10-K

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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

For the fiscal year ended December 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, Minnesota 55441

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (763) 520-8500

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐              No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐              No ☒

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, a 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 ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $339,792,677.

Shares of no par value Common Stock outstanding as of March 9, 2020:  3,648,753 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on April 29, 2020 have been incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this report

WINMARK CORPORATION AND SUBSIDIARIES

INDEX TO ANNUAL REPORT ON FORM 10-K

PART I		PAGE
Item 1.	Business	1
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Mine Safety Disclosures	12
PART II		PAGE
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	49
Item 9A.	Controls and Procedures	49
Item 9B.	Other Information	49
PART III		PAGE
Item 10.	Directors, Executive Officers and Corporate Governance	50
Item 11.	Executive Compensation	50
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
Item 13.	Certain Relationships and Related Transactions, and Director Independence	50
Item 14.	Principal Accounting Fees and Services	50
PART IV		PAGE
Item 15.	Exhibits and Financial Statement Schedules	51
Item 16.	Form 10-K Summary	53
	SIGNATURES	54

PART I

ITEM 1:     BUSINESS

Background

We are a franchisor of five value-oriented retail store concepts that buy, sell and trade gently used merchandise.  Each of our retail store brands emphasizes consumer value by offering high-quality used merchandise at substantial savings from the price of new merchandise and by purchasing customers’ used goods that have been outgrown or are no longer used.  Our concepts also offer a limited amount of new merchandise to customers.  For over 30 years, we have offered a sustainable solution for consumers to recycle their gently used clothing, toys, sporting goods and musical instruments.  As of December 28, 2019, we had 1,256 franchised stores across the United States and Canada. In addition, we provide franchise consulting and advisory services to new and emerging franchisors through Winmark Franchise Partners, which we launched in 2017.

We operate a middle-market equipment leasing business through our wholly owned subsidiary, Winmark Capital Corporation.  Our middle-market leasing business serves large and medium-sized organizations and focuses on technology and business-essential equipment.  The businesses we target generally have annual revenue of between $30 million and several billion dollars.  We generate middle-market equipment leases primarily through business alliances, equipment vendors and directly from customers.

Additionally, we operate a small-ticket financing business through our wholly owned subsidiary, Wirth Business Credit, Inc.  Our small-ticket financing business serves small businesses and focuses on assets which generally have a cost of $5,000 to $100,000.

Our significant assets are located within the United States, and we generate all revenues from United States operations other than franchising revenues from Canadian operations of approximately $4.7 million, $4.4 million and $3.8 million for 2019, 2018 and 2017, respectively.  For additional financial information, please see Item 6 — Selected Financial Data and Item 8 — Financial Statements and Supplementary Data.  We were incorporated in Minnesota in 1988.

Franchise Operations

Our retail brands with their fiscal year 2019 system-wide sales, which we define as estimated revenues generated by all franchise locations, are summarized as follows:

Plato’s Closet® - $516 million.

We began franchising the Plato’s Closet brand in 1999.  Plato’s Closet stores buy and sell gently used clothing and accessories geared toward the teenage and young adult market.  Customers have the opportunity to sell their used items to Plato’s Closet stores and to purchase quality used clothing and accessories at prices lower than new merchandise.

Once Upon A Child® - $376 million.

We began franchising the Once Upon A Child brand in 1993.  Once Upon A Child stores buy and sell gently used and, to a lesser extent, new children’s clothing, toys, furniture, equipment and accessories.  This brand primarily targets parents of children ages infant to 12 years.  These customers have the opportunity to sell their used children’s items to a Once Upon A Child store when outgrown and to purchase quality used children’s clothing, toys, furniture and equipment at prices lower than new merchandise.

Play It Again Sports® - $227 million.

We began franchising the Play It Again Sports brand in 1988.  Play It Again Sports stores buy, sell, trade and consign gently used and new sporting goods, equipment and accessories for a variety of athletic activities including team sports (baseball/softball, hockey, football, lacrosse, soccer), fitness, ski/snowboard and golf among others.  The stores offer a flexible mix of merchandise that is adjusted to adapt to seasonal and regional differences.

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Style Encore® - $49 million.

We began franchising the Style Encore brand in 2013.  Style Encore stores buy and sell gently used women’s apparel, shoes and accessories.  Customers have the opportunity to sell their used items to Style Encore stores and to purchase quality used clothing, shoes and accessories at prices lower than new merchandise.

Music Go Round® - $35 million.

We began franchising the Music Go Round brand in 1994.  Music Go Round stores buy, sell, trade and consign gently used and, to a lesser extent, new musical instruments, speakers, amplifiers, music-related electronics and related accessories. 

The following table presents the royalties and franchise fees contributed by our franchised retail brands for each of the past three years and the corresponding percentage of consolidated revenues for each such year:

	Total Royalties and Franchise Fees
	(in millions)						% of Consolidated Revenue
	2017		2018		2019		2017		2018		2019
Plato’s Closet	$	20.2	$	21.8	$	23.1	29.0	%	30.1	%	31.6	%
Once Upon A Child		14.5		15.2		16.7	20.8		20.9		22.8
Play It Again Sports		9.3		9.4		9.5	13.3		13.0		12.9
Style Encore		2.2		2.4		2.6	3.1		3.3		3.5
Music Go Round		1.0		1.0		1.1	1.4		1.4		1.5
	$	47.2	$	49.8	$	53.0	67.6	%	68.7	%	72.3	%

The following table presents a summary of our retail brands franchising activity for the fiscal year ended December 28, 2019:

					AVAILABLE
	TOTAL			TOTAL	FOR	COMPLETED
	12/29/2018	OPENED	CLOSED	12/28/2019	RENEWAL	RENEWALS	% RENEWED
Plato’s Closet
Franchises - US and Canada	480	6	(3)	483	45	43	96	%
Once Upon A Child
Franchises - US and Canada	379	12	(3)	388	27	27	100	%
Play It Again Sports
Franchises - US and Canada	281	4	(5)	280	15	15	100	%
Style Encore
Franchises - US and Canada	67	5	(4)	68	—	—	N/A
Music Go Round
Franchises - US	34	4	(1)	37	4	4	100	%
Total Franchised Stores	1,241	31	(16)	1,256	91	89	98	%

Retail Brands Franchising Overview

We use franchising as a business method of distributing goods and services through our retail brands to consumers.  We, as franchisor, own a retail business brand, represented by a service mark or similar right, and an operating system for the franchised business.  We then enter into franchise agreements with franchisees and grant the franchisee the right to use our business brand, service marks and operating system to manage a retail business.  Franchisees are required to operate their retail businesses according to the systems, specifications, standards and formats we develop for the business brand.  We train the franchisees how to operate the franchised business.  We also provide continuing support and service to our franchisees.

We have developed value-oriented retail brands based on a mix of gently used and, to a lesser extent, new merchandise.  We franchise rights to franchisees who open franchised locations under such brands.  The key elements of our franchise strategy include:

· franchising the rights to operate retail stores offering value-oriented merchandise;

· attracting new, qualified franchisees; and

· providing initial and continuing support to franchisees.

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Offering Value-Oriented Merchandise

Our retail brands provide value to consumers by purchasing and reselling gently used merchandise that consumers have outgrown or no longer use at substantial savings from the price of new merchandise.  By offering a combination of high-quality used and value-priced new merchandise, we benefit from consumer demand for value-oriented retailing.  In addition, we believe that among national retail operations our retail store brands provide a unique source of value to consumers by purchasing used merchandise.  We also believe that the strategy of buying used merchandise increases consumer awareness of our retail brands.

Attracting Franchisees

Our franchise marketing program for retail brands seeks to attract prospective franchisees with experience in management and operations and an interest in being the owner and operator of their own business.  We seek franchisees who:

· have a sufficient net worth;

· have prior business experience; and

· intend to be integrally involved with the management of the business.

At December 28, 2019, we had 38 signed retail franchise agreements, of which the majority are expected to open in 2020.

We began franchising in Canada in 1991 and, as of December 28, 2019, had 121 franchised retail stores open in Canada.  The Canadian retail stores are operated by franchisees under agreements substantially similar to those used in the United States.

Retail Brand Franchise Support

As a franchisor, our success depends upon our ability to develop and support competitive and successful franchise brands.  We emphasize the following areas of franchise support and assistance.

Training

Each franchisee must attend our training program regardless of prior experience.  Soon after signing a franchise agreement, the franchisee is required to attend new owner orientation training.  This course covers basic management issues, such as preparing a business plan, lease evaluation, evaluating insurance needs and obtaining financing.  Our training staff assists each franchisee in developing a business plan for their retail store with financial and cash flow projections.  The second training session is centered on store operations.  It covers, among other things, point-of-sale computer training, inventory selection and acquisition, sales, marketing and other topics.  We provide the franchisee with operations manuals that we periodically update.

Field Support

We provide operations personnel to assist the franchisee in the opening of a new business.  We also have an ongoing field support program designed to assist franchisees in operating their retail stores.  Our franchise support personnel visit each retail store periodically and, in most cases, a business assessment is made to determine whether the franchisee is operating in accordance with our standards.  The visit is also designed to assist franchisees with operational issues.

Purchasing

During training each franchisee is taught how to evaluate, purchase and price used goods directly from customers.  We have developed specialized computer point-of-sale systems for our brands that provide the franchisee with standardized pricing information to assist in the purchasing of used items.

We provide centralized buying services, which on a limited basis include credit and billing for the Play It Again Sports franchisees.  Our Play It Again Sports franchise system uses several major vendors for new product including Nautilus, Wilson Sporting Goods, Champro Sports, Easton Sports, CCM Hockey and Bauer Hockey.  The loss of any of the above vendors would change the vendor mix, but not significantly change our products offered.

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To provide the franchisees of our Play It Again Sports, Once Upon A Child and Music Go Round systems a source of affordable new product, we have developed relationships with our significant vendors and negotiated prices for our franchisees to take advantage of the buying power a franchise system brings.

Our typical Once Upon A Child franchised store purchases approximately 30% of its new product from Rachel’s Ribbons, Wild Side Accessories, Melissa & Doug and Nuby.  The loss of any of the above vendors would change the vendor mix, but not significantly change our products offered.

Our typical Music Go Round franchised store purchases approximately 50% of its new product from KMC/Musicorp, RapcoHorizon Company, D’Addario, GHS Corporation and Ernie Ball.  The loss of any of the above vendors would change the vendor mix, but not significantly change our products offered.

There are no significant vendors of new products to our typical Plato’s Closet and Style Encore franchised stores as new product is an extremely low percentage of sales for these brands.

Retail Advertising and Marketing

We encourage our franchisees to implement a marketing program that includes the following: television, radio, point-of-purchase materials, in-store signage and local store marketing programs as well as email marketing promotions, website promotions and participation in social and digital media.  Franchisees of the respective retail brands are required to spend a minimum of 5% of their gross sales on approved advertising and marketing.  Franchisees may be required to participate in regional cooperative advertising groups.

Computerized Point-Of-Sale Systems

We require our retail brand franchisees to use a retail information management computer system in each store, which has evolved with the development of new technology.  This computerized point-of-sale system is designed specifically for use in our franchise retail stores.  The current system includes our proprietary Data Recycling System software, a dedicated server, two or more work station registers, a receipt printer, a report printer and a bar code scanner, together with software modules for inventory management, cash management and customer information management.  Our franchisees purchase the computer hardware from us.  The Data Recycling System software is designed to accommodate buying of used merchandise.  This system provides franchisees with an important management tool that reduces errors, increases efficiencies and enhances inventory control.  We provide point-of-sale system support through our Computer Support Center located at our Company headquarters.

The Retail Franchise Agreement

We enter into franchise agreements with our franchisees.  The following is a summary of certain key provisions of our current standard retail brand franchise agreement.  Except as noted, the franchise agreements used for each of our retail brands are generally the same.

Each franchisee must execute our franchise agreement and pay an initial franchise fee.  At December 28, 2019, the franchise fee for all brands was $25,000 for an initial store in the U.S. and $34,000CAD for an initial store in Canada.  Once a franchisee opens its initial store, it can open additional stores, in any brand, by paying a $15,000 franchise fee for a store in the U.S. and $20,500CAD for a store in Canada, provided an acceptable territory is available and the franchisee meets the brand’s additional store standards.  The franchise fee for our initial retail store and additional retail store in Canada is based upon the exchange rate applied to the United States franchise fee on the last business day of the preceding fiscal year.  The franchise fee in March 2020 for an initial retail store in Canada will be $32,500CAD, and an additional retail store in Canada will be $19,500CAD.  Typically, the franchisee’s initial store is open for business approximately 12 months from the date the franchise agreement is signed.  The franchise agreement has an initial term of 10 years, with subsequent 10-year renewal periods, and grants the franchisee an exclusive geographic area, which will vary in size depending upon population, demographics and other factors.  Under current franchise agreements, franchisees of the respective brands are required to pay us weekly continuing fees (royalties) equal to the percentage of gross sales outlined in their Franchise Agreements, generally ranging from 4% to 5% for all of our brands.

Each Franchisee is currently required to pay us an annual marketing fee of $1,000.  Each new or renewing franchisee is required to spend 5% of its gross sales for advertising and promoting its franchised store.  Currently, for all of the retail brands except Play It Again Sports, we have the option to increase the minimum advertising expenditure requirement

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from 5% to 6% of the franchisee’s gross sales, of which up to 2% would be paid to us as an advertising fee for deposit into an advertising fund.  While we currently do not have the option to increase the advertising expenditure requirement for Play It Again Sports franchisees, we may also require those franchisees to pay 2% of their gross sales into an advertising fund.  This fund, if initiated, would be managed by us and would be used for advertising and promotion of the franchise system.

During the term of a franchise agreement, franchisees agree not to operate directly or indirectly any competitive business.  In addition, franchisees agree that after the end of the term or termination of the franchise agreement, franchisees will not operate any competitive business for a period of two years and within a reasonable geographic area.

Although our franchise agreements contain provisions designed to assure the quality of a franchisee’s operations, we have less control over a franchisee’s operations than we would if we owned and operated a retail store.  Under the franchise agreement, we have a right of first refusal on the sale of any franchised store, but we are not obligated to repurchase any franchised store.

Renewal of the Franchise Relationship

At the end of the 10-year term of each franchise agreement, each franchisee has the option to “renew” the franchise relationship by signing a new 10-year franchise agreement.  If a franchisee chooses not to sign a new franchise agreement, a franchisee must comply with all post termination obligations including the franchisee’s noncompetition clause discussed above.  We may choose not to renew the franchise relationship only when permitted by the franchise agreement and applicable state law.

We believe that renewing a significant number of these franchise relationships is important to the success of the Company.  During the past three years, we renewed 99% of franchise agreements up for renewal.

Retail Franchising Competition

Retailing, including the sale of teenage, children’s and women’s apparel, sporting goods and musical instruments, is highly competitive.  Many retailers have substantially greater financial and other resources than we do.  Our franchisees compete with established, locally owned retail stores, discount chains and traditional retail stores for sales of new merchandise.  Full line retailers generally carry little or no used merchandise.  Resale, thrift and consignment shops and garage and rummage sales offer competition to our franchisees for the sale of used merchandise.  Also, our franchisees increasingly compete with online used and new goods marketplaces such as eBay, craigslist, Amazon and many others.

Our Plato’s Closet franchise stores primarily compete with specialty apparel stores such as American Eagle, Gap, Abercrombie & Fitch, Old Navy, Hollister and Forever 21.  We compete with other franchisors in the teenage resale clothing retail market.

Our Once Upon A Child franchisees compete primarily with large retailers such as Wal-Mart, Target and various specialty children’s retail stores such as Gap Kids. We compete with other franchisors in the specialty children’s resale retail market.

Our Play It Again Sports franchisees compete with large retailers such as Dick’s Sporting Goods, Academy Sports & Outdoors as well as regional and local sporting goods stores.  We also compete with Target and Wal-Mart.

Our Style Encore franchise stores compete with a wide range of women’s apparel stores. We also compete with other franchisors in the women’s resale clothing retail market.

Our Music Go Round franchise stores compete with large musical instrument retailers such as Guitar Center as well as local independent musical instrument stores.

Our retail franchises may face additional competition in the future.  This could include additional competitors that may enter the used merchandise market.  We believe that our franchisees will continue to be able to compete with other retailers based on the strength of our value-oriented brands and the name recognition associated with our service marks.

We also face competition in connection with the sale of franchises.  Our prospective franchisees frequently evaluate other franchise opportunities before purchasing a franchise from us.  We compete with other franchise companies for

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franchisees based on the following factors, among others: amount of initial investment, franchise fee, royalty rate, profitability, franchisor services and industry.  We believe that our franchise brands are competitive with other franchises based on the fees we charge, our franchise support services and the performance of our existing franchise brands.

Winmark Franchise Partners®

During 2017, we announced the launch of an initiative to provide consulting services, support and capital to emerging and established franchisors. Under the Winmark Franchise Partners mark, we leverage our experience in franchising through strategic partnering with select companies interested in franchising to grow their brands.  We anticipate that this concept will create additional revenue streams while being synergistic with our existing business.

Equipment Leasing Operations

We operate a middle-market leasing business through Winmark Capital Corporation, a wholly owned subsidiary.  We operate a small-ticket financing business through Wirth Business Credit, Inc., a wholly owned subsidiary.  We incorporated both of these subsidiaries in April 2004.  Our leasing business provides us with a means to invest cash generated from our franchise business into assets that provide a strong financial return to our shareholders. 

During the past three years, our leasing operations have experienced a decrease in purchases of equipment for lease customers and a corresponding decrease in the size of the leasing portfolio. Purchases of equipment decreased from $26.2 million in 2016 to $9.0 million in 2019, and the leasing portfolio decreased from $41.5 million at the end of 2016 to $25.3 million at the end of 2019. Operating income from the leasing segment has decreased over this same period, from $9.7 million in 2016 to $8.0 million in 2019. The lower level of equipment purchases and decrease in the size of the leasing portfolio have been a direct result of a decrease in the number of customers installing equipment. We continue to explore ways to grow leased assets and add new customers to our leasing portfolio; however, continued low levels of equipment purchases for lease customers and decreases in the size of our portfolio will impact the long-term operating income of our leasing segment.    

Winmark Capital Corporation

Winmark Capital Corporation is engaged in the business of providing non-cancelable leases for high-technology and business-essential assets to both larger organizations and smaller, growing companies.  We target businesses with annual revenue between $30 million and several billion dollars.  We focus on transactions that have terms from two to three years.  Such transactions are generally larger than $250,000 and include high-technology equipment and/or business essential equipment, including computers, telecommunications equipment, storage systems, network equipment and other business-essential equipment.  The leases are retained in our portfolio to accommodate equipment additions and upgrades to meet customers’ changing needs.

Industry

The high-technology equipment industry has been characterized by rapid and continuous advancements permitting broadened user applications and reductions in processing costs.  The introduction of new equipment generally does not cause existing equipment to become obsolete but usually does cause the market value of existing equipment to decrease, reflecting the improved performance per dollar cost of the new equipment.  Users frequently replace equipment as their existing equipment becomes inadequate for their needs or as increased processing capacity is required, creating a secondary market in used equipment.

Generally, high-technology equipment, such as information technology equipment, does not suffer from material physical deterioration if properly maintained.  As required under our leases, our leased equipment must be kept under continual maintenance, in accordance with the manufacturer’s specifications, most often provided by the manufacturer.  The economic life and residual value of information technology equipment is subject to, among other things, the development of technological improvements and changes in sale and maintenance terms initiated by the manufacturer.

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Business Strategy

Our business strategy allows us to differentiate ourselves from our competitors in the leasing industry.  Key elements of this strategy include:

· Relationship Focus.  We maintain a focused, long-term, customer-service approach to our business.

· Full Service.  We can service the equipment leasing needs of both large organizations as well as smaller, growing companies.

· Asset Ownership.  We differentiate ourselves with our commitment to retain ownership of our leases throughout the lease term.

Leasing and Sales Activities

We market our leasing services directly to end-users and indirectly through business alliances, and through vendors of equipment, software, value-added services and consulting services.  We directly market to customers and prospects by telephone canvassing and by establishing relationships with business alliances in the local business community.

We generally lease high-technology and other business-essential equipment.  Additionally, we may lease operating system and application software to our customers, but typically only with a hardware lease.  Our standard lease agreement, entered into with each customer, is a noncancelable “net” lease which contains “hell-or-high water” provisions under which the customer, upon acceptance of the equipment, must make all lease payments regardless of any defects or performance of the equipment, and which require the customer to maintain and service the equipment, insure the equipment against casualty loss and pay all property, sales and other taxes related to the equipment.  We retain ownership of the equipment we lease and, in the event of default by the customer, we or the financial institution to whom the lease payment has been assigned may declare the customer in default, accelerate all lease payments due under the lease and pursue other available remedies, including repossession of the equipment.  Upon expiration of the initial term or extended lease term, depending on the structure of the lease, the customer may:

· return the equipment to us;

· renew the lease for an additional term; or

· purchase the equipment.

If the equipment is returned to us, it will typically be sold into the secondary-user marketplace.

Wirth Business Credit, Inc.

Our small-ticket financing operation serves the needs of small businesses.  Small-ticket financing transactions are typically between $5,000 and $100,000, have terms of between two and four years and cover business essential assets, including computers, printing equipment, security systems, telecommunications equipment, production equipment and other assets.  Our financing transactions are generally full pay out transactions, which means, after paying all required payments under the financing agreement, the customer owns the asset.  Key elements of our small-ticket business strategy include a focus on both business owners and equipment vendor relationships as well as providing fast credit decisions, flexible terms and an easy to understand process.

The small ticket finance industry is highly fragmented and competitive. Small business owners typically finance their businesses through one of many possible sources including banks, vendor captive finance companies, leasing brokers, credit card companies and independent leasing companies.  These sources of funding typically limit their focus to certain types of transactions and may base their decision on credit quality, geography, size of transaction, type of asset or other criteria.

Financing

To date, we have funded the vast majority of our leases internally using our available cash or debt.

Winmark Capital Corporation may from time to time arrange permanent financing of leases through non-recourse discounting of lease rentals with various financial institutions at fixed interest rates.  The proceeds from the assignment of the lease rentals will generally be equal to the present value of the remaining lease payments due under the lease,

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discounted at the interest rate charged by the financial institution.  Interest rates obtained under this type of financing are negotiated on a transaction-by-transaction basis and reflect the financial strength of the customer, the term of the lease and the prevailing interest rates.  In the event of a default by a customer in non-recourse financing, the financial institution has a first lien on the underlying leased equipment, with no further recourse against us.  The institution may, however, take title to the collateral in the event the customer fails to make lease payments or certain other defaults by the customer occur under the terms of the lease.  Our use of lease discounting is dependent upon having leases that are attractive to financial institutions as well as our available cash balances.

Equipment Leasing Competition

We compete with a variety of equipment financing sources that are available to businesses, including:  national, regional and local finance companies that provide lease and loan products; financing through captive finance and leasing companies affiliated with major equipment manufacturers; credit card companies; and commercial banks, savings and loans, and credit unions.  Many of these companies are substantially larger than we are and have considerably greater financial, technical and marketing resources than we do.

Some of our competitors have a lower cost of funds and access to funding sources that are not available to us.  A lower cost of funds could enable a competitor to offer leases with yields that are much less than the yields that we offer, which might cause us to lose lease origination volume.  In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could enable them to establish more origination sources and end user customer relationships and increase their market share.  We have and will continue to encounter significant competition.

Government Regulation

Fourteen states, the Federal Trade Commission and six Canadian Provinces impose pre-sale franchise registration and/or disclosure requirements on franchisors.  In addition, a number of states have statutes which regulate substantive aspects of the franchisor-franchisee relationship such as termination, nonrenewal, transfer, discrimination among franchisees and competition with franchisees.

Additional legislation, both at the federal and state levels, could expand pre-sale disclosure requirements, further regulate substantive aspects of the franchise relationship and require us to file our Franchise Disclosure Documents with additional states.  We cannot predict the effect of future franchise legislation, but do not believe there is any imminent legislation currently under consideration which would have a material adverse impact on our operations.

Although most states do not directly regulate the commercial equipment lease financing business, certain states require licensing of lenders and finance companies, and impose limitations on interest rates and other charges, and a disclosure of certain contract terms and constrain collection practices.  We believe that we are currently in compliance with all material statutes and regulations that are applicable to our business.

Trademarks and Service Marks

Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore®, Music Go Round®, Winmark®, Wirth Business Credit®, Winmark Capital® and Winmark Franchise Partners®, among others, are our registered service marks.  These marks are of considerable value to our business.  We intend to protect our service marks by appropriate legal action where and when necessary.  Each service mark registration must be renewed every 10 years.  We have taken, and intend to continue to take, all steps necessary to renew the registration of all our material service marks.

Seasonality

Our Plato’s Closet and Once Upon A Child franchise brands have experienced higher than average sales volumes during the spring months and during the back-to-school season.  Our Play It Again Sports franchise brand has experienced higher than average sales volumes during the winter season.  Overall, the different seasonal trends of our brands partially offset each other and do not result in significant seasonality trends on a Company-wide basis.  Our equipment leasing business is not seasonal; however, quarter to quarter results often vary significantly.

Employees

As of December 28, 2019, we employed 98 employees.

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Available Information

We maintain a Web site at www.winmarkcorporation.com, the contents of which are not part of or incorporated by reference into this Annual Report on Form 10-K.  We make our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and amendments to those reports) available on our Web site via a link to the U.S. Securities and Exchange Commission (SEC) Web site, free of charge, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.

ITEM 1A:    RISK FACTORS

We are dependent on franchise renewals.

Each of our franchise agreements is 10 years long.  At the end of the term of each franchise agreement, each franchisee may, if certain conditions are met, “renew” the franchise relationship by signing a new 10-year franchise agreement.  As of December 28, 2019 each of our five franchised retail brands have the following number of franchise agreements that will expire over the next three years:

	2020	2021	2022
Plato’s Closet	46	56	56
Once Upon A Child	29	18	32
Play It Again Sports	24	43	61
Music Go Round	1	1	—
Style Encore	—	—	—
	100	118	149

We believe that renewing a significant number of these franchise relationships is important to our continued success.  If a significant number of franchise relationships are not renewed, our financial performance would be materially and adversely impacted.

We are dependent on new franchisees.

Our ability to generate increased revenue and achieve higher levels of profitability depends in part on increasing the number of franchises open.  Unfavorable macro-economic conditions may affect the ability of potential franchisees to obtain external financing and/or impact their net worth, both of which could lead to a lower level of openings than we have historically experienced.  There can be no assurance that we will sustain our current level of franchise openings.

We are in the early stages of a new franchising initiative.

We are currently investing in a new initiative to provide consulting services, support and capital to emerging and established franchisors.  There can be no assurance that we will be successful in this undertaking and that it will not have a negative impact on our financial performance.

We may make additional investments outside of our core businesses.

From time to time, we have and may continue to make investments both inside and outside of our current businesses.  To the extent that we make additional investments that are not successful, such investments could have a material adverse impact on our financial results.

We may sell franchises for a territory, but the franchisee may not open.

We believe that a substantial majority of franchises awarded but not opened will open within the time period permitted by the applicable franchise agreement or we will be able to resell the territories for most of the terminated or expired franchises.  However, there can be no assurance that substantially all of the currently sold but unopened franchises will open and commence paying royalties to us.

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Our retail franchisees are dependent on supply of used merchandise.

Our retail brands are based on offering customers a mix of used and new merchandise.  As a result, the ability of our franchisees to obtain continuing supplies of high quality used merchandise is important to the success of our brands.  Supply of used merchandise comes from the general public and is not regular or highly reliable. In addition, adherence to federal and state product safety and other requirements may limit the amount of used merchandise available to our franchisees.  In addition to laws and regulations that apply to businesses generally, our franchised retail stores may be subject to state or local statutes or ordinances that govern secondhand dealers.  There can be no assurance that our franchisees will avoid supply problems with respect to used merchandise.

We may be unable to collect accounts receivable from franchisees.

In the event that our ability to collect accounts receivable significantly declines from current rates, we may incur additional charges that would affect earnings.  If we are unable to collect payments due from our franchisees, it would materially adversely impact our results of operations and financial condition.

We operate in extremely competitive industries.

Retailing, including the sale of teenage, children’s and women’s apparel, sporting goods and musical instruments, is highly competitive.  Many retailers have significantly greater financial and other resources than us and our franchisees.  Individual franchisees face competition in their markets from retailers of new merchandise and, in certain instances, resale, thrift and other stores that sell used merchandise.  We may face additional competition as our franchise systems expand and if additional competitors enter the used merchandise market.

Our equipment leasing businesses compete with a variety of equipment financing sources that are available to businesses, including: national, regional, and local finance companies that provide leases and loan products; financing through captive finance and leasing companies affiliated with major equipment manufacturers; and commercial banks, savings and loans, credit unions and credit cards.  Many of these companies are substantially larger than we are and have considerably greater financial, technical and marketing resources than we do.  There can be no assurances that we will be able to successfully compete with these larger competitors.

We are subject to credit risk in our lease portfolio and our allowance for credit losses may be inadequate to absorb losses.

In our leasing business, if we inaccurately assess the creditworthiness of our customers, we may experience a higher number of lease defaults than expected, which would reduce our earnings.  For our middle-market customers, we serve a wide range of businesses from smaller companies that may be financed by venture capital investors to larger organizations that may be financed by private equity firms and larger independent public or private companies.  In many cases, our credit analysis relies on the customer’s current or projected financials.  If we fail to adequately assess the risks of our customer’s business plans, we may experience credit losses.  For our small-ticket customers, there is typically only limited publicly available financial and other information about their businesses.  Accordingly, in making credit decisions, we rely upon the accuracy of information from the small business owner and/or third party sources, such as credit reporting agencies. If the information we obtain from small business owners and/or third party sources is incorrect, our ability to make appropriate credit decisions will be impaired.

We may incur concentration of credit risk in our lease portfolio.  As of December 28, 2019, leased assets with one customer represented approximately 18% of our total net investment in leases.

If losses from leases exceed our allowance for credit losses, our operating income will be reduced.  In connection with our leases, we record an allowance for credit losses to provide for estimated losses.  Determining the appropriate level of the allowance is an inherently uncertain process and therefore our determination of this allowance may prove to be inadequate to cover losses in connection with our portfolio of leases.  Losses in excess of our allowance for credit losses would cause us to increase our provision for credit losses, reducing or eliminating our operating income.  Any such significant increase in losses could have a material adverse impact on our financial results.

Deterioration in economic or business conditions may negatively impact our leasing business.

In an economic slowdown or recession, our equipment leasing businesses may face an increase in delinquent payments, lease defaults and credit losses.  The volume of leasing business for our new and existing customers may decline, as well

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as the credit quality of our customers.  Because we extend credit to many emerging and leveraged companies through our subsidiary Winmark Capital Corporation and primarily to small businesses through our subsidiary Wirth Business Credit, Inc., our customers may be particularly susceptible to economic slowdowns or recessions.   Any protracted economic slowdowns or recessions may make it difficult for us to maintain the volume of lease originations for new and existing customers, and may deteriorate the credit quality of new leases.  Any of these events may slow the growth of our leasing portfolio and impact the profitability of our leasing operations.

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.

We are subject to restrictions in our line of credit and note facilities.  Additionally, we are subject to counter party risk in our line of credit facility.

The terms of our $45.0 million line of credit and $37.5 million note facility impose certain operating and financial restrictions on us and require us to meet certain financial tests including tests related to minimum levels of debt service coverage and tangible net worth and maximum levels of leverage.  As of December 28, 2019, we were in compliance with all of our financial covenants under these facilities; however, failure to comply with these covenants in the future may result in default under one or both of these sources of capital and could result in acceleration of the related indebtedness.  Any such acceleration of indebtedness would have an adverse impact on our business activities and financial condition.

Sustained credit market deterioration could jeopardize the counterparty obligations of one or both of the banks participating in our line of credit facility, which could have an adverse impact on our business if we are not able to replace such credit facility or find other sources of liquidity on acceptable terms.

We have indebtedness.

We have indebtedness in connection with the purchase of shares in the 2017 and 2019 Tender Offers (see Note 5 — “Shareholders’ Equity (Deficit)” and Note 6 — “Debt”), and we incurred additional indebtedness in connection with the purchase of shares in the 2020 Tender Offer (See Note 14 — “Subsequent Events”).  We expect to generate the cash necessary to pay our expenses, finance our leasing business and to pay the principal and interest on all of our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate.  Our ability to pay our expenses, finance our leasing business and meet our debt service obligations depends on our future performance, which may be affected by financial, business, economic, and other factors.  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 are subject to government regulation.

As a franchisor, we are subject to various federal and state franchise laws and regulations.  Fourteen states, the Federal Trade Commission and six Canadian Provinces impose pre-sale franchise registration and/or disclosure requirements on franchisors.  In addition, a number of states have statutes which regulate substantive aspects of the franchisor-franchisee relationship such as termination, nonrenewal, transfer, discrimination among franchisees and competition with franchisees.

Additional legislation, both at the federal and state levels, could expand pre-sale disclosure requirements, further regulate substantive aspects of the franchise relationship and require us to file our franchise offering circulars with additional states.  Future franchise legislation could impose costs or other burdens on us that could have a material adverse impact on our operations.  In addition, evolving labor and employment laws, rules and regulations could result in

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potential claims against us as a franchisor for labor and employment related liabilities that have historically been borne by franchisees.

Although most states do not directly regulate the commercial equipment lease financing business, certain states require licensing of lenders and finance companies, impose limitations on interest rates and other charges, constrain collection practices and require disclosure of certain contract terms.  Laws or regulations may be adopted with respect to our equipment leases or the equipment leasing industry, and collection processes. Any new legislation or regulation, or changes in the interpretation of existing laws, which affect the equipment leasing industry could increase our costs of compliance.

We may be unable to protect against data security risks.

We have implemented security systems with the intent of maintaining the physical security of our facilities and protecting our employees, franchisees, lessees, customers’, clients’ and suppliers’ confidential information and information related to identifiable individuals against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media.  These include, for example, the appropriate encryption of information.  Despite such efforts, we are subject to potential breach of security systems which may result in unauthorized access to our facilities or the information we are trying to protect.  Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient preventative measures.  If unauthorized parties gain physical access to one of our facilities or electronic access to our information systems or such information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers and clients that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our business.

ITEM 1B:  UNRESOLVED STAFF COMMENTS

None.

ITEM 2:     PROPERTIES

We lease 41,016 square feet at our headquarters facility in Minneapolis, Minnesota.  We are obligated to pay rent monthly under the lease, and will pay an average of $771,000 annually over the remaining term that expires in 2029.  We are also obligated to pay estimated taxes and operating expenses as described in the lease, which change annually.  The total rentals, taxes and operating expenses paid may increase if we exercise any of our rights to acquire additional space described in the lease.  Our facilities are sufficient to meet our current and immediate future needs.

ITEM 3:     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 4:     MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5:MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders, Dividends

Winmark Corporation’s common stock trades on the NASDAQ Global Market under the symbol “WINA”.  For dividend information see Note 5 – “Shareholders’ Equity (Deficit).”

At March 9, 2020, there were approximately 59 shareholders of record of our common stock.

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

				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
September 29, 2019 to November 2, 2019	—	$	—	—	130,604
November 3, 2019 to November 30, 2019	—	$	—	—	130,604
December 1, 2019 to December 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.

Performance Graph

In accordance with the rules of the SEC, the following graph compares the performance of our common stock on the NASDAQ Stock Market to the NASDAQ US Benchmark TR composite index and to the NASDAQ US Benchmark Retail TR industry index, of which we are a component.  The graph compares on an annual basis the cumulative total shareholder return on $100 invested on December 27, 2014 through our fiscal year ended December 28, 2019 and assumes reinvestment of all dividends.  The performance graph is not necessarily indicative of future investment performance.

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ITEM 6:     SELECTED FINANCIAL DATA

The following table sets forth selected financial information for the periods indicated.  The information should be read in conjunction with the consolidated financial statements and related notes discussed in Items 8 and 15, and Management’s Discussion and Analysis of Financial Condition and Results of Operations discussed in Item 7.

	Fiscal Year Ended
	(in thousands except per share data)
	December 28,			December 29,			December 30,			December 26,			December 27,
	2019			2018			2017			2016			2015(1)
Revenue:
Royalties	$	51,422		$	48,225		$	45,644		$	43,995		$	41,908
Leasing income		16,056			18,176			18,470			17,283			21,566
Merchandise sales		2,619			2,903			2,572			2,217			2,817
Franchise fees		1,541			1,580			1,541			1,564			1,788
Other		1,661			1,627			1,530			1,460			1,369
Total revenue		73,299			72,511			69,757			66,519			69,448
Cost of merchandise sold		2,470			2,741			2,433			2,101			2,653
Leasing expense		2,031			1,929			3,269			2,324			5,759
Provision for credit losses		(78)			39			9			18			(150)
Selling, general and administrative expenses		25,745			26,038			25,241			23,867			24,095
Income from operations		43,131			41,764			38,805			38,209			37,091
Interest expense		(1,731)			(2,448)			(2,366)			(2,343)			(1,802)
Interest and other income (expense)		67			(33)			13			(12)			(64)
Income before income taxes		41,467			39,283			36,452			35,854			35,225
Provision for income taxes		(9,318)			(9,158)			(11,871)			(13,706)			(13,425)
Net income	$	32,149		$	30,125		$	24,581		$	22,148		$	21,800
Earnings per common share - diluted	$	7.84		$	7.26		$	5.66		$	5.11		$	4.69
Weighted average shares outstanding - diluted		4,101			4,150			4,330			4,330			4,652
Cash dividends per common share	$	0.90		$	0.56		$	0.43		$	0.37		$	0.27
Balance Sheet Data:
Working capital (2)	$	29,270		$	11,768		$	12,020		$	15,436		$	16,920
Total assets (2)		61,842			46,663			48,842			48,582			47,406
Total debt		25,688			28,938			67,588			45,400			66,400
Shareholders’ equity (deficit)		12,448			(4,809)			35,714			(7,852)			(30,674)
Selected Financial Ratios:
Return on average assets (2)		59.3	%		63.1	%		50.5	%		46.1	%		42.7	%
Return on average equity		N/A	%		N/A	%		N/A	%		N/A	%		N/A	%

(1) We adopted a new revenue recognition standard on December 31, 2017 that was applied retrospectively to 2017 and 2016; financial information for 2015 has not been adjusted to reflect the new standard.

(2) We adopted a new lease accounting standard on December 30, 2018 that resulted in balance sheet recognition of operating lease liabilities and right-of-use assets (See Note 2, “Significant Accounting Policies: Recently Adopted Accounting Pronouncements”); financial information for years before 2019 has not been adjusted to reflect the new standard.

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ITEM 7:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

As of December 28, 2019, we had 1,256 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands and had a leasing portfolio of $25.3 million.  Management closely tracks the following financial criteria to evaluate current business operations and future prospects: royalties, leasing activity, and selling, general and administrative expenses.

Our most significant source of franchising revenue is royalties received from our franchisees.  During 2019, our royalties increased $3.2 million or 6.6% compared to 2018.

Leasing income net of leasing expense in 2019 was $14.0 million compared to $16.2 million in 2018.  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 2019, we purchased $9.0 million in equipment for lease customers compared to $23.1 million in 2018  and $25.4 million in 2017.  Our leasing portfolio (net investment in leases — current and long-term) was $25.3 million at December 28, 2019 compared to $39.0 million at December 29, 2018 and $41.3 million at December 30, 2017.  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. 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 2019, selling, general and administrative expense decreased $0.3 million, or 1.1%, compared to the same period last year.

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 fiscal year ended December 28, 2019:

					AVAILABLE
	TOTAL			TOTAL	FOR	COMPLETED
	12/29/2018	OPENED	CLOSED	12/28/2019	RENEWAL	RENEWALS	% RENEWED
Plato’s Closet
Franchises - US and Canada	480	6	(3)	483	45	43	96	%
Once Upon A Child
Franchises - US and Canada	379	12	(3)	388	27	27	100	%
Play It Again Sports
Franchises - US and Canada	281	4	(5)	280	15	15	100	%
Style Encore
Franchises - US and Canada	67	5	(4)	68	—	—	N/A
Music Go Round
Franchises - US	34	4	(1)	37	4	4	100	%
Total Franchised Stores	1,241	31	(16)	1,256	91	89	98	%

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.  In 2019, we renewed 98% of franchise agreements up for renewal.  This percentage of renewal has ranged between 98% and 100% during the last three years.

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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 portfolios, and (iv) control our selling, general and administrative expenses.  A detailed description of the risks to our business along with other risk factors can be found in Item 1A “Risk Factors”.

Results of Operations

The following table sets forth selected information from our Consolidated Statements of Operations expressed as a percentage of total revenue and the percentage change in the dollar amounts from the prior period:

	Fiscal Year Ended						Fiscal 2019		Fiscal 2018
	December 28,		December 29,		December 30,		over (under)		over (under)
	2019		2018		2017		2018		2017
Revenue:
Royalties	70.1	%	66.5	%	65.4	%	6.6	%	5.7	%
Leasing income	21.9		25.1		26.5		(11.7)		(1.6)
Merchandise sales	3.6		4.0		3.7		(9.8)		12.9
Franchise fees	2.1		2.2		2.2		(2.5)		2.5
Other	2.3		2.2		2.2		2.1		6.3
Total revenue	100.0		100.0		100.0		1.1		3.9
Cost of merchandise sold	(3.4)		(3.8)		(3.5)		(9.9)		12.7
Leasing expense	(2.8)		(2.7)		(4.7)		5.3		(41.0)
Provision for credit losses	0.1		—		—		(302.8)		328.9
Selling, general and administrative expenses	(35.1)		(35.9)		(36.2)		(1.1)		3.2
Income from operations	58.8		57.6		55.6		3.3		7.6
Interest expense	(2.4)		(3.4)		(3.4)		(29.3)		3.4
Interest and other income (expense)	0.1		—		—		(303.0)		(357.4)
Income before income taxes	56.5		54.2		52.2		5.6		7.8
Provision for income taxes	(12.7)		(12.6)		(17.0)		1.8		(22.9)
Net income	43.8	%	41.6	%	35.2	%	6.7	%	22.6	%

Revenue

Revenues for the year ended December 28, 2019 totaled $73.3 million compared to $72.5 million and $69.8 million for the comparable periods in 2018 and 2017, respectively.

Royalties and Franchise Fees

Royalties increased to $51.4 million for 2019 from $48.2 million for the same period in 2018, a 6.6% increase.  The increase was due to higher Once Upon A Child, Plato’s Closet and Style Encore royalties of $1.5 million, $1.3 million and $0.2 million, respectively.  The increase in royalties for these brands is primarily due to higher franchisee retail sales in these brands as well as having additional franchise stores across these brands in 2019 compared to 2018.  In 2018, royalties increased $2.6 million compared to 2017.  This increase was primarily due to higher franchisee retail sales in these brands as well as having additional franchise stores in 2018 compared to 2017.

Franchise fees of $1.5 million for 2019 were comparable to $1.6 million for 2018 and $1.5 million for 2017.  Franchise fees include initial franchise fees from the sale of new franchises and transfer fees related to the transfer of existing franchises.  Franchise fee revenue is recognized over the estimated life of the franchise, beginning when the franchise opens.  An overview of retail brand franchise fees is presented in the Franchising subsection of the Business section (Item 1).

Leasing Income

Leasing income decreased to $16.1 million in 2019 compared to $18.2 million for the same period in 2018.  The decrease is due to a smaller lease portfolio.  Leasing income in 2018 decreased $0.3 million compared to 2017 primarily due to a lower level of equipment sales to customers.

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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 decreased to $2.6 million in 2019 from $2.9 million in 2018.  The decrease is primarily due to a decrease in technology purchases by our franchisees.  Direct Franchisee Sales in 2018 increased $0.3 million compared to 2017 as a result of increased 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 decreased to $2.5 million in 2019 from $2.7 million in 2018.  The decrease was due to a decrease in Direct Franchisee Sales in 2019 discussed above.  Cost of merchandise sold in 2018 increased $0.3 million compared to 2017 due to an increase in Direct Franchisee Sales in 2018 discussed above.  Cost of merchandise sold as a percentage of Direct Franchisee Sales for 2019, 2018 and 2017 was 94.3%, 94.4% and 94.6%, respectively.

Leasing Expense

Leasing expense of  $2.0 million in 2019 was comparable to $1.9 million in 2018.  Leasing expense in 2018 decreased $1.4 million compared to 2017 due to a decrease in the associated cost of equipment sales to customers discussed above.

Provision for Credit Losses

Provision for credit losses was ($78,300) in 2019 compared to $38,600 in 2018 and $9,000 in 2017.  The provision levels in 2019 reflect the reduction in lease payments receivable from lease customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 1.1% to $25.7 million in 2019 from $26.0 million in 2018.  The decrease was primarily due to decreases in compensation and benefit expenses.  The $0.8 million, or 3.2%, increase in selling, general and administrative expenses in 2018 compared to 2017 was primarily due to increases in compensation and benefit expenses, occupancy and advertising production.

Interest Expense

Interest expense decreased to $1.7 million in 2019 compared to $2.4 million in 2018 and $2.4 million in 2017. The decrease in 2019 is primarily due to lower average corporate borrowings during 2019 compared to 2018.

Income Taxes

The provision for income taxes was calculated at an effective rate of 22.5%, 24.1% and 32.6% for 2019, 2018 and 2017, respectively. The lower effective rate in 2019 compared to 2018 is primarily due to tax benefits on the exercise of non-qualified stock options.  The lower effective rate in 2018 compared to 2017 is primarily due to the enactment of the Tax Cut and Jobs Act that reduced the federal corporate rate from 35% to 21% beginning in 2018. (See Note 11 – “Income Taxes”).

Segment Comparison of Fiscal Years 2019, 2018 and 2017

We currently have 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, our middle-market equipment leasing business and (ii) Wirth Business Credit, Inc., our small-ticket financing business.  Segment reporting is intended to give financial statement users a better view of how we manage and evaluate our businesses.  Our internal management reporting is the basis for the information disclosed for our business segments and includes allocation of  shared-service costs.  The following tables summarize financial information by segment and provide a reconciliation of segment contribution to income from operations:

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	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Revenue:
Franchising	$	57,243,100	$	54,334,600	$	51,287,100
Leasing		16,055,800		18,176,500		18,470,200
Total revenue	$	73,298,900	$	72,511,100	$	69,757,300
Reconciliation to income from operations:
Franchising segment contribution	$	35,169,900	$	31,882,200	$	29,513,900
Leasing segment contribution		7,961,200		9,881,600		9,291,100
Total income from operations	$	43,131,100	$	41,763,800	$	38,805,000

Revenues are all generated from United States operations other than franchising revenue from Canadian operations of $4.7 million, $4.4 million and $3.8 million in each of fiscal 2019, 2018 and 2017, respectively.

Franchising Segment Operating Income

The franchising segment’s 2019 operating income increased by $3.3 million, or 10.3%, to $35.2 million from $31.9 million for 2018.  The increase in segment contribution was primarily due to increased royalty revenues.  The $2.4 million increase in the franchising segment’s 2018 operating income from 2017 was primarily due to increased royalty revenues; partially offset by an increase in selling, general and administrative expenses.

Leasing Segment Operating Income

The leasing segment’s operating income for 2019 decreased by $1.9 million, or 19.4%, to $8.0 million from $9.9 million for 2018.  The decrease in segment contribution was due to a  decrease in leasing income net of leasing expense; partially offset by a decrease in selling, general and administrative expenses.  The $0.6 million increase in the leasing segment’s 2018 operating income from 2017 was due to an increase in leasing income net of leasing expense; partially offset by an increase in selling, general and administrative expenses.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been cash flow from operations and borrowings.  The components of the Consolidated 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 2019 with $25.2 million in cash, cash equivalents and restricted cash compared to $2.6 million in cash, cash equivalents and restricted cash at the end of 2018.

Operating activities provided $50.6 million of cash during 2019 compared to $34.9 million provided during 2018 and $25.2 million provided during 2017.   The increase in cash provided by operating activities in 2019 compared to 2018 was primarily due to the classification of principal collections on lease receivables of $19.4 million as operating activities in 2019, where such collections in 2018 were classified as investing activities. (See Note 2 – “Significant Accounting Policies: Recently Adopted Accounting Pronouncements”). The increase in cash provided by operating activities in 2018 compared to 2017 was primarily due to a decrease in cash paid for income taxes.

Investing activities used  $9.2 million of cash during 2019 compared to $0.5 million provided during 2018 and $0.1 million used during 2017.  Comparability of investing activities is impacted by the above referenced changes in the classification of principal collections on lease receivables in 2019 as operating activities.  Our most significant investing activities consist of the purchase of equipment for lease contracts and principal collections on lease receivables (for periods prior to 2019), as our franchising business is not capital intensive.  Purchase of equipment for lease customers in 2019 was $9.0 million compared to $23.1 million in 2018 and $25.4 million in 2017.  During 2018, principal collections on lease receivables were $24.3 million compared to $25.3 million during 2017.

Financing activities used $18.9 million of cash during 2019 compared to $34.0 million used during 2018 and $25.4 million used during 2017.  Our most significant financing activities over the past three years have consisted of net borrowings/payments on our debt facilities, the payment of dividends, repurchase of common stock, and net proceeds

18

received from the exercise of stock options and discounted lease rentals.  During 2017, we paid $1.8 million in cash dividends and used $49.9 million to purchase 400,000 shares of our common stock in a tender offer (the “2017 Tender Offer”). Net borrowings on our line of credit and notes payable of $22.2 million during 2017 were associated with these activities.  During 2018, we made net payments on our Line of Credit and notes payable of $38.7 million, paid $2.2 million in cash dividends and repurchased 12,384 shares of our common stock for $1.8 million; partially offset by $5.9 million in proceeds received from discounted lease rentals and $2.8 million of proceeds from the exercise of stock options.  During 2019, we paid $3.4 million in cash dividends, used $24.0 million to purchase 150,000 shares of our common stock in a tender offer (the “2019 Tender Offer”) and made net payments on our Line of Credit and notes payable of $3.3 million; partially offset by $10.9 million of proceeds from the exercise of stock options and $0.9 million in proceeds received from discounted lease rentals. (See Note 5 — “Shareholders’ Equity (Deficit)” and Note 6 — “Debt”). 

We have debt obligations and future operating lease commitments for our corporate headquarters and satellite office space.  As of December 28, 2019, we had no other material outstanding commitments.  (See Note 12 — “Commitments and Contingencies”).  The following table summarizes our significant future contractual obligations at December 28, 2019:

	Payments due by period
			Less than 1						More than 5
	Total		year		1-3 years		3-5 years		years
Contractual Obligations
Line of Credit(2)	$	—	$	—	$	—	$	—	$	—
Notes payable(1)(2)		30,262,500		5,055,500		10,445,300		9,530,300		5,231,400
Operating Lease Obligations		7,737,900		730,000		1,467,800		1,547,700		3,992,400
Total Contractual Obligations	$	38,000,400	$	5,785,500	$	11,913,100	$	11,078,000	$	9,223,800

(1) Includes interest payable quarterly at rates ranging from 5.10% to 5.50% assuming principal payments in accordance with amortizing schedules.

(2) Refer to Part II, Item 8 in this report under Note 6 — “Debt” for additional information regarding long-term debt.

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

We have a revolving credit with CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) and BMO Harris Bank N.A. (the “Line of Credit”). The Line of Credit,  which has a termination date of July 19, 2021, has been and will continue to be used for general corporate purposes.  During 2019, the Line of Credit was used to finance in part of the 2019 Tender Offer.  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 December 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 under the line of credit leaving $45.0 million available for additional borrowings.

The Line of Credit allows us to choose between two interest rate options in connection with our borrowings. The interest rate options are the Base Rate (as defined) and the LIBOR Rate (as defined) plus an applicable margin of 0% and 2.0% respectively. Interest periods for LIBOR borrowings can be one, two, three, six or twelve months, as selected by us. The Line of Credit also provides for non-utilization fees of 0.25% per annum on the daily average of the unused commitment.

We have a Note Agreement (the “Note Agreement”) with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”) that was entered into in May 2015. As of December 28, 2019,  the aggregate principal outstanding under the Note Agreement was $25.7 million, consisting of $16.0 million from the $25.0 million Series A notes issued in May 2015 and $9.7 million from the $12.5 million Series B notes issued in August 2017.

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

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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).

On December 16, 2019, we entered into an Amendment No. 6 to our Line of Credit and an Amendment No. 2 to the Note Agreement (collectively, the “Amendments”) whereby the lenders under each of these facilities consented to a self-tender to purchase up to 300,000 shares, or approximately 7.6% of our outstanding common stock, for a price of $163.00 per share (the “2020 Tender Offer”) that we announced on December 17, 2019. The 2020 Tender Offer expired on January 16, 2020 and, we purchased 300,000 shares for a total purchase price of approximately  $49.0 million including fees and expenses. We paid for the shares tendered and associated fees with existing available cash and from borrowing $19.2 million under the Line of Credit.

Under the Amendments, the tangible net worth covenant calculation within each of these facilities was amended to remove the effect of the 2020 Tender Offer and to allow for the replacement of LIBOR.

As of December 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 all of our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate.  Our ability to pay our expenses, finance our leasing business and meet our debt service obligations depends on our future performance, which may be affected by financial, business, economic, and other factors including the risk factors described under Item 1A of this report.  If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or raise equity.  In such an event, we may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us or at all.  Also, our ability to carry out any of these activities on favorable terms, if at all, may be further impacted by any financial or credit crisis which may limit access to the credit markets and increase our cost of capital.

We may utilize discounted lease financing to provide funds for a portion of our leasing activities.  Rates for discounted lease financing reflect prevailing market interest rates and the credit standing of the lessees for which the payment stream of the leases are discounted.  We believe that discounted lease financing will continue to be available to us at competitive rates of interest through the relationships we have established with financial institutions.

We believe that the combination of our cash on hand, the cash generated from our franchising business, cash generated from discounting sources and our Line of Credit will be adequate to fund our planned operations through 2020.

Critical Accounting Policies

The Company prepares the consolidated financial statements of Winmark Corporation and Subsidiaries in conformity with accounting principles generally accepted in the United States of America.  As such, the Company is required to 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

20

estimates, its royalty revenue would be impacted.  During 2019, the Company collected $27,100 less than it estimated at December 29, 2018.  As of December 28, 2019, the Company’s royalty receivable was $1,543,100.

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 balance sheet.  As of December 28, 2019, deferred franchise fee revenue was $7,623,800.

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 (when more than three monthly payments are owed), the lease is classified as being on non-accrual and the Company stops recognizing leasing income on that date.  Payments received on leases in non-accrual status generally reduce the lease receivable.  Leases on non-accrual status remain classified as such until there is sustained payment performance that, in the Company’s judgment, would indicate that all contractual amounts will be collected in full.

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 3 — “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.

Recent Accounting Pronouncements

See Note 2, “Significant Accounting Policies — Recently Issued Accounting Pronouncements and Recently Adopted Accounting Pronouncements”.

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Outlook

Forward Looking Statements

The statements contained Item 1 “Business”, Item 1A “Risk Factors”, in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Item 8 “Financial Statements and Supplemental Data” that are not strictly historical fact, including without limitation, the Company’s statements relating to growth opportunities, its ability to open new franchises, its ability to manage costs in the future, the number of franchises it believes will open, growth and performance of its lease portfolio, prospects for and anticipated revenue streams for Winmark Franchise Partners, its future cash requirements, its future effective tax rate, allowance for credit losses and its 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 which 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 including, but not limited to, the risk factors discussed in Section 1A of this report.  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 statement for any reason.

ITEM 7A:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company incurs financial markets 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 December 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 December 28, 2019 under this line of credit.  The Company’s earnings would be affected by changes in short-term interest rates only in the event that it were to borrow amounts under this facility.  With the Company’s borrowings at December 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 December 28, 2019.

None of the Company’s cash and cash equivalents at December 29, 2018 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 year ended December 28, 2019, as less than 7% 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 $458,000.  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 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Winmark Corporation and Subsidiaries

Index to Consolidated Financial Statements

Consolidated Balance Sheets	Page 23
Consolidated Statements of Operations	Page 24
Consolidated Statements of Comprehensive Income	Page 25
Consolidated Statements of Shareholders’ Equity (Deficit)	Page 26
Consolidated Statements of Cash Flows	Page 27
Notes to the Consolidated Financial Statements	Page 28
Reports of Independent Registered Public Accounting Firm	Page 47

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WINMARK CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

	December 28, 2019		December 29, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	25,130,300	$	2,496,000
Restricted cash		50,000		80,000
Receivables, less allowance for doubtful accounts of $1,900 and $400		1,669,500		1,553,100
Net investment in leases - current		12,800,100		18,547,500
Income tax receivable		497,900		565,500
Inventories		86,000		107,600
Prepaid expenses		968,100		901,600
Total current assets		41,201,900		24,251,300
Net investment in leases — long-term		12,505,500		20,455,500
Property and equipment:
Furniture and equipment		3,910,900		3,518,600
Building and building improvements		2,955,100		1,466,400
Less - accumulated depreciation and amortization		(4,093,400)		(4,118,800)
Property and equipment, net		2,772,600		866,200
Operating lease right of use assets		3,595,200		—
Goodwill		607,500		607,500
Other assets		492,500		482,600
Deferred income taxes		667,000		—
	$	61,842,200	$	46,663,100
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900	$	3,736,100	$	3,236,100
Accounts payable		1,015,000		1,351,800
Accrued liabilities		2,783,100		3,128,600
Discounted lease rentals		2,680,700		3,021,900
Deferred revenue		1,717,000		1,744,900
Total current liabilities		11,931,900		12,483,300
Long-term Liabilities:
Notes payable, net of unamortized debt issuance costs of $68,700 and $82,600		21,868,800		25,604,900
Discounted lease rentals		836,900		2,723,500
Deferred revenue		7,858,500		8,432,400
Operating lease liabilities		5,846,100		—
Other liabilities		1,051,700		1,079,200
Deferred income taxes		—		1,148,300
Total long-term liabilities		37,462,000		38,988,300
Commitments and Contingencies		—		—
Shareholders’ Equity (Deficit):
Common stock, no par value, 10,000,000 shares authorized, 3,947,858 and 3,907,686 shares issued and outstanding		11,929,300		4,425,600
Retained earnings (accumulated deficit)		519,000		(9,234,100)
Total shareholders' equity (deficit)		12,448,300		(4,808,500)
	$	61,842,200	$	46,663,100

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

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WINMARK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Revenue:
Royalties	$	51,421,800	$	48,224,500	$	45,643,500
Leasing income		16,055,800		18,176,500		18,470,200
Merchandise sales		2,618,800		2,903,100		2,572,200
Franchise fees		1,540,900		1,580,300		1,541,100
Other		1,661,600		1,626,700		1,530,300
Total revenue		73,298,900		72,511,100		69,757,300
Cost of merchandise sold		2,469,700		2,741,100		2,432,600
Leasing expense		2,031,100		1,929,300		3,269,100
Provision for credit losses		(78,300)		38,600		9,000
Selling, general and administrative expenses		25,745,300		26,038,300		25,241,600
Income from operations		43,131,100		41,763,800		38,805,000
Interest expense		(1,731,100)		(2,447,500)		(2,366,400)
Interest and other income (expense)		67,400		(33,200)		12,900
Income before income taxes		41,467,400		39,283,100		36,451,500
Provision for income taxes		(9,318,100)		(9,157,600)		(11,871,000)
Net income	$	32,149,300	$	30,125,500	$	24,580,500
Earnings per share - basic	$	8.37	$	7.77	$	6.06
Earnings per share - diluted	$	7.84	$	7.26	$	5.66
Weighted average shares outstanding - basic		3,840,638		3,874,757		4,056,049
Weighted average shares outstanding - diluted		4,100,629		4,149,779		4,339,944

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

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WINMARK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Net income	$	32,149,300	$	30,125,500	$	24,580,500
Other comprehensive income, before tax:
Unrealized holding net gains arising during period		—				15,900
Other comprehensive income, before tax		—		—		15,900
Income tax expense related to items of other comprehensive income:
Unrealized net gains/losses on marketable securities:
Unrealized holding net gains/losses arising during period		—		—		(6,000)
Income tax expense related to items of other comprehensive income		—		—		(6,000)
Other comprehensive income, net of tax		—		—		9,900
Comprehensive income	$	32,149,300	$	30,125,500	$	24,590,400

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

25

WINMARK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Deficit)

Fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017

					Retained	Accumulated
					Earnings	Other
	Common Stock			(Accumulated		Comprehensive
	Shares	Amount		Deficit)		Income (Loss)		Total
BALANCE, December 31, 2016	4,165,769	$	2,976,100	$	(15,868,900)	$	(9,900)	$	(12,902,700)
Repurchase of common stock	(400,000)		(5,766,200)		(44,136,300)		—		(49,902,500)
Stock options exercised and related tax benefits	77,309		2,309,700		—		—		2,309,700
Compensation expense relating to stock options	—		1,956,600		—		—		1,956,600
Cash dividends	—		—		(1,765,000)		—		(1,765,000)
Comprehensive income (as adjusted)	—		—		24,580,500		9,900		24,590,400
BALANCE, December 30, 2017	3,843,078		1,476,200		(37,189,700)		—		(35,713,500)
Repurchase of common stock	(12,384)		(1,846,400)		—		—		(1,846,400)
Stock options exercised	76,992		2,819,700		—		—		2,819,700
Compensation expense relating to stock options	—		1,976,100		—		—		1,976,100
Cash dividends	—		—		(2,169,900)		—		(2,169,900)
Comprehensive income	—		—		30,125,500		—		30,125,500
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	190,172		10,918,300		—		—		10,918,300
Compensation expense relating to stock options	—		1,666,400		—		—		1,666,400
Cash dividends	—		—		(3,449,100)		—		(3,449,100)
Comprehensive income	—		—		32,149,300		—		32,149,300
BALANCE, December 28, 2019	3,947,858	$	11,929,300	$	519,000	$	—	$	12,448,300

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

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WINMARK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
OPERATING ACTIVITIES:
Net income	$	32,149,300	$	30,125,500	$	24,580,500
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		400,100		314,100		355,400
Provision for credit losses		(78,300)		38,600		9,000
Compensation expense related to stock options		1,666,400		1,976,100		1,956,600
Deferred income taxes		(1,815,300)		827,800		(1,370,300)
Gain on sale of marketable securities		—		—		(1,400)
Loss from disposal of property and equipment		1,900		—		—
Deferred initial direct costs		(92,600)		(1,367,800)		(416,300)
Amortization of deferred initial direct costs		550,000		1,048,500		447,700
Operating lease right of use asset amortization		345,400		—		—
Tax benefits on exercised stock options		1,218,900		403,800		882,300
Change in operating assets and liabilities:
Receivables		(116,400)		242,900		(316,800)
Principal collections on lease receivables		19,421,400		—		—
Income tax receivable/payable		(1,151,300)		1,192,500		(1,371,300)
Inventories		21,600		(10,500)		(9,600)
Prepaid expenses		(66,500)		—		242,400
Other assets		(9,900)		(132,200)		(15,500)
Accounts payable		(336,800)		(721,200)		381,000
Accrued and other liabilities		(661,600)		1,490,000		(174,400)
Rents received in advance and security deposits		(197,300)		(358,200)		126,700
Deferred revenue		(601,800)		(132,900)		(98,300)
Net cash provided by operating activities		50,647,200		34,937,000		25,207,700
INVESTING ACTIVITIES:
Proceeds from sale of marketable securities		—		—		217,200
Purchase of property and equipment		(169,400)		(693,500)		(72,600)
Purchase of equipment for lease contracts		(9,009,000)		(23,104,800)		(25,403,200)
Principal collections on lease receivables		—		24,252,200		25,343,800
Net cash provided by (used for) investing activities		(9,178,400)		453,900		85,200
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit		18,800,000		7,300,000		51,900,000
Payments on line of credit		(18,800,000)		(42,700,000)		(39,900,000)
Proceeds from borrowings on notes payable		—		—		12,500,000
Payments on notes payable		(3,250,000)		(3,250,000)		(2,312,500)
Repurchases of common stock		(24,028,100)		(1,846,400)		(49,902,500)
Proceeds from exercises of stock options		10,918,300		2,819,700		2,309,700
Dividends paid		(3,449,100)		(2,169,900)		(1,765,000)
Proceeds from discounted lease rentals		944,400		5,868,500		1,747,700
Net cash used for financing activities		(18,864,500)		(33,978,100)		(25,422,600)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		22,604,300		1,412,800		(129,700)
Cash, cash equivalents and restricted cash, beginning of period		2,576,000		1,163,200		1,292,900
Cash, cash equivalents and restricted cash, end of period	$	25,180,300	$	2,576,000	$	1,163,200
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	1,705,600	$	2,497,000	$	2,176,100
Cash paid for income taxes	$	11,122,300	$	6,727,600	$	13,585,200
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 Balance Sheets to the total of the same amounts shown above:
	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Cash and cash equivalents	$	25,130,300	$	2,496,000	$	1,073,200
Restricted cash		50,000		80,000		90,000
Total cash, cash equivalents and restricted cash	$	25,180,300	$	2,576,000	$	1,163,200

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

27

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

1.     Organization and Business:

Winmark Corporation and subsidiaries (the Company) offers licenses to operate franchises using the service marks Plato’s Closet®, Play It Again Sports®, Once Upon A Child®, Style Encore® and Music Go Round®.  In addition, the Company sells point-of-sale system hardware to its franchisees and certain merchandise to its Play It Again Sports franchisees.  The Company uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks. The Company has a 52/53-week fiscal year that ends on the last Saturday in December. Fiscal years 2019, 2018 and 2017 were 52-week fiscal years. 

Following is a summary of our franchising activity for the fiscal year ended December 28, 2019:

	12/29/2018	OPENED	CLOSED	12/28/2019
Plato’s Closet
Franchises - US and Canada	480	6	(3)	483
Once Upon A Child
Franchises - US and Canada	379	12	(3)	388
Play It Again Sports
Franchises - US and Canada	281	4	(5)	280
Style Encore
Franchises - US and Canada	67	5	(4)	68
Music Go Round
Franchises - US	34	4	(1)	37
Total Franchised Stores	1,241	31	(16)	1,256

2.     Significant Accounting Policies:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Winmark Capital Corporation, Wirth Business Credit, Inc. and Grow Biz Games, Inc. All material inter-company transactions have been eliminated in consolidation.

Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased.  Cash equivalents are stated at cost, which approximates fair value.  As of December 28, 2019 and December 29, 2018, the Company had $56,500 and $83,000 of cash located in Canadian banks.  The Company holds its cash and cash equivalents with financial institutions and at times, such balances may be in excess of insurance limits.

Receivables

The Company provides an allowance for doubtful accounts on trade receivables.  The allowance for doubtful accounts was $1,900 and $400 at December 28, 2019 and December 29, 2018, respectively.  If receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the year the determination is made.  Trade receivables are written off when they become uncollectible (which generally occurs when the franchise terminates and there is no reasonable expectation of collection), and payments subsequently received on such receivable are credited to the allowance for doubtful accounts.  Historically, receivables balances written off have not exceeded allowances provided.

28

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

Restricted Cash

The Company is required by certain states to maintain initial franchise fees in a restricted bank account until the franchise opens.  The use of these funds by the Company is restricted until the franchise opens.  Cash held in escrow totaled $50,000 and $80,000 at December 28, 2019 and December 29, 2018, respectively.

Investment in Leasing Operations

The Company uses the direct finance method of accounting to record income from direct financing leases.  At the inception of a lease, the Company records the minimum future lease payments receivable, the estimated residual value of the leased equipment and the unearned lease income.  Initial direct costs related to lease originations are deferred as part of the investment and amortized over the lease term.  Unearned lease income is the amount by which the total lease receivable plus the estimated residual value exceeds the cost of the equipment.

Leasing Income Recognition

Leasing income for direct financing leases is recognized under the effective interest method.  The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. 

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 (when more than three monthly payments are owed), the lease is classified as being on non-accrual and the Company stops recognizing leasing income on that date.  Payments received on leases in non-accrual status generally reduce the lease receivable.  Leases on non-accrual status remain classified as such until there is sustained payment performance that, in the Company’s judgment, would indicate that all contractual amounts will be collected in full.

       Leasing Expense

Leasing expense includes the cost of financing equipment purchases, the cost of equipment sales as well as depreciation expense for operating lease assets.

       Initial Direct Costs

The Company defers initial direct costs incurred to originate its leases in accordance with applicable accounting guidance.  The initial direct costs deferred are part of the investment in leasing operations and are amortized using the effective interest method.  Initial direct costs include commissions and costs associated with credit evaluation, recording guarantees and other security arrangements, documentation and transaction closing.

Lease Residual Values

Residual values reflect the estimated amounts to be received at lease termination from sales or other dispositions of leased equipment to unrelated parties.  The leased equipment residual values are based on the Company’s best estimate.

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

29

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

Company’s methodology for determining the allowance for credit losses includes consideration of the level of delinquencies and non-accrual leases, historical net charge-off amounts and review of any significant concentrations.

A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level.  If the actual results are different from the Company’s estimates, results could be different.  The Company’s policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.

Inventories

The Company values its inventories at the lower of cost, as determined by the weighted average cost method and net realizable values.  Inventory consists of computer hardware and related accessories.

Impairment of Long-lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  If the carrying amount of the asset exceeds expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value.

Property and Equipment

Property and equipment is stated at cost.  Depreciation and amortization for financial reporting purposes is provided on the straight-line method.  Estimated useful lives used in calculating depreciation and amortization are: three to five years for computer and peripheral equipment, five to seven years for furniture and equipment and the shorter of the lease term or useful life for leasehold improvements.  Major repairs, refurbishments and improvements which significantly extend the useful lives of the related assets are capitalized.  Maintenance and repairs, supplies and accessories are charged to expense as incurred.

Goodwill

The Company reviews its goodwill for impairment at its fiscal year end or whenever events or changes in circumstances indicate that there has been impairment in the value of its goodwill.  No impairment was noted during the years ended December 28, 2019 and December 29, 2018.  Goodwill of $607,500 in the consolidated balance sheets at December 28, 2019 and December 29, 2018 is all attributable to the Franchising segment.

Use of Estimates

The preparation of financial statements in conformity with generally accepted U.S. accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The ultimate results could differ from those estimates.  The most significant estimates relate to allowance for credit losses.  These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

Advertising

Advertising costs are charged to operating expenses as incurred.  Advertising costs were $402,700, $423,400 and $307,700 for fiscal years 2019, 2018 and 2017, respectively.

Accounting for Stock-Based Compensation

The Company recognizes the cost of all share-based payments to employees, including grants of employee stock options, in the consolidated financial statements based on the grant date fair value of those awards.  This cost is recognized over the period for which an employee is required to provide service in exchange for the award.

30

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

The Company estimates the fair value of options granted using the Black-Scholes option valuation model.  The Company estimates the volatility of its common stock at the date of grant based on its historical volatility rate.  The Company’s decision to use historical volatility was based upon the lack of actively traded options on its common stock.  The Company estimates the expected term based upon historical option exercises.  The risk-free interest rate assumption is based on observed interest rates for the expected term.  The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.  For options granted, the Company amortizes the fair value on a straight-line basis.  All options are amortized over the vesting periods, which are generally four years beginning from the date of grant.

Revenue Recognition - Franchising

The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 13 – “Segment Reporting”.

Royalties

The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales.  The Company recognizes royalties as revenue when earned.

Merchandise Sales

Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees.  Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.

Franchise Fees

The Company collects initial franchise fees when franchise agreements are signed.  The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement. The Company had deferred franchise fee revenue of $7,623,800 and $8,214,600 at December 28, 2019 and December 29, 2018, respectively.

Marketing Fees

Marketing fee revenue is included in the Revenue: Other line of the Consolidated Statements of Operations.  The Company bills and collects annual marketing fees from its franchisees at various times throughout the year.  The Company recognizes marketing fee revenue on a straight line basis over the franchise duration.  The Company recognized $1.3 million, $1.3 million and $1.2 million for the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

Software License Fees

Software license fee revenue is included in the Revenue: Other line of the Consolidated Statements of Operations.  The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the

31

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

franchisee.  The Company recognizes software license fee revenue on a straight line basis over the franchise duration.  The Company recognized $0.3 million for each of the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017. The Company had deferred software license fees of $1,741,800 and $1,767,700 at December 28, 2019 and December 29, 2018, respectively.

Contract Liabilities

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above.

Commission Fees

The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.6 million and $0.6 million are outstanding at December 28, 2019 and December 29, 2018, respectively and are included in Prepaid expenses and Other assets of the Consolidated Balance Sheets.

Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, the Company recognized $107,200, $99,500 and $98,800 of commission fee expense, respectively.

Income Taxes

We account for incomes taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

Sales Tax

The Company’s accounting policy is to present taxes collected from customers and remitted to government authorities on a net basis.

Discounted Lease Rentals

The Company may utilize its lease rentals receivable and underlying equipment as collateral to borrow from financial institutions at fixed rates on a non-recourse basis.  In the event of a default by a customer, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Company.  Proceeds from discounting are recorded on the balance sheet as discounted lease rentals.  As customers make payments, lease income and interest expense are recorded and discounted lease rentals are reduced by the effective interest method.

Earnings Per Share

The Company calculates earnings per share by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Earnings Per Share — Basic.  The Company calculates Earnings Per Share — Diluted by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the potential exercise of stock options using the treasury stock method.

32

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

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

	Year Ended
	December 28, 2019	December 29, 2018	December 30, 2017
Denominator for basic EPS — weighted average common shares	3,840,638	3,874,757	4,056,049
Dilutive shares associated with option plans	259,991	275,022	283,895
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,100,629	4,149,779	4,339,944
Options excluded from EPS calculation — anti-dilutive	10,262	21,933	24,516

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.

Recently Issued Accounting Pronouncements

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

33

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

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. Under ASU 2018-20 Leases (Topic 842): Narrow Scope Improvements for Lessors, the Company has elected the practical expedient to exclude from its income statement, taxes imposed on leasing revenue transactions by a government agency that are collected by the lessor from the lessee. 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 Balance Sheets. The adoption of the standard did not have a material impact on its Consolidated 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 Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the year ended December 28, 2019, principal collections on lease receivables were $19.4 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 10 – “Operating Leases”, and as a lessor in Note 3 – “Investment in Leasing Operations”.

Reclassifications

In addition to the adjustments noted above, 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.

34

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

3.     Investment in Leasing Operations:

Investment in leasing operations consists of the following:

	December 28, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	26,001,200	$	40,822,400
Estimated unguaranteed residual value of equipment		4,109,800		4,741,200
Unearned lease income, net of initial direct costs deferred		(4,039,400)		(6,739,900)
Security deposits		(3,852,000)		(4,118,300)
Equipment installed on leases not yet commenced		3,437,800		5,094,800
Total investment in direct financing and sales-type leases		25,657,400		39,800,200
Allowance for credit losses		(580,600)		(861,200)
Net investment in direct financing and sales-type leases		25,076,800		38,939,000
Operating leases:
Operating lease assets		820,700		777,000
Less accumulated depreciation and amortization		(591,900)		(713,000)
Net investment in operating leases		228,800		64,000
Total net investment in leasing operations	$	25,305,600	$	39,003,000

As of December 28, 2019, the $25.3 million total net investment in leases consisted of $12.8 million classified as current and $12.5 million classified as long-term. As of December 29, 2018, the $39.0 million total net investment in leases consisted of $18.5 million classified as current and $20.5 million classified as long-term.

As of December 28, 2019,  no customer had leased assets totaling more than 10% of the Company’s total assets. As of December 29, 2018, leased assets with two customers approximated 24% and 11%, respectively, of the Company’s total assets.  A portion of the lease payments receivable from these customers is assigned as collateral in non-recourse financing with financial institutions. See Note 8 – “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 as of December 28, 2019:

	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2020	$	16,855,200	$	3,193,700
2021		8,049,100		802,000
2022		1,084,400		43,100
2023		8,100		500
2024		4,400		100
Thereafter		—		—
	$	26,001,200	$	4,039,400

The activity in the allowance for credit losses for leasing operations during 2019, 2018 and 2017, respectively, is as follows:

	December 28, 2019		December 29, 2018		December 30, 2017
Balance at beginning of period	$	861,200	$	711,200	$	896,000
Provisions charged to expense		(78,300)		38,600		9,000
Recoveries		21,900		213,500		8,600
Deductions for amounts written-off		(224,200)		(102,100)		(202,400)
Balance at end of period	$	580,600	$	861,200	$	711,200

35

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

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

	December 28, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	25,657,400		580,600	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	25,657,400	$	580,600	$	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.

	December 28, 2019
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	24,546,300	$	—	$	—	$	—	$	24,546,300
Small-Ticket		1,111,100		—		—		—		1,111,100
Total Investment in Leases	$	25,657,400	$	—	$	—	$	—	$	25,657,400

	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 Statements of Operations consists of the following:

	Year Ended
	December 28, 2019
Interest income on direct financing and sales-type leases	$	7,602,600
Selling profit (loss) at commencement of sales-type leases		2,470,300
Operating lease income		2,525,600
Income on sales of equipment under lease		2,855,400
Other		601,900
Leasing income	$	16,055,800

36

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

4.     Receivables:

The Company’s current receivables consisted of the following:

	December 28, 2019		December 29, 2018
Trade	$	35,800	$	19,700
Royalty		1,543,100		1,396,000
Other		90,600		137,400
	$	1,669,500	$	1,553,100

As part of its normal operating procedures, the Company requires Standby Letters of Credit as collateral for a portion of its trade receivables.

5.     Shareholders’ Equity (Deficit):

Dividends

In 2019, the Company declared and paid quarterly cash dividends totaling $0.90 per share ($3.4 million).

In 2018, the Company declared and paid quarterly cash dividends totaling $0.56 per share ($2.2 million).

In 2017, the Company declared and paid quarterly cash dividends totaling $0.43 per share ($1.8 million).

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 “2019 Tender Offer”). The 2019 Tender Offer began on the date of the announcement, February 28, 2019 and expired 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 2019 Tender Offer. The 2019 Tender Offer was financed in part by net borrowings under the Line of Credit. (See Note 6 – “Debt”).

In 2018 the Company purchased 12,384 shares of our common stock for an aggregate purchase price of $1.8 million or $149.10 per share.

In July 2017, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of our common stock for a price of $124.48 per share through a tender offer (the “2017 Tender Offer”). The 2017 Tender Offer began on the date of the announcement, July 19, 2017 and expired on August 16, 2017. Upon expiration, the Company accepted for payment 400,000 shares for a total purchase price of approximately $49.9 million, including fees and expenses related to the 2017 Tender Offer. The 2017 Tender Offer was financed by net borrowings under the Line of Credit and Notes Payable. (See Note 6 – “Debt”).

Under a previous Board of Directors’ authorization, as of December 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 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 December 28, 2019, the Company has authorized up to 700,000 shares of common stock for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).

37

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

Grants under the 2001 Plan and 2010 Plan are made by the Compensation Committee of the Board of Directors at a price of not less than 100% of the fair market value on the date of grant.  If an incentive stock option is granted to an individual who owns more than 10% of the voting rights of the Company’s common stock, the option exercise price may not be less than 110% of the fair market value on the date of grant.  The term of the options may not exceed 10 years, except in the case of nonqualified stock options, whereby the terms are established by the Compensation Committee. Options may be exercisable in whole or in installments, as determined by the Compensation Committee.

As of December 28, 2019, the Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”), and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.

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

				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)	Intrinsic Value
Outstanding, December 31, 2016	673,670	$	62.11	6.11	$	43,139,100
Granted	69,500		128.00
Exercised	(80,236)		33.41
Forfeited	(4,750)		95.28
Outstanding, December 30, 2017	658,184		72.33	5.87		37,723,800
Granted	69,000		149.51
Exercised	(79,241)		39.37
Forfeited	(8,563)		119.24
Outstanding, December 29, 2018	639,380		84.12	5.61		47,808,100
Granted	54,800		170.14
Exercised	(190,172)		57.41
Forfeited	(24,450)		138.13
Outstanding, December 28, 2019	479,558	$	101.78	5.79	$	45,283,200
Exercisable, December 28, 2019	344,108	$	83.08	4.69	$	38,930,300

The fair value of options granted under the Option Plans during 2019, 2018 and 2017 were estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

	Year Ended
	December 28, 2019			December 29, 2018			December 30, 2017
Risk free interest rate		1.85	%		2.73	%		2.05	%
Expected life (years)		6			6			6
Expected volatility		19.30	%		19.94	%		25.64	%
Dividend yield		1.38	%		1.13	%		1.10	%
Option fair value	$	30.96		$	32.45		$	32.07

The total intrinsic value of options exercised during 2019, 2018 and 2017 was $22.7 million, $8.3 million and $7.7 million, respectively.  The total fair value of shares vested during 2019, 2018 and 2017 was $8.6 million, $7.8 million and $7.3 million, respectively.

During 2019, 2018 and 2017, option holders surrendered 0 shares, 2,249 shares and 2,927 shares, respectively, of previously owned common stock as payment for option shares exercised as provided for by the Option Plans.  All unexercised options at December 28, 2019 have an exercise price equal to the fair market value on the date of the grant.

38

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

Compensation expense of $1,666,400, $1,976,100 and $1,956,600 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in 2019, 2018 and 2017, respectively.  As of December 28, 2019, the Company had $3.7 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.6 years.

6.     Debt:

Line of Credit

As of December 28, 2019 there were no borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) and BMO Harris Bank N.A. (the “Line of Credit”).

In July 2017, the Line of Credit was amended to, among other things:

· Provide the consent of the lenders for the 2017 Tender Offer;

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

· Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer;

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

· Permit the Company to sell up to $15.0 million in term notes to one or more affiliates or managed accounts of Prudential Investment Management, Inc. (“Prudential”) to partially fund the 2017 Tender Offer.

In December 2019, the Line of Credit was amended to, among other things:

· Provide the consent of the lenders for the 2020 Tender Offer (See Note 14  - “Subsequent Events”);

· Amend the tangible net worth covenant calculation to remove the effect of the 2020 Tender Offer; and

· Allow the replacement of LIBOR.

The Line of Credit has been and will continue to be used for general corporate purposes.  During 2019 and 2017, the Line of Credit was used to finance in part the 2019 Tender Offer and 2017 Tender Offer (as indicated above).  Borrowings under the Line of Credit are subject to certain borrowing base limitations, and the Line of Credit is secured by a lien against substantially all of the Company’s assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit).  In July 2019 the aggregate commitments under the Line of Credit automatically reduced by $5.0 million and will reduce automatically by the same amount each subsequent July thereafter through the term of the facility.  As of December 28, 2019, the Company was in compliance with all of its financial covenants and the Company’s additional borrowing availability under the Line of Credit was $45.0 million.

The Line of Credit allows the Company to choose between two interest rate options in connection with its borrowings.  The interest rate options are the Base Rate (as defined) and the LIBOR Rate (as defined) plus an applicable margin of 0% and 2.0%, respectively.  Interest periods for LIBOR borrowings can be one, two, three, six or twelve months, as selected by the Company.  The Line of Credit also provides for non-utilization fees of 0.25% per annum on the daily average of the unused commitment.

Notes Payable

In May 2015, the Company entered into a $25.0 million Note Agreement (the “Note Agreement”) with Prudential.

In July 2017, the Note Agreement was amended to, among other things:

· Provide the consent of Prudential for the 2017 Tender Offer;

· Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer; and

· Provide for a new $12.5 million term loan to partially fund the 2017 Tender offer.

39

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

In December 2019, the Note Agreement was amended to, among other things:

· Provide the consent of Prudential for the 2020 Tender Offer (See Note 14  - “Subsequent Events”); and

· Amend the tangible net worth covenant calculation to remove the effects of the 2020 Tender Offer.

As of December 28, 2019, the Company had $16.0 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $9.7 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.

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

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

As of December 28, 2019, required prepayments of the notes payable for each of the next five years and thereafter are as follows:

2020	$ 3,750,000
2021	4,250,000
2022	4,250,000
2023	4,250,000
2024	4,250,000
Thereafter	4,937,500
Total	$ 25,687,500

7.     Accrued Liabilities:

Accrued liabilities at December 28, 2019 and December 29, 2018 are as follows:

	December 28, 2019		December 29, 2018
Accrued compensation and benefits	$	887,900	$	1,490,700
Rent related liabilities		388,500		91,100
Accrued interest		210,800		218,600
Accrued purchases of goods and services		186,200		716,400
Other		1,109,700		611,800
	$	2,783,100	$	3,128,600

40

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

8.      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 December 28, 2019 on a non-recourse basis. As of December 28, 2019, $2.7 million of the $3.5 million liability balance was current. As of December 29, 2018, $3.0 million of the $5.7 million liability balance was current.

9.     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 fiscal years 2019 and 2018, respectively:

	December 28, 2019		December 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		1,203,500		1,749,100
Fees earned that were included in the balance at the beginning of the period		(1,805,300)		(1,882,000)
Balance at end of period	$	9,575,500	$	10,177,300

The following table illustrates future estimated revenue to be recognized for the next five fiscal years and fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 28, 2019:

Contract Liabilities expected to be recognized in	Amount
2020	$	1,717,000
2021		1,578,200
2022		1,433,300
2023		1,262,000
2024		1,064,300
Thereafter		2,520,700
	$	9,575,500

10.     Operating Leases:

As of December 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 9.9 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 $1,358,000, $1,235,000 and $1,102,000 of rent expense for the periods ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

41

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

Maturities of operating lease liabilities is as follows as of December 28, 2019:

Operating Lease Liabilities expected to be recognized in	Amount
2020	$	704,300
2021		783,600
2022		784,400
2023		763,300
2024		784,400
Thereafter		4,258,600
Total lease payments		8,078,600
Less imputed interest		(1,863,100)
Present value of lease liabilities	$	6,215,500

Of the $6.2 million operating lease liability outstanding at December 28, 2019, $0.4 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Balance Sheets.

For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as an adjustment to the amortization of the operating lease right of use assets and operating lease liabilities.  

Cash or lease incentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. In 2019, we recorded a $2.1 million tenant allowance for non-cash landlord leasehold improvements received as a reduction to the operating lease right of use asset. The reduction in rent also causes a reduction in the amortization of the operating lease right of use asset through the end of the initial lease term.

The Company’s policy for leases with a term of twelve months or less is to exclude these short-term leases from our right of use assets and lease liabilities.

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

	Year Ended
	December 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	493,900

The following disclosures for the year ended December 29, 2018 were made in accordance with the accounting guidance for operating leases in effect at that time.

As of December 29, 2018 minimum rental commitments under noncancelable operating leases, exclusive of maintenance, insurance, taxes and other expenses, were as follows:

2019	$	503,700
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total	$	8,640,400

At December 29, 2018 total deferred rent included in our consolidated balance sheets was $0.3 million of which $0.2 million was included in other liabilities.

42

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

11.     Income Taxes:

A reconciliation of the expected federal income tax expense based on the federal statutory tax rate to the actual income tax expense is provided below:

	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Federal income tax expense at statutory rate (21%, 21%, 35%)	$	8,708,200	$	8,249,400	$	12,758,000
Change in valuation allowance		147,900		(13,800)		7,500
State and local income taxes, net of federal benefit		1,310,800		1,334,100		1,057,100
Permanent differences, including stock option expenses		(1,056,800)		(355,500)		(628,400)
Adjustment to uncertain tax positions		(58,500)		4,500		77,800
Rate change		—		—		(1,540,300)
Other, net		266,500		(61,100)		139,300
Actual income tax expense	$	9,318,100	$	9,157,600	$	11,871,000

Components of the provision for income taxes are as follows:

	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Current:
Federal	$	9,076,400	$	6,355,800	$	10,296,100
State		1,693,800		1,551,000		1,688,100
Foreign		363,200		423,000		365,900
Current provision		11,133,400		8,329,800		12,350,100
Deferred:
Federal		(1,834,800)		967,300		(463,800)
State		19,500		(139,500)		(15,300)
Deferred provision		(1,815,300)		827,800		(479,100)
Total provision for income taxes	$	9,318,100	$	9,157,600	$	11,871,000

The tax effects of temporary differences that give rise to the net deferred income tax assets and liabilities are presented below:

	December 28, 2019		December 29, 2018
Deferred tax assets:
Accounts receivable and lease reserves	$	154,700	$	215,900
Non-qualified stock option expense		1,758,100		2,071,600
Deferred revenue		1,957,500		2,020,100
Trademarks		34,500		39,800
Lease deposits		930,700		1,004,700
Loss from and impairment of equity and note investments		2,595,500		2,620,700
Foreign tax credits		173,100		—
Valuation allowance		(2,768,600)		(2,620,700)
Other		194,400		331,400
Total deferred tax assets		5,029,900		5,683,500
Deferred tax liabilities:
Lease revenue and initial direct costs		(4,207,400)		(6,664,800)
Depreciation and amortization		(155,500)		(167,000)
Total deferred tax liabilities		(4,362,900)		(6,831,800)
Total net deferred tax assets (liabilities)	$	667,000	$	(1,148,300)

On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was signed into law. The Tax Act made changes to the U.S. tax code that affected our income tax rates in 2017, 2018 and 2019, notably the reduction of the U.S. federal

43

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

corporate income tax rate from 35% to 21% beginning in 2018.  Accounting guidance applicable to income taxes required us to recognize the impact of the change in tax rate on our existing deferred tax assets and liabilities as of the date that the Tax Act was signed into law. We recorded a reduction in our 2017 income tax expense of $1.5 million and a corresponding reduction in our net deferred income tax liabilities as a result of the decrease in the federal income tax rate.

The Company has assessed its taxable earnings history and prospective future taxable income.  Based upon this assessment, the Company has determined that it is more likely than not that its deferred tax assets will be realized in future periods and no valuation allowance is necessary, except for the deferred tax assets related to the loss from and impairment of equity and note investments (which are capital losses for tax purposes) and the foreign tax credits.  As a result, valuation allowances of $2.8 million and $2.6 million as of December 28, 2019 and December 29, 2018, respectively, have been recorded.

The amount of unrecognized tax benefits, including interest and penalties, as of December 28, 2019 and December 29, 2018, was $532,500 and $589,000, respectively, primarily for potential state taxes.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense for all periods presented.  The Company had accrued approximately $33,500 and $37,700 for the payment of interest and penalties at December 28, 2019 and December 29, 2018, respectively.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

	Total
Balance at December 30, 2017	$	551,100
Increases related to current year tax positions		135,600
Expiration of the statute of limitations for the assessment of taxes		(135,400)
Balance at December 29, 2018		551,300
Increases related to current year tax positions		131,900
Expiration of the statute of limitations for the assessment of taxes		(184,200)
Balance at December 28, 2019	$	499,000

The Company and its subsidiaries file income tax returns in the U.S. federal, numerous state and certain foreign jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015. We expect various statutes of limitation to expire during the next 12 months.  Due to the uncertain response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.

12.     Commitments and Contingencies:

Employee Benefit Plan

The Company provides a 401(k) Savings Incentive Plan which covers substantially all employees.  The plan provides for matching contributions and optional profit-sharing contributions at the discretion of the Board of Directors.  Employee contributions are fully vested; matching and profit sharing contributions are subject to a five-year service vesting schedule.  Company contributions to the plan for 2019, 2018 and 2017 were $343,500, $361,400 and $319,700, respectively.

Litigation

The Company is exposed to a number of asserted and unasserted legal claims encountered in the normal course of business.  Management believes that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

44

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

13.     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:

	Year ended
	December 28, 2019		December 29, 2018		December 30, 2017
Revenue:
Franchising	$	57,243,100	$	54,334,600	$	51,287,100
Leasing		16,055,800		18,176,500		18,470,200
Total revenue	$	73,298,900	$	72,511,100	$	69,757,300
Reconciliation to operating income:
Franchising segment contribution	$	35,169,900	$	31,882,200	$	29,513,900
Leasing segment contribution		7,961,200		9,881,600		9,291,100
Total operating income	$	43,131,100	$	41,763,800	$	38,805,000
Depreciation and amortization:
Franchising	$	281,600	$	240,500	$	271,300
Leasing		118,500		73,600		84,100
Total depreciation and amortization	$	400,100	$	314,100	$	355,400

	As of
	December 28, 2019		December 29, 2018
Identifiable assets:
Franchising	$	3,736,000	$	5,208,400
Leasing		26,596,700		40,490,000
Unallocated		31,509,500		964,700
Total	$	61,842,200	$	46,663,100

Revenues are all generated from United States operations other than franchising revenues from Canadian operations of $4.7 million, $4.4 million and $3.8 million in each of fiscal 2019, 2018 and 2017, respectively.  All long-lived assets are located within the United States.

14.     Subsequent Events:

In December 2019, the Company’s Board of Directors authorized the repurchase of up to 300,000 shares of our common stock for a price of $163.00 per share through a tender offer (the “2020 Tender Offer”). The 2020 Tender Offer began on the date of the announcement, December 17, 2019 and expired on January 16, 2020. Upon expiration, the Company purchased 300,000 shares for a total purchase price of approximately $49.0 million, including fees and expenses related to the Tender Offer. The 2020 Tender Offer was financed in part by net borrowings of $19.2 million under the Line of Credit. (See Note 6 – “Debt”).

45

WINMARK CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 28, 2019, December 29, 2018 and December 30, 2017

15.     Quarterly Financial Data (Unaudited):

The Company’s unaudited quarterly results for the years ended December 28, 2019 and December 29, 2018 were as follows:

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
2019
Total Revenue	$	18,331,200	$	17,404,200	$	19,680,900	$	17,882,600	$	73,298,900
Income from Operations		10,066,500		9,846,900		12,274,700		10,943,000		43,131,100
Net Income		7,272,200		7,301,900		9,113,800		8,461,400		32,149,300
Net Income Per Common Share — Basic	$	1.86	$	1.94	$	2.39	$	2.18	$	8.37
Net Income Per Common Share — Diluted	$	1.73	$	1.79	$	2.24	$	2.08	$	7.84
2018
Total Revenue	$	18,161,000	$	18,159,800	$	19,118,500	$	17,071,800	$	72,511,100
Income from Operations		10,074,200		10,074,700		11,435,300		10,179,600		41,763,800
Net Income		6,960,400		7,143,000		8,364,300		7,657,800		30,125,500
Net Income Per Common Share — Basic	$	1.81	$	1.85	$	2.15	$	1.96	$	7.77
Net Income Per Common Share — Diluted	$	1.69	$	1.73	$	2.01	$	1.83	$	7.26

The total of basic and diluted earnings per common share by quarter may not equal the totals for the year as there are changes in the weighted average number of common shares outstanding each quarter and basic and diluted earnings per common share are calculated independently for each quarter.

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Winmark Corporation

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Winmark Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of December 28, 2019 and December 29, 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 10, 2020 expressed an unqualified opinion.

Change in accounting principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018 due to the adoption of ASC 842, Leases.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2006.

Minneapolis, Minnesota

March 10, 2020

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Winmark Corporation

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Winmark Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of December 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 28, 2019, and our report dated March 10, 2020 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota

March 10, 2020

48

ITEM 9:CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A:CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our 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 on that evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective as of December 28, 2019.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 28, 2019.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The effectiveness of our internal control over financial reporting as of December 28, 2019 has been audited by Grant Thornton LLP, our independent registered public accounting firm, as stated in their report, which is included under Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter ended December 28, 2019, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B:OTHER INFORMATION

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

49

PART III

ITEM 10:DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The sections entitled “Election of Directors,” “Executive Officers,” “Audit Committee,” “Majority of Independent Directors; Committees of Independent Directors,” and “Code of Ethics and Business Conduct,” appearing in our proxy statement for the annual meeting of stockholders to be held on April 29, 2020 are incorporated herein by reference.

ITEM 11:EXECUTIVE COMPENSATION

The sections entitled “Executive Compensation,” “2019 Director Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” appearing in our proxy statement for the annual meeting of stockholders to be held on April 29, 2020 are incorporated herein by reference.

ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The sections entitled “Security Ownership of Certain Beneficial Owners, Directors and Executive Officers” and “Securities Authorized for Issuance Under Equity Compensation Plans” appearing in our proxy statement for the annual meeting of stockholders to be held on April 29, 2020 are incorporated herein by reference.

ITEM 13:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE

The sections entitled “Transactions with Related Persons, Promoters and Certain Control Persons,” “Review, Approval or Ratification of Transactions with Related Persons” and “Majority of Independent Directors; Committees of Independent Directors” appearing in our proxy statement for the annual meeting of stockholders to be held on April 29, 2020 is incorporated herein by reference.

ITEM 14:PRINCIPAL ACCOUNTING FEES AND SERVICES

The section entitled “Principal Accounting Fees and Services” appearing in our proxy statement for the annual meeting of stockholders to be held April 29, 2020 is incorporated herein by reference.

50

PART IV

ITEM 15:EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as a part of this Report:

1.           Financial Statements

The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on page 22.

2.           Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted as not required or not applicable, or the information required has been included elsewhere by reference in the consolidated financial statements and related items.

3.           Exhibits

Exhibits that are not filed herewith have been previously filed with the Securities and Exchange Commission and are incorporated herein by reference.

Exhibit Number	Description
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)
4.1*	Description of the Company’s Common Stock
10.1	Asset Purchase Agreement dated January 24, 1992 with Sports Traders, Inc. and James D. Van Buskirk (“Van Buskirk”) concerning acquisition of wholesale business, including amendment dated March 11, 1992 (Exhibit 10.6 (a))(1)
10.2	Retail store agreement dated January 24, 1992 with Van Buskirk (Exhibit 10.6 (b))(1)
10.3	Amended and Restated Stock Option Plan for Nonemployee Directors (Exhibit 10.3)(3)(4)
10.4	Employment Agreement with John L. Morgan, dated March 22, 2000 (Exhibit 10.1)(3)(5)
10.5	First Amendment to Employment Agreement with John L. Morgan dated February 18, 2001 (Exhibit 10.26)(3)(6)
10.6	2001 Stock Option Plan, including forms of stock option agreements (Exhibit 10.27)(3)(6)
10.7	Second Amendment to Employment Agreement with John L. Morgan dated March 23, 2006 (Exhibit 10.16)(3)(7)
10.8	Third Amendment to Employment Agreement with John L. Morgan dated December 15, 2006 (Exhibit 10.1)(3)(8)
10.9	Amendment No. 1 to the 2001 Stock Option Plan (Exhibit 10.13)(3) (2)
10.10	Multi-Tenant Office Lease with Utah State Retirement Investment Fund for Corporate Headquarters dated September 28, 2008 (Exhibit 10.1)(9)
10.11	2010 Stock Option Plan, including forms of stock option agreements (Exhibit 10.18)(3) (10)
10.12	Credit Agreement, dated July 13, 2010, among Winmark Corporation and its subsidiaries and CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) (Exhibit 10.2)(11)
10.13	Amendment No. 1 to Credit Agreement, among Winmark Corporation and its subsidiaries, CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company), and BMO Harris Bank N.A., dated January 30, 2012 (Exhibit 10.1)(12)
10.14	Amendment No. 2 to Credit Agreement, among Winmark Corporation and its subsidiaries, CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company), and BMO Harris Bank N.A., dated February 29, 2012 (Exhibit 10.1)(13)
10.15	Lease Amending Agreement No. 1 to Multi-Tenant Office Lease by and between Winmark Corporation and AX Waterford L.P. dated October 21, 2013 (Exhibit 10.1)(14)

51

Exhibit Number	Description
10.16	Amendment No. 3 to Credit Agreement, among Winmark Corporation and its subsidiaries, CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company), and BMO Harris Bank N.A., dated February 21, 2014 (Exhibit 10.1)(15)
10.17	First Amendment to the 2010 Stock Option Plan (Exhibit 10.1)(3)(16)
10.18	First Amendment to the Amended and Restated Stock Option Plan for Nonemployee Directors (Exhibit 10.2)(3)(16)
10.19	Non-Competition Agreement, dated January 26, 2015, by and among Steven C. Zola, Winmark Corporation and Winmark Capital Corporation (Exhibit 10.1)(3)(17)
10.20	Amendment No. 4 to Credit Agreement, among Winmark Corporation and its subsidiaries, CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company), and BMO Harris Bank N.A., dated April 14, 2015 (Exhibit (b)(2))(18)
10.21	Amended and Restated Security Agreements, dated May 14, 2015, among Winmark Corporation, each of its subsidiaries and CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) (Exhibit 10.4)(19)
10.22	Amended and Restated Pledge Agreement, dated May 14, 2015, among Winmark Corporation and CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) (Exhibit 10.5)(19)
10.23	Trademark Security Agreement, dated May 14, 2015, among Winmark Corporation and its subsidiaries and CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) (Exhibit 10.6)(19)
10.24	Intercreditor and Collateral Agency Agreement, dated May 14, 2015, among CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company), BMO Harris Bank N.A. and Prudential Investment Management, Inc., its affiliates and managed accounts (Exhibit 10.7)(19)
10.25	Note Agreement, dated May 14, 2015, among Winmark Corporation and its subsidiaries and Prudential Investment Management, Inc., its affiliates and managed accounts (Exhibit 10.8)(19)
10.26	Amendment No. 5 to Credit Agreement, among Winmark Corporation and its subsidiaries, CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company), and BMO Harris Bank N.A., dated July 18, 2017 (Exhibit (b)(7)) (20)
10.27	Amendment No. 1 to Note Agreement dated July 19, 2017 among Winmark Corporation and its subsidiaries and Prudential Investment Management, Inc., its affiliates and managed accounts (Exhibit (b)(8))(20)
10.28	Amendment No. 1 to Intercreditor and Collateral Agency Agreement dated July 19, 2017 (Exhibit (b)(9))(20)
10.29	Second Amendment to the 2010 Stock Option Plan (Exhibit (d)(7))(20)
10.30	Lease Amending Agreement No. 2 dated May 17, 2018 between Winmark Corporation and G&I VIII 605 Waterford LLC (Exhibit 10.1)(21)
10.31	Amendment No. 6 to Credit Agreement, among Winmark Corporation and its subsidiaries, CIBC Bank USA (as successor by merger to The Private Bank and Trust Company), and BMO Harris Bank N.A., dated December 16, 2019 (Exhibit (b)(6))(22)
10.32	Amendment No. 2 to Note Agreement dated December 16, 2019 among Winmark Corporation and its subsidiaries and Prudential Investment Management, Inc., its affiliates and managed accounts (Exhibit (b)(7))(22)
10.33	Transition and Retirement Agreement with John L. Morgan, dated January 29, 2020 (Exhibit 10.1)(3)(23)
10.34*	2020 Stock Option Plan, including forms of stock option agreements
21.1	Subsidiaries: Grow Biz Games, Inc., a Minnesota corporation; Winmark Capital Corporation, a Minnesota corporation and Wirth Business Credit, Inc., a Minnesota corporation
23.1*	Consent of GRANT THORNTON LLP; Independent Registered Public Accounting Firm
24.1	Power of Attorney (Contained on signature page to this Form 10-K)

52

Exhibit Number	Description
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 under 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 annual report on Form 10-K of Winmark Corporation and Subsidiaries for the year ended December 28, 2019, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity (Deficit), (v) Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated 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. 33-65108).

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

(3) Indicates management contracts, compensation plans or arrangements required to be filed as exhibits.

(4) Incorporated by reference to the specified exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2009.

(5) Incorporated by reference to the specified exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 25, 2000.

(6) Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 30, 2000.

(7) Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

(8) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on December 20, 2006.

(9) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on October 2, 2008.

(10) Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 26, 2009.

(11) Incorporated by reference to the specified exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 26, 2010.

(12) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on January 31, 2012.

(13) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on March 1, 2012.

(14) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on October 23, 2013.

(15) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on February 21, 2014.

(16) Incorporated by reference to the specified exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2014.

(17) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on January 26, 2015.

(18) Incorporated by reference to the specified exhibit to the Schedule TO filed on April 15, 2015.

(19) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on May 18, 2015.

(20) Incorporated by reference to the specified exhibit to the Schedule TO filed on July 19, 2017.

(21) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on May 18, 2018.

(22) Incorporated by reference to the specified exhibit to the Schedule TO filed on December 17, 2019.

(23) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed on January 29, 2020.

ITEM 16:FORM 10-K SUMMARY

Not Applicable.

53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

By:	/s/ BRETT D. HEFFES	Date: March 10, 2020
	Brett D. Heffes
	Chairman of the Board and Chief Executive Officer

KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brett D. Heffes and Anthony D. Ishaug and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

SIGNATURE	TITLE	DATE
/s/ BRETT D. HEFFES	Chairman of the Board and Chief Executive Officer	March 10, 2020
Brett D. Heffes	(principal executive officer)
/s/ Anthony D. Ishaug	Executive Vice President, Chief Financial Officer and Treasurer	March 10, 2020
Anthony D. Ishaug	(principal financial and accounting officer)
/s/ LAWRENCE A. BARBETTA	Director	March 10, 2020
Lawrence A. Barbetta
/s/ JENELE C. GRASSLE	Director	March 10, 2020
Jenele C. Grassle
/s/ KIRK A. MACKENZIE	Director	March 10, 2020
Kirk A. MacKenzie
/s/ PAUL C. REYELTS	Director	March 10, 2020
Paul C. Reyelts
/s/ MARK L. WILSON	Director	March 10, 2020
Mark L. Wilson

54

EX-4.1

Description of Registrant’s SecuritiesExhibit 4.1

The summary of the general terms and provisions of the capital stock of Winmark Corporation set forth below does not purport to be complete and is subject to and qualified by reference to our articles of incorporation and bylaws, each of which is incorporated by reference and included as exhibits to our Annual Report on Form 10-K.  The disclosure below also includes a summary of certain provisions of the Minnesota Business Corporation Act (“MBCA”) applicable to us.  For additional information, please review the applicable provisions of the MBCA referred to below.

Our authorized capital stock consists of 15,000,000 shares of capital securities, no par value.  Our articles of incorporation designate 10,000,000 shares as common stock, and 5,000,000 shares as undesignated.

Common Stock

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, and do not have cumulative voting rights.  Subject to preferences that may be applicable if we were to issue outstanding preferred stock, holders of common stock are entitled to receive dividends, if any, as and when declared by our board of directors.  All outstanding shares of common stock are fully paid and non-assessable.  Holders of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock.  The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future.  In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in our assets that are remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.

Transfer Agent

The transfer agent and registrar for our common stock is Equiniti Trust Company.

Listing

Our common stock is listed for trading on the Nasdaq Global Market under the symbol “WINA”.

Ability to Designate Preferred Stock

We currently have no outstanding shares of preferred stock.  Our articles of incorporation have established 5,000,000 shares of capital securities as undesignated.  The board of directors has the right by the MBCA and our articles of incorporation, to adopt resolutions establishing a class or series, setting forth the designation of the class or series, and fixing the relative rights and preferences of the class or series that could be superior in rights to our common stock.

The resolutions for each class or series will fix the designations, powers, preferences, rights, qualifications, limitations and restrictions, including the following:

•the number of shares constituting each class or series;

•voting rights;

•rights and terms of redemption, including sinking fund provisions;

•preemptive rights;

•dividend rights and rates;

•dissolution;

•terms concerning the distribution of assets;

•conversion or exchange terms;

•redemption prices; and

•liquidation preferences.

Our board of directors could authorize the issuance of additional shares of preferred stock with terms and conditions that could have the effect of discouraging a takeover of us.

Anti-Takeover Effects of Provisions of Minnesota Law

Some provisions of Minnesota law and provisions in our articles of incorporation could make an acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors more difficult.

Provisions of Minnesota Law

We are governed by the provisions of Section 671 (Control Share Act), Section 673 (Business Combination Act) and Section 675 (Takeover Provisions) of the MBCA.  The following description of certain provisions of the MBCA is only a summary and does not purport to be complete and is qualified in its entirety by reference to the MBCA.

In general, Section 671 of the MBCA provides that shares of an “issuing public corporation,” such as Winmark, acquired by an “acquiring person” in a “control share acquisition” that exceed the threshold of voting power of any of the three ranges identified below will not have voting rights, unless the issuing public company’s shareholders vote to accord such shares the voting rights normally associated with such shares.  A “control share acquisition” is an acquisition, directly or indirectly, by an “acquiring person” (as defined in the MBCA) of beneficial ownership of shares of an issuing public corporation that, but for Section 671, would, when added to all other shares of the issuing public corporation beneficially owned by the acquiring person, entitle the acquiring person, immediately after the acquisition, to exercise or direct the exercise of a new range of voting power of the issuing public corporation with any of the following three ranges: (i) at least 20 percent but less than 33.33 percent; (ii) at least 33.33 percent but less than or equal to 50 percent; and (iii) over 50 percent.  Shares acquired in a control share acquisition in excess of any of the three thresholds will have not voting rights, unless voting rights are accorded to such shares by an affirmative vote by the issuing public company’s shareholders. Certain acquisitions of voting power are exempt from Section 671, including acquisitions directly from the issuing public company.

In general, Section 673 of the MBCA prohibits a public Minnesota corporation from engaging in a business combination with an interested shareholder for a period of four years after the date of the transaction in which the person became an interested shareholder, unless either the business combination or the acquisition by which such person becomes an interested shareholder is approved by a special committee of our board before the person became an interested shareholder.  An “interested shareholder” is a person who is the beneficial owner, directly or indirectly, of 10% or more of voting stock.

In general, Section 675 of the MBCA precludes an offeror from acquiring additional shares of stock (including in acquisitions pursuant to mergers, consolidations or statutory share exchanges) within two years following the completion of a takeover offer, unless shareholders selling their shares in the later acquisition are given the opportunity to sell their shares on terms that are substantially the same as those contained in an earlier takeover offer unless the takeover offer is approved by a special committee of our board of directors.

EX-10.34

EXHIBIT 10.34

WINMARK CORPORATION

2020 STOCK OPTION PLAN

SECTION 1.

DEFINITIONS

As used herein, the following terms shall have the meanings indicated below:

(a)         “Affiliate” shall mean a Parent or Subsidiary of the Company.

(b)         “Committee” shall mean a Committee of two or more directors who shall be appointed by and serve at the pleasure of the Board.  In the event the Company’s securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, each of the members of the Committee shall be a “non-employee director” within the meaning of Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934 as amended and shall be independent under the listing rules of any stock exchange upon which the Company’s common stock is listed for trading.

(c)         The “Company” shall mean Winmark Corporation, a Minnesota corporation.

(d)         “Fair Market Value” as of any date shall mean (i) if such stock is listed on the Nasdaq Global Select Market, Nasdaq Global Market, Nasdaq Capital Market, or an established stock exchange, the price of such stock at the close of the regular trading session of such market or exchange on such date, as reported by The Wall Street Journal or a comparable reporting service, or, if no sale of such stock shall have occurred on such date, on the next preceding day on which there was a sale of stock; (ii) if such stock is not so listed on the Nasdaq National Market, Nasdaq Small Cap Market, or an established stock exchange, the average of the closing “bid” and “asked” prices quoted by the OTC Bulletin Board, the Pink OTC Markets, or any comparable reporting service on such date or, if there are no quoted “bid” and “asked” prices on such date, on the next preceding date for which there are such quotes; or (iii) if such stock is not publicly traded as of such date, the per share value as determined by the Board, or the Committee, in its sole discretion by any fair and reasonable determination made in good faith that complies with Internal Revenue Code Sections 422 and 409A, as applicable.

(e)         The “Internal Revenue Code” is the Internal Revenue Code of 1986, as amended from time to time.

(f)         “Option Stock” shall mean Common Stock of the Company (subject to adjustment as described in Section 12) reserved for options pursuant to this Plan.

(g)         The “Optionee” means an employee of the Company or any Affiliate to whom an incentive stock option has been granted pursuant to Section 9; and a consultant or advisor, to or director, employee or officer, of the Company or any Affiliate to whom a nonqualified stock option has been granted pursuant to Section 10.

(h)         “Parent” shall mean any corporation which owns, directly or indirectly in an unbroken chain, fifty percent (50%) or more of the total voting power of the Company’s outstanding stock.

(i)          The “Plan” means the Winmark Corporation 2020 Stock Option Plan, as amended hereafter from time to time, including the form of Option Agreements as they may be modified by the Administrator from time to time.

(j)          A “Subsidiary” shall mean any corporation of which fifty percent (50%) or more of the total voting power of outstanding stock is owned, directly or indirectly in an unbroken chain, by the Company.

SECTION 2.

PURPOSE

The purpose of the Plan is to promote the success of the Company and its Affiliates by facilitating the employment and retention of competent personnel and by furnishing incentive to officers, directors, employees, consultants, and advisors upon whose efforts the success of the Company and its Affiliates will depend to a large degree.

It is the intention of the Company to carry out the Plan through the granting of stock options which will qualify as “incentive stock options” under the provisions of Section 422 of the Internal Revenue Code, or any successor provision, and through the granting of “non-qualified stock options.”  Adoption of this Plan shall be and is expressly subject to the condition of approval by the shareholders of the Company within twelve (12) months before or after the adoption of the Plan by the Board of Directors.  In the event shareholder approval is not obtained within such twelve-month period, any incentive stock options granted under the Plan shall automatically become nonqualified stock options.

SECTION 3.

EFFECTIVE DATE OF PLAN

The Plan shall be effective as of the date of adoption by the Board of Directors, subject to approval by the shareholders of the Company as required in Section 2.

SECTION 4.

ADMINISTRATION

The Plan shall be administered by the Committee which shall be appointed by the Board of Directors of the Company (the “Board”) (hereinafter the Committee shall be referred to as the “Administrator”).  The Administrator shall have all of the powers vested in it under the provisions of the Plan, including but not limited to exclusive authority (where applicable and within the limitations described herein) to determine, in its sole discretion, whether an incentive stock option or nonqualified stock option shall be granted, the individuals to whom, and the time or times at which, options shall be granted, the number of shares subject to each option and the option price and terms and conditions of each option.  The Administrator shall have full power and authority to administer and interpret the Plan, to make and amend rules, regulations and guidelines for administering the Plan, to prescribe the form and conditions of the respective stock option agreements (which may vary from Optionee to Optionee) evidencing each option and to make all other determinations necessary or advisable for the administration of the Plan.  The Administrator’s interpretation of the Plan, and all actions taken and determinations made by the Administrator pursuant to the power vested in it hereunder, shall be conclusive and binding on all parties concerned.

No member of the Board or the Committee shall be liable for any action taken or determination made in good faith in connection with the administration of the Plan.  Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote of the Committee members or pursuant to the written resolution of all Committee members.

SECTION 5.

PARTICIPANTS

The Administrator shall from time to time, at its discretion and without approval of the shareholders, designate those employees, officers, directors, consultants, and advisors of the Company or of any Affiliate to whom nonqualified stock options shall be granted under this Plan; provided, however, that consultants or advisors shall not be eligible to receive stock options hereunder unless such consultant or advisor renders bona fide services

to the Company or Affiliate and such services are not in connection with the offer or sale of securities in a capital raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities.  The Administrator shall, from time to time, at its discretion and without approval of the shareholders, designate those employees of the Company or any Affiliate to whom incentive stock options shall be granted under this Plan.  The Administrator may grant additional incentive stock options or nonqualified stock options under this Plan to some or all participants then holding options or may grant options solely or partially to new participants.  In designating participants, the Administrator shall also determine the number of shares to be optioned to each such participant.  The Administrator may from time to time designate individuals as being ineligible to participate in the Plan.

SECTION 6.

STOCK

The Stock to be optioned under this Plan shall consist of authorized but unissued shares of Option Stock.  One Hundred Thousand (100,000) shares of Option Stock, together with any authorized but unissued shares reserved under the Company’s 2010 Stock Option Plan (the 2010 Plan) and the Stock Option Plan for Nonemployee Directors (the Nonemployee Director Plan), shall be reserved and available for Options under the Plan. No Optionee may be granted more than One Hundred Thousand (100,000) shares of Option Stock in the aggregate in any calendar year. In the event that any outstanding option under either the Plan,  the 2010 Plan or the Nonemployee Director Plan for any reason expires or is terminated prior to the exercise thereof, the shares of Option Stock allocable to the unexercised portion of such option shall continue to be reserved for options under the Plan and may be optioned hereunder. Immediately upon the approval of the Plan by the Company’s shareholders, no further grants will be permitted under the Company’s 2010 Plan and the Nonemployee Director Plan. The total number of shares of Option Stock reserved for options under this Plan (including those added from the 2010 Plan and the Nonemployee Director Plan) and the limit on annual grants shall be subject to adjustment as provided in Section 12 of the Plan.

SECTION 7.

DURATION OF PLAN

Incentive stock options may be granted pursuant to the Plan from time to time during a period of ten (10) years from the effective date as defined in Section 3.  Nonqualified stock options may be granted pursuant to the Plan from time to time after the effective date of the Plan and until the Plan is discontinued or terminated by the Board.

SECTION 8.

PAYMENT

Optionees may pay for shares upon exercise of options granted pursuant to this Plan with cash, personal check, certified check or, if approved by the Administrator in its sole discretion, previously-owned shares of Option Stock valued at such stock’s then Fair Market Value, or any other form of payment, or any combination of the foregoing; provided that, with respect to an incentive stock option, the discretion to permit previously owned shares or other forms is set forth in the Option at the time of grant. The Administrator may, in its sole discretion, limit the forms of payment available to the Optionee and may exercise such discretion any time prior to the termination of the Option granted to the Optionee or upon any exercise of the Option by the Optionee.           With respect to payment in the form of previously owned shares of Option Stock, the Administrator may require advance approval or adopt such rules as it deems necessary to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

SECTION 9.

TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS

Each incentive stock option granted pursuant to this Section 9 shall be evidenced by a written stock option agreement (the “Option Agreement”).  The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Optionee to Optionee; provided, however, that each Optionee and each Option Agreement shall comply with and be subject to the following terms and conditions:

(a)         Number of Shares and Option Price.  The Option Agreement shall state the total number of shares covered by the incentive stock option.  To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, the option price per share shall not be less than one hundred percent (100%) of the per share Fair Market Value of the Option Stock on the date the Administrator grants the option; provided, however, that if an Optionee owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or any Subsidiary, the option price per share of an incentive stock option granted to such Optionee shall not be less than one hundred ten percent (110%) of the per share Fair Market Value of the Option Stock on the date of the grant of the option.  The Administrator shall have full authority and discretion in establishing the option price and shall be fully protected in so doing.

(b)         Term and Exercisability of Incentive Stock Option.  The term during which any incentive stock option granted under the Plan may be exercised shall be established in each case by the Administrator.  To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, in no event shall any incentive stock option be exercisable during a term of more than ten (10) years after the date on which it is granted; provided, however, that if an Optionee owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or any Subsidiary, the incentive stock option granted to such Optionee shall be exercisable during a term of not more than five (5) years after the date on which it is granted.  The Option Agreement shall state when the incentive stock option becomes exercisable and shall also state the maximum term during which the Option may be exercised.  In the event an incentive stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the Option Agreement.  The Administrator may accelerate the exercise date of any incentive stock option granted hereunder which is not immediately exercisable as of the date of grant.

(c)         Other Provisions.  The Option Agreement authorized under this Section 9 shall contain such other provisions as the Administrator shall deem advisable.  Any such Option Agreement shall contain such limitations and restrictions upon the exercise of the option as shall be necessary to ensure that such option will be considered an “incentive stock option” as defined in Section 422 of the Internal Revenue Code or to conform to any change therein.

SECTION 10.

TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS

Each nonqualified stock option granted pursuant to this Section 10 shall be evidenced by a written Option Agreement.  The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Optionee to Optionee; provided, however, that each Optionee and each Option Agreement shall comply with and be subject to the following terms and conditions:

(a)         Number of Shares and Option Price.  The Option Agreement shall state the total number of shares covered by the nonqualified stock option.  Unless otherwise determined by the Administrator, the option price per share shall be one hundred percent (100%) of the per share Fair Market Value of the Option Stock on the date the Administrator grants the option.

(b)         Term and Exercisability of Nonqualified Stock Option.  The term during which any nonqualified stock option granted under the Plan may be exercised shall be established in each case by the Administrator.  The Option Agreement shall state when the nonqualified stock option becomes exercisable and shall also state the maximum term during which the Option may be exercised.  In the event a nonqualified stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the stock option agreement.  The Administrator may accelerate the exercise date of any nonqualified stock option granted hereunder which is not immediately exercisable as of the date of grant.

(c)         Withholding.  The Company or its Affiliate shall be entitled to withhold and deduct from future wages of the Optionee all legally required amounts necessary to satisfy any and all withholding and employment-related taxes attributable to the Optionee’s exercise of a nonqualified stock option; provided, however, that the Optionee may pay by cash or check, or make arrangements satisfactory to the Company respecting payment of such withholding and employment-related taxes.

(d)         Other Provisions.  The Option Agreement authorized under this Section 10 shall contain such other provisions as the Administrator shall deem advisable.

SECTION 11.

TRANSFER OF OPTION

No incentive stock option shall be transferable, in whole or in part, by the Optionee other than by will or by the laws of descent and distribution and, during the Optionee’s lifetime, the option may be exercised only by the Optionee.  If the Optionee shall attempt any transfer of any incentive stock option granted under the Plan during the Optionee’s lifetime, such transfer shall be void and the incentive stock option, to the extent not fully exercised, shall terminate.

No nonqualified stock option shall be transferred, except that the Administrator may, in its sole discretion, permit the Optionee to transfer any or all nonqualified stock options to any member of the Optionee’s “immediate family” as such term is defined in Rule 16a-1(e) promulgated under the Securities Exchange Act of 1934, or any successor provision, or to one or more trusts whose beneficiaries are members of such Optionee’s “immediate family” or partnerships in which such family members are the only partners; provided, however, that the Optionee receives no consideration for the transfer and such transferred nonqualified stock option shall continue to be subject to the same terms and conditions as were applicable to such nonqualified stock option immediately prior to its transfer.

SECTION 12.

RECAPITALIZATION, SALE, MERGER, EXCHANGE

OR LIQUIDATION

If, following adoption of this Plan, the Company effects an increase or decrease in the number of shares of Common Stock in the form of a subdivision or consolidation of shares, or the payment of a stock dividend, effects any other increase or decrease in the number of shares of Common Stock without receipt of consideration by the Company, or in the event of any transaction described in Section 424(a) of the Code, the number of shares of Option Stock reserved under Section 6 hereof, the limit set forth in Section 6 and the number of shares of Option Stock covered by each outstanding option and the price per share thereof shall be equitably adjusted by the Administrator to reflect such change in a manner that precludes the enlargement of rights and benefits under the Option.  If any adjustment under this Section 12 creates a fractional share under a Stock Option, such fractional share shall be disregarded, and the number of shares reserved under Section 6 and the number subject to any Stock Option granted under this Plan shall be the next lower number of shares, rounding all fractions downward. An adjustment made under this Section by the Committee shall be conclusive and binding on all affected persons.  Additional shares which may be credited pursuant to such adjustment shall be subject to the same restrictions as are applicable to the shares with respect to which the adjustment relates.

Unless otherwise provided in the Option Agreement, in the event of an acquisition of the Company through the sale of substantially all of the Company’s assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization, reclassification, extraordinary dividend divestiture or liquidation of the Company (collectively referred to as a “transaction”), all outstanding stock options shall become immediately exercisable, whether or not such options had become exercisable prior to the transaction.  In addition to the foregoing, the Board may provide for one or more of the following:

(a)         the complete termination of this Plan and the cancellation of outstanding options not exercised prior to a date specified by the Board (which date shall give Optionees a reasonable period of time in which to exercise the options prior to the effectiveness of such transaction);

(b)         that Optionees holding outstanding stock options shall receive, with respect to each share of Stock subject to such options, as of the effective date of any such transaction, cash in an amount equal to the excess of the Fair Market Value of such Stock on the date immediately preceding the effective date of such transaction over the option price per share of such options; provided that the Board may, in lieu of such cash payment, distribute to such Optionees shares of stock of the Company or shares of stock of any corporation succeeding the Company by reason of such transaction, such shares having a value equal to the cash payment herein;

(c)         the continuance of the Plan with respect to the exercise of options which were outstanding as of the date of adoption by the Board of such plan for such transaction and provide to Optionees holding such options the right to exercise their respective options as to an equivalent number of shares of stock of the corporation succeeding the Company by reason of such transaction.

The Board may restrict the rights of or the applicability of this Section 12 to the extent necessary to comply with Section 16(b) of the Securities Exchange Act of 1934, the Internal Revenue Code or any other applicable law or regulation.  The grant of an option pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 13.

INVESTMENT PURPOSE

No shares of Option Stock shall be issued pursuant to the Plan unless and until there has been compliance, in the opinion of Company’s counsel, with all applicable legal requirements, including without limitation, those relating to securities laws and stock exchange listing requirements.  As a condition to the issuance of Option Stock to Optionee, the Administrator may require Optionee to (a) represent that the shares of Option Stock are being acquired for investment and not resale and to make such other representations as the Administrator shall deem necessary or appropriate to qualify the issuance of the shares as exempt from the Securities Act of 1933 and any other applicable securities laws, and (b) represent that Optionee shall not dispose of the shares of Option Stock in violation of the Securities Act of 1933 or any other applicable securities laws.

As a further condition to the grant of any stock option or the issuance of Option Stock to Optionee, Optionee agrees to the following:

(a)         In the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee will not, for a period not to exceed 180 days from the prospectus, sell or contract to sell or grant an option to buy or otherwise dispose of any stock option granted to Optionee pursuant to the Plan

or any of the underlying shares of Option Stock without the prior written consent of the underwriter(s) or its representative(s).

(b)         In the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any states securities or Blue Sky law limitations with respect thereto, the Administrator shall have the right (i) to accelerate the exercisability of any stock option and the date on which such option must be exercised, provided that the Company gives Optionee prior written notice of such acceleration and a reasonable period of time to exercise, and (ii) to cancel any options or portions thereof which Optionee does not exercise prior to or contemporaneously with such public offering.

The Company reserves the right to place a legend on any stock certificate issued upon exercise of an option granted pursuant to the Plan to assure compliance with this Section 13.

SECTION 14.

RIGHTS AS A SHAREHOLDER

An Optionee (or the Optionee’s successor or successors) shall have no rights as a shareholder with respect to any shares covered by an option until the date of the issuance of a stock certificate evidencing such shares.  No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is actually issued (except as otherwise provided in Section 12 of the Plan).

SECTION 15.

AMENDMENT OF THE PLAN

The Administrator may from time to time, insofar as permitted by law, suspend or discontinue the Plan or revise or amend it in any respect; provided, however, that no such revision or amendment, except

as is authorized in Section 12, shall impair the terms and conditions of any option which is outstanding on the date of such revision or amendment to the material detriment of the Optionee without the consent of the Optionee.  Notwithstanding the foregoing, no such revision or amendment shall (i) increase the number of shares subject to the Plan except as provided in Section 12 hereof, (ii) change the designation of the class of employees eligible to receive options, (iii) decrease the price at which options may be granted, (iv) materially increase the benefits accruing to Optionees under the Plan, or otherwise make any material amendment of the Plan as defined under any listing regulations of the stock exchange in which the Company’s common stock is listed without the approval of the shareholders of the Company if such approval is required for compliance with the requirements of any applicable law or regulation.  Furthermore, the Plan may not, without the approval of the shareholders, be amended in any manner that will cause incentive stock options to fail to meet the requirements of Section 422 of the Internal Revenue Code.

SECTION 16.

NO OBLIGATION TO EXERCISE OPTION

The granting of an option shall impose no obligation upon the Optionee to exercise such option.  Further, the granting of an option hereunder shall not impose upon the Company or any Affiliate any obligation to retain the Optionee in its employ for any period.

STOCK OPTION AGREEMENT

WINMARK CORPORATION

2020 STOCK OPTION PLAN

THIS AGREEMENT, made effective as of this ______ day of ___________, _____, by and between Winmark Corporation, a Minnesota corporation (the “Company”), and ________________ ("Optionee").

W I T N E S S E T H:

WHEREAS, Optionee on the date hereof is an employee, officer, director or consultant of the Company or an Affiliate; and

WHEREAS, the Company may grant incentive stock options to employees and nonqualified stock options to employees, officers, non-employee directors and consultant to purchase shares of the Company's Common Stock pursuant to the Company's 2020 Stock Option Plan (the "Plan"); and

WHEREAS, the Administrator has authorized the grant of a stock option to Optionee under the terms of the Plan and this Agreement and has determined the fair market value of the Company's Common Stock as of the Date of Grant as set forth below;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows:

1.          Grant of Option.  The Company hereby grants to Optionee on the date set forth above (the "Date of Grant"), the right and option (the "Option") to purchase all or portions of an aggregate of _______ (________________) shares of Common Stock (the "Stock") at a per share price of $______ (the “Option Price”) on the terms and conditions set forth herein, and subject to adjustment pursuant to Section 12 of the Plan.  This Option is [intended to be an incentive stock option as defined in Section 9 of the Plan and Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder] [a nonqualified stock option under Section 10 of the Plan].

2.          Duration and Exercisability.

a.           General.  The term during which this Option may be exercised shall terminate on _______________, ______, except as otherwise provided in Paragraphs 2(b) through 2(d) below.  This Option shall become exercisable according to the following schedule:

Vesting Date Cumulative Percentage
of Shares

Once the Option becomes fully (100%) exercisable, Optionee may continue to exercise this Option under the terms and conditions of this Agreement until the termination of the Option as provided herein.  If Optionee does not purchase upon an exercise of this Option the full number of shares which Optionee is then entitled to purchase, Optionee may purchase upon any subsequent exercise prior to this Option's termination such previously un-purchased shares in addition to those Optionee is otherwise entitled to purchase.

b.          Cessation of Services (Other Than Disability or Death).  If Optionee's employment with the Company and its Affiliates, or in the case of a non-employee director or consultant, services performed for the Company and its Affiliates (in either case, the “Services”) ceases for any reason other than disability or death, this Option shall completely terminate on the earlier of (i) the close of business on the three-month anniversary date of the date such Services ceased, and (ii) the expiration date of this Option stated in Paragraph 2(a) above.  During such period, this Option shall be exercisable only to the extent the Option was exercisable immediately preceding the date on which Optionee's Services with the Company and its Affiliates ceased, but had not previously been exercised.  To the extent this Option was not exercisable on the date such Services ceased, or if Optionee fails to exercise the Option within the time specified in this Paragraph 2(b), all rights of Optionee under this Option shall be forfeited.

c.           Disability.  If Optionee ceases to provide Services to the Company and its Affiliates because of disability (as defined in Code Section 22(e), or any successor provision), this Option shall completely terminate on the earlier of (i) the close of business on the twelve-month anniversary date such Services ceased, and (ii) the expiration date of this Option stated in Paragraph 2(a) above.  During such period, this Option shall be exercisable only to the extent the Option was exercisable immediately preceding the date on which Optionee's Services with the Company and its Affiliates ceased, but had not previously been exercised.  To the extent this Option was not exercisable on the date such Services ceased, or if Optionee fails to exercise the Option within the time specified in this Paragraph 2(c), all rights of Optionee under this Option shall be forfeited.

d.          Death.  In the event of Optionee's death, this Option shall terminate on the earlier of (i) the close of business on the twelve-month anniversary date of the date of Optionee's death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above.  In such period following Optionee's death, this Option may be exercised by the person or persons to whom Optionee's rights under this Option shall have passed by Optionee's will or by the laws of descent and distribution but only to the extent the Option was exercisable immediately preceding the date of Optionee's death, but had not previously been exercised.  To the extent this Option was not exercisable on the date of Optionee's death, or if such person or persons fail to exercise this Option within the time specified in this Paragraph 2(d), all rights under this Option shall be forfeited.

3.          Manner of Exercise.

a.           General.  The Option may be exercised only by Optionee (or other proper party in the event of death or incapacity), subject to the conditions of the Plan and subject to such other administrative rules as the Administrator may deem advisable, by delivering within the period specified in Paragraph 2 written notice of exercise to the Company at its principal office.  The notice shall state the number of shares as to which the Option is being exercised and shall be accompanied by payment in full of the Option Price for all shares of Stock designated in the notice.  The exercise of the Option shall be deemed effective upon receipt of such notice by the Company and upon payment that complies with the terms of the Plan and this Agreement.  The Option may be exercised with respect to any number or all of the shares of Stock as to which it can then be exercised and, if partially exercised, may be exercised as to the unexercised shares any number of times during the period specified in Paragraph 2.

b.          Form of Payment.  Payment of the Option Price by Optionee shall be in the form of cash, personal check, certified check or, subject to the approval of the Administrator, previously owned shares of Stock of the Company, or any combination thereof.  Any Stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan.

c.           Stock Transfer Records.  As soon as practicable after the effective exercise of all or any part of the Option, Optionee shall be recorded on in book entry form on the stock transfer books of the Company as the owner of the Stock purchased, and upon the request of the Optionee, the Company

shall deliver to Optionee one or more duly issued stock certificates evidencing such ownership.  All requisite original issue or transfer documentary stamp taxes shall be paid by the Company.

4.          Miscellaneous.

a.           Rights as Shareholder.  This Agreement shall not confer on Optionee any right with respect to the continuance of Services with the Company or any of its Affiliates, nor will it interfere in any way with the right of the Company to terminate any such Services.  Optionee shall have no rights as a shareholder with respect to the Stock subject to this Option until such Stock have been issued to Optionee upon exercise of this Option.  No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such Stock are issued, except as provided in Section 12 of the Plan.

b.          Securities Law Compliance.  The exercise of all or any parts of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Stock pursuant to such exercise will not violate any state or federal securities or other laws.  Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that all Stock to be acquired pursuant to such exercise shall be held, until such time that such Stock is registered and freely tradable under applicable state and federal securities laws, for Optionee's own account without a view to any further distribution thereof and that such Stock will be not transferred or disposed of except in compliance with applicable state and federal securities laws.

c.           Mergers, Recapitalizations, Stock Splits, Etc.  Pursuant and subject to Section 12 of the Plan, certain changes in the number or character of the Stock of the Company (through sale, merger, consolidation, exchange, reorganization, divestiture (including a spin-off), liquidation, recapitalization, stock split, stock dividend or otherwise) shall result in an adjustment, reduction or enlargement, as appropriate, in Optionee's rights with respect to any unexercised portion of the Option (i.e., Optionee shall have such "anti-dilution" rights under the Option with respect to such events, but shall not have "preemptive" rights).

d.          Shares Reserved.  The Company shall at all times during the option period reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement.

e.           Notice, Withholding Taxes.  If this Option is an incentive stock option, in the event the Optionee disposes of the shares of Stock issued under this Option within two years of the Date of Grant, or one year after the receipt of the Stock upon exercise (a “disqualifying disposition”), the Optionee agrees to inform the Company of such disqualifying disposition.  In the event that, in connection with the exercise of this Option, the Company is required to withhold and pay any applicable taxes on behalf of the Optionee, the Company or its Affiliate shall be entitled to take such action as it deems appropriate to insure that all applicable federal or state payroll, income or other taxes are withheld from any amounts payable by the Company to Optionee up to the maximum statutory withholding rates.  If the Company is unable to withhold such federal and state taxes, for whatever reason, Optionee hereby agrees to pay to the Company by cash or check, or make other arrangements satisfactory to the Company an amount equal to the amount the Company is required to withhold under applicable tax laws.

f.           Nontransferability.  During the lifetime of Optionee, the accrued Option shall be exercisable only by Optionee or by the Optionee's guardian or other legal representative, and shall not be assignable or transferable by Optionee, in whole or in part, other than by will or by the laws of descent and distribution.

g.          2020 Stock Option Plan.  The Option evidenced by this Agreement is granted pursuant to the Plan, a copy of which Plan has been made available to Optionee and is hereby incorporated into this Agreement.  This Agreement is subject to and in all respects limited and conditioned as provided

in the Plan.  All defined terms of the Plan shall have the same meaning when used in this Agreement.  The Plan governs this Option and, in the event of any questions as to the construction of this Agreement or in the event of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides.

h.          Lockup Period Limitation.  Optionee agrees that in the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee hereby agrees that for a period not to exceed 180 days from the prospectus, Optionee will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Stock without the prior written consent of the underwriter(s) or its representative(s).

i.           Blue Sky Limitation.  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Administrator shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives Optionee 15 days' prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Optionee at the address of Optionee on file with the Company.

j.           Stock Legend.  The Administrator may require that the certificates for any shares of Stock purchased by Optionee (or, in the case of death, Optionee's successors) shall bear an appropriate legend to reflect the restrictions of Paragraph 4(b), 4(h) and 4(i) of this Agreement.

k.          Scope of Agreement.  This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and Optionee and any successor or successors of Optionee permitted by Paragraph 2 or Paragraph 4(f) above.

l.           Arbitration.  Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy.  If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years.  If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Hennepin County, Minnesota, select an arbitrator.  Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement.  Limited civil discovery shall be permitted for the production of documents and taking of depositions.  Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute.  The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin County, Minnesota.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

WINMARK CORPORATION
By:
	Its:	Optionee

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated March 10, 2020 with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of Winmark Corporation on Form 10-K for the year ended December 28, 2019.  We consent to the incorporation by reference of said reports in the Registration Statements of Winmark Corporation on Forms S-8 (File No. 33-85972, File No. 333-81392, File No. 333-120489, File No. 333-138798, File No. 333-143281, File No. 333-172745, File No. 333-197600, File No. 333-197601 and File No. 333-221109).

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota

March 10, 2020

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 annual report on Form 10-K 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: March 10, 2020	/s/  Brett D. Heffes
	Brett D. Heffes Chairman of the Board and Chief Executive Officer

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 annual report on Form 10-K 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:  March 10, 2020	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 Annual Report of Winmark Corporation (the “Company”) on Form 10-K for the year ended December  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:  March 10, 2020	/s/  Brett D. Heffes
	Brett D. Heffes Chairman of the Board and Chief Executive Officer

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 Annual Report of Winmark Corporation (the “Company”) on Form 10-K for the year ended December  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:  March 10, 2020	/s/  Anthony D. Ishaug
	Anthony D. Ishaug Executive Vice President, Chief Financial Officer and Treasurer

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Debt: Notes Payable (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 30, 2017	Jul. 31, 2017	May 31, 2015
Notes Payable
Proceeds from the Note Agreement		$ 12,500,000
Notes Payable | Prudential Investment Management, Inc
Notes Payable
Minimum prepayment	$ 1,000,000
Series A Notes | Prudential Investment Management, Inc
Notes Payable
Principal amount outstanding	$ 16,000,000
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 | Prudential Investment Management, Inc
Notes Payable
Principal amount outstanding	$ 9,700,000
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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Shareholders' Equity (Deficit): Stock Options (Details) - shares	12 Months Ended
	Dec. 28, 2019	Feb. 20, 2011
2001 Plan and 2010 Plan | Stock options | Minimum
Stock Option Plans
Exercise price of stock options as a percentage of fair value on the date of grant	100.00%
Threshold voting rights above which the option exercise price may not be less than 110% of the fair market value (as a percent)	10.00%
Exercise price of stock options as a percentage of fair value on the date of grant for an individual who owns more than 10% of voting rights	110.00%
2001 Plan and 2010 Plan | Stock options | Maximum
Stock Option Plans
Term of the option	10 years
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 options
Stock Option Plans
Number of shares authorized for issuance	350,000

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Operating Leases:

12 Months Ended

Dec. 28, 2019

Operating Leases:

Operating Leases:

10.     Operating Leases:

As of December 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 9.9 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 $1,358,000,  $1,235,000 and $1,102,000 of rent expense for the periods ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

Maturities of operating lease liabilities is as follows as of December 28, 2019:

Operating Lease Liabilities expected to be recognized in	Amount
2020	$	704,300
2021		783,600
2022		784,400
2023		763,300
2024		784,400
Thereafter		4,258,600
Total lease payments		8,078,600
Less imputed interest		(1,863,100)
Present value of lease liabilities	$	6,215,500

Of the $6.2 million operating lease liability outstanding at December 28, 2019, $0.4 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Balance Sheets.

For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as an adjustment to the amortization of the operating lease right of use assets and operating lease liabilities.  

Cash or lease incentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. In 2019, we recorded a $2.1 million tenant allowance for non-cash landlord leasehold improvements received as a reduction to the operating lease right of use asset. The reduction in rent also causes a reduction in the amortization of the operating lease right of use asset through the end of the initial lease term.

The Company’s policy for leases with a term of twelve months or less is to exclude these short-term leases from our right of use assets and lease liabilities.

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

	Year Ended
	December 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	493,900

The following disclosures for the year ended December 29, 2018 were made in accordance with the accounting guidance for operating leases in effect at that time.

As of December 29, 2018 minimum rental commitments under noncancelable operating leases, exclusive of maintenance, insurance, taxes and other expenses, were as follows:

2019	$	503,700
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total	$	8,640,400

At December 29, 2018 total deferred rent included in our consolidated balance sheets was $0.3 million of which $0.2 million was included in other liabilities.

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Debt:

12 Months Ended

Dec. 28, 2019

Debt:

Debt:

6.     Debt:

Line of Credit

As of December 28, 2019 there were no borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA (as successor by merger to The PrivateBank and Trust Company) and BMO Harris Bank N.A. (the “Line of Credit”).

In July 2017, the Line of Credit was amended to, among other things:

· Provide the consent of the lenders for the 2017 Tender Offer;

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

· Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer;

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

· Permit the Company to sell up to $15.0 million in term notes to one or more affiliates or managed accounts of Prudential Investment Management, Inc. (“Prudential”) to partially fund the 2017 Tender Offer.

In December 2019, the Line of Credit was amended to, among other things:

· Provide the consent of the lenders for the 2020 Tender Offer (See Note 14 - “Subsequent Events”);

· Amend the tangible net worth covenant calculation to remove the effect of the 2020 Tender Offer; and

· Allow the replacement of LIBOR.

The Line of Credit has been and will continue to be used for general corporate purposes.  During 2019 and 2017, the Line of Credit was used to finance in part the 2019 Tender Offer and 2017 Tender Offer (as indicated above).  Borrowings under the Line of Credit are subject to certain borrowing base limitations, and the Line of Credit is secured by a lien against substantially all of the Company’s assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit).  In July 2019 the aggregate commitments under the Line of Credit automatically reduced by $5.0 million and will reduce automatically by the same amount each subsequent July thereafter through the term of the facility.  As of December 28, 2019, the Company was in compliance with all of its financial covenants and the Company’s additional borrowing availability under the Line of Credit was $45.0 million.

The Line of Credit allows the Company to choose between two interest rate options in connection with its borrowings.  The interest rate options are the Base Rate (as defined) and the LIBOR Rate (as defined) plus an applicable margin of 0% and 2.0%, respectively.  Interest periods for LIBOR borrowings can be one,  two,  three,  six or twelve months, as selected by the Company.  The Line of Credit also provides for non-utilization fees of 0.25% per annum on the daily average of the unused commitment.

Notes Payable

In May 2015, the Company entered into a $25.0 million Note Agreement (the “Note Agreement”) with Prudential.

In July 2017, the Note Agreement was amended to, among other things:

· Provide the consent of Prudential for the 2017 Tender Offer;

· Amend the tangible net worth covenant calculation to remove the effect of the 2017 Tender Offer; and

· Provide for a new $12.5 million term loan to partially fund the 2017 Tender offer.

In December 2019, the Note Agreement was amended to, among other things:

· Provide the consent of Prudential for the 2020 Tender Offer (See Note 14 - “Subsequent Events”); and

· Amend the tangible net worth covenant calculation to remove the effects of the 2020 Tender Offer.

As of December 28, 2019, the Company had $16.0 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $9.7 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.

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

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

As of December 28, 2019, required prepayments of the notes payable for each of the next five years and thereafter are as follows:

2020	$ 3,750,000
2021	4,250,000
2022	4,250,000
2023	4,250,000
2024	4,250,000
Thereafter	4,937,500
Total	$ 25,687,500

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Significant Accounting Policies:

12 Months Ended

Dec. 28, 2019

Significant Accounting Policies:

Significant Accounting Policies:

2.     Significant Accounting Policies:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Winmark Capital Corporation, Wirth Business Credit, Inc. and Grow Biz Games, Inc. All material inter-company transactions have been eliminated in consolidation.

Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased.  Cash equivalents are stated at cost, which approximates fair value.  As of December 28, 2019 and December 29, 2018, the Company had $56,500 and $83,000 of cash located in Canadian banks.  The Company holds its cash and cash equivalents with financial institutions and at times, such balances may be in excess of insurance limits.

Receivables

The Company provides an allowance for doubtful accounts on trade receivables.  The allowance for doubtful accounts was $1,900 and $400 at December 28, 2019 and December 29, 2018, respectively.  If receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the year the determination is made.  Trade receivables are written off when they become uncollectible (which generally occurs when the franchise terminates and there is no reasonable expectation of collection), and payments subsequently received on such receivable are credited to the allowance for doubtful accounts.  Historically, receivables balances written off have not exceeded allowances provided.

Restricted Cash

The Company is required by certain states to maintain initial franchise fees in a restricted bank account until the franchise opens.  The use of these funds by the Company is restricted until the franchise opens.  Cash held in escrow totaled $50,000 and $80,000 at December 28, 2019 and December 29, 2018, respectively.

Investment in Leasing Operations

The Company uses the direct finance method of accounting to record income from direct financing leases.  At the inception of a lease, the Company records the minimum future lease payments receivable, the estimated residual value of the leased equipment and the unearned lease income.  Initial direct costs related to lease originations are deferred as part of the investment and amortized over the lease term.  Unearned lease income is the amount by which the total lease receivable plus the estimated residual value exceeds the cost of the equipment.

Leasing Income Recognition

Leasing income for direct financing leases is recognized under the effective interest method.  The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. 

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 (when more than three monthly payments are owed), the lease is classified as being on non-accrual and the Company stops recognizing leasing income on that date.  Payments received on leases in non-accrual status generally reduce the lease receivable.  Leases on non-accrual status remain classified as such until there is sustained payment performance that, in the Company’s judgment, would indicate that all contractual amounts will be collected in full.

       Leasing Expense

Leasing expense includes the cost of financing equipment purchases, the cost of equipment sales as well as depreciation expense for operating lease assets.

       Initial Direct Costs

The Company defers initial direct costs incurred to originate its leases in accordance with applicable accounting guidance.  The initial direct costs deferred are part of the investment in leasing operations and are amortized using the effective interest method.  Initial direct costs include commissions and costs associated with credit evaluation, recording guarantees and other security arrangements, documentation and transaction closing.

Lease Residual Values

Residual values reflect the estimated amounts to be received at lease termination from sales or other dispositions of leased equipment to unrelated parties.  The leased equipment residual values are based on the Company’s best estimate.

Allowance for Credit Losses

The Company maintains an allowance for credit losses at an amount that it believes to be sufficient to absorb losses inherent in its existing lease portfolio as of the reporting dates.  Leases are collectively evaluated for potential loss.  The Company’s methodology for determining the allowance for credit losses includes consideration of the level of delinquencies and non-accrual leases, historical net charge-off amounts and review of any significant concentrations.

A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level.  If the actual results are different from the Company’s estimates, results could be different.  The Company’s policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.

Inventories

The Company values its inventories at the lower of cost, as determined by the weighted average cost method and net realizable values.  Inventory consists of computer hardware and related accessories.

Impairment of Long-lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  If the carrying amount of the asset exceeds expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value.

Property and Equipment

Property and equipment is stated at cost.  Depreciation and amortization for financial reporting purposes is provided on the straight-line method.  Estimated useful lives used in calculating depreciation and amortization are: three to five years for computer and peripheral equipment, five to seven years for furniture and equipment and the shorter of the lease term or useful life for leasehold improvements.  Major repairs, refurbishments and improvements which significantly extend the useful lives of the related assets are capitalized.  Maintenance and repairs, supplies and accessories are charged to expense as incurred.

Goodwill

The Company reviews its goodwill for impairment at its fiscal year end or whenever events or changes in circumstances indicate that there has been impairment in the value of its goodwill.  No impairment was noted during the years ended December 28, 2019 and December 29, 2018.  Goodwill of $607,500 in the consolidated balance sheets at December 28, 2019 and December 29, 2018 is all attributable to the Franchising segment.

Use of Estimates

The preparation of financial statements in conformity with generally accepted U.S. accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The ultimate results could differ from those estimates.  The most significant estimates relate to allowance for credit losses.  These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

Advertising

Advertising costs are charged to operating expenses as incurred.  Advertising costs were $402,700,  $423,400 and $307,700 for fiscal years 2019, 2018 and 2017, respectively.

Accounting for Stock-Based Compensation

The Company recognizes the cost of all share-based payments to employees, including grants of employee stock options, in the consolidated financial statements based on the grant date fair value of those awards.  This cost is recognized over the period for which an employee is required to provide service in exchange for the award.

The Company estimates the fair value of options granted using the Black-Scholes option valuation model.  The Company estimates the volatility of its common stock at the date of grant based on its historical volatility rate.  The Company’s decision to use historical volatility was based upon the lack of actively traded options on its common stock.  The Company estimates the expected term based upon historical option exercises.  The risk-free interest rate assumption is based on observed interest rates for the expected term.  The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.  For options granted, the Company amortizes the fair value on a straight-line basis.  All options are amortized over the vesting periods, which are generally four years beginning from the date of grant.

Revenue Recognition - Franchising

The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 13 – “Segment Reporting”.

Royalties

The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales.  The Company recognizes royalties as revenue when earned.

Merchandise Sales

Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees.  Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.

Franchise Fees

The Company collects initial franchise fees when franchise agreements are signed.  The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement. The Company had deferred franchise fee revenue of $7,623,800 and $8,214,600 at December 28, 2019 and December 29, 2018, respectively.

Marketing Fees

Marketing fee revenue is included in the Revenue: Other line of the Consolidated Statements of Operations.  The Company bills and collects annual marketing fees from its franchisees at various times throughout the year.  The Company recognizes marketing fee revenue on a straight line basis over the franchise duration.  The Company recognized $1.3 million, $1.3 million and $1.2 million for the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

Software License Fees

Software license fee revenue is included in the Revenue: Other line of the Consolidated Statements of Operations.  The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the franchisee.  The Company recognizes software license fee revenue on a straight line basis over the franchise duration.  The Company recognized $0.3 million for each of the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017. The Company had deferred software license fees of $1,741,800 and $1,767,700 at December 28, 2019 and December 29, 2018, respectively.

Contract Liabilities

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above.

Commission Fees

The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.6 million and $0.6 million are outstanding at December 28, 2019 and December 29, 2018, respectively and are included in Prepaid expenses and Other assets of the Consolidated Balance Sheets.

Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, the Company recognized $107,200,  $99,500 and $98,800 of commission fee expense, respectively.

Income Taxes

We account for incomes taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

Sales Tax

The Company’s accounting policy is to present taxes collected from customers and remitted to government authorities on a net basis.

Discounted Lease Rentals

The Company may utilize its lease rentals receivable and underlying equipment as collateral to borrow from financial institutions at fixed rates on a non-recourse basis.  In the event of a default by a customer, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Company.  Proceeds from discounting are recorded on the balance sheet as discounted lease rentals.  As customers make payments, lease income and interest expense are recorded and discounted lease rentals are reduced by the effective interest method.

Earnings Per Share

The Company calculates earnings per share by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Earnings Per Share — Basic.  The Company calculates Earnings Per Share — Diluted by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the potential exercise of stock options using the treasury stock method.

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

	Year Ended
	December 28, 2019	December 29, 2018	December 30, 2017
Denominator for basic EPS — weighted average common shares	3,840,638	3,874,757	4,056,049
Dilutive shares associated with option plans	259,991	275,022	283,895
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,100,629	4,149,779	4,339,944
Options excluded from EPS calculation — anti-dilutive	10,262	21,933	24,516

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.

Recently Issued Accounting Pronouncements

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

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. Under ASU 2018-20 Leases (Topic 842): Narrow Scope Improvements for Lessors, the Company has elected the practical expedient to exclude from its income statement, taxes imposed on leasing revenue transactions by a government agency that are collected by the lessor from the lessee. 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 Balance Sheets. The adoption of the standard did not have a material impact on its Consolidated 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 Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the year ended December 28, 2019, principal collections on lease receivables were $19.4 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 10 – “Operating Leases”, and as a lessor in Note 3 – “Investment in Leasing Operations”.

Reclassifications

In addition to the adjustments noted above, 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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Operating Leases: (Tables)

12 Months Ended

Dec. 28, 2019

Operating Leases:

Schedule of maturities of operating lease liabilities

Operating Lease Liabilities expected to be recognized in	Amount
2020	$	704,300
2021		783,600
2022		784,400
2023		763,300
2024		784,400
Thereafter		4,258,600
Total lease payments		8,078,600
Less imputed interest		(1,863,100)
Present value of lease liabilities	$	6,215,500

Schedule of supplemental cash flow information related to operating leases

	Year Ended
	December 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	493,900

Schedule of minimum rental commitments under noncancelable operating leases, made in accordance with accountaing guidance from the prior year

As of December 29, 2018 minimum rental commitments under noncancelable operating leases, exclusive of maintenance, insurance, taxes and other expenses, were as follows:

2019	$	503,700
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total	$	8,640,400

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Organization and Business: (Details) - item	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018
Franchising activity
Number of weeks in a fiscal year	52	52
Number of franchises in operation at the beginning of the period	1,241
OPENED	31
CLOSED	(16)
Number of franchises in operation at the end of the period	1,256	1,241
Plato's Closet | US and Canada
Franchising activity
Number of franchises in operation at the beginning of the period	480
OPENED	6
CLOSED	(3)
Number of franchises in operation at the end of the period	483	480
Once Upon A Child | US and Canada
Franchising activity
Number of franchises in operation at the beginning of the period	379
OPENED	12
CLOSED	(3)
Number of franchises in operation at the end of the period	388	379
Play It Again Sports | US and Canada
Franchising activity
Number of franchises in operation at the beginning of the period	281
OPENED	4
CLOSED	(5)
Number of franchises in operation at the end of the period	280	281
Style Encore | US
Franchising activity
Number of franchises in operation at the beginning of the period	67
OPENED	5
CLOSED	(4)
Number of franchises in operation at the end of the period	68	67
Music Go Round | US
Franchising activity
Number of franchises in operation at the beginning of the period	34
OPENED	4
CLOSED	(1)
Number of franchises in operation at the end of the period	37	34

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Significant Accounting Policies: (Tables)

12 Months Ended

Dec. 28, 2019

Significant Accounting Policies:

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

	Year Ended
	December 28, 2019	December 29, 2018	December 30, 2017
Denominator for basic EPS — weighted average common shares	3,840,638	3,874,757	4,056,049
Dilutive shares associated with option plans	259,991	275,022	283,895
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,100,629	4,149,779	4,339,944
Options excluded from EPS calculation — anti-dilutive	10,262	21,933	24,516

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Subsequent Events

12 Months Ended

Dec. 28, 2019

Subsequent Events:

Subsequent Events:

14.     Subsequent Events:

In December 2019, the Company’s Board of Directors authorized the repurchase of up to 300,000 shares of our common stock for a price of $163.00 per share through a tender offer (the “2020 Tender Offer”). The 2020 Tender Offer began on the date of the announcement, December 17, 2019 and expired on January 16, 2020. Upon expiration, the Company purchased 300,000 shares for a total purchase price of approximately $49.0 million, including fees and expenses related to the Tender Offer. The 2020 Tender Offer was financed in part by net borrowings of $19.2 million under the Line of Credit. (See Note 6 – “Debt”).

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Dec. 28, 2019	Dec. 29, 2018
CONSOLIDATED CONDENSED BALANCE SHEETS
Receivables, allowance for doubtful accounts	$ 1,900	$ 400
Unamortized debt issuance costs - Current	13,900	13,900
Unamortized debt issuance costs - Noncurrent	$ 68,700	$ 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	3,947,858	3,907,686
Common stock, shares outstanding	3,947,858	3,907,686

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
OPERATING ACTIVITIES:
Net Income	$ 32,149,300	$ 30,125,500	$ 24,580,500
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	400,100	314,100	355,400
Provision for credit losses	(78,300)	38,600	9,000
Compensation expense related to stock options	1,666,400	1,976,100	1,956,600
Deferred income taxes	(1,815,300)	827,800	(1,370,300)
Gain on sale of marketable securities			(1,400)
Loss from disposal of property and equipment	1,900
Deferred initial direct costs	(92,600)	(1,367,800)	(416,300)
Amortization of deferred initial direct costs	550,000	1,048,500	447,700
Operating lease right of use asset amortization	345,400
Tax benefits on exercised stock options	1,218,900	403,800	882,300
Change in operating assets and liabilities:
Receivables	(116,400)	242,900	(316,800)
Principal collections on lease receivables	19,421,400
Income tax receivable/payable	(1,151,300)	1,192,500	(1,371,300)
Inventories	21,600	(10,500)	(9,600)
Prepaid expenses	(66,500)		242,400
Other assets	(9,900)	(132,200)	(15,500)
Accounts payable	(336,800)	(721,200)	381,000
Accrued and other liabilities	(661,600)	1,490,000	(174,400)
Rents received in advance and security deposits	(197,300)	(358,200)	126,700
Deferred revenue	(601,800)	(132,900)	(98,300)
Net cash provided by operating activities	50,647,200	34,937,000	25,207,700
INVESTING ACTIVITIES:
Proceeds from sale of marketable securities			217,200
Purchase of property and equipment	(169,400)	(693,500)	(72,600)
Purchase of equipment for lease contracts	(9,009,000)	(23,104,800)	(25,403,200)
Principal collections on lease receivables		24,252,200	25,343,800
Net cash provided by (used for) investing activities	(9,178,400)	453,900	85,200
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit	18,800,000	7,300,000	51,900,000
Payments on line of credit	(18,800,000)	(42,700,000)	(39,900,000)
Proceeds from borrowings on notes payable			12,500,000
Payments on notes payable	(3,250,000)	(3,250,000)	(2,312,500)
Repurchases of common stock	(24,028,100)	(1,846,400)	(49,902,500)
Proceeds from exercises of stock options	10,918,300	2,819,700	2,309,700
Dividends paid	(3,449,100)	(2,169,900)	(1,765,000)
Proceeds from discounted lease rentals	944,400	5,868,500	1,747,700
Net cash used for financing activities	(18,864,500)	(33,978,100)	(25,422,600)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	22,604,300	1,412,800	(129,700)
Cash, cash equivalents and restricted cash, beginning of period	2,576,000	1,163,200	1,292,900
Cash, cash equivalents and restricted cash, end of period	$ 25,180,300	$ 2,576,000	$ 1,163,200

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Significant Accounting Policies: Recent Accounting Pronouncements - ASU 2016-02 (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 30, 2018
Recent Accounting Pronouncements
Operating lease right of use asset	$ 3,595,200
Operating lease liabilities	6,215,500
Principal collections on lease receivables	19,421,400
Accounting Standards Update 2016-02
Recent Accounting Pronouncements
Principal collections on lease receivables	$ 19,400,000
Adjustment | Accounting Standards Update 2016-02
Recent Accounting Pronouncements
Operating lease right of use asset		$ 6,000,000
Operating lease liabilities		$ 6,300,000

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Investment in Leasing Operations: Credit Losses (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Activity in the allowance for credit losses for leasing operations
Balance at beginning of period	$ 861,200	$ 711,200	$ 896,000
Provision for credit losses	(78,300)	38,600	9,000
Recoveries	21,900	213,500	8,600
Deductions for amounts written-off	(224,200)	(102,100)	(202,400)
Balance at end of period	580,600	861,200	$ 711,200
Investment In Leases
Total investment in direct financing and sales-type leases	25,657,400
Total investment in direct financing and sales-type leases		39,800,200
Allowance for Credit Losses
Total	580,600
Total		861,200
Investment in leases
Investment In Leases
Collectively evaluated for loss potential	25,657,400	39,800,200
Total investment in direct financing and sales-type leases	25,657,400
Total investment in direct financing and sales-type leases		39,800,200
Allowance for Credit Losses
Collectively evaluated for loss potential	580,600	861,200
Total	$ 580,600
Total		$ 861,200

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Segment Reporting: (Details)	3 Months Ended								12 Months Ended
	Dec. 28, 2019 USD ($)	Sep. 28, 2019 USD ($)	Jun. 29, 2019 USD ($)	Mar. 30, 2019 USD ($)	Dec. 29, 2018 USD ($)	Sep. 29, 2018 USD ($)	Jun. 30, 2018 USD ($)	Mar. 31, 2018 USD ($)	Dec. 28, 2019 USD ($) item	Dec. 29, 2018 USD ($)	Dec. 30, 2017 USD ($)
Segment Reporting
Number of reportable business segments | item									2
Total revenue	$ 17,882,600	$ 19,680,900	$ 17,404,200	$ 18,331,200	$ 17,071,800	$ 19,118,500	$ 18,159,800	$ 18,161,000	$ 73,298,900	$ 72,511,100	$ 69,757,300
Total operating income	10,943,000	$ 12,274,700	$ 9,846,900	$ 10,066,500	10,179,600	$ 11,435,300	$ 10,074,700	$ 10,074,200	43,131,100	41,763,800	38,805,000
Total depreciation and amortization									400,100	314,100	355,400
Total identifiable assets	61,842,200				46,663,100				61,842,200	46,663,100
Franchising | Canadian operations
Segment Reporting
Total revenue									4,700,000	4,400,000	3,800,000
Operating | Franchising
Segment Reporting
Total revenue									57,243,100	54,334,600	51,287,100
Total operating income									35,169,900	31,882,200	29,513,900
Total depreciation and amortization									281,600	240,500	271,300
Total identifiable assets	3,736,000				5,208,400				3,736,000	5,208,400
Operating | Leasing
Segment Reporting
Total revenue									16,055,800	18,176,500	18,470,200
Total operating income									7,961,200	9,881,600	9,291,100
Total depreciation and amortization									118,500	73,600	$ 84,100
Total identifiable assets	26,596,700				40,490,000				26,596,700	40,490,000
Unallocated
Segment Reporting
Total identifiable assets	$ 31,509,500				$ 964,700				$ 31,509,500	$ 964,700

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Operating Leases: Prior year accounting guidance (Details)	Dec. 29, 2018 USD ($)
Minimum rental commitments
2019	$ 503,700
2020	762,500
2021	783,600
2022	784,400
2023	763,300
Thereafter	5,042,900
Total	8,640,400
Total deferred rent	300,000
Deferred rent included in other liabilities	$ 200,000

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Contract Liabilities - Activity (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 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	1,203,500	1,749,100
Fees earned that were included in the balance at the beginning of the period	(1,805,300)	(1,882,000)
Balance at end of period	$ 9,575,500	$ 10,177,300

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Investment in Leasing Operations: (Tables)

12 Months Ended

Dec. 28, 2019

Investment in Leasing Operations:

Schedule of investment in leasing operations

	December 28, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	26,001,200	$	40,822,400
Estimated unguaranteed residual value of equipment		4,109,800		4,741,200
Unearned lease income, net of initial direct costs deferred		(4,039,400)		(6,739,900)
Security deposits		(3,852,000)		(4,118,300)
Equipment installed on leases not yet commenced		3,437,800		5,094,800
Total investment in direct financing and sales-type leases		25,657,400		39,800,200
Allowance for credit losses		(580,600)		(861,200)
Net investment in direct financing and sales-type leases		25,076,800		38,939,000
Operating leases:
Operating lease assets		820,700		777,000
Less accumulated depreciation and amortization		(591,900)		(713,000)
Net investment in operating leases		228,800		64,000
Total net investment in leasing operations	$	25,305,600	$	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

Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows as of December 28, 2019:

	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2020	$	16,855,200	$	3,193,700
2021		8,049,100		802,000
2022		1,084,400		43,100
2023		8,100		500
2024		4,400		100
Thereafter		—		—
	$	26,001,200	$	4,039,400

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

	December 28, 2019		December 29, 2018		December 30, 2017
Balance at beginning of period	$	861,200	$	711,200	$	896,000
Provisions charged to expense		(78,300)		38,600		9,000
Recoveries		21,900		213,500		8,600
Deductions for amounts written-off		(224,200)		(102,100)		(202,400)
Balance at end of period	$	580,600	$	861,200	$	711,200

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

	December 28, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	25,657,400		580,600	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	25,657,400	$	580,600	$	39,800,200	$	861,200

Schedule of information regarding accruing and non-accrual leases

	December 28, 2019
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	24,546,300	$	—	$	—	$	—	$	24,546,300
Small-Ticket		1,111,100		—		—		—		1,111,100
Total Investment in Leases	$	25,657,400	$	—	$	—	$	—	$	25,657,400

	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

	Year Ended
	December 28, 2019
Interest income on direct financing and sales-type leases	$	7,602,600
Selling profit (loss) at commencement of sales-type leases		2,470,300
Operating lease income		2,525,600
Income on sales of equipment under lease		2,855,400
Other		601,900
Leasing income	$	16,055,800

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Quarterly Financial Data (Unaudited):

12 Months Ended

Dec. 28, 2019

Quarterly Financial Data (Unaudited):

Quarterly Financial Data (Unaudited):

15.     Quarterly Financial Data (Unaudited):

The Company’s unaudited quarterly results for the years ended December 28, 2019 and December 29, 2018 were as follows:

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
2019
Total Revenue	$	18,331,200	$	17,404,200	$	19,680,900	$	17,882,600	$	73,298,900
Income from Operations		10,066,500		9,846,900		12,274,700		10,943,000		43,131,100
Net Income		7,272,200		7,301,900		9,113,800		8,461,400		32,149,300
Net Income Per Common Share — Basic	$	1.86	$	1.94	$	2.39	$	2.18	$	8.37
Net Income Per Common Share — Diluted	$	1.73	$	1.79	$	2.24	$	2.08	$	7.84
2018
Total Revenue	$	18,161,000	$	18,159,800	$	19,118,500	$	17,071,800	$	72,511,100
Income from Operations		10,074,200		10,074,700		11,435,300		10,179,600		41,763,800
Net Income		6,960,400		7,143,000		8,364,300		7,657,800		30,125,500
Net Income Per Common Share — Basic	$	1.81	$	1.85	$	2.15	$	1.96	$	7.77
Net Income Per Common Share — Diluted	$	1.69	$	1.73	$	2.01	$	1.83	$	7.26

The total of basic and diluted earnings per common share by quarter may not equal the totals for the year as there are changes in the weighted average number of common shares outstanding each quarter and basic and diluted earnings per common share are calculated independently for each quarter.

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Significant Accounting Policies: Earnings Per Share (Details) - shares	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Earnings Per Share
Denominator for basic EPS - weighted average common shares	3,840,638	3,874,757	4,056,049
Dilutive shares associated with option plans	259,991	275,022	283,895
Denominator for diluted EPS - weighted average common shares and dilutive potential common shares	4,100,629	4,149,779	4,339,944
Options excluded from EPS calculation - anti-dilutive (in shares)	10,262	21,933	24,516

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Investment in Leasing Operations: Minimum Lease Payments Receivable (Details)	Dec. 28, 2019 USD ($)
Direct Financing and Sales-Type Leases, Minimum Lease Payments Receivable
2020	$ 16,855,200
2021	8,049,100
2022	1,084,400
2023	8,100
2024	4,400
Total	26,001,200
Direct Financing and Sales-Type Leases, Income Amortization
2020	3,193,700
2021	802,000
2022	43,100
2023	500
2024	100
Total	$ 4,039,400

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CONSOLIDATED BALANCE SHEETS - USD ($)	Dec. 28, 2019	Dec. 29, 2018
Current Assets:
Cash and cash equivalents	$ 25,130,300	$ 2,496,000
Restricted cash	50,000	80,000
Receivables, less allowance for doubtful accounts of $1,900 and $400	1,669,500	1,553,100
Net investment in leases - current	12,800,100
Net investment in leases - current		18,547,500
Income tax receivable	497,900	565,500
Inventories	86,000	107,600
Prepaid expenses	968,100	901,600
Total current assets	41,201,900	24,251,300
Net investment in leases - long-term	12,505,500
Net investment in leases - long-term		20,455,500
Property and equipment:
Furniture and equipment	3,910,900	3,518,600
Building and building improvements	2,955,100	1,466,400
Less - accumulated depreciation and amortization	(4,093,400)	(4,118,800)
Property and equipment, net	2,772,600	866,200
Operating lease right of use asset	3,595,200
Goodwill	607,500	607,500
Other assets	492,500	482,600
Deferred income taxes	667,000
Total assets	61,842,200	46,663,100
Current Liabilities:
Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900	3,736,100	3,236,100
Accounts payable	1,015,000	1,351,800
Accrued liabilities	2,783,100	3,128,600
Discounted lease rentals	2,680,700	3,021,900
Deferred revenue	1,717,000	1,744,900
Total current liabilities	11,931,900	12,483,300
Long-term Liabilities:
Notes payable, net of unamortized debt issuance costs of $68,700 and $82,600	21,868,800	25,604,900
Discounted lease rentals	836,900	2,723,500
Deferred revenue	7,858,500	8,432,400
Operating lease liabilities	5,846,100
Other liabilities	1,051,700	1,079,200
Deferred income taxes		1,148,300
Total long-term liabilities	37,462,000	38,988,300
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock, no par value, 10,000,000 shares authorized, 3,947,858 and 3,907,686 shares issued and outstanding	11,929,300	4,425,600
Retained earnings (accumulated deficit)	519,000	(9,234,100)
Total shareholders' equity (deficit)	12,448,300	(4,808,500)
Total liabilities and shareholders' equity (deficit)	$ 61,842,200	$ 46,663,100

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - USD ($)	Common Stock	Retained Earnings (Accumulated Deficit).	Accumulated Other Comprehensive Income (Loss)	Total
BALANCE at Dec. 31, 2016	$ 2,976,100	$ (15,868,900)	$ (9,900)	$ (12,902,700)
BALANCE (in shares) at Dec. 31, 2016	4,165,769
Shareholders’ Equity (Deficit)
Repurchase of common stock	$ (5,766,200)	(44,136,300)		(49,902,500)
Repurchase of common stock (in shares)	(400,000)
Stock options exercised	$ 2,309,700			2,309,700
Stock options exercised (in shares)	77,309
Compensation expense relating to stock options	$ 1,956,600			1,956,600
Cash dividends		(1,765,000)		(1,765,000)
Comprehensive income		24,580,500	$ 9,900	24,590,400
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)
Repurchase of common stock	$ (1,846,400)			(1,846,400)
Repurchase of common stock (in shares)	(12,384)
Stock options exercised	$ 2,819,700			2,819,700
Stock options exercised (in shares)	76,992
Compensation expense relating to stock options	$ 1,976,100			1,976,100
Cash dividends		(2,169,900)		(2,169,900)
Comprehensive income		30,125,500		30,125,500
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	$ 10,918,300			10,918,300
Stock options exercised (in shares)	190,172
Compensation expense relating to stock options	$ 1,666,400			1,666,400
Cash dividends		(3,449,100)		(3,449,100)
Comprehensive income		32,149,300		32,149,300
BALANCE at Dec. 28, 2019	$ 11,929,300	$ 519,000		$ 12,448,300
BALANCE (in shares) at Dec. 28, 2019	3,947,858			3,947,858

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Income Taxes: Reconciliation, Components and Deferred Taxes (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Income Taxes:
Federal statutory tax rate (as a percent)	21.00%	21.00%	35.00%
Reconciliation of the expected federal income tax expense based on the federal statutory tax rate to the actual income tax expense
Federal income tax expense at statutory rate (21%, 21%, 35%)	$ 8,708,200	$ 8,249,400	$ 12,758,000
Change in valuation allowance	147,900	(13,800)	7,500
State and local income taxes, net of federal benefit	1,310,800	1,334,100	1,057,100
Permanent differences, including stock option expenses	(1,056,800)	(355,500)	(628,400)
Adjustment to uncertain tax positions	(58,500)	4,500	77,800
Rate change			(1,540,300)
Other, net	266,500	(61,100)	139,300
Total provision for income taxes	9,318,100	9,157,600	11,871,000
Current provision for income taxes:
Federal	9,076,400	6,355,800	10,296,100
State	1,693,800	1,551,000	1,688,100
Foreign	363,200	423,000	365,900
Current provision	11,133,400	8,329,800	12,350,100
Deferred provision for income taxes:
Federal	(1,834,800)	967,300	(463,800)
State	19,500	(139,500)	(15,300)
Deferred provision	(1,815,300)	827,800	(479,100)
Total provision for income taxes	9,318,100	9,157,600	$ 11,871,000
Deferred tax assets:
Accounts receivable and lease reserves	154,700	215,900
Non-qualified stock option expense	1,758,100	2,071,600
Deferred revenue	1,957,500	2,020,100
Trademarks	34,500	39,800
Lease deposits	930,700	1,004,700
Loss from and impairment of equity and note investments	2,595,500	2,620,700
Foreign tax credits	173,100
Valuation allowance	(2,768,600)	(2,620,700)
Other	194,400	331,400
Total deferred tax assets	5,029,900	5,683,500
Deferred tax liabilities:
Lease revenue and initial direct costs	(4,207,400)	(6,664,800)
Depreciation and amortization	(155,500)	(167,000)
Total deferred tax liabilities	(4,362,900)	(6,831,800)
Total net deferred tax liabilities		$ (1,148,300)
Total net deferred tax liabilities	$ 667,000

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Contract Liabilities - Performance Obligations (Details)	Dec. 28, 2019 USD ($)
Future estimated revenue to be recognized related to performance obligations
Revenue, remaining performance obligation	$ 9,575,500
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-12-29
Future estimated revenue to be recognized related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, remaining performance obligation	$ 1,717,000
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-12-27
Future estimated revenue to be recognized related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, remaining performance obligation	$ 1,578,200
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-12-26
Future estimated revenue to be recognized related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, remaining performance obligation	$ 1,433,300
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-01-01
Future estimated revenue to be recognized related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, remaining performance obligation	$ 1,262,000
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-12-31
Future estimated revenue to be recognized related to performance obligations
Duration of expected recognition period for remaining performance obligation	1 year
Revenue, remaining performance obligation	$ 1,064,300
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-12-29
Future estimated revenue to be recognized related to performance obligations
Duration of expected recognition period for remaining performance obligation
Revenue, remaining performance obligation	$ 2,520,700

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Subsequent Events (Details) - USD ($)		1 Months Ended	12 Months Ended
	Jan. 16, 2020	Dec. 31, 2019	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Subsequent Events
Borrowing from Line of Credit for Tender Offer			$ 18,800,000	$ 7,300,000	$ 51,900,000
2020 Tender Offer | Subsequent Event
Subsequent Events
Shares authorized for repurchase per tender offer		300,000
Price per share of common stock per tender offer		$ 163.00
Number of shares repurchased	300,000
Purchase price of shares per tender offer	$ 49,000,000
Borrowing from Line of Credit for Tender Offer	$ 19,200,000

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Debt: Maturities (Details)	Dec. 28, 2019 USD ($)
Required prepayments of the notes payable for each of the next five years and thereafter
2020	$ 3,750,000
2021	4,250,000
2022	4,250,000
2023	4,250,000
2024	4,250,000
Thereafter	4,937,500
Total	$ 25,687,500

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Shareholders' Equity (Deficit): Stock Options Activity (Details) - Stock options - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017	Dec. 31, 2016
Number of Shares
Outstanding at the beginning of the period (in shares)	639,380	658,184	673,670
Granted (in shares)	54,800	69,000	69,500
Exercised (in shares)	(190,172)	(79,241)	(80,236)
Forfeited (in shares)	(24,450)	(8,563)	(4,750)
Outstanding at the end of the period (in shares)	479,558	639,380	658,184	673,670
Exercisable at the end of the period (in shares)	344,108
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 84.12	$ 72.33	$ 62.11
Granted (in dollars per share)	170.14	149.51	128.00
Exercised (in dollars per share)	57.41	39.37	33.41
Forfeited (in dollars per share)	138.13	119.24	95.28
Outstanding at the end of the period (in dollars per share)	101.78	$ 84.12	$ 72.33	$ 62.11
Exercisable at the end of the period (in dollars per share)	$ 83.08
Weighted Average Remaining Contractual Life (years)
Outstanding	5 years 9 months 15 days	5 years 7 months 10 days	5 years 10 months 13 days	6 years 1 month 10 days
Exercisable at the end of the period	4 years 8 months 9 days
Intrinsic Value
Outstanding at the beginning of the period	$ 47,808,100	$ 37,723,800	$ 43,139,100
Outstanding at the end of the period	45,283,200	$ 47,808,100	$ 37,723,800	$ 43,139,100
Exercisable at the end of the period	$ 38,930,300
Weighted average assumptions and results used in estimation of fair value of options granted
Risk free interest rate (as a percent)	1.85%	2.73%	2.05%
Expected life (years)	6 years	6 years	6 years
Expected volatility (as a percent)	19.30%	19.94%	25.64%
Dividend yield (as a percent)	1.38%	1.13%	1.10%
Option fair value (in dollars per share)	$ 30.96	$ 32.45	$ 32.07

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Quarterly Financial Data (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 28, 2019	Sep. 28, 2019	Jun. 29, 2019	Mar. 30, 2019	Dec. 29, 2018	Sep. 29, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Quarterly Financial Data (Unaudited):
Total Revenue	$ 17,882,600	$ 19,680,900	$ 17,404,200	$ 18,331,200	$ 17,071,800	$ 19,118,500	$ 18,159,800	$ 18,161,000	$ 73,298,900	$ 72,511,100	$ 69,757,300
Income from Operations	10,943,000	12,274,700	9,846,900	10,066,500	10,179,600	11,435,300	10,074,700	10,074,200	43,131,100	41,763,800	38,805,000
Net Income	$ 8,461,400	$ 9,113,800	$ 7,301,900	$ 7,272,200	$ 7,657,800	$ 8,364,300	$ 7,143,000	$ 6,960,400	$ 32,149,300	$ 30,125,500	$ 24,580,500
Net Income Per Common Share - Basic	$ 2.18	$ 2.39	$ 1.94	$ 1.86	$ 1.96	$ 2.15	$ 1.85	$ 1.81	$ 8.37	$ 7.77	$ 6.06
Net Income Per Common Share - Diluted	$ 2.08	$ 2.24	$ 1.79	$ 1.73	$ 1.83	$ 2.01	$ 1.73	$ 1.69	$ 7.84	$ 7.26	$ 5.66

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Accrued Liabilities:

12 Months Ended

Dec. 28, 2019

Accrued Liabilities

Accrued Liabilities:

7.     Accrued Liabilities:

Accrued liabilities at December 28, 2019 and December 29, 2018 are as follows:

	December 28, 2019		December 29, 2018
Accrued compensation and benefits	$	887,900	$	1,490,700
Rent related liabilities		388,500		91,100
Accrued interest		210,800		218,600
Accrued purchases of goods and services		186,200		716,400
Other		1,109,700		611,800
	$	2,783,100	$	3,128,600

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Investment in Leasing Operations:

12 Months Ended

Dec. 28, 2019

Investment in Leasing Operations:

Investment in Leasing Operations:

3.     Investment in Leasing Operations:

Investment in leasing operations consists of the following:

	December 28, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	26,001,200	$	40,822,400
Estimated unguaranteed residual value of equipment		4,109,800		4,741,200
Unearned lease income, net of initial direct costs deferred		(4,039,400)		(6,739,900)
Security deposits		(3,852,000)		(4,118,300)
Equipment installed on leases not yet commenced		3,437,800		5,094,800
Total investment in direct financing and sales-type leases		25,657,400		39,800,200
Allowance for credit losses		(580,600)		(861,200)
Net investment in direct financing and sales-type leases		25,076,800		38,939,000
Operating leases:
Operating lease assets		820,700		777,000
Less accumulated depreciation and amortization		(591,900)		(713,000)
Net investment in operating leases		228,800		64,000
Total net investment in leasing operations	$	25,305,600	$	39,003,000

As of December 28, 2019, the $25.3 million total net investment in leases consisted of $12.8 million classified as current and $12.5  million classified as long-term. As of December 29, 2018, the $39.0 million total net investment in leases consisted of $18.5 million classified as current and $20.5 million classified as long-term.

As of December 28, 2019, no customer had leased assets totaling more than 10% of the Company’s total assets. As of December 29, 2018, leased assets with two customers approximated 24% and 11%, respectively, of the Company’s total assets.  A portion of the lease payments receivable from these customers is assigned as collateral in non-recourse financing with financial institutions. See Note 8 – “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 as of December 28, 2019:

	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2020	$	16,855,200	$	3,193,700
2021		8,049,100		802,000
2022		1,084,400		43,100
2023		8,100		500
2024		4,400		100
Thereafter		—		—
	$	26,001,200	$	4,039,400

The activity in the allowance for credit losses for leasing operations during 2019, 2018 and 2017, respectively, is as follows:

	December 28, 2019		December 29, 2018		December 30, 2017
Balance at beginning of period	$	861,200	$	711,200	$	896,000
Provisions charged to expense		(78,300)		38,600		9,000
Recoveries		21,900		213,500		8,600
Deductions for amounts written-off		(224,200)		(102,100)		(202,400)
Balance at end of period	$	580,600	$	861,200	$	711,200

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:

	December 28, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	25,657,400		580,600	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	25,657,400	$	580,600	$	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.

	December 28, 2019
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	24,546,300	$	—	$	—	$	—	$	24,546,300
Small-Ticket		1,111,100		—		—		—		1,111,100
Total Investment in Leases	$	25,657,400	$	—	$	—	$	—	$	25,657,400

	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 Statements of Operations consists of the following:

	Year Ended
	December 28, 2019
Interest income on direct financing and sales-type leases	$	7,602,600
Selling profit (loss) at commencement of sales-type leases		2,470,300
Operating lease income		2,525,600
Income on sales of equipment under lease		2,855,400
Other		601,900
Leasing income	$	16,055,800

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Income Taxes:

12 Months Ended

Dec. 28, 2019

Income Taxes:

Income Taxes:

11.     Income Taxes:

A reconciliation of the expected federal income tax expense based on the federal statutory tax rate to the actual income tax expense is provided below:

	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Federal income tax expense at statutory rate (21%,  21%,  35%)	$	8,708,200	$	8,249,400	$	12,758,000
Change in valuation allowance		147,900		(13,800)		7,500
State and local income taxes, net of federal benefit		1,310,800		1,334,100		1,057,100
Permanent differences, including stock option expenses		(1,056,800)		(355,500)		(628,400)
Adjustment to uncertain tax positions		(58,500)		4,500		77,800
Rate change		—		—		(1,540,300)
Other, net		266,500		(61,100)		139,300
Actual income tax expense	$	9,318,100	$	9,157,600	$	11,871,000

Components of the provision for income taxes are as follows:

	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Current:
Federal	$	9,076,400	$	6,355,800	$	10,296,100
State		1,693,800		1,551,000		1,688,100
Foreign		363,200		423,000		365,900
Current provision		11,133,400		8,329,800		12,350,100
Deferred:
Federal		(1,834,800)		967,300		(463,800)
State		19,500		(139,500)		(15,300)
Deferred provision		(1,815,300)		827,800		(479,100)
Total provision for income taxes	$	9,318,100	$	9,157,600	$	11,871,000

The tax effects of temporary differences that give rise to the net deferred income tax assets and liabilities are presented below:

	December 28, 2019		December 29, 2018
Deferred tax assets:
Accounts receivable and lease reserves	$	154,700	$	215,900
Non-qualified stock option expense		1,758,100		2,071,600
Deferred revenue		1,957,500		2,020,100
Trademarks		34,500		39,800
Lease deposits		930,700		1,004,700
Loss from and impairment of equity and note investments		2,595,500		2,620,700
Foreign tax credits		173,100		—
Valuation allowance		(2,768,600)		(2,620,700)
Other		194,400		331,400
Total deferred tax assets		5,029,900		5,683,500
Deferred tax liabilities:
Lease revenue and initial direct costs		(4,207,400)		(6,664,800)
Depreciation and amortization		(155,500)		(167,000)
Total deferred tax liabilities		(4,362,900)		(6,831,800)
Total net deferred tax assets (liabilities)	$	667,000	$	(1,148,300)

On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was signed into law. The Tax Act made changes to the U.S. tax code that affected our income tax rates in 2017, 2018 and 2019, notably the reduction of the U.S. federal corporate income tax rate from 35% to 21% beginning in 2018.  Accounting guidance applicable to income taxes required us to recognize the impact of the change in tax rate on our existing deferred tax assets and liabilities as of the date that the Tax Act was signed into law. We recorded a reduction in our 2017 income tax expense of $1.5 million and a corresponding reduction in our net deferred income tax liabilities as a result of the decrease in the federal income tax rate.

The Company has assessed its taxable earnings history and prospective future taxable income.  Based upon this assessment, the Company has determined that it is more likely than not that its deferred tax assets will be realized in future periods and no valuation allowance is necessary, except for the deferred tax assets related to the loss from and impairment of equity and note investments (which are capital losses for tax purposes) and the foreign tax credits.  As a result, valuation allowances of $2.8 million and $2.6 million as of December 28, 2019 and December 29, 2018, respectively, have been recorded.

The amount of unrecognized tax benefits, including interest and penalties, as of December 28, 2019 and December 29, 2018, was $532,500 and $589,000, respectively, primarily for potential state taxes.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense for all periods presented.  The Company had accrued approximately $33,500 and $37,700 for the payment of interest and penalties at December 28, 2019 and December 29, 2018, respectively.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

	Total
Balance at December 30, 2017	$	551,100
Increases related to current year tax positions		135,600
Expiration of the statute of limitations for the assessment of taxes		(135,400)
Balance at December 29, 2018		551,300
Increases related to current year tax positions		131,900
Expiration of the statute of limitations for the assessment of taxes		(184,200)
Balance at December 28, 2019	$	499,000

The Company and its subsidiaries file income tax returns in the U.S. federal, numerous state and certain foreign jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015. We expect various statutes of limitation to expire during the next 12 months.  Due to the uncertain response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.

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Contract Liabilities: (Tables)

12 Months Ended

Dec. 28, 2019

Contract Liabilities:

Schedule of activity of current and noncurrent deferred franchise revenue

	December 28, 2019		December 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		1,203,500		1,749,100
Fees earned that were included in the balance at the beginning of the period		(1,805,300)		(1,882,000)
Balance at end of period	$	9,575,500	$	10,177,300

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

Contract Liabilities expected to be recognized in	Amount
2020	$	1,717,000
2021		1,578,200
2022		1,433,300
2023		1,262,000
2024		1,064,300
Thereafter		2,520,700
	$	9,575,500

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Quarterly Financial Data (Unaudited): (Tables)

12 Months Ended

Dec. 28, 2019

Quarterly Financial Data (Unaudited):

Schedule of the Company's quarterly financial data

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
2019
Total Revenue	$	18,331,200	$	17,404,200	$	19,680,900	$	17,882,600	$	73,298,900
Income from Operations		10,066,500		9,846,900		12,274,700		10,943,000		43,131,100
Net Income		7,272,200		7,301,900		9,113,800		8,461,400		32,149,300
Net Income Per Common Share — Basic	$	1.86	$	1.94	$	2.39	$	2.18	$	8.37
Net Income Per Common Share — Diluted	$	1.73	$	1.79	$	2.24	$	2.08	$	7.84
2018
Total Revenue	$	18,161,000	$	18,159,800	$	19,118,500	$	17,071,800	$	72,511,100
Income from Operations		10,074,200		10,074,700		11,435,300		10,179,600		41,763,800
Net Income		6,960,400		7,143,000		8,364,300		7,657,800		30,125,500
Net Income Per Common Share — Basic	$	1.81	$	1.85	$	2.15	$	1.96	$	7.77
Net Income Per Common Share — Diluted	$	1.69	$	1.73	$	2.01	$	1.83	$	7.26

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Shareholders' Equity (Deficit): (Tables)

12 Months Ended

Dec. 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 31, 2016	673,670	$	62.11	6.11	$	43,139,100
Granted	69,500		128.00
Exercised	(80,236)		33.41
Forfeited	(4,750)		95.28
Outstanding, December 30, 2017	658,184		72.33	5.87		37,723,800
Granted	69,000		149.51
Exercised	(79,241)		39.37
Forfeited	(8,563)		119.24
Outstanding, December 29, 2018	639,380		84.12	5.61		47,808,100
Granted	54,800		170.14
Exercised	(190,172)		57.41
Forfeited	(24,450)		138.13
Outstanding, December 28, 2019	479,558	$	101.78	5.79	$	45,283,200
Exercisable, December 28, 2019	344,108	$	83.08	4.69	$	38,930,300

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

	Year Ended
	December 28, 2019			December 29, 2018			December 30, 2017
Risk free interest rate		1.85	%		2.73	%		2.05	%
Expected life (years)		6			6			6
Expected volatility		19.30	%		19.94	%		25.64	%
Dividend yield		1.38	%		1.13	%		1.10	%
Option fair value	$	30.96		$	32.45		$	32.07

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Organization and Business: (Tables)

12 Months Ended

Dec. 28, 2019

Organization and Business:

Summary of franchising activity

	12/29/2018	OPENED	CLOSED	12/28/2019
Plato’s Closet
Franchises - US and Canada	480	6	(3)	483
Once Upon A Child
Franchises - US and Canada	379	12	(3)	388
Play It Again Sports
Franchises - US and Canada	281	4	(5)	280
Style Encore
Franchises - US and Canada	67	5	(4)	68
Music Go Round
Franchises - US	34	4	(1)	37
Total Franchised Stores	1,241	31	(16)	1,256

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Segment Reporting:

12 Months Ended

Dec. 28, 2019

Segment Reporting:

Segment Reporting:

13.     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:

	Year ended
	December 28, 2019		December 29, 2018		December 30, 2017
Revenue:
Franchising	$	57,243,100	$	54,334,600	$	51,287,100
Leasing		16,055,800		18,176,500		18,470,200
Total revenue	$	73,298,900	$	72,511,100	$	69,757,300
Reconciliation to operating income:
Franchising segment contribution	$	35,169,900	$	31,882,200	$	29,513,900
Leasing segment contribution		7,961,200		9,881,600		9,291,100
Total operating income	$	43,131,100	$	41,763,800	$	38,805,000
Depreciation and amortization:
Franchising	$	281,600	$	240,500	$	271,300
Leasing		118,500		73,600		84,100
Total depreciation and amortization	$	400,100	$	314,100	$	355,400

	As of
	December 28, 2019		December 29, 2018
Identifiable assets:
Franchising	$	3,736,000	$	5,208,400
Leasing		26,596,700		40,490,000
Unallocated		31,509,500		964,700
Total	$	61,842,200	$	46,663,100

Revenues are all generated from United States operations other than franchising revenues from Canadian operations of $4.7 million, $4.4 million and $3.8 million in each of fiscal 2019, 2018 and 2017, respectively.  All long-lived assets are located within the United States.

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Commitments and Contingencies: (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Employee Benefit Plan
Service period for vesting of employer contribution	5 years
Company contributions	$ 343,500	$ 361,400	$ 319,700

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Operating Leases: Maturities and other (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018
Maturities of operating lease liabilities:
2020	$ 704,300
2021	783,600
2022	784,400
2023	763,300
2024	784,400
Thereafter	4,258,600
Total	8,078,600
Less imputed interest	(1,863,100)
Present value of lease liabilities	6,215,500
Operating lease liability
Operating lease liability, current	$ 400,000
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Accrued Liabilities, Current
Total deferred rent		$ 300,000
Deferred rent included in other liabilities		$ 200,000
Other disclosures
Tenant allowance recorded during the year as a reduction to the operating lease right of use asset	$ 2,100,000
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$ 493,900

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Significant Accounting Policies: Marketing Fees and Software License Fees (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Revenue recognition
Deferred revenue	$ 9,575,500	$ 10,177,300	$ 10,310,200
Franchise fees
Revenue recognition
Deferred revenue	7,623,800	8,214,600
Revenue	1,540,900	1,580,300	1,541,100
Marketing Fees
Revenue recognition
Revenue	1,300,000	1,300,000	1,200,000
Software License Fees
Revenue recognition
Deferred revenue	1,741,800	1,767,700
Revenue	$ 300,000	$ 300,000	$ 300,000

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Investment in Leasing Operations: Summary of Leasing Operations (Details) - USD ($)	Dec. 28, 2019	Dec. 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$ 26,001,200
Minimum lease payments receivable		$ 40,822,400
Estimated unguaranteed residual value of equipment	4,109,800
Estimated unguaranteed residual value of equipment		4,741,200
Unearned lease income net of initial direct costs deferred	(4,039,400)
Unearned lease income net of initial direct costs deferred		(6,739,900)
Security deposits	(3,852,000)
Security deposits		(4,118,300)
Equipment installed on leases not yet commenced	3,437,800
Equipment installed on leases not yet commenced		5,094,800
Total investment in direct financing and sales-type leases	25,657,400
Total investment in direct financing and sales-type leases		39,800,200
Allowance for credit losses	(580,600)
Allowance for credit losses		(861,200)
Net investment in direct financing and sales-type leases	25,076,800
Net investment in direct financing and sales-type leases		38,939,000
Operating leases:
Operating lease assets	820,700
Less accumulated depreciation and amortization	(591,900)
Net investment in operating leases	228,800
Total net investment in leasing operations	25,305,600
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	12,800,100
Net investment in leases - long-term	$ 12,505,500
Net investment in leases - current		18,547,500
Net investment in leases - long-term		$ 20,455,500

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CONSOLIDATED STATEMENTS OF CASH FLOWS - Supplemental Disclosures - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$ 1,705,600	$ 2,497,000	$ 2,176,100
Cash paid for income taxes	11,122,300	6,727,600	13,585,200
Non-cash landlord leasehold improvements	2,139,000
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	25,130,300	2,496,000	1,073,200
Restricted cash	50,000	80,000	90,000
Total cash, cash equivalents and restricted cash	$ 25,180,300	$ 2,576,000	$ 1,163,200

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CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Revenue:
Leasing income	$ 16,055,800
Leasing income		$ 18,176,500	$ 18,470,200
Total revenue	73,298,900	72,511,100	69,757,300
Cost of merchandise sold	2,469,700	2,741,100	2,432,600
Leasing expense	2,031,100	1,929,300	3,269,100
Provision for credit losses	(78,300)	38,600	9,000
Selling, general and administrative expenses	25,745,300	26,038,300	25,241,600
Income from operations	43,131,100	41,763,800	38,805,000
Interest expense	(1,731,100)	(2,447,500)	(2,366,400)
Interest and other income (expense)	67,400	(33,200)	12,900
Income before income taxes	41,467,400	39,283,100	36,451,500
Provision for income taxes	(9,318,100)	(9,157,600)	(11,871,000)
Net income	$ 32,149,300	$ 30,125,500	$ 24,580,500
Earnings per share - basic (in dollars per share)	$ 8.37	$ 7.77	$ 6.06
Earnings per share - diluted (in dollars per share)	$ 7.84	$ 7.26	$ 5.66
Weighted average shares outstanding - basic	3,840,638	3,874,757	4,056,049
Weighted average shares outstanding - diluted	4,100,629	4,149,779	4,339,944
Royalties
Revenue:
Revenue	$ 51,421,800	$ 48,224,500	$ 45,643,500
Merchandise sales
Revenue:
Revenue	2,618,800	2,903,100	2,572,200
Franchise fees
Revenue:
Revenue	1,540,900	1,580,300	1,541,100
Other
Revenue:
Revenue	$ 1,661,600	$ 1,626,700	$ 1,530,300

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Investment in Leasing Operations: Investment Aging (Details) - USD ($)	Dec. 28, 2019	Dec. 29, 2018
Investment in leasing operations
0-60 Days Delinquent and Accruing	$ 25,657,400	$ 39,730,200
Non-Accrual		70,000
Total investment in direct financing and sales-type leases	25,657,400
Total investment in direct financing and sales-type leases		39,800,200
Middle-Market
Investment in leasing operations
0-60 Days Delinquent and Accruing	24,546,300	38,395,000
Non-Accrual		70,000
Total investment in direct financing and sales-type leases	24,546,300
Total investment in direct financing and sales-type leases		38,465,000
Small-Ticket
Investment in leasing operations
0-60 Days Delinquent and Accruing	1,111,100	1,335,200
Total investment in direct financing and sales-type leases	$ 1,111,100
Total investment in direct financing and sales-type leases		$ 1,335,200

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Discounted Lease Rentals: (Details) - USD ($)	Dec. 28, 2019	Dec. 29, 2018
Discounted Lease Rentals
Discounted lease rentals, current	$ 2,680,700	$ 3,021,900
Discounted lease rentals	$ 3,500,000	$ 5,700,000
Secured Debt.
Discounted Lease Rentals
Weighted average interest rate on a non-recourse basis (as a percent)	6.39%

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Debt: Line of Credit (Details) $ in Millions	12 Months Ended
	Dec. 28, 2019 USD ($) item	Jul. 31, 2017 USD ($)
Private Bank, Trust Company and BMO Harris Bank N A | One month LIBOR
Line of Credit
Variable rate basis	one month LIBOR
Private Bank, Trust Company and BMO Harris Bank N A | Two month LIBOR
Line of Credit
Variable rate basis	two month LIBOR
Private Bank, Trust Company and BMO Harris Bank N A | Three month LIBOR
Line of Credit
Variable rate basis	three month LIBOR
Private Bank, Trust Company and BMO Harris Bank N A | Six month LIBOR
Line of Credit
Variable rate basis	six month LIBOR
Private Bank, Trust Company and BMO Harris Bank N A | Twelve month LIBOR
Line of Credit
Variable rate basis	twelve month LIBOR
Line of Credit
Line of Credit
Borrowings outstanding	$ 0.0
Line of Credit | Private Bank, Trust Company and BMO Harris Bank N A
Line of Credit
Terms notes, available borrowing to fund Tender Offer		$ 15.0
Automatic deduction in the aggregate commitments under the line of credit effective July 2019 and each subsequent July thereafter through the term of the facility		$ 5.0
Line of credit available for additional borrowings	$ 45.0
Number of interest rate options | item	2
Non-utilization fees (as a percent)	0.25%
Line of Credit | Private Bank, Trust Company and BMO Harris Bank N A | Base Rate
Line of Credit
Variable rate basis	Base Rate
Applicable margin (as a percent)	0.00%
Line of Credit | Private Bank, Trust Company and BMO Harris Bank N A | LIBOR
Line of Credit
Variable rate basis	LIBOR
Applicable margin (as a percent)	2.00%

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Shareholders' Equity (Deficit): Dividends and Repurchase of Common Stock (Details) - USD ($)				1 Months Ended	12 Months Ended
	Mar. 28, 2019	Aug. 16, 2017	Jul. 19, 2017	Feb. 28, 2019	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Repurchase of Common Stock
Aggregate purchase price of shares repurchased (in dollars)					$ 24,028,100	$ 1,846,400	$ 49,902,500
Dividends
Cash dividends declared and paid (in dollars per share)					$ 0.90	$ 0.56	$ 0.43
Aggregate quarterly cash dividends declared and paid					$ 3,449,100	$ 2,169,900	$ 1,765,000
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	$ 24,000,000
Tender Offer
Repurchase of Common Stock
Shares authorized for repurchase per tender offer			400,000
Price per share of common stock per tender offer			$ 124.48
Number of shares repurchased		400,000
Aggregate purchase price of shares repurchased (in dollars)		$ 49,900,000
Common Stock Repurchase Program
Repurchase of Common Stock
Purchase of stock, price per share						$ 149.10
Number of shares repurchased						12,384
Aggregate purchase price of shares repurchased (in dollars)						$ 1,800,000
Number of additional shares that can be repurchased					130,604

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Debt (Tables)

12 Months Ended

Dec. 28, 2019

Debt:

Schedule of required prepayments of the notes payable for each of the next five years and thereafter

2020	$ 3,750,000
2021	4,250,000
2022	4,250,000
2023	4,250,000
2024	4,250,000
Thereafter	4,937,500
Total	$ 25,687,500

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Income Taxes: (Tables)

12 Months Ended

Dec. 28, 2019

Income Taxes:

Schedule of reconciliation of the expected federal income tax expense based on the federal statutory tax rate to the actual income tax expense

	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Federal income tax expense at statutory rate (21%,  21%,  35%)	$	8,708,200	$	8,249,400	$	12,758,000
Change in valuation allowance		147,900		(13,800)		7,500
State and local income taxes, net of federal benefit		1,310,800		1,334,100		1,057,100
Permanent differences, including stock option expenses		(1,056,800)		(355,500)		(628,400)
Adjustment to uncertain tax positions		(58,500)		4,500		77,800
Rate change		—		—		(1,540,300)
Other, net		266,500		(61,100)		139,300
Actual income tax expense	$	9,318,100	$	9,157,600	$	11,871,000

Schedule of components of the provision for income taxes

	Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Current:
Federal	$	9,076,400	$	6,355,800	$	10,296,100
State		1,693,800		1,551,000		1,688,100
Foreign		363,200		423,000		365,900
Current provision		11,133,400		8,329,800		12,350,100
Deferred:
Federal		(1,834,800)		967,300		(463,800)
State		19,500		(139,500)		(15,300)
Deferred provision		(1,815,300)		827,800		(479,100)
Total provision for income taxes	$	9,318,100	$	9,157,600	$	11,871,000

Schedule of tax effects of temporary differences that give rise to the net deferred income tax assets and liabilities

	December 28, 2019		December 29, 2018
Deferred tax assets:
Accounts receivable and lease reserves	$	154,700	$	215,900
Non-qualified stock option expense		1,758,100		2,071,600
Deferred revenue		1,957,500		2,020,100
Trademarks		34,500		39,800
Lease deposits		930,700		1,004,700
Loss from and impairment of equity and note investments		2,595,500		2,620,700
Foreign tax credits		173,100		—
Valuation allowance		(2,768,600)		(2,620,700)
Other		194,400		331,400
Total deferred tax assets		5,029,900		5,683,500
Deferred tax liabilities:
Lease revenue and initial direct costs		(4,207,400)		(6,664,800)
Depreciation and amortization		(155,500)		(167,000)
Total deferred tax liabilities		(4,362,900)		(6,831,800)
Total net deferred tax assets (liabilities)	$	667,000	$	(1,148,300)

Summary of activity related to the Company's unrecognized tax benefits

	Total
Balance at December 30, 2017	$	551,100
Increases related to current year tax positions		135,600
Expiration of the statute of limitations for the assessment of taxes		(135,400)
Balance at December 29, 2018		551,300
Increases related to current year tax positions		131,900
Expiration of the statute of limitations for the assessment of taxes		(184,200)
Balance at December 28, 2019	$	499,000

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Significant Accounting Policies: Balance Sheet Disclosures (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Receivables
Allowance for Doubtful Accounts Receivable, Current	$ 1,900	$ 400
Restricted Cash
Restricted cash held in escrow	$ 50,000	80,000	$ 90,000
Allowance for Credit Losses
Delinquent period for charging-off against allowance for credit losses	121 days
Canadian operations
Cash Equivalents
Cash located in banks	$ 56,500	$ 83,000

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Contract Liabilities:

12 Months Ended

Dec. 28, 2019

Contract Liabilities:

Contract Liabilities:

9.     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 fiscal years 2019 and 2018, respectively:

	December 28, 2019		December 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		1,203,500		1,749,100
Fees earned that were included in the balance at the beginning of the period		(1,805,300)		(1,882,000)
Balance at end of period	$	9,575,500	$	10,177,300

The following table illustrates future estimated revenue to be recognized for the next five fiscal years and fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 28, 2019:

Contract Liabilities expected to be recognized in	Amount
2020	$	1,717,000
2021		1,578,200
2022		1,433,300
2023		1,262,000
2024		1,064,300
Thereafter		2,520,700
	$	9,575,500

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Shareholders' Equity (Deficit):

12 Months Ended

Dec. 28, 2019

Shareholders' Equity (Deficit):

Shareholders' Equity (Deficit):

5.     Shareholders’ Equity (Deficit):

Dividends

In 2019, the Company declared and paid quarterly cash dividends totaling $0.90 per share ($3.4 million).

In 2018, the Company declared and paid quarterly cash dividends totaling $0.56 per share ($2.2 million).

In 2017, the Company declared and paid quarterly cash dividends totaling $0.43 per share ($1.8 million).

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 “2019 Tender Offer”). The 2019 Tender Offer began on the date of the announcement, February 28, 2019 and expired 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 2019 Tender Offer. The 2019 Tender Offer was financed in part by net borrowings under the Line of Credit. (See Note 6 – “Debt”).

In 2018 the Company purchased 12,384 shares of our common stock for an aggregate purchase price of $1.8 million or $149.10 per share.

In July 2017, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of our common stock for a price of $124.48 per share through a tender offer (the “2017 Tender Offer”). The 2017 Tender Offer began on the date of the announcement, July 19, 2017 and expired on August 16, 2017. Upon expiration, the Company accepted for payment 400,000 shares for a total purchase price of approximately $49.9 million, including fees and expenses related to the 2017 Tender Offer. The 2017 Tender Offer was financed by net borrowings under the Line of Credit and Notes Payable. (See Note 6 – “Debt”).

Under a previous Board of Directors’ authorization, as of December 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 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 December 28, 2019, the Company has authorized up to 700,000 shares of common stock for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).

Grants under the 2001 Plan and 2010 Plan are made by the Compensation Committee of the Board of Directors at a price of not less than 100% of the fair market value on the date of grant.  If an incentive stock option is granted to an individual who owns more than 10% of the voting rights of the Company’s common stock, the option exercise price may not be less than 110% of the fair market value on the date of grant.  The term of the options may not exceed 10 years, except in the case of nonqualified stock options, whereby the terms are established by the Compensation Committee. Options may be exercisable in whole or in installments, as determined by the Compensation Committee.

As of December 28, 2019, the Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”), and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.

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

				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)	Intrinsic Value
Outstanding, December 31, 2016	673,670	$	62.11	6.11	$	43,139,100
Granted	69,500		128.00
Exercised	(80,236)		33.41
Forfeited	(4,750)		95.28
Outstanding, December 30, 2017	658,184		72.33	5.87		37,723,800
Granted	69,000		149.51
Exercised	(79,241)		39.37
Forfeited	(8,563)		119.24
Outstanding, December 29, 2018	639,380		84.12	5.61		47,808,100
Granted	54,800		170.14
Exercised	(190,172)		57.41
Forfeited	(24,450)		138.13
Outstanding, December 28, 2019	479,558	$	101.78	5.79	$	45,283,200
Exercisable, December 28, 2019	344,108	$	83.08	4.69	$	38,930,300

The fair value of options granted under the Option Plans during 2019, 2018 and 2017 were estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

	Year Ended
	December 28, 2019			December 29, 2018			December 30, 2017
Risk free interest rate		1.85	%		2.73	%		2.05	%
Expected life (years)		6			6			6
Expected volatility		19.30	%		19.94	%		25.64	%
Dividend yield		1.38	%		1.13	%		1.10	%
Option fair value	$	30.96		$	32.45		$	32.07

The total intrinsic value of options exercised during 2019, 2018 and 2017 was $22.7 million, $8.3 million and $7.7 million, respectively.  The total fair value of shares vested during 2019, 2018 and 2017 was $8.6 million, $7.8 million and $7.3 million, respectively.

During 2019, 2018 and 2017, option holders surrendered 0 shares, 2,249 shares and 2,927 shares, respectively, of previously owned common stock as payment for option shares exercised as provided for by the Option Plans.  All unexercised options at December 28, 2019 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of $1,666,400,  $1,976,100 and $1,956,600 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in 2019, 2018 and 2017, respectively.  As of December 28, 2019, the Company had $3.7 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.6 years.

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Shareholders' Equity (Deficit): Additional Information (Details) - Stock options - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Additional disclosures
Total intrinsic value of options exercised	$ 22,700,000	$ 8,300,000	$ 7,700,000
Total fair value of shares vested	$ 8,600,000	$ 7,800,000	$ 7,300,000
Shares of previously owned common stock surrendered as payment for option shares exercised	0	2,249	2,927
Compensation expense	$ 1,666,400	$ 1,976,100	$ 1,956,600
Total unrecognized compensation expense	$ 3,700,000
Weighted average period for recognition of unrecognized compensation expense	2 years 7 months 6 days

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Receivables: (Details) - USD ($)	Dec. 28, 2019	Dec. 29, 2018
Current receivables
Trade	$ 35,800	$ 19,700
Royalty	1,543,100	1,396,000
Other	90,600	137,400
Total current receivables	$ 1,669,500	$ 1,553,100

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Accrued Liabilities: (Details) - USD ($)	Dec. 28, 2019	Dec. 29, 2018
Accrued Liabilities
Accrued compensation and benefits	$ 887,900	$ 1,490,700
Deferred rent	388,500	91,100
Accrued interest	210,800	218,600
Accrued purchases of goods and services	186,200	716,400
Other	1,109,700	611,800
Accrued liabilities	$ 2,783,100	$ 3,128,600

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Significant Accounting Policies: PPE, Goodwill, Advertising, Stock-Based Comp (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Goodwill
Goodwill impairment	$ 0	$ 0
Goodwill	607,500	607,500
Advertising
Advertising costs	$ 402,700	$ 423,400	$ 307,700
Accounting for Stock-Based Compensation
Stock options, vesting period	4 years
Computer and peripheral equipment | Minimum
Property, plant and equipment
Estimated useful lives	3 years
Computer and peripheral equipment | Maximum
Property, plant and equipment
Estimated useful lives	5 years
Furniture and equipment | Minimum
Property, plant and equipment
Estimated useful lives	5 years
Furniture and equipment | Maximum
Property, plant and equipment
Estimated useful lives	7 years

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Accrued Liabilities (Tables)

12 Months Ended

Dec. 28, 2019

Accrued Liabilities

Schedule of accrued liabilities

	December 28, 2019		December 29, 2018
Accrued compensation and benefits	$	887,900	$	1,490,700
Rent related liabilities		388,500		91,100
Accrued interest		210,800		218,600
Accrued purchases of goods and services		186,200		716,400
Other		1,109,700		611,800
	$	2,783,100	$	3,128,600

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Segment Reporting: (Tables)

12 Months Ended

Dec. 28, 2019

Segment Reporting:

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

	Year ended
	December 28, 2019		December 29, 2018		December 30, 2017
Revenue:
Franchising	$	57,243,100	$	54,334,600	$	51,287,100
Leasing		16,055,800		18,176,500		18,470,200
Total revenue	$	73,298,900	$	72,511,100	$	69,757,300
Reconciliation to operating income:
Franchising segment contribution	$	35,169,900	$	31,882,200	$	29,513,900
Leasing segment contribution		7,961,200		9,881,600		9,291,100
Total operating income	$	43,131,100	$	41,763,800	$	38,805,000
Depreciation and amortization:
Franchising	$	281,600	$	240,500	$	271,300
Leasing		118,500		73,600		84,100
Total depreciation and amortization	$	400,100	$	314,100	$	355,400

	As of
	December 28, 2019		December 29, 2018
Identifiable assets:
Franchising	$	3,736,000	$	5,208,400
Leasing		26,596,700		40,490,000
Unallocated		31,509,500		964,700
Total	$	61,842,200	$	46,663,100

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Discounted Lease Rentals:

12 Months Ended

Dec. 28, 2019

Discounted Lease Rentals:

Discounted Lease Rentals:

8.      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 December 28, 2019 on a non-recourse basis. As of December 28, 2019, $2.7 million of the $3.5 million liability balance was current. As of December 29, 2018, $3.0 million of the $5.7 million liability balance was current.

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Receivables:

12 Months Ended

Dec. 28, 2019

Receivables:

Receivables:

4.     Receivables:

The Company’s current receivables consisted of the following:

	December 28, 2019		December 29, 2018
Trade	$	35,800	$	19,700
Royalty		1,543,100		1,396,000
Other		90,600		137,400
	$	1,669,500	$	1,553,100

As part of its normal operating procedures, the Company requires Standby Letters of Credit as collateral for a portion of its trade receivables.

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Significant Accounting Policies: (Policies)

12 Months Ended

Dec. 28, 2019

Significant Accounting Policies:

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Winmark Capital Corporation, Wirth Business Credit, Inc. and Grow Biz Games, Inc. All material inter-company transactions have been eliminated in consolidation.

Cash Equivalents

Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased.  Cash equivalents are stated at cost, which approximates fair value.  As of December 28, 2019 and December 29, 2018, the Company had $56,500 and $83,000 of cash located in Canadian banks.  The Company holds its cash and cash equivalents with financial institutions and at times, such balances may be in excess of insurance limits.

Receivables

Receivables

The Company provides an allowance for doubtful accounts on trade receivables.  The allowance for doubtful accounts was $1,900 and $400 at December 28, 2019 and December 29, 2018, respectively.  If receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the year the determination is made.  Trade receivables are written off when they become uncollectible (which generally occurs when the franchise terminates and there is no reasonable expectation of collection), and payments subsequently received on such receivable are credited to the allowance for doubtful accounts.  Historically, receivables balances written off have not exceeded allowances provided.

Restricted Cash

Restricted Cash

The Company is required by certain states to maintain initial franchise fees in a restricted bank account until the franchise opens.  The use of these funds by the Company is restricted until the franchise opens.  Cash held in escrow totaled $50,000 and $80,000 at December 28, 2019 and December 29, 2018, respectively.

Investment in Leasing Operations

Investment in Leasing Operations

The Company uses the direct finance method of accounting to record income from direct financing leases.  At the inception of a lease, the Company records the minimum future lease payments receivable, the estimated residual value of the leased equipment and the unearned lease income.  Initial direct costs related to lease originations are deferred as part of the investment and amortized over the lease term.  Unearned lease income is the amount by which the total lease receivable plus the estimated residual value exceeds the cost of the equipment.

Leasing Income Recognition

Leasing income for direct financing leases is recognized under the effective interest method.  The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. 

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 (when more than three monthly payments are owed), the lease is classified as being on non-accrual and the Company stops recognizing leasing income on that date.  Payments received on leases in non-accrual status generally reduce the lease receivable.  Leases on non-accrual status remain classified as such until there is sustained payment performance that, in the Company’s judgment, would indicate that all contractual amounts will be collected in full.

       Leasing Expense

Leasing expense includes the cost of financing equipment purchases, the cost of equipment sales as well as depreciation expense for operating lease assets.

       Initial Direct Costs

The Company defers initial direct costs incurred to originate its leases in accordance with applicable accounting guidance.  The initial direct costs deferred are part of the investment in leasing operations and are amortized using the effective interest method.  Initial direct costs include commissions and costs associated with credit evaluation, recording guarantees and other security arrangements, documentation and transaction closing.

Lease Residual Values

Residual values reflect the estimated amounts to be received at lease termination from sales or other dispositions of leased equipment to unrelated parties.  The leased equipment residual values are based on the Company’s best estimate.

Allowance for Credit Losses

The Company maintains an allowance for credit losses at an amount that it believes to be sufficient to absorb losses inherent in its existing lease portfolio as of the reporting dates.  Leases are collectively evaluated for potential loss.  The Company’s methodology for determining the allowance for credit losses includes consideration of the level of delinquencies and non-accrual leases, historical net charge-off amounts and review of any significant concentrations.

A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level.  If the actual results are different from the Company’s estimates, results could be different.  The Company’s policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.

Inventories

Inventories

The Company values its inventories at the lower of cost, as determined by the weighted average cost method and net realizable values.  Inventory consists of computer hardware and related accessories.

Impairment of Long-lived Assets

Impairment of Long-lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  If the carrying amount of the asset exceeds expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value.

Property and Equipment

Property and Equipment

Property and equipment is stated at cost.  Depreciation and amortization for financial reporting purposes is provided on the straight-line method.  Estimated useful lives used in calculating depreciation and amortization are: three to five years for computer and peripheral equipment, five to seven years for furniture and equipment and the shorter of the lease term or useful life for leasehold improvements.  Major repairs, refurbishments and improvements which significantly extend the useful lives of the related assets are capitalized.  Maintenance and repairs, supplies and accessories are charged to expense as incurred.

Goodwill

Goodwill

The Company reviews its goodwill for impairment at its fiscal year end or whenever events or changes in circumstances indicate that there has been impairment in the value of its goodwill.  No impairment was noted during the years ended December 28, 2019 and December 29, 2018.  Goodwill of $607,500 in the consolidated balance sheets at December 28, 2019 and December 29, 2018 is all attributable to the Franchising segment.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with generally accepted U.S. accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The ultimate results could differ from those estimates.  The most significant estimates relate to allowance for credit losses.  These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

Advertising

Advertising

Advertising costs are charged to operating expenses as incurred.  Advertising costs were $402,700,  $423,400 and $307,700 for fiscal years 2019, 2018 and 2017, respectively.

Accounting for Stock-Based Compensation

Accounting for Stock-Based Compensation

The Company recognizes the cost of all share-based payments to employees, including grants of employee stock options, in the consolidated financial statements based on the grant date fair value of those awards.  This cost is recognized over the period for which an employee is required to provide service in exchange for the award.

The Company estimates the fair value of options granted using the Black-Scholes option valuation model.  The Company estimates the volatility of its common stock at the date of grant based on its historical volatility rate.  The Company’s decision to use historical volatility was based upon the lack of actively traded options on its common stock.  The Company estimates the expected term based upon historical option exercises.  The risk-free interest rate assumption is based on observed interest rates for the expected term.  The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.  For options granted, the Company amortizes the fair value on a straight-line basis.  All options are amortized over the vesting periods, which are generally four years beginning from the date of grant.

Revenue Recognition - Franchising

Revenue Recognition - Franchising

The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 13 – “Segment Reporting”.

Royalties

The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales.  The Company recognizes royalties as revenue when earned.

Merchandise Sales

Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees.  Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.

Franchise Fees

The Company collects initial franchise fees when franchise agreements are signed.  The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement. The Company had deferred franchise fee revenue of $7,623,800 and $8,214,600 at December 28, 2019 and December 29, 2018, respectively.

Marketing Fees

Marketing fee revenue is included in the Revenue: Other line of the Consolidated Statements of Operations.  The Company bills and collects annual marketing fees from its franchisees at various times throughout the year.  The Company recognizes marketing fee revenue on a straight line basis over the franchise duration.  The Company recognized $1.3 million, $1.3 million and $1.2 million for the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

Software License Fees

Software license fee revenue is included in the Revenue: Other line of the Consolidated Statements of Operations.  The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the franchisee.  The Company recognizes software license fee revenue on a straight line basis over the franchise duration.  The Company recognized $0.3 million for each of the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017. The Company had deferred software license fees of $1,741,800 and $1,767,700 at December 28, 2019 and December 29, 2018, respectively.

Contract Liabilities

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above.

Commission Fees

The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.6 million and $0.6 million are outstanding at December 28, 2019 and December 29, 2018, respectively and are included in Prepaid expenses and Other assets of the Consolidated Balance Sheets.

Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, the Company recognized $107,200,  $99,500 and $98,800 of commission fee expense, respectively.

Income Taxes

Income Taxes

We account for incomes taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

Sales Tax

Sales Tax

The Company’s accounting policy is to present taxes collected from customers and remitted to government authorities on a net basis.

Discounted Lease Rentals

Discounted Lease Rentals

The Company may utilize its lease rentals receivable and underlying equipment as collateral to borrow from financial institutions at fixed rates on a non-recourse basis.  In the event of a default by a customer, the financial institution has a first lien on the underlying leased equipment, with no further recourse against the Company.  Proceeds from discounting are recorded on the balance sheet as discounted lease rentals.  As customers make payments, lease income and interest expense are recorded and discounted lease rentals are reduced by the effective interest method.

Earnings Per Share

Earnings Per Share

The Company calculates earnings per share by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Earnings Per Share — Basic.  The Company calculates Earnings Per Share — Diluted by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the potential exercise of stock options using the treasury stock method.

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

	Year Ended
	December 28, 2019	December 29, 2018	December 30, 2017
Denominator for basic EPS — weighted average common shares	3,840,638	3,874,757	4,056,049
Dilutive shares associated with option plans	259,991	275,022	283,895
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,100,629	4,149,779	4,339,944
Options excluded from EPS calculation — anti-dilutive	10,262	21,933	24,516

Fair Value Measurements

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.

Recent Accounting Pronouncements:

Recently Issued Accounting Pronouncements

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

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. Under ASU 2018-20 Leases (Topic 842): Narrow Scope Improvements for Lessors, the Company has elected the practical expedient to exclude from its income statement, taxes imposed on leasing revenue transactions by a government agency that are collected by the lessor from the lessee. 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 Balance Sheets. The adoption of the standard did not have a material impact on its Consolidated 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 Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the year ended December 28, 2019, principal collections on lease receivables were $19.4 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 10 – “Operating Leases”, and as a lessor in Note 3 – “Investment in Leasing Operations”.

Reclassifications

Reclassifications

In addition to the adjustments noted above, 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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Commitments and Contingencies:

12 Months Ended

Dec. 28, 2019

Commitments and Contingencies:

Commitments and Contingencies:

12.     Commitments and Contingencies:

Employee Benefit Plan

The Company provides a 401(k) Savings Incentive Plan which covers substantially all employees.  The plan provides for matching contributions and optional profit-sharing contributions at the discretion of the Board of Directors.  Employee contributions are fully vested; matching and profit sharing contributions are subject to a five-year service vesting schedule.  Company contributions to the plan for 2019, 2018 and 2017 were $343,500,  $361,400 and $319,700, respectively.

Litigation

The Company is exposed to a number of asserted and unasserted legal claims encountered in the normal course of business.  Management believes that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

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Receivables: (Tables)

12 Months Ended

Dec. 28, 2019

Receivables:

Schedule of the Company's current receivables

	December 28, 2019		December 29, 2018
Trade	$	35,800	$	19,700
Royalty		1,543,100		1,396,000
Other		90,600		137,400
	$	1,669,500	$	1,553,100

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Income Taxes: Other (Details) - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Tax Act
Corporate income tax rate (as a percent)	21.00%	21.00%	35.00%
Reduction of income tax expense related to the decrease in the federal income tax rate			$ 1,500,000
Deferred tax assets, valuation allowance
Valuation allowance	$ 2,768,600	$ 2,620,700
Unrecognized Tax Benefits
Unrecognized tax benefits, including interest and penalties	532,500	589,000
Interest and penalties accrued related to unrecognized tax benefit	33,500	37,700
Activity related to the company's unrecognized tax benefits
Balance at the beginning of the period	551,300	551,100
Increases related to current year tax positions	131,900	135,600
Expiration of the statute of limitations for the assessment of taxes	(184,200)	(135,400)
Balance at the end of the period	$ 499,000	$ 551,300	$ 551,100
Period over which various statutes of limitations are expected to expire	12 months

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Operating Leases: (Details)	12 Months Ended
	Dec. 28, 2019 USD ($) item	Dec. 29, 2018 USD ($)	Dec. 30, 2017 USD ($)
Operating Leases
Weighted average remaining lease term	9 years 10 months 24 days
Weighted average discount rate (as a percent)	5.50%
Rent expense	$ 1,358,000
Rent expense		$ 1,235,000	$ 1,102,000
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 - USD ($)	12 Months Ended
	Dec. 28, 2019	Mar. 09, 2020	Jun. 29, 2019
Document and Entity Information
Entity Registrant Name	WINMARK CORP
Entity Central Index Key	0000908315
Document Type	10-K
Document Period End Date	Dec. 28, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-28
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 339,792,677
Entity Common Stock, Shares Outstanding		3,648,753
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	FY
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	12 Months Ended
	Dec. 30, 2017 USD ($)
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 24,580,500
Other comprehensive income, before tax:
Unrealized holding net gains arising during period	15,900
Other comprehensive income, before tax	15,900
Income tax expense related to items of other comprehensive income:
Unrealized holding net gains/losses arising during period	(6,000)
Income tax expense related to items of other comprehensive income	(6,000)
Other comprehensive income, net of tax	9,900
Comprehensive income	$ 24,590,400

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Investment in Leasing Operations: Leasing Income (Details)	12 Months Ended
	Dec. 28, 2019 USD ($)
Leasing income
Interest income on direct financing and sales-type leases	$ 7,602,600
Selling profit (loss) at commencement of sales-type leases	2,470,300
Operating lease income	2,525,600
Income on sales of equipment under lease	2,855,400
Other	601,900
Leasing income	$ 16,055,800

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Significant Accounting Policies: Commission Fees (Details) - Commission Fees - USD ($)	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018	Dec. 30, 2017
Commission Fees
Capitalized contract costs	$ 600,000	$ 600,000
Expense	$ 107,200	$ 99,500	$ 98,800

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Investment in Leasing Operations: Risk Concentration (Details) - Total assets - customer	12 Months Ended
	Dec. 28, 2019	Dec. 29, 2018
Investment in leasing operations
Number of customers	0	2
Customer One Concentration Risk
Investment in leasing operations
Percentage of concentration risk		24.00%
Customer Two Concentration Risk
Investment in leasing operations
Percentage of concentration risk		11.00%

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Organization and Business:

12 Months Ended

Dec. 28, 2019

Organization and Business:

Organization and Business:

1.     Organization and Business:

Winmark Corporation and subsidiaries (the Company) offers licenses to operate franchises using the service marks Plato’s Closet®, Play It Again Sports®, Once Upon A Child®, Style Encore® and Music Go Round®.  In addition, the Company sells point-of-sale system hardware to its franchisees and certain merchandise to its Play It Again Sports franchisees.  The Company uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks. The Company has a 52/53-week fiscal year that ends on the last Saturday in December. Fiscal years 2019, 2018 and 2017 were 52-week fiscal years.

Following is a summary of our franchising activity for the fiscal year ended December 28, 2019:

	12/29/2018	OPENED	CLOSED	12/28/2019
Plato’s Closet
Franchises - US and Canada	480	6	(3)	483
Once Upon A Child
Franchises - US and Canada	379	12	(3)	388
Play It Again Sports
Franchises - US and Canada	281	4	(5)	280
Style Encore
Franchises - US and Canada	67	5	(4)	68
Music Go Round
Franchises - US	34	4	(1)	37
Total Franchised Stores	1,241	31	(16)	1,256