Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark one)**

 
| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For the fiscal year endedDecember 26, 2009, or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from                to                **

 

## **Commission File Number: 000-22012**

 

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**WINMARK CORPORATION**

(exact name of registrant as specified in itscharter)

 

| **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 registeredpursuant to Section 12 (b) of the Act:

 
| **Title of Each Class**              | ** ** | **Name of Each Exchange On Which Registered** |
|--------------------------------------|------------|-----------------------------------------------|
| Common Stock, no par value per share |       | Nasdaq Global Market                          |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  Yes o No x

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.  Yes o No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days: Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes  o No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act (Check one): (Do not check if a smallerreporting company)

 

| Large accelerated filer o |   | Accelerated filer o         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act.  Yeso No x

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant, computed by reference to the price at whichthe common equity was last sold, of the average bid and asked price of suchcommon equity, as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was $30,326,345.

 

Sharesof no par value Common Stock outstanding as of March 8, 2010: 5,122,233shares.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the definitiveProxy Statement for the Registrant’s Annual Meeting of Shareholders to be heldon April 28, 2010 have been incorporated by reference into **Items 10, 11, 12, 13 and 14** ofPart III of this report.

 

 

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

**INDEX TO ANNUAL REPORT ON FORM 10-K**

 
| ** **        | ** **                                                                                                          | **PAGE**   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                |       |
| **PART I**   |                                                                                                                |       |
|              |                                                                                                                |       |
| Item 1.           | Business                                                                                                            | 1          |
|              |                                                                                                                |       |
| Item 1A.          | Risk Factors                                                                                                        | 15         |
|              |                                                                                                                |       |
| Item 2.           | Properties                                                                                                          | 18         |
|              |                                                                                                                |       |
| Item 3.           | Legal Proceedings                                                                                                   | 18         |
|              |                                                                                                                |       |
| Item 4.           | Reserved                                                                                                            | 18         |
|              |                                                                                                                |       |
| ** **        | ** **                                                                                                          | **PAGE**   |
| ** **        | ** **                                                                                                          | ** ** |
| **PART II**  | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 19         |
|              |                                                                                                                |       |
| Item 6.           | Selected Financial  Data                                                                                            | 20         |
|              |                                                                                                                |       |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 21         |
|              |                                                                                                                |       |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 29         |
|              |                                                                                                                |       |
| Item 8.           | Financial  Statements and Supplementary Data                                                                        | 30         |
|              |                                                                                                                |       |
| Item 9.           | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                               | 54         |
|              |                                                                                                                |       |
| Item 9A(T)        | Controls and Procedures                                                                                             | 54         |
|              |                                                                                                                |       |
| Item 9B.          | Other Information                                                                                                   | 54         |
|              |                                                                                                                |       |
| ** **        | ** **                                                                                                          | **PAGE**   |
| ** **        | ** **                                                                                                          | ** ** |
| **PART III** | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                             | 55         |
|              |                                                                                                                |       |
| Item 11.          | Executive  Compensation                                                                                             | 55         |
|              |                                                                                                                |       |
| Item 12.          | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 55         |
|              |                                                                                                                |       |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                          | 55         |
|              |                                                                                                                |       |
| Item 14.          | Principal  Accountant Fees and Services                                                                             | 55         |
|              |                                                                                                                |       |
| ** **        | ** **                                                                                                          | **PAGE**   |
| ** **        | ** **                                                                                                          | ** ** |
| **PART IV**  | ** **                                                                                                          | ** ** |
|              |                                                                                                                |       |
| Item 15.          | Exhibits  and Financial Statement Schedules                                                                         | 55         |
|              |                                                                                                                |       |
|              | SIGNATURES                                                                                                          | 56         |

 

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**PART I**

 

## **ITEM 1: BUSINESS**

## ** **

## **Background**

## ** **

We are a franchisor offour value-oriented retail store concepts that buy, sell, trade and consignmerchandise.  Each of our retail storebrands emphasizes consumer value by offering high-quality used merchandise atsubstantial savings from the price of new merchandise and by purchasingcustomers’ used goods that have been outgrown or are no longer used.  The retail brands also offer new merchandiseto customers.

 

We operate amiddle-market equipment leasing business through our wholly owned subsidiary,Winmark Capital Corporation.  Ourmiddle-market leasing business serves large and medium-sized businesses andfocuses on technology-based assets which typically cost more than$250,000.  The businesses we targetgenerally have annual revenue of $50 million or more.  We generate middle-market equipment leasesprimarily through business alliances, equipment vendors and directly fromcustomers.

 

We also operate asmall-ticket financing business through our wholly owned subsidiary, WirthBusiness Credit, Inc. (formerly known as Winmark Business Solutions, Inc.).  Our small-ticket financing business servessmall businesses and focuses on assets which generally have a cost of $5,000 to$250,000.  We generate financing businessdirectly from customers, and also through our Wirth Business Creditfranchisees.

 

Our significant assetsare located within the United States, and we generate all revenues from UnitedStates operations other than franchising revenues from Canadian operations ofapproximately $1.8 million, $2.0 million and $2.0 million for 2009, 2008 and2007, respectively.  For additionalfinancial 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 four retail brandswith their fiscal year 2009 system-wide sales, defined as estimated revenuesgenerated by all franchise owned locations, are summarized as follows:

 

***PlayIt Again Sports***®***- $222 million.***

 

We began franchising thePlay It Again Sports brand in 1988.  PlayIt Again Sports franchises sell, buy, trade and consign used and new sportinggoods, equipment and accessories for a variety of athletic activities includinghockey, wheeled sports (in-line skating, skateboards, etc.), fitness,ski/snowboard, golf and baseball/softball. The franchises offer a flexible mix of merchandise that is adjusted toadapt to seasonal and regional differences. Play It Again Sports is known for providing high value to the customerby offering a mix of new and used sporting goods.  For the years ended 2009, 2008 and 2007, PlayIt Again Sports contributed royalties and franchise fees of $9.1 million, $9.8million and $10.4 million, respectively.  As a percentage of consolidated revenues for 2009, 2008 and 2007, theseamounts equaled 24.3%, 27.6% and 33.3%, respectively.

 

***Plato’sCloset***®***- $206 million.***

 

We began franchising thePlato’s Closet brand in 1999.  Plato’sCloset franchises sell and buy used clothing and accessories geared toward theteenage and young adult market.  Customershave the opportunity to sell their used items to a Plato’s Closet franchisewhen gently-used or outgrown and to purchase quality used clothing andaccessories at prices lower than new merchandise.  For the years ended 2009, 2008 and 2007,Plato’s Closet contributed royalties and franchise fees of $8.5 million, $6.9million and $5.4 million, respectively. As a percentage of consolidated revenues for 2009, 2008 and 2007, theseamounts equaled 22.8%, 19.5% and 17.2%, respectively.

 

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***OnceUpon A Child***®***- $154 million.***

 

We began franchising theOnce Upon A Child brand in 1993.  OnceUpon A Child franchises sell and buy used and new children’s clothing, toys,furniture, equipment and accessories. This brand primarily targets cost-conscious parents of children agesinfant to 10 years with emphasis on children ages seven years old and under.  These customers have the opportunity to selltheir used children’s items to a Once Upon A Child franchise when outgrown andto purchase quality used children’s clothing, toys, furniture and equipment atprices lower than new merchandise.  Newmerchandise is offered to supplement the used merchandise.  For the years ended 2009, 2008 and 2007, OnceUpon A Child contributed royalties and franchise fees of $6.4 million, $5.7million, and $5.4 million, respectively. As a percentage of consolidated revenues for 2009, 2008 and 2007, theseamounts equaled 17.1%, 16.0% and 17.3%, respectively.

 

***MusicGo Round***®***- $25 million.***

 

We began franchising theMusic Go Round brand in 1994.  Music GoRound franchises sell, buy, trade and consign used and new musical instruments,speakers, amplifiers, music-related electronics and related accessories forparents of children who play musical instruments, as well as professional andamateur musicians.  For the years ended2009, 2008 and 2007, Music Go Round contributed royalties and franchise fees of$0.8 million each year.  As a percentageof consolidated revenues for 2009, 2008 and 2007, these amounts equaled 2.0%,2.2% and 2.4%, respectively.

 

***WirthBusiness Credit®***

 

We began franchising theWirth Business Credit business in 2006. The Wirth Business Credit brand franchises leasing and financingservices businesses that provide franchisees an array of small-ticket equipmentleasing and financing options funded through Winmark or its affiliates to offerto customers for business essential equipment and assets.  Wirth Business Credit franchisees are paid atransaction fee for each leasing or financing transaction funded throughWinmark or its affiliates, and as such Winmark Corporation does not receiveroyalties from Wirth Business Credit franchisees.

 

The following tablepresents a summary of our franchising activity for the fiscal year ended December 26,2009:

 
| ** **                    | ** ** | **TOTAL  12/27/08** | ** ** | **OPENED** | ** ** | **CLOSED** | ** ** | **TOTAL  12/26/09** | ** ** | **AVAILABLE  FOR  RENEWAL** | ** ** | **COMPLETED  RENEWALS** | ** ** | **%  RENEWED** | ** ** |
|-------------------------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|-----------------------------|------------|-------------------------|------------|----------------|------------|
| Play  It Again Sports         |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US and Canada   |       | 364                 |       | 6          |       | (29        | )          | 341                 |       | 15                          |       | 15                      |       | 100            | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Plato’s  Closet          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US and Canada   |       | 241                 |       | 30         |       | (4         | )          | 267                 |       | 11                          |       | 11                      |       | 100            | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Once  Upon A Child            |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US and Canada   |       | 229                 |       | 13         |       | (7         | )          | 235                 |       | 22                          |       | 20                      |       | 91             | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Music  Go Round               |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US              |       | 36                  |       | 0          |       | (2         | )          | 34                  |       | 4                           |       | 4                       |       | 100            | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Total  Franchised Stores      |       | 870                 |       | 49         |       | (42        | )          | 877                 |       | 52                          |       | 50                      |       | 96             | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Wirth  Business Credit        |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Territories  - US             |       | 54                  |       | 0          |       | (17        | )          | 37                  |       | —                      |       | —                  |       | N/A            |       |
| Total  Franchises/Territories |       | 924                 |       | 49         |       | (59        | )          | 914                 |       | 52                          |       | 50                      |       | 96             | %          |

 

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## ***Retail Brands FranchisingOverview***

 

We use franchising as abusiness method of distributing goods and services through our retail brands toconsumers.  We also use franchising as amethod to originate small-ticket leasing transactions with our Wirth BusinessCredit franchises.  We discuss our WirthBusiness Credit franchise system in the Equipment Leasing Operations subsectionof this Business section.  We, asfranchisor, own a retail business brand, represented by a service mark orsimilar right, and an operating system for the franchised business.  We then enter into franchise agreements withfranchisees 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 theirretail businesses according to the systems, specifications, standards andformats we develop for the business brand. We train the franchisees how to operate the franchised business.  We also provide continuing support andservice to our franchisees.

 

We have developed value-orientedretail brands based on a mix of used and new merchandise.  We franchise rights to franchisees who openfranchised locations under such brands. The key elements of our franchise strategy include:

 

*·*                  franchising the rights to operateretail stores offering value-oriented merchandise;

*·*                  attracting new, qualifiedfranchisees; and

*·*                  providing initial and continuingsupport to franchisees.

* *

*We have and will continue toreinvest operating cash flow generated from our business into:*

* *

·                  supporting the current franchise systems;

·                  making investments in infrastructure tosupport our corporate needs;

·                  supporting Wirth Business Credit andWinmark Capital; and

·                  pursuing new business opportunities.

 

*OfferingValue-Oriented Merchandise*

 

Our retail brands providevalue to consumers by purchasing and reselling used merchandise that consumershave outgrown or no longer use at substantial savings from the price of newmerchandise.  Our retail brands alsooffer value-priced new merchandise.  Byoffering 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 nationalretail operations our retail store brands provide a unique source of value toconsumers by purchasing used merchandise. We also believe that the strategy of buying used merchandise increasesconsumer awareness of our retail brands.

 

*AttractingFranchisees*

 

Our franchise marketingprogram for retail brands seeks to attract prospective franchisees withexperience in management and operations and an interest in being the owner andoperator of their own business.  We seekfranchisees who:

 

·                  have a sufficient net worth;

·                  have prior business experience; and

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

 

At December 26,2009, we had 46 signed retail franchise agreements that are expected to open in2010.

 

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We began franchising inCanada in 1991 and, as of December 26, 2009, had 62 franchised retailstores open in Canada.  The Canadianretail stores are operated by franchisees under agreements substantiallysimilar to those used in the United States.

 

***RetailBrand Franchise Support***

 

As a franchisor, oursuccess depends upon our ability to develop and support competitive and successfulfranchise brands.  We emphasize thefollowing areas of franchise support and assistance.

 

*Training*

 

Each franchisee mustattend our training program regardless of prior experience.  Soon after signing a franchise agreement, thefranchisee of one of our retail brands is required to attend new ownerorientation training.  This course coversbasic management issues, such as preparing a business plan, lease evaluation,evaluating insurance needs and obtaining financing.  Our training staff assists each franchisee indeveloping a business plan for their retail store with financial and cash flowprojections.  The second training sessionis centered on store operations.  Itcovers, among other things, point-of-sale computer training, inventoryselection and acquisition, sales, marketing and other topics.  We provide the franchisee with operationsmanuals that we periodically update.

 

*FieldSupport*

 

We provide operationspersonnel to assist the franchisee in the opening of a new business.  We also have an ongoing field support programdesigned to assist franchisees in operating their retail stores.  Our franchise support personnel visit eachretail store periodically and, in most cases, a business assessment is made todetermine whether the franchisee is operating in accordance with ourstandards.  The visit is also designed toassist franchisees with operational issues.

 

*Purchasing*

 

During training eachfranchisee is taught how to evaluate, purchase and price used goods.  In addition to purchasing used products fromcustomers who bring merchandise to the store, the franchisee is also encouragedto develop sources for purchasing used merchandise in the community.  Franchisees typically do not repair orrecondition used products, but rather, purchase quality used merchandise thatmay be put directly on display for resale on an ‘*as is*’ basis.  We have developed specialized computerpoint-of-sale systems for Once Upon A Child and Plato’s Closet stores thatprovide the franchisee with standardized pricing information to assist in thepurchasing of used items.  Play It AgainSports, Once Upon A Child and Music Go Round also use buying guides and thepoint-of-sale system to assist franchisees in pricing used items.

 

We provide centralizedbuying services, which on a limited basis include credit and billing for thePlay It Again Sports franchisees.  Uponcredit approval, Play It Again Sports franchisees may order through the buyinggroup, in which case, product is shipped directly to the store by thevendor.  We are invoiced by the vendor,and in turn, we invoice the franchisee adding a 4% service fee to cover ourcosts of operating the buying group.  OurPlay It Again Sports franchise system uses several major vendors includingHorizon Fitness, Nautilus, Wilson Sporting Goods, Champro Sporting Goods,Easton-Bell Sports, RBK CCM Hockey and Bauer Hockey.   The loss of any of the above vendors wouldchange the vendor mix, but not significantly change our products offered.  The amount of product being sold through thebuying group has significantly decreased over the past few years as a result ofour strategic decision to have more franchisees purchase merchandise directlyfrom vendors.

 

To provide thefranchisees of our Once Upon A Child and Music Go Round systems a source of affordablenew product, we have developed relationships with our significant vendors andnegotiated prices for our franchisees to take advantage of the buying power afranchise system brings.

 

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Our typical Once Upon AChild franchised store purchases approximately 30% of its new product fromGraco, Million Dollar Baby and Dorel Juvenile Group.  The loss of any of the above vendors wouldchange the vendor mix, but not significantly change our products offered.

 

There are no significantvendors to our typical Plato’s Closet franchised store.

 

*RetailAdvertising and Marketing*

 

We encourage ourfranchisees to implement a marketing program that includes one or more of thefollowing: television, radio, direct mail, point-of-purchase materials, instore signage and local store marketing programs.  Through these mediums, we advertise that webuy, sell and trade used and new items. Franchisees of the respective retail brands are required to spend thefollowing minimum percentage of their gross sales on approved advertising andmarketing: Play It Again Sports - 5%, Plato’s Closet - 5%, Once Upon A Child -5% and Music Go Round - 5%.  In addition,Play It Again Sports, Plato’s Closet, Once Upon A Child and Music Go Round arerequired to pay us an annual marketing fee. Franchisees may be required to participate in regional cooperativeadvertising groups.

 

*ComputerizedPoint-Of-Sale Systems*

 

We require our retailbrand franchisees to use a retail information management computer system ineach store, which has evolved with the development of new technology.  This computerized point-of-sale system isdesigned specifically for use in our franchise retail stores.  The current system includes our proprietaryData Recycling System software, a dedicated server, two or more work stationregisters, a receipt printer, a report printer and a bar code scanner, togetherwith software modules for inventory management, cash management and customerinformation management.  Our franchiseespurchase the computer hardware from us. We charge a fee of approximately 4% for handling and configuration ofsystems sold through us.  The DataRecycling System software is designed to accommodate buying and consigning ofused merchandise.  This system providesfranchisees with an important management tool that reduces errors, increasesefficiencies and enhances inventory control. We provide point-of-sale system support through our Computer SupportCenter located at our Company headquarters.

 

# ***Winmark Business Solutions***

# ** **

We established WinmarkBusiness Solutions to provide business support services to franchisees andother small businesses.  We provide a website that:

 

*·*                  aggregates the purchasing power ofsmall businesses, including our franchisees, which allows us to moreeffectively negotiate arrangements for products and services critical to mostsmall businesses;

*·*                  provides an easy point of contactbetween vendors and small businesses;

*·*                  provides small business ownersinformation and tools that will help them be successful at every stage of theirsmall business;

*·*                  provides equipment leasing optionsfor small businesses; and

*·*                  provides advertising and promotionalopportunities for small businesses.

* *

We have establishedpreferred provider relationships with high quality vendors that provide smallbusinesses a host of critical services. Included in the array of services available through the web site areaccounting, tax and payroll services, copying and printing services, purchaseof office supplies, credit card processing, loss prevention, businessinsurance, computer/POS equipment, and more. A small business becomes a member of Winmark Business Solutions byregistration, which is free.

 

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***TheRetail Franchise Agreement***

 

We enter into franchiseagreements with our franchisees.  Thefollowing is a summary of certain key provisions of our current standard retailbrand franchise agreement.  Except asnoted, the franchise agreements used for each of our retail brands aregenerally the same.  The FranchiseAgreement signed by Wirth Business Credit franchisees is described in the WirthBusiness Credit Franchise System subsection of this Business section.

 

Each franchisee mustexecute our franchise agreement and pay an initial franchise fee.  At December 26, 2009, the franchise feefor all brands was $25,000 for an initial store in the U.S. and $30,000CAD foran initial store in Canada.  Once afranchisee opens its initial store, it can open additional stores, in anybrand, by paying a $15,000 franchise fee for a store in the U.S. and $18,000CADfor a store in Canada, provided an acceptable territory is available and thefranchisee meets the brand’s additional store standards.  The franchise fee for our initial retailstore and additional retail store in Canada is based upon the exchange rateapplied to the United States fee on the last business day of the precedingfiscal year.  The franchise fee in March 2010for an initial retail store in Canada will be $26,000CAD, and an additionalretail store in Canada will be $16,000CAD.  Typically, the franchisee’s initial store is open for business betweeneight and ten months from the date the franchise agreement is signed.  The franchise agreement has an initial termof 10 years, with subsequent 10-year renewal periods, and grants the franchiseean exclusive geographic area, which will vary in size depending uponpopulation, demographics and other factors. Under current franchise agreements, franchisees of the respective brandsare required to pay us weekly continuing fees (royalties) equal to thepercentage of gross sales outlined in their Franchise Agreements, generallyranging from 4% to 5% for Play It Again Sports, Plato’s Closet and Once Upon AChild and 3% for Music Go Round.

 

**Each Franchisee is required topay us an annual marketing fee of between $500 and $1,000.  Each new or renewing Play It Again Sports,Plato’s Closet, Once Upon A Child and Music Go Round franchisee is required tospend 5% of its gross sales for advertising and promoting its franchisedstore.  Existing franchisees with olderFranchise Agreements may only be required to spend 3% to 4% of their grosssales on advertising and promotion. Currently, for all of the retail brands except Play It Again Sports, wehave the option to increase the minimum advertising expenditure requirementfrom 5% to 6% of the franchisee’s gross sales, of which up to 2% would be paidto us as an advertising fee for deposit into an advertising fund.  While we currently do not have the option toincrease the advertising expenditure requirement for Play It Again Sportsfranchisees, we may also require those franchisees to pay 2% of their grosssales into an advertising fund.  Thisfund, if initiated, would be managed by us and would be used for advertisingand promotion of the franchise system.**

** **

During the term of afranchise agreement, franchisees agree not to operate directly or indirectlyany competitive business.  In addition,franchisees agree that after the end of the term or termination of thefranchise agreement, franchisees will not operate any competitive business fora period of one year and within a reasonable geographic area.  We will pursue enforcement of ournoncompetition clause vigorously; however, these noncompetition clauses are notenforceable in certain states or in all circumstances.

 

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

 

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***Renewalof the Franchise Relationship***

 

At the end of the 10-yearterm of each franchise agreement, each franchisee has the option to “renew” thefranchise relationship by signing a new 10-year franchise agreement.  If a franchisee chooses not to sign a newfranchise agreement, a franchisee must comply with all post terminationobligations including the franchisee’s noncompetition clause discussedabove.  This noncompetition clause maynot be enforceable in certain states or in all circumstances.  We may choose not to renew the franchiserelationship only when permitted by the franchise agreement and applicablestate law.

 

In 2009, 15 Play It AgainSports franchise agreements expired.  Ofthose franchise relationships, 15 were renewed with the signing of a new10-year franchise agreement.  In 2010,2011 and 2012, 25, 53 and 76 Play It Again Sports franchise agreements willexpire, respectively.

 

In 2009, 11 of ourPlato’s Closet franchise agreements expired. Of those franchise relationships, 11 were renewed with the signing of anew 10-year franchise agreement. In 2010, 2011 and 2012, 22, 23 and 30 Plato’sCloset franchise agreements will expire, respectively.

 

In 2009, 22 Once Upon A Child franchise agreementsexpired.  Of those franchise relationships,20 were renewed with the signing of a new 10-year franchise agreement.  In 2010, 2011 and 2012, 20, 7 and 3 Once UponA Child franchise agreements will expire, respectively.

 

In 2009, 4 Music Go Roundfranchise agreements expired. Of those franchise relationships, 4 were renewedwith the signing of a new 10-year franchise agreement.  In 2010, 2011 and 2012, 1, 0, and 0 Music GoRound franchise agreements will expire, respectively.

 

We believe that renewinga significant number of these franchise relationships is important to thesuccess of the Company.

 

***RetailFranchising Competition***

 

Retailing, including thesale of sporting goods, children’s and teenage apparel, and musicalinstruments, is highly competitive.  Manyretailers have substantially greater financial and other resources than wedo.  Our franchisees compete withestablished, locally owned retail stores, discount chains and traditionalretail stores for sales of new merchandise. Full line retailers generally carry little or no used merchandise.  Resale, thrift and consignment shops andgarage and rummage sales offer some competition to our franchisees for the saleof used merchandise.  Also, ourfranchisees increasingly compete with online used and new goods retailers suchas eBay, Harmony Central and many others. We are aware of, and compete with,one franchisor of stores which sells new and used sporting equipment, twofranchisors of stores which sell used and new children’s clothing, toys andaccessories and one franchisor of teen apparel stores.

 

Our Play It Again Sportsfranchisees compete with large retailers such as Dick’s Sporting Goods, TheSports Authority as well as regional and local sporting goods stores.  We also compete with Target  and Wal-Mart .

 

Our Plato’s Closetfranchise stores primarily compete with specialty apparel stores such as Gap,Abercrombie & Fitch, Old Navy, Banana Republic and The Limited.  We compete with one other franchisor in theteenage clothing retail market.

 

Our Once Upon A Childfranchisees compete primarily with large retailers such as Babies “R” Us,Wal-Mart, Target and various specialty children’s retail stores such as GapKids. We compete with one other franchisor in the specialty children’s retailmarket.

 

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Our Music Go Roundfranchise stores compete with large musical instrument retailers such as GuitarCenter and Sam Ash Music.  We do notbelieve we compete with any other franchisor directly in the used and newmusical instrument market.

 

Our retail franchises mayface additional competition in the future. This could include additional competitors that may enter the usedmerchandise market.  We believe that ourfranchisees will continue to be able to compete with other retailers based onthe strength of our value-oriented brands and the name recognition associatedwith our service marks.

 

We also face competitionin connection with the sale of franchises. Our prospective franchisees frequently evaluate other franchiseopportunities before purchasing a franchise from us.  We compete with other franchise companies forfranchisees based on the following factors, among others: amount of initialinvestment, franchise fee, royalty rate, profitability, franchisor services andindustry.  We believe that our franchisebrands are competitive with other franchises based on the fees we charge, ourfranchise support services and the performance of our existing franchise brands.

 

***WirthBusiness Credit Franchise System***

 

We franchise the right tooperate a small business equipment leasing and finance business under the brandWirth Business Credit.  Franchisees inthe Wirth Business Credit franchise system market and sell small businessequipment leasing and financing services offered by us.

 

*AttractingFranchisees*

 

Our franchise marketingprogram for Wirth Business Credit seeks to attract prospective franchisees witha desire to operate their own sales and marketing business who:

 

·                  have a sufficient net worth;

·                  have prior sales or small businessexperience; and

·                  intend to be integrally involved in theoperation of the franchise.

 

During 2009, we did notopen additional Wirth Business Credit territories, and we do not anticipateopening additional territories in 2010.

 

*FranchiseSupport*

 

As a franchisor of WirthBusiness Credit, our lease originations volume depends heavily on our abilityto support competitive and successful Wirth Business Credit franchisees.  We emphasize the following areas of franchisesupport and assistance in our Wirth Business Credit franchise system:

 

·                  Training;

·                  Marketing; and

·                  Ongoing Support.

 

*Training*

 

Each franchisee, alongwith any hired salespersons, must attend our training program prior tocommencing operations.  Soon aftersigning the franchise agreement, a Wirth Business Credit franchisee is requiredto participate in our training program. We begin with pre-training.  Atpre-training, we cover, among other topics, sales basics, owning your ownbusiness and valuation.  Our franchiseesnext come to our headquarters for a week-long training session.  This week-long training session covers thebasics of leasing, market orientation, lead generation, selling to vendors,owning your own business, business planning, credit basics, marketing, computerand software training and the nature of our franchise relationship.

 

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After the initial week oftraining, we continue to support our Wirth Business Credit franchisees.  We provide sales support to our franchiseesthrough a dedicated territory manager. The territory manager provides the opportunity for each franchisee towork together on monthly sales planning and analysis.

 

*Marketing*

 

We encourage ourfranchisees to implement a marketing program that includes one or more of thefollowing: direct mail, direct email, advertising in approved industry andbusiness publications, joining networking groups and telemarketing.  Franchisees are required to spend 4% of theircompensation on developing new customers in their local market area.  Franchisees may be required to participate inregional cooperative advertising groups.

 

*OngoingSupport*

 

In addition to receivingsupport from their territory manager, an operations manager supportsfranchisees by expediting the lease transaction process.  The operations manager ensures creditapplications are complete, interfaces with the credit department, managesvendor communications and documents transactions a Wirth Business Creditfranchisee submits.  We also provide anychanges to the franchise system to our franchisees as they are available.  We provide all updates to our OperationsManual to franchisees.  We continue todevelop marketing materials to assist franchisees in the generation offinancing transactions.

 

*Computerand Software*

 

We require ourfranchisees to use our proprietary computer system.  This computer system allows our franchiseesto submit and track leasing transactions. It also allows us to manage the lease transaction process.

 

*TheFranchise Agreement*

 

We enter into 10-yearfranchise agreements with our franchisees. The following is a summary of certain key provisions of our currentstandard franchise agreement.

 

Each franchisee mustexecute our franchise agreement and pay an initial franchise fee.  The Initial Franchise Fee for our standardmarket area is $35,000.  However,beginning in March 2008, we amended our “Pioneer Program,” which offers areduced initial franchise fee to prospective franchisees for their firstterritory and second territory.  ThePioneer Program reduces the initial franchise fee to $22,500 for the firstterritory.  In addition, $10,000 of the$22,500 fee is eligible for reimbursement from us if a franchisee spendsamounts on qualified marketing expenditures within 12 months of signing theFranchise Agreement.  For their secondterritory, the Initial Franchise Fee is $10,000, $5,000 of which is eligiblefor reimbursement from us if the franchisee spends amounts on qualifiedmarketing expenditures with 12 months of signing the Franchise Agreement.  Wirth may, at its discretion, award more thantwo territories at one time using the Pioneer Program.

 

Our franchisees pay nocontinuing fees in the form of royalty payments like the retail brandfranchisees.  Instead, a Wirth BusinessCredit franchisee’s compensation primarily depends on the profit a franchiseeadds to a transaction.  Franchisees arepaid monthly.

 

Our franchisees can onlyfund their transactions through us. During the term of a franchise agreement, franchisees agree not tooperate any competitive business directly or indirectly.  In addition, franchisees agree that after theend of the term or termination of the franchise agreement, franchisees will notoperate any competitive business for 18 months within a reasonable geographicarea.  We will pursue enforcement of ournon-competition clause vigorously; however, these non-competition clauses arenot enforceable in certain states or all circumstances.

 

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At the end of the term ofeach 10-year term of each Wirth Business Credit franchise agreement, eachfranchisee has the option to “renew” the franchise relationship by signing anew 10-year franchise agreement.  If afranchisee chooses not to sign a new franchise agreement, a franchisee mustcomply with all post termination obligations including the franchisee’snon-competition clause.  In 2009, none ofour Wirth Business Credit franchise agreements expired, and none will expire in2010, 2011 or 2012.

 

The small-ticket leasingindustry is very competitive.  Ourfranchisees compete directly with multiple financial institutions, many ofwhich have greater financial resources than us. We compete with various other franchise opportunities forfranchisees.  We are not aware of anyother companies offering similar franchising opportunities in the small-ticketfinancing industry.

 

# **Equipment Leasing Operations**

# ** **

We are engaged in thebusiness of providing non-cancelable leases for high-technology andbusiness-essential assets to both larger organizations and smaller, growingcompanies.  We started our equipmentleasing operations in April of 2004.

 

We operate ourmiddle-market leasing operation through Winmark Capital Corporation, a whollyowned subsidiary.  We operate oursmall-ticket financing operation through Wirth Business Credit, Inc., awholly owned subsidiary (formerly known as Winmark Business Solutions, Inc.).  We incorporated both of the corporations on April 2,2004.  To differentiate ourselves fromour competitors in the leasing industry, we offer innovative lease andfinancing products and concentrate on building long-term, relationship-basedassociations with our customers and business alliances.

 

**During the past three years, ourleasing operations have experienced moderate growth and improved financialresults.  Our leasing portfolio has grownfrom $18.3 million at the end of 2006 to $37.0 million at the end of 2009, andour operating losses from this segment have decreased from a loss of $3.3million in fiscal 2006 to a loss of $1.4 million in fiscal 2009.  Growth in the leasing portfolio during thisperiod primarily occurred during 2007, as the level of equipment purchases forlease contracts during 2008 and 2009 were impacted by the unfavorable generaleconomic environment as well as our decision during 2008 to tighten creditstandards in our small-ticket financing business in response to theseconditions.**

** **

***Winmark Capital Corporation***

** **

Winmark Capital Corporationfocuses on middle-market transactions that generally have terms from two tofive years.  We target businesses withannual revenue of $50 million or more. Such transactions are generally larger than $250,000 and includehigh-technology equipment and/or business essential equipment, includingcomputers, telecommunications equipment, point-of-sale systems and otherbusiness-essential equipment.  The leasesare retained in our portfolio to accommodate equipment additions and upgradesto meet customers’ changing needs.

 

# ***Industry***

# ** **

The high-technologyequipment industry has been characterized by rapid and continuous advancementspermitting broadened user applications and reductions in processing costs.  The introduction of new equipment generallydoes not cause existing equipment to become obsolete but usually does cause themarket value of existing equipment to decrease to reflect the improvedperformance per dollar cost of the new equipment.  Users frequently replace equipment as theirexisting equipment becomes inappropriate for their needs or as increased dataprocessing capacity is required, creating a secondary market in used equipment.

 

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Generally,high-technology equipment, such as data processing equipment, does not sufferfrom material physical deterioration if properly maintained.  Our leased equipment is kept under continualmaintenance, in accordance with the manufacturer’s specifications, most oftenprovided by the manufacturer.  Theeconomic life and residual value of data processing equipment is subject to,among other things, the development of technological improvements and changesin sale and maintenance terms initiated by the manufacturer.

 

# ***Business Strategy***

# ** **

Our business strategyallows us to differentiate ourselves from our competitors in the leasingindustry.  Key elements of this strategyinclude:

 

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

*·*                  Full Service.  We can service the equipment leasing needs oflarge organizations through our middle-market operations and smallorganizations through our small-ticket operations.  Our enterprise-wide capabilities allow us toservice the needs of a large company and its many small business affiliates.

*·*                  Asset Ownership.  We typically retain ownership of our leasesand the underlying equipment.

* *

# ***Leasing and Sales Activities***

 

Our middle-market leaseproducts are marketed nationally through our principal office in Minneapolis,Minnesota and our satellite offices in Atlanta, Georgia; Boulder, Colorado andSanta Barbara, California.

 

We market our leasingservices directly to end-users and indirectly through business alliances, andthrough vendors of equipment, software, value-added services and consultingservices.  We attend trade shows anddirectly market to customers and prospects by telephone canvassing.  We may also advertise in magazines or otherperiodicals in targeted industries.

 

We generally leasehigh-technology and other business-essential equipment for terms ranging fromtwo to five years.  Additionally, we maylease operating system and application software to our customers, but typicallyonly with a hardware lease.  Our standardlease agreements, entered into with each customer, are noncancelable “net”leases which contain “hell-or-high water” provisions under which the customer,upon acceptance of the equipment, must make all lease payments regardless ofany defects or performance of the equipment, and which require the customer tomaintain and service the equipment, insure the equipment against casualty lossand pay all property, sales and other taxes related to the equipment.  We retain ownership of the equipment we leaseand, in the event of default by the customer, we or the financial institutionto whom the lease payment has been assigned may declare the customer indefault, accelerate all lease payments due under the lease and pursue other availableremedies, including repossession of the equipment.  Upon expiration of the initial term orextended lease term, depending on the structure of the lease, the customer may:

 

*·*                  return the equipment to us;

*·*                  renew the lease for an additionalterm; or

*·*                  purchase the equipment.

* *

If the equipment isreturned to us, it will be either re-leased to another customer or sold intothe secondary-user marketplace.

 

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***Wirth BusinessCredit, Inc.***

 

Our small-ticketfinancing operation serves the needs of small businesses.  Small-ticket financing transactions aretypically between $5,000 and $250,000, have terms of between two and five yearsand cover business essential assets, including computers, printing equipment,security systems, telecommunications equipment, car wash equipment, productionequipment and other assets.  Small-ticketfinancing products are marketed under the trade name Wirth Business Creditthrough our network of Wirth Business Credit franchisees or directly throughour employed sales representatives.

 

#### *Industry*

####  

The small ticket financeindustry is highly fragmented and competitive. Small business owners typicallyfinance their businesses through one of many possible sources including banks,vendor captive finance companies, leasing brokers, credit card companies andindependent leasing companies.  Thesesources of funding typically limit their focus to certain types of transactionsand may base their decision on credit quality, geography, size of transaction,type of asset or other criteria.  Thesmall-ticket finance industry is very competitive, however, small business ownersdo not generally receive the same level of customer service as largerbusinesses do.  Small business ownersdesire products that are convenient, easy to understand, competitive and comefrom a trusted source.

 

The small ticketfinance industry has faced particularly unfavorable economic trends during thepast few years that have significantly impacted the financial viability andcredit quality of many small business owners. These circumstances have the effect of not only reducing the pool ofcredit worthy customers, but increasing the level of non-performing andunder-performing existing financing transactions of lending institutions andleasing companies.

 

#### *Business Strategy*

####  

Key elements of oursmall-ticket business strategy include:

 

*·*                  Local Presence.  Through a network of franchisees, WirthBusiness Credit maintains a local presence in its markets.

*·*                  Relationship Focus.  We maintain a focused, long-term,customer-service approach to our business. In our small-ticket segment, we establish relationships with companiesthat control or have influence over multiple smaller businesses such asfranchisors, equipment vendors and associations.

*·*                  Customer Service.   We understand that small business ownersdesire a convenient, flexible financing solution.  We provide fast credit decisions, flexible termsand an easy to understand process.

* *

#### *Leasing and Sales Activities*

####  

We originate financingtransactions through our Wirth Business Credit franchisees and territorymanagers employed by Wirth Business Credit, Inc.   We focus our sales efforts on establishingrelationships with organizations with influence over many small businesses suchas vendors, franchisors and trade associations.

 

As described above, wefranchise the right to operate small businesses under the name Wirth BusinessCredit.  Our franchisees in our WirthBusiness Credit franchise system are dedicated to originating equipment leaseand financing transactions.  Ourfranchisees build business relationships at the local level and also have thesupport and infrastructure of a national leasing company.

 

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We generally financebusiness-essential assets for terms ranging from two to five years.  Our financing transactions are generally fullpay out transactions, which means, after paying all required payments under thefinancing agreement, the customer owns the asset.

 

***Financing***

 

Ourability to arrange financing is important to our middle-market leasing and oursmall-ticket financing businesses.

 

Winmark CapitalCorporation will from time to time arrange permanent financing of leasesthrough non-recourse discounting of lease rentals with various financialinstitutions at fixed interest rates. The proceeds from the assignment of the lease rentals will be generallyequal to the present value of the remaining lease payments due under the lease,discounted at the interest rate charged by the financial institution.  Interest rates obtained under this type offinancing will be negotiated on a transaction-by-transaction basis and reflectthe financial strength of the customer, the term of the lease and theprevailing interest rates.  For leasesdiscounted on a non-recourse basis, the financial institution will have no recourseagainst us unless we are in default of the terms of the agreement under whichthe lease and the leased equipment will be assigned to the institution ascollateral.  The institution may,however, take title to the collateral in the event the customer fails to makelease payments or certain other defaults by the customer occur under the termsof the lease.

 

To date, we have fundedthe vast majority of our leases internally using our available cash, bank orsubordinated debt.  Leases are fundedinternally for a variety of reasons, including:

 

·                  we may have a sufficient amount of cashon hand;

·                  lease amounts are too small to beattractive to financial institutions;

·                  the credit strength of the customer isacceptable only for recourse funding; or

·                  when we intend to discount a lease butthe discounting process has not been completed.

 

We will rely on recoursebank facilities to fund both our middle-market and small-ticket portfolios**. **We currently have a$40 million line of credit with Bank of America, N.A. and The PrivateBank andTrust Company.  We may also use theproceeds from our offering of $50 million in principal of unsecuredsubordinated debt of varying interest rates and maturity dates filed on Form S-1to fund both our middle-market and small-ticket portfolios.  As of December 26, 2009, we had $21.2million outstanding in unsecured subordinated notes.

 

***EquipmentLeasing Competition***

 

We compete with a varietyof equipment financing sources that are available to businesses,including:  national, regional and localfinance companies that provide lease and loan products; financing throughcaptive finance and leasing companies affiliated with major equipmentmanufacturers; credit card companies; and commercial banks, savings and loans,and credit unions.  Many of thesecompanies are substantially larger than we are and have considerably greaterfinancial, technical and marketing resources than we do.

 

Some of our competitorshave a lower cost of funds and access to funding sources that are not availableto us.  A lower cost of funds couldenable a competitor to offer leases with yields that are much less than theyields that we use to price our leases, which might force us to lower ouryields or lose lease origination volume. In addition, certain of our competitors may have higher risk tolerancesor different risk assessments, which could enable them to establish moreorigination sources and end user customer relationships and increase theirmarket share.  We have and will continueto encounter significant competition.

 

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***GovernmentRegulation***

 

Fourteen states, theFederal Trade Commission and three Canadian Provinces impose pre-sale franchiseregistration and/or disclosure requirements on franchisors.  In addition, a number of states have statuteswhich regulate substantive aspects of the franchisor-franchisee relationship suchas termination, nonrenewal, transfer, discrimination among franchisees andcompetition with franchisees.

 

Additional legislation,both at the federal and state levels, could expand pre-sale disclosurerequirements, further regulate substantive aspects of the franchiserelationship and require us to file our Franchise Disclosure Documents withadditional states.  We cannot predict theeffect of future franchise legislation, but do not believe there is anyimminent legislation currently under consideration which would have a materialadverse impact on our operations.

 

Although most states donot directly regulate the commercial equipment lease financing business,certain states require licensing of lenders and finance companies, and imposelimitations on interest rates and other charges, and a disclosure of certaincontract terms and constrain collection practices.   We believe that we are currently incompliance with all material statutes and regulations that are applicable toour business.

 

# **Trademarks and Service Marks**

# ** **

Play It Again Sports®, Plato’sCloset®, Once Upon A Child®, Music Go Round®, Winmark®, Winmark BusinessSolutions®, Wirth Business Credit®, Winmark Capital® and LeaseManager®, amongothers, are our registered service marks. These marks are of considerable value to our business.  We intend to protect our service marks byappropriate legal action where and when necessary.  Each service mark registration must berenewed every 10 years.  We have taken,and intend to continue to take, all steps necessary to renew the registrationof all our material service marks.

 

# **Seasonality**

# ** **

Our Play It Again Sportsand Music Go Round franchise brands have experienced higher than average salesvolumes during the holiday shopping season. Our Plato’s Closet and Once Upon A Child franchise brands have experiencedhigher than average sales volumes during the spring months and, along with ourMusic Go Round brand, also during the back to school season.  Overall, the different seasonal trends of ourbrands partially offset each other and do not result in significant seasonalitytrends on a Company-wide basis.  Ourequipment leasing business is not seasonal; however, quarter to quarter resultsmay vary significantly.

 

# **Employees**

# ** **

As of December 26,2009, we employed 106 full-time employees, of which 15 were salespersons, 60were support personnel and 31 were administrative.

 

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**ITEM1A: RISK FACTORS**

 

*We are dependent on franchise renewals.*

 

Each of our franchiseagreements is 10 years long.  At the endof the term of each franchise agreement, each franchisee has the option to“renew” the franchise relationship by signing a new 10-year franchise agreement.  In 2009, of the 15 franchisees that had theirPlay It Again Sports franchise agreement expire, 15 signed new 10-yearfranchise agreements.  In 2010, 2011 and2012, 25, 53 and 76 Play It Again Sports franchise agreements will expire,respectively.  In 2009, of the 11 franchisesthat had Plato’s Closet franchise agreements expire, 11 signed new 10-yearfranchise agreements.  In 2010, 2011 and2012, 22, 23 and 30 Plato’s Closet franchise agreements will expire,respectively.  In 2009, of the 22franchisees that had their Once Upon A Child franchise agreement expire, 20signed new 10-year franchise agreements. In 2010, 2011 and 2012, 20, 7 and 3Once Upon A Child franchise agreements will expire, respectively.  In 2009, of the 4 franchisees that had MusicGo Round franchise agreement expire, 4 signed new 10-year franchiseagreements.  In 2010, 2011 and 2012, 1, 0and 0 Music Go Round franchise agreements will expire, respectively.  We believe that renewing a significant numberof these franchise relationships is important to our continued success.  If a significant number of franchiserelationships are not renewed our financial performance would be materially andadversely impacted.

 

*We are dependent on new franchisees.*

 

Our ability to generate increased revenueand achieve higher levels of profitability depends in part on increasing thenumber of franchises open.  While we believe that many larger and smallermarkets will continue to provide significant opportunities for sales offranchises, continuing unfavorable macro-economic conditions may affect theability of potential franchisees to obtain external financing and/or impacttheir net worth, both of which could lead to a lower level of openings than wehave historically experienced.  There canbe no assurance that we will sustain our current level of franchise openings.

 

*We are dependentupon our chief executive officer.*

 

Our success depends on the efforts andabilities of John L. Morgan, our chairman of the board and chief executiveofficer.  The loss of the services of Mr. Morgancould materially harm our business.  Sucha loss would also divert management attention away from operational issues.

 

*We may sell franchises for a territory, but the franchisee may notopen.*

 

We believe that a substantial majority offranchises sold but not opened will open within the time period permitted bythe applicable franchise agreement or we will be able to resell the territoriesfor most of the terminated or expired franchises.  However, there can beno assurance that substantially all of the currently sold but unopenedfranchises will open and commence paying royalties to us.  At December 26,2009, we had 46 franchise agreements expected to open in 2010.

 

*Our retail franchisees are dependent on supply of used merchandise.*

 

Our retail brands are based on offeringcustomers a mix of used and new merchandise.  As a result, the ability ofour franchisees to obtain continuing supplies of high quality used merchandiseis important to the success of our brands.  Supply of used merchandisecomes from the general public and is not regular or highly reliable. Inaddition, adherence to federal and state product safety requirements may limitthe amount of used merchandise available to our franchisees. There can be noassurance that our franchisees will avoid supply problems with respect to usedmerchandise.

 

*We may be unable to collect accounts receivable from franchisees.*

 

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

 

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*We operate in extremely competitive industries.*

 

Retailing, including the sale of sportinggoods, children’s and teenage apparel and musical instruments, is highlycompetitive.  Many retailers have significantly greater financial andother resources than us and our franchisees.  Individual franchisees facecompetition in their markets from retailers of new merchandise and, in certaininstances, resale, thrift and other stores that sell used merchandise.  Todate, our franchisees have not faced a high degree of competition in the saleof used merchandise, but do so in connection with the sale of newmerchandise.  However, we may face additional competition as our franchisesystems expand and if additional competitors enter the used merchandise market.

 

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

 

*We are subject to credit riskfrom nonpayment or slow payments in our lease portfolio and our allowance forcredit losses may be inadequate to absorb losses.*

 

In our leasing business,if we inaccurately assess the creditworthiness of our customers, we mayexperience a higher number of lease defaults than expected, which would reduceour earnings.  For our smaller customers,there is typically only limited publicly available financial and otherinformation about their businesses and they often do not have audited financialstatements.  Accordingly, in making creditdecisions, we rely upon the accuracy of information from the small businessowner and/or third party sources, such as credit reporting agencies. If theinformation we obtain from small business owners and/or third party sources isincorrect, our ability to make appropriate credit decisions will be impaired.

 

If losses from leasesexceed our allowance for credit losses, our operating income will bereduced.  In connection with our leases,we record an allowance for credit losses to provide for estimated losses.  Determining the appropriate level of theallowance is an inherently uncertain process and therefore our determination ofthis allowance may prove to be inadequate to cover losses in connection withour portfolio of leases.  Losses in excess of our allowance for creditlosses would cause us to increase our provision for credit losses, reducing oreliminating our operating income.

 

During 2009, ourprovision for credit losses increased to $2.8 million from $2.6 million in 2008and $0.6 million in 2007, primarily due to a higher level of net charge-offs inthe small-ticket financing business portion of our leasing segment, as well asan increase in our allowance for credit losses due to the worsening generaleconomic trends that have increased the level of delinquencies in thisbusiness. During 2009, we had total net charge-offs of $3.0 million compared to$1.6 million in 2008 and $0.4 million in 2007. Continued charge-offs at these levels or higher would have a materialadverse impact on our results of operations and financial condition.

 

*Deterioratedeconomic or business conditions may negatively impact our leasing business.*

 

In an economic slowdownor recession, our equipment leasing businesses may face an increase indelinquent payments, lease defaults and credit losses.  The volume of leasing business for our newand existing customers may decline, as well as the credit quality of ourcustomers.  Because we extend creditprimarily to small businesses through our subsidiary Wirth Business Credit, Inc.,and to many emerging companies through our subsidiary Winmark CapitalCorporation, our customers may be particularly susceptible to economicslowdowns or recessions.  Any protractedeconomic slowdowns or recessions may make it difficult for us to maintain thevolume of lease originations for new and existing customers, and maydeteriorate the credit quality of new leases.  Any of these events may slow the growth of our leasing portfolio andimpact the profitability of our leasing operations.

 

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*We must control our selling, general and administrative expense to besuccessful.*

 

Our ability to control the amount, and rateof growth in, selling, general and administrative expenses and the impact ofunusual items resulting from our ongoing evaluation of our business strategies,asset valuations and organizational structures is important to our financialsuccess.  In the near term, our leasingincome may not exceed our expenses.  We cannot assure any investor that wewill be able to control such items of expense.

 

*We have suffered losses from investments outside of our franchise andleasing businesses and may continue to suffer losses in the future*

 

We currently have investments in twoprivate companies.  We have purchased18.3% of the common stock of Tomsten, Inc., a privately held corporation(d/b/a Archiver’s).  Archiver’s is aretail concept created to help people preserve and enjoy their photographs. Inaddition, we currently have an investment of subordinated debt with warrants inBridgeFunds Limited (“BridgeFunds”). BridgeFunds advances funds to claimantsinvolved in civil litigation to cover litigation expenses.

 

Since the inception of our investment in2002, Archiver’s has incurred over $13.3 million in losses.  As of December 26, 2009, the carryingvalue of our $7.5 million investment equaled $2.2 million. If Archiver’scontinues to sustain losses, it may need to seek external financingin the form of equity and/or debt.  There can be no assurance that Archiver’s will be able to obtainadditional financing.  Any continuedlosses or inability to obtain financing on attractive terms may result in afurther impairment of the carrying value of our investment and a reduction inour book value and profitability.  Also,there is not a market for the equity of Archiver’s and our ability to receiveour investment back and realize a cash return on our investment in these companieswill  depend on the development of amarket for Archiver’s equity or the sale of Archiver’s.

 

During 2009, the board ofBridgeFunds decided to cease advancing funds to new claimants and place itsportfolio of receivables in run-off.  On October 22,2009, we entered into a modification agreement with BridgeFunds, whereby thematurity date of our investment was changed to September 30, 2010, theannual rate of interest on the notes was increased to 15% and monthlyprepayments of the principal of such notes in an amount equal to Available CashFlow (as defined within the modification agreement) is required.  We have not received any payments ofprincipal or interest since the date of the modification agreement.  Our ability to receive our investment backand realize a cash return on our investment in Bridge Funds will depend on thesuccessful run-off of the BridgeFunds portfolio. In addition, the warrant wehold in BridgeFunds may be of no value.

 

The loss of our entire investment in anyone or both of these investments would have a material adverse impact on ourfinancial results.

 

From time to time, we have and willcontinue to make investments outside of our franchise and leasingbusinesses.  There can be no assurancethat such investments will be profitable.

 

***We are subject to restrictions in our credit facility and oursubordinated note indenture. Additionally, we are subject to counterparty risk in our creditfacility.***

** **

The terms of our $40.0million credit facility with Bank of America and The PrivateBank impose certainoperating and financial restrictions on us and require us to meet certainfinancial tests including tests related to minimum levels of debt servicecoverage and tangible net worth and maximum levels of leverage.  The terms of the indenture governing our$50.0 million subordinated note offering contain limited restrictive covenants,which include requiring us to maintain a positive net worth.  As of December 26, 2009, we were incompliance with all of our financial covenants; however, failure to comply withthese covenants in the future may result in default under one or both of thesesources of capital and could result in acceleration of the relatedindebtedness.  Any such acceleration ofindebtedness would have an adverse impact on our business activities andfinancial condition.

 

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Recent events in theworldwide credit markets have had an adverse impact on the general availabilityof credit.  Although our credit facilitydoes not expire until June 2013, continued market deterioration couldjeopardize the counterparty obligations of one or both of the banksparticipating in this facility, which could have an adverse impact on ourbusiness if we are not able to replace such credit facility or find othersources of liquidity on acceptable terms.

 

*We are subject to government regulation.*

 

As a franchisor, we aresubject to various federal and state franchise laws and regulations. Fourteen states, the Federal Trade Commission and three Canadian Provincesimpose pre-sale franchise registration and/or disclosure requirements onfranchisors.  In addition, a number ofstates have statutes which regulate substantive aspects of thefranchisor-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 disclosurerequirements, further regulate substantive aspects of the franchise relationshipand require us to file our franchise offering circulars with additionalstates.  Future franchise legislationcould impose costs or other burdens on us that could have a material adverseimpact on our operations.

 

Although most states donot directly regulate the commercial equipment lease financing business,certain states require licensing of lenders and finance companies, imposelimitations on interest rates and other charges, constrain collection practicesand require disclosure of certain contract terms.  Laws or regulations may be adopted withrespect to our equipment leases or the equipment leasing industry, andcollection processes. Any new legislation or regulation, or changes in theinterpretation of existing laws, which affect the equipment leasing industrycould increase our costs of compliance.

 

## **ITEM 2: PROPERTIES**

## ** **

We lease 33,513 squarefeet at our headquarters facility in Minneapolis, Minnesota, under a lease thatcommenced in March 2009.  Weare obligated to pay rent monthly under the Lease, and will pay an estimated$5.1 million in total rental payments over the entire term of the Lease whichruns ten years and six months from the commencement date.  We are also obligated to pay Landlord’sestimated taxes and operating expenses as described in the Lease, which changeannually.  The total rentals, taxes andoperating expenses paid may increase if we exercise any of our rights toacquire additional space described in the Lease.

 

## **ITEM 3: LEGAL PROCEEDINGS**

## ** **

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

 

## **ITEM 4: RESERVED**

 

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**PART II**

 

## **ITEM 5:  MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

# **Market Information, Holders, Dividends**

# ** **

Winmark Corporation’s common stock trades on theNasdaq Global Market under the symbol “WINA”. The table below sets forth the high and low sales prices of our commonstock as reported by Nasdaq for the quarterly periods indicated:

 
| **FY  2009:** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|---------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| High          |       | 13.99     |       | 17.14      |       | 21.95     |       | 23.00      |       |
| Low           |       | 8.20      |       | 9.50       |       | 16.02     |       | 19.87      |       |

 
| **FY  2008:** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|---------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| High          |       | 22.47     |       | 19.99      |       | 19.49     |       | 18.49      |       |
| Low           |       | 17.00     |       | 16.12      |       | 13.60     |       | 10.28      |       |

 

At March 8, 2010,there were 5,122,233 shares of common stock outstanding held by approximately114 shareholders of record.  Shareholdersof record do not include holders who beneficially own common stock held innominee or “street name”.  We have notdeclared any cash dividends on our common stock during the two most recentfiscal years.  Any future declaration ofdividends will be subject to the discretion of our Board of Directors andsubject to our results of operations, financial condition, cash requirementsand other factors deemed relevant by our Board of Directors.

 

**Purchases of Equity Securities bythe Issuer and Affiliated Purchasers**

 
| ** **                                        | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of a Publicly  Announced Plan(1)** | ** ** | **Maximum Number  of Shares that may  yet be Purchased  Under the Plan(2)** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
|                                              |       |                                  |       |                              |       |                                                                                 |       |                                                                        |       |
| December 28,  2008 to January 31, 2009  |       | 33,795                                |       | $                                 | 11.94      |                                                                                 | 33,795     |                                                                        | 40,746     |   |
| February 1,  2009 to February 28, 2009  |       | 7,424                                 |       | 10.27                             |       | 7,424                                                                                |       | 533,322                                                                     |       |
| March 1,  2009 to March 28, 2009        |       | 46,722                                |       | 9.12                              |       | 46,722                                                                               |       | 486,600                                                                     |       |
| March 29,  2009 to May 2, 2009          |       | 13,676                                |       | 12.25                             |       | 13,676                                                                               |       | 472,924                                                                     |       |
| May 3,  2009 to May 30, 2009            |       | 16,813                                |       | 13.28                             |       | 16,813                                                                               |       | 456,111                                                                     |       |
| May 31,  2009 to June 27, 2009          |       | 12,591                                |       | 15.24                             |       | 12,591                                                                               |       | 443,520                                                                     |       |
| June 28,  2009 to August 1, 2009        |       | 14,465                                |       | 17.70                             |       | 14,465                                                                               |       | 429,055                                                                     |       |
| August 2,  2009 to August 29, 2009      |       | 25,937                                |       | 19.27                             |       | 25,937                                                                               |       | 403,118                                                                     |       |
| August 30,  2009 to September 26, 2009  |       | 11,903                                |       | 20.90                             |       | 11,903                                                                               |       | 391,215                                                                     |       |
| September 27,  2009 to October 31, 2009 |       | 35,173                                |       | 20.83                             |       | 35,173                                                                               |       | 356,042                                                                     |       |
| November 1,  2009 to November 28, 2009  |       | 25,086                                |       | 21.89                             |       | 25,086                                                                               |       | 330,956                                                                     |       |
| November 29,  2009 to December 26, 2009 |       | 70,000                                |       | 21.55                             |       | 70,000                                                                               |       | 260,956                                                                     |       |
| Total                                             |       | 313,585                               |       | $                                 | 16.85      |                                                                                 | 313,585    |                                                                        | 260,956    |   |

 

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(1)          The Board of Directors’ authorization forthe repurchase of shares of the Company’s common stock was originally approvedin 1995 with no expiration date.  Thetotal shares approved for repurchase has been increased by additional Board ofDirectors’ approvals and as of December 26, 2009 was limited to 4,500,000shares, of which 260,956 may still be repurchased.

 

(2)          On February 26, 2009, the Board ofDirectors authorized a 500,000 share repurchase.

 

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**ITEM 6:  SELECTED FINANCIAL DATA**

 

The followingtable sets forth selected financial information for the periods indicated.  The information should be read in conjunctionwith the consolidated financial statements and related notes discussed in Item8 and 15, and Management’s Discussion and Analysis of Financial Condition andResults of Operations discussed in Item 7.

 
|                                           |       |                                     |       |                        |       |                        |       |                           |       |                           |       |   |   |   |   |   |
|------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------|--------|--------|--------|--------|
| ** **                                     | ** ** | **Fiscal Year Ended**                    | ** ** |
| ** **                                     | ** ** | **(in thousands except per share data)** | ** ** |
| ** **                                     | ** ** | **December 26,  2009**              | ** ** | **December 27,  2008** | ** ** | **December 29,  2007** | ** ** | **December 30,  2006(2)** | ** ** | **December 31,  2005(2)** | ** ** |
| **Revenue:**                                   |       |                                     |       |                        |       |                        |       |                           |       |                           |       |
| Royalties                                      |       | $                                        | 23,616     |                        | $          | 21,804                      |       | $                              | 20,447     |                           | $          | 19,212 |   | $      | 17,875 |   |
| Leasing  income                                |       | 9,537                                    |       | 8,093                       |       | 4,416                       |       | 1,853                          |       | 437                            |       |
| Merchandise  sales                             |       | 2,387                                    |       | 3,268                       |       | 3,999                       |       | 4,469                          |       | 6,655                          |       |
| Franchise  fees                                |       | 1,073                                    |       | 1,705                       |       | 1,724                       |       | 1,246                          |       | 1,052                          |       |
| Other                                          |       | 683                                      |       | 554                         |       | 579                         |       | 591                            |       | 581                            |       |
| Total  revenue                                 |       | 37,296                                   |       | 35,424                      |       | 31,165                      |       | 27,371                         |       | 26,600                         |       |
| Cost  of merchandise sold                      |       | 2,290                                    |       | 3,121                       |       | 3,837                       |       | 4,283                          |       | 5,506                          |       |
| Leasing  expense                               |       | 2,288                                    |       | 1,882                       |       | 1,031                       |       | 227                            |       | 7                              |       |
| Provision  for credit losses                   |       | 2,796                                    |       | 2,570                       |       | 604                         |       | 341                            |       | 90                             |       |
| Selling,  general and administrative expenses  |       | 19,142                                   |       | 19,760                      |       | 19,267                      |       | 17,158                         |       | 16,503                         |       |
| Income  from operations                        |       | 10,780                                   |       | 8,091                       |       | 6,426                       |       | 5,362                          |       | 4,494                          |       |
| Gain  (loss) from equity investments(1)        |       | (100                                     | )          | (3,163                      | )          | (359                        | )          | 117                            |       | (1,419                         | )          |
| Interest  expense                              |       | (1,309                                   | )          | (1,305                      | )          | (1,457                      | )          | (729                           | )          | —                         |       |
| Interest  and other income                     |       | 459                                      |       | 224                         |       | 539                         |       | 867                            |       | 330                            |       |
| Income  before income taxes                    |       | 9,830                                    |       | 3,847                       |       | 5,149                       |       | 5,617                          |       | 3,405                          |       |
| Provision  for income taxes                    |       | 3,981                                    |       | 2,708                       |       | 2,104                       |       | 2,279                          |       | 1,555                          |       |
| Net  income                                    |       | $                                        | 5,849      |                        | $          | 1,139                       |       | $                              | 3,045      |                           | $          | 3,338  |   | $      | 1,850  |   |
|                                           |       |                                     |       |                        |       |                        |       |                           |       |                           |       |
| Earnings  per common share - diluted           |       | $                                        | 1.10       |                        | $          | .21                         |       | $                              | .54        |                           | $          | .56    |   | $      | .29    |   |
| Weighted  average shares outstanding - diluted |       | 5,338                                    |       | 5,531                       |       | 5,591                       |       | 6,007                          |       | 6,358                          |       |
| **Balance Sheet Data:**                        |       |                                     |       |                        |       |                        |       |                           |       |                           |       |
| Working  capital                               |       | $                                        | 12,556     |                        | $          | 6,164                       |       | $                              | (598       | )                              | $          | 2,297  |   | $      | 4,776  |   |
| Total  assets                                  |       | 56,805                                   |       | 58,110                      |       | 56,947                      |       | 36,012                         |       | 25,038                         |       |
| Total  debt                                    |       | 30,508                                   |       | 34,431                      |       | 37,261                      |       | 15,978                         |       | —                         |       |
| Shareholders’  equity                     |       | 15,329                                   |       | 13,891                      |       | 12,669                      |       | 14,161                         |       | 20,776                         |       |
| **Selected Financial Ratios:**                 |       |                                     |       |                        |       |                        |       |                           |       |                           |       |
| Return  on average assets                      |       | 10.2                                     | %          | 2.0                         | %          | 6.6                         | %          | 10.9                           | %          | 7.6                            | %          |
| Return  on average equity                      |       | 40.0                                     | %          | 8.6                         | %          | 22.7                        | %          | 19.1                           | %          | 9.0                            | %          |

 

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(1)          Included in gain (loss) from equityinvestments is a $2,839,100 impairment charge for the partial write off of theCompany’s investment in Tomsten, Inc. in 2008 and a $937,600 impairmentcharge for the write off of the Company’s investment in eFrame, LLC in 2005.

 

(2)          In accordance with GAAP, prior periodsare presented assuming the Company had used the equity method of accountingsince the inception of the Company’s investment in Tomsten, Inc.  Prior to 2007, the Company had accounted forits investment in Tomsten, Inc. under the cost method

 

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**ITEM 7:  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Overview

 

As of December 26,2009, we had 914 franchises operating under the Play it Again Sports, Plato’sCloset, Once Upon a Child, Music Go Round and Wirth Business Credit brands andhad a leasing portfolio of $37.0 million. Management closely tracks the following criteria to evaluate currentbusiness operations and future prospects: franchising revenue, leasing activity,and selling, general and administrative expenses.

 

Our most profitablesources of franchising revenue are royalties earned from our franchise partnersand franchise fees for new openings and transfers.  During 2009, our royalties increased$1,812,000 or 8.3% compared to 2008.  Franchise feesdecreased $631,600 or 37.1% compared to last year.

 

During 2009, we purchased $15.5 million in equipmentfor lease contracts compared to $21.9 million in 2008.  The level of equipment purchases for leasecontracts continued to be impacted by the unfavorable general economicenvironment as well as our decision during 2008 to tighten credit standards inour small-ticket financing business in response to these conditions.  Overall, our leasing portfolio (net investmentin leases — current and long-term) decreased 18.5% to $37.0 million at December 26,2009 from $45.4 million at December 27, 2008.  Leasing income in 2009 was $9.5 millioncompared to $8.1 million in the same period last year, an increase of17.8%.  Our earnings are also impacted bycredit losses.  During 2009, ourprovision for credit losses increased to $2.8 million from $2.6 million in2008, as we continued to experience a higher level of net write-offs and delinquencies,primarily in the small-ticket financing business portion of our leasingsegment.

 

Managementcontinually monitors the level and timing of selling, general andadministrative expenses.  The majorcomponents of selling, general and administrative expenses include salaries,wages and benefits,advertising, travel, occupancy, legal and professional fees.  During 2009, selling, general andadministrative expense decreased $618,500, or 3.1%, compared to the same periodlast year.

 

Management also monitorsseveral nonfinancial factors in evaluating the current business operations andfuture prospects including franchise openings and closings and franchiserenewals.  The following is a summary ofour franchising activity for the fiscal year ended December 26, 2009:

 
| ** **                    | ** ** | **TOTAL  12/27/08** | ** ** | **OPENED** | ** ** | **CLOSED** | ** ** | **TOTAL  12/26/09** | ** ** | **AVAILABLE  FOR  RENEWAL** | ** ** | **COMPLETED  RENEWALS** | ** ** | **%  RENEWED** | ** ** |
|-------------------------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|-----------------------------|------------|-------------------------|------------|----------------|------------|
| Play  It Again Sports         |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US and Canada   |       | 364                 |       | 6          |       | (29        | )          | 341                 |       | 15                          |       | 15                      |       | 100            | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Plato’s  Closet          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US and Canada   |       | 241                 |       | 30         |       | (4         | )          | 267                 |       | 11                          |       | 11                      |       | 100            | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Once  Upon A Child            |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US and Canada   |       | 229                 |       | 13         |       | (7         | )          | 235                 |       | 22                          |       | 20                      |       | 91             | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Music  Go Round               |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Franchises  - US              |       | 36                  |       | 0          |       | (2         | )          | 34                  |       | 4                           |       | 4                       |       | 100            | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Total  Franchised Stores      |       | 870                 |       | 49         |       | (42        | )          | 877                 |       | 52                          |       | 50                      |       | 96             | %          |
|                          |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Wirth  Business Credit        |       |                |       |       |       |       |       |                |       |                        |       |                    |       |           |       |
| Territories  - US             |       | 54                  |       | 0          |       | (17        | )          | 37                  |       | —                      |       | —                  |       | N/A            |       |
| Total  Franchises/Territories |       | 924                 |       | 49         |       | (59        | )          | 914                 |       | 52                          |       | 50                      |       | 96             | %          |

 

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Renewal activity is a key focus area formanagement.  Our franchisees sign 10-yearagreements with us.  The renewal ofexisting franchise agreements as they approach their expiration is an indicatorthat management monitors to determine the health of our business and thepreservation of future royalties.  In2009, we renewed 96% of franchise agreements up for renewal.  This percentage of renewal has ranged between96% and 100% during the last three years.

 

Our ability to grow our profits isdependent on our ability to: (i) effectively support our franchisepartners so that they produce higher revenues, (ii) open new franchises, (iii) increaselease originations and minimize write-offs in our leasing portfolios, and (iv) controlour selling, general and administrative expenses.  A detailed description of the risks to ourbusiness along with other risk factors can be found in Item 1A “Risk Factors”.

 

***Resultsof Operations***

 

The following table setsforth selected information from our Consolidated Statements of Operationsexpressed as a percentage of total revenue and the percentage change in thedollar amounts from the prior period:

 
| ** **                                    | ** ** | **Fiscal Year Ended**      | ** ** | **Fiscal 2009**            | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** | **over (under) 2008** | ** ** |
| Revenue:                                      |       |                       |       |                       |       |   |   |
| Royalties                                     |       | 63.3                       | %          | 61.6                       | %          | 8.3 | % |
| Leasing  income                               |       | 25.6                       |       | 22.8                       |       | 17.8 |   |
| Merchandise  sales                            |       | 6.4                        |       | 9.2                        |       | (27.0 | ) |
| Franchise  fees                               |       | 2.9                        |       | 4.8                        |       | (37.1 | ) |
| Other                                         |       | 1.8                        |       | 1.6                        |       | 23.3 |   |
| Total  revenue                                |       | 100.0                      |       | 100.0                      |       | 5.3 |   |
|                                          |       |                       |       |                       |       |   |   |
| Cost  of merchandise sold                     |       | (6.2                       | )          | (8.8                       | )          | (26.6 | ) |
| Lease  expense                                |       | (6.1                       | )          | (5.3                       | )          | 21.6 |   |
| Provision  for credit losses                  |       | (7.5                       | )          | (7.3                       | )          | 8.8 |   |
| Selling,  general and administrative expenses |       | (51.3                      | )          | (55.8                      | )          | (3.1 | ) |
| Income  from operations                       |       | 28.9                       |       | 22.8                       |       | 33.2 |   |
| Loss  from equity investments                 |       | (0.2                       | )          | (8.9                       | )          | (96.8 | ) |
| Interest  expense                             |       | (3.5                       | )          | (3.7                       | )          | 0.3 |   |
| Interest  and other income                    |       | 1.2                        |       | 0.7                        |       | 104.5 |   |
| Income  before income taxes                   |       | 26.4                       |       | 10.9                       |       | 155.5 |   |
| Provision  for income taxes                   |       | (10.7                      | )          | (7.7                       | )          | 47.0 |   |
| Net  income                                   |       | 15.7                       | %          | 3.2                        | %          | 413.3 | % |

 

***Revenue***

 

Revenues for the yearended December 26, 2009 totaled $37.3 million compared to $35.4 millionfor the comparable period in 2008.

 

*Royalties and Franchise Fees*

 

Royalties increased to$23.6 million for 2009 from $21.8 million for the same period in 2008, a 8.3%increase.  The increase was due to higherPlato’s Closet and Once Upon A Child royalties of $1,687,400 and $732,900,respectively, partially offset by lower Play It Again Sports royalties of $582,700.  The increase in Plato’s Closet and Once UponA Child royalties is primarily due to having 26 additional Plato’s Closet and 6additional Once Upon A Child franchise stores in 2009 compared to the sameperiod last year and higher franchisee retail sales in both brands.

 

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Franchise fees includeinitial franchise fees from the sale of new franchises and transfer feesrelated to the transfer of existing franchises. Franchise fee revenue is recognized when the franchise opens or when thefranchise agreement is assigned to a buyer of a franchise.  An overview of retail brand and WirthBusiness Credit franchise fees is presented in the Franchising subsection ofthe Business section.  Franchise feesdecreased to $1,072,900 for 2009 from $1,704,500 for 2008 primarily as a resultof opening 31 fewer franchise territories in 2009 compared to 2008.

 

*Leasing Income*

 

**Leasingincome increased to $9,536,900 in 2009 compared to $8,092,800 for the sameperiod in 2008, a 17.8% increase.  Theincrease is primarily due to the classification of certain leases as sales-typeleases in accordance with Financial Accounting Standards Board (FASB)Accounting Standards Codification Topic (ASC) 840, *Leases,*as well as increased sales of equipment.**

** **

***Merchandise Sales***

*** ***

Merchandise sales includethe sale of product to franchisees either through the Play It Again Sportsbuying group, or through our Computer Support Center (together, “DirectFranchisee Sales”).  Direct FranchiseeSales decreased 27.0% to $2,386,700 in 2009 from $3,268,100 in 2008.  This is a result of management’s strategicdecision to have more franchisees purchase merchandise directly from vendorsand having 23 fewer Play It Again Sports stores open than one year ago.

 

***Costof Merchandise Sold***

 

Cost of merchandise soldincludes in-bound freight and the cost of merchandise associated with DirectFranchisee Sales.  Cost of merchandisesold decreased 26.6% to $2,290,200 in 2009 from $3,120,700 in 2008.  The decrease was primarily due to a decreasein Direct Franchisee Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for2009 and 2008 was 96.0% and 95.5%, respectively.

 

***LeasingExpense***

 

Leasing expense increasedto $2,288,200 in 2009 compared to $1,881,800 in 2008.  The increase is primarily due to theclassification of certain leases as sales-type leases in accordance with ASC840 as well as the associated cost of increased equipment sales discussedabove.

 

***Provisionfor Credit Losses***

 

Provision for creditlosses increased to $2,795,500 in 2009 compared to $2,569,800 in 2008.  The increase is primarily due to a higherlevel of net write-offs and delinquencies, primarily in the small-ticketfinancing business portion of our leasing segment.  During 2009, we had total net write-offs of$2,995,000 compared to $1,644,700 in 2008.

 

***Selling,General and Administrative Expenses***

 

The$618,500, or 3.1%, decrease in selling, general and administrative expenses in2009 compared to the same period in 2008 is primarily due to a decrease inadvertising expenses.

 

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***Lossfrom Equity Investments***

 

During 2009 and 2008, werecorded losses of $100,500 and $324,100, respectively, from our investment inTomsten (representing our pro-rata share of losses for the periods).  In addition, as part of an impairmentanalysis during 2008 we determined that the carrying value of our investmentwas not expected to be fully recoverable from the future cash flows of thethen-current Tomsten business and we recorded an impairment charge of$2,839,100.  (See Item 1A “Risk Factors”as well as Note 3 — “Investments”).

 

***Interestand Other Income***

 

During 2009, we hadinterest and other income of $459,300 compared to $224,600 of interest andother income in 2008.  The increase isprimarily due to foreign currency transaction losses incurred in 2008.  (See Item 7A “Quantitative and QualitativeDisclosures About Market Risk”).

 

***IncomeTaxes***

 

The provision for incometaxes was calculated at an effective rate of 40.5% and 70.4% for 2009 and 2008,respectively.  The higher effective ratein 2008 compared to 2009 reflects our recording of a $1.2 million deferred taxasset valuation allowance for losses from and impairment of our investment inTomsten in 2008, partially offset by an adjustment to uncertain tax positionsof $127,300 in 2008.

 

**SegmentComparison of the Year Ended December 26, 2009 to**

**YearEnded December 27, 2008**

 

We currently have tworeportable business segments, franchising and leasing.  The franchising segment franchisesvalue-oriented retail store concepts that buy, sell, trade and consignmerchandise and Wirth Business Credit, Inc., our small-ticket leasingfranchise.  The leasing segment includes (i) WinmarkCapital Corporation, our middle-market equipment leasing business and (ii) WirthBusiness Credit, Inc., our small-ticket financing business.  Segment reporting is intended to givefinancial statement users a better view of how we manage and evaluate ourbusinesses.  Our internal managementreporting is the basis for the information disclosed for our business segmentsand includes allocation of shared-service costs.  The following tables summarize financialinformation by segment and provide a reconciliation of segment contribution tooperating income:

 
| ** **                            | ** ** | **Year Ended**             | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| Revenue:                              |       |                       |       |   |   |
| Franchising                           |       | $                          | 27,748,300 |   | $ | 27,330,800 |   |
| Leasing                               |       | 9,547,700                  |       | 8,092,800 |   |
| Total  revenue                        |       | $                          | 37,296,000 |   | $ | 35,423,600 |   |
|                                  |       |                       |       |   |   |
| Reconciliation  to operating income:  |       |                       |       |   |   |
| Franchising  segment operating income |       | $                          | 12,205,600 |   | $ | 10,019,500 |   |
| Leasing  segment operating loss       |       | (1,425,200                 | )          | (1,928,400 | ) |
| Total  operating income               |       | $                          | 10,780,400 |   | $ | 8,091,100 |   |

 

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***Franchisingsegment operating income***

 

Thefranchising segment’s 2009 operating income increased by $2.2 million, or21.8%, to $12.2 million from $10.0 million for 2008.  The increase in segment contribution wasprimarily due to increased royalty revenues and lower selling, general andadministrative expenses, mainly advertising expenses.

 

***Leasingsegment operating loss***

 

Theleasing segment’s 2009 operating loss decreased $503,200 or 26.1% to ($1.4million) compared to a loss of ($1.9 million) during 2008.  This improvement was primarily due to a$1,444,100 increase in leasing income partially offset by a $406,400 increasein leasing expense and a $225,700 increase in provision for credit losses.

 

# **Liquidity and Capital Resources**

# ** **

Our primary sources ofliquidity have historically been cash flow from operations and borrowings.  The components of the statement of operationsthat affect our liquidity include non-cash items for depreciation, compensationexpense related to stock options and loss from and impairment of equityinvestments.  The most significantcomponent of the balance sheet that affects liquidity is investments.  Investments include $4.2 million of illiquidinvestments in two private companies: Tomsten, Inc. and BridgeFunds LLC.

 

We ended 2009 with $9.5million in cash and cash equivalents and a current ratio (current assetsdivided by current liabilities) of 1.6 to 1.0 compared to $2.1 million in cashand cash equivalents and a current ratio of 1.3 to 1.0 at the end of 2008.

 

**Operating activities provided$13.7 million of cash during 2009 compared to $9.0 million during 2008.  Cash provided by operating assets andliabilities include an increase in deferred and current income taxes of $2.8million, primarily due to tax depreciation on lease equipment purchases.  Receivables provided cash of $327,300,primarily due to an improvement in royalty collections and a reduction inDirect Franchisee Sales.  Cash utilizedby operating assets and liabilities include a $0.9 million decrease in accruedand other liabilities due to a decrease in amounts owed for lease equipmentpurchases and decreased accrued compensation.**

** **

Investingactivities provided $2.4 million of cash during 2009 compared to $7.6 millionused during 2008.  The 2009 activitiesconsisted primarily of the purchase of equipment for lease contracts of $15.5million and collections on lease receivables of $19.3 million.

 

Financingactivities used $8.7 million of cash during 2009 compared to $0.5 million usedduring 2008.  The 2009 activitiesconsisted primarily of net proceeds from subordinated notes and discountedlease rentals of $0.8 million, net payments of $4.3 million on the line ofcredit and $5.3 million used to purchase 313,585 shares of our common stock.

 

We have future operating lease commitments for ourcorporate headquarters and have remained a guarantor on Company-owned retailstores that have been previously sold or closed at December 26, 2009.  As of December 26, 2009, we had no othermaterial outstanding commitments.  SeeNote 11 to the consolidated financial statements.

 

As of December 26, 2009, we had no off balancesheet arrangements.

 

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# **On June 10, 2008, we amended andrestated our 364-Day Revolving Credit Agreement with Bank of America, N.A. to,among other things, join the PrivateBank and Trust Company as lender andDocumentation Agent, appoint Bank of America as Administrative Agent, increasethe aggregate commitment to $55.0 million and extend the term to June 15,2013.  The Amended and Restated RevolvingCredit Agreement (the “Credit Facility”) permits us to borrow up to theaggregate commitment subject to certain borrowing base limitations.  On August 12, 2009, we amended theCredit Facility to reduce the aggregate commitment to $40.0 million.**

# ** **

# **The CreditFacility allows us to choose between three interest rate options in connectionwith our borrowings.  The interest rateoptions are the Base Rate, LIBOR and Fixed Rate (all as defined within theCredit Facility) plus an applicable margin of 0%, 2.00% and 2.00%,respectively.  Interest periods for LIBORborrowings can be one, two, three or six months, and interest periods for FixedRate borrowings can be one, two, three, four or five years as selected byus.  The Credit Facility also providesfor non-utilization fees of 0.25% per annum on the daily average of the unusedcommitment.**

# ** **

Asof December 26, 2009, our borrowing availability under the Credit Facilitywas $40.0 million (the lesser of the borrowing base or the aggregate line ofcredit).  There were $9.3 million inborrowings outstanding under the Credit Facility bearing Fixed Rate interestranging from 4.58% to 5.76% and having initial terms ranging from three yearsto five years, leaving $30.7 million available for additional borrowings at December 26,2009.

 

TheCredit Facility will be used for growing our leasing business, stockrepurchases and general corporate purposes. The Credit Facility is secured by a lien against substantially all ofour assets, contains customary financials conditions and covenants, andrequires maintenance of minimum levels of debt service coverage and tangiblenet worth and maximum levels of leverage (all as defined within the CreditFacility).  As of December 26, 2009,we were in compliance with all of our financial covenants.

 

OnApril 19, 2006, we announced the filing of a “shelf registration” on Form S-1registration statement with the Securities and Exchange Commission for the saleof up to $50 million of renewable subordinated unsecured notes with maturitiesfrom three months to ten years.  In June 2006,the Form S-1 registration became effective.  Every year since the S-1 registration becameeffective, we have filed Post-Effective Amendments to keep the registrationstatement effective.  We have in the pastand continue to intend to use the net proceeds from the offering to pay downour credit facility, expand our leasing portfolio, to make acquisitions, torepurchase common stock and for other general corporate purposes.  As of December 26, 2009, $32.4 millionof the renewable subordinated notes have been sold, leaving $17.6 million remainingto be sold.  In addition, the $21.2million of notes that remained outstanding at December 26, 2009 willautomatically renew at each note’s individual maturity date unless we decide torepay the note(s) or the investor(s) notifies us that they want thenotes repaid.

 

Wemay utilize discounted lease financing to provide funds for a portion of ourleasing activities.  Rates for discountedlease financing reflect prevailing market interest rates and the creditstanding of the lessees for which the payment stream of the leases arediscounted.  We believe that discountedlease financing will continue to be available to us at competitive rates ofinterest through the relationships we have established with financial institutions.

 

We believe that thecombination of our cash on hand, the cash generated from our franchisingbusiness, cash generated from discounting sources, our bank line of credit aswell as our renewable subordinated unsecured notes, will be adequate to fundour planned operations, including leasing activity, for 2010.

 

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# **Critical Accounting Policies**

# ** **

The Company prepares the consolidated financialstatements of Winmark Corporation and Subsidiaries in conformity withaccounting principles generally accepted in the United States of America.  As such, the Company is required to makecertain estimates, judgments and assumptions that it believes are reasonable basedon information available.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the periods presented. There can be no assurance that actual results will not differ from theseestimates.  The critical accountingpolicies that the Company believes are most important to aid in fullyunderstanding and evaluating our reported financial results include thefollowing:

 

*RevenueRecognition — Royalty Revenue and Franchise Fees*

 

The Company collectsroyalties from each retail franchise based on a percentage of retail storegross sales.  The Company recognizesroyalties as revenue when earned.  At theend of each accounting period, estimates of royalty amounts due are made basedon applying historical weekly sales information to the number of weeks ofunreported franchisee sales.  If thereare significant changes in the actual performances of franchisees versus theCompany’s estimates, its royalty revenue would be impacted.  During 2009, the Company collected $48,600more than it estimated at December 27, 2008.  As of December 26, 2009, the Company’sroyalty receivable was $1,108,600.

 

The Company collectsinitial franchise fees when franchise agreements are signed and recognizes theinitial franchise fees as revenue when the franchise is opened, which is whenthe Company has performed substantially all initial services required by thefranchise agreement.  Franchise feescollected from franchisees but not yet recognized as income are recorded asdeferred revenue in the liability section of the consolidated balancesheet.  As of December 26, 2009,deferred franchise fees were $984,500.

 

*LeasingIncome Recognition*

 

Leasing income is recognizedunder the effective interest method.  Theeffective interest method of income recognition applies a constant rate ofinterest equal to the internal rate of return on the lease.  Generally, when a lease is 90 days or moredelinquent, the lease is classified as being on non-accrual and the Companystops recognizing leasing income on that date.

 

In certain circumstances,the Company may re-lease equipment in its existing portfolio.  This may give rise to dealer profit andrequire the Company to account for the lease as a sales-type lease.  At inception of a sales-type lease, revenueis recorded that consists of the present value of the future minimum leasepayments discounted at the rate implicit in the lease.  In subsequent periods, the recording of incomeis consistent with the accounting for a direct financing lease.

 

*Allowancefor Credit Losses*

 

The Company maintains anallowance for credit losses at an amount that it believes to be sufficient toabsorb losses inherent in its existing lease portfolio as of the reportingdates.  A provision is charged againstearnings to maintain the allowance for credit losses at the appropriatelevel.  If the actual results aredifferent from the Company’s estimates, results could be different.  The Company’s policy is to charge-off againstthe allowance the estimated unrecoverable portion of accounts once they reach121 days delinquent.

 

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*Stock-Based Compensation*

 

The Company currentlyuses the Black-Scholes option-pricing model to determine the fair value ofstock options.  The determination of thefair value of the awards on the date of grant using an option-pricing model isaffected by stock price as well as assumptions regarding a number of complexand subjective variables.  Thesevariables include implied volatility over the term of the awards, actual andprojected employee stock option exercise behaviors, risk-free interest rate andexpected dividends.

 

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

 

*Impairmentof Long-term Investments*

 

The Company evaluates itslong-term investments for impairment on an annual basis or whenever events orchanges in circumstances indicate the carrying amount may not berecoverable.  The impairment, if any, ismeasured by the difference between the assets’ carrying amount and their fairvalue, based on the best information available, including market prices,discounted cash flow analysis or other financial metrics that managementutilizes to help determine fair value. Judgments made by management related to the fair value of its long-terminvestments are affected by factors such as the ongoing financial performanceof the investees, additional capital raised by the investees as well as generalchanges in the economy.

 

*New Accounting Pronouncements*

 

InFebruary 2008, the Financial Accounting Standards Board (FASB) issuedguidance that delayed the effective date of Accounting Standards CodificationTopic (ASC) 820,*Fair Value Measurements andDisclosures*for non-financial assets and non-financial liabilities,except those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually).  The Company adoptedASC 820 for non-financial assets and non-financial liabilities on December 28,2008, and such adoption did not have a material impact on the Company’sfinancial condition or results of operations.

 

# **In April 2009, the FASB issuedguidance that requires interim reporting period disclosure about the fair valueof certain financial instruments, effective for interim reporting periodsending after June 15, 2009.  TheCompany has adopted these disclosure requirements; see Note 3 for disclosuresassociated with this adoption.  Due totheir nature, the carrying value of cash, receivables, payables and debtobligations approximates fair value.**

# ** **

In June 2009, theFASB issued guidance that establishes the FASB Accounting StandardsCodificationTM (the Codification) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with generally accepted accounting principles (GAAP).  Use of the new Codification is effective forinterim and annual periods ending after September 15, 2009.  The Company has used the new Codification inreference to GAAP in this annual report on Form 10-K and such use has notimpacted the consolidated results of the Company.

 

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# **Outlook**

# ** **

***ForwardLooking Statements***

 

The statements containedin the letter from the CEO, Item 1 “Business”, Item 1A “Risk Factors”, in thisItem 7 “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”, and in Item 8 “Financial Statements and Supplemental Data” thatare not strictly historical fact, including without limitation, the Company’sstatements relating to growth opportunities, prospects for Wirth BusinessCredit and Winmark Capital Corporation, contribution of the leasing business tofinancial results, anticipated operations of the leasing businesses, itsability to open new franchises, its ability to manage costs in the future, thenumber of franchises it believes will open, its future cash requirements,allowance for credit losses, possible losses related to its investments and itsbelief that it will have adequate capital and reserves to meet its current andcontingent obligations and operating needs, as well as its disclosures regardingmarket rate risk, are forward looking statements made under the safe harborprovision of the Private Securities Litigation Reform Act.  Such statements are based on management’scurrent expectations as of the date of this report but involve risks, uncertaintiesand other factors which may cause actual results to differ materially fromthose contemplated by such forward looking statements.  Investors are cautioned to consider theseforward looking statements in light of important factors which may result inmaterial variations between results contemplated by such forward lookingstatements and actual results and conditions including, but not limited to, therisk factors discussed in Section 1A of this report.  You should not place undue reliance on theseforward-looking statements, which speak only as of the date they weremade.  The Company undertakes noobligation to revise or update publicly any forward-looking statement for anyreason.

 

**ITEM 7A:****                                          ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

TheCompany incurs financial markets risk in the form of interest rate risk. Riskcan be quantified by measuring the financial impact of a near-term adverseincrease in short-term interest rates. The Company currently has available a$40.0 million line of credit with Bank of America, N.A. and The PrivateBank andTrust Company.  The interest ratesapplicable to this agreement are based on either the bank’s base rate or LIBORfor short-term borrowings (less than six months) or the bank’s index rate for borrowingsone year or greater.  The Company had$9.3 million of debt outstanding at December 26, 2009 under this line ofcredit, all of which was in the form of fixed rate borrowings in excess of oneyear and therefore was not subject to daily changes in the bank’s base rate orLIBOR.  The Company’s earnings would beaffected by changes in these short-term interest rates only in the event thatit were to borrow additional amounts under this facility with interest ratesbased on the bank’s base rate or LIBOR. With the Company’s current borrowings, a one percent increase inshort-term rates would have no impact on annual pretax earnings.  The Company had no interest rate derivativesin place at December 26, 2009.

 

Approximately $7.9million of the Company’s cash and cash equivalents at December 26, 2009was invested in money market mutual funds, which are subject to the effects ofmarket fluctuations in interest rates.

 

Although the Companyconducts business in foreign countries, international operations are notmaterial to its consolidated financial position, results of operations or cashflows.  Additionally, foreign currencytransaction gains and losses were not material to the Company’s results ofoperations for the year ended December 26, 2009.  Accordingly, the Company is not currentlysubject to material foreign currency exchange rate risks from the effects thatexchange rate movements of foreign currencies would have on its future costs oron future cash flows it would receive from its foreign activity.  To date, the Company has not entered into anyforeign currency forward exchange contracts or other derivative financialinstruments to hedge the effects of adverse fluctuations in foreign currencyexchange rates.

 

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**ITEM 8:****   ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Winmark Corporation andSubsidiaries

Index to ConsolidatedFinancial Statements

 
| Consolidated Balance Sheets                                                    | Page 31 |
|--------------------------------------------------------------------------------|--------------|
| Consolidated  Statements of Operations                                         | Page 32 |
| Consolidated  Statements of Shareholders’ Equity and Comprehensive Income | Page 33 |
| Consolidated  Statements of Cash Flows                                         | Page 34 |
| Notes to  the Consolidated Financial Statements                                | Page 35 |
| Report of  Independent Registered Public Accounting Firm                       | Page 53 |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

Consolidated Balance Sheets

 
| ** **                                                                                                  | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                  |       |                       |       |                       |       |
| CURRENT  ASSETS:                                                                                            |       |                       |       |                       |       |
| Cash  and cash equivalents                                                                                  |       | $                          | 9,490,800  |                       | $          | 2,140,000 |   |
| Marketable  securities                                                                                      |       | 1,274,000                  |       | 438,300                    |       |
| Current  investments                                                                                        |       | 2,000,000                  |       | 500,000                    |       |
| Receivables,  less allowance for doubtful accounts of $35,700 and $52,700                                   |       | 1,761,100                  |       | 2,064,100                  |       |
| Net  investment in leases - current                                                                         |       | 17,575,900                 |       | 17,379,700                 |       |
| Income  tax receivable                                                                                      |       | —                     |       | 792,200                    |       |
| Inventories                                                                                                 |       | 111,400                    |       | 141,500                    |       |
| Prepaid  expenses                                                                                           |       | 398,800                    |       | 1,018,800                  |       |
| Deferred  income taxes                                                                                      |       | —                     |       | 216,900                    |       |
| Total  current assets                                                                                       |       | 32,612,000                 |       | 24,691,500                 |       |
| NET  INVESTMENT IN LEASES — LONG-TERM                                                                  |       | 19,423,700                 |       | 28,035,300                 |       |
| LONG-TERM  INVESTMENTS                                                                                      |       | 2,232,900                  |       | 3,833,300                  |       |
| LONG-TERM  RECEIVABLES, less allowance for doubtful accounts of $1,400 and $4,100                           |       | 14,900                     |       | 39,200                     |       |
| PROPERTY  AND EQUIPMENT:                                                                                    |       |                       |       |                       |       |
| Furniture  and equipment                                                                                    |       | 2,351,500                  |       | 2,585,600                  |       |
| Building  and building improvements                                                                         |       | 1,171,200                  |       | 498,500                    |       |
| Less  - accumulated depreciation and amortization                                                           |       | (1,679,200                 | )          | (2,571,900                 | )          |
| Property  and equipment, net                                                                                |       | 1,843,500                  |       | 512,200                    |       |
| OTHER  ASSETS:                                                                                              |       |                       |       |                       |       |
| Other  assets                                                                                               |       | 677,500                    |       | 677,500                    |       |
| Deferred  income taxes                                                                                      |       | —                     |       | 320,800                    |       |
| Total  other assets                                                                                         |       | 677,500                    |       | 998,300                    |       |
|                                                                                                        |       | $                          | 56,804,500 |                       | $          | 58,109,800 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                               |       |                       |       |                       |       |
| CURRENT  LIABILITIES:                                                                                       |       |                       |       |                       |       |
| Current  line of credit                                                                                     |       | $                          | 3,983,100  |                       | $          | 4,313,200 |   |
| Current  renewable subordinated notes (including $5,688,000 and $4,736,700 due to  related parties)         |       | 9,166,900                  |       | 8,052,400                  |       |
| Accounts  payable                                                                                           |       | 1,415,200                  |       | 1,108,200                  |       |
| Income  tax payable                                                                                         |       | 183,500                    |       | —                     |       |
| Accrued  liabilities                                                                                        |       | 1,794,100                  |       | 2,905,400                  |       |
| Current  discounted lease rentals                                                                           |       | 972,600                    |       | 1,012,900                  |       |
| Current  rents received in advance                                                                          |       | 294,400                    |       | 141,600                    |       |
| Current  deferred revenue                                                                                   |       | 1,188,800                  |       | 993,600                    |       |
| Deferred  income taxes                                                                                      |       | 1,057,700                  |       | —                     |       |
| Total  current liabilities                                                                                  |       | 20,056,300                 |       | 18,527,300                 |       |
| LONG-TERM  LINE OF CREDIT                                                                                   |       | 5,298,900                  |       | 9,276,300                  |       |
| LONG-TERM  RENEWABLE SUBORDINATED NOTES (including $7,260,400 and $8,584,100 due to  related parties)       |       | 12,058,700                 |       | 12,788,700                 |       |
| LONG-TERM  DISCOUNTED LEASE RENTALS                                                                         |       | 507,600                    |       | 1,298,500                  |       |
| LONG-TERM  RENTS RECEIVED IN ADVANCED                                                                       |       | 1,332,000                  |       | 1,696,400                  |       |
| LONG-TERM  DEFERRED REVENUE                                                                                 |       | 709,500                    |       | 631,400                    |       |
| OTHER  LONG-TERM LIABILITIES                                                                                |       | 1,298,400                  |       | —                     |       |
| DEFERRED  INCOME TAXES                                                                                      |       | 214,400                    |       | —                     |       |
| COMMITMENTS  AND CONTINGENCIES                                                                              |       | —                     |       | —                     |       |
| SHAREHOLDERS’  EQUITY:                                                                                 |       |                       |       |                       |       |
| Common  stock, no par, 10,000,000 shares authorized, 5,125,025 and 5,433,610 shares  issued and outstanding |       | —                     |       | 427,500                    |       |
| Accumulated  other comprehensive income (loss)                                                              |       | 9,600                      |       | (38,500                    | )          |
| Retained  earnings                                                                                          |       | 15,319,100                 |       | 13,502,200                 |       |
| Total  shareholders’ equity                                                                            |       | 15,328,700                 |       | 13,891,200                 |       |
|                                                                                                        |       | $                          | 56,804,500 |                       | $          | 58,109,800 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

Consolidated Statements of Operations

 
| ** **                                     | ** ** | **Fiscal Year Ended**      | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| REVENUE:                                       |       |                       |       |   |   |
| Royalties                                      |       | $                          | 23,616,200 |   | $ | 21,804,200 |   |
| Leasing  income                                |       | 9,536,900                  |       | 8,092,800 |   |
| Merchandise  sales                             |       | 2,386,700                  |       | 3,268,100 |   |
| Franchise  fees                                |       | 1,072,900                  |       | 1,704,500 |   |
| Other                                          |       | 683,300                    |       | 554,000 |   |
| Total  revenue                                 |       | 37,296,000                 |       | 35,423,600 |   |
| COST  OF MERCHANDISE SOLD                      |       | 2,290,200                  |       | 3,120,700 |   |
| LEASING  EXPENSE                               |       | 2,288,200                  |       | 1,881,800 |   |
| PROVISION  FOR CREDIT LOSSES                   |       | 2,795,500                  |       | 2,569,800 |   |
| SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES  |       | 19,141,700                 |       | 19,760,200 |   |
| Income  from operations                        |       | 10,780,400                 |       | 8,091,100 |   |
| LOSS  FROM EQUITY INVESTMENTS                  |       | (100,500                   | )          | (3,163,200 | ) |
| INTEREST  EXPENSE                              |       | (1,309,000                 | )          | (1,305,000 | ) |
| INTEREST  AND OTHER INCOME                     |       | 459,300                    |       | 224,600 |   |
| Income  before income taxes                    |       | 9,830,200                  |       | 3,847,500 |   |
| PROVISION  FOR INCOME TAXES                    |       | (3,981,200                 | )          | (2,708,100 | ) |
| NET  INCOME                                    |       | $                          | 5,849,000  |   | $ | 1,139,400 |   |
| EARNINGS  PER SHARE - BASIC                    |       | $                          | 1.10       |   | $ | .21 |   |
| EARNINGS  PER SHARE - DILUTED                  |       | $                          | 1.10       |   | $ | .21 |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING - BASIC   |       | 5,303,177                  |       | 5,504,705 |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING - DILUTED |       | 5,337,668                  |       | 5,531,216 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

Consolidated Statements of Shareholders’ Equity andComprehensive Income

Fiscal years endedDecember 27, 2008 and December 26, 2009

 
| ** **                                                                        | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Accumulated Other Comprehensive** | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------------------------------|------------|-------------------|------------|
| ** **                                                                        | ** ** | **Shares**       | ** ** | **Amount**   | ** ** | **Earnings**                        | ** ** | **Income (Loss)** | ** ** | **Total** | ** ** |
|                                                                              |       |             |       |         |       |                                |       |              |       |   |   |
| BALANCE,  December 29, 2007                                                  |       | 5,417,775        |       | $            | 305,900    |                                | $          | 12,362,800        |       | $ | — |   | $ | 12,668,700 |   |
| Repurchase  of common stock                                                       |       | (110,213         | )          | (1,720,000   | )          | —                              |       | —            |       | (1,720,000 | ) |
| Stock  options exercised net of related tax benefits                              |       | 126,048          |       | 1,011,400    |       | —                              |       | —            |       | 1,011,400 |   |
| Compensation  expense relating to stock options                                   |       | —           |       | 830,200      |       | —                              |       | —            |       | 830,200 |   |
| Unrealized  loss on marketable securities, net of related tax benefits of $24,000 |       | —           |       | —       |       | —                              |       | (38,500           | )          | (38,500 | ) |
| Net  income                                                                       |       | —           |       | —       |       | 1,139,400                           |       | —            |       | 1,139,400 |   |
| Total  comprehensive income                                                       |       | —           |       | —       |       | —                              |       | —            |       | 1,100,900 |   |
|                                                                              |       |             |       |         |       |                                |       |              |       |   |   |
| BALANCE,  December 27, 2008                                                  |       | 5,433,610        |       | 427,500      |       | 13,502,200                          |       | (38,500           | )          | 13,891,200 |   |
|                                                                              |       |             |       |         |       |                                |       |              |       |   |   |
| Repurchase  of common stock                                                       |       | (313,585         | )          | (1,251,400   | )          | (4,032,100                          | )          | —            |       | (5,283,500 | ) |
| Stock  options exercised net of related tax benefits                              |       | 5,000            |       | 55,500       |       | —                              |       | —            |       | 55,500 |   |
| Compensation  expense relating to stock options                                   |       | —           |       | 768,400      |       | —                              |       | —            |       | 768,400 |   |
| Unrealized  gain on marketable securities, net of related tax expense of $30,000  |       | —           |       | —       |       | —                              |       | 48,100            |       | 48,100 |   |
| Net  income                                                                       |       | —           |       | —       |       | 5,849,000                           |       | —            |       | 5,849,000 |   |
| Total  comprehensive income                                                       |       | —           |       | —       |       | —                              |       | —            |       | 5,897,100 |   |
|                                                                              |       |             |       |         |       |                                |       |              |       |   |   |
| BALANCE,  December 26, 2009                                                  |       | 5,125,025        |       | $            | —     |                                | $          | 15,319,100        |       | $ | 9,600 |   | $ | 15,328,700 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

 
| ** **                                                                         | ** ** | **Fiscal Year Ended**      | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| OPERATING  ACTIVITIES:                                                             |       |                       |       |   |   |
| Net  income                                                                        |       | $                          | 5,849,000  |   | $ | 1,139,400 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                       |       |   |   |
| Depreciation                                                                       |       | 530,100                    |       | 390,400 |   |
| Provision  for credit losses                                                       |       | 2,795,500                  |       | 2,569,800 |   |
| Compensation  expense related to stock options                                     |       | 768,400                    |       | 830,200 |   |
| Gain  on sale of marketable securities                                             |       | (76,700                    | )          | (69,400 | ) |
| Gain  from disposal of property and equipment                                      |       | (1,200                     | )          | — |   |
| Loss  from equity investments                                                      |       | 100,500                    |       | 3,163,200 |   |
| Deferred  initial direct costs                                                     |       | (644,900                   | )          | (1,217,300 | ) |
| Amortization  of deferred initial direct costs                                     |       | 916,700                    |       | 886,600 |   |
| Change  in operating assets and liabilities:                                       |       |                       |       |   |   |
| Receivables                                                                        |       | 327,300                    |       | 268,700 |   |
| Income  tax receivable / payable                                                   |       | 945,800                    |       | (601,900 | ) |
| Inventories                                                                        |       | 30,100                     |       | 3,500 |   |
| Prepaid  expenses                                                                  |       | 620,000                    |       | 86,100 |   |
| Deferred  income taxes                                                             |       | 1,809,800                  |       | 691,700 |   |
| Accounts  payable                                                                  |       | 307,000                    |       | (305,900 | ) |
| Accrued  and other liabilities                                                     |       | (885,300                   | )          | 403,500 |   |
| Additions  to advance and security deposits                                        |       | 8,900                      |       | 860,500 |   |
| Other  assets                                                                      |       | —                     |       | (51,700 | ) |
| Deferred  revenue                                                                  |       | 273,300                    |       | (63,300 | ) |
| Net  cash provided by operating activities                                         |       | 13,674,300                 |       | 8,984,100 |   |
| INVESTING  ACTIVITIES:                                                             |       |                       |       |   |   |
| Proceeds  from sale of marketable securities                                       |       | 311,500                    |       | 417,600 |   |
| Purchase  of marketable securities                                                 |       | (992,500                   | )          | (849,000 | ) |
| Proceeds  from sale of property and equipment                                      |       | 1,800                      |       | — |   |
| Purchase  of property and equipment                                                |       | (789,700                   | )          | (235,200 | ) |
| Purchase  of equipment for lease contracts                                         |       | (15,457,600                | )          | (21,855,400 | ) |
| Principal  collections on lease receivables                                        |       | 19,325,900                 |       | 14,933,200 |   |
| Net  cash provided by (used for) investing activities                              |       | 2,399,400                  |       | (7,588,800 | ) |
| FINANCING  ACTIVITIES:                                                             |       |                       |       |   |   |
| Proceeds  from borrowings on line of credit                                        |       | —                     |       | 3,500,000 |   |
| Payments  on line of credit                                                        |       | (4,307,500                 | )          | (6,149,100 | ) |
| Proceeds  from issuance of subordinated notes                                      |       | 5,038,400                  |       | 1,764,600 |   |
| Payments  on subordinated notes                                                    |       | (4,653,900                 | )          | (1,945,400 | ) |
| Repurchases  of common stock                                                       |       | (5,283,500                 | )          | (1,720,000 | ) |
| Proceeds  from exercises of stock options                                          |       | 50,000                     |       | — |   |
| Proceeds  from discounted lease rentals                                            |       | 428,100                    |       | 3,030,200 |   |
| Tax  benefits on exercised stock options and warrants                              |       | 5,500                      |       | 1,011,400 |   |
| Net  cash used for financing activities                                            |       | (8,722,900                 | )          | (508,300 | ) |
| INCREASE  IN CASH AND CASH EQUIVALENTS                                             |       | 7,350,800                  |       | 887,000 |   |
| CASH  AND CASH EQUIVALENTS, beginning of year                                      |       | 2,140,000                  |       | 1,253,000 |   |
| CASH  AND CASH EQUIVALENTS, end of year                                            |       | $                          | 9,490,800  |   | $ | 2,140,000 |   |
| SUPPLEMENTAL  DISCLOSURES:                                                         |       |                       |       |   |   |
| Cash  paid for interest                                                            |       | $                          | 2,701,500  |   | $ | 2,678,400 |   |
| Cash  paid for income taxes                                                        |       | $                          | 1,222,100  |   | $ | 1,565,000 |   |
| Non-cash  landlord leasehold improvements                                          |       | $                          | 1,072,400  |   | $ | — |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to the Consolidated Financial Statements

December 26,2009 and December 27, 2008

 

**1.****                                     ****Organization and Business:**

 

Winmark Corporation andsubsidiaries (the Company) offers licenses to operate franchises using theservice marks Play It Again Sports®, Plato’s Closet®, Once Upon A Child®, MusicGo Round® and Wirth Business Credit®.  Inaddition, the Company sells inventory to its Play It Again Sports franchiseesthrough its buying group.  The Companyalso operates both small-ticket and middle market equipment leasing businessesunder the Wirth Business Credit® and Winmark Capital® marks.  The Company has a 52/53-week fiscal year thatends on the last Saturday in December. Fiscal years 2009 and 2008 were 52-week fiscal years.

 

Following is a summary of our franchising activity forthe fiscal year ended December 26, 2009:

 
| ** **                    | ** ** | **(Unaudited)**     | ** ** |
|-------------------------------|------------|---------------------|------------|
| ** **                    | ** ** | **TOTAL  12/27/08** | ** ** | **OPENED** | ** ** | **CLOSED** | ** ** | **TOTAL  12/26/09** | ** ** |
| Play  It Again Sports         |       |                |       |   |   |   |   |   |   |
| Franchises  - US and Canada   |       | 364                 |       | 6 |   | (29 | ) | 341 |   |
|                          |       |                |       |   |   |   |   |   |   |
| Plato’s  Closet          |       |                |       |   |   |   |   |   |   |
| Franchises  - US and Canada   |       | 241                 |       | 30 |   | (4 | ) | 267 |   |
|                          |       |                |       |   |   |   |   |   |   |
| Once  Upon A Child            |       |                |       |   |   |   |   |   |   |
| Franchises  - US and Canada   |       | 229                 |       | 13 |   | (7 | ) | 235 |   |
|                          |       |                |       |   |   |   |   |   |   |
| Music  Go Round               |       |                |       |   |   |   |   |   |   |
| Franchises  - US              |       | 36                  |       | 0 |   | (2 | ) | 34 |   |
|                          |       |                |       |   |   |   |   |   |   |
| Total  Franchised Stores      |       | 870                 |       | 49 |   | (42 | ) | 877 |   |
|                          |       |                |       |   |   |   |   |   |   |
| Wirth  Business Credit        |       |                |       |   |   |   |   |   |   |
| Territories  - US             |       | 54                  |       | 0 |   | (17 | ) | 37 |   |
| Total  Franchises/Territories |       | 924                 |       | 49 |   | (59 | ) | 914 |   |

 

**2.****                                     ****Significant Accounting Policies:**

 

***Principlesof Consolidation***

 

The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries, Wirth Business Credit, Inc., Winmark Capital Corporation andGrow Biz Games, Inc. All material inter-company transactions have beeneliminated in consolidation.  Theconsolidated financial statements also include the Company’s investment in andshare of net earnings or losses for its investment in Tomsten, Inc. (“Tomsten”),which is recorded on the equity method of accounting.

 

***CashEquivalents***

 

Cash equivalents consistof highly liquid investments with an original maturity of three months orless.  Cash equivalents are stated atcost, which approximates fair value.  Asof December 26, 2009 and December 27, 2008, the Company had $148,600and $75,500 of cash located in Canadian banks. The Company holds its cash and cash equivalents with financialinstitutions and at times, such balances may be in excess of insurance limits.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***Receivables***

 

The Company provides an allowance for doubtfulaccounts on receivables.  The allowancefor doubtful accounts was $37,100 and $56,800 at December 26, 2009 and December 27,2008, respectively.  If receivables inexcess of the provided allowance are determined uncollectible, they are chargedto expense in the year the determination is made.  Receivables are written off when they becomeuncollectible, and payments subsequently received on such receivable arecredited to the allowance for doubtful accounts.  Historically, receivables balances writtenoff have not exceeded allowances provided.

 

***Investmentin Leasing Operations***

 

The Company uses thedirect finance method of accounting to record income from direct financingleases.  At the inception of a lease, theCompany records the minimum future lease payments receivable, the estimatedresidual value of the leased equipment and the unearned lease income.  Initial direct costs related to leaseoriginations are deferred as part of the investment and amortized over thelease term.  Unearned lease income is theamount by which the total lease receivable plus the estimated residual valueexceeds the cost of the equipment.

 

*LeasingIncome Recognition*

 

Leasing income isrecognized under the effective interest method. The effective interest method of income recognition applies a constantrate of interest equal to the internal rate of return on the lease.  Generally, when a lease is 90 days or moredelinquent, the lease is classified as being on non-accrual and the Companystops recognizing leasing income on that date.

 

In certain circumstances,the Company may re-lease equipment in its existing portfolio.  This may give rise to dealer profit andrequire the Company to account for the lease as a sales-type lease.  At inception of a sales-type lease, revenueis recorded that consists of the present value of the future minimum leasepayments discounted at the rate implicit in the lease.  In subsequent periods, the recording ofincome is consistent with the accounting for a direct financing lease.

 

*LeasingExpense*

 

Leasing expense includesthe cost of financing equipment purchases as well as the cost of equipmentsales.  Additionally, at inception of asales-type lease, cost is recorded that consists of the equipment’s book value,less the present value of its residual and is included in leasing expense.

 

*InitialDirect Costs*

 

The Company defersinitial direct costs incurred to originate its leases in accordance withapplicable accounting guidance*.*  The initial direct costs deferred are part ofthe investment in leasing operations and are amortized to leasing income usingthe effective interest method.  Initialdirect costs include commissions and costs associated with credit evaluation,recording guarantees and other security arrangements, documentation andtransaction closing.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

*LeaseResidual Values*

 

Residual values reflectthe estimated amounts to be received at lease termination from leaseextensions, sales or other dispositions of leased equipment.  The lease residual values are based on theCompany’s best estimate.

 

*Allowancefor Credit Losses*

 

The Company maintains anallowance for credit losses at an amount that it believes to be sufficient toabsorb losses inherent in the existing lease portfolio as of the reportingdates.  A provision is charged againstearnings to maintain the allowance for credit losses at the appropriatelevel.  The Company’s policy is tocharge-off against the allowance the estimated unrecoverable portion ofaccounts once they reach 121 days delinquent. The allowance for credit losses is considered a significant estimatethat could materially change within the next year.

 

*RentsReceived in Advance*

 

Rents received in advancerepresent advance payments from customers that will be applied to futurepayments.  For example, if the Company isholding one advance payment, it will be applied to the customer’s lastpayment.  If the Company is holding twoadvance payments, they will be applied to the customer’s last two payments.

 

***Inventories***

 

The Company values its inventoriesat the lower of cost, as determined by the average weighted cost method, ormarket.  Inventory consists of computerhardware and related accessories and store sign packages.

 

***Impairmentof Long-lived Assets and Investments***

 

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

 

The Company evaluates itslong-term investments for impairment on an annual basis or whenever events orchanges in circumstances indicate the carrying amount may not be recoverable.  The impairment, if any, is measured by thedifference between the assets’ carrying amount and their fair value, based onthe best information available, including market prices, discounted cash flowanalysis or other financial metrics that management utilizes to help determinefair value.

 

***Propertyand Equipment***

 

Property and equipment isstated at cost.  Depreciation andamortization for financial reporting purposes is provided on the straight-linemethod.  Estimated useful lives used incalculating depreciation and amortization are: three years for computer andperipheral equipment, five years for furniture and equipment and the shorter ofthe lease term or useful life for leasehold improvements.  Major repairs, refurbishments andimprovements which significantly extend the useful lives of the related assetsare capitalized.  Maintenance andrepairs, supplies and accessories are charged to expense as incurred.

 

***Goodwill***

 

On an annual basis, theCompany considers whether there has been a permanent impairment in the value ofits goodwill.  Goodwill is included inother assets in the consolidated balance sheet.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***Useof Estimates***

 

The preparation offinancial statements in conformity with generally accepted U.S. accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  The ultimate results could differ from thoseestimates.  The most significantestimates relate to allowance for credit losses and impairment of other long-terminvestments.  These estimates may beadjusted as more current information becomes available, and any adjustmentcould be significant.

 

***Advertising***

 

Advertising costs arecharged to operating expenses as incurred. Advertising costs were $122,900 and $505,300, for fiscal years 2009 and2008, respectively.

 

***Accountingfor Stock-Based Compensation***

 

The Company recognizesthe cost of all share-based payments to employees, including grants of employeestock options, in the consolidated financial statements based on the grant datefair value of those awards.   This costis recognized over the period for which an employee is required to provideservice in exchange for the award.  Thebenefits associated with tax deductions in excess of recognized compensationexpense are reported as a financing cash flow rather than as an operating cashflow.  Compensation expense of$768,400 and $830,200 relating to the vested portion of the fair value of stockoptions granted was expensed to “Selling, General and Administrative Expenses”in 2009 and 2008, respectively.

 

TheCompany estimates the fair value of options granted using the Black-Scholesoption valuation model.  The Companyestimates the volatility of its common stock at the date of grant based on itshistorical volatility rate.  TheCompany’s decision to use historical volatility was based upon the lack ofactively traded options on its common stock. The Company estimates the expected term based upon historical optionexercises.  The risk-free interest rateassumption is based on observed interest rates for the volatility period.  The Company uses historical data to estimatepre-vesting option forfeitures and record share-based compensation expense onlyfor those awards that are expected to vest. For options granted, the Company amortizes the fair value on astraight-line basis.  All options areamortized over the vesting periods.

 

Thefair value of each option granted in 2009 and 2008 was estimated on the date ofthe grant using the Black-Scholes option pricing model with the followingassumptions:

 
| **Year  Granted** | ** ** | **Option  Fair Value** | ** ** | **Risk Free  Interest Rate** | ** ** | **Expected  Life (Years)** | ** ** | **Implied  Volatility** | ** ** | **Dividend  Yield** | ** ** |
|-------------------|------------|------------------------|------------|------------------------------|------------|----------------------------|------------|-------------------------|------------|---------------------|------------|
| 2009              |       | $4.25 / $7.14          |       | 2.92% / 2.57%                |       | 6 / 6                      |       | 27.1% / 27.6%           |       | none                |       |
| 2008              |       | $5.20 / $5.69 /  $3.71 |       | 3.36% / 3.04% /  1.77%       |       | 6 / 6 / 6                  |       | 24.4% / 24.7% /  26.0%  |       | none                |       |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***RevenueRecognition***

 

The Company collectsroyalties from each retail franchise based on a percentage of retail storegross sales.  The Company recognizesroyalties as revenue when earned.  TheCompany collects initial franchise fees when franchise agreements are signedand recognizes the initial franchise fees as revenue when the franchise isopened, which is when the Company has performed substantially all initialservices required by the franchise agreement. The Company had deferred franchise fee revenue of $984,500 and $855,800at December 26, 2009 and December 27, 2008, respectively.  The Company recognizes deferred softwarelicense fees over the 10-year life of the initial franchise agreement.  The Company had deferred software licensefees of $833,800 and $734,300 at December 26, 2009 and December 27,2008, respectively.  Merchandise salesthrough the buying group are recognized when the product has been invoiced bythe vendor.

 

***SalesTax***

 

The Company’s accountingpolicy is to present taxes collected from customers and remitted to governmentauthorities on a net basis.

 

***DiscountedLease Rentals***

 

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

 

***EarningsPer Share***

 

The Company calculatesearnings per share by dividing net income by the weighted average number ofshares of common stock outstanding to arrive at the Earnings Per Share —Basic.  The Company calculates EarningsPer Share — Diluted by dividing net income by the weighted average number ofshares of common stock and dilutive stock equivalents from the exercise ofstock options and warrants using the treasury stock method.  The weighted average diluted outstandingshares is computed by adding the weighted average basic shares outstanding withthe dilutive effect of stock options equivalent to 34,491 shares and 26,511shares for the years ended December 26, 2009 and December 27, 2008,respectively.

 

Options totaling 208,105and 186,494 shares for the year ended December 26, 2009 and December 27,2008, respectively, were outstanding but were not included in the calculationof Earnings Per Share — Diluted because their exercise prices were greater thanthe average market price of the common shares and, therefore, including theoptions in the denominator would be anti-dilutive.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***FairValue Measurements***

 

TheCompany defines fair value as the price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date.  The Company usesthree levels of inputs to measure fair value:

 

·                  Level 1 — quoted prices in active markets foridentical assets and liabilities.

·                  Level 2 — observable inputs other than quotedprices in active markets for identical assets and liabilities.

·                  Level 3 — unobservable inputs in which thereis little or no market data available, which require the reporting entity todevelop its own assumptions.

 

TheCompany’s cash and cash equivalents and marketable securities are valued basedon Level 1 inputs using quoted prices.

 

***NewAccounting Pronouncements***

 

InFebruary 2008, the Financial Accounting Standards Board (FASB) issuedguidance that delayed the effective date of Accounting Standards CodificationTopic (ASC) 820, *Fair Value Measurements andDisclosures*for non-financial assets and non-financial liabilities,except those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually).  The Company adoptedASC 820 for non-financial assets and non-financial liabilities on December 28,2008 and such adoption did not have a material impact on the Company’sfinancial condition or results of operations.

 

# **In April 2009, the FASB issuedguidance that requires interim reporting period disclosure about the fair valueof certain financial instruments, effective for interim reporting periodsending after June 15, 2009.  TheCompany has adopted these disclosure requirements; see Note 3 for disclosuresassociated with this adoption.  Due totheir nature, the carrying value of cash, receivables, payables and debtobligations approximates fair value.**

# ** **

In June 2009, theFASB issued guidance that establishes the FASB Accounting StandardsCodificationTM (the Codification) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with generally accepted accounting principles (GAAP).  Use of the new Codification is effective forinterim and annual periods ending after September 15, 2009.  The Company has used the new Codification inreference to GAAP in this annual report on Form 10-K and such use has notimpacted the consolidated results of the Company.

 

***Reclassifications***

 

Certain reclassificationsof previously reported amounts have been made to conform to the current yearpresentation.   Such reclassificationsdid not impact net income or shareholders’ equity as previously reported.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

**3.****                                     ****Investments**

 

***Marketable Securities***

 

Thefollowing is a summary of marketable securities classified asavailable-for-sale securities as required by ASC 320, *Investments — Debt and Equity Securities*:

 
| ** **         | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|--------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **         | ** ** | **Cost**                   | ** ** | **Fair Value**             | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Equity  securities |       | $                          | 1,258,500  |                       | $          | 1,274,000 |   | $ | 500,800 |   | $ | 438,300 |   |
|                    |            |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

TheCompany’s unrealized gains and losses for marketable securities classified asavailable-for-sale securities in accumulated other comprehensive income (loss)are as follows:

 
| **Year-ended**         | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Net Unrealized  Gains / (Losses)** | ** ** |
|------------------------|------------|-----------------------|------------|------------------------|------------|--------------------------------------|------------|
| December 26, 2009 |       | $                     | 77,700     |                   | $          | (62,200                              | )          | $ | 15,500 |   |
| December 27, 2008 |       | $                     | —     |                   | $          | (62,500                              | )          | $ | (62,500 | ) |

 

TheCompany’s realized gains and losses recognized on sales of available-for-salemarketable securities are as follows:

 
| **Year-ended**         | ** ** | **Realized Gains** | ** ** | **Realized  Losses** | ** ** | **Net Realized  Gains (Losses)** | ** ** |
|------------------------|------------|--------------------|------------|----------------------|------------|----------------------------------|------------|
| December 26, 2009 |       | $                  | 76,700     |                 | $          | —                           |       | $ | 76,700 |   |
| December 27, 2008 |       | $                  | 76,600     |                 | $          | (7,200                           | )          | $ | 69,400 |   |

 

***Other Long-term Investments***

 

The Company’s long-term investmentsconsist of:

 
| ** **            | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|-----------------------|------------|----------------------------|------------|----------------------------|------------|
| Tomsten, Inc.    |       | $                          | 2,232,900  |                       | $          | 2,333,300 |   |
| BridgeFunds,  LLC     |       | 2,000,000                  |       | 2,000,000                  |       |
|                  |       | 4,232,900                  |       | 4,333,300                  |       |
| Less  current portion |       | 2,000,000                  |       | 500,000                    |       |
|                  |       | $                          | 2,232,900  |                       | $          | 3,833,300 |   |

 

The Company has aninvestment in Tomsten, the parent company of “Archiver’s” retail chain.  Archiver’s is a retail concept created tohelp people preserve and enjoy their photographs.  The Company has invested a total of $7.5million in the purchase of common stock of Tomsten.  The Company’s investment currently represents18.3% of the outstanding common stock of Tomsten.

 

Beginning in December 2009,the Company began providing management services to Tomsten.  Management fees received by the Company arerecorded as other revenue.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26, 2009 and December 27, 2008

 

In 2009 and 2008, the Company recorded $100,500 and$324,100, respectively, for its pro-rata share of Tomsten’s losses in theincome statement on the line item captioned Loss from Equity Investments.  During the fourth quarter of 2008, theCompany also recorded an impairment charge for a portion of its investment inTomsten.  As part of its impairmentanalysis for Tomsten in 2008, the Company determined that the carrying value ofits investment was not expected to be fully recoverable from the future cashflow of the then-current Tomsten business. The Company therefore recognized an impairment charge of $2.8 million toreduce its carrying value of this investment to its then-expected realizablevalue.   As of December 26, 2009,$0.2 million of the Company’s investment with a current carrying cost of $2.2million is attributable to goodwill.  Theamount of goodwill was determined by calculating the difference between theCompany’s net investment in Tomsten less its pro rata share of Tomsten’s networth.

 

Summarized annual financial information for Tomsten, Inc.for each of the past two fiscal years is as follows:

 
| ** **                           | ** ** | **Fiscal Year Ended**      | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| Net  sales                           |       | $                          | 56,843,000 |   | $ | 62,907,800 |   |
| Gross  profit                        |       | 27,475,600                 |       | 31,041,700 |   |
| Net  loss from continuing operations |       | (821,000                   | )          | (1,242,500 | ) |
| Net  loss                            |       | (821,000                   | )          | (1,260,100 | ) |
|                                      |            |                            |            |  |  |  |  |

 

On October 13, 2004,the Company made a commitment to lend $2.0 million to BridgeFunds Limited at anannual rate of 12% pursuant to several senior subordinated promissorynotes.  BridgeFunds Limited advancesfunds to claimants involved in civil litigation to cover litigationexpenses.  At December 26, 2009, andDecember 27, 2008, the Company had funded the $2.0 millioncommitment.  In addition, the Company hasreceived a warrant to purchase approximately 257,000 shares of BridgeFunds at$1 per share, which currently represents 6.4% of the equity of BridgeFunds on afully diluted basis.  On August 23,2007, in connection with raising capital, BridgeFunds Limited completed arestructuring where all assets and liabilities, including the warrant, wereassigned to and assumed by BridgeFunds, LLC. During 2009, the board of BridgeFunds decided to cease advancing fundsto new claimants and place its portfolio of receivables in run-off, therebyallowing equity holders the opportunity to receive distributions aftercollection of receivables and the payment in full to all debt holders,including the Company’s notes.  Entry byBridgeFunds into transactions contemplated by these actions necessitatedconsent by its debt holders.  On October 22,2009, the Company entered into a modification agreement with BridgeFunds, LLC,whereby the maturity date of all of the outstanding promissory notes was changedto September 30, 2010, the annual rate of interest on the notes wasincreased to 15% and monthly prepayments of the principal of such notes in anamount equal to Available Cash Flow (as defined within the modificationagreement) is required.  As of December 26,2009, the $2.0 million investment balance is classified as current based onexpected payments from Available Cash Flow.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

**4.****                                     ****Investment in Leasing Operations:**

 

Investment in leasingoperations consists of the following:

 
| ** **                                                  | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Minimum  lease payments receivable                          |       | $                          | 40,868,500 |                       | $          | 51,110,200 |   |
| Estimated  residual value of equipment                      |       | 2,954,400                  |       | 2,406,500                  |       |
| Unearned  lease income net of initial direct costs deferred |       | (6,412,900                 | )          | (8,675,300                 | )          |
| Security  deposits                                          |       | (1,928,200                 | )          | (1,707,700                 | )          |
| Allowance  for credit losses                                |       | (1,339,400                 | )          | (1,538,900                 | )          |
| Equipment  installed on leases not yet commenced            |       | 2,857,200                  |       | 3,820,200                  |       |
| Total  net investment in leases                             |       | 36,999,600                 |       | 45,415,000                 |       |
| Less:  net investment in leases — current              |       | (17,575,900                | )          | (17,379,700                | )          |
| Net  investment in leases — long-term                  |       | $                          | 19,423,700 |                       | $          | 28,035,300 |   |

 

The Company had $2,995,000 and $1,644,700 of write-offs,net of recoveries, related to the lease portfolio during 2009 and 2008,respectively.

 

As of December 26,2009, no customer had leased assets totaling more than 10% of the Company’stotal assets.  As of December 27,2008, leased assets with one customer approximated 13% of the Company’s totalassets.

 

Minimum lease paymentsreceivable under lease contracts and the amortization of unearned lease income,net of initial direct costs deferred, is as follows as of December 26,2009:

 
| **Fiscal  Year** | ** ** | **Minimum Lease  Payments Receivable** | ** ** | **Income  Amortization** | ** ** |
|------------------|------------|----------------------------------------|------------|--------------------------|------------|
| 2010             |       | $                                      | 22,028,400 |                     | $          | 4,355,700 |   |
| 2011             |       | 12,691,100                             |       | 1,650,300                |       |
| 2012             |       | 5,331,800                              |       | 369,000                  |       |
| 2013             |       | 771,000                                |       | 36,900                   |       |
| 2014             |       | 46,200                                 |       | 1,000                    |       |
| Thereafter       |       | —                                 |       | —                   |       |
|             |       | $                                      | 40,868,500 |                     | $          | 6,412,900 |   |

 

The activity in theallowance for credit losses for leasing operations is as follows:

 
| ** **                          | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Balance  at beginning of year       |       | $                          | 1,538,900  |                       | $          | 613,800 |   |
| Provisions  charged to expense      |       | 2,795,500                  |       | 2,569,800                  |       |
| Recoveries                          |       | 178,800                    |       | 313,900                    |       |
| Deductions  for amounts written-off |       | (3,173,800                 | )          | (1,958,600                 | )          |
| Balance  at end of year             |       | $                          | 1,339,400  |                       | $          | 1,538,900 |   |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26, 2009and December 27, 2008

 

**5.             Receivables:**

 

The Company’s currentreceivables consisted of the following:

 
| ** **                   | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Trade                        |       | $                          | 284,200    |                       | $          | 570,900 |   |
| Royalty                      |       | 1,108,600                  |       | 1,288,900                  |       |
| Notes  receivable            |       | 41,100                     |       | 76,600                     |       |
| Other                        |       | 342,100                    |       | 166,900                    |       |
|                         |       | 1,776,000                  |       | 2,103,300                  |       |
| Less:  long-term receivables |       | (14,900                    | )          | (39,200                    | )          |
| Current  receivables         |       | $                          | 1,761,100  |                       | $          | 2,064,100 |   |

 

The activity in theallowance for doubtful accounts for accounts and note receivables is asfollows:

 
| ** **                          | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Balance  at beginning of year       |       | $                          | 56,800     |                       | $          | 58,000 |   |
| Provisions  charged to expense      |       | (15,700                    | )          | (300                       | )          |
| Deductions  for amounts written-off |       | (4,000                     | )          | (900                       | )          |
| Balance  at end of year             |       | $                          | 37,100     |                       | $          | 56,800 |   |

 

As part of its normaloperating procedures, the Company requires Standby Letters of Credit ascollateral for a portion of its trade receivables.

 

**6.             Shareholders’ Equity:**

 

***Repurchaseof Common Stock***

 

Under the board of directors’ authorization, as of December 26,2009, the Company had the ability to repurchase up to 4,500,000 shares of itscommon stock, of which all but 260,956 shares had been repurchased.  Repurchases may be made from time to time atprevailing prices, subject to certain restrictions on volume, pricing andtiming.  Since inception of stockrepurchase activities in November 1995 through December 26, 2009, theCompany has repurchased 4,239,044 shares of its stock at an average price of$14.32 per share.  In 2009, the Companyrepurchased 313,585 shares for an aggregate purchase price of $5,283,500 or$16.85 per share.  In 2008, the Companyrepurchased 110,213 shares for an aggregate purchase price of $1,720,000 or$15.61 per share.

 

***StockOption Plans***

 

The Company hasauthorized up to 750,000 shares of common stock to be reserved for grantingeither nonqualified or incentive stock options to officers and key employeesunder the Company’s 2001 Stock Option Plan (“the 2001 Plan”).

 

Grants under the 2001 Plan are made by the Board ofDirectors or a Board-designated committee at a price of not less than 100% ofthe fair market value on the date of grant. If an incentive stock option is granted to an individual who owns morethan 10% of the voting rights of the Company’s common stock, the option exerciseprice may not be less than 110% of the fair market value on the date ofgrant.  The term of the options may notexceed 10 years, except in the case of nonqualified stock options, whereby theterms are established by the Board of Directors or a Board-designatedcommittee.  Options may be exercisable inwhole or in installments, as determined by the Board of Directors or aBoard-designated committee.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

TheCompany also sponsors a Stock Option Plan for Nonemployee Directors (the“Nonemployee Directors Plan”) and has reserved a total of 300,000 shares forissuance to directors of the Company who are not employees.  At the April 29, 2009 AnnualShareholders Meeting, the Company’s shareholders approved a resolution (asdescribed more completely in the Company’s definitive Proxy Statement filedwith the United States Securities and Exchange Commission on March 16,2009) to amend the Nonemployee Directors Plan to provide the CompensationCommittee with the discretion to award stock option grants to the outsidemembers of the Board of Directors on a more frequent than annual basis.

 

Stock option activity under the 2001 Plan andNon-employee Directors Plan as of December 26, 2009 was as follows:

 
| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted Average Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (years)** | ** ** | **Intrinsic Value** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|------------------------------------------------------------|------------|---------------------|------------|
| Outstanding  at December 29, 2007 |       | 443,300               |       | $                                   | 19.35      |                                                       | 7.67       |                | $          | — |   |
| Granted                                |       | 118,000               |       | 14.39                               |       |                                                       |       |                |       |
| Exercised                              |       | —                |       | —                              |       |                                                       |       |                |       |
| Forfeited                              |       | (12,500               | )          | 22.08                               |       |                                                       |       |                |       |
| Outstanding  at December 27, 2008 |       | 548,800               |       | 18.22                               |       | 7.36                                                       |       | —              |       |
| Granted                                |       | 100,750               |       | 17.55                               |       |                                                       |       |                |       |
| Exercised                              |       | (5,000                | )          | 10.00                               |       |                                                       |       |                |       |
| Forfeited                              |       | (29,900               | )          | 20.11                               |       |                                                       |       |                |       |
| Outstanding  at December 26, 2009 |       | 614,650               |       | $                                   | 18.08      |                                                       | 6.93       |                | $          | 2,524,800 |   |
| Exercisable  at December 26, 2009 |       | 342,790               |       | $                                   | 18.62      |                                                       | 5.59       |                | $          | 1,286,600 |   |

 

Options outstanding as of December 26, 2009 areexercisable as follows:

 
| ** **                   | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                    | ** ** |
|------------------------------|------------|-------------------------|------------|------------------------------------------------------------|------------|
| **Range of  Exercise Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $                            |  9.91 | -                       | $          |  13.01                                                |       | 176,300 |   | 6.98 |   | $ | 11.94 |   | 75,484 |   | $ | 10.69 |   |
| 16.52                        | -          | 20.32                   |       | 179,850                                                    |       | 6.81 |   | 18.72 |   | 108,056 |   | 19.20 |   |
| 20.46                        | -          | 26.05                   |       | 258,500                                                    |       | 6.98 |   | 21.83 |   | 159,250 |   | 21.99 |   |
|                         |       |                    |       | 614,650                                                    |       | 6.93 |   | $ | 18.08 |   | 342,790 |   | $ | 18.62 |   |
|                              |            |                         |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic valueof options exercised during 2009 and 2008 was $14,500 and $0,respectively.  The total fair value ofshares vested during 2009 and 2008 was $1,840,100 and $1,715,800, respectively.

 

All unexercised optionsat December 26, 2009 have an exercise price equal to the fair market valueon the date of the grant.

 

As of December 26,2009, the Company had $1,438,500 of total unrecognized compensation expenserelated to stock options that is expected to be recognized over the remainingweighted average vesting period of approximately 2.1 years.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***Warrants***

 

OnMarch 22, 2000, Sheldon Fleck, a former consultant to the Company, wasgranted a warrant to purchase 200,000 shares of common stock at an exerciseprice of $6 per share.  This warrantwould have expired on March 22, 2008 if unexercised.  On October 4, 2007 and January 17,2008, Mr. Fleck exercised 25,000 and 175,000 of the warrant shares,respectively.  The exercise of thewarrant shares resulted in a $1,025,500 tax benefit in 2008 which was recordedas an increase to common stock.

 

**7.****                                     ****Long-term Debt:**

 

OnJune 10, 2008, the Company amended and restated its 364-Day RevolvingCredit Agreement with Bank of America, N.A. to, among other things, join ThePrivateBank and Trust Company as lender and Documentation Agent, appoint Bankof America as Administrative Agent, increase the aggregate commitment to $55.0million and extend the term to June 15, 2013.  The Amended and Restated Revolving CreditAgreement (the “Credit Facility”) permits the Company to borrow up to theaggregate commitment subject to certain borrowing base limitations.  On August 12, 2009, the Company amendedthe Credit Facility to reduce the aggregate commitment to $40.0 million.

 

TheCredit Facility allows the Company to choose between three interest rateoptions in connection with its borrowings. The interest rate options are the Base Rate, LIBOR and Fixed Rate (allas defined within the Credit Facility) plus an applicable margin of 0%, 2.00%and 2.00%, respectively.  Interestperiods for LIBOR borrowings can be one, two, three or six months, and interestperiods for Fixed Rate borrowings can be one, two, three, four or five years asselected by the Company.  The CreditFacility also provides for non-utilization fees of 0.25% per annum on the dailyaverage of the unused commitment.

 

Asof December 26, 2009, the Company’s borrowing availability under theCredit Facility was $40.0 million (the lesser of the borrowing base or theaggregate line of credit).  There were$9.3 million in borrowings outstanding under the Credit Facility bearing FixedRate interest ranging from 4.58% to 5.76% and having initial terms ranging fromthree years to five years, leaving $30.7 million available for additionalborrowings at December 26, 2009.

 

TheCredit Facility will be used for growing the Company’s leasing business, stockrepurchases and general corporate purposes. The Credit Facility is secured by a lien against substantially all ofthe Company’s assets, contains customary financial conditions and covenants,and requires maintenance of minimum levels of debt service coverage and tangiblenet worth and maximum levels of leverage (all as defined within the CreditFacility).  As of December 26, 2009the Company was in compliance with all of its financial covenants.

 

Future maturities of lineof credit debt as of December 26, 2009 are as follows:

 
| 2010       |   | $         |     3,980,900 |   |
|------------|--------|-----------|------------------------------|--------|
| 2011       |   | 2,997,000 |                         |
| 2012       |   | 1,610,200 |                         |
| 2013       |   | 693,900   |                         |
| 2014       |   | —    |                         |
| Thereafter |   | —    |                         |
| Total      |   | $         |     9,282,000 |   |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***RenewableUnsecured Subordinated Notes***

 

In2006, the Company filed a public offering of up to $50 million of RenewableUnsecured Subordinated Notes that was declared effective in June of thatyear.  Every year since the registrationbecame effective, we have filed Post-Effective Amendments to keep theregistration statement effective.  As of December 26,2009, the Company has $21,225,600 outstanding in renewable unsecuredsubordinated notes.  The table belowpresents the Company’s outstanding notes payable as of December 26, 2009:

 
| ** **                             | ** ** | **Original Term** | ** ** | **Principal  Amount** | ** ** | **Weighted Average  Interest Rate** | ** ** |
|----------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------------------------|------------|
| Renewable unsecured subordinated notes |       | 3  months         |       | $                     | 992,600    |                                | 6.55       | % |
|                                   |       | 6  months         |       | 506,600               |       | 7.26                                | %          |
|                                   |       | 1  year           |       | 2,450,100             |       | 8.27                                | %          |
|                                   |       | 2  years          |       | 3,162,700             |       | 9.29                                | %          |
|                                   |       | 3  years          |       | 5,181,100             |       | 9.95                                | %          |
|                                   |       | 4  years          |       | 1,973,500             |       | 9.86                                | %          |
|                                   |       | 5  years          |       | 5,998,500             |       | 10.11                               | %          |
|                                   |       | 10  years         |       | 960,500               |       | 10.51                               | %          |
| Total                                  |       |              |       | $                     | 21,225,600 |                                | 9.50       | % |

 

The Company made interestpayments of $2,010,900 and $1,827,300 on the renewable unsecured subordinatednotes during 2009 and 2008, respectively. The weighted average initial and remaining terms of the outstandingrenewable unsecured subordinated notes are 41 months and 18 months,respectively.

 

The Company incurredcosts related to the issuance of the Renewable Unsecured Subordinated Notes inthe amount of $231,800.  The costs can bebroken into three distinct categories (i) offering costs (ii) ongoingcosts (iii) annual costs.  Thesecosts have been capitalized and are being amortized as a component of interestexpense.  The offering and ongoing costsassociated with the debt offering are being amortized over the weighted-averageterm of the debt.  In connection with thedebt offering, the Company will incur certain annual costs that are beingamortized over a 12-month period.

 

Future maturities ofrenewable unsecured subordinated notes as of December 26, 2009 are asfollows:

 
| 2010       |   | $         | 9,166,900  |   |
|------------|--------|-----------|------------|--------|
| 2011       |   | 9,346,600 |       |
| 2012       |   | 1,116,100 |       |
| 2013       |   | 440,000   |       |
| 2014       |   | 195,500   |       |
| Thereafter |   | 960,500   |       |
| Total      |   | $         | 21,225,600 |   |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

**8.****                                     ****Accrued Liabilities**

 

Accrued liabilities at December 26,2009 and December 27, 2008 are as follows:

 
| ** **                                        | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Accrued  salaries, wages, commissions and bonuses |       | $                          | 534,100    |                       | $          | 1,088,800 |   |
| Accrued  advertising                              |       | 6,400                      |       | 193,100                    |       |
| Accrued  vacation                                 |       | 190,300                    |       | 166,100                    |       |
| Accrued  restructuring liability                  |       | 170,000                    |       | 170,000                    |       |
| Accrued  lease reserves                           |       | 71,000                     |       | 71,000                     |       |
| Accrued  interest                                 |       | 460,600                    |       | 336,200                    |       |
| Other                                             |       | 361,700                    |       | 880,200                    |       |
|                                              |       | $                          | 1,794,100  |                       | $          | 2,905,400 |   |

 

**9.****                                     ****Discounted Lease Rentals**

 

TheCompany utilized certain lease receivables and underlying equipment ascollateral to borrow from financial institutions at a weighted average rate of5.7% at December 26, 2009 on a non-recourse basis.  In the event of a default by a customer innon-recourse financing, the financial institution has a first lien on theunderlying leased equipment, with no further recourse against the Company.  As of December 26, 2009, $1.0 million ofthe $1.5 million liability balance is current.

 

**10.****                              ****Income Taxes:**

 

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

 
| ** **                                            | ** ** | **Year Ended**             | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| Federal  income tax expense at statutory rate (34%)   |       | $                          | 3,342,300  |   | $ | 1,308,200 |   |
| Valuation  allowance                                  |       | 38,900                     |       | 1,225,200 |   |
| Increase  (decrease) in income taxes resulting from:  |       |                       |       |   |   |
| State  and local income taxes, net of federal benefit |       | 483,500                    |       | 175,500 |   |
| Nondeductible  items, including stock option expenses |       | 126,000                    |       | 129,500 |   |
| Adjustment  to uncertain tax positions                |       | (9,600                     | )          | (127,300 | ) |
| Other,  net                                           |       | 100                        |       | (3,000 | ) |
| Actual  income tax expense                            |       | $                          | 3,981,200  |   | $ | 2,708,100 |   |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

Components of theprovision (benefit) for income taxes are as follows:

 
| ** **                             | ** ** | **Year Ended**             | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| Current:                               |       |                       |       |   |   |
| Federal                                |       | $                          | 1,645,900  |   | $ | 1,569,400 |   |
| State                                  |       | 368,800                    |       | 370,000 |   |
| Foreign                                |       | 166,300                    |       | 204,300 |   |
| Current  provision                     |       | 2,181,000                  |       | 2,143,700 |   |
| Deferred:                              |       |                       |       |   |   |
| Federal                                |       | 1,446,000                  |       | 569,000 |   |
| State                                  |       | 363,800                    |       | 122,700 |   |
| Deferred  provision                    |       | 1,809,800                  |       | 691,700 |   |
| Adjustment  to uncertain tax positions |       | (9,600                     | )          | (127,300 | ) |
| Total  provision for income taxes      |       | $                          | 3,981,200  |   | $ | 2,708,100 |   |

 

The tax effects of temporary differences that giverise to the net deferred income tax assets are presented below:

 
| ** **                                    | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Deferred  tax assets:                         |       |                       |       |                       |       |
| Accounts  receivable and lease reserves       |       | $                          | 533,300    |                       | $          | 612,700 |   |
| Depreciation  and amortization                |       | -                          |       | 51,000                     |       |
| Accrued  restructuring charge                 |       | 65,800                     |       | 65,300                     |       |
| Non-qualified  stock option expense           |       | 766,900                    |       | 578,500                    |       |
| Deferred  franchise and software license fees |       | 397,600                    |       | 339,500                    |       |
| Trademarks                                    |       | 117,900                    |       | 119,600                    |       |
| Lease  deposits                               |       | 747,000                    |       | 655,800                    |       |
| Loss  from affiliates                         |       | 2,024,600                  |       | 1,984,000                  |       |
| Valuation  allowance                          |       | (1,833,600                 | )          | (1,794,700                 | )          |
| Other                                         |       | 258,200                    |       | 111,200                    |       |
| Total  deferred tax assets                    |       | 3,077,700                  |       | 2,722,900                  |       |
| Deferred  tax liabilities:                    |       |                       |       |                       |       |
| Lease  revenue and initial direct costs       |       | (4,151,300                 | )          | (2,185,200                 | )          |
| Depreciation  and amortization                |       | (198,500                   | )          | —                     |       |
| Total  deferred tax liabilities               |       | (4,349,800                 | )          | (2,185,200                 | )          |
| Total  net deferred tax assets                |       | $                          | (1,272,100 | )                          | $          | 537,700 |   |

 

During the years ended December 26, 2009 and December 27,2008, $55,500 and $1,011,400, respectively, was directly credited tostockholders’ equity to account for excess tax benefits related to stock optionand warrant exercises.

 

The Company has assessedits taxable earnings history and prospective future taxable income.  Based upon this assessment, the Company hasdetermined that it is more likely than not that its deferred tax assets will berealized in future periods and no valuation allowance is necessary, except fordeferred tax assets related to loss from affiliates.  A valuation allowance of $1,833,600 and$1,794,700 as of December 26, 2009 and December 27, 2008,respectively, has been recorded for these losses.

 

The amount of unrecognizedtax benefits, including interest and penalties, as of December 26, 2009and December 27, 2008, was $120,500 and $130,100, respectively, primarilyfor potential foreign and state taxes.

 

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**WI****NMARK CORPORATION ANDSUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

The Company recognizesinterest accrued related to unrecognized tax benefits and penalties as incometax expense for all periods presented. The Company had accrued approximately $8,400 and $11,600 for the paymentof interest and penalties at December 26, 2009 and December 27, 2008,respectively.

 

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

** **
| ** **                                                            | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|
| Balance at December 29, 2007                                     |       | $         | 232,300    |   |
| Increases related to current year tax positions                       |       | 34,100    |       |
| Reductions for tax positions of prior years                           |       | (85,000   | )          |
| Expiration of the statute of limitations for the  assessment of taxes |       | (63,000   | )          |
| Balance at December 27, 2008                                     |       | 118,400   |       |
| Increases related to current year tax positions                       |       | 32,100    |       |
| Reductions for tax positions of prior years                           |       | (7,700    | )          |
| Expiration of the statute of limitations for the assessment of taxes  |       | (30,700   | )          |
| Balance at December 26, 2009                                     |       | $         | 112,100    |   |

 

**11.****                              ****Commitments and Contingencies:**

 

***EmployeeBenefit Plan***

 

The Company provides a401(k) Savings Incentive Plan which covers substantially allemployees.  The plan provides formatching contributions and optional profit-sharing contributions at thediscretion of the Board of Directors. Employee contributions are fully vested; matching and profit sharingcontributions are subject to a five-year service vesting schedule.  Company contributions to the plan for 2009and 2008 were $291,600 and $282,100, respectively.

 

***OperatingLeases***

 

As of December 26,2009, the Company rents its corporate headquarters in a facility with a leasethat expires in August 2019 as well as satellite office space in Georgia,Colorado and California with leases that expire from 2011 to 2014.  These leases require the Company to paymaintenance, insurance, taxes and other expenses in addition to minimum annualrent.  Total rent expense under operatingleases was $753,400 in 2009 and $547,600 in 2008.  As of December 26, 2009, minimum rentalcommitments under noncancelable operating leases, exclusive of maintenance,insurance, taxes and other expenses, are as follows:

 
| 2010       |   | $         | 564,800   |   |
|------------|--------|-----------|-----------|--------|
| 2011       |   | 551,300   |      |
| 2012       |   | 534,900   |      |
| 2013       |   | 545,300   |      |
| 2014       |   | 512,000   |      |
| Thereafter |   | 2,481,600 |      |
| Total      |   | $         | 5,189,900 |   |

 

In addition to theoperating leases obligations disclosed above, the Company has remained aguarantor on Company-owned retail stores that have been either sold orclosed.  At December 26, 2009 and December 27,2008, $71,000 and $71,000, respectively, is included in accrued liabilitiesrelating to these guarantees.  TheCompany believes it has adequate accruals for any future liability.

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

***Litigation***

 

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

 

**12.****         ****Segment Reporting**

 

The Company currently hastwo reportable business segments, franchising and leasing.  The franchising segment franchisesvalue-oriented retail store concepts that buy, sell, trade and consignmerchandise and Wirth Business Credit, Inc., our small ticket leasingfranchise.  The leasing segment includes (i) WinmarkCapital Corporation, a middle-market equipment leasing business and (ii) WirthBusiness Credit, Inc., a small-ticket financing business.  Segment reporting is intended to givefinancial statement users a better view of the how the Company manages andevaluates its businesses.   The Company’sinternal management reporting is the basis for the information disclosed forits business segments and includes allocation of shared-service costs.  Segment assets are those that are directlyused in or identified with segment operations, including cash, accountsreceivable, prepaids, inventory, property and equipment and investment inleasing operations.  Unallocated assetsinclude corporate cash and cash equivalents, marketable securities, current andlong-term investments, deferred tax amounts and other corporate assets.  Inter-segment balances and transactions havebeen eliminated.  The following tablessummarize financial information by segment and provide a reconciliation ofsegment contribution to operating income:

 
| ** **                           | ** ** | **Year Ended**             | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| Revenue:                             |       |                       |       |   |   |
| Franchising                          |       | $                          | 27,748,300 |   | $ | 27,330,800 |   |
| Leasing                              |       | 9,547,700                  |       | 8,092,800 |   |
| Total  revenue                       |       | $                          | 37,296,000 |   | $ | 35,423,600 |   |
|                                 |       |                       |       |   |   |
| Reconciliation  to operating income: |       |                       |       |   |   |
| Franchising  segment contribution    |       | $                          | 12,205,600 |   | $ | 10,019,500 |   |
| Leasing  segment contribution        |       | (1,425,200                 | )          | (1,928,400 | ) |
| Total  operating income              |       | $                          | 10,780,400 |   | $ | 8,091,100 |   |
|                                 |       |                       |       |   |   |
| Depreciation  and amortization:      |       |                       |       |   |   |
| Leasing                              |       | $                          | 42,300     |   | $ | 67,800 |   |
| Allocated                            |       | 487,800                    |       | 322,600 |   |
| Total  depreciation and amortization |       | $                          | 530,100    |   | $ | 390,400 |   |

 
| ** **            | ** ** | **As of**                  | ** ** |
|-----------------------|------------|----------------------------|------------|
| ** **            | ** ** | **December 26, 2009** | ** ** | **December 27, 2008** | ** ** |
| Identifiable  assets: |       |                       |       |   |   |
| Franchising           |       | $                          | 3,137,300  |   | $ | 3,835,100 |   |
| Leasing               |       | 38,281,900                 |       | 47,500,800 |   |
| Unallocated           |       | 15,385,300                 |       | 6,773,900 |   |
| Total                 |       | $                          | 56,804,500 |   | $ | 58,109,800 |   |

 

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**WINMARKCORPORATION AND SUBSIDIARIES**

 

Notes to theConsolidated Financial Statements

December 26,2009 and December 27, 2008

 

**13. Related Party Transactions:**

 

On February 27, 2009, Sheila Morgan, spouseof John L. Morgan, Chief Executive Officer and Chairman of Winmark, subscribedfor and purchased $300,000 of three month maturity unsecured subordinated noteson a monthly interest payment schedule at the rates described on the InterestRate Supplement filed on Form 424(b)(2) with the Securities andExchange Commission on March 31, 2008 (“March 2008 Interest RateSupplement”) offered by Winmark pursuant to a prospectus and related documentsdeclared effective on March 27, 2008 (“March 2008 Prospectus”).  In connection with her investment, Mrs. Morganagreed that her notes would be voted consistent with the majority of theremaining noteholders in an event of default.

 

On March 2, 2009, John L. Morgan subscribedfor and purchased $1.6 million of unsecured subordinated notes of variousmaturities ($200,000 of six month maturity, $200,000 of one year maturity,$200,000 of two year maturity, $130,000 of three year maturity, $180,000 offour year maturity, $190,000 of five year maturity and $500,000 of ten yearmaturity) all on a monthly interest payment schedule at the rates described inthe March 2008 Interest Rate Supplement offered by Winmark pursuant to theMarch 2008 Prospectus.  Inconnection with his investment, Mr. Morgan agreed that his notes would bevoted consistent with the majority of the remaining noteholders in an event ofdefault.

 

**14.****         ****Quarterly Financial Data(Unaudited):**

 

The Company’s unaudited quarterly results for theyears ended December 26, 2009 and December 27, 2008 were as follows:

 
| ** **                                    | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
| 2009                                          |       |               |       |                |       |               |       |                |       |       |       |
| Total  Revenue                                |       | $                  | 9,250,000  |                | $          | 8,838,100          |       | $                   | 9,824,800  |       | $          | 9,383,100 |   | $ | 37,296,000 |   |
| Income  from Operations                       |       | 2,669,400          |       | 2,239,400           |       | 3,186,700          |       | 2,684,900           |       | 10,780,400 |       |
| Net  Income                                   |       | 1,413,700          |       | 1,195,300           |       | 1,779,500          |       | 1,460,500           |       | 5,849,000  |       |
| Net  Income Per Common Share — Basic     |       | $                  | .26        |                | $          | .22                |       | $                   | .34        |       | $          | .28 |   | $ | 1.10 |   |
| Net  Income Per Common Share - Diluted        |       | $                  | .26        |                | $          | .22                |       | $                   | .33        |       | $          | .28 |   | $ | 1.10 |   |
| 2008                                          |       |               |       |                |       |               |       |                |       |       |       |
| Total  Revenue                                |       | $                  | 8,877,400  |                | $          | 8,717,300          |       | $                   | 9,128,200  |       | $          | 8,700,700 |   | $ | 35,423,600 |   |
| Income  from Operations                       |       | 1,926,700          |       | 1,905,800           |       | 2,610,500          |       | 1,648,100           |       | 8,091,100  |       |
| Net  Income (Loss)                            |       | 937,300            |       | 930,500             |       | 1,350,800          |       | (2,079,200          | )          | 1,139,400  |       |
| Net  Income (Loss) Per Common Share - Basic   |       | $                  | .17        |                | $          | .17                |       | $                   | .24        |       | $          | (.38 | ) | $ | .21 |   |
| Net  Income (Loss) Per Common Share - Diluted |       | $                  | .17        |                | $          | .17                |       | $                   | .24        |       | $          | (.38 | ) | $ | .21 |   |

 

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

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Boardof Directors and Shareholders

WinmarkCorporation

 

We have audited theaccompanying consolidated balance sheets of Winmark Corporation (a MinnesotaCorporation) and subsidiaries as of December 26, 2009 and December 27,2008, and the related consolidated statements of operations, shareholders’equity and comprehensive income, and cash flows for the years ended December 26,2009 and December 27, 2008.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company isnot required to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.**We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Winmark Corporationand subsidiaries as of December 26, 2009 and December 27, 2008, andthe results of their operations and their cash flows for the years ended December 26,2009 and December 27, 2008 in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

/s/GRANT THORNTON LLP

 

 

Minneapolis,Minnesota

March 11,2010

 

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**ITEM 9:****                 ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T):****       ****CONTROLS AND PROCEDURES**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”)).  Based on that evaluation, ourprincipal executive officer and principal financial officer have concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures are effective as of December 26, 2009.  During the period covered by this AnnualReport on Form 10-K, there was no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the ExchangeAct that materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control —Integrated Framework, our management concluded that our internal control overfinancial reporting was effective as of December 26, 2009.

 

Due to its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate due to changes in conditions, or that thedegree of compliance with the policies and procedures may deteriorate.

 

This annual report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting.  Internal control over financial reporting wasnot subject to attestation by the company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the company to provide only management’s report in this annual report.

 

**ITEM 9B:****             ****OTHER INFORMATION**

 

All information requiredto be reported in a report on Form 8-K during the fourth quarter coveredby this Form 10-K has been reported.

 

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**PART III**

 

**ITEM 10:****              ****DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

The sections entitled“Election of Directors,” “Executive Officers,” “Audit Committee,” “Majority ofIndependent Directors; Committees of Independent Directors,” “Section 16(a) BeneficialOwnership Reporting Compliance,” and “Code of Ethics and Business Conduct,”appearing in our proxy statement for the annual meeting of stockholders to beheld on April 28, 2010 are incorporated herein by reference.

 

**ITEM 11:**               EXECUTIVE COMPENSATION

** **

The sections entitled“Executive Compensation” and “Director Compensation” appearing in our proxystatement for the annual meeting of stockholders to be held on April 28,2010 are incorporated herein by reference.

 

**ITEM 12:**               SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The sections entitled“Security Ownership of Certain Beneficial Owners, Directors and ExecutiveOfficers” and “Securities Authorized for Issuance Under Equity CompensationPlans” appearing in our proxy statement for the annual meeting of stockholdersto be held on April 28, 2010 are incorporated herein by reference.

 

**ITEM 13:****              ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The sections entitled“Transactions with Related Persons, Promoters and Certain Control Persons” and“Majority of Independent Directors; Committees of Independent Directors”appearing in our proxy statement for the annual meeting of stockholders to beheld on April 28, 2010 is incorporated herein by reference.

 

**ITEM 14:****              ****PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

The section entitled“Principal Accountant Fees and Services” appearing in our proxy statement forthe annual meeting of stockholders to be held April 28, 2010 isincorporated herein by reference.

 

**PART IV**

 

**ITEM 15:****              ****EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

The following documentsare filed as a part of this Report:

 

1.**            **Financial Statements

The financial statementsfiled as part of this report are listed on the Index to

Consolidated FinancialStatements on page 30

 

2.**            **Financial Statement Schedules

All schedules for whichprovision is made in the applicable accounting regulations of the SEC have beenomitted as not required or not applicable, or the information required has beenincluded elsewhere by reference in the consolidated financial statements andrelated items.

 

3.**            **Exhibits

See Exhibit Indeximmediately following the signature page.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

**WINMARKCORPORATION**

 
| ** **                                           | By:        | /s/ JOHN L. MORGAN | ** ** | ** ** | Date: March 11,  2010 |
|------------------------------------------------------|------------|--------------------|------------|------------|----------------------------|
| John L. Morgan  Chairman and Chief Executive Officer | ** ** |               |

 

KNOWN TO ALL PERSONS BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints John L. Morgan and Anthony D. Ishaug and each of them, his true andlawful attorney-in-fact and agent, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any amendments to this Form 10-K, and to file thesame, with exhibits thereto and other documents in connection therewith, withthe Securities and Exchange Commission, hereby ratifying and confirming allthat said attorney-in-fact or his substitute or substitutes, may do or cause tobe done by virtue hereof.

 

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

 
| **SIGNATURE**          | ** ** | **TITLE**                                          | ** ** | **DATE**             |
|------------------------|------------|----------------------------------------------------|------------|----------------------|
|                   |       |                                               |       |                 |
| /s/  JOHN L. MORGAN    |       | Chairman of the Board and  Chief Executive Officer |       | March 11,  2010 |
| John  L. Morgan        |       | (principal executive  officer)                     |       |                 |
|                   |       |                                               |       |                 |
|                   |       |                                               |       |                 |
| /s/  ANTHONY D. ISHAUG |       | Chief Financial Officer  and Treasurer             |       | March 11,  2010 |
| Anthony  D. Ishaug     |       | (principal financial  and accounting officer)      |       |                 |
|                   |       |                                               |       |                 |
|                   |       |                                               |       |                 |
| /s/  KIRK A. MACKENZIE |       | Vice Chairman and  Director                        |       | March 11,  2010 |
| Kirk  A. MacKenzie     |       |                                               |       |                 |
|                   |       |                                               |       |                 |
|                   |       |                                               |       |                 |
| /s/  JENELE C. GRASSLE |       | Director                                           |       | March 11,  2010 |
| Jenele  C. Grassle     |       |                                               |       |                 |
|                   |       |                                               |       |                 |
|                   |       |                                               |       |                 |
| /s/  DEAN B. PHILLIPS  |       | Director                                           |       | March 11,  2010 |
| Dean  B. Phillips      |       |                                               |       |                 |
|                   |       |                                               |       |                 |
|                   |       |                                               |       |                 |
| /s/  PAUL C. REYELTS   |       | Director                                           |       | March 11,  2010 |
| Paul  C. Reyelts       |       |                                               |       |                 |
|                   |       |                                               |       |                 |
|                   |       |                                               |       |                 |
| /s/  MARK L. WILSON    |       | Director                                           |       | March 11,  2010 |
| Mark  L. Wilson        |       |                                               |       |                 |

 

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**EXHIBITINDEX**

 

**WINMARKCORPORATION**

**FORM 10-KFOR THE YEAR ENDED DECEMBER 26, 2009**

 
| **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                 |       | Indenture between the  Company and Wells Fargo Bank, National Association dated June 15, 2006  (Exhibit 4.1) (3)                                                                                                                                                                                                             |
| 4.2                 |       | Form of Note  (Exhibit 4.2) (3)                                                                                                                                                                                                                                                                                              |
| 4.3                 |       | Form of Note  Confirmation (Exhibit 4.3) (3)                                                                                                                                                                                                                                                                                 |
| 4.4                 |       | Form of Subscription  Agreement (Exhibit 4.4) (3)                                                                                                                                                                                                                                                                            |
| 4.5                 |       | Paying Agent Agreement  between Wells Fargo Bank, National Association and Winmark Corporation dated  June 15, 2006 (Exhibit 4.5) (3)                                                                                                                                                                                        |
| 4.6                 |       | Current Interest Rates  for Renewable Unsecured Subordinated Notes(4)                                                                                                                                                                                                                                                                  |
| 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)(5)(6)                                                                                                                                                                                                                                            |
| 10.4                |       | Employment Agreement  with John L. Morgan, dated March 22, 2000 (Exhibit 10.1)(5)(7)                                                                                                                                                                                                                                         |
| 10.5                |       | Common Stock Warrant  with Sheldon Fleck, dated March 22, 2000 (Exhibit 10.3)(7)                                                                                                                                                                                                                                             |
| 10.6                |       | First Amendment to  Employment Agreement with John L. Morgan dated February 18, 2001  (Exhibit 10.26)(5)(8)                                                                                                                                                                                                                  |
| 10.7                |       | 2001 Stock Option Plan,  including forms of stock option agreements (Exhibit10.27)(5)(8)                                                                                                                                                                                                                                               |
| 10.8                |       | Second Amendment to  Employment Agreement with John L. Morgan dated March 23, 2006  (Exhibit 10.1)(5)(9)                                                                                                                                                                                                                     |
| 10.9                |       | Third Amendment to  Employment Agreement with John L. Morgan dated December 15, 2006  (Exhibit 10.1)(5)(10)                                                                                                                                                                                                                  |
| 10.10               |       | Amendment No. 1 to  the 2001 Stock Option Plan (Exhibit 10.13)(5) (2)                                                                                                                                                                                                                                                   |
| 10.11               |       | Subscription Agreements  for notes between Winmark Corporation and each of John L. Morgan, Sheila  Morgan, Kirk A. MacKenzie and Rush River Group, LLC — See Exhibits 4.2 and 4.3  for Form of Subscriptions and Notes(11)                                                                                                   |
| 10.12               |       | Securities Purchase  Agreement with BridgeFunds Limited dated October 13, 2004  (Exhibit 10.3)(12)                                                                                                                                                                                                                           |
| 10.13               |       | Amendment No. 1 to  Securities Purchase Agreement with BridgeFunds Limited dated April 14,  2006 (Exhibit 10.1)(13)                                                                                                                                                                                                     |
| 10.14               |       | Amended and Restated  Credit Agreement by and among Winmark Corporation, Winmark Capital  Corporation, Wirth Business Credit, Inc., Grow Biz Games, Inc. and  Bank of America, N.A. (as successor by merger to LaSalle Bank, N.A.) and The  PrivateBank and Trust Company, dated June 10, 2008  (Exhibit 10.1)(14) |
| 10.15               |       | Multi-Tenant Office  Lease with Utah State Retirement Investment Fund for Corporate Headquarters  dated September 28, 2008 (Exhibit 10.1)(15)                                                                                                                                                                                |
| 10.16               |       | First Amendment to  Amended and Restated Revolving Credit Agreement by and among Winmark  Corporation and its Subsidiaries, Bank of America, N.A. (as successor by  merger to LaSalle Bank National Association) and The Private Bank and Trust  Company, dated August 12, 2009 (Exhibit 10.1)(16)                           |
| 10.17               |       | Modification Agreement  by and between Winmark Corporation and BridgeFunds, LLC dated  October 22, 2009 (Exhibit 10.2)(16)                                                                                                                                                                                                   |

 

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18*              |       | 2010 Stock Option Plan,  including forms of stock option agreements                                                                                                                        |
| 12.1*               |       | Statement - Re:  Computation of Ratios                                                                                                                                                     |
| 21.1                |       | Subsidiaries: Grow Biz  Games, Inc., a Minnesota corporation; Wirth Business Credit, Inc.,  a Minnesota corporation and Winmark Capital Corporation, a Minnesota  corporation(2) |
| 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)                                                                                                               |
| 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                                                                                         |

 

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***             **Filed Herewith

 

(1)**          **Incorporated by reference to the specified exhibit tothe Registration Statement on Form S-1, effective August 24, 1993(Reg. No. 33-65108).

 

(2)**          **Incorporatedby reference to the specified exhibit to the Annual Report on Form 10-Kfor the fiscal year ended December 30, 2006.

 

(3)**          **Incorporated by references to the specified exhibit tothe Registration Statement on Form S-1, effective June 16, 2006 (Reg.No. 333-133393).

 

(4)**          **Incorporated by reference to the Prospectus filedpursuant to Rule 424(b)(2) dated March 30, 2009 (Reg. No. 333-133393),as may be amended by subsequent Prospectus filings.

 

(5)**          **Indicates management contracts, compensation plans orarrangements required to be filed as exhibits.

 

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

 

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

 

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

 

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

 

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

 

(11)**        **Incorporated by reference to the Current Reports on Form 8-Kfiled on July 6 and July 19, 2006; March 1, April 10, July 3,October 9, November 8, 2007; and March 6, 2009.

 

(12)**        **Incorporated by reference to the specified exhibit tothe Quarterly Report on Form 10-Q for the fiscal quarter ended September 25,2004.

 

(13)**        **Incorporated by reference to the specified exhibit tothe Current Report on Form 8-K filed on April 5, 2006.

 

(14)**        **Incorporated by reference to the specified exhibit tothe Current Report on Form 8-K filed on June 10, 2008.

 

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

 

(16)**        **Incorporated by reference to the specific exhibit tothe Quarterly Report on Form 10-Q for the fiscal quarter ended September 26,2009.

 

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