net cash used for financing activities	(25,009,900)	(23,150,900)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	4,986,200	79,000
Cash, cash equivalents and restricted cash, beginning of period	2,576,000	1,163,200
Cash, cash equivalents and restricted cash, end of period	$ 7,562,200	$ 1,242,200

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Contract Liabilities - Activity (Details) - USD ($)	9 Months Ended
	Sep. 28, 2019	Sep. 29, 2018
Activity of the current and noncurrent deferred franchise revenue
Balance at beginning of period	$ 10,177,300	$ 10,310,200
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period	979,700	1,354,500
Fees earned that were included in the balance at the beginning of the period	(1,394,200)	(1,390,200)
Balance at end of period	$ 9,762,800	$ 10,274,500

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Operating Leases: (Tables)

9 Months Ended

Sep. 28, 2019

Operating Leases:

Schedule of maturities of operating lease liabilities

Operating Lease Liabilities expected to be recognized in	Amount
2019	$	14,300
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total lease payments		8,151,000
Less imputed interest		(1,870,900)
Present value of lease liabilities	$	6,280,100

Schedule of supplemental cash flow information related to operating leases

	Nine Months Ended
	September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	479,600

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Contract Liabilities: (Tables)

9 Months Ended

Sep. 28, 2019

Contract Liabilities:

Schedule of activity of current and noncurrent deferred franchise revenue

	September 28, 2019		September 29, 2018
Balance at beginning of period	$	10,177,300	$	10,310,200
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		979,700		1,354,500
Fees earned that were included in the balance at the beginning of the period		(1,394,200)		(1,390,200)
Balance at end of period	$	9,762,800	$	10,274,500

Schedule of future estimated revenue to be recognized related to performance obligations

Contract Liabilities expected to be recognized in	Amount
2019	$	433,200
2020		1,693,100
2021		1,554,300
2022		1,409,400
2023		1,238,100
Thereafter		3,434,700
	$	9,762,800

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Debt:

9 Months Ended

Sep. 28, 2019

Debt:

Debt:

9.  Debt:

Line of Credit

As of September 28, 2019, there were no borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA and BMO Harris Bank N.A. (the “Line of Credit”), leaving $45.0 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 2019, the Line of Credit was used to finance in part the 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 September 28, 2019, the Company was in compliance with all of its financial covenants.

Notes Payable

As of September 28, 2019, the Company had $16.5 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $10.0 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under its Note Agreement with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”).

The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $1.0 million), but prepayments require payment of a Yield Maintenance Amount, as defined in the Note Agreement.

The Company’s obligations under the Note Agreement are secured by a lien against substantially all of the Company’s assets (as the notes rank pari passu with the Line of Credit), and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of fixed charge coverage and tangible net worth and maximum levels of leverage (all as defined within the Note Agreement). As of September 28, 2019, 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.

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Fair Value Measurements:

9 Months Ended

Sep. 28, 2019

Fair Value Measurements:

Fair Value Measurements:

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.

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Investment in Leasing Operations: Risk Concentration (Details) - Total assets - Customer One Concentration Risk	9 Months Ended
	Sep. 28, 2019 customer
Investment in leasing operations
Number of customers	1
Percentage of concentration risk	12.00%

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Investment in Leasing Operations: Leasing Income (Details) - USD ($)	3 Months Ended	9 Months Ended
	Sep. 28, 2019	Sep. 28, 2019
Leasing income
Interest income on direct financing and sales-type leases	$ 1,856,000	$ 6,066,800
Selling profit (loss) at commencement of sales-type leases	1,098,100	1,971,600
Operating lease income	702,600	1,908,700
Income on sales of equipment under lease	496,600	2,268,500
Other	222,200	518,200
Leasing income	$ 4,375,500	$ 12,733,800

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Debt: Line of Credit (Details) - Line of Credit $ in Millions	Sep. 28, 2019 USD ($)
Line of Credit
Borrowings outstanding	$ 0.0
Line of credit available for additional borrowings	$ 45.0

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Segment Reporting: (Details)	3 Months Ended		9 Months Ended
	Sep. 28, 2019 USD ($)	Sep. 29, 2018 USD ($)	Sep. 28, 2019 USD ($) item	Sep. 29, 2018 USD ($)	Dec. 29, 2018 USD ($)
Segment Reporting
Number of reportable business segments | item			2
Total revenue	$ 19,680,900	$ 19,118,500	$ 55,416,300	$ 55,439,300
Total operating income	12,274,700	11,435,300	32,188,100	31,584,200
Total depreciation and amortization	110,700	78,600	276,700	233,700
Total identifiable assets	48,507,500		48,507,500		$ 46,663,100
Operating | Franchising
Segment Reporting
Total revenue	15,305,400	14,509,900	42,682,500	40,444,800
Total operating income	9,895,700	9,064,900	25,844,500	23,264,900
Total depreciation and amortization	79,000	60,300	208,900	178,200
Total identifiable assets	3,841,400		3,841,400		5,208,400
Operating | Leasing
Segment Reporting
Total revenue	4,375,500	4,608,600	12,733,800	14,994,500
Total operating income	2,379,000	2,370,400	6,343,600	8,319,300
Total depreciation and amortization	31,700	$ 18,300	67,800	$ 55,500
Total identifiable assets	31,771,400		31,771,400		40,490,000
Unallocated
Segment Reporting
Total identifiable assets	$ 12,894,700		$ 12,894,700		$ 964,700

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CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 28, 2019	Sep. 29, 2018	Sep. 28, 2019	Sep. 29, 2018
Revenue:
Leasing income	$ 4,375,500		$ 12,733,800
Leasing income	4,375,500	$ 4,608,600		$ 14,994,500
Total revenue	19,680,900	19,118,500	55,416,300	55,439,300
Leasing expense	572,400	718,500	1,642,000	1,769,200
Provision for credit losses	(55,500)	(55,600)	23,900	148,400
Selling, general and administrative expenses	6,217,600	6,208,800	19,637,900	19,702,500
Income from operations	12,274,700	11,435,300	32,188,100	31,584,200
Interest expense	(406,200)	(576,900)	(1,348,700)	(1,978,600)
Interest and other income (expense)	500	(1,000)	(5,900)	(13,300)
Income before income taxes	11,869,000	10,857,400	30,833,500	29,592,300
Provision for income taxes	(2,755,200)	(2,493,100)	(7,145,600)	(7,124,600)
Net income	$ 9,113,800	$ 8,364,300	$ 23,687,900	$ 22,467,700
Earnings per share - basic (in dollars per share)	$ 2.39	$ 2.15	$ 6.19	$ 5.81
Earnings per share - diluted (in dollars per share)	$ 2.24	$ 2.01	$ 5.76	$ 5.43
Weighted average shares outstanding - basic	3,808,863	3,886,473	3,829,329	3,864,077
Weighted average shares outstanding - diluted	4,065,301	4,164,339	4,112,318	4,140,816
Royalties
Revenue:
Revenue	$ 13,808,800	$ 12,865,900	$ 38,223,400	$ 35,735,900
Merchandise sales
Revenue:
Revenue	704,500	858,400	2,037,300	2,340,200
Cost of merchandise sold	671,700	811,500	1,924,400	2,235,000
Franchise fees
Revenue:
Revenue	377,400	383,300	1,183,100	1,162,300
Other
Revenue:
Revenue	$ 414,700	$ 402,300	$ 1,238,700	$ 1,206,400

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Management's Interim Financial Statement Representation:

9 Months Ended

Sep. 28, 2019

Management's Interim Financial Statement Representation:

Management's Interim Financial Statement Representation:

WINMARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.  Management’s Interim Financial Statement Representation:

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

Revenues and operating results for the nine months ended September 28, 2019 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.

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Management's Interim Financial Statement Representation: (Details)	9 Months Ended
	Sep. 28, 2019 item
Minimum
Number of Weeks in Fiscal Year	52
Maximum
Number of Weeks in Fiscal Year	53

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Earnings Per Share: (Tables)

9 Months Ended

Sep. 28, 2019

Earnings Per Share:

Schedule of shares outstanding used in the calculation of basic and diluted earnings per share

	Three Months Ended		Nine Months Ended
	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Denominator for basic EPS — weighted average common shares	3,808,863	3,886,473	3,829,329	3,864,077
Dilutive shares associated with option plans	256,438	277,866	282,989	276,739
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,065,301	4,164,339	4,112,318	4,140,816
Options excluded from EPS calculation — anti-dilutive	7,146	6,116	6,782	15,428

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Investment in Leasing Operations: Credit Losses (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 28, 2019	Sep. 29, 2018	Sep. 28, 2019	Sep. 29, 2018	Dec. 29, 2018
Activity in the allowance for credit losses for leasing operations
Balance at beginning of period			$ 861,200	$ 711,200
Provision for credit losses	$ (55,500)	$ (55,600)	23,900	148,400
Recoveries			15,700	210,700
Deductions for amounts written-off			(224,000)	(101,100)
Balance at end of period	676,800	$ 969,200	676,800	$ 969,200
Investment In Leases
Total investment in direct financing and sales-type leases	30,645,100		30,645,100
Total investment in direct financing and sales-type leases					$ 39,800,200
Allowance for Credit Losses
Total	676,800		676,800
Total					861,200
Investment in leases
Investment In Leases
Collectively evaluated for loss potential	30,645,100		30,645,100		39,800,200
Total investment in direct financing and sales-type leases	30,645,100		30,645,100
Total investment in direct financing and sales-type leases					39,800,200
Allowance for Credit Losses
Collectively evaluated for loss potential	676,800		676,800		861,200
Total	$ 676,800		$ 676,800
Total					$ 861,200

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Shareholders' Equity (Deficit): Dividends and Repurchase of Common Stock (Details) - USD ($) $ / shares in Units, $ in Millions					1 Months Ended
	Jul. 24, 2019	Apr. 24, 2019	Mar. 28, 2019	Jan. 23, 2019	Feb. 28, 2019	Sep. 28, 2019
Dividends
Cash dividends declared and paid (in dollars per share)	$ 0.25	$ 0.25		$ 0.15
2019 Tender Offer
Repurchase of Common Stock
Shares authorized for repurchase per tender offer					150,000
Price per share of common stock per tender offer					$ 159.63
Number of shares repurchased			150,000
Purchase price of shares per tender offer			$ 24.0
Common Stock Repurchase Program
Repurchase of Common Stock
Number of additional shares that can be repurchased						130,604

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Earnings Per Share:

9 Months Ended

Sep. 28, 2019

Earnings Per Share:

Earnings Per Share:

7.  Earnings Per Share:

The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):

	Three Months Ended		Nine Months Ended
	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Denominator for basic EPS — weighted average common shares	3,808,863	3,886,473	3,829,329	3,864,077
Dilutive shares associated with option plans	256,438	277,866	282,989	276,739
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,065,301	4,164,339	4,112,318	4,140,816
Options excluded from EPS calculation — anti-dilutive	7,146	6,116	6,782	15,428

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Recent Accounting Pronouncements:

9 Months Ended

Sep. 28, 2019

Recent Accounting Pronouncements:

Recent Accounting Pronouncements:

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 will be effective for reporting periods beginning after December 15, 2019, with early adoption permitted.  While the Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements, at this time it does not believe the adoption of the ASU will have a material impact on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

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, as well as adding new disclosures for leasing activities.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard.  In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842):Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company used the prospective approach of adoption when the new guidance was adopted on December 30, 2018, the first day of fiscal 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward historical lease classification. Upon adoption, as a lessee, the Company recognized operating lease right-of-use assets of $6.0 million and operating lease liabilities of $6.3 million on its Consolidated Condensed Balance Sheets. The adoption of the standard did not have a material impact on its Consolidated Condensed Statements of Operations or Shareholders’ Equity (Deficit). As a lessor, the adoption of the new standard required the Company to present cash receipts from leases within operating activities in the Consolidated Condensed Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the nine months ended September 28, 2019, principal collections on lease receivables were $14.4 million.

As a lessor, 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.  For sales-type leases in which the equipment has a fair value greater or less than its carrying amount, selling profit/loss is recognized at commencement.  For subsequent periods or for leases in which the equipment’s fair value is equal to its carrying amount, 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.

Additional information and disclosures required by this new standard for the Company as a lessee are contained in Note 11 – “Operating Leases”, and as a lessor in Note 6 – “Investment in Leasing Operations”.

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Operating Leases:

9 Months Ended

Sep. 28, 2019

Operating Leases:

Operating Leases:

11. Operating Leases:

As of September 28, 2019, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029 as well as satellite office space in California with an operating lease that expires in August 2022.  Our leases include both lease (fixed payments including rent) and non-lease components (common area or other maintenance costs and taxes) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.  The corporate headquarters lease provides us the option to extend the lease for two additional five year periods.  The California lease provides us an option to extend the lease for an additional three year period.  The lease renewal options are at our sole discretion; therefore, the renewals to extend the lease term are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise.  The weighted average remaining lease term for these leases is 10.1 years and the weighted average discount rate is 5.5%.  As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.  The Company recognized $1,047,600 and $913,800 of rent expense for the periods ended September 28, 2019 and September 29, 2018, respectively.

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2019 and full fiscal years thereafter as of September 28, 2019:

Operating Lease Liabilities expected to be recognized in	Amount
2019	$	14,300
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total lease payments		8,151,000
Less imputed interest		(1,870,900)
Present value of lease liabilities	$	6,280,100

Of the $6.3 million operating lease liability outstanding at September 28, 2019, $0.3 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 September 28, 2019:

	Nine Months Ended
	September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	479,600

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Investment in Leasing Operations: Minimum Lease Payments Receivable (Details)	Sep. 28, 2019 USD ($)
Direct Financing and Sales-Type Leases, Minimum Lease Payments Receivable
2019	$ 5,214,200
2020	17,273,500
2021	7,999,300
2022	876,300
2023	8,100
Thereafter	4,400
Total	31,375,800
Direct Financing and Sales-Type Leases, Income Amortization
2019	1,291,400
2020	2,782,500
2021	661,400
2022	29,100
2023	500
Thereafter	100
Total	$ 4,765,000

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Earnings Per Share: (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 28, 2019	Sep. 29, 2018	Sep. 28, 2019	Sep. 29, 2018
Earnings Per Share:
Denominator for basic EPS - weighted average common shares	3,808,863	3,886,473	3,829,329	3,864,077
Dilutive shares associated with option plans	256,438	277,866	282,989	276,739
Denominator for diluted EPS - weighted average common shares and dilutive potential common shares	4,065,301	4,164,339	4,112,318	4,140,816
Options excluded from EPS calculation - anti-dilutive (in shares)	7,146	6,116	6,782	15,428

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Segment Reporting:

9 Months Ended

Sep. 28, 2019

Segment Reporting:

Segment Reporting:

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-segment balances and transactions have been eliminated. The following tables summarize financial information by segment and provide a reconciliation of segment contribution to operating income:

	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Revenue:
Franchising	$	15,305,400	$	14,509,900	$	42,682,500	$	40,444,800
Leasing		4,375,500		4,608,600		12,733,800		14,994,500
Total revenue	$	19,680,900	$	19,118,500	$	55,416,300	$	55,439,300
Reconciliation to operating income:
Franchising segment contribution	$	9,895,700	$	9,064,900	$	25,844,500	$	23,264,900
Leasing segment contribution		2,379,000		2,370,400		6,343,600		8,319,300
Total operating income	$	12,274,700	$	11,435,300	$	32,188,100	$	31,584,200
Depreciation and amortization:
Franchising	$	79,000	$	60,300	$	208,900	$	178,200
Leasing		31,700		18,300		67,800		55,500
Total depreciation and amortization	$	110,700	$	78,600	$	276,700	$	233,700

	As of
	September 28, 2019		December 29, 2018
Identifiable assets:
Franchising	$	3,841,400	$	5,208,400
Leasing		31,771,400		40,490,000
Unallocated		12,894,700		964,700
Total	$	48,507,500	$	46,663,100

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Shareholders' Equity (Deficit):

9 Months Ended

Sep. 28, 2019

Shareholders' Equity (Deficit):

Shareholders' Equity (Deficit):

8.  Shareholders’ Equity (Deficit):

Dividends

On January 23, 2019, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on February 6, 2019, which was paid on March 1, 2019.

On April 24, 2019, 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 May 8, 2019, which was paid on June 1, 2019.

On July 24, 2019, 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 August 7, 2019, which was paid on September 3, 2019.

Repurchase of Common Stock

In February 2019, the Company’s Board of Directors authorized the repurchase of up to 150,000 shares of our common stock for a price of $159.63 per share through a tender offer (the “Tender Offer”). The Tender Offer began on the date of the announcement, February 28, 2019 and expired on March 28, 2019. Upon expiration, the Company accepted for payment 150,000 shares for a total purchase price of approximately $24.0 million, including fees and expenses related to the Tender Offer. The Tender Offer was financed in part by net borrowings under the Line of Credit. (See Note 9 – “Debt”).

Under a previous Board of Directors’ authorization, as of September 28, 2019, 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.

Stock Option Plans and Stock-Based Compensation

The Company had authorized up to 750,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2001 Stock Option Plan (the “2001 Plan”).  The 2001 Plan expired on February 20, 2011. As of September 29, 2019, the Company has authorized up to 700,000 shares of common stock to be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).

The Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”) and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.

Stock option activity under the 2001 Plan, 2010 Plan and Nonemployee Directors Plan (collectively, the “Option Plans”) as of September 28, 2019 was as follows:

				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)		Intrinsic Value
Outstanding, December 29, 2018	639,380	$	84.12	5.61	$	47,808,100
Granted	29,250		164.84
Exercised	(65,292)		45.87
Outstanding, September 28, 2019	603,338	$	92.17	5.37	$	50,698,600
Exercisable, September 28, 2019	440,813	$	74.76	4.28	$	44,717,900

The fair value of options granted under the Option Plans during the first nine months of 2019 and 2018 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

	Nine Months Ended
	September 28, 2019			September 29, 2018
Risk free interest rate		1.98	%		2.73	%
Expected life (years)		6			6
Expected volatility		20.30	%		20.40	%
Dividend yield		1.26	%		1.17	%
Option fair value	$	32.65		$	31.44

All unexercised options at September 28, 2019 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of $1,511,400 and $1,507,800 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first nine months of 2019 and 2018, respectively.  As of September 28, 2019, the Company had $3.8 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.4 years.

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Contract Liabilities:

9 Months Ended

Sep. 28, 2019

Contract Liabilities:

Contract Liabilities:

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 third nine months of 2019 and 2018, respectively:

	September 28, 2019		September 29, 2018
Balance at beginning of period	$	10,177,300	$	10,310,200
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		979,700		1,354,500
Fees earned that were included in the balance at the beginning of the period		(1,394,200)		(1,390,200)
Balance at end of period	$	9,762,800	$	10,274,500

The following table illustrates future estimated revenue to be recognized for the remainder of 2019 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2019.

Contract Liabilities expected to be recognized in	Amount
2019	$	433,200
2020		1,693,100
2021		1,554,300
2022		1,409,400
2023		1,238,100
Thereafter		3,434,700
	$	9,762,800

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Organization and Business:

9 Months Ended

Sep. 28, 2019

Organization and Business:

Organization and Business:

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.    

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Operating Leases: (Details)	9 Months Ended
	Sep. 28, 2019 USD ($) item	Sep. 29, 2018 USD ($)
Operating Leases
Weighted average remaining lease term	10 years 1 month 6 days
Weighted average discount rate (as a percent)	5.50%
Rent expense	$ 1,047,600
Rent expense		$ 913,800
Maturities of operating lease liabilities:
2019	14,300
2020	762,500
2021	783,600
2022	784,400
2023	763,300
Thereafter	5,042,900
Total lease payments	8,151,000
Less imputed interest	(1,870,900)
Present value of lease liabilities	6,280,100
Operating lease liability
Operating lease liability, current	$ 300,000
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Accrued Liabilities, Current
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$ 479,600
Corporate headquarters, Minnesota
Operating Leases
Lease renewal option	true
Number of lease extension periods | item	2
Lease renewal term	5 years
Satellite office space, California
Operating Leases
Lease renewal option	true
Lease renewal term	3 years

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Document and Entity Information - shares	9 Months Ended
	Sep. 28, 2019	Oct. 11, 2019
Document and Entity Information
Entity Registrant Name	WINMARK CORP
Entity Central Index Key	0000908315
Document Type	10-Q
Document Period End Date	Sep. 28, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-28
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		3,830,850
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - USD ($)	Common Stock	Retained Earnings (Accumulated Deficit)	Total
BALANCE at Dec. 30, 2017	$ 1,476,200	$ (37,189,700)	$ (35,713,500)
BALANCE (in shares) at Dec. 30, 2017	3,843,078
Shareholders’ Equity (Deficit)
Stock options exercised	$ 48,400		48,400
Stock options exercised (in shares)	6,428
Compensation expense relating to stock options	$ 490,800		490,800
Cash dividends		(423,200)	(423,200)
Comprehensive income (Net income)		6,960,400	6,960,400
BALANCE at Mar. 31, 2018	$ 2,015,400	(30,652,500)	(28,637,100)
BALANCE (in shares) at Mar. 31, 2018	3,849,506
Shareholders’ Equity (Deficit)
Stock options exercised	$ 798,100		798,100
Stock options exercised (in shares)	19,020
Compensation expense relating to stock options	$ 516,100		516,100
Cash dividends		(577,900)	(577,900)
Comprehensive income (Net income)		7,143,000	7,143,000
BALANCE at Jun. 30, 2018	$ 3,329,600	(24,087,400)	(20,757,800)
BALANCE (in shares) at Jun. 30, 2018	3,868,526
Shareholders’ Equity (Deficit)
Repurchase of common stock	$ (558,200)		(558,200)
Repurchase of common stock (in shares)	(3,770)
Stock options exercised	$ 1,325,100		1,325,100
Stock options exercised (in shares)	36,446
Compensation expense relating to stock options	$ 500,900		500,900
Cash dividends		(583,000)	(583,000)
Comprehensive income (Net income)		8,364,300	8,364,300
BALANCE at Sep. 29, 2018	$ 4,597,400	(16,306,100)	(11,708,700)
BALANCE (in shares) at Sep. 29, 2018	3,901,202
BALANCE at Dec. 29, 2018	$ 4,425,600	(9,234,100)	$ (4,808,500)
BALANCE (in shares) at Dec. 29, 2018	3,907,686		3,907,686
Shareholders’ Equity (Deficit)
Repurchase of common stock	$ (5,081,000)	(18,947,100)	$ (24,028,100)
Repurchase of common stock (in shares)	(150,000)
Stock options exercised	$ 156,600		156,600
Stock options exercised (in shares)	1,500
Compensation expense relating to stock options	$ 498,800		498,800
Cash dividends		(586,100)	(586,100)
Comprehensive income (Net income)		7,272,200	7,272,200
BALANCE at Mar. 30, 2019		(21,495,100)	(21,495,100)
BALANCE (in shares) at Mar. 30, 2019	3,759,186
BALANCE at Dec. 29, 2018	$ 4,425,600	(9,234,100)	$ (4,808,500)
BALANCE (in shares) at Dec. 29, 2018	3,907,686		3,907,686
BALANCE at Sep. 28, 2019	$ 3,851,000	(6,977,000)	$ (3,126,000)
BALANCE (in shares) at Sep. 28, 2019	3,822,978		3,822,978
BALANCE at Mar. 30, 2019		(21,495,100)	$ (21,495,100)
BALANCE (in shares) at Mar. 30, 2019	3,759,186
Shareholders’ Equity (Deficit)
Stock options exercised	$ 788,800		788,800
Stock options exercised (in shares)	22,153
Compensation expense relating to stock options	$ 516,800		516,800
Cash dividends		(942,800)	(942,800)
Comprehensive income (Net income)		7,301,900	7,301,900
BALANCE at Jun. 29, 2019	$ 1,305,600	(15,136,000)	(13,830,400)
BALANCE (in shares) at Jun. 29, 2019	3,781,339
Shareholders’ Equity (Deficit)
Stock options exercised	$ 2,049,600		2,049,600
Stock options exercised (in shares)	41,639
Compensation expense relating to stock options	$ 495,800		495,800
Cash dividends		(954,800)	(954,800)
Comprehensive income (Net income)		9,113,800	9,113,800
BALANCE at Sep. 28, 2019	$ 3,851,000	$ (6,977,000)	$ (3,126,000)
BALANCE (in shares) at Sep. 28, 2019	3,822,978		3,822,978

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Recent Accounting Pronouncements: ASU 2016-02 (Details) - USD ($)	9 Months Ended
	Sep. 28, 2019	Dec. 30, 2018
Recently Adopted Accounting Pronouncements
Operating lease right-of-use assets	$ 3,734,400
Operating lease liabilities	6,280,100
Proceeds from Lease Payments	14,407,300
Accounting Standards Update 2016-02
Recently Adopted Accounting Pronouncements
Proceeds from Lease Payments	$ 14,400,000
Accounting Standards Update 2016-02 | Adjustment
Recently Adopted Accounting Pronouncements
Operating lease right-of-use assets		$ 6,000,000
Operating lease liabilities		$ 6,300,000

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Shareholders' Equity (Deficit): (Tables)

9 Months Ended

Sep. 28, 2019

Shareholders' Equity (Deficit):

Schedule of stock option activity

				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)		Intrinsic Value
Outstanding, December 29, 2018	639,380	$	84.12	5.61	$	47,808,100
Granted	29,250		164.84
Exercised	(65,292)		45.87
Outstanding, September 28, 2019	603,338	$	92.17	5.37	$	50,698,600
Exercisable, September 28, 2019	440,813	$	74.76	4.28	$	44,717,900

Schedule of weighted average assumptions used in estimation of fair value of options granted

	Nine Months Ended
	September 28, 2019			September 29, 2018
Risk free interest rate		1.98	%		2.73	%
Expected life (years)		6			6
Expected volatility		20.30	%		20.40	%
Dividend yield		1.26	%		1.17	%
Option fair value	$	32.65		$	31.44