10-K 1 wina-20191228x10k.htm 10-K

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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

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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

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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

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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

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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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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.

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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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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.

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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.

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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

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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.

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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

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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.

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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.

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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.

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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 |

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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 |

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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”).

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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.

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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.

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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 |

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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.

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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.

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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

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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.

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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”).

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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.

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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 |

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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 |

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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.

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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.

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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)

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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)

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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.

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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 |  |  |  |

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