<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997
REGISTRATION NO. 333-36911
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 5943 41-1612534
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MN 55426
(612) 936-1000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
YALE T. DOLGINOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PAPER WAREHOUSE, INC.
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MN 55426
(612) 936-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
RUSSELL F. LEDERMAN, ESQ. BRUCE A. MACHMEIER, ESQ.
Maslon Edelman Borman & Brand, LLP KRISTINE L. GABEL, ESQ.
3300 Norwest Center Oppenheimer Wolff & Donnelly
Minneapolis, MN 55402-4140 3400 Plaza VII
(612) 672-8200 45 South Seventh Street
Minneapolis, MN 55402-1609
(612) 607-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997
1,666,667 SHARES
[Paper Warehouse, Inc. LOGO]
COMMON STOCK
All of the 1,666,667 shares of Common Stock offered hereby are being sold by
Paper Warehouse, Inc. Prior to this offering, there has been no public market
for the Common Stock. It is currently estimated that the initial public offering
price will be between $8.00 and $10.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for inclusion of the Common Stock on the
Nasdaq National Market under the symbol "PWHS."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
(1) The Company and a shareholder of the Company (the "Selling Shareholder")
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$550,000.
(3) The Company and the Selling Shareholder have granted the Underwriters an
option, exercisable within 30 days of the date of this Prospectus, to
purchase up to an aggregate of 250,000 additional shares of Common Stock,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Shareholder will be $ ,
$ , $ and $ , respectively. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Shareholder. See "Principal and Selling Shareholders" and "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and are
subject to the right of the Underwriters to withdraw such offer and to reject
any order in whole or in part. It is expected that delivery of the shares of
Common Stock will be made on or about , 1997.
[Dain Bosworth Incorporated LOGO]
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
PAPER OVER 120 STORES NATIONWIDE!
WAREHOUSE
DISCOUNT PARTY & PAPER
[Following is a map of the United States indicating the location of
Company-owned and franchise stores; lines drawn on the map call out the location
of 11 stores in the Denver metropolitan area, 26 stores in the Minneapolis/St.
Paul metropolitan area, 7 stores in the Oklahoma City metropolitan area and 16
stores in the Kansas City metropolitan area]
<TABLE>
<S> <C> <C> <C>
COMPANY STORES FRANCHISE KANSAS (2) NEBRASKA (2)
COLORADO (11) STORES Lawrence Lincoln
Denver Metro Area (11) ARIZONA (5) Topeka NEVADA (1)
IOWA (3) Tucson (4) KENTUCKY (1) Sparks
Des Moines (2) Chandler Lexington NORTH DAKOTA (4)
Ankeny COLORADO (5) LOUISIANA (4) Fargo
KANSAS (9) Westminster Hammond Grand Forks
Kansas City Metro Area Wheat Ridge Mandeville Minot
MISSOURI (9) Longmont Baton Rouge Bismarck
Kansas City Metro Area Boulder Lafayette SOUTH DAKOTA (4)
Columbia Greeley MARYLAND (2) Rapid City
St. Joseph FLORIDA (1) Germantown Sioux Falls
MINNESOTA (29) Panama City Rockville Aberdeen
Minneapolis/St. Paul Metro Area GEORGIA (2) MINNESOTA (1) Watertown
(26) Roswell Duluth TENNESSEE (2)
St. Cloud Savannah MISSISSIPPI (1) Memphis
Rochester ILLINOIS (3) Hattiesburg Madison
Mankato Wheaton MISSOURI (1) TEXAS (2)
OKLAHOMA (10) Decatur Springfield Carrollton
Oklahoma City Metro Area (7) Champaign MONTANA (2) Dallas
Tulsa (3) IOWA (4) Billings WYOMING (2)
WISCONSIN (2) Iowa City Bozeman Casper
Onalaska Sioux City Cheyenne
Eau Claire Fort Dodge
Cedar Falls
</TABLE>
[Following are four pictures of typical store interiors]
[The inside front cover of the Prospectus is a gatefold design. The two
pages contained in the gatefold contain eight photos depicting products sold in
Company stores. Five of the photos (captioned "special occasion") depict
individuals celebrating special occasions (children's birthday, adult birthday,
weddings, theme parties and graduations). The other three photos (captioned
"seasonal and holiday") depict products sold by the Company used to celebrate
Valentine's Day, Halloween and Christmas. Below these pictures is a photo of a
typical Paper Warehouse storefront, a symbol representing the Company's low-
price pledge, a photo of gift wrapped boxes, the Paper Warehouse logo and the
Party Universe logo.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. ALL REFERENCES IN THIS PROSPECTUS TO "PAPER WAREHOUSE" OR THE
"COMPANY" REFER TO PAPER WAREHOUSE, INC. AND ITS WHOLLY-OWNED SUBSIDIARY. EXCEPT
AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS A
37.57-FOR-1 STOCK SPLIT EFFECTED IN SEPTEMBER 1997, AND (II) ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." REFERENCES TO
FISCAL YEARS IN THIS PROSPECTUS REFER TO THE FISCAL YEAR ENDING ON THE FRIDAY
NEAREST JANUARY 31 OF THE FOLLOWING CALENDAR YEAR (E.G., FISCAL 1996 ENDED ON
JANUARY 31, 1997).
THE COMPANY
Paper Warehouse is a rapidly growing chain of stores specializing in party
supplies and paper goods operating under the names PAPER WAREHOUSE and PARTY
UNIVERSE. The Company is one of the leading party supplies and paper goods
retailer in number of stores in its four principal markets of Minneapolis/St.
Paul, Kansas City, Denver and Oklahoma City. Paper Warehouse stores offer an
extensive assortment of special occasion, seasonal and everyday paper products,
including party supplies, gift wrap, greeting cards and catering supplies, at
everyday low prices. The Company's 124 stores (73 Company-owned and 51 franchise
stores) are conveniently located in major retail trade areas to provide
customers with easy access to its stores. For the first six months of fiscal
1997, the Company's revenues increased 27.3% to $24.7 million from $19.4 million
for the comparable period of fiscal 1996.
The Company offers a broad selection of party supplies and paper goods for a
wide variety of celebratory occasions and everyday uses, including birthdays,
weddings, baby showers, graduations and other family and religious celebrations,
as well as seasonal events such as Valentine's Day, Easter, Fourth of July,
Halloween, Thanksgiving, Christmas, Hanukkah and New Year's. Through the
Company's 8,500 square foot store prototype, the Company offers a comprehensive
selection of over 19,000 SKUs, which provides customers the convenience of
one-stop shopping for all party supplies and paper goods. The Company's
merchandise is organized by party themes, and the prominent signage and wide
aisles allow customers to easily access and coordinate the merchandise required
for all party occasions. The Company also believes that its extensive selection,
combined with high in-stock positions, often stimulates customers to purchase
additional products.
The Company believes that total United States retail sales of party and
special occasion merchandise (including greeting cards, party supplies, gift
wrap and related items) will grow to approximately $8.9 billion in 1997. Larger
format stores have become the fastest growing retail format within the party
goods industry by offering consumers a broader selection of merchandise at lower
prices compared to traditional party goods retailers. Paper Warehouse, through
its strategy of clustering multiple large format stores in metropolitan markets,
emphasizes both convenient locations and an extensive selection of merchandise
at everyday low prices.
Paper Warehouse's goal is to maintain its position as one of the leading
suppliers of party supplies and paper goods in existing markets and to establish
a dominant position in new markets. Paper Warehouse opened nine Company-owned
stores in fiscal 1997 and plans to open approximately 25 Company-owned stores in
fiscal 1998, of which approximately two-thirds are expected to open in two new
major markets. Additionally, management established three franchise stores in
fiscal 1997 and expects to establish between 15 and 20 franchise stores in
fiscal 1998.
In order to increase its market share in existing markets, achieve a
dominant position in new markets and maximize operating efficiencies, the
Company employs the following growth strategy: (i) open multiple Company-owned
stores close to one another in new and existing metropolitan markets, (ii)
selectively open Company-owned stores in secondary markets that can support one
or two stores and that are contiguous with metropolitan markets where the
Company has existing stores, (iii) establish franchise stores in other markets,
and (iv) continuously refresh, remodel and expand existing stores.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 1,666,667 shares
Common Stock to be outstanding
after the offering.............. 4,247,035 shares (1)
Use of proceeds................... To repay debt outstanding under the Company's revolving
credit facility, to repay Shareholder Notes, to repay
the Subordinated Notes and for new store expansion and
working capital and other general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.......................... PWHS
</TABLE>
- ------------------------
(1) Assumes options and warrants to purchase 377,550 shares are exercised
immediately prior to this offering and an initital public offering price of
$9.00 per share. Does not include an aggregate of 639,641 shares reserved
for issuance under the Company's 1997 Stock Option and Compensation Plan and
Directors Stock Option Plan, of which 202,965 shares will be subject to
options to be granted upon consummation of this offering at an exercise
price equal to the initial public offering price. See "Management--Employee
and Directors Stock Option Plans."
------------------------
The first Paper Warehouse store opened in Minneapolis, Minnesota in 1983.
The current management team purchased this business in 1986 and incorporated the
Company in Minnesota in 1987. The Company's principal executive offices are
located at 7630 Excelsior Boulevard, St. Louis Park, Minnesota 55426 and its
telephone number is (612) 936-1000.
PAPER WAREHOUSE-Registered Trademark- and PARTY
UNIVERSE-Registered Trademark- are trademarks of the Company.
------------------------
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE FEDERAL SECURITIES LAWS, WHICH INVOLVE RISKS AND UNCERTAINTIES AND WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR
OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN SUCH FORWARD-LOOKING STATEMENTS DUE TO A
NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS.
4
<PAGE>
SUMMARY OF FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR FIRST SIX MONTHS
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues........................... $ 15,135 $ 18,218 $ 24,084 $ 33,478 $ 43,002 $ 19,444 $ 24,748
Operating income................... 600 1,096 1,494 1,781 2,080 598 957
Net income......................... 306 980 1,281 1,286 1,303 211 473
Pro forma net income(1)............ 313 608 794 797 808 131 293
Pro forma net income per
share(1)......................... 0.14 0.24 0.32 0.32 0.32 0.05 0.12
OPERATING DATA:
Number of stores open at end of
period:
Company-owned stores............. 37 40 42 55 64 60 68
Franchise stores................. 15 21 29 53 50 52 50
Remodeled stores................. 5 9 8 8 1 1 3
Comparable store sales
increase(2)...................... 8.6% 8.8% 16.6% 13.6%(3) 7.8%(3) 12.4% 9.5%
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(4)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................................... $ 5,561 $ 10,719
Total assets......................................................................... 19,086 22,109
Total debt(5)........................................................................ 11,132 921
Total stockholders' equity........................................................... 2,140 15,389
</TABLE>
- ------------------------
(1) Since February 1, 1993, the Company has been an S corporation and during
this period was not generally subject to corporate income taxes. The
statement of earnings data during this period reflects a pro forma provision
for income taxes as if the Company were subject to corporate income taxes
for such periods. This pro forma provision for income taxes is computed
using a combined federal and state tax rate of 38%. See "S Corporation
Distributions" and Note 10 of Notes to Financial Statements.
(2) Company-owned stores enter the comparable store sales base at the beginning
of their 13th month of operations. Stores in which retail square footage is
increased more than 50%, or stores which are relocated, are no longer
included in the comparable store sales base until 12 months have passed.
(3) For purposes of computing the increase in comparable store sales, this
computation assumes fiscal 1995 was a 52 week year.
(4) Adjusted to give effect to (i) an estimated $166,000 S corporation
distribution to existing shareholders upon consummation of this offering,
(ii) the exercise of options and warrants to purchase an aggregate of
377,550 shares immediately prior to this offering (at an assumed initial
public offering price of $9.00 per share), and (iii) the sale of the Common
Stock offered by the Company hereby (at an assumed initial public offering
price of $9.00 per share) and (iv) the application of the estimated net
proceeds therefrom. See "S Corporation Distributions," "Use of Proceeds" and
Note 10 of Notes to Financial Statements.
(5) Total debt consists of total current and long-term debt. See
"Capitalization."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY.
RISKS ASSOCIATED WITH GROWTH
The Company's ability to increase its sales and net earnings will depend in
part on its ability to open stores in new and existing markets and to operate
such stores on a profitable basis. Paper Warehouse, which currently operates 73
Company-owned stores, opened 11 Company-owned stores during fiscal 1996 and nine
Company-owned stores during fiscal 1997. In fiscal 1998, Paper Warehouse expects
to open approximately 25 Company-owned stores, two-thirds of which are planned
to be opened in two new markets. This planned expansion represents a significant
increase in the number of stores previously opened and operated by the Company.
RISK OF OPENING NEW STORES
The Company's planned expansion in both new and existing markets is subject
to many risks, including, but not limited to, failure to identify suitable
markets, the unavailability of suitable sites on acceptable lease terms and the
failure to obtain qualified management and other store personnel. Operating
stores in new geographic markets may present competitive and merchandising
challenges that are different from those currently faced by the Company in its
existing geographic markets. The Company's expansion plans may also place
significant demands on the Company's management, financial controls, operations
and information systems and may cause the Company to incur higher costs relating
to marketing and operations. The Company's expansion plans will also require an
increase in Company personnel, particularly store managers and sales associates
to operate the Company's new stores. There can be no assurance that the Company
will be able to continue to attract, develop, train and retain the personnel
necessary to pursue and maintain its growth and business strategies.
The Company's continued growth will depend on its ability to increase sales
in its existing stores. The opening of additional Company-owned stores in
existing markets could reduce sales from existing stores located in or near
those markets. Although the Company believes it has planned carefully for the
implementation of its expansion program, there can be no assurance that such
plans can be executed as presently envisioned or that the implementation of
those plans will not have an adverse effect on the Company's business, financial
condition and results of operations. See "Business--Expansion Strategy."
POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company currently intends to finance new stores with cash generated from
operations, together with the net proceeds of this offering, payment terms from
vendors and available borrowings. The Company believes that funds from these
sources will be sufficient to finance the Company's growth plan to open
approximately 25 stores in fiscal 1998. To the extent that the funds generated
from the sources described above are insufficient to finance the Company's
growth plans, the Company would need to raise additional funds through debt or
equity financing. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--Expansion
Strategy."
RISK OF POTENTIAL ACQUISITIONS
As part of its growth strategies, the Company periodically considers
strategic acquisitions of other retail stores or chains in the party supply
industry. As of the date of this Prospectus, the Company has no existing
agreements or commitments to affect any material acquisitions. There can be no
assurance that
6
<PAGE>
suitable acquisition candidates will be identified, that acquisitions can be
consummated or that new stores acquired through such acquisitions can be
operated profitably or integrated successfully into the Company's operations.
Further, growth through acquisition entails certain risks to the Company,
including unanticipated business uncertainties, including diversion of
management attention, legal liabilities and significant costs and expenses to
the Company to complete the acquisition, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISK OF SEASONAL AND QUARTERLY REVENUE AND OPERATING FLUCTUATIONS
The Company's results of operations have historically fluctuated from
quarter to quarter for such reasons as seasonal variations in revenues and
operating expenses, the amount and timing of revenues contributed by new
Company-owned and franchise stores, the costs associated with the opening of new
stores and expenses incurred to support the Company's expansion strategy. As a
result of these seasonal variations, a significant portion of the Company's
operating income is generated in the second and fourth fiscal quarters.
Historically, the Company has engaged in more promotional activity during the
third quarter than the second quarter which results in reduced operating income
for the third quarter as compared to the second quarter. Any factors negatively
affecting the Company during the second and fourth fiscal quarters could have a
material adverse effect on the Company's financial condition and results of
operations for the entire fiscal year. Further, as a result of the seasonality
of the Company's revenue, the Company expects to incur a loss in the first
quarter of each year for the foreseeable future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Quarterly Results
and Seasonality."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends in large part upon the abilities and continued
service of Yale T. Dolginow, its President and Chief Executive Officer, and
Brent D. Schlosser, its Executive Vice President in charge of merchandising.
While the Company has employment agreements with Messrs. Dolginow and Schlosser,
there can be no assurance that the Company will be able to retain the services
of such individuals. Loss of the services of Mr. Dolginow or Mr. Schlosser could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management--Employment Agreements."
RISKS ASSOCIATED WITH FRANCHISEES
During fiscal 1998 the Company plans to establish between 15 and 20 new
franchise stores. The continued growth and success of the Company is dependent
in part upon its ability to attract, contract with and retain qualified
franchisees and the ability of those franchisees to operate their stores
successfully and promote and develop the Paper Warehouse store concept. Although
the Company has established criteria to evaluate prospective franchisees and the
Company's franchise agreements include certain operating standards, each
franchisee operates its store independently and the Company is limited in its
ability to influence day-to-day store operations. There can be no assurance that
franchisees will be able to operate Paper Warehouse stores successfully in their
franchise areas in a manner consistent with the Company's concepts and
standards. Accordingly, the Company's franchisees could operate their stores in
a manner that damages the Company's reputation and, by reducing the gross
revenues of such stores, reduce the franchise revenue received by the Company.
See "Business--Franchising."
FAILURE TO ANTICIPATE AND/OR RESPOND TO MERCHANDISING TRENDS
The Company's success depends, in part, on its ability to anticipate and
respond, in a timely manner, to changing merchandise trends and consumer
demands. The Company makes merchandising decisions well in advance of the
seasons when such merchandise will be sold. Accordingly, any delay or failure by
the Company in identifying and responding to emerging trends could adversely
effect consumer acceptance of
7
<PAGE>
the merchandise in the Company's stores, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Certain licensed products sold by the Company are in great demand for short time
periods making it difficult to project inventory needs for such products.
Significant deviations from projected demand for its products, in particular
licensed products, could have a material adverse effect on the Company's
business, financial condition and results of operations, either from lost sales
due to insufficient inventory, higher carrying costs associated with slower
turning inventory or reduced or eliminated margins due to the need to mark down
excess inventory. See "Business-- Merchandising."
HIGHLY COMPETITIVE MARKET
The party supplies and paper goods retailing business is highly competitive.
Paper Warehouse stores compete with a variety of smaller and larger retailers,
including specialty party supply retailers (including other superstores), card
shops and designated departments in mass merchandisers, discount retailers, toy
stores, drug stores, supermarkets and department stores. Many of the Company's
competitors have substantially greater financial and personnel resources than
the Company. The Company may also encounter additional competition from new
entrants in the future in the Company's existing or planned new markets.
Increased competition by existing or future competitors may have a material
adverse effect on the Company. See "Business--Competition."
IMPLEMENTATION OF NEW INFORMATION SYSTEMS
In order to support the Company's continued expansion and enhance its
competitive position in the industry, the Company has entered into an agreement
to purchase a retail software package from JDA Software Company. Implementation
began during the third quarter of 1997 and is estimated to be completed sometime
during the third quarter of 1998. There can be no assurance that the JDA
Software will be implemented by the third quarter of 1998 or at all. The failure
to complete, or delays or problems in completing the implementation of the JDA
retail software package could have an adverse effect on the Company's business.
RISKS ASSOCIATED WITH PRODUCT SOURCING
The Company purchases its merchandise from approximately 150 suppliers. In
fiscal 1996, the Company's largest supplier represented approximately 13% of the
Company's purchases and the seven largest suppliers accounted for approximately
50% of the Company's purchases. The Company's future success is partially
dependent upon its ability to maintain good relationships with its principal
suppliers. Many of the Company's principal suppliers currently provide the
Company with certain incentives, such as volume purchasing allowances and trade
discounts. A reduction or discontinuance of these incentives could have a
material adverse effect on the Company. The Company does not have contracts with
any of its suppliers, and any supplier could discontinue selling to the Company
at any time. While the Company believes its supplier relationships are good, the
failure by the Company to maintain good relationships with its principal
suppliers could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Product Sourcing
and Inventory Management."
EFFECT OF CHANGES IN CONSUMER PREFERENCES AND ECONOMIC CONDITIONS
The party goods business would be adversely affected if consumer demand for
single-use, disposable party goods were to diminish. For example, if cost
increases in raw materials such as paper or plastic were to cause the Company's
prices to increase significantly, consumers might decide to forgo the
convenience associated with single-use, disposable products and use standard
dinnerware and flatware. Similarly, changes in consumer preferences away from
disposable products and in favor of reusable products for environmental or other
reasons could reduce the demand for the Company's products. In addition, future
adverse changes in economic conditions affecting disposable consumer income,
such as employment levels,
8
<PAGE>
the rate of inflation, interest rates and taxation, could have an adverse effect
on the party good business. Because its operations are located principally in
four metropolitan areas, the Company is also subject to certain regional risks,
such as the economy, weather conditions, natural disasters and governmental
regulations. If any region in which the Company operates stores were to suffer
an economic downturn or other adverse regional events were to occur, there could
be an adverse impact on the Company's sales and profitability and its ability to
implement its planned expansion programs.
GOVERNMENT REGULATION
The Company, as a franchisor, is subject to regulation by the Federal Trade
Commission and also must comply with state laws regulating the offer and sale of
franchises and limiting the Company's ability to terminate or refuse to renew
franchises. The failure to obtain or maintain approvals to sell franchises could
adversely affect the Company. The Company and its franchisees are subject to
laws governing their relationships with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Because a significant number of the Company's employees are paid
at rates related to the federal minimum wage, increases in the minimum wage
would increase the Company's labor costs. See "Business--Government Regulation."
CONTROL BY SHAREHOLDERS
Upon completion of this offering, Yale T. Dolginow, President and Chief
Executive Officer, and Brent D. Schlosser, Executive Vice President, will own or
have the right to vote and control the disposition of 51.9% of the Company's
outstanding Common Stock. Accordingly, these shareholders, acting together, will
have the ability to elect the Company's directors and determine the outcome of
other corporate actions requiring shareholder approval, regardless of the vote
of the other shareholders. Such control by existing shareholders could have the
effect of delaying, deferring or preventing a change in control of the Company.
See "Principal and Selling Shareholders."
DILUTION; DIVIDEND POLICY
Purchasers of Common Stock in this offering will incur immediate and
substantial dilution in the net tangible book value per share of their shares.
At the present time, the Company intends to use any earnings which may be
generated to finance further growth of the Company's business and does not
intend to pay dividends in the foreseeable future. See "Dilution" and "Dividend
Policy."
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Company has applied to have its Common Stock approved for
quotation on the Nasdaq National Market, there can be no assurance that a market
for the Common Stock will develop or, if developed, will be sustained after this
offering. The initial public offering price of the Common Stock will be
determined by negotiations between the Company and the Representative. The
market price for the Common Stock may be volatile and fluctuate depending on
various factors, including the general economy, stock market conditions, analyst
recommendations, news announcements concerning the Company or the party supplies
and paper goods industry, variations in the Company's quarterly and annual
operating results and other factors. The stock market in general, and the market
for shares of small capitalization stocks in particular, have experienced
significant price and volume fluctuations that often have been unrelated to the
operating performance of particular companies. These market fluctuations may
adversely effect the market price of the Common Stock, and the negotiated
initial public offering price may not be indicative of future market prices of
the Common Stock. There can be no assurance that the prices at which the Common
Stock will sell in the public market after this offering will not be lower than
the Price to Public. See "Underwriting."
9
<PAGE>
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF MINNESOTA LAW
Pursuant to the Company's Amended and Restated Articles of Incorporation,
the Board of Directors has authority to fix the rights, preferences, privileges
and restrictions, including voting rights, of any shares of the Company's
preferred stock and to issue such stock without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights and preferences of the holders of
any shares of preferred stock that the Board of Directors may create and issue
in the future. The issuance of any such preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company. In
addition, certain provisions of Minnesota law applicable to the Company could
have the effect of discouraging certain attempts to acquire the Company, which
could deprive the Company's shareholders of opportunities to sell their shares
of Common Stock at prices higher than prevailing market prices and may also have
a depressive effect on the market price of the Company's Common Stock. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
The Company and each of its directors and executive officers and all of its
existing shareholders have agreed with the Underwriters not to sell, offer to
sell, solicit an offer to buy, contract to sell, grant any option to purchase,
or otherwise transfer or dispose of any shares of Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock, for
a period of 180 days after the effective date of this offering without the prior
written consent of the Representative. Following this offering, 4,247,035 shares
of Common Stock will be outstanding. Of such shares, the 1,666,667 shares of
Common Stock offered hereby will be freely tradable by persons who are not
affiliates of the Company and 2,580,368 shares of Common Stock will be subject
to 180-day lock-up agreements with the Underwriters. Upon expiration of the
180-day period, all of these shares will be eligible for public sale under Rule
144, subject in certain cases to volume and manner of sale limitations.
Approximately 90 days after completion of this offering, the Company intends to
file a Registration Statement on Form S-8 covering shares issuable under the
Company's 1997 Employee Stock Option and Compensation Plan and the Directors
Stock Option Plan, thus permitting the resale of such shares by non-affiliates
in the public market without restrictions under the Securities Act. Sales of a
substantial number of shares of Common Stock in the public market following the
offering, or the perception that such sales could occur, could have a material
adverse effect on the price of the Common Stock. See "Shares Eligible for Future
Sale."
S CORPORATION STATUS; DISTRIBUTIONS
Since 1993, the Company has been treated as an S corporation under the
Internal Revenue Code of 1986 as amended (the "Code"). As a result, the
Company's shareholders prior to the consummation of this offering (Messrs.
Dolginow and Schlosser) (the "Current Shareholders") have been directly subject
to tax on the income of the Company for federal, state and certain local income
tax purposes. As an S corporation, the Company has made distributions of
accumulated net income to the Current Shareholders. In connection with this
offering, the Company will be converted to a C corporation and similar
distributions will not be made to the purchasers of Common Stock in this
offering. The Company believes that it has met the S corporation requirements
and, as of the date of this Prospectus, the Internal Revenue Service (the "IRS")
and other applicable state taxing authorities have not challenged the Company's
S corporation status. If, for any reason, the Company were subsequently
determined by the IRS or other applicable state taxing authorities not to have
met S corporation requirements, the Company could be liable to pay corporate
taxes on its income at the effective corporate tax rate for all or a part of the
period from February 1, 1993 through the consummation of this offering, plus
interest and possibly penalties. See "S Corporation Distributions" and "Certain
Transactions."
10
<PAGE>
S CORPORATION DISTRIBUTIONS
The Company has elected to be treated for federal and certain state income
tax purposes as an S corporation under the Code since February 1, 1993. As a
result, earnings of the Company since that time have been taxed for federal and
certain state income tax purposes directly to its Current Shareholders rather
than to the Company. In connection with this offering, the Company will be
converted from an S corporation to a C corporation under the Code. In past
years, the Company has paid annual distributions to its Current Shareholders to
provide them with funds to pay income taxes on such earnings and as a return on
their investment. The Company declared aggregate distributions to its Current
Shareholders of approximately $186,000, $963,000 and $808,000 during fiscal
1993, fiscal 1994 and fiscal 1995, respectively (87% of which was received by
Mr. Dolginow and 13% of which was received by Mr. Schlosser).
In January 1997, the Board of Directors of the Company declared a cash
dividend payable to the Current Shareholders of the Company (the "Fiscal Year
1996 Dividend"). The Fiscal Year 1996 Dividend was equal to the Company's
estimate of its accumulated taxable income from the time of its S corporation
election through the first eleven months of fiscal 1996 to the extent such
taxable income had not previously been distributed. This dividend aggregated
approximately $2.1 million and, following payment of approximately $1.9 million
to Mr. Dolginow and $275,000 to Mr. Schlosser, was loaned back to the Company
pursuant to term promissory notes accruing interest at 5.63% per annum (the
"First Shareholder Notes") that mature on January 13, 1998. In September 1997,
the Board of Directors of the Company declared a cash dividend payable to the
Current Shareholders of the Company (the "First Dividend"). The First Dividend
was equal to the Company's estimate of its accumulated taxable income from the
date of the Fiscal Year 1996 Dividend through the first six months of fiscal
1997 to the extent such taxable income had not previously been distributed. The
First Dividend aggregated approximately $166,000 and, following payment of
approximately $144,000 to Mr. Dolginow and $22,000 to Mr. Schlosser, was loaned
back to the Company pursuant to term promissory notes accruing interest at 5.63%
per annum that mature on October 2, 1998 (the "Second Shareholder Notes" and,
together with the First Shareholder Notes, the "Shareholder Notes"). The
Shareholder Notes will be repaid from the proceeds of this offering. The Board
of Directors of the Company also will declare a cash dividend payable to the
Current Shareholders, concurrent with the consummation of this offering (the
"Second Dividend" and, together with the First Dividend, the "Dividends") equal
to the balance, if any, of accumulated taxable income from the date of the First
Dividend through the date of the conversion of the Company to a C corporation in
connection with this offering. Because the Company does not currently anticipate
that it will have a material amount of accumulated taxable income during the
period from the date of the First Dividend through the date of the conversion of
the Company to a C corporation, the Company does not believe the Second Dividend
will be a material amount. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview." If a Second Dividend
is declared, a portion of the net proceeds of this offering would be used to pay
the dividend. See "Use of Proceeds." Purchasers of the Common Stock in this
offering will not receive any of these distributions.
The Company and the Current Shareholders are parties to an S Corporation Tax
Allocation and Indemnification Agreement (the "Tax Agreement") relating to their
respective income tax liabilities. The Tax Agreement indemnifies the
shareholders for any adjustments causing an increase in the shareholders'
federal and state income tax liability (including interest and penalties)
related to the Company's tax years prior to the consummation of this offering,
unless such adjustments result in or are related to a corresponding decrease in
the shareholders' federal and state income tax liability with respect to another
S corporation taxable year. Subject to certain limitations, the Tax Agreement
also provides that the Company will be indemnified by the shareholders with
respect to federal and state income taxes (plus interest and penalties) shifted
from an S corporation taxable year to a Company taxable year subsequent to the
consummation of this offering. Since the shareholders have not given any
security for their indemnification obligation, the Company's ability to collect
such payments is dependent upon the financial condition of the shareholders at
the time any such indemnification obligation arises. The Company is not aware of
any tax adjustments which may arise under the Tax Agreement. The Tax Agreement
further provides that to the extent that the accumulated taxable income of the
Company prior to its conversion to a C corporation is less than the Dividends,
the Current Shareholders will make a payment equal to such difference to the
Company, and if such accumulated taxable income is greater than the aggregate
amount of the Dividends, the Company will make an additional distribution equal
to such difference to such shareholders, in either case, with interest thereon.
Any payment made by the Company to the Current Shareholders pursuant to the Tax
Agreement may be considered by the Internal Revenue Service or the state taxing
authorities to be nondeductible by the Company for income tax purposes. See Note
10 of Notes to Financial Statements.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering after deducting
underwriting discounts and commissions and estimated offering expenses and
assuming an initial public offering price of $9.00 per share, are estimated to
be approximately $13.4 million ($15.1 million if the Underwriters'
over-allotment option is exercised in full). The Company will not receive any of
the proceeds from the sale of shares by the Selling Shareholder.
The principal purpose of this offering is to reduce existing indebtedness to
provide additional capital to support the Company's continued expansion and
growth. The Company intends to use the proceeds of this offering as follows: (i)
approximately $5.8 million to repay the Company's current outstanding balance on
its revolving credit facility with Richfield Bank & Trust Co., which accrues
interest at the bank's base rate plus 0.5% (9.0% as of August 1, 1997) and
terminates on May 31, 1999, (ii) approximately $2.3 million to repay the
Shareholder Notes, which accrue interest at 5.63% per annum, and (iii)
approximately $2.3 million to repay the Subordinated Notes, which accrue
interest at 10% per annum and mature November 30, 2004. In addition, in the
event that the Company declares the Second Dividend, a portion of the net
proceeds will be used to pay the Second Dividend. Because the Company does not
currently anticipate that it will have a material amount of accumulated taxable
income during the period from the date of the First Dividend through the date of
the conversion of the Company to a C corporation, the Company does not believe
that the Second Dividend will be material. Messrs. Dolginow and Schlosser,
directors, executive officers and principal shareholders of the Company, are the
payees of the Shareholder Notes. The First Shareholder Notes mature on January
13, 1998 and the Second Shareholder Notes mature on October 2, 1998. See "S
Corporation Distributions." Mr. Dolginow has guaranteed a portion of the
Company's revolving credit facility with Richfield Bank & Trust Co. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
The balance of the net proceeds of this offering will primarily be used for
new store expansion as well as for working capital and other general corporate
purposes. Pending the use of the net proceeds of this offering, the Company will
invest the funds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
Other than the dividends described in "S Corporation Distributions," the
Company has not declared any cash dividends during the past two fiscal years or
the six months ended August 1, 1997. Following the consummation of this
offering, the Company's Board of Directors intends to retain the future earnings
of the Company, if any, to support the Company's operations and to finance its
growth and development. The Company does not intend to pay cash dividends on the
Common Stock in the foreseeable future. Any future determination as to the
payment of dividends will be at the discretion of the Board of Directors and
will depend on the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors may deem relevant.
In addition, the Company's current revolving credit facility prohibits the
payment of cash dividends by the Company except for distributions in connection
with the termination of its S corporation status.
12
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company (i) at August 1, 1997, (ii) pro forma to give effect to (x) the exercise
of options and warrants to purchase an aggregate of 377,550 shares immediately
prior to this offering, assuming an initial public offering price of $9.00 per
share, (y) the payment of the First Dividend, and (z) the issuance of the Second
Shareholder Notes, and (iii) pro forma as adjusted to reflect the receipt and
application of the net proceeds from the issuance and sale by the Company of
1,666,667 shares of Common Stock offered hereby at an assumed initial public
offering price of $9.00 per share. This table should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AUGUST 1, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable...................................................................... $ 2,136 $ 2,136 $ 0
Current maturities of long-term debt............................................... 22 22 22
--------- ----------- -----------
$ 2,158 $ 2,158 $ 22
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, less current maturities............................................ $ 8,974 $ 9,140 $ 899
Stockholders' equity
Serial preferred stock; 10,000,000 shares authorized; none outstanding........... 0 0 0
Common stock, $0.01 par value, 40,000,000 shares authorized; 2,202,818 shares
issued and outstanding, actual; 2,580,368 shares issued and outstanding, pro
forma; 4,247,035 shares issued and outstanding, pro forma as adjusted(1)....... 22 26 42
Additional paid-in capital....................................................... 572 568 13,967
Retained earnings................................................................ 1,546 1,546 1,546
S Corporation distribution....................................................... -- (166) (166)
--------- ----------- -----------
Total stockholders' equity..................................................... 2,140 1,974 15,389
--------- ----------- -----------
Total capitalization......................................................... $ 11,114 $ 11,114 $ 16,288
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Does not include an aggregate of 639,641 shares reserved for issuance under
the Company's 1997 Stock Option and Compensation Plan and the Directors
Stock Option Plan, of which 202,965 shares will be subject to options to be
granted upon consummation of this offering at an exercise price equal to the
initial public offering price. See "Management--Employee and Directors Stock
Option Plans."
13
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
August 1, 1997 was approximately $2.0 million, or $0.77 per share, after giving
pro forma effect to the exercise of options and warrants to purchase an
aggregate of 377,550 shares immediately prior to this offering assuming an
initial public offering price of $9.00 per share and to the payment of the First
Dividend. Pro forma net tangible book value per share represents the Company's
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding.
After giving effect to the sale by the Company of the 1,666,667 shares of
Common Stock offered hereby (at an assumed initial public offering price of
$9.00 per share and after deduction of estimated underwriting discounts and
commissions and estimated offering expenses), and application of the estimated
net proceeds therefrom, and without taking into account any other changes in
such net tangible book value after August 1, 1997 other than the exercise of
options and warrants to purchase an aggregate of 377,550 shares immediately
prior to this offering and the payment of the First Dividend, the pro forma net
tangible book value of the Company at August 1, 1997 would have been
approximately $15.4 million, or $3.62 per share. This represents an immediate
increase in net tangible book value of $2.85 per share to existing shareholders
and an immediate dilution of $5.38 per share to investors in this offering.
"Dilution" is determined by subtracting net tangible book value per share after
this offering from an assumed initial public offering price of $9.00 per share,
as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 9.00
Pro forma net tangible book value per share at August 1, 1997.... $ 0.77
Increase per share attributable to investors in this offering.... 2.85
---------
Pro forma net tangible book value per share after this offering
(1).............................................................. 3.62
---------
Dilution per share to new investors................................ $ 5.38
---------
---------
</TABLE>
- ------------------------
(1) The above computation assumes no exercise of outstanding stock options. The
Company has reserved an aggregate of 639,641 shares of Common Stock for
issuance under the Company's 1997 Stock Option and Compensation Plan and the
Directors Stock Option Plan, of which 202,965 shares will be subject to
options to be granted upon consummation of this offering at an exercise
price equal to the initial public offering price. See "Management--Employee
and Directors Stock Option Plans."
14
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The selected combined/consolidated financial and operating data presented
below under the captions "Statement of Earnings Data," "Selected Operating
Data," and "Balance Sheet Data" for, and as of the end of, each of the years in
the five-year period ended January 31, 1997, and for the six-month periods ended
August 1, 1997 and August 2, 1996, are derived from the combined/consolidated
financial statements of the Company. The combined/consolidated balance sheets as
of January 31, 1997 and February 2, 1996, and the related statements of earnings
and retained earnings, and cash flows for each of the years in the three-year
period ended January 31, 1997 have been audited by KPMG Peat Marwick LLP,
independent certified public accountants; these financial statements and the
report thereon are included elsewhere in this Prospectus. The unaudited selected
data presented below is derived from the combined/consolidated unaudited balance
sheets as of January 29, 1993 and January 31, 1992, and as of August 1, 1997,
and August 2, 1996, and related unaudited statements of earnings and retained
earnings and cash flows for each of the periods then ended. The unaudited
combined/consolidated balance sheets as of August 1, 1997 and August 2, 1996,
and the related unaudited financial statements are included elsewhere in this
Prospectus. With respect to such unaudited financial statements, management
believes all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
<TABLE>
<CAPTION>
FISCAL YEAR FIRST SIX MONTHS
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue
Company-owned stores...................... $ 14,942 $ 17,847 $ 23,640 $ 32,414 $ 41,892 $ 18,970 $ 24,206
Franchise related fees.................... 193 371 443 1,064 1,110 474 542
--------- --------- --------- --------- --------- --------- ---------
Total revenues.......................... 15,135 18,218 24,084 33,478 43,002 19,444 24,748
Costs and expenses:
Costs of products sold and occupancy
costs................................... 10,170 11,718 15,474 21,879 27,947 12,946 16,267
Store operating expenses.................. 2,970 3,594 4,635 6,367 8,732 3,829 4,896
General and administrative expenses....... 1,395 1,810 2,480 3,451 4,293 2,071 2,628
--------- --------- --------- --------- --------- --------- ---------
Operating income........................ 600 1,096 1,494 1,781 2,080 598 957
Interest expense............................ 94 111 208 490 772 385 479
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes(1)........... 505 985 1,286 1,291 1,308 213 478
Provision for income taxes(1)............... 198 5 5 5 5 2 5
--------- --------- --------- --------- --------- --------- ---------
Net income.................................. $ 306 $ 980 $ 1,281 $ 1,286 $ 1,303 $ 211 $ 473
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma provision for income taxes(1)..... (7) 372 487 489 495 80 180
Pro forma net income(1)..................... 313 608 794 797 808 131 293
Pro forma net income per share(1)........... 0.14 0.24 0.32 0.32 0.32 0.05 0.12
SELECTED OPERATING DATA:
Number of stores open at end of period:
Company-owned stores...................... 37 40 42 55 64 60 68
Franchise stores.......................... 15 21 29 53 50 52 50
Remodeled stores.......................... 5 9 8 8 1 1 3
Comparable store sales(2)................... 8.6% 8.8% 16.6% 13.6%(3) 7.8%(3) 12.4% 9.5%
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................. $ 492 $ 979 $ 2,301 $ 925 $ 1,701 $ 793 $ 5,561
Total assets................................ 4,080 5,517 8,211 14,934 16,270 16,150 19,086
Total debt.................................. 1,404 1,853 3,619 8,021 11,240 8,720 11,132
Total shareholders' equity.................. 1,535 2,328 2,646 3,124 1,793 3,334 2,140
</TABLE>
- ------------------------------
(1) Since February 1, 1993, the Company has been an S corporation and during
this period was not generally subject to corporate income taxes. The
statement of operations data during this period reflects a pro forma
provision (benefit) for income taxes as if the Company were subject to
corporate income taxes for such periods. This pro forma provision (benefit)
for income taxes is computed using a combined federal and state tax rate of
38%. See "S Corporation Distributions" and Note 10 of Notes to Financial
Statements.
(2) Company-owned stores enter the comparable store sales base at the beginning
of their 13th month of operations. Stores in which retail square footage is
increased more than 50% or stores which are relocated, are no longer
included in the comparable store sales base until 12 months have passed.
(3) For purposes of computing the increase in comparable store sales, this
computation assumes fiscal 1995 was a 52 week year.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and its
liquidity and capital resources should be read in conjunction with "Selected
Financial and Operating Data" and the Financial Statements of the Company and
related Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
Paper Warehouse is a rapidly growing chain of stores specializing in party
supplies and paper goods operating under the names PAPER WAREHOUSE and PARTY
UNIVERSE. The current management team purchased the business in 1986 and
incorporated the Company in Minnesota in 1987. At the time of the acquisition,
the Company consisted of three stores located in Minneapolis/St. Paul
metropolitan area. In 1987, the Company began granting franchises. Over the past
10 years, the Company has grown to an aggregate of 124 stores, including 73
Company-owned stores and 51 franchise stores throughout 23 states. In growing
the number of Company-owned stores, management has employed a strategy of
clustering stores in the Company's principal markets to provide its customers
with convenient store locations, expand its total market share and achieve
favorable economies of scale.
During the early 1990s, the Company began increasing the size of its stores
to accommodate a significantly wider breadth and depth of party supplies
available to the industry. The current prototype store, introduced in 1994, is
8,500 square feet and offers over 19,000 SKUs. Management believes this
prototype is the optimal store format for its planned expansion.
From fiscal 1994 through fiscal 1996, Paper Warehouse has opened 24 new
Company-owned stores and has remodeled 17 existing Company-owned stores. As a
result of this expansion and the installation of its POS system, occupancy,
advertising and depreciation expenses have increased as a percentage of
Company-owned store revenue. To finance this expansion and investment in
technology, the Company has increased bank borrowings and issued Subordinated
Notes, in addition to using cash generated from operations. The increased
borrowings resulted in higher interest expense as a percentage of total revenue
during this period. In addition, store labor expense as a percentage of
Company-owned store revenue has increased during this period, the result of
increased minimum wage. As a result of the increases in expenses outlined above,
pro forma net income as a percentage of total revenues has declined from 3.3% to
1.9% over the period.
Prior to this offering, the Company elected to be treated for federal and
state income tax purposes as an S corporation under the Code and comparable
state tax laws. As a result, earnings of the Company have been taxed for federal
and state income tax purposes directly to the shareholders of the Company,
rather than to the Company. In connection with this offering, the Company will
convert from an S corporation to a C corporation under the Code. The statement
of operations data for all periods discussed below includes a provision for
federal and state income taxes as if the Company were subject to federal and
state corporate income taxes for all such periods. This pro forma provision is
computed using a combined federal and state tax income tax rate of 38%. See "S
Corporation Distributions" and Note 10 of Notes to Financial Statements.
Total revenue consists of Company-owned store sales and franchise revenues.
Franchise revenues are generated from royalties received on sales, generally 4%
of the store's sales, and initial franchise fees, which are recognized at the
time a store opens. Company-owned stores enter the comparable store sales base
at the beginning of their 13th month of operations. Stores in which retail
square footage is increased more than 50%, or stores which are relocated, are no
longer included in the comparable store sales base until 12 months have passed.
Cost of goods sold include the direct cost of merchandise, plus handling and
distribution, coupon costs, and certain occupancy costs. Store operating
expenses include all costs incurred at the store level, such as advertising,
credit card processing fees, and store payroll. General and
16
<PAGE>
administrative expenses include corporate administrative expense for the
Company-owned stores and expenses relating to franchising, primarily payroll,
legal, travel, and advertising.
RECENT DEVELOPMENTS
Based on preliminary results for the third quarter ended October 31, 1997,
the Company believes that sales of Company-owned stores will increase
approximately 21% from the comparable period of the prior fiscal year.
Comparable store sales increases were approximately 10% over the prior period.
The balance of the increase in sales is attributable to new and remodeled
Company-owned stores. Pro forma net income for the third quarter is expected to
be approximately break-even compared to $172,000 for the comparable period of
fiscal 1996. The Company believes that the decrease in pro forma net income from
the comparable period in 1996 is primarily the result of additional advertising
expense and additional operating expenses associated with hiring new senior
management personnel and upgrading systems infrastructure to support its growth
plans. Also, the Company incurred additional borrowings during the quarter and
pre-opening expenses related to three stores that opened in the first week of
the fourth quarter.
As a result of the early retirement of the Subordinated Notes in connection
with the offering, the Company will incur a one-time charge to earnings, in the
fourth quarter, of approximately $180,000 for the unamortized portion of the
Company's expenses related to issuance of the Subordinated Notes.
RESULTS OF OPERATIONS
SIX MONTHS ENDED AUGUST 1, 1997 COMPARED TO SIX MONTHS ENDED AUGUST 2, 1996
REVENUE. The number of Company-owned stores increased to 68 stores at the
end of the six months ended August 1, 1997, from 60 stores at the end of the six
months ended August 2, 1996. Company-owned store sales increased 27.6% to $24.2
million for the first six months of fiscal 1997 from $19.0 million for the
comparable period of fiscal 1996. Of this increase, approximately $4.4 million
is attributable to comparable store sales and approximately $800,000 is
attributable to new and remodeled Company-owned stores. Comparable store sales
increased 9.5% for the six months ended August 1, 1997, compared to the prior
period.
The number of franchise stores decreased to 50 franchise stores at the end
of the six months ended August 1, 1997, from 52 franchise stores at the six
months ended August 2, 1996. Franchise revenue increased 14.4% to $542,000 for
the first six months of fiscal 1997 from $474,000 for the comparable period of
fiscal 1996. Initial franchise fees decreased $19,700 due to a reduction in
franchise store openings in the first six months of fiscal 1997. The decrease in
initial franchise fees was offset by increased royalty payments resulting from
higher sales in the franchise stores.
COST OF GOODS SOLD. Cost of goods sold for the first six months of fiscal
1997 was $16.3 million, or 67.2% of Company-owned store revenue, as compared to
$12.9 million, or 68.2%, of Company-owned store revenue, for the comparable
period of fiscal 1996. The decrease as a percentage of Company-owned store
revenues was primarily attributable to a decrease in the cost of merchandise
arising from greater volume discounts and more favorable pricing from vendors.
STORE OPERATING EXPENSES. Store expenses for the first six months of fiscal
1997 were $4.9 million, or 20.2% of Company-owned store revenue, as compared to
$3.8 million, or 20.2% of Company-owned store revenue, for the comparable period
of fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the first six months of fiscal 1997 were $2.6 million as compared to $2.1
million. The increase was primarily due to an increased number of stores.
17
<PAGE>
INTEREST EXPENSE. Interest expense increased $94,000 to $479,000, or 1.9%
of total revenue for the first six months of fiscal 1997 from $385,000, or 2.0%
of total revenue for the comparable period of fiscal 1996. This is the result of
increased bank borrowing necessary to fund the Company's growth. Interest rates
have been stable.
PRO FORMA NET INCOME. As a result of the factors discussed above, pro forma
net income increased 125.4%, to $293,000, or 1.2% of total revenue for the first
six months of fiscal 1997 from $131,000, or 0.7% of total revenue for the
comparable period of fiscal 1996. Pro forma net income includes a provision for
federal and state income taxes.
FISCAL YEAR 1996 (52 WEEKS) COMPARED TO FISCAL YEAR 1995 (53 WEEKS)
REVENUE. The number of Company-owned stores increased to 64 at the end of
fiscal 1996 from 55 Company-owned stores at the end of fiscal 1995.
Company-owned store revenue increased 29.2% to $41.9 million for fiscal 1996
from $32.4 million for fiscal 1995. Of this increase, approximately $2.0 million
was attributable to comparable store sales increases and approximately $7.5
million is attributable to new and remodeled Company-owned stores. For purposes
of computing the increase in comparable store sales, this calculation assumes
fiscal 1995 was a 52 week year. Comparable store sales increased 7.8% for the
fiscal year ended 1996 compared to the prior period.
The number of franchise stores decreased to 50 franchise stores at the end
of fiscal 1996 from 53 franchise stores at the end of fiscal 1995. During fiscal
1996, one of the Company's franchisees, a catalog showroom chain operating
franchise stores as designated departments within 12 of its stores, ceased
business. As a result of this action, these franchise stores, which contributed
$79,000 in franchise revenues to the Company in fiscal 1996, ceased operating.
Franchise revenue increased 4.3%, to $1.1 million for fiscal 1996 from $1.1
million for fiscal 1995. Initial franchise fees decreased $320,000 due to a
reduction in franchise store openings in the fiscal 1996. The decrease in
initial franchise fees was offset by increased royalty payments resulting from
increased sales in the franchise stores.
COST OF GOODS SOLD. Cost of goods sold for fiscal 1996 was $27.9 million,
or 66.7% of Company-owned store revenue, as compared to $21.9 million, or 67.5%,
of Company-owned store revenue for fiscal 1995. The decrease as a percentage of
Company-owned store revenue was primarily attributable to greater volume
discounts and more favorable pricing from vendors.
STORE OPERATING EXPENSES. Store operating expenses for 1996 were $8.7
million, or 20.8% of Company-owned store revenue, as compared to $6.4 million,
or 19.6% of Company-owned store revenue in fiscal 1995. The increase as a
percentage of Company-owned store revenue was primarily attributable to
increases in store labor, advertising, utilities, and depreciation. Store labor
increased due to the increase in minimum wage, and increased management staff at
larger stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $4.2 million compared to $3.5 million in fiscal 1995. The increase in
general and administrative expenses was primarily due an increase number of
stores.
INTEREST EXPENSE. Interest expense increased $282,000 to $772,000, or 1.8%
of total revenue in fiscal 1996 from $490,000, or 1.5% of total revenue, in
fiscal 1995. The increase is due to greater bank borrowing, used to finance the
Company's growth.
PRO FORMA NET INCOME. As a result of the factors discussed above, pro forma
net income increased 1.4%, to $808,000, or 1.9% of total revenue in fiscal 1996
from $797,000, or 2.4% of total revenue in fiscal 1995. Pro forma net income
includes a provision for federal and state income taxes.
18
<PAGE>
FISCAL YEAR 1995 (53 WEEKS) COMPARED TO FISCAL YEAR 1994 (52 WEEKS)
REVENUE. The number of Company-owned stores increased to 55 at the end of
fiscal 1995, from 42 Company-owned stores at the end of fiscal 1994.
Company-owned store revenue increased 37.1%, to $32.4 million for fiscal 1995
from $23.6 million for fiscal 1994. Of this increase, $2.6 million was
attributable to comparable store sales, $6.2 million was attributable to new and
remodeled Company-owned stores. Comparable store sales increased 13.6% for the
fiscal year ended 1996 compared to the prior period.
The number of franchise stores increased to 53 at the end of fiscal 1995,
from 29 franchise stores at the end of fiscal 1994. Franchise revenue increased
140.3%, to $1.1 million for fiscal 1995 from $443,000 for fiscal 1994. Initial
franchise fees increased $380,000, primarily from establishing 27 new franchise
stores, including a 12-store franchisee. Royalty payments increased $242,000.
COST OF GOODS SOLD. Cost of goods sold for fiscal 1995 was $21.9 million,
or 67.5% of Company-owned store revenue, as compared to $15.5 million, or 65.5%,
of Company-owned store revenue, for fiscal 1994. The increase as percentage of
Company-owed store revenue was primarily attributable to an increase in
occupancy costs from the new Company-owned stores without a commensurate
increase in revenue.
STORE OPERATING EXPENSES. Store operating expenses for fiscal 1995 were
$6.4 million, or 19.6% of Company-owned store revenue, as compared to $4.6
million, or 19.6% of Company-owned store revenue for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for fiscal 1995 were $3.5 million as compared to $2.5 million. This increase in
general and administrative expenses was primarily due to an increase in the
number of stores.
INTEREST EXPENSE. Interest expense increased 135.2%, to $490,000, or 1.5%
of total revenue for fiscal 1995 from $208,000, or 0.9% of total revenue for
fiscal 1994. This increase resulted primarily from increased borrowing under the
Company's bank facility.
PRO FORMA NET INCOME. As a result of the factors discussed above, pro forma
net income increased 0.4%, to $797,000, or 2.4% of total revenue for fiscal 1995
from $794,000, or 3.3% of total revenue for fiscal 1994. Pro forma net income
includes a provision for federal and state income taxes.
19
<PAGE>
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the Company's unaudited consolidated
quarterly results of operations for each of the quarters in fiscal 1995, fiscal
1996, and the first two quarters of fiscal 1997, in thousands. This quarterly
information is unaudited, but has been prepared on the same basis as the annual
financial information and, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation indicative of the results for the representative fiscal year.
The results of operations for any quarter are not necessarily indicative of the
results of any future period.
<TABLE>
<CAPTION>
FISCAL 1995
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Total revenue...................................... $ 5,766 $ 8,276 $ 8,471 $ 10,965
% of full year................................... 17.2% 24.7% 25.3% 32.8%
Operating income (loss)............................ $ (305) $ 777 $ 352 $ 957
% of full year................................... (17.1%) 43.6% 19.8% 53.7%
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
-------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Total revenue...................................... $ 8,739 $ 10,705 $ 11,278 $ 12,281
% of full year................................... 20.3% 24.9% 26.2% 28.6%
Operating income (loss)............................ $ (53) $ 855 $ 474 $ 804
% of full year................................... (2.6%) 41.1% 22.8% 38.7%
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
------------------------------
FIRST QUARTER SECOND QUARTER
------------- ---------------
<S> <C> <C> <C> <C>
Total revenue...................................... $ 11,129 $ 13,619
Operating income (loss)............................ $ (216) $ 1,173
</TABLE>
The Company's results of operations have historically fluctuated from
quarter to quarter for such reasons as seasonal variations in revenues and
operating expenses, the amount and timing of revenues contributed by new
Company-owned and franchise stores, the costs associated with the opening of new
stores, and expenses incurred to support the Company's expansion strategy. As a
result of these seasonal variations, a significant portion of the Company's
operating income is generated in the second and fourth fiscal quarters.
Historically, the Company has engaged in more promotional activity during the
third quarter than the second quarter, which results in reduced operating income
for the third quarter as compared to the second quarter. Any factors negatively
affecting the Company during the second and fourth fiscal quarters could have a
material adverse effect on the Company's financial condition and results of
operations for the entire fiscal year. Further, as a result of the seasonality
of the Company's revenue, the Company expects to incur a loss in the first
quarter of each year for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for ongoing operations,
principally inventory, and capital improvements to support the opening of new
Company-owned stores and the remodeling of existing Company-owned stores.
Historically, the Company's primary sources of liquidity have been met by cash
from operations, payment terms from vendors, and borrowing under its revolving
lines of credit and the Subordinated Notes.
At August 1, 1997 and August 2, 1996, the Company's working capital was $5.6
million and $793,000 respectively. Cash provided (used) by operating activities
for the first six months of fiscal 1997 and fiscal 1996 was $995,000 and
($219,000), respectively. For these two periods, $2.4 million and $1.4 million,
respectively, was used to increase inventory levels to support new and existing
Company-owned stores. At the end of fiscal 1996 and fiscal 1995, the Company's
working capital was $1.7 million, and $925,000, respectively. For fiscal 1996
and fiscal 1995, cash provided by operating activities was $85,000, and
$394,000, respectively. In each of these periods, $1.9 million and $3.1 million
was used to increase inventory levels to support new and existing Company-owned
stores.
20
<PAGE>
At August 1, 1997 and August 2, 1996, the Company's accounts payable were
$2.2 million and $265,000, respectively. The increase in accounts payable was
primarily attributable to increased merchandise inventory. Historically, the
amount of the Company's obsolete inventory has been immaterial.
Net cash used in investing activities for the first six months of fiscal
1997 and the comparable period of fiscal 1996 was $759,000 and $762,000,
respectively. Net cash used in investing activities for fiscal 1996 and fiscal
1995, was $1.2 million and $3.5 million, respectively. These expenditures were
primarily to open new and remodel existing Company-owned stores and upgrade the
Company's information systems.
For fiscal 1997, the Company expects to spend approximately $1.8 million on
capital expenditures which includes approximately $1.2 million on new stores and
approximately $600,000 on further information systems upgrades. As a result of
these information system upgrades, the Company does not currently anticipate
that it will incur material liabilities with respect to year 2000 costs. The
Company currently plans to open approximately 25 stores in fiscal 1998. Total
capital expenditures in 1998 are estimated to be $4.2 million. These capital
expenditures will be for new store openings, fixturing and remodeling existing
stores, and information systems. The Company intends to continue to finance all
of its new stores with long-term operating leases, assuming availability and
reasonable terms.
Net cash provided from (used in) financing activities during the first six
months of fiscal 1997 and the comparable period of fiscal 1996 was ($233,000)
and $700,000, respectively. As of August 1, 1997, and August 2, 1996, the
outstanding balance under the Company's then-existing line of credit was $5.8
million and $5.5 million, respectively. Net cash provided from financing
activities for fiscal 1996 and fiscal 1995, was $585,000 and $3.6 million,
respectively.
In January 1997, the Company entered into a new $7.5 million revolving
credit facility. The credit facility accrues interest at the bank's base rate
plus 0.5% and expires on May 31, 1999. The credit facility is secured by
substantially all the assets of the Company. The Company is required to maintain
certain customary covenants. The credit facility also prohibits the Company from
paying dividends except for distributions in connection with the termination of
its S corporation status. The initial borrowing of this facility were used to
retire in full the outstanding balance under the Company's previous credit
facility. The Subordinated Notes were issued as part of the Company's 1994
private placement, are secured by a lien on substantially all of the Company's
assets and are subordinated to the credit facility. The Subordinated Notes
accrue interest quarterly at the rate of 10% per annum. See Notes 3 and 4 of
Notes to Financial Statements.
The Company believes that cash generated by operating activities, the net
proceeds from this offering and availability under its credit facility will be
sufficient to finance its current and anticipated operations and planned capital
expenditures at least through fiscal 1998. To the extent that the funds
generated from these sources are insufficient to finance the Company's
activities in the short or long term, the Company would need to raise additional
funds through public or private financing. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company.
INFLATION
The Company believes that inflation has not had a material impact upon its
historical operating results, and does not expect it to have such an impact in
the future. There can be no assurance that the Company's business will not be
affected by inflation in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued two financial accounting
standards ("FAS") which became effective January 1, 1996. The standards are FAS
121, "Accounting for the Impairment of Long-Live Assets and for Long-Lived
Assets to Be Disposed Of," and FAS 123, "Accounting for Stock-Based
Compensation." The Company does not expect FAS 121 to impact its financial
position or results of operations. In addition, the Company does not expect to
adopt the non-mandatory provisions of FAS 123. Accordingly, this standard will
not impact the Company's financial position or results of operations.
21
<PAGE>
BUSINESS
GENERAL
Paper Warehouse is a rapidly growing chain of stores specializing in party
supplies and paper goods operating under the names PAPER WAREHOUSE and PARTY
UNIVERSE. The Company is one of the leading party supplies and paper goods
retailer in number of stores in its four principal markets of Minneapolis/St.
Paul, Kansas City, Denver and Oklahoma City. Paper Warehouse stores offer an
extensive assortment of special occasion, seasonal and everyday paper products,
including party supplies, gift wrap, greeting cards and catering supplies, at
everyday low prices. The Company's 124 stores (73 Company-owned and 51
franchised stores) are conveniently located in major retail trade areas to
provide customers with easy access to its stores. For the first six months of
fiscal 1997, the Company's revenues increased 27.3% to $24.7 million from $19.4
million for the comparable period of fiscal 1996.
The Company offers a broad selection of party supplies and paper goods for a
wide variety of celebratory occasions and everyday uses, including birthdays,
weddings, baby showers, graduations and other family and religious celebrations,
as well as seasonal events such as Valentine's Day, Easter, Fourth of July,
Halloween, Thanksgiving, Christmas, Hanukkah and New Year's. Through the
Company's 8,500 square foot superstore prototype, the Company offers a
comprehensive selection of over 19,000 SKUs, which provides customers the
convenience of one-stop shopping for all party supplies and paper goods. The
Company's merchandise is organized by party themes, and the prominent signage
and wide aisles allow customers to easily access and coordinate the merchandise
required for all party occasions. The Company also believes that its extensive
selection, combined with high in-stock positions, often stimulates customers to
purchase additional products.
Paper Warehouse's goal is to maintain its position as one of the leading
suppliers of party supplies and paper goods in existing markets and to establish
a dominant position in new markets. Paper Warehouse opened nine Company-owned
stores in fiscal 1997 and plans to open approximately 25 Company-owned stores in
fiscal 1998, two-thirds of which are expected to open in two new major markets.
Additionally, management established three franchise stores in fiscal 1997 and
expects to establish between 15 and 20 franchise stores in fiscal 1998.
INDUSTRY OVERVIEW
Consumers purchase party supplies and paper goods frequently throughout the
year in order to create, enhance and celebrate a wide range of celebratory
occasions and everyday use. The Company believes that total United States retail
sales of party and special occasion merchandise (including greeting cards, party
supplies, gift wrap and related items) will grow to approximately $8.9 billion
in 1997. The Company believes that the industry will continue to grow as a
result of a number of factors, including increasing depth and breadth of
available party merchandise, increasing consumer awareness and acceptance of the
ease and convenience of disposable party goods and the trend toward at-home
entertaining.
Management believes that convenience, selection and price are the principal
factors used by consumers in determining where to purchase party supplies and
paper goods. Historically, consumers have purchased these products from small,
independent party goods stores and card shops offering a broad selection in
certain merchandise categories at higher prices and from designated departments
in mass merchandisers, discount retailers, toy stores, drug stores and
supermarkets offering a limited selection at lower prices. Although traditional
party goods retailers differ in the breadth of merchandise selection and price,
they have tended to be convenient for consumers.
Larger format stores have become the fastest growing retail format within
the party goods industry by offering consumers a broader selection of
merchandise at lower prices compared to traditional party goods retailers. Paper
Warehouse, through its strategy of clustering multiple large format stores in
metropolitan
22
<PAGE>
markets, emphasizes both convenient locations and an extensive selection of
merchandise at everyday low prices.
BUSINESS STRATEGY
The Company's goal is to be the leading supplier of party supplies and paper
goods in each of its existing and prospective markets. The key elements of the
Company's strategy are as follows:
CONVENIENT LOCATIONS. Based upon the results of its customer surveys and
focus groups, the Company believes that convenience is one of the most important
criteria to a customer in deciding where to shop for party goods. As a result,
the Company clusters stores in metropolitan markets, making travel to a Paper
Warehouse store convenient for its customers. For example, the Company has 26
stores in the Minneapolis/St. Paul metropolitan area, 16 stores in the Kansas
City metropolitan area, 16 stores in the Denver metropolitan area (including
five franchise stores) and seven stores in the Oklahoma City metropolitan area.
The Company locates its stores in or near visible high traffic strip mall
centers in close proximity to prominent mass merchandise, discount or grocery
store anchors to promote customer convenience.
EXTENSIVE MERCHANDISE SELECTION. Paper Warehouse offers an extensive
selection of merchandise to provide its customers with a one-stop shopping
solution for party supplies and paper goods. The Company's broad and diverse
selection of merchandise includes party supplies, gift wrapping products,
greeting cards and household and catering food service supplies. The Company
believes that its extensive selection of party supplies and paper goods combined
with high in-stock positions often stimulates customers to purchase additional
products.
EVERYDAY LOW PRICES. The Company provides customers with everyday low
prices on all merchandise at discounts ranging from 10% to 50% off the
manufacturer's suggested retail price. In addition, the Company guarantees that
it will meet or beat any advertised price on the products it offers. The Company
reinforces its everyday low price strategy with signs prominently displayed
throughout its stores and through its extensive promotional advertising.
CUSTOMER FRIENDLY STORE ENVIRONMENT. The Company creates a customer
friendly store environment through its easy to shop store format and commitment
to customer service, which includes employee training, innovative party planning
assistance and a "no hassle" return policy. Paper Warehouse stores are bright
and festively decorated to correspond to the current season. Prominent signage
and wide aisles are organized by party themes, enabling customers to easily move
about the stores and coordinate party supplies for any occasion. The Company has
developed party planning aids and has trained store personnel to assist
customers in purchasing the proper party supplies for a particular event. The
Company believes that this customer friendly environment provides customers with
a pleasant shopping experience and encourages browsing, impulse purchases and
repeat visits.
COMPREHENSIVE ADVERTISING. The Company maintains aggressive advertising and
marketing programs designed to educate consumers about its convenient store
locations, promote the breadth and value of its product offering, increase its
name recognition and increase sales during seasonal and special events. The
Company's strategy of clustering stores in metropolitan markets enables it to
cost effectively employ a variety of media, including newspaper, radio,
television and direct mail mini-catalogs.
EXPANSION STRATEGY
In order to increase its market share in existing markets, achieve a
dominant position in new markets and maximize operating efficiencies, the
Company employs the following expansion strategy: (i) open multiple
Company-owned stores close to one another in new and existing metropolitan
markets, (ii) selectively open Company-owned stores in secondary markets that
can support one or two stores and that are contiguous with metropolitan markets
served by Company-owned stores, (iii) establish franchise stores in other
markets, and (iv) continuously refresh, remodel and expand existing stores.
23
<PAGE>
CLUSTER COMPANY-OWNED STORES IN METROPOLITAN MARKETS. To provide its
customers with convenient store locations, expand its total market share and
achieve favorable economies of scale, the Company's strategy is to continue
clustering stores in larger metropolitan markets, primarily in the Midwest and
western United States. During fiscal 1997, the Company opened four new stores in
the Minneapolis/St. Paul area, where it currently operates 26 stores, one new
store in the Kansas City area, where it now operates 18 stores, two new stores
in the Denver area, where it now operates 11 stores and franchises five stores,
one new store in the Oklahoma area, where it now operates 10 stores. The Company
is currently planning to enter two new metropolitan markets in fiscal 1998.
EXPAND COMPANY-OWNED STORES IN CONTIGUOUS MARKETS. The Company seeks to
open stores in secondary markets contiguous to metropolitan markets where the
Company has existing stores. These secondary markets provide an opportunity for
the Company to increase sales and to realize operational efficiencies resulting
from their close proximity to its larger metropolitan markets. The Company only
establishes stores in secondary markets that can be managed by the district
manager of the contiguous metropolitan market.
EXPAND FRANCHISE STORES IN OTHER MARKETS. The Company establishes franchise
stores in markets that are not contiguous to metropolitan areas with
Company-owned stores. In addition, the Company grants development rights in
metropolitan markets where the Company does not plan to open Company-owned
stores. The Company believes that these markets typically are not served
adequately by the party goods industry. In addition to generating franchise
revenues, franchise stores benefit the Company through increased name
recognition and increased buying power from its suppliers.
REFRESH, REMODEL AND EXPAND EXISTING STORES. The Company continuously
reviews opportunities to remodel or expand its existing stores. Since 1992, the
Company has expanded and/or remodeled 34 stores. The Company believes that it
must continue to refresh its existing store base to keep up with current retail
trends and to keep its stores fresh and appealing to its customers. In addition,
the Company takes advantage of expansion opportunities for its smaller stores
when opportunities are available and when the store's operating results warrant
the expansion.
Paper Warehouse plans to open approximately 25 Company-owned stores in
fiscal 1998. The Company plans to open between 15 and 20 new franchise stores in
fiscal 1998. The Company has entered into agreements with two franchisees for
two new stores and has granted development rights to a developer that may open
multiple new stores. The Company is in the process of negotiating the terms and
conditions of these franchise arrangements and there can no assurance that these
negotiations will be successfully concluded.
In addition to new store openings, the Company's growth strategy also
includes increasing comparable store sales through its advertising and marketing
programs and merchandising presentations. The Company also periodically
considers strategic acquisitions of other retail chains in the party supply
industry. As of the date of this Prospectus, the Company has no existing
agreements or commitments to affect any material acquisitions.
PAPER WAREHOUSE STORES
FORMAT. The Company developed its current store prototype based on
management's industry and other extensive retail experience and customer
research. Paper Warehouse operates stores that range in size from 3,000 square
feet to 8,500 square feet of retail space. Management introduced its current
8,500 square foot prototype store in 1994 and believes it is the optimal store
format for its future growth. Of the 73 Company-owned stores approximately 80%
are 6,000 square feet or larger.
Paper Warehouse stores are designed to create a customer friendly
environment. The Company uses vibrant colors, theme-oriented merchandise
displays and unique products to create a fun and festive shopping experience.
The focal point of the Company's stores is the seasonal display located at the
front of
24
<PAGE>
each store which creates a "store-within-a-store" appearance. These displays
maximize the season's selling impact and are updated continuously to promote a
fresh image within the store. Customers are able to easily move about the
different departments and find specific product categories due to prominent,
easy to read signage, bright lighting and wide aisles. To assist customers in
coordinating party supplies for any occasion, the Company locates related
departments, such as gift wrap and greeting cards, adjacent to one another and
displays related merchandise such as party hats, plates, cups and napkins
together within a department. Management believes that the Paper Warehouse store
layout assists customers in finding and coordinating their party supply needs,
as well as encourages browsing, impulse purchases and repeat visits.
CUSTOMER SERVICE. Paper Warehouse seeks to provide a high level of customer
service to enhance its customer friendly store environment. Store managers and
sales associates are trained to assist customers with party planning and event
coordination. In addition, the Company provides party planning guides and
checklists for graduation, Halloween, Hanukkah, Christmas and New Year's. The
Company's "no hassle" return policy makes it easy for customers to return or
exchange products, which the Company believes encourages customers to purchase
additional quantities. Certain products which require additional sales
assistance, such as balloons and custom printing, are located near check-out
counters where sales associates can readily assist customers. Management
continually monitors its level of customer service by regular store visits and
by employing anonymous "mystery shoppers." Mystery shoppers visit all Company-
owned stores at least once per quarter to rate personnel on various aspects of
customer service, including responsiveness, quality of product displays and
store cleanliness. A portion of store managers' compensation is based on the
results of these mystery shopper surveys.
OPERATIONS AND TRAINING. Each Company-owned store is typically operated by
a general manager, one assistant manager and a varying number of full-time and
part-time sales associates, depending on the store size, sales volume and
selling season. General managers are responsible for all aspects of the store's
day-to-day operations, including employee hiring and training, work scheduling,
expense control and customer service. These managers report to a district or
operations manager, each of whom is responsible for approximately 10 to 18
stores. Within each geographic market, the Company uses floating managers to
assist in smaller stores that cannot support both a manager and an assistant
manager. In addition, floating managers support store managers during busy
holiday seasons and substitute for store managers during vacations and other
absences. The floating managers also work with newly hired store managers to
ensure a smooth transition for sales personnel and customers.
Prior to the opening of a new Company-owned store, store managers are
usually intensely trained for two weeks, depending on prior experience and
receive additional on-going training. During the new store set-up, a manager
receives additional training from the Company's district management team. After
the store opening, corporate headquarters personnel spend considerable time
overseeing the operations. Each district has a dedicated trainer who visits the
stores to work with the Store Managers, reinforcing prior training and providing
on-going training. Periodic training sessions are scheduled for store managers
in the central or district offices on various topics, including human resources,
merchandising, loss prevention and employee supervision. Additional training
topics are covered at monthly managers' meetings and through monthly mailings
and the Company's monthly newsletter.
Paper Warehouse stores are typically open from 9:00 a.m. to 9:00 p.m. Monday
through Friday, from 9:00 a.m. to 6:00 p.m. on Saturday and from 11:30 a.m. to
5:00 p.m. on Sunday.
SITE SELECTION AND LOCATION
SITE SELECTION. In order to efficiently cluster stores in metropolitan
markets, the Company has developed a site selection process that examines
various criteria, including population density, demographics, traffic counts,
storefront visibility and presence, local competition, lease rates and parking
availability. The Company locates its stores in or near visible high traffic
strip mall centers in close proximity to prominent mass merchandise, discount or
grocery store anchors. The Company's strategy of
25
<PAGE>
clustering stores in metropolitan markets promotes customer convenience and
creates favorable economies of scale for marketing, advertising and operations.
LOCATIONS. As of November 5, 1997 Paper Warehouse had 73 Company-owned
stores in the following locations:
<TABLE>
<CAPTION>
LOCATION NUMBER OF STORES
- ---------------------------------------------------------------------------- ---------------------
<S> <C>
Minnesota
Minneapolis/St. Paul Metropolitan Area.................................... 26
Mankato................................................................... 1
Rochester................................................................. 1
St. Cloud................................................................. 1
Kansas/Missouri
Kansas City Metropolitan Area............................................. 16
Columbia.................................................................. 1
St. Joseph................................................................ 1
Colorado
Denver Metropolitan Area.................................................. 11
Oklahoma
Oklahoma City Metropolitan Area........................................... 7
Tulsa..................................................................... 3
Iowa
Des Moines................................................................ 3
Wisconsin
Onalaska.................................................................. 1
Eau Claire................................................................ 1
</TABLE>
MERCHANDISING
The Company offers a broad selection of party supplies and paper goods for a
wide variety of celebratory occasions and everyday uses, including birthdays,
weddings, baby showers, graduations and other family and religious celebrations,
as well as seasonal events such as Valentine's Day, Easter, Fourth of July,
Halloween, Thanksgiving, Christmas, Hanukkah and New Year's. Through the
Company's 8,500 square foot store prototype, the Company offers a comprehensive
selection of over 19,000 SKUs, which provides customers the convenience of
one-stop shopping for all party supplies and paper goods. The Company's
merchandise is organized by party themes, and the prominent signage and wide
aisles allow customers to easily access and coordinate the merchandise required
for all party occasions. The Company also believes that its extensive selection,
combined with high in-stock positions, often stimulates customers to purchase
additional products.
The Company's merchandise offering consists of the following:
PARTY SUPPLIES. The Company offers an extensive selection of complementary
and coordinating party supplies in both unique and traditional patterns, colors
and designs. The Company's party supplies include invitations, plates, napkins,
party favors, streamers, banners, candles, balloons, party snacks and seasonal
novelties such as Halloween costumes and Christmas decor. The Company's 8,500
square foot store prototype offers over 140 ensembles of party goods for many
occasions, which include party hats, plates, napkins and cups. A significant
portion of the Company's party goods ensembles involves the use of movie and
television figures, animated characters and celebrity likenesses licensed to the
manufacturer of such ensembles.
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<PAGE>
GIFT WRAPPING PRODUCTS. The Company offers a wide assortment of gift
wrapping products in various patterns and colors, including gift wrap, gift
bags, gift boxes, tissue paper, ribbons, bows, shred and gift tags. In addition
to holiday selections, the Company offers distinctive gift packaging products
for special occasions such as birthdays, graduations, weddings, baby showers and
other family and religious celebrations.
GREETING CARDS. The Company features a wide variety of special occasion,
seasonal and everyday greeting cards. The Company's 8,500 square foot prototype
store offers over 3,300 titles. The Company carries traditional, humorous and
contemporary brand name greeting cards at significantly lower prices than
national greeting card chain stores.
HOUSEHOLD AND CATERING FOOD SERVICE SUPPLIES. The Company offers paper
supplies such as toilet paper, paper towels, dispenser towels, plates, cups,
serving trays and bowls and table coverings. In addition to offering such
products to the Company's regular party goods customers, the Company is a paper
product supplier for many commercial users of paper products, including catering
companies and non-profit organizations.
The Company provides customers with everyday low pricing on all products, at
discounts ranging from 10% to 50% off the manufacturer's suggested retail price.
In addition, the Company guarantees that it will meet or beat any advertised
price on the products it offers. The Company reinforces its everyday low price
strategy with signs prominently displayed throughout its stores and extensive
promotional advertising.
PRODUCT SOURCING AND INVENTORY MANAGEMENT
The Company purchases its merchandise from approximately 150 suppliers. In
fiscal 1996, the Company's largest supplier, Amscan Holdings, Inc., accounted
for approximately 13% of the Company's purchases and the seven largest suppliers
represented approximately 50% of the Company's purchases. The Company does not
have long-term purchase commitments or exclusive contracts with any of its
suppliers. Management believes that alternative sources of product are available
at comparable terms and conditions. The Company considers numerous factors in
supplier selection, including price, payment terms, product offerings and
product quality.
The Company negotiates pricing with suppliers on behalf of all Company-owned
and franchise stores and believes that its buying power enables it to receive
favorable pricing terms and to more readily obtain high demand merchandise.
Although franchise stores are responsible for purchasing their own inventory,
franchisees are able to make purchases on the Company's negotiated pricing
terms. As the Company adds new stores, the Company believes it will increase the
volume of its inventory purchases and benefit further from increased discounts
and trade allowances and more favorable payment terms from its suppliers.
More than 95% of the Company's merchandise is shipped directly from the
supplier to the Company's stores. Drop shipment of merchandise provides the
Company with flexibility in pursuing new markets without the geographical
constraints and costs associated with a central distribution system. Deliveries
are processed and inventory items are inspected, sorted and priced in a
segregated receiving area in the back of the store (approximately 10% of total
gross square feet per store) before being placed on the selling floor. The
Company believes that it realizes substantial savings by not maintaining a
central distribution system.
In addition, the Company uses cross-dock distribution for suppliers that
will not ship directly to each store, such as overseas suppliers, and to
facilitate opportunistic volume purchases by the Company. The Company maintains
space for cross-dock distribution in each of the Company's principal
metropolitan markets, including Minneapolis/St. Paul, Denver, Oklahoma and
Kansas City, for separation and redistribution to the other Paper Warehouse
stores within that market. The Company's primary cross dock facility in
Minneapolis is designed for the separation and distribution of merchandise
system wide.
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<PAGE>
ADVERTISING AND MARKETING
The Company maintains aggressive advertising and marketing programs. The
Company's strategy of clustering stores in metropolitan markets enables it to
cost effectively employ a variety of media. The Company advertises primarily
through newspaper and direct mail inserts, television and radio. Paper Warehouse
also promotes products through the use of direct mail mini-catalogs, as well as
through in-store coupon books and party planning aids.
The Company's advertising efforts are designed to educate consumers about
its convenient store locations, promote the breadth and value of its product
offering and increase its name recognition. The Company's advertising consists
primarily of full color newspaper and direct mail inserts designed around major
holidays and the spring and summer seasons. For fiscal 1996, the Company
distributed 11 newspaper and direct mail inserts and plans on distributing 16
inserts for fiscal 1997. Inserts are supplemented by television advertising for
Halloween, Christmas and New Year's and by radio advertising for graduation,
Easter and the spring season. In addition, Paper Warehouse typically advertises
the opening of new stores in newspaper and direct mail inserts and on radio.
Management has initiated a targeted direct mail program to increase sales
for special events. The Company currently mails mini-catalogs of wedding and
graduation party goods to brides-to-be and families of high school graduates.
Management has recently expanded this direct mail program to other special
occasions such as a child's first birthday. The Company also plans to produce a
mini-catalog for organizations purchasing basic party and paper goods for
commercial or institutional use. The Company's institutional customers include a
variety of small businesses, food product companies, schools, synagogues,
churches, civic groups and other organizations.
For fiscal 1996, the Company spent approximately 80% of its marketing budget
on full color newspaper and direct mail inserts, approximately 15% for
television and radio advertising and the remainder of the budget was used for
direct mail mini-catalogs and in-store sales promotions.
INFORMATION SYSTEMS
The Company's information systems are an important factor in supporting its
continued expansion and enhancing its competitive position in the industry. The
Company completed the installation of Point of Sale ("POS") terminals in all its
Company owned stores in third quarter 1996. The POS terminals allow price lookup
and inventory tracking by SKU. By polling transaction data nightly from each
store's POS terminals, the system provides daily sales information and inventory
levels at the store, department, class and SKU level, allowing the corporate
office to monitor daily sales, gross profit, pricing and inventory by SKU across
its entire store base. Also, the Company's automatic merchandise replenishment
system uses this information to allocate goods to individual stores based on
specific SKU requirements.
The Company entered into an agreement with JDA Software Company in September
1997 to replace its current corporate office software. Implementation began
during the third quarter of 1997 and is estimated to be completed during the
third quarter of 1998. The JDA retail software package will operate on an IBM
AS/400 platform, requiring the Company to purchase new hardware. Switching
hardware platforms will provide the Company the benefit of parallel operations
during the conversion process. In addition, the Company plans to make extensive
use of JDA's Minneapolis consulting office in both the implementation and data
conversion process.
The JDA system supports the complete range of retail cycle functions in the
areas of finance, merchandising and distribution, providing management with more
sophisticated tools to utilize the information collected by its POS terminals.
In addition, the Company plans to develop enhancements such as data warehousing
and electronic data interchange to improve the Company's ability to
systematically manage its inventory. The Company's current information system is
already performing most of these functions, however, management believes JDA
will improve the efficiency of these tasks.
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<PAGE>
FRANCHISING
The Company has offered franchises of its Paper Warehouse store concept
since October 1987. As of November 5, 1997, the Company had 51 franchise stores.
The Company's 51 franchise stores are located in the following states:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION STORES
- ------------------------------------------------------------------------------------ ---------------
<S> <C>
Arizona............................................................................. 5
Colorado............................................................................ 5
Florida............................................................................. 1
Georgia............................................................................. 2
Illinois............................................................................ 3
Iowa................................................................................ 4
Kansas.............................................................................. 2
Kentucky............................................................................ 1
Louisiana........................................................................... 4
Maryland............................................................................ 2
Minnesota........................................................................... 1
Mississippi......................................................................... 1
Missouri............................................................................ 1
Montana............................................................................. 2
Nebraska............................................................................ 2
Nevada.............................................................................. 1
North Dakota........................................................................ 4
South Dakota........................................................................ 4
Tennessee........................................................................... 2
Texas............................................................................... 2
Wyoming............................................................................. 2
</TABLE>
The Company establishes franchise stores in markets that are not contiguous
to metropolitan areas with Company-owned stores. In addition, the Company grants
development rights in metropolitan markets where the Company does not plan to
open Company-owned stores. The Company believes that these markets typically are
not served adequately by the party goods industry. In addition to generating
franchise revenues, franchise stores benefit the Company through increased name
recognition and increased buying power from its suppliers.
The Company assists franchisees in all aspects of opening and operating a
Paper Warehouse store. During the pre-opening phase, Company support includes
site evaluation and assistance with lease negotiations, store build-out
assistance, fixture, equipment, supplies and inventory procurement, opening
advertisement materials and operational training. The Company provides its
franchisees with ongoing services such as business planning, operations and
promotional activities. In addition, the Company performs the merchandising
process for its franchisees. The Company makes periodic inspections of its
franchise stores to ensure that the franchisee is complying with the Company's
various requirements and quality standards. The Company generally has not
granted franchisees the right to prevent the Company or other franchisees from
establishing stores within a particular territory. However, the Company has
entered, and may in the future enter, into multiple store development agreements
with franchisees granting to them certain exclusive rights to develop stores in
specified markets, so long as the franchisee meets a stated development schedule
and complies with other provisions of the development agreement and the
franchise agreement.
Paper Warehouse franchise revenues are comprised of initial franchise fees
and continuing royalty payments. The Company's current initial franchise fee
ranges from $19,000 to $25,000 for new franchisees,
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<PAGE>
depending on the type of store. The Company occasionally negotiates a special
rate for developers opening multiple stores. If a franchisee enters into a
second or third franchise agreement it may receive a discount on the initial fee
associated with the second or third store. Franchisees are also required to pay
the Company a continuing royalty equal to a percentage of their weekly gross
sales. Historically, this percentage has varied from 3% to 5%. Currently, new
franchises pay the Company a continuing royalty of 4% of gross sales.
The franchisee's initial investment depends primarily upon store size. This
investment includes the initial franchise fee, real estate and leasehold
improvements, fixtures and equipment, signs, point-of-sale systems, deposits and
business licenses, initial inventory, opening promotional expenses and working
capital. The Company may also require franchisees to pay a weekly advertising
fee not to exceed 1% of gross sales, although to date it has not required such
fee. Each franchisee is granted a license from the Company for the right to use
certain intellectual property rights, including the mark PAPER WAREHOUSE or
PARTY UNIVERSE and related designs. The Company's franchise agreements provide
for a ten-year term and often contain conditional renewal options.
COMPETITION
The party and paper supply retailing business is highly competitive. In
order to compete successfully against other party good retailers, the Company
believes it must maintain convenient locations, broad merchandise selections,
competitive pricing and strong customer service. Paper Warehouse stores compete
with a variety of smaller and larger retailers, including specialty party supply
retailers such as Party City and Factory Card Outlet, card shops such as
Hallmark and designated departments in mass merchandisers, discount retailers,
toy stores, drug stores, supermarkets and department stores such as Target and
Wal-Mart. Many of these competitors have substantially greater financial
resources than the Company.
TRADEMARKS AND SERVICE MARKS
The marks PAPER WAREHOUSE and PARTY UNIVERSE are federally registered
trademarks owned by the Company. The Company is aware of the common law usage of
the name PAPER WAREHOUSE by several companies in various parts of the United
States, which may prevent the Company from using that name in certain regional
markets. In markets where PAPER WAREHOUSE cannot be used by the Company, it
intends to use the name PARTY UNIVERSE, for Company-owned and franchise stores.
Because of the Company's regional approach to advertising and store clustering,
the Company believes that the use of a single trademark within each market is
more important to its growth and business strategy than the use of one mark
nationally.
GOVERNMENT REGULATION
As a franchisor, the Company must comply with rules and regulations adopted
by the Federal Trade Commission and with state laws that regulate the offer and
sale of franchises. The Company also must comply with a number of state laws
that regulate certain substantive aspects of the franchisor-franchisee
relationship. These laws regulate the franchise relationship, for example, by
requiring the franchisor to deal with its franchisees in good faith, by
prohibiting interference with the right of free association among franchisees
and by regulating illegal discrimination among franchises with regard to
charges, royalties or fees. To date, those laws have not precluded the Company
from seeking franchisees in any given area and have not had a material adverse
effect on the Company's operations.
All Paper Warehouse stores must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire and other departments. More stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors and difficulties or failures in obtaining the
required licenses or approvals, can delay and sometimes prevent the opening of a
new store. In addition, the Company must
30
<PAGE>
comply with the Fair Labor Standard Act and various state laws governing matters
such as minimum wage, overtime and other working conditions. The Company also
must comply with the provisions of the Americans with Disabilities Act of 1990,
which generally requires that employers provide reasonable accommodation for
employees with disabilities and that stores be accessible to customers with
disabilities.
EMPLOYEES
As of August 1, 1997, the Company employed approximately 200 full-time and
approximately 500 part-time employees. The Company considers its relationships
with its employees to be good. None of the Company's employees is covered by a
collective bargaining agreement.
PROPERTIES
Paper Warehouse currently leases the locations for its 73 Company-owned
stores. The Company purchased an approximate 25,000 square foot building for its
headquarters and cross-dock distribution facility in St. Louis Park, Minnesota
in 1995. As of August 1, 1997, the secured debt on such property was $920,908,
of which $509,354 was owed to Richfield Bank & Trust Co. and $411,554 was owed
to the U.S. Small Business Administration. Richfield Bank & Trust Co. holds a
first mortgage on such property and the U.S. Small Business Administration holds
a second mortgage. The Company anticipates that its new Company-owned stores
will typically have ten-year leases with at least one five-year renewal option.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL
The following sets forth certain information with respect to the directors,
executive officers and certain key personnel of the Company as of October 1,
1997:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
- ----------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
Yale T. Dolginow................... 54 President, Chief Executive Officer and Chairman of the Board
Brent D. Schlosser................. 44 Executive Vice President and Director
Cheryl W. Newell................... 44 Vice President and Chief Financial Officer
Diane C. Dolginow.................. 53 Secretary and Director
Arthur H. Cobb..................... 46 Director
Marvin W. Goldstein................ 54 Director
Martin A. Mayer.................... 55 Director
Jeffrey S. Halpern................. 54 Director
<CAPTION>
CERTAIN KEY PERSONNEL AGE POSITION
- ----------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
Carol A. Carroll................... 46 Vice President of Stores
Willard V. Lewis................... 61 Vice President of Store Development
Steven P. Durst.................... 29 Vice President of Information Systems
Michael A. Anderson................ 37 Controller/Treasurer
Francis E. O'Neil.................. 62 Director of Franchising
Kristen Lenn....................... 30 Director of Human Resources
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
Yale T. Dolginow has been President, Chief Executive Officer and a director
of the Company since 1986. From 1982 to 1986, he served as President and Chief
Executive Officer of Carlson Catalog Showrooms, Inc., which was a chain of 59
catalog showrooms located throughout the Midwest. From 1981 to 1982, Mr.
Dolginow served as Assistant to the President of Dayton Hudson Corporation. From
1978 to 1980, Mr. Dolginow served as President of Modern Merchandising, Inc., a
70 store retail chain operating in several markets, and as Executive Vice
President from 1977 to 1978. From 1968 until 1976, Mr. Dolginow was the Chief
Executive Officer and President of Dolgin's, Inc., a chain of catalog showroom
stores which operated in the Kansas City and St. Louis metropolitan markets. Mr.
Dolginow and Diane C. Dolginow are husband and wife.
Brent D. Schlosser has been Executive Vice President and a director of the
Company since 1986. From 1982 to 1986, he served in various capacities,
including Vice President Marketing/Buying and Executive Vice President
Marketing/Merchandising, at Carlson Catalog Showrooms, Inc. From 1977 to 1982,
he served as Director of Marketing for Modern Merchandising, Inc. From 1975 to
1977, Mr. Schlosser was advertising director for Dolgin's, Inc.
Cheryl W. Newell has been Vice President and Chief Financial Officer of the
Company since August 1997. From 1991 to August 1997, Ms. Newell was a Vice
President with the Corporate Banking Group at U.S. Bancorp, a bank holding
company, responsible for management of desktop technology, disaster recovery,
training and development. From 1986 to 1991 Ms. Newell was a Vice President with
Citicorp, a bank holding company. From 1976 to 1986, Ms. Newell was a Vice
President at Norwest Bank.
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<PAGE>
Diane C. Dolginow has been a director of the Company since 1986 and
Secretary since August 1997. Ms. Dolginow and Mr. Dolginow are husband and wife.
Ms. Dolginow was a director of Dolgin's Inc. from 1968 to 1976, and since 1994
has been a director on the National Advisory Board of School of Education at
University of Kansas.
Arthur H. Cobb has been a director of the Company since 1992. He is a
consultant and certified public accountant. Since June 1987, he has been engaged
in providing financial consulting services and is President of Cobb &
Associates, Ltd. Prior thereto, Mr. Cobb was a partner with Peat Marwick
Mitchell & Co.
Marvin W. Goldstein has been a director of the Company since December 1996.
Mr. Goldstein is currently a financial consultant. From April 1997 through
August 1997, Mr. Goldstein was Executive Vice President and Chief Operating
Officer of Regis Corp., a national chain of hair salons. From 1995 through
December 1996, Mr. Goldstein was Chairman of the Board, Chief Executive Officer
and President of Pet Food Warehouse, Inc., a specialty retailer. From 1992 to
September 1994, he was President and Chief Operating Officer of the Department
Store Division of Dayton Hudson Corporation. From 1981 through 1987 he served as
Senior Vice President of Merchandising and Senior Vice President of Stores for
R.H. Macy, California. From 1976 to 1981 he served as Vice President General
Merchandise of Carter Hawley Hale, Inc. From 1966 to 1976, he served as
Divisional Merchandise Manager and Associate Buyer of the Department Store
Division of Dayton Hudson Corporation. Mr. Goldstein is a director of Buffets,
Inc.
Martin A. Mayer has been a director of the Company since 1992. He has been
an adjunct professor of marketing at the University of San Diego since 1995 and
has been an independent financial consultant since 1992. Mr. Mayer was a partner
with Peat Marwick Mitchell & Co., a public accounting firm, from 1973 until
1992. Mr. Mayer is a certified public accountant.
Jeffrey S. Halpern has been a director of the Company since 1997. He has
been Chairman of the Board and Chief Executive Officer of Southwest Casino and
Hotel Corp. since 1993. Mr. Halpern was a partner in the law firm of Popham,
Haik, Schnobrich & Kaufman, Ltd. from 1989 until 1993, and a founding partner of
Halpern & Druck from 1980 to 1989.
CERTAIN KEY PERSONNEL
Carol A. Carroll has been Vice President of Stores of the Company since
1997. Prior to that time and since 1994, she was Director of Stores. From 1992
to 1994, she was Director of Stores of CBR, Inc., a privately-owned retailer,
specializing in airport retail. From 1976 to 1992 she served as a District
Manager, managing 17 stores in a five state area, for Best Products, Inc.
Willard V. Lewis has been Vice President of Store Development of the Company
since 1997. Prior to that time and since 1992 he was Director of Development.
From 1990 to 1992, Mr. Lewis served as Vice President of Network Facilities
Professionals, Inc., a Minnesota-based computer software firm. He was employed
by Dolgin's, Inc. from 1970 to 1985, served as Vice President and Treasurer from
1973 to 1977 and President and General Manager from 1977 to 1985.
Steven P. Durst has been Vice President of Information Systems since 1997.
Prior to that time and since 1995, he was Director of Information Systems. From
1990 to 1995, he was employed by Exxon Corporation where he performed various
engineering and business planning functions. Mr. Durst is the son-in-law of Mr.
and Ms. Dolginow.
Michael A. Anderson has served as Controller/Treasurer of the Company since
1997. Prior to that time and since 1991, he was Controller. From 1987 to 1991,
he was an accountant at Lurie, Eiger, Besikof & Company, a Minneapolis public
accounting firm. From 1982 to 1986, he was a staff accountant with Marvin O.
Anderson, LPA, a public accounting firm located in Minnesota.
33
<PAGE>
Francis E. O'Neil has served as Director of Franchising since 1997. From
1995 to 1997, he was Director of Marketing at Graphics Xpress, a subsidiary of
Meyers Printing Co. From 1993 to 1995, he was a New Business Consultant at
Deluxe Corporation. From 1990 to 1993, he was Vice President of Marketing for
Insty-Prints, Inc. From 1985 to 1996 he provided consulting services to various
firms, including Paper Warehouse as President of Franchise Forum, Inc. Mr.
O'Neil has provided consulting services to the Company on a regular basis since
1992.
Kristen Lenn has served as Director of Human Resources since August 1997.
Prior to that time and since 1994, she was a Senior Consultant with McGladrey &
Pullen, LLP, a public accounting firm. She provided a wide range of Human
Resources Generalist services to clients. From 1989 to 1994, she was employed by
various organizations as a human resources generalist.
The Company's executive officers are appointed annually by the Company's
directors. Each of the Company's directors continues to serve until his or her
successor has been designated and qualified.
DIRECTOR COMPENSATION
The Company pays non-employee directors $500 for each meeting attended, plus
expenses. Upon the consummation of this offering, the Company will grant,
pursuant to the Directors Stock Option Plan, an option to acquire 10,000 shares
of Common Stock to each of its non-employee directors at an exercise price equal
to the initial public offering price (the "Directors' Stock Options"). These
options will have a term of ten years and vest in equal installments over three
years beginning one year from the date of grant. In the event of the (i) death
of the director; (ii) upon the removal of the director from the Board without
cause; (iii) in the event the director is not re-nominated or re-elected as a
director; (iv) in the event of a change in control of the Company, as defined in
any existing agreements between the Company and its senior officers; or (v) in
the event the director voluntarily resigns from the Board, all options granted
to such director will become immediately exercisable in full.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and Compensation Committee.
The Audit Committee, which is currently comprised of Messrs. Cobb, Goldstein and
Mayer, recommends to the Board of Directors the appointment of independent
auditors and oversees the accounting and auditing functions of the Company. The
Compensation Committee, which is currently comprised of Messrs. Mayer and
Goldstein, reviews and recommends compensation of officers and directors,
administers stock option plans and reviews major personnel matters.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid or earned for services rendered to the Company in the fiscal year ended
January 31, 1997 by the Chief Executive Officer and the only other executive
officer whose aggregate salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION ALL OTHER
------------- COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) ($)(1)
- ------------------------------------------------------------------------- ----------- ------------- ----------------
<S> <C> <C> <C>
Yale T. Dolginow ........................................................ 1996 285,000 27,005
President and Chief Executive Officer
Brent D. Schlosser ...................................................... 1996 145,000 1,282
Executive Vice President
</TABLE>
- ------------------------
(1) Other compensation amounts include $1,278 for Mr. Dolginow and $1,282 for
Mr. Schlosser as matching contributions under the Company's 401(k) Plan;
$25,727 as the value of benefits for Mr. Dolginow, determined as prescribed
by the Securities and Exchange Commission for such valuations, under a
"split dollar" life insurance arrangement.
34
<PAGE>
No options were granted to any executive officers or any other employee of
the Company in fiscal 1996.
EMPLOYMENT AGREEMENTS
In February 1997, the Company entered into two year employment agreements
with Yale T. Dolginow and Brent D. Schlosser pursuant to which they serve as
President and Chief Executive Officer and Executive Vice President of the
Company, respectively. Pursuant to their respective employment agreements,
Messrs. Dolginow and Schlosser receive an annual base salary of $285,000 and
$150,000, respectively, subject to increase by the Compensation Committee based
upon the Company's performance and other factors. Pursuant to such agreements,
Messrs. Dolginow and Schlosser may not during the agreement term or for one year
thereafter disclose confidential information about the Company and have agreed
not to compete with the Company for a two-year period after any termination of
employment, other than termination without "good cause" as defined in their
respective agreements. Messrs. Dolginow and Schlosser may each terminate their
employment with the Company upon 30 days' written notice to the Board of
Directors. Their respective agreements also terminate automatically upon the
death of the executive or upon written notice by the Board of Directors of the
Company, upon the disability of the executive provided such disability continues
for a period of more than 90 days. If either is terminated by the Company
without "good cause" as defined in their respective agreements, the terminated
employee is entitled to receive his respective base salary for 12 months. For
purposes of their respective agreements, "good cause" means (i) commission of a
felony; (ii) theft or embezzlement of Company property or commission of similar
acts involving moral turpitude; or (iii) the failure to substantially perform
their respective material duties under the agreements which willful failure is
not cured within thirty days after receipt of written notice from the Board of
Directors specifying the nonperformance.
EMPLOYEE AND DIRECTORS STOCK OPTION PLANS
The Company has adopted a 1997 Stock Option and Compensation Plan (the
"Employee Stock Plan") and a Director Stock Option Plan (the "Director Stock
Plan" together with the Employee Stock Plan, the "Stock Plans"). Officers and
key employees may be granted stock options, stock appreciation rights, stock
awards, performance shares and cash awards under the Employee Stock Plan. The
Company has reserved an aggregate 639,641 shares of Common Stock for issuance
under the Stock Plans.
The Employee Stock Plan is administered by the Compensation Committee (the
"Compensation Committee") of the Board of Directors of the Company whose members
must qualify as "non-employee directors" (as such term is defined under Rule
16b-3 of the Securities Exchange Act of 1934, as amended). The Compensation
Committee will be authorized to determine, among other things, the employees to
whom, and the times at which, options and other benefits are to be granted, the
number of shares subject to each option, the applicable vesting schedule and the
exercise price. The Compensation Committee will also determine the treatment to
be afforded to a participant in the Employee Stock Plan in the event of
termination of employment for any reason, including death, disability or
retirement. Under the Employee Stock Plan the maximum term of a stock option is
ten years for incentive options and ten years plus one day for non-statutory
options and no option may be exercised during the first twelve months of its
term. Upon the occurrence of a "change in control," unless otherwise determined
by the Board of Directors and a majority of the "continuing directors"
("continuing directors" are directors who were in office prior to the occurrence
of or public announcement of a "change in control," directors in office for a
period of more than two years and directors nominated and approved by the
"continuing directors"), (i) the restrictions on all shares of restricted stock
awards lapse immediately, (ii) all outstanding options and stock appreciation
rights will become exercisable immediately, and (iii) all performance shares
shall be deemed to be met and payment made immediately. For purposes of the
Employee Stock Plan, a "change in control" occurs when (i) any person or group
becomes the beneficial owner of 30% or more of any equity security of the
Company entitled to vote for the election of directors; (ii) a majority of the
members of the Board of
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<PAGE>
Directors of the Company is replaced within the period of less than two years by
directors not nominated and approved by the Board of Directors; or (iii) the
shareholders of the Company approve an agreement to merge or consolidate with or
into another corporation or an agreement to sell or otherwise dispose of all or
substantially all of the Company's assets (including a plan of liquidation). The
Company has granted, pursuant to the Employee Stock Plan, concurrent with the
consummation of this offering, options to purchase an aggregate of 162,965
shares at an exercise price equal to the initial public offering price of this
offering. Such options vest over a five-year period beginning on the first
anniversary of the date of grant and will terminate in ten years.
The Director Stock Plan is administered by the Board of Directors. Pursuant
to the terms of the Directors Stock Plan, upon election to the Board of
Directors of the Company, each non-employee director will be automatically
granted a non-statutory option to purchase 10,000 shares of the Common Stock of
the Company at an exercise price equal to the fair market value of the Company's
Common Stock on the date of grant. Such options vest in 20% increments beginning
on the first anniversary of the date of grant. Pursuant to the Director Stock
Plan, the Company has granted concurrent with the consummation of this offering
options to purchase an aggregate of 40,000 shares of Common Stock to each
nonemployee director of the Company at an exercise price equal to the initial
public offering price of this offering. These options will have a term of ten
years and vest in equal installments over three years beginning one year from
the date of grant. In the event of the (i) death of the director; (ii) upon the
removal of the director from the Board without cause; (iii) in the event the
director is not re-nominated or re-elected as a director; (iv) in the event of a
change in control of the Company, as defined in any existing agreements between
the Company and its senior officers; or (v) in the event the director
voluntarily resigns from the Board, all options granted to such director will
become immediately exercisable in full.
36
<PAGE>
CERTAIN TRANSACTIONS
For information concerning the Dividends paid to Mr. Dolginow and Mr.
Schlosser, the Shareholder Notes issued to Messrs. Dolginow and Schlosser for
working capital purposes following certain S corporation distributions, and the
Tax Agreement between the Company and Messrs. Dolginow and Schlosser, see "S
Corporation Distributions."
Prickly Pear Paper, Inc. ("Prickly Pear") operates four franchise stores in
Tucson, Arizona. Susan Hazan, Mr. Dolginow's sister, is a 95% shareholder and is
the President and Chief Executive Officer of Prickly Pear and Mr. Dolginow is
the Vice President of Prickly Pear. Prickly Pear paid franchise, continuing and
other fees to the Company in fiscal 1994, 1995 and 1996 in the aggregate amount
of approximately $41,000, $56,000 and $84,000, respectively. On January 8, 1996,
the Company loaned Prickly Pear $80,000, interest free. Such loan was repaid in
fiscal 1996.
In March 1996, Sunflower Party and Paper, Inc. ("Sunflower") purchased a
Paper Warehouse store located in Lawrence, Kansas from the Company for an
aggregate amount of $144,000 plus the assumption of certain liabilities of the
Company relating to that store, and began operating this store as a franchise
store. Sunflower is wholly owned by Larry and Patty Schlosser, the brother and
sister-in-law of Mr. Schlosser. During fiscal 1996, Sunflower paid the Company
an aggregate of approximately $39,000 in franchise and other fees. On March 1,
1996, Sunflower also entered into a Sublease Agreement with the Company pursuant
to which Sunflower agreed to sublease the property in Lawrence, Kansas from the
Company pursuant to terms of the original lease between the Company and the
owner of the property. The sublease expires on February 28, 1998. Total payments
to the Company under the terms of the Sublease were approximately $51,000 in
fiscal 1996. The Company remains liable for the full performance of the original
lease.
Prior to February 1, 1997, Paper Warehouse Franchising, Inc. ("PWF") was
beneficially owned 87% by Yale T. Dolginow and 13% by Brent D. Schlosser.
Pursuant to an arrangement between the Company and PWF, the Company provided PWF
with office facilities, equipment and other administrative support and
management services in exchange for the payment by PWF to the Company of at
least 90% of PWF's pre-tax profits. The Company received $154,000, $560,000 and
$0 from PWF for fiscal 1994, fiscal 1995 and fiscal 1996, respectively pursuant
to this arrangement. On February 1, 1997, Messrs. Dolginow and Schlosser
contributed the stock of PWF beneficially owned by them to the Company and PWF
became a wholly-owned subsidiary of the Company.
In January 1997, the Company entered into a $7.5 million revolving credit
facility with Richfield Bank & Trust Co. Mr. Dolginow has personally guaranteed
$1.5 million of the Company's obligations with respect to such facility. This
Guaranty will be released concurrent with the consummation of this offering. In
June 1995, Richfield Bank & Trust Co. also loaned the Company $945,000 to
finance, in part, the acquisition of the Company's corporate headquarters. Mr.
Dolginow has also personally guaranteed a loan to the Company from the U.S.
Small Business Administration in the orginal principal amount of $433,000, the
proceeds of which were also used to finance, in part, the acquisition of the
Company's corporate headquarters. See "Business--Properties." Prior to January
1997, the Company had borrowed pursuant to a $6.5 million revolving credit
facility with Richfield Bank & Trust Co. Mr. Dolginow is a director of Richfield
Bank and Trust Co.
37
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of November 1, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the shares of the
Company's Common Stock by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each
director, (iii) each executive officer named in the "Summary Compensation Table"
above, (iv) the Selling Shareholder, and (v) all executive officers and
directors as a group. Unless otherwise indicated, each of the following persons
has sole voting and investment power with respect to the shares of Common Stock
set forth opposite their respective names. Unless otherwise indicated, the
address of each of the directors and executive officers is 7630 Excelsior
Boulevard, Minneapolis, Minnesota 55426.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNERSHIP
BENEFICIALLY ------------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING(1)
- ------------------------------------------------------------ ----------------- --------------- -------------------
<S> <C> <C> <C>
Yale T. Dolginow............................................ 1,916,443 87.0% 45.1%
Brent D. Schlosser.......................................... 286,375 13.0% 6.7%
Diane C. Dolginow........................................... --(2) -- --
Arthur H. Cobb.............................................. -- -- --
Marvin Goldstein............................................ -- -- --
Martin A. Mayer............................................. 27,728(3) 1.2% *
Jeffrey S. Halpern.......................................... -- -- --
LSG Corporation............................................. 220,285(4) 9.1% 4.7%
All directors and executive officers as a group
(eight persons)........................................... 2,202,818 100.0% 51.9%
</TABLE>
- ------------------------
* Less than 1%
(1) Assumes the exercise of options and warrants to purchase an aggregate of
377,550 shares immediately prior to this offering and an initial public
offering price of $9.00 per share.
(2) Does not include shares beneficially owned by Yale T. Dolginow, Ms.
Dolginow's husband.
(3) Represents 27,728 shares issuable upon exercise of a stock option granted by
Mr. Dolginow which is exercisable within 60 days of this Prospectus.
(4) The address of such shareholder is 4800 Norwest Center, Minneapolis, MN
55402. Upon consummation of this offering, LSG Corporation has agreed to
execise its option. In addition, LSG has granted the Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up to
50,000 shares of Common Stock solely to cover over-allotments, if any. See "
Underwriting." If the Underwriters' over-allotment option is exercised in
full, the number of shares beneficially owned by the Selling Shareholder
after this offering and the percent ownership after this offering will be
151,064 and 3.4%, respectively.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company presently consists of 50,000,000
shares, 40,000,000 of which are Common Stock, par value $0.01 per share, and,
10,000,000 shares of Preferred Stock, par value $0.01 per share, issuable in
series (the "Serial Preferred Stock").
COMMON STOCK
As of September 30, 1997, there were 2,202,818 shares of Common Stock
outstanding held by two owners of record. All outstanding shares of Common Stock
are, and the shares offered hereby will be, fully paid and nonassessable. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters voted upon by the shareholders and may not cumulate votes for the
election of directors. Thus, the owners of a majority of the shares of Common
Stock outstanding have the power to elect all of the directors. Subject to the
rights of any future class or series of Serial Preferred Stock that may be
authorized and issued in the future by the Board of Directors, each share of
outstanding Common Stock is entitled to participate equally in any distribution
of net assets made to the shareholders in liquidation, dissolution or winding up
of the Company and is entitled to participate equally in dividends as and when
declared by the Board of Directors. There are no redemption, sinking fund,
conversion or preemptive rights with respect to the shares of Common Stock. All
shares of Common Stock have equal rights and preferences.
SERIAL PREFERRED STOCK
Under governing Minnesota law and the Company's Amended and Restated
Articles of Incorporation (the "Articles"), no action by the Company's
shareholders is necessary, and only action of the Board of Directors is required
to authorize the issuance of any shares of Serial Preferred Stock. The Board of
Directors is empowered to establish, and to designate the name of, each class or
series of the shares of Serial Preferred Stock and to set the terms of such
shares (including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences), any or
all of which may be greater than the rights of the holders of Common Stock.
Accordingly, the Board of Directors, without shareholder approval, may issue
shares of Serial Preferred Stock with terms (including terms with respect to
redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences) that could adversely affect the voting power and
other rights of holders of the Common Stock. At present, the Board of Directors
has not authorized or issued any shares of Serial Preferred Stock and has no
present plan to establish any such additional class or series.
The Serial Preferred Stock may have the effect of discouraging an attempt,
through acquisition of a substantial number of shares of Common Stock, to
acquire control of the Company with a view to effecting a merger, sale or
exchange of assets or a similar transaction. For example, the Board of Directors
could issue such shares as a dividend to holder of Common Stock or place such
shares privately with purchasers who may side with the Board of Directors in
opposing a takeover bid. The anti-takeover effects of the Serial Preferred Stock
may deny shareholders the receipt of a premium on their Common Stock and may
also have a depressive effect on the market price of the Common Stock.
LSG OPTION
In connection with Yale T. Dolginow's purchase of Common Stock of the
Company from LSG Corporation, the Selling Shareholder ("LSG") the Company
granted LSG an option to acquire 220,285 shares of Common Stock upon the
occurrence of a merger or the initial public offering of the Company's
securities (the "Event Option"). The Event Option terminates November 30, 1997.
The Company also granted LSG a conditional option, effective January 1, 1998, to
purchase 220,285 shares of Common Stock in the event the Event Option is not
exercised (the "1998 Option"). Upon exercise of the 1998 Option and receipt of
shares, LSG has the right to put (the "Put Option") the shares to the Company at
a price equal to the aggregate book value per share of the shares calculated as
of the end of the immediately preceding
39
<PAGE>
fiscal year of the Company. The 1998 Option and the Put Option terminate on
December 31, 1998, and the 1998 Option terminates upon the exercise by LSG of
the Event Option.
The exercise price of each of the Event Option and the 1998 Option is
$150,000 plus an amount equal to 10% of all capital and equity contributions
made to the Company between December 1, 1992 and the date of exercise. As a
result of the exercise of the Warrants (as herein defined) immediately prior to
this offering, the aggregate exercise price of the LSG Option will be $172,999.
Shares of Common Stock issuable upon exercise of the Event Option do not have
registration rights. Concurrently with the consummation of the offering, LSG has
agreed to exercise the LSG Option on a cashless basis, whereby the exercise
price will be paid by reducing the number of shares issued upon exercise of the
LSG Option in an amount equal to the aggregate exercise price divided by the
initial price to the public in the offering. Assuming a $9.00 per share initial
public offering price, LSG will be issued 201,064 shares upon the "cashless
exercise" of the LSG Option. LSG has granted the Underwriter an option to
purchase an additional 50,000 shares to cover over-allotments. See
"Underwriting." The shares issued upon exercise of the LSG Option will be
restricted securities as defined in Rule 144 under the Securities Act and may
only be publicly resold pursuant to a registration statement or pursuant to an
exemption from the registration statement requirements, including Rule 144 under
the Securities Act after expiration of the then applicable holding period.
WARRANTS
In connection with the Company's 1994 private placement of the Subordinated
Notes the Company issued to the 37 purchasers of the Subordinated Notes warrants
("Warrants") to purchase an aggregate of 183,720 shares of Common Stock at an
exercise price of $1.25 per share. The Warrants provide that if the Company
issues shares of Common Stock to LSG pursuant to the LSG Option, the number of
shares of Common Stock purchasable in the aggregate upon exercise of the
Warrants will be increased to 202,040 shares of Common Stock at an exercise
price of $1.14. A warrant holder may require the Company to redeem the holder's
Warrants at any time beginning November 30, 1998, and the Company may redeem the
Warrants at any time beginning November 30, 1999, in either case at a defined
redemption price.
Pursuant to a registration rights agreement with the Company dated December
7, 1994, holders of Warrants have certain rights with respect to the
registration of shares issuable upon exercise of the Warrants under the
Securities Act. Under the terms of the agreement, if the Company proposes to
register any of its securities under the Securities Act for its own account or
for the account of others, the holders are entitled to include such shares
therein, subject to any limitation by the underwriters in the offering on the
number of shares included in such registration. The Company is required to use
its best efforts to effect all such registrations, subject to certain conditions
and limitations. Each of the Warrant holders has been given notice of this
offering and of such registration rights and none of such holders has exercised
such registration rights in connection with this offering. Concurrent with the
consummation of the offering, assuming an initial public offering price of $9.00
per share, holders of all of the Warrants have agreed to convert their Warrants
into an aggregate of 176,486 shares of Common Stock and have agreed not to sell
the Common Stock issuable upon exercise of such Warrants until at least 180 days
after the effective date of this offering.
STATE LAW PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's shareholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
40
<PAGE>
Section 302A.671 of the Minnesota Business Corporation Act (the "MBCA")
applies, with certain exceptions, to any acquisition of voting stock of the
Company (from a person other than the Company, and other than in connection with
certain mergers and exchanges to which the Company is a party) resulting in the
beneficial ownership of 20% or more of the voting stock then outstanding.
Section 302A.671 requires approval of any such acquisition by a majority vote of
the shareholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then-fair market value by the Company within 30 days after
the acquiring person has failed to give a timely information statement to the
Company or the date the shareholders voted not to grant voting rights to the
acquiring person's shares.
Section 302A.673 of the MBCA generally prohibits any business combination by
the Company, or any subsidiary of the Company, with any shareholder that
purchases 10% or more of the Company's voting shares (an "interested
shareholder") within four years following such interested shareholder's share
acquisition date, unless the business combination is approved by a committee of
all of the disinterested members of the Board of Directors of the Company before
the interested shareholder's share acquisition date.
The Company's Amended & Restated Bylaws (the "Bylaws") provide that Section
302A.673 of the MBCA, is not applicable to any business combination (as defined
in the MBCA) of the Company with, with respect to, proposed by or on behalf of,
or pursuant to, any written or oral agreement, arrangement, relationship,
understanding, or otherwise with Yale T. Dolginow and/or Brent D. Schlosser or
any of their respective affiliates or associates (as defined in the MBCA).
CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
The Company's Articles limit the liability of its directors to the fullest
extent permitted by law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of the fiduciary duty as
directors, except for liability for (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) corporate distributions which are in contravention of restrictions in the
MBCA, the Company's Articles or Bylaws, or any agreement to which the Company is
a party, (iv) violations of Minnesota securities laws, (v) any transaction from
which the director derives an improper personal benefit, or (vi) any act or
omission occurring prior to the effective date of the provision in the Company's
Articles eliminating or limiting liability. This provision will generally not
limit liability under state or federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business corporation
must indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Article 6 of the Company's Bylaws provides that each director, officer and
employee of the Company shall be indemnified by the Company in accordance with,
and to the fullest extent permissible by, applicable law.
Insofar as indemnification for liabilities arising under the Security Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is therefore
unenforceable.
TRANSFER AGENT AND REGISTRAR
Firstar Trust Company is the transfer agent and registrar of the Common
Stock.
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Dain Bosworth Incorporated is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company the shares of Common Stock offered hereby. Each Underwriter will
purchase the number of shares of Common Stock at the price to public less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus, in the amounts set forth below opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Dain Bosworth Incorporated.................................................
-----------------
Total.................................................................... 1,666,667
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if the Underwriters purchase any
shares. The Representative has advised the Company that the several Underwriters
may offer the shares of Common Stock directly to the public at the price to
public set forth on the cover page of this Prospectus and to certain dealers at
the price to public less a concession not exceeding $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not exceeding
$ per share to other dealers. After the shares of Common Stock are
released for sale to the public, the Representative may change the initial price
to public and other selling terms.
The Company and the Selling Shareholder have granted to the Underwriters an
option, exercisable for 30 days after the date of this Prospectus, to purchase
up to an aggregate of 200,000 and 50,000 additional shares of Common Stock,
respectively, at the same price per share as the initial shares to be purchased
by the Underwriters. The Underwriters may purchase these shares solely to cover
over-allotments, if any, in connection with the sale of Common Stock offered
hereby. If the Underwriters exercise the over-allotment option, the Underwriters
will be obligated, subject to certain conditions, to purchase additional shares
in approximately the same proportion as those in the above table.
The Underwriting Agreement provides that the Company, the Selling
Shareholder and the Underwriters will indemnify each other against certain
liabilities, including liabilities under the Securities Act, in connection with
this offering.
The Company and all of its directors, executive officers and shareholders
have agreed not to sell, offer to sell, solicit an offer to buy, contract to
sell, grant an option to purchase, or otherwise transfer or dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representative.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot the
Common Stock in connection with the offering, creating a short position in the
Common Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of the Common Stock in the open
42
<PAGE>
market. The Underwriters may also reclaim selling concessions allowed to an
underwriter or a dealer for distributing the Common Stock in the offering, if
the Underwriters repurchase previously distributed Common Stock in transactions
to cover their short positions, in stabilization transactions or otherwise.
Finally, the Underwriters may bid for, and purchase, shares of the Common Stock
in market making transactions and impose penalty bids. These activities may
stabilize or maintain the market price of the Common Stock above market levels
that may otherwise prevail. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation between the Company and the Representative. In determining the
initial price to public, the Company and the Representative will consider, among
other things, the history of and prospects for the industry in which the Company
operates, past and present operations and earnings of the Company and the trend
of such earnings, the qualifications of the Company's management, the general
condition of the securities markets at the time of this offering and the market
prices for other publicly traded companies. There can be no assurance, however,
that the prices at which the Common Stock will sell in the public market after
this offering will not be lower than the Price to Public.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Sales of a substantial number of shares of Common Stock in the public
market following this offering, or the perception that such sales could occur,
could have a material adverse effect on the prevailing market price of the
Common Stock and could adversely affect the ability of the Company to raise
equity capital in the future.
Upon completion of this offering, 4,247,035 shares of Common Stock will be
outstanding (4,447,035 shares if the Underwriters' over-allotment option is
exercised in full), of which the 1,666,667 shares offered hereby (1,916,667
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradeable on the public market without restriction or further
registration under the Securities Act, by persons who are not deemed to be
affiliates of the Company as that term is defined in the Securities Act. The
remaining 2,580,368 shares of Common Stock were issued and sold by the Company
in private transactions, and are "restricted stock" within the meaning of Rule
144, and public sale thereof is restricted except to the extent they are
registered under the Securities Act or sold in accordance with an exemption from
such registration such as Rule 144. The Company and the holders of these
remaining shares have entered into lock-up agreements with the Underwriters
under which they have agreed not to sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase, or otherwise transfer or
dispose of any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 180 days after the
date of this Prospectus without the prior written consent of the Representative.
Upon expiration of the 180-day period, all of these remaining shares will be
eligible for immediate public sale under Rule 144(k).
In general, Rule 144 as currently in effect provides that if at least one
year has elapsed since shares of Common Stock that constitute restricted stock
were last acquired from the Company or an affiliate of the Company, the holder
is generally entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the shares of Common Stock then
outstanding or the reported average weekly trading volume of the Common Stock
during the four calendar weeks immediately preceding the date on which notice of
the sale is sent to the Commission. Sales under Rule 144 are subject to certain
manner of sale restrictions, notice requirements and availability of current
public information concerning the Company. Under Rule 144(k), a person who is
not an affiliate of the Company during the three months preceding the sale,
generally may sell shares without regard to the volume limitations, manner of
sale provision, notice requirements or the availability of public information
concerning the
43
<PAGE>
Company, provided that at least two years have elapsed since the shares were
last acquired from the Company or an affiliate.
The Company intends to file a registration statement under the Securities
Act to register an aggregate of 639,641 shares of Common Stock reserved for
issuance under the Stock Plans, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act, subject, however, to vesting requirements with the Company and the lock-up
agreements described above.
LEGAL MATTERS
The validity of the shares of Common Stock being sold in this offering will
be passed upon for the Company by Maslon Edelman Borman & Brand, LLP,
Minneapolis, Minnesota. Oppenheimer Wolff & Donnelly, Minneapolis, Minnesota is
acting as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby.
INDEPENDENT PUBLIC ACCOUNTANTS
The combined/consolidated financial statements of Paper Warehouse, Inc. as
of January 31, 1997 and February 2, 1996, and for each of the years in the
three-year period ended January 31, 1997 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Although all material terms and provisions of any
material contract or other document filed are referred to in this Prospectus and
described herein, such descriptions are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Registration Statement and the exhibits
and schedules thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at 500 West Madison Street,
Suite 1400, Chicago, IL 60661, and 7 World Trade Center, Suite 1500, New York,
New York 10048. Copies of all or any part of the Registration Statement can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements, and other information that has been or will be filed by
the Company.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
44
<PAGE>
PAPER WAREHOUSE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Combined/Consolidated Balance Sheets as of February 2, 1996, January 31, 1997, August 2, 1996 (unaudited)
and August 1, 1997 (unaudited)........................................................................... F-3
Combined/Consolidated Statements of Earnings and Retained Earnings for the fiscal years ended January 27,
1995, February 2, 1996, and January 31, 1997, and the six-month periods ended August 2, 1996 (unaudited)
and August 1, 1997 (unaudited)........................................................................... F-4
Combined/Consolidated Statements of Cash Flows for the fiscal years ended January 27, 1995, February 2,
1996, and January 31, 1997, and the six-month periods ended August 2, 1996 (unaudited) and August 1, 1997
(unaudited).............................................................................................. F-5
Notes to Combined/Consolidated Financial Statements........................................................ F-6
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Paper Warehouse, Inc.:
We have audited the accompanying combined/consolidated balance sheets of
Paper Warehouse, Inc. and subsidiary (the Company) as of February 2, 1996 and
January 31, 1997, and the related combined/ consolidated statements of earnings
and retained earnings, and cash flows for each of the years in the three-year
period ended January 31, 1997. These combined/consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined/consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined/consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Paper
Warehouse, Inc. and subsidiary as of February 2, 1996 and January 31, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 28, 1997, except
as to the fourth and fifth paragraphs
of note 10(a) which are as
of September 26, 1997
F-2
<PAGE>
PAPER WAREHOUSE, INC.
COMBINED/CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, 1996, JANUARY 31, 1997,
AUGUST 2, 1996 AND AUGUST 1, 1997
<TABLE>
<CAPTION>
PRO FORMA
AUGUST 1,
FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1, 1997 (NOTE
1996 1997 1996 1997 10(B))
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 885,440 $ 357,167 $ 604,142 $ 359,516 $ 359,516
Inventories, net................................ 7,716,758 9,568,680 9,144,189 11,949,521 11,949,521
Accounts receivable............................. 479,164 261,424 163,859 183,908 183,908
Prepaid expenses and other current assets....... 132,312 119,053 210,429 414,202 414,202
------------- ------------- ------------- ------------- -------------
Total current assets........................ 9,213,674 10,306,324 10,122,619 12,907,147 12,907,147
Property and equipment, net..................... 5,193,485 5,461,219 5,514,005 5,681,746 5,681,746
Other assets, net............................... 527,032 502,639 513,055 496,615 496,615
------------- ------------- ------------- ------------- -------------
$ 14,934,191 $ 16,270,182 $ 16,149,679 $ 19,085,508 $ 19,085,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................... $ 4,763,939 $ 5,870,000 $ 5,473,939 $ 0 $ 0
Notes payable--related party.................... 0 0 0 2,136,193 2,136,193
Current maturities of long-term debt............ 23,040 22,015 22,668 22,015 22,015
Accounts payable................................ 2,610,505 2,122,285 2,875,901 4,357,481 4,357,481
Accrued liabilities:
Payroll and related expenses.................. 218,302 268,046 287,852 312,816 312,816
Accrued interest.............................. 87,788 17,407 107,726 69,593 69,593
Other......................................... 585,508 305,433 561,891 448,426 448,426
Pro forma dividends declared subsequent to
period end (note 10(b))....................... 0 0 0 0 166,000
------------- ------------- ------------- ------------- -------------
Total current liabilities................... 8,289,082 8,605,186 9,329,977 7,346,524 7,512,524
Notes payable (note 10(b)) 0 0 0 5,775,000 5,775,000
Notes payable--related party...................... 0 2,136,193 0 0 0
Long-term debt, less current maturities........... 3,233,656 3,211,575 3,223,702 3,198,893 3,198,893
Deferred rent credits and other................... 287,878 524,694 261,849 624,846 624,846
------------- ------------- ------------- ------------- -------------
Total liabilities........................... 11,810,616 14,477,648 12,815,528 16,945,263 17,111,263
Stockholders' equity (note 10(a)):
Serial preferred stock, 10,000,000 shares
authorized; none issued or outstanding........ 0 0 0 0 0
Common stock, $.01 par value.
Authorized 40,000,000 shares; issued and
outstanding 2,202,818 shares................ 22,028 22,028 22,028 22,028 22,028
Additional paid-in capital...................... 572,472 572,472 572,472 572,472 572,472
Retained earnings............................... 2,529,075 1,198,034 2,739,651 1,545,745 1,379,745
------------- ------------- ------------- ------------- -------------
Total stockholders' equity.................. 3,123,575 1,792,534 3,334,151 2,140,245 1,974,245
Commitments and contingencies (note 5)............
------------- ------------- ------------- ------------- -------------
$ 14,934,191 $ 16,270,182 $ 16,149,679 $ 19,085,508 $ 19,085,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to combined/consolidated financial statements.
F-3
<PAGE>
PAPER WAREHOUSE, INC.
COMBINED/CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997,
AND THE SIX-MONTH PERIODS ENDED AUGUST 2, 1996 AND AUGUST 1, 1997
<TABLE>
<CAPTION>
JANUARY 27, FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1,
1995 1996 1997 1996 1997
-------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Company-owned stores.............. $ 23,640,633 $ 32,414,215 $ 41,892,173 $ 18,969,660 $ 24,205,806
Franchise related fees............ 442,867 1,064,092 1,109,737 473,878 542,350
-------------- ------------- ------------- ------------- -------------
Total revenue................... 24,083,500 33,478,307 43,001,910 19,443,538 24,748,156
-------------- ------------- ------------- ------------- -------------
Costs and expenses:
Costs of products sold and
occupancy costs................. 15,474,410 21,879,566 27,946,561 12,946,154 16,267,318
Store operating expenses.......... 4,634,847 6,367,150 8,732,589 3,828,979 4,895,477
General and administrative
expenses........................ 2,479,972 3,450,737 4,242,960 2,070,616 2,628,166
-------------- ------------- ------------- ------------- -------------
Operating income................ 1,494,271 1,780,854 2,079,800 597,789 957,195
Interest expense.................. 208,301 489,891 771,549 384,713 479,021
-------------- ------------- ------------- ------------- -------------
Income before income
taxes......................... 1,285,970 1,290,963 1,308,251 213,076 478,174
Income taxes........................ 5,000 5,181 5,300 2,500 5,039
-------------- ------------- ------------- ------------- -------------
Net income...................... 1,280,970 1,285,782 1,302,951 210,576 473,135
Retained earnings:
Beginning of the period........... 1,733,850 2,051,783 2,529,075 2,529,075 1,198,034
Distributions of earnings......... (963,037) (808,490) (2,633,992) 0 (125,424)
-------------- ------------- ------------- ------------- -------------
End of the period................. $ 2,051,783 $ 2,529,075 $ 1,198,034 $ 2,739,651 $ 1,545,745
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
Weighted average common shares
outstanding..................... 2,202,818 2,202,818 2,202,818 2,202,818 2,202,818
Pro forma data (unaudited-note
10(b))
Historical net income............. $ 1,280,970 $ 1,285,782 $ 1,302,951 $ 210,576 $ 473,135
Pro forma provision for income
taxes........................... 486,769 488,597 495,121 80,019 179,791
-------------- ------------- ------------- ------------- -------------
Pro forma net income.............. $ 794,201 $ 797,185 $ 807,830 $ 130,557 $ 293,344
-------------- ------------- ------------- ------------- -------------
Pro forma net income per common
share........................... $ 0.32 $ 0.32 $ 0.32 $ 0.05 $ 0.12
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to combined/consolidated financial statements.
F-4
<PAGE>
PAPER WAREHOUSE, INC.
COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997,
AND THE SIX-MONTH PERIODS ENDED AUGUST 2, 1996 AND AUGUST 1, 1997
<TABLE>
<CAPTION>
JANUARY 27, FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1,
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,280,970 $ 1,285,782 $ 1,302,951 $ 210,576 $ 473,135
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization................. 432,748 695,356 959,901 455,346 546,818
Gain on sale of property and equipment........ (170) (1,775) (4,375) 0 (1,892)
Changes in operating assets and liabilities;
net of the effect of the purchase of the
assets of a business:
Accounts receivable......................... (82,116) (300,022) 217,740 315,306 77,516
Prepaid expenses and other current assets... 43,312 (68,308) 13,259 (78,117) (295,149)
Merchandise inventories..................... (1,443,016) (3,061,944) (1,851,922) (1,427,431) (2,380,841)
Accounts payable............................ 271,985 1,462,471 (488,220) 265,396 2,235,196
Accrued liabilities......................... 337,771 382,694 (63,896) 39,841 340,100
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by operating
activities.............................. 841,484 394,254 85,438 (219,083) 994,883
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.... 3,683 1,775 136,960 0 7,807
Purchases of property and equipment............. (1,122,206) (3,454,752) (1,317,283) (751,625) (745,466)
Purchases of trademarks......................... (2,969) (2,947) 0 0 0
Other assets, net of effect of asset
acquisition................................... (92,983) (51,329) (18,544) (10,263) (21,770)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities..... (1,214,475) (3,507,253) (1,198,867) (761,888) (759,429)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from related party loans........... 0 0 2,136,193 0 0
Net proceeds from (payments on) notes payable to
bank.......................................... (61,167) 3,448,939 1,106,061 710,000 (95,000)
Proceeds from issuance of long-term debt........ 3,557,158 958,000 0 0 0
Principal payments on long-term debt............ (1,729,326) (6,215) (23,106) (10,327) (12,681)
Payment of debt acquisition fees................ (251,546) (8,000) 0 0 0
Distribution of earnings........................ (963,037) (808,490) (2,633,992) 0 (125,424)
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by financing
activities.............................. 552,082 3,584,234 585,156 699,673 (233,105)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash........... 179,091 471,235 (528,273) (281,298) 2,349
Cash:
Beginning of period............................. 235,114 414,205 885,440 885,440 357,167
------------- ------------- ------------- ------------- -------------
End of period................................... $ 414,205 $ 885,440 $ 357,167 $ 604,142 $ 359,516
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................... $ 194,614 $ 474,819 $ 877,410 $ 364,775 $ 426,836
Income taxes.................................. 5,000 10,181 5,300 300 5,039
</TABLE>
See accompanying notes to combined/consolidated financial statements.
F-5
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Paper Warehouse, Inc. (the Company) is a paper and party goods retailer
operating 64 company-owned stores in the states of Minnesota, Missouri, Iowa,
Kansas, Oklahoma, Colorado, and Wisconsin. Paper Warehouse, Inc. also sells
Paper Warehouse franchises through its affiliated company, which became a
wholly-owned subsidiary as of February 1, 1997 (see note 10(a)). The Company's
acquisition of its affiliate was accounted for as a combination of companies
under common control. In exchange for the initial and continuing fees received,
the Company provides management assistance to and gives franchisees the right to
use the name "Paper Warehouse" or "Party Universe."
BASIS OF COMBINATION
The financial statements of the Company represent the combined financial
statements of the two affiliates as of and for the fiscal years ended January
27, 1995, February 2, 1996, and January 31, 1997 and the six-month period ended
August 2, 1996. The financial statements for the six-month period ended August
1, 1997 represent the consolidated financial statements of the two companies.
The Company's financial statements have been prepared on the same basis for all
periods presented, whether combined or consolidated. The results of all
intercompany transactions have been eliminated.
ACCOUNTING ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial assets and liabilities,
because of their short-term nature, is approximately fair value. The fair value
of the Company's borrowing, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
S CORPORATION ELECTION
The Company has elected to be taxed as an S corporation under the Internal
Revenue Code. The Company has agreed to make distributions of earnings in
amounts sufficient to enable stockholders to pay their federal and state income
taxes resulting from pass-through of taxable income as a result of the S
corporation election.
FISCAL YEAR
The Company's fiscal year ends on the Friday closest to January 31. The
fiscal year ended February 2, 1996 included 53 weeks, and the fiscal year ended
January 31, 1997 included 52. Unless otherwise stated, references to years in
this report relate to fiscal years rather than to calendar years.
F-6
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the first in, first out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
METHOD USEFUL LIFE
-------------- -------------
<S> <C> <C>
Fixtures and equipment........................................ Straight-line 5 to 7 years
Building...................................................... Straight-line 40 years
Land improvements............................................. Straight-line 40 years
</TABLE>
Maintenance, repairs, and minor renewals are expensed as incurred. Upon
retirement or disposal of assets, the cost and accumulated depreciation are
eliminated from the respective accounts and the related gains or losses are
credited or charged to income.
DEBT ACQUISITION COSTS
Debt acquisition costs relate to costs associated with the issuance of notes
payable. These costs are being amortized over the related term of the debt using
the straight-line method.
INTANGIBLE ASSETS
The excess of cost over fair value of net assets resulting from the
acquisition of a store created goodwill that is being amortized over 15 years
using the straight-line method.
Costs of acquiring trademarks have been capitalized and are being amortized
on a straight-line basis over ten years.
OTHER ASSETS
Other assets consist primarily of security deposits and lease acquisition
fees. Lease acquisition fees are amortized over the related lease term using the
straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
F-7
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this statement
did not have a material impact on the Company's financial position or results of
operations.
DEFERRED RENT CREDITS
Certain of the Company's operating leases provide for scheduled increases in
base rentals over their terms. For these leases, the Company recognizes the
total rental amounts due over the lease terms on a straight-line basis and,
accordingly, has established corresponding deferred rent credits for the
differences between the amounts recognized and the amounts paid.
PRE-OPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
STOCK-BASED COMPENSATION
Compensation expense for stock option grants is recognized in accordance
with Accounting Principles Board (APB) Opinion 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. Had the Company incurred compensation expense in the disclosure
periods required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, pro
forma effects on net income would have been provided as if the fair value based
method, as defined in SFAS No. 123, had been applied.
ADVERTISING
The Company expenses the cost of advertising as incurred or the first time
the advertisement takes place.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per common share is determined by dividing pro forma
net income by the weighted average number of common shares and common share
equivalents outstanding.
The Company will adopt SFAS No. 128, EARNINGS PER SHARE, in the fourth
quarter of the fiscal year ending January 30, 1998. The Company does not expect
the implementation of SFAS No. 128 to have a material impact on earnings per
share.
F-8
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1,
1996 1997 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Fixtures and equipment............ $ 5,992,179 $ 7,120,047 $ 6,716,608 $ 7,859,135
Buildings......................... 1,041,702 1,041,702 1,041,702 1,041,702
Land and improvements............. 319,733 319,733 319,733 319,733
Accumulated depreciation and
amortization.................... (2,160,129) (3,020,263) (2,564,038) (3,538,824)
------------- ------------- ------------- -------------
$ 5,193,485 $ 5,461,219 $ 5,514,005 $ 5,681,746
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Depreciation and amortization expense on property and equipment was
$415,453, $652,802, and $913,918 for the years ended January 27, 1995, February
2, 1996, and January 31, 1997, respectively, and $455,346 and $546,818 for the
six-month periods ended August 2, 1996 and August 1, 1997, respectively.
(3) NOTES PAYABLE TO BANK
The Company has a revolving line of credit agreement with its bank that
permits borrowings up to $7,500,000. Borrowings under the agreement bear
interest at the bank's base rate plus .5% and are secured by all assets of the
Company. The agreement contains restrictive covenants which, among other things,
require the Company to maintain a minimum tangible net worth and minimum current
ratios.
The current agreement is subject to annual renewal by the Company and the
bank. Additionally, the Company's majority stockholder has personally guaranteed
$1,500,000 of these notes. There was $4,763,939 and $5,870,000 outstanding under
the agreement as of February 2, 1996 and January 31, 1997, respectively, and
$5,473,948 and $5,775,000 outstanding at August 2, 1996 and August 1, 1997,
respectively (see note 10(a)).
F-9
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1,
1996 1997 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Note payable in monthly installments of $3,551, including
interest at 6.914% through October 2015. The note is
secured by a second mortgage on the Company's office
headquarters, assignment of a life insurance policy,
and the personal guarantee of the Company's majority
stockholder............................................ $ 429,542 $ 418,834 $ 424,313 $ 411,554
Term note payable in monthly installments of $4,796,
including interest at 9.08% through December 2015. The
note is secured by a first mortgage on the Company's
office headquarters.................................... 524,310 514,756 519,511 509,354
Note payable in monthly installments of $322, including
interest at 8% through May 1996........................ 2,844 0 2,546 0
$2,300,000 subordinated note payable to private placement
holders with interest due quarterly at 10%. Principal
installments of $575,000 due annually commencing
November 30, 2001...................................... 2,300,000 2,300,000 2,300,000 2,300,000
------------ ------------ ------------ ------------
3,256,696 3,233,590 3,246,370 3,220,908
Less current maturities.................................. 23,040 22,015 22,668 22,015
------------ ------------ ------------ ------------
$ 3,233,656 $ 3,211,575 $ 3,223,702 $ 3,198,893
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Long-term subordinated related party notes payable due
March 5, 1998, with interest at 5.63%.................. 0 2,136,193 0 0
</TABLE>
On December 12, 1994, the Company completed a private placement of 46 units,
each unit consisting of a 10% subordinated note of the Company due in annual
installments commencing November 30, 2001 through November 30, 2004, and one
detachable common stock purchase warrant. Subject to certain adjustments, each
warrant entitles the holder thereof to purchase 3,994 shares of common stock,
$.01 par value, of the Company at a price of $1.25 per share anytime after
November 30, 1995 and before November 30, 2004. The entire proceeds of
$2,300,000 were recorded as long-term debt.
F-10
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(4) LONG-TERM DEBT (CONTINUED)
Aggregate annual maturities of long-term debt subsequent to the fiscal year
ended January 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 22,015
1999............................................................ 2,160,041
2000............................................................ 25,928
2001............................................................ 602,776
2002............................................................ 605,326
2003 and thereafter............................................. 1,953,697
</TABLE>
(5) LEASES
The Company leases all of its retail stores and corporate offices under
noncancelable operating leases which have various expiration dates. In addition
to base rents, certain leases require the Company to pay its share of
maintenance and real estate taxes, and include provisions for contingent rentals
based upon sales. Certain of the leases contain renewal options under which the
Company may extend the terms three to five years.
Future minimum rental payments due under noncancelable operating leases at
January 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY: AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 4,701,108
1999........................................................................... 4,589,634
2000........................................................................... 4,443,846
2001........................................................................... 3,929,569
2002........................................................................... 3,881,994
Thereafter..................................................................... 12,715,404
-------------
$ 34,261,555
-------------
-------------
</TABLE>
Rent expense for all operating leases for the years ended January 27, 1995,
February 2, 1996, and January 31, 1997, and the six-month periods ended August
2, 1996 and August 1, 1997 were as follows:
<TABLE>
<CAPTION>
JANUARY 27, FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1,
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rentals........ $ 2,081,693 $ 3,138,814 $ 4,309,403 $ 2,068,516 $ 2,564,330
Contingent rentals..... 3,754 0 0 0 0
------------ ------------ ------------ ------------ ------------
$ 2,085,447 $ 3,138,814 $ 4,309,403 $ 2,068,516 $ 2,564,330
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-11
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(6) INCOME TAXES--S CORPORATION ELECTION
As indicated in note 1, the Company has elected to be taxed as an S
corporation under the Internal Revenue Code. The Company's earnings or losses
are allocated to its stockholders for inclusion in their individual tax returns.
The Company has provided $5,000, $5,181, and $5,300, for income tax expense
relating to the State of Minnesota minimum tax for the years ended January 27,
1995, February 2, 1996, and January 31, 1997, respectively, and $2,500 and
$5,039 for the six-month periods ended August 2, 1996 and August 1, 1997,
respectively.
(7) RELATED PARTY TRANSACTIONS
Four of the Company's franchise stores are substantially owned by two
related parties of the Company's majority stockholder. Continuing franchise fees
collected from these related parties were $37,605, $52,845, and $75,639, for the
fiscal years ended January 27, 1995, February 2, 1996, and January 31, 1997,
respectively, and $20,144 and $42,285 in the six-month periods ended August 2,
1996 and August 1, 1997, respectively. The Company had a receivable of $8,842,
$21,224, and $19,428, from this franchisee at January 27, 1995, February 2,
1996, and January 31, 1997, respectively, and a receivable of $20,141 and $6,681
as of August 2, 1996 and August 1, 1997, respectively.
During the year ended January 31, 1997, the Company sold a Paper Warehouse
store to a related party for $144,000. The transaction resulted in no gain or
loss to the Company. Continuing fees collected from this related party were
$17,851 for the year ended January 31, 1997. The Company had a receivable of
$368 from this franchisee as of January 31, 1997.
On January 13, 1997, the Company issued notes payable to the Company's two
primary shareholders for the aggregate amount of $2,136,193. These notes bear
interest at 5.63%, are fully subordinated to all other long-term obligations,
and are due March 5, 1998.
(8) STOCK OPTIONS
The Company entered into an option agreement (the Agreement) on December 1,
1992. The Agreement, which was amended in its entirety on October 6, 1994,
provides the following:
<TABLE>
<CAPTION>
INITIAL
EXERCISE NUMBER OF EXERCISE
DESCRIPTION DATE SHARES PRICE EXPIRATION DATE
- ------------------------------ ---------- --------- ------------- ------------------------------
<S> <C> <C> <C> <C>
Event option.................. (1) 220,285 (3) 11/30/97
1998 option................... 1/1/98 220,285 (3) 12/31/98 or exercise of the
event option
Put option.................... (2) (2) (3) 12/31/98
</TABLE>
- ------------------------
(1) The event option is exercisable upon a triggering event. The triggering
event is defined as either any merger between the Company and any unrelated
entity or the offering of capital stock of the Company pursuant to a public
offering registered under the Securities Act of 1933.
F-12
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(8) STOCK OPTIONS (CONTINUED)
(2) Upon receipt of the 1998 option shares, the buyer has the right to put the
1998 option shares back to the Company at a price equal to the aggregate
book value per share of the 1998 option shares calculated at the end of the
immediately preceding fiscal year of the Company.
(3) Exercise price equals $150,000 plus an amount equal to 10% of all capital
and equity contributions made to the Company since December 1, 1992. To
date, there have been no capital or equity contributions made to the Company
since December 1, 1992.
(9) EMPLOYEE BENEFITS
The Company has a retirement savings plan, covering substantially all
employees who have completed one year of service and attained 21 years of age,
which includes a noncontributory profit sharing plan and 401(k) feature.
Employees become fully vested in the plan on a graduated scale over a six-year
period. Contributions to the profit sharing plan are made at the discretion of
the plan committee. The 401(k) feature allows for employee's elective salary
deferrals up to 15% of their compensation, but not in excess of certain
limitations.
Discretionary contributions to the profit sharing plan were $25,000, $0, and
$0 for the fiscal years ended January 27, 1995, February 2, 1996, and January
31, 1997, respectively, and $0 and $0 for the six-month periods ended August 2,
1996 and August 1, 1997, respectively.
On March 1, 1996, the Company established a Voluntary Employee Benefit Plan
and Employee Benefit Trust for the sole and exclusive benefit of its employees.
The Company matches 25% of the first four percent of employee contributions to
the plan. Company contributions were $17,831 for the year ended January 31,
1997, and $3,939 and $13,271 for the six-month periods ended August 2, 1996 and
August 1, 1997, respectively.
(10) SUBSEQUENT EVENTS
10(A)
Effective as of February 1, 1997, Paper Warehouse Franchising, Inc. became a
wholly-owned subsidiary of Paper Warehouse, Inc. through a stock transfer of all
the outstanding shares of Paper Warehouse Franchising, Inc. to Paper Warehouse,
Inc.
On February 6, 1997, the Board of Directors of the Company increased the
number of common shares authorized for issuance from 200,000 to 40,000,000 and
authorized 10,000,000 shares of serial preferred stock.
On February 25, 1997, the Company purchased the assets of a franchisee for
$72,650.
On September 26, 1997, the Board of Directors of the Company declared a
37.57217275 to 1 common stock split increasing the number of common shares
issued and outstanding from 58,629 to 2,202,818. All references to share and per
share amounts in the accompanying combined/consolidated financial statements
reflect this stock split.
F-13
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(10) SUBSEQUENT EVENTS (CONTINUED)
Effective September 26, 1997, the Company's revolving line of credit
agreement with the bank was amended to extend the renewal date to May 31, 1999,
and to eliminate the personal guarantee of the Company's majority stockholder of
$1,500,000 of the note.
10(B) PROFORMA PROVISION FOR INCOME TAXES--UNAUDITED
The Company anticipates filing a Form S-1 Registration Statement in October
1997. Upon completion of such offering, the Company will terminate its S
Corporation federal tax status and change to a C Corporation and, accordingly,
will be subject to federal and certain state income taxes. Prior to such
termination, the Company will distribute to its current stockholders all, or a
portion of, accumulated S Corporation earnings as of the termination date.
Accordingly, the pro forma effect of this transaction has been disclosed in the
accompanying pro forma balance sheet. In September 1997, the Board of Directors
of the Company declared a cash dividend payable to the current stockholders of
the Company equal to the Company's estimate of its accumulated taxable income
from the date of the last dividend paid, in January 1997, through the first six
months of the fiscal year ending January 1998 to the extent such taxable income
had not previously been distributed. This dividend aggregated approximately
$166,000 and, following payment, was loaned back to the Company by the
shareholders pursuant to term notes accruing interest at 5.63% annually. The
Board of Directors also anticipates declaring a cash dividend payable to the
current shareholders, concurrent with the consummation of the offering, equal to
the balance of any accumulated taxable income from the date of the September
1997 dividend through the date of the conversion of the Company to a C
Corporation in connection with the offering.
Pro forma net income and pro forma net income per share for the fiscal years
ended January 27, 1995, February 6, 1996, and January 31, 1997, and for the
six-month periods ended August 2, 1996 and August 1, 1997, have been determined
assuming that the Company had been taxed as a C Corporation for federal and
certain state income tax purposes for such periods.
Unaudited pro forma income taxes represent the estimated income taxes that
would have been reported had the Company been a taxable entity for both federal
and state income tax purposes for the fiscal years ended January 27, 1995,
February 2, 1996, and January 31, 1997. The components of the unaudited pro
forma income tax provision are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
JANUARY 27, FEBRUARY 2, JANUARY 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal..................................................... $ 409,911 $ 411,450 $ 416,944
State....................................................... 76,858 77,147 78,177
----------- ----------- -----------
Unaudited pro forma provision for income taxes.............. $ 486,769 $ 488,597 $ 495,121
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-14
<PAGE>
PAPER WAREHOUSE, INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 27, 1995, FEBRUARY 2, 1996, AND JANUARY 31, 1997
UNAUDITED AS TO THE SIX-MONTH PERIODS ENDED
AUGUST 2, 1996 AND AUGUST 1, 1997
(10) SUBSEQUENT EVENTS (CONTINUED)
A reconciliation of taxes based on the federal statutory rate of 34% and the
unaudited pro forma provision for income taxes for the fiscal years ended
January 27, 1995, February 2, 1996, and January 31, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
JANUARY 27, FEBRUARY 2, JANUARY 31,
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Income taxes at the federal statutory rate.................. 34% 34% 34%
State income taxes, net of federal benefit.................. 4 4 4
-- -- --
Unaudited pro forma provision for income taxes.............. 38% 38% 38%
-- -- --
-- -- --
</TABLE>
F-15
<PAGE>
[Inside back cover][The inside back cover contains 7 photographs of the
Company's merchandise, store display and advertising.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
S Corporation Distributions.................... 11
Use of Proceeds................................ 12
Dividend Policy................................ 12
Capitalization................................. 13
Dilution....................................... 14
Selected Financial and Operating Data.......... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
Business....................................... 22
Management..................................... 32
Certain Transactions........................... 37
Principal and Selling Shareholders............. 38
Description of Capital Stock................... 39
Underwriting................................... 42
Shares Eligible for Future Sale................ 43
Legal Matters.................................. 44
Independent Public Accountants................. 44
Additional Information......................... 44
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,666,667 SHARES
[Paper Warehouse, Inc. LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
[Dain Bosworth Incorporated LOGO]
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth the expenses in connection with the issuance and
distribution of the shares of Common Stock registered hereby (estimated other
than the SEC registration, NASD and Nasdaq fees which are actual) other than
underwriting discounts and fees, are set forth in the following table.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 5,810
NASD filing fee................................................... 2,417
Nasdaq listing fee................................................ 10,000
Legal fees and expenses........................................... 150,000
Accounting fees and expenses...................................... 100,000
Directors and Officers Insurance Premium.......................... 40,000
Blue Sky fees and expenses........................................ 5,000
Transfer agent fees and expenses.................................. 10,000
Printing and engraving expenses................................... 70,000
Miscellaneous..................................................... 156,773
---------
Total......................................................... $ 550,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles limit the liability of its directors to the fullest
extent permitted by law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of the fiduciary duty as
directors, except for liability for (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) corporate distributions which are in contravention of restrictions in the
MBCA, the Company's Articles or Bylaws, or any agreement to which the Company is
a party, (iv) violations of Minnesota securities laws, (v) any transaction from
which the director derives an improper personal benefit, or (vi) any act or
omission occurring prior to the effective date of the provision in the Company's
Articles eliminating or limiting liability. This provision will generally not
limit liability under state or federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business corporation
must indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Article 6 of the Company's Bylaws provides that each director, officer and
employee of the Company shall be indemnified by the Company in accordance with,
and to the fullest extent permissible by, applicable law.
Article 10 of the Company's Bylaws provides that Section 302A.673 of the
MBCA, is not applicable to any Business Combination (as defined in the MBCA) of
the Company with, with respect to, proposed by or on behalf of, or pursuant to,
any written or oral agreement, arrangement, relationship, understanding, or
otherwise with Yale T. Dolginow and/or Brent D. Schlosser or any of their
respective affiliates or associates (as defined in the MBCA).
II-1
<PAGE>
The Warrants provide that if the Company issues shares of Common Stock to a
certain option holder, the aggregate number of shares purchaseable upon exercise
of the Warrants will be increased to 202,040 at an exercise price of $1.14.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 4, 1994, the Company sold an aggregate of 46 Units, each Unit
consisting of a $50,000 10% Subordinated Note due November 30, 2004 and one
Common Stock purchase warrant to purchase 3,994 shares of Common Stock at $1.25
per share (the "Warrants"), to Accredited Investors (as defined in Regulation D
of the Securities Act) for a total aggregate consideration of $2,300,000. In
connection with such transaction, the Company paid $138,000 in commissions to
George K. Baum & Company, placement agent for such offering. The Company
believes that each sale of such securities was exempt from registration pursuant
to Rules 505 and 506 under the Securities Act of 1933.
Concurrent with the consummation of this offering, the Company will issue
201,064 shares of Common Stock to the Selling Shareholder pursuant to the
cashless exercise of an option. No commissions were paid in connection with this
transaction. The Company believes that such issuance of such securities is
exempt from registration pursuant to Section 3(a)(9) under the Securities Act of
1933.
Concurrent with the consummation of this offering, the Company will issue an
aggregate of 176,486 shares of Common Stock to holders of the Warrants upon the
cashless exercise of such Warrants. The Company believes that the issuance of
such securities is exempt from registration pursuant to Section 3(a)(9) under
the Securities Act of 1933.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation(1).
3.2 Amended and Restated By-laws(1).
4.1 Form of 10% Subordinated Note due November 30, 2004, dated December 7,
1994.
4.2 Form of Warrant Agreement(1)
4.3 Form of Warrant Conversion Agreement, as extended.
5 Opinion of Maslon Edelman Borman & Brand, LLP.
10.1 Restated Option Agreement by and between the Company and LSG dated October
6, 1994.(1)
10.2 Form of Registration Rights Agreement.(1)
10.3 1997 Stock Option and Compensation Plan.
10.4 Directors Stock Option Plan.
10.5 January 13, 1997 Shareholder Promissory Note issued to Yale T.
Dolginow.(1)
10.6 January 13, 1997 Shareholder Promissory Note issued to Brent D.
Schlosser(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.7 Corporation Tax Allocation and Indemnification Agreement entered into on
September 26, 1997 between the Company and Yale T. Dolginow and Brent D.
Schlosser.
10.8 Employment Agreement by and between the Company and Yale T. Dolginow dated
February 7, 1997.(1)
10.9 Employment Agreement by and between the Company and Brent D. Schlosser
dated February 7, 1997.(1)
10.10 Combination Mortgage and Security Agreement and Fixture Financing
Statement dated June 9, 1995 by and between the Company and Richfield
Bank & Trust Co.
10.11 Secured Promissory Note of the Company in favor of Richfield Bank & Trust
Co. in the amount of $945,000 dated June 9, 1995.
10.12 Authorization and Debenture Guaranty of the Company dated May 25, 1995.
10.13 Employment Agreement by and between the Company and Cheryl W. Newell dated
July 14, 1997.(1)
10.14 October 1, 1997 Shareholder Promissory Note issued to Yale T. Dolginow.(1)
10.15 October 1, 1997 Shareholder Promissory Note issued to Brent D.
Schlosser(1)
10.16 Loan Agreement between Paper Warehouse, Inc., Yale T. Dolginow and
Richfield Bank & Trust Co., dated January 29, 1997(1)
10.17 Revolving Promissory Note to Richfield Bank & Trust Co. dated January 29,
1997.(1)
10.18 Security Agreement between the Company and Richfield Bank & Trust Co.
dated January 29, 1997.(1)
10.19 Guaranty of Yale T. Dolginow dated January 29, 1997.(1)
10.20 Amendment to Loan Agreement entered into as of October 1, 1997 by and
between the Company, Yale T. Dolginow and Richfield Bank & Trust Co.
10.21 Master Lease by and between Targa Financial, Inc. and the Company dated
October 22, 1997.
10.22 Loan Agreement SBA Debenture No. COCL837046 3001 MN, dated August 15,
1995.
11 Earnings per share calculation.
21 Subsidiaries of Company.(1)
23.1 Consent of Maslon Edelman Borman & Brand, LLP. (included in Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney(1).
27.1 Financial Data Schedule(1).
</TABLE>
- ------------------------
(1) Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is,
II-3
<PAGE>
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such demoninations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Pre-Effective Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Minneapolis, State of Minnesota, on November 3, 1997.
<TABLE>
<S> <C> <C>
PAPER WAREHOUSE, INC.
By: /s/ YALE T. DOLGINOW
-----------------------------------------
Yale T. Dolginow
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed below on
the 3rd day of November, 1997 by the following persons in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
President Chief Executive
/s/ YALE T. DOLGINOW Officer and Director
- ------------------------------ (Principal Executive
Yale T. Dolginow Officer)
*
- ------------------------------ Executive Vice President
Brent D. Schlosser and Director
/s/ CHERYL W. NEWELL Chief Financial Officer
- ------------------------------ (Principal Financial
Cheryl W. Newell Officer)
*
- ------------------------------ Secretary and Director
Diane C. Dolginow
* Controller/Treasurer
- ------------------------------ (Principal Accounting
Michael A. Anderson Officer)
*
- ------------------------------ Director
Arthur H. Cobb
*
- ------------------------------ Director
Marvin W. Goldstein
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
*
- ------------------------------ Director
Martin A. Mayer
*
- ------------------------------ Director
Jeffrey S. Halpern
</TABLE>
*By: /s/ YALE T. DOLGINOW
-------------------------
Yale T. Dolginow
ATTORNEY-IN-FACT
II-6
<PAGE>
DRAFT OF NOVEMBER 4, 1997
1,666,667 SHARES
PAPER WAREHOUSE, INC.
COMMON STOCK
$.01 PAR VALUE
UNDERWRITING AGREEMENT
, 1997
Dain Bosworth Incorporated
As Representative of the several Underwriters
c/o Dain Bosworth Incorporated
Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Paper Warehouse, Inc., a Minnesota corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
several Underwriters named in Schedule A hereto (the "Underwriters"), for
which you are acting as representative (the "Representative"), an aggregate
of 1,666,667 shares (the "Firm Shares") of Common Stock, $.01 par value per
share, of the Company (the "Common Stock"), and, at the election of the
Underwriters, up to an aggregate of 250,000 shares of Common Stock (the
"Option Shares"), 200,000 shares of which are to be sold by the Company and
50,000 shares of which are to be sold by LSG Corporation (the "Selling
Shareholder"). The Firm Shares and the Option Shares are herein collectively
called the "Shares."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-36911)
and a related preliminary prospectus for the registration of the Shares under
the Securities Act of 1933, as amended (the "Act"). The registration
statement, as amended at the time it was declared effective, including the
information (if any) deemed to be part thereof pursuant to Rule 430A under
the Act is herein referred to as the "Registration Statement." The form of
prospectus first filed by the Company with the Commission pursuant to Rules
424(b) and 430A under the Act is referred to herein as the "Prospectus."
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective or filed with the Commission pursuant to Rule
424(a) under the Act is referred to herein as a "Preliminary Prospectus."
Copies of the
<PAGE>
Registration Statement, including all exhibits and schedules thereto, any
amendments thereto and all Preliminary Prospectuses have been delivered to
you.
The Company and the Selling Shareholder hereby confirm their agreements
with respect to the purchase of the Shares by the Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) The Registration Statement has been declared effective under the
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. No stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or threatened by the
Commission.
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission promulgated thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided,
however, the Company makes no representation or warranty as to information
contained in or omitted in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter
through the Representative expressly for use in the preparation thereof.
(iii) The Registration Statement conforms, and the Prospectus and
any amendments or supplements thereto will conform, in all material
respects to the requirements of the Act and the rules and regulations
thereunder. Neither the Registration Statement nor any amendment thereto,
and neither the Prospectus nor any supplement thereto, contains or will
contain, as the case may be, any untrue statement of a material fact or
omits or will omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representation or warranty as to information contained in
or omitted from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter
through the Representative expressly for use in the preparation thereof.
(iv) The Company has been duly organized, is validly existing as a
corporation in good standing under the laws of the State of Minnesota, has
the corporate power and authority to own or lease its properties and
conduct its business as described in the Prospectus, and is duly qualified
to transact business in all jurisdictions in which the
2
<PAGE>
conduct of its business or its ownership or leasing of property requires
such qualification and the failure so to qualify would have a material
adverse effect on the business or condition, financial or otherwise, of the
Company and its subsidiaries, taken as a whole.
(v) The Company does not own any stock or other equity interest in
any corporation, partnership, joint venture, unincorporated association or
other entity other than Paper Warehouse Franchising, Inc. ("PWF"). Each
subsidiary of the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus, and is
duly qualified to transact business in all jurisdictions in which the
conduct of its business or its ownership or leasing of property requires
such qualification and the failure so to qualify would have a material
adverse effect on the business or condition, financial or otherwise, of the
Company and its subsidiaries, taken as a whole. All outstanding shares of
capital stock of each of the subsidiaries of the Company have been duly
authorized and validly issued, are fully paid and non-assessable, and are
owned directly or indirectly, by the Company free and clear of all liens,
encumbrances and security interests. No options, warrants or other rights
to purchase, agreements or other obligations to issue, or other rights to
convert any obligations into, shares of capital stock or ownership
interests in any of the subsidiaries of the Company are outstanding.
(vi) The outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable.
All offers and sales by the Company of outstanding shares of capital stock
and other securities of the Company, prior to the date hereof, were made in
compliance with the Act and all applicable state securities or blue sky
laws. The Shares to be issued and sold by the Company to the Underwriters
pursuant to this Agreement have been duly authorized and, when issued and
paid for as contemplated herein, will be validly issued, fully paid and
nonassessable. There are no preemptive rights or other rights to subscribe
for or to purchase, or any restriction upon the voting or transfer of, any
shares of capital stock of the Company pursuant to the Company's Articles
of Incorporation, Bylaws or any agreement or other instrument to which the
Company is a party or by which the Company is bound. Neither the filing of
the Registration Statement nor the offering or the sale of the Shares as
contemplated by this Agreement gives rise to any rights for, or relating
to, the registration of any shares of capital stock or other securities of
the Company, except such rights which have been validly waived or
satisfied. Except as described in the Prospectus, there are no outstanding
options, warrants, agreements, contracts or other rights to purchase or
acquire from the Company any shares of its capital stock. The Company has
the authorized and outstanding capital stock as set forth under the heading
"Capitalization" in the Prospectus. The outstanding capital stock of the
Company, including the Shares, conforms, and the Shares to be issued by the
Company to the Underwriters will conform, to the description thereof
contained in the Prospectus.
(vii) The financial statements, together with the related notes
and schedules as set forth in the Registration Statement and Prospectus,
present fairly the consolidated
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financial position, results of operations and changes in cash flows of the
Company and its subsidiaries on the basis stated in the Registration
Statement at the indicated dates and for the indicated periods. Such
financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of results
for such periods have been made, except as otherwise stated therein.
The summary and selected financial and statistical data included in the
Registration Statement present fairly the information shown therein on the
basis stated in the Registration Statement and have been compiled on a
basis consistent with the financial statements presented therein.
(viii) There is no action or proceeding pending or, to the
knowledge of the Company, threatened or contemplated against the Company or
any of its subsidiaries before any court or administrative or regulatory
agency which, if determined adversely to the Company or any of its
subsidiaries, would, individually or in the aggregate, result in a material
adverse change in the business or condition (financial or otherwise),
results of operations, stockholders' equity or prospects of the Company and
its subsidiaries, taken as a whole, except as set forth in the Registration
Statement.
(ix) The Company has good and marketable title to all properties and
assets reflected as owned in the financial statements hereinabove described
(or as described as owned in the Prospectus), in each case free and clear
of all liens, encumbrances and defects, except such as are described in the
Prospectus or do not substantially affect the value of such properties and
assets and do not materially interfere with the use made and proposed to be
made of such properties and assets by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with
the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
(x) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, (A) there
has not been any material adverse change, or any development involving a
prospective material adverse change, in or affecting the condition,
financial or otherwise, of the Company and its subsidiaries, taken as a
whole, or the business affairs, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not occurring in the ordinary
course of business, (B) there has not been any transaction not in the
ordinary course of business entered into by the Company or any of its
subsidiaries which is material to the Company and its subsidiaries, taken
as a whole, other than transactions described or contemplated in the
Registration Statement, (C) the Company and its subsidiaries have not
incurred any material liabilities or obligations, which are not in the
ordinary course of business or which could result in a material reduction
in the future earnings of the Company and its subsidiaries, (D) the Company
and its subsidiaries have not sustained any material loss or interference
with their respective businesses or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance, (E) there
has not been any change in the
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capital stock of the Company (other than upon the exercise of options and
warrants described in the Registration Statement), or any material increase
in the short-term or long-term debt (including capitalized lease
obligations) of the Company and its subsidiaries, taken as a whole,
(F) there has not been any declaration or payment of any dividends or any
distributions of any kind with respect to the capital stock of the Company,
other than any dividends or distributions described or contemplated in the
Registration Statement, or (G) there has not been any issuance of warrants,
options, convertible securities or other rights to purchase or acquire
capital stock of the Company.
(xi) Neither the Company nor any of its subsidiaries are in violation
of, or in default under, their respective Articles of Incorporation or
Bylaws, or any statute, or any rule, regulation, order, judgment, decree or
authorization of any court or governmental or administrative agency
(including the Federal Trade Commission (the "FTC")) or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties, or any indenture, mortgage, deed of trust, loan agreement,
lease, franchise, license or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of them
are bound or to which any property or assets of the Company or any of its
subsidiaries is subject, which violation or default would have a material
adverse effect on the business, condition (financial or otherwise), results
of operations, stockholders' equity or prospects of the Company and its
subsidiaries, taken as a whole.
(xii) The issuance and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions contemplated herein will not violate
any provision of the Articles of Incorporation or Bylaws of the Company or
any of its subsidiaries or any statute or any order, judgment, decree,
rule, regulation or authorization of any court or governmental or
administrative agency (including the FTC) or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties, and will
not conflict with, result in a breach or violation of, or constitute,
either by itself or upon notice or passage of time or both, a default under
any indenture, mortgage, deed of trust, loan agreement, lease, franchise,
license or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
is bound or to which any property or assets of the Company or any of its
subsidiaries is subject. No approval, consent, order, authorization,
designation, declaration or filing by or with any court or governmental
agency or body is required for the execution and delivery by the Company of
this Agreement and the consummation of the transactions herein
contemplated, except as may be required under the Act or any state
securities or blue sky laws.
(xiii) The Company and all of its subsidiaries hold and are operating
in compliance with all franchises, grants, authorizations, licenses,
approvals, consents, orders, certificates and permits from governmental
and regulatory authorities, foreign and domestic, which are necessary to
the conduct of its business as described in the Prospectus and all such
franchises, grants, authorizations, licenses, approvals, consents,
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<PAGE>
orders, certificates and permits are valid and in full force and effect.
Neither the Company nor any of its subsidiaries have received notice of
nor have knowledge of any basis for any proceeding or action relating
specifically to the Company or its subsidiaries for the revocation or
suspension of any such franchises, grants, authorizations, licenses,
approvals, consents, orders, certificates or permits or any other action
or proposed action by any regulatory authority having jurisdiction over
the Company or its subsidiaries that would have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(xiv) The Company has the power and authority to enter into this
Agreement and to authorize, issue and sell the Shares it will sell
hereunder as contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(xv) KPMG Peat Marwick LLP, which has certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the rules and regulations thereunder.
(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to, or which has constituted, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
(xvii) The Company's registration statement pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), has been declared effective by the Commission; and the Shares have
been approved for designation upon notice of issuance on the Nasdaq
National Market under the symbol PWHS.
(xviii) The Company has obtained and delivered to the Representative
written agreements, in form and substance satisfactory to the
Representative, of each of its directors, executive officers and
shareholders (or persons who will be shareholders as of the Closing Date)
that no offer, sale, assignment, transfer, encumbrance, contract to sell,
grant of an option to purchase or other disposition of any Common Stock or
other capital stock of the Company will be made for a period of 180 days
after the date of the Prospectus, directly or indirectly, by such holder
otherwise than hereunder or with the prior written consent of the
Representative.
(xix) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Shares other than any Preliminary Prospectus or the Prospectus
or other materials permitted by the Act to be distributed by the Company.
(xx) The Company is in compliance with all provisions of Florida
Statutes Section 517.075 (Chapter 92-198, laws of Florida). The Company
does not do any business, directly or indirectly, with the government of
Cuba or with any person or entity located in Cuba.
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(xxi) The Company and its subsidiaries have filed all federal,
state, local and foreign tax returns or reports required to be filed, and
have paid in full all taxes indicated by said returns or reports and all
assessments received by it or any of them to the extent that such taxes
have become due and payable, except where the Company and its subsidiaries
are contesting in good faith such taxes and assessments. The Company and
PWF each have had in effect a valid election under Internal Revenue Code
(the "Code") Section 1362 to be treated as an "S corporation" for each of
their taxable years since February 1, 1993 (the "S Corporation Commencement
Date"). Neither the Company, PWF nor any of the shareholders of the
Company or PWF have taken any action to revoke that election. Neither the
Company nor PWF nor any of the shareholders are aware of any basis or the
existence of any facts that would permit the Internal Revenue Service to
revoke that election for any period prior to the effective date of the
Registration Statement. Since the S Corporation Commencement Date to and
including the effective date of the Registration Statement, neither the
Company nor PWF will have incurred or become liable for the payment of any
corporate-level income tax, or any related penalties or interest.
(xxii) The Company and each of its subsidiaries owns or possesses
all patents, patent applications, trademarks, service marks, tradenames,
trademark registrations, service mark registrations, copyrights, licenses,
inventions, know-how, trade secrets and other similar rights necessary for
the conduct of their respective business as currently carried on or
intended to be carried on and as described in the Prospectus. No name
which the Company, its subsidiaries or any of its franchisees uses and no
other aspect of the business of the Company, its subsidiaries or any of its
franchisees involves or gives rise to any infringement of or conflict with,
or licenses or similar registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets or other similar rights of
others, and neither the Company nor any of its subsidiaries have received
any notice or claim of conflict with the asserted rights of others with
respect to any of the foregoing.
(xxiii) The Company is not, and upon completion of the sale of
Shares contemplated hereby will not be, required to register as an
"investment company" under the Investment Company Act of 1940, as amended.
(xxiv) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions
are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (C) access
to records is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxv) Other than as contemplated by this Agreement, the Company
has not incurred any liability for any finder's or broker's fee or agent's
commission in connection
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<PAGE>
with the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby.
(xxvi) There has been no unlawful storage, treatment or disposal of
waste by the Company or its subsidiaries (or any of its
predecessors-in-interest) at any of the facilities owned thereby, except
for such violations which would not have a material adverse effect on
the condition, financial or otherwise, or the earnings, affairs or
business prospects of the Company and its subsidiaries, taken as a
whole; there has been no material spill, discharge, leak, emission,
ejection, escape, dumping or release of any kind onto the properties
owned by the Company or its subsidiaries, or into the environment
surrounding those properties of any toxic or hazardous substances as
defined under any federal, state or local regulations, laws or statutes,
except for those releases permissible under such regulations, laws or
statutes or otherwise allowable under applicable permits and except for
such releases which would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, affairs or business
prospects of the Company and its subsidiaries, taken as a whole.
(xxvii) No material labor dispute with the employees of the Company
or its subsidiaries exists or is imminent.
(xxviii) Each employee benefit plan (as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
("Employee Benefit Plan"), and each bonus, retirement, pension, profit
sharing, stock bonus, thrift, stock option, stock purchase, incentive,
severance, deferred or other compensation or welfare benefit plan, program,
agreement or arrangement of, or applicable to current or former employees
of, or individuals providing or who provided personal services to, the
Company or its subsidiaries or with respect to which the Company or its
subsidiaries could have any liability ("Benefit Plans"), was or has been
established, maintained and operated in all material respects in compliance
with all applicable federal, state, and local statutes, orders,
governmental rules and regulations, including, but not limited to, ERISA
and the Internal Revenue Code of 1986, as amended (the "Code"). The
Company does not, either directly or indirectly as a member of a controlled
group within the meaning of Sections 414(b), (c), (m) and (o) of the Code
("Controlled Group"), have and there are no facts or circumstances that
could result in any material liability arising, directly or indirectly,
pursuant to or in connection with (A) the termination of any single
employer plan under Sections 4062 or 4064 of ERISA, (B) Section 302 of
ERISA or Section 412 of the Code, (C) any minimum funding contributions
under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code, (D)
any accumulated funding deficiency within the meaning of Section 412(a) of
the Code, whether or not waived, or (E) to the Internal Revenue Service,
the Department of Labor, the Pension Benefit Guaranty Corporation, or any
Benefit Plan or any multiemployer plan (as defined in Section 3(37) of
ERISA) ("Multiemployer Plan") under Section 502 or 515 or ERISA, under
Subtitle D or Subtitle E of Title IV of ERISA, under Subchapter D of
Chapter 1 of Subtitle A of the Code, under Chapter 43 or Chapter 47 of
Subtitle D of the Code or Section 6652 of the Code or other penalty
relating to an Employee Benefit Plan. No action, suit, grievance,
8
<PAGE>
arbitration, Internal Revenue Service, Department of Labor or Pension
Benefit Guaranty Corporation audit or investigation or other matter of
litigation or claim with respect to any Benefit Plan (other than routine
claims for benefits made in the ordinary course of plan administration
for which plan administrative procedures have not been exhausted) is
pending or, to the Company's knowledge, threatened or imminent against
or with respect to any Benefit Plan, any member of a Controlled Group
that includes the Company, or any fiduciary within the meaning of
Section 3(21) of ERISA with respect to a Benefit Plan which, if
determined adversely to the Company, would have a material adverse
effect on the Company and its subsidiaries, taken as whole. Neither the
Company nor any member of a Controlled Group that includes the Company,
has any knowledge of any facts that could give rise to any action, suit,
grievance, arbitration, audit or investigation or any other manner of
litigation or claim with respect to any Benefit Plan.
(xxix) The Company maintains insurance of the types and in the
amounts generally deemed adequate in its business and consistent with
insurance coverage maintained by similar companies and businesses, and as
required by the rules and regulations of all governmental agencies having
jurisdiction over the Company, all of which insurance is in full force and
effect.
(b) Any certificate signed by any officer of the Company and delivered to
the Representative or counsel to the Underwriters shall be deemed to be a
representation and warranty of the Company to each Underwriter as to the matters
covered thereby.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING SHAREHOLDER.
(a) The Selling Shareholder represents and warrants to, and covenants and
agrees with, each of the Underwriters and the Company that:
(i) Such Selling Shareholder has duly executed and delivered a Power
of Attorney (the "Power of Attorney"), appointing ____________________ and
__________________________, and each of them, as attorney-in-fact (the
"Attorneys-In-Fact") with full power and authority to execute and deliver
this Agreement on behalf of the Selling Shareholder, to authorize the
delivery of the Shares to be sold by the Selling Shareholder, and otherwise
to act on behalf of such Selling Shareholder in connection with the
transactions contemplated by this Agreement.
(ii) The Selling Shareholder has duly executed and delivered a Custody
Agreement (the "Custody Agreement") with _______________________________,
as Custodian, pursuant to which certificates in negotiable form for the
Shares to be sold by the Selling Shareholder hereunder have been placed in
custody for delivery under this Agreement.
(iii) The Selling Shareholder has full right, power and authority
to enter into this Agreement, the Power of Attorney and the Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold
by the Selling Shareholder hereunder; and all consents, approvals,
authorizations and orders necessary for the execution and delivery by
9
<PAGE>
the Selling Shareholder of this Agreement, the Power of Attorney and the
Custody Agreement, and for the sale and delivery of the Shares to be
sold by the Selling Shareholder hereunder, have been obtained, except
such as may be required by any state securities or blue sky laws.
(iv) The Selling Shareholder has, and at the Closing Date and the
Option Closing Date, as the case may be (as such dates are hereinafter
defined), will have good and valid title to the Option Shares to be sold
by the Selling Shareholder hereunder, free of any liens, encumbrances,
security interests, equities or claims whatsoever; and upon delivery of
and payment for the Option Shares pursuant to this Agreement, good and
valid title thereto, free of any liens, encumbrances, security
interests, equities or claims whatsoever, will be transferred to the
several Underwriters.
(v) The consummation by the Selling Shareholder of the transactions
herein contemplated and the fulfillment by the Selling Shareholder of the
terms hereof will not conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any
mortgage, deed of trust, loan agreement or other agreement, instrument or
obligation to which the Selling Shareholder is a party or to which any of
the property or assets of the Selling Shareholder is subject, except for
such agreements, instruments or obligations for which consents have been
obtained, nor will such actions result in any violations of the provisions
of the charter or by-laws of the Selling Shareholder, or any statute, rule,
regulation or order applicable to the Selling Shareholder of any court or
of any regulatory body or administrative agency or other governmental body
having jurisdiction over the Selling Shareholder.
(vi) The Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to, or which has constituted, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
(vii) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus thereof, the Prospectus
or any amendment or supplement thereto are made in reliance upon and in
conformity with written information with respect to the Selling Shareholder
furnished to the Company by the Selling Shareholder expressly for use
therein, such Preliminary Prospectus and the Registration Statement did
not, and the Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus will not, when they become
effective or are filed with the Commission, as the case may be, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(viii) The Selling Shareholder represents and warrants to, and
agrees with, the Underwriters to the same effect as the representations and
warranties of the Company set forth in Section 1 of this Agreement.
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<PAGE>
(b) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Code with respect to the transactions herein
contemplated, the Selling Shareholder agrees to deliver to you prior to or at
the Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form of statement specified by Treasury
Department regulations in lieu thereof).
(c) The Selling Shareholder specifically agrees that the Shares
represented by the certificates held in custody for the Selling Shareholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by the Selling Shareholder for such
custody and the appointment by the Selling Shareholder of the
Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable.
The Selling Shareholder specifically agrees that the obligations of the
Selling Shareholder hereunder shall not be terminated by operation of law, by
the dissolution of such corporation or by the occurrence of any other event.
If any such event should occur before the delivery of the Shares hereunder,
certificates representing the Shares shall be delivered by or on behalf of
the Selling Shareholder in accordance with the terms and conditions of this
Agreement and of the Custody Agreement, and actions taken by the
Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if
such dissolution or other event has not occurred, regardless of whether or
not the Custodian, the Attorneys-in-fact, or any of them, shall have received
notice of such dissolution or other event.
(d) Any certificate signed by or on behalf of the Selling Shareholder
and delivered to the Representatives or to counsel to the Underwriters shall
be deemed to be a representation and warranty of the Selling Shareholder to
each Underwriter as to the matters covered thereby.
3. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties and covenants
contained herein, and subject to the terms and conditions herein set forth,
the Company agrees to sell to each Underwriter and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at a price of $_____
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule A hereto, subject to adjustments in accordance with
Section 9 hereof.
In addition, on the basis of the representations, warranties and covenants
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters an option to purchase at their
election up to 200,000 Option Shares and the Selling Shareholder hereby grants
to the several Underwriters an option to purchase at its election up to 50,000
Option Shares, each at the same price per share as set forth for the Firm Shares
in the paragraph above, for the sole purpose of covering overallotments in the
sale of the Firm Shares. The option granted hereby may be exercised in whole or
in part, but only once, and at any time upon written notice given within 30 days
after the date of this Agreement, by you, as Representative of the several
Underwriters, to the Company and the Selling Shareholder setting forth the
number of Option Shares as to which the several Underwriters are exercising the
option and the time and date at which certificates are to be delivered. If any
Option Shares are
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<PAGE>
purchased, each Underwriter agrees, severally and not jointly, to purchase
that portion of the number of Option Shares as to which such election shall
have been exercised (subject to adjustment to eliminate fractional shares)
determined by multiplying such number of Option Shares by a fraction the
numerator of which is the maximum number of Option Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule A hereto and the denominator of which is the maximum
number of Option Shares which all of the Underwriters are entitled to
purchase hereunder. The time and date at which certificates for Option
Shares are to be delivered shall be determined by the Representative but
shall not be earlier than two or later than ten full business days after the
exercise of such option, and shall not in any event be prior to the Closing
Date. If the date of exercise of the option is three or more full days
before the Closing Date, the notice of exercise shall set the Closing Date as
the Option Closing Date.
(b) Certificates (or uncertificated shares at the election of the
Representative) in definitive form for the Shares to be purchased by each
Underwriter hereunder, and in such denominations and registered in such names
as Dain Bosworth Incorporated may request upon at least forty-eight hours'
prior notice to the Company, shall be delivered by or on behalf of the
Company to you for the account of such Underwriter at such time and place as
shall hereafter be designated by the Representative, against payment by such
Underwriter or on its behalf of the purchase price therefor by certified or
official bank check or checks, payable to the order of the Company in next
day funds. The time and date of such delivery and payment shall be, with
respect to the Firm Shares, 8:30 a.m. Minneapolis time, at the offices of
Oppenheimer Wolff & Donnelly, on _________________, 1997, or such other
time and date as you and the Company may agree upon in writing, such time and
date being herein referred to as the "Closing Date," and, with respect to the
Option Shares, at the time and on the date specified by you in the written
notice given by you of the Underwriters' election to purchase the Option
Shares, or such other time and date as you and the Company may agree upon in
writing, such time and date being referred to herein as the "Option Closing
Date." Such certificates will be made available for checking and packaging
at least twenty-four hours prior to the Closing Date or the Option Closing
Date, as the case may be, at a location as may be designated by you.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to make a public offering of the Firm Shares as soon as the
Representative deems it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price set forth in the
Prospectus. The Representative may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 3 hereof, the Underwriters
will offer such Option Shares to the public on the foregoing terms.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will prepare and timely file with the Commission under
Rule 424(b) under the Act a Prospectus containing information previously omitted
at the time of effectiveness of the Registration Statement in reliance on Rule
430A under the Act, and will not
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<PAGE>
file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representative shall not previously have been advised
and furnished with a copy and as to which the Representative shall have
objected in writing promptly after reasonable notice thereof or which is not
in compliance with the Act or the rules and regulations thereunder.
(b) The Company will advise the Representative promptly of any request of
the Commission for amendment of the Registration Statement or for any supplement
to the Prospectus or for any additional information, or of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus, of the suspension of the qualification
of the Shares for offering or sale in any jurisdiction, or of the institution or
threatening of any proceedings for that purpose, and the Company will use its
best efforts to prevent the issuance of any such stop order preventing or
suspending the use of the Prospectus or suspending such qualification and to
obtain as soon as possible the lifting thereof, if issued.
(c) The Company will endeavor to qualify the Shares for sale under the
securities laws of such jurisdictions as the Representative may reasonably have
designated in writing and will, or will cause counsel to, make such
applications, file such documents, and furnish such information as may be
reasonably requested by the Representative, provided that the Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports and other documents as are or may be required
to continue such qualifications in effect for so long a period as the
Representative may reasonably request for distribution of the Shares.
(d) The Company will furnish the Underwriters with as many copies of any
Preliminary Prospectus as the Representative may reasonably request and, during
the period when delivery of a prospectus is required under the Act, the Company
will furnish the Underwriters with as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may, from
time to time, reasonably request. The Company will deliver to the
Representative, at or before the Closing Date, two (2) signed copies of the
Registration Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Representative such number of copies of the
Registration Statement, without exhibits, and of all amendments thereto, as the
Representative may reasonably request.
(e) If, during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, any event shall occur as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or if
for any other reason it shall be necessary at any time to amend or supplement
the Prospectus to comply with any law, the Company promptly will prepare and
file with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so
amended or supplemented will not include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein in light of the
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circumstances existing when it is so delivered, not misleading, or so that
the Prospectus will comply with law. In case any Underwriter is required to
deliver a prospectus in connection with sales of any Shares at any time nine
months or more after the effective date of the Registration Statement, upon
the request of the Representative but at the expense of such Underwriter, the
Company will prepare and deliver to such Underwriter as many copies as the
Representative may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act.
(f) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 18 months
after the effective date of the Registration Statement, an earnings statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 thereunder and will advise you in writing when
such statement has been so made available.
(g) The Company will, for such period up to five years from the Closing
Date, deliver to the Representative copies of its annual report and copies of
all other documents, reports and information furnished by the Company to its
security holders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or the
Exchange Act. The Company will deliver to the Representative similar reports
with respect to significant subsidiaries, as that term is defined in the rules
and regulations under the Act, which are not consolidated in the Company's
financial statements.
(h) No offering, sale or other disposition of any Common Stock or other
capital stock of the Company, or warrants, options, convertible securities or
other rights to acquire such Common Stock or other capital stock (other than
pursuant to employee stock option plans, outstanding options or on the
conversion of convertible securities outstanding on the date of this Agreement)
will be made for a period of 180 days after the date of this Agreement, directly
or indirectly, by the Company otherwise than hereunder or with the prior written
consent of the Representative.
(i) The Company will apply the net proceeds from the sale of the Shares to
be sold by it hereunder substantially in accordance with the purposes set forth
under "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to maintain the designation of
the Common Stock on the Nasdaq National Market.
6. COSTS AND EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, the Company will pay (directly or by
reimbursement) all costs, expenses and fees incident to the performance of the
obligations of the Company and the Selling Shareholder under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company; the cost of preparing, printing and filing of the Registration
Statement, Preliminary Prospectuses and the Prospectus and any amendments and
supplements thereto and the printing, mailing and delivery to the Underwriters
and dealers of copies thereof and of this Agreement, the
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Master Agreement Among Underwriters, Selected Dealers Agreement and any
supplements or amendments thereto (excluding, except as provided below, fees
and expenses of counsel to the Underwriters); the filing fees of the
Commission; the filing fees and expenses (including legal fees and
disbursements of counsel for the Underwriters) incident to securing any
required review by the NASD of the terms of the sale of the Shares; listing
fees, if any, transfer taxes and the expenses, including the fees and
disbursements of counsel for the Underwriters incurred in connection with the
qualification of the Shares under state securities or Blue Sky laws; the fees
and expenses incurred in connection with the designation of the Shares on the
Nasdaq National Market; the costs of preparing stock certificates; the costs
and fees of any registrar or transfer agent and all other costs and expenses
incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section 6. In addition, the
Company will pay all travel and lodging expenses incurred by management of
the Company in connection with any informational "road show" meetings held in
connection with the offering and will also pay for the preparation of all
materials used in connection with such meetings. The Company shall not,
however, be required to pay for any of the Underwriters' expenses (other than
those related to qualification of the Shares under state securities or Blue
Sky laws and those incident to securing any required review by the NASD of
the terms of the sale of the Shares) except that, if this Agreement shall not
be consummated because the conditions in Section 7 hereof are not satisfied,
or because this Agreement is terminated by the Representative pursuant to
Section 11(b) hereof, or by reason of any failure, refusal or inability on
the part of the Company to perform any undertaking or satisfy any condition
of this Agreement or to comply with any of the terms hereof on its part to be
performed, unless such failure to satisfy said condition or to comply with
said terms shall be due to the default or omission of any Underwriter, then
the Company shall promptly upon request by the Representative reimburse the
several Underwriters for all out-of-pocket accountable expenses, including
fees and disbursements of counsel, incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of
performing their obligations hereunder; but the Company shall not in any
event be liable to any of the several Underwriters for damages on account of
loss of anticipated profits from the sale by them of the Shares.
7. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several
obligations of the Underwriters to purchase the Firm Shares on the Closing
Date and the Option Shares, if any, on the Option Closing Date, are subject
to the condition that all representations and warranties of the Company and
the Selling Shareholder contained herein are true and correct, at and as of
the Closing Date or the Option Closing Date, as the case may be, the
condition that the Company and the Selling Shareholder shall have performed
all of their covenants and obligations hereunder and to the following
additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; no stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, or any part thereof shall have been
issued and no proceedings for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on
the part of the Commission shall have been complied with to the reasonable
satisfaction of the Representative.
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(b) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Maslon Edelman Borman
& Brand, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters, to the
effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Minnesota, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Prospectus.
(ii) The Company does not own any stock or other equity interest in
any corporation, partnership, joint venture, unincorporated association
or other entity other than PWF. Each subsidiary of the Company has been
duly organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with corporate
power and authority to own or lease its properties and conduct its
business as described in the Prospectus. The outstanding shares of
capital stock of each such subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable and are owned directly
or indirectly, by the Company, free and clear of all liens, encumbrances
and security interests, other than security interests specifically
disclosed in the Prospectus. To the knowledge of such counsel, no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into any
shares of capital stock or ownership interests in each such subsidiary
are outstanding.
(iii) The Company has authorized and outstanding capital stock as
described in the Prospectus. The outstanding shares of the Company's
capital stock have been duly authorized and validly issued and are fully
paid and nonassessable. The form of certificate for the Shares is in
due and proper form and complies with all applicable statutory
requirements. The Shares to be issued and sold by the Company pursuant
to this Agreement have been duly authorized and, when issued and paid
for as contemplated herein, will be validly issued, fully paid and
nonassessable. No preemptive or, to the knowledge of such counsel,
other similar subscription rights of shareholders of the Company, or of
holders of warrants, options, convertible securities or other rights to
acquire shares of capital stock of the Company, exist with respect to
any of the Shares or the issue and sale thereof. To the knowledge of
such counsel, no rights to register outstanding shares of the Company's
capital stock, or shares issuable upon the exercise of outstanding
warrants, options, convertible securities or other rights to acquire
shares of such capital stock, exist which have not been validly
exercised or waived with respect to the Registration Statement. The
capital stock of the Company, including the Shares, conforms in all
material respects to the description thereof contained in the Prospectus.
(iv) The Registration Statement has become effective under the Act
and, to the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened by the
Commission.
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(v) The Registration Statement, the Prospectus and each amendment or
supplement thereto comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder (except
that such counsel need express no opinion as to the financial statements
and related schedules included therein).
(vi) The descriptions of statutes, legal and governmental proceedings,
contracts and other documents (A) in the Prospectus under the captions
"Risk Factors -- Risks Associated with Franchisees, --Government
Regulation, --Possible Issuances of Preferred Stock; Anti-Takeover Effect
of Minnesota Law, --Shares Eligible for Future Sale, --S Corporation
Status; Distributions" "S Corporation Distributions," "Dividend Policy,"
"Business -- Franchising, -- Trademark and Service Marks, -- Government
Regulation, -- Properties, -- Legal Proceedings," "Management -- Employment
Agreements, -- Employee and Director Stock Option Plans," "Certain
Transactions," "Description of Capital Stock," and "Shares Eligible for
Future Sale" and (B) in the Registration Statement in Item 14 are accurate
summaries and fairly present the information called for with respect to
such matters.
(vii) Such counsel does not know of any contracts, agreements,
documents or instruments required to be filed as exhibits to the
Registration Statement or described in the Registration Statement or the
Prospectus which are not so filed or described as required; and insofar as
any statements in the Registration Statement or the Prospectus constitute
summaries of any contract, agreement, document or instrument to which the
Company or any of its subsidiaries is a party, such statements are accurate
summaries and fairly present the information called for with respect to
such matters.
(viii) Such counsel knows of no legal or governmental proceeding,
pending or threatened, before any court or administrative body or
regulatory agency, to which the Company or any of its subsidiaries is a
party or to which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in the
Registration Statement or Prospectus and are not so described, or statutes
or regulations that are required to be described in the Registration
Statement or the Prospectus that are not so described.
(ix) The execution and delivery of this Agreement and the consummation
of the transactions herein contemplated do not and will not conflict with
or result in a violation of or default under the Articles or Bylaws of the
Company or its subsidiaries, or under any franchise, statute, permit,
judgment, decree, order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties, or under any lease,
contract, indenture, mortgage, loan agreement or other agreement or other
instrument or obligation known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any property or assets of the Company or
any of its subsidiaries is subject, except such agreements, instruments or
obligations with respect to which valid consents or waivers have been
obtained by the Company or its subsidiaries.
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(x) The Company has the corporate power and authority to enter into
this Agreement and to authorize, issue and sell the Shares as contemplated
hereby. This Agreement has been duly and validly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by state securities and blue
sky laws, as to which such counsel need express no opinion) except such as
have been obtained or made, specifying the same.
(xii) The Company is not, and immediately upon completion of the sale of
Shares contemplated hereby will not be, required to register as an
"investment company" under the Investment Company Act of 1940, as amended.
(xiii) Such counsel has no reason to believe that, as of its effective
date, the Registration Statement or any further amendment thereto made by
the Company prior to the Closing Date or the Option Closing Date, as the
case may be (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to the Closing
Date or the Option Closing Date, as the case may be (other than the
financial statements and related schedules therein, as to which such
counsel need express no opinion), contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading or that, as of the Closing Date or the Option Closing Date,
as the case may be, either the Registration Statement or the Prospectus or
any further amendment or supplement thereto made by the Company prior to
the Closing Date or the Option Closing Date, as the case may be (other than
the financial statements and related schedules therein, as to which such
counsel need express no opinion), contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading; and they do not know of any amendment to the Registration
Statement required to be filed.
(xiv) The Company holds, and is operating in compliance in all material
respects with, all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and all such
franchises, grants, authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect.
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(xv) The Company and PWF each have had in effect a valid election
under Code Section 1362 to be treated as an "S corporation" for each of
their taxable years since the S Corporation Commencement Date. To such
counsel's knowledge, neither the Company, PWF nor any of the shareholders
of the Company or PWF have taken any action to revoke that election. Such
counsel is not aware of any basis or the existence of any facts that would
permit the Internal Revenue Service to revoke that election for any period
prior to the effective date of the Registration Statement. Since the S
Corporation Commencement Date to and including the effective date of the
Registration Statement, neither the Company nor PWF will have incurred or
become liable for the payment of any corporate-level income tax, or any
related penalties or interest.
(c) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of counsel for the Selling
Shareholder, which counsel shall be reasonably acceptable to the Representative,
dated the Closing Date or the Option Closing Date, as the case may be, addressed
to the Underwriters, to the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by the Selling Shareholder and are the valid and
binding agreements of Selling Shareholder.
(ii) This Agreement has been duly authorized, executed and delivered
by or on behalf of the Selling Shareholder.
(iii) The sale of the Shares to be sold by the Selling Shareholder
hereunder and the compliance by the Selling Shareholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement, and the consummation of the transactions herein and therein
contemplated, will not conflict with or result in a breach or violation of
any terms or provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument know to such counsel to which the Selling Shareholder is a party
of the property or assets of the Selling Shareholder is subject, nor will
such action result in any violation of the provisions of the organizational
documents of the Selling Shareholder, or any order, rule or regulation
known to such counsel of any court or governmental agency or body having
jurisdiction over Selling Shareholder of the property of the Selling
Shareholder.
(iv) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the Shares
to be sold by the Selling Shareholder hereunder, except such consents,
approvals, authorizations or orders as have been validly obtained and are
in full force and effect, such as have been obtained under the Act and such
as may be required under the state securities or blue sky laws in
connection with the purchase and distribution of such Shares by the
Underwriters.
(v) The Selling Shareholder has full right, power and authority to
sell, assign, transfer and deliver the Shares to be sold by the Selling
Shareholder hereunder.
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(vi) Good and valid title to the Shares being sold by the Selling
Shareholder, free and clear of any claims, liens, encumbrances, security
interests or other adverse claims, has been transferred to each of the
several Underwriters who have purchased such Shares in good faith and
without notice of any such claim, lien, encumbrance, security interest or
other adverse claim within the meaning of the Uniform Commercial Code.
(d) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Gray Plant Mooty Mooty &
Bennett, P.A., counsel to the Company relating to certain franchise matters,
dated the Closing Date or the Option Closing Date, as the case may be, addressed
to the Underwriters, to the effect that:
(i) Each of the franchise agreements and development agreements
entered into by the Company or any of its subsidiaries relating to its
conveyance of franchise and development rights have been duly authorized,
executed and delivered by, and, assuming due execution and delivery by the
other parties thereto, are valid, legal and binding obligations of, and are
enforceable by, the Company and its subsidiaries.
(ii) The Company's uniform franchise offering circulars, dated April
30, 1996 and April 22, 1997, as amended September 10, 1997, inclusive of
attached exhibits ("UFOCS") contained information substantially in
compliance, as of the effective date of the respective UFOCS, with the
disclosure provisions of the FTC franchise and business opportunity laws
and regulations ("FTC Rule") and the franchise disclosure laws of those
states with which the Company has filed such UFOCS. The UFOCS are
substantially in compliance as to form with the FTC Rule and the franchise
disclosure laws of those states with which the Company has filed such
UFOCS.
(iii) The Company holds, and is operating in compliance in all material
respects with, all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and all such
franchises, grants, authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect.
(iv) The descriptions of federal and state franchise regulations set
forth in the Prospectus under the captions "Risk Factors -- Risks
Associated with Franchises," "Risk Factors -- Government Regulation," and
"Business -- Government Regulation" fairly and accurately describe the
status of the material governmental franchise regulations pertaining to the
Company's franchising activities.
(v) The description of the Company's franchising agreements set forth
in the Prospectus under the caption "Business -- Franchising" fairly and
accurately describes the material terms of the Company's franchise
agreements.
(vi) The Company has not received any notice of violation of any FTC
Rule or any state franchise registration or franchise disclosure law.
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(e) The Representative shall have received from Oppenheimer Wolff &
Donnelly, counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, with respect to the incorporation of
the Company, the validity of the Shares, the Registration Statement, the
Prospectus, and other related matters as the Representative may reasonably
request, and such counsel shall have received such papers and information as
they may reasonably request to enable them to pass upon such matters.
(f) The Representative shall have received on each of the date hereof, the
Closing Date and the Option Closing Date, as the case may be, a signed letter,
dated as of the date hereof, the Closing Date or the Option Closing Date, as the
case may be, in form and substance satisfactory to the Representative, from KPMG
Peat Marwick LLP, to the effect that they are independent public accountants
with respect to the Company and its subsidiaries within the meaning of the Act
and the related rules and regulations and containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(g) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date or the Option Closing Date, as the case may be, there shall
not have been any change or any development involving a prospective change, in
or affecting the general affairs, management, financial position, shareholders'
equity or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of which, in
your judgment, is material and adverse to the Company and makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at the Closing Date or the Option Closing Date, as the case may
be, on the terms and in the manner contemplated in the Prospectus.
(h) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
chief executive officer and the chief financial officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Prospectus was filed with the Commission pursuant to Rule
424(b) within the applicable period prescribed for such filing by the rules
and regulations under the Act and in accordance with Section 5 of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been
initiated or are, to his knowledge, threatened by the Commission.
(ii) The representations and warranties of the Company set forth in
Section 1 of this Agreement are true and correct at and as of the Closing
Date or the Option Closing Date, as the case may be, and the Company has
performed all of its obligations under this Agreement to be performed at or
prior to the Closing Date or the Option Closing Date, as the case may be.
(i) The Representative shall have received on the Closing Date and the
Option Closing Date, as the case may be, a certificate of the Selling
Shareholder to the effect that, as of
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the Closing Date and the Option Closing Date, as the case may be, the Selling
Shareholder represents as follows:
(i) The representations and warranties of the Selling Shareholder set
forth in Section 2 of this Agreement are true and correct at and as of the
Closing Date and the Option Closing Date, as the case may be, and the
Selling Shareholder has performed all of its obligations under this
Agreement to be performed at or prior to the Closing Date and the Option
Closing Date, as the case may be.
(j) All outstanding warrants (the "Warrants") issued by the Company in
connection with the Company's 1994 private placement of 46 units of 10%
subordinated notes (the "Notes") with Warrants attached thereto, shall no longer
be outstanding and shall have been exchanged for shares of Common Stock of the
Company in accordance with the terms and conditions set forth in that certain
letter provided to the holders of the Notes and Warrants from the Company dated
January 14, 1997, as extended pursuant to the Extension of Warrant Conversion
Agreement.
(k) All of the options outstanding under that certain Restated Option
Agreement by and between the Company and the Selling Shareholder dated October
6, 1995 shall have been exercised in full.
(l) The Company and the Selling Shareholder shall have furnished to the
Representative such further certificates and documents as the Representative may
reasonably have requested.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representative and to Oppenheimer Wolff
& Donnelly, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 7 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representative by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be. In such event, the Company, the Selling Shareholder and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 6 and 8 hereof).
8. INDEMNIFICATION.
(a) The Company and the Selling Shareholder severally agree to indemnify
and hold harmless each Underwriter, each officer and director thereof, and each
person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
such persons may became subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any Preliminary
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Prospectus or the Prospectus, including any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the statements
therein not misleading in light of the circumstances under which they were
made, or (iii) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to, the
Common Stock or the offering contemplated hereby, and which is included as
part of or referred to in any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arising out of or based upon
matters covered by clause (i) or (ii) above, and will reimburse each
Underwriter and each such controlling person for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that neither the Company nor the
Selling Shareholder shall be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged
omission, made in the Registration Statement, any Preliminary Prospectus or
the Prospectus, including any amendments or supplements thereto, in reliance
upon and in conformity with written information furnished to the Company by
any Underwriter through the Representative specifically for use therein; and
provided, further, that neither the Company nor the Selling Shareholder shall
be liable in the case of any matter covered by clause (iii) above to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such losses, claims, damages or liabilities resulted
directly from any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful misconduct.
(b) Each Underwriter agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed the Registration
Statement, each person, if any, who controls the Company within the meaning
of the Act, and the Selling Shareholder against any losses, claims, damages
or liabilities to which the Company, any such director, officer or
controlling person or the Selling Shareholder may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances under which they were made, and will
reimburse any legal or other expenses reasonably incurred by the Company any
such director, officer or controlling person or the Selling Shareholder in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that each Underwriter will be
liable in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission has
been made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity or
contribution may be sought
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pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) or contribution provided for in Section 8(d) shall be available
with respect to a proceeding to any party who shall fail to give notice of
such proceeding as provided in this Section 8(c) if the party to whom notice
was not given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified party
otherwise than on account of the provisions of Section 8(a), (b) or (c). In
case any such proceeding shall be brought against any indemnified party and
it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party and shall pay as incurred the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay promptly as incurred the reasonable fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention
of such counsel or (ii) the named parties to any such proceeding (including
any impleaded parties) include both the indemnifying party and the
indemnified party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party
and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it or other indemnified parties
which are different from or additional to those available to the indemnifying
party. It is understood that the indemnifying party shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be
liable for the fees and expenses of more than one separate firm at any time
for all such indemnified parties. Such firm shall be designated in writing
by the Representative and shall be reasonably satisfactory to the Company in
the case of parties indemnified pursuant to Section 8(a) and shall be
designated in writing by the Company and shall be reasonably satisfactory to
the Representative in the case of parties indemnified pursuant to Section
8(b). The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 is unavailable
or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholder, on the one hand, and the Underwriters, on the other,
from the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to
24
<PAGE>
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Shareholder, on the one hand, and the Underwriters,
on the other, in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Shareholder, on
the one hand, and the Underwriters, on the other, shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholder bears
to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Selling Shareholder, on the one
hand, or the Underwriters, on the other, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Shareholder and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereto) referred to above
in this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter; and no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company or the Selling Shareholder under this
Section 8 shall be in addition to any liability which the Company or the
Selling Shareholder may otherwise have, and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the Underwriters may otherwise have.
9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option
Closing Date, as the case may be, any Underwriter shall fail to purchase and
pay for the portion of the Shares which such Underwriter has agreed to
purchase and pay for on such date (otherwise than by reason of any default on
the part of the Company), you, as Representative of the Underwriters, shall
use your best efforts to procure within 36 hours thereafter one or more of
the other Underwriters, or any others, to purchase from the Company such
amounts as may be agreed upon, and upon the terms set forth herein, of the
Firm Shares or Option Shares, as the case may be, which the defaulting
Underwriter or Underwriters failed to purchase. If during such 36 hours you,
as Representative, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of Shares with respect
25
<PAGE>
to which such default shall occur does not exceed 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the other Underwriters
shall be obligated, severally, in proportion to the respective numbers of
Firm Shares or Option Shares, as the case may be, which they are obligated to
purchase hereunder, to purchase the Firm Shares or Option Shares, as the case
may be, which such defaulting Underwriter or Underwriters failed to purchase,
or (b) if the aggregate number of shares of Firm Shares or Option Shares, as
the case may be, with respect to which such default shall occur exceeds 10%
of the Firm Shares or Option Shares, as the case may be, covered hereby, the
Company or you as the Representative of the Underwriters will have the right,
by written notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company except for expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 9,
the Closing Date or Option Closing Date, as the case may be, may be postponed
for such period, not exceeding seven days, as you, as Representative, may
determine in order that the required changes in the Registration Statement or
in the Prospectus or in any other documents or arrangements may be effected.
The term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. NOTICES. All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows: if to the Underwriters, to Dain Bosworth
Incorporated, 1201 Third Avenue, Suite 2500, Seattle, Washington 98101-3044,
Attention: John Siegler, with copies to Oppenheimer Wolff & Donnelly, 45
South Seventh Street, Suite 3400, Plaza VII, Minneapolis, Minnesota 55402,
Attention: Bruce A. Machmeier, Esq.; if to the Company, to 7630 Excelsior
Boulevard, St. Louis Park, MN 55426, Attention: Yale T. Dolginow, with
copies to Maslon Edelman Borman & Brand, 3300 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota 55402-4140, Attention: Russell F.
Lederman, Esq.; and if to the Selling Shareholder, to ________________, with
copies to ________________.
11. TERMINATION. This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters or (ii) 4:00 p.m.,
Minneapolis time, on the first business day following the later of the date
on which the Registration Statement becomes effective or the date of this
Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change in
or affecting the condition, financial or otherwise, of the Company and its
subsidiaries taken as a whole or the business affairs, management, financial
position, shareholders' equity or results of operations of the Company and
its subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or
26
<PAGE>
escalation of hostilities or declaration of war or national emergency after
the date hereof or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your judgment, make the
offering or delivery of the Shares impracticable or inadvisable, (iii)
suspension of trading in securities on the New York Stock Exchange or the
American Stock Exchange or limitation on prices (other than limitations on
hours or numbers of days of trading) for securities on either such Exchange,
or a halt or suspension of trading in securities generally which are quoted
on Nasdaq National Market, or (iv) declaration of a banking moratorium by
either federal or New York State authorities; or
(c) as provided in Sections 7 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company,
as to any obligation of the Underwriters to purchase the Option Shares, upon
the occurrence at any time prior to the Option Closing Date of any of the
events described in subparagraph (b) above or as provided in Sections 7 and 9
of this Agreement.
12. WRITTEN INFORMATION. For all purposes under this Agreement
(including, without limitation, Section 1, Section 2, Section 3 and Section 8
hereof), the Company and the Selling Shareholder understand and agree with each
of the Underwriters that the following constitutes the only written information
furnished to the Company and the Selling Shareholder by or through the
Representative specifically for use in preparation of the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto: (i) the information relating to stabilization set forth in
the last paragraph on page two of the Preliminary Prospectus and the Prospectus,
and (ii) the information set forth under the caption "Underwriting" in the
Preliminary Prospectus and the Prospectus.
13. SUCCESSORS. This Agreement has been and is made solely for the
benefit of and shall be binding upon the Underwriters, the Company and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Shares merely because of such purchase.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors and officers and (c) delivery of and payment for
the Shares under this Agreement.
Each provision of this Agreement shall be interpreted in such a manner as
to be effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable under any applicable
law or rule in any jurisdiction, such provision will be ineffective only to the
extent of such invalidity, illegality or unenforceability in such jurisdiction
or any provision hereof in any other jurisdiction
27
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Minnesota.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholder and the several Underwriters in accordance with its terms.
Very truly yours,
PAPER WAREHOUSE, INC.
By:
--------------------------------------
Yale T. Dolginow
Its: President and Chief Executive Officer
SELLING SHAREHOLDER
LSG CORPORATION
By:
--------------------------------------
Its:
-------------------------------------
The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.
DAIN BOSWORTH INCORPORATED
As Representative of the several Underwriters
By:
------------------------------------
Its:
-----------------------------------
28
<PAGE>
SCHEDULE A
Schedule of Underwriters
Number of Firm Maximum Number
Underwriter Shares to be Purchased of Option Shares
- ----------- ---------------------- ----------------
Dain Bosworth Incorporated.......
______________ ____________
Total
______________ ____________
______________ ____________
29
<PAGE>
Exhibit 4.1
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR CERTAIN STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR
SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THEY ARE REGISTERED OR
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE COMPANY SHALL HAVE
RECEIVED AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THIS
COMPANY, THAT SUCH AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
PAPER WAREHOUSE, INC.
10% SUBORDINATED NOTE DUE NOVEMBER 30, 2004
No. R-__
December 7, 1994
$__________
FOR VALUE RECEIVED, the undersigned, PAPER WAREHOUSE, INC., a
corporation organized under the laws of the state of Minnesota (the "Company"),
hereby unconditionally promises to pay to the order of
_______________________________, or its registered assigns (the "Holder"), the
principal amount of __________________________ ($_________), together with
interest (a) on the unpaid principal amount hereof from time to time outstanding
from the date hereof, at the rate of 10% per annum (computed on the basis of a
360-day year of 12 thirty day months), payable quarterly on the last day of
April, July, October, and January, and at maturity, commencing with the April
30, July 31, October 31 or January 31 next succeeding the date hereof, until the
principal hereof shall have become due and payable, and (b) on any overdue
payment of principal and any overdue payment of interest, payable quarterly as
aforesaid (or at the option of the registered Holder hereof, on demand), at the
rate of 12% per annum. The principal of this Note is payable in installment
payments on the dates set forth in the Amortization Schedule attached hereto
and, in accordance therewith, will be fully paid on November 30, 2004.
This Note is one of a series of Subordinated Notes (all Notes of such
series are collectively referred to herein as the "Subordinated Notes") issued
to separate purchasers pursuant to the Confidential Private Placement
Memorandum, dated as of November 4, 1994 (the "Private Placement Memorandum").
If any payment on this Note becomes due and payable on a Saturday,
Sunday or other day on which commercial banks in Minneapolis, Minnesota are
authorized or required by law to close, the due date shall be extended to the
next succeeding day on which commercial banks in Minneapolis, Minnesota are
authorized or required by law to be open, and with respect to payments of
principal, interest thereon shall be payable at the then applicable rate during
such extension.
<PAGE>
This Note shall be subject to prepayment, in whole or in part, at any
time or from time to time, at the option of the Company, at 100% of the
principal amount to be prepaid plus interest thereon to the prepayment date. The
Company shall give the Holder irrevocable written notice of any such prepayment
not less than thirty (30) days nor more than sixty (60) days prior to the
prepayment date, specifying such prepayment date and the principal amount of
this Note, and all of the Subordinated Notes to be prepaid on such date and such
notice may require the surrender of this Note to the Company as a condition of
prepayment. If the prepayment is in part, then the Company will issue a Note to
the Holder for the remaining aggregate principal amount.
The Company covenants that it will not make any prepayment pursuant to
the immediately preceding paragraph unless it shall also make a prepayment on
all of the Subordinated Notes in proportion to the respective outstanding
principal amounts thereof.
The Company further covenants that it will deliver to the Holder:
(i) as soon as practicable and in any event within 60 days after
the end of each fiscal quarter (other than the last fiscal quarter) in
each fiscal year, consolidated statements of operations and
shareholders' equity, and consolidated balance sheets of the Company
and its subsidiaries as at the end of such fiscal quarter, setting
forth in the case of the consolidated statements in comparative form
corresponding consolidated figures for the corresponding fiscal
quarter in the preceding fiscal year, all in reasonable detail and
certified by an authorized financial officer of the Company, subject
to changes resulting from year-end adjustments; and
(ii) as soon as practicable and in any event within 120 days
after the end of each fiscal year, consolidated statements of
operations and shareholders' equity and consolidated statements of
cash flows of the Company and its subsidiaries for such year, and
consolidated balance sheets of the Company and its subsidiaries as at
the end of such year, setting forth in the case of the consolidated
statements in comparative form corresponding consolidated figures from
the preceding annual audit; the consolidated statements and balance
sheet of the Company and its subsidiaries will be reported on to the
Company by independent public accountants of recognized national
standing selected by the Company whose report shall be in scope and
substance based on accepted auditing practices; and such other
statements and balance sheets as herein required will be certified by
the chief financial officer or treasurer of the Company.
Together with each delivery of financial statements required by clauses (i) and
(ii) above, the Company will deliver to the Holder a certificate stating that
there exists no Event of Default
2
<PAGE>
(as hereinafter defined) or Default (as hereinafter defined), or, if any
Event of Default or Default exists, specifying the nature and period of
existence thereof and what action the Company proposes to take with respect
thereto. Together with each delivery of financial statements required by
clause (ii) above, the Company will deliver to the Holder a certificate of
such accountants stating that, in making the audit necessary to the
certification of such financial statements, they have obtained no knowledge
of any Event of Default or Default, or, if they have obtained knowledge of
any Event of Default or Default, specifying the nature and period of
existence thereof.
If any one of the following events (each, an "Event of Default") shall
occur and be continuing for any reason whatsoever (and whether such occurrence
shall be voluntary or involuntary or come about or be effected by operation of
law or otherwise): (i) there should be a default in the payment of principal
when the same shall become due hereunder; or (ii) there should be a default in
the payment of interest when the same shall become due hereunder and such
default shall continue for more than 90 days; or (iii) the Company defaults in
any payment of principal of or interest on any other obligations for money
borrowed, other than this Note, for 180 days; or (iv) the Company defaults in
the performance or observance of an agreement set forth herein and such default
shall not have been remedied within 30 days after the written notice thereof
shall have been received by the Company from any holder of Subordinated Notes
(other than as set forth in clause (i) and (ii) above); or (v) the Company
should make an assignment for the benefit of creditors; or (vi) attachment or
garnishment proceedings are commenced against the Company, and such proceedings
continue for 90 days undismissed or undischarged; or (vii) a receiver, trustee
or liquidator is appointed over or execution levied upon any property of the
Company; or (viii) proceedings are instituted by or against the Company under
any bankruptcy, insolvency, reorganization, receivership or other law relating
to the relief of debtors from time to time in effect, including without
limitation the United States Bankruptcy Code, as amended, and such proceedings
shall remain unstayed for 90 days or an order for relief shall be entered; then
(a) if such Event of Default is an event specified in clauses (v), (vi), (vii)
or (viii) above, this Note shall automatically become immediately due and
payable at par together with interest accrued thereon, without presentment,
demand, protest or notice of any kind, all of which are hereby waived by the
Company, (b) if such Event of Default is an event specified in clauses (i) or
(ii) above, the registered Holder may at its option, by notice in writing to the
Company, declare this Note to be, and this Note shall thereupon be and become,
immediately due and payable at par together with interest accrued thereon,
without presentment, demand, protest or notice of any kind, all of which are
hereby waived by the Company, and (c) if such Event of Default is an Event of
Default specified in clauses (iii) or (iv), the Holder or Holders of at least
70% in aggregate principal amount of the Subordinated Notes at the time
outstanding may, at its or their option and in addition to any right, power or
remedy permitted by law or in equity, by notice in writing to the Company,
declare all of the Subordinated Notes to be, and all of the Subordinated Notes
shall thereupon be and become forthwith due and payable together with interest
accrued thereon with respect to each Subordinated Notes, including this Note,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company.
3
<PAGE>
For purposes of this Note "Default" shall mean any condition or event
which constitutes an Event of Default or which the giving of notice or lapse of
time or both would, unless cured or waived, become an Event of Default.
All payments made hereunder shall be made in lawful currency of the
United States of America by check payable to such place as the registered Holder
may designate in writing to the Company. All payments made hereunder, whether a
scheduled installment, prepayment, or payment as a result of acceleration, shall
be allocated FIRST to costs and expenses of the registered Holder resulting from
collection efforts with respect to this Note, SECOND to accrued but unpaid
interest, and THIRD to installments of principal remaining outstanding hereunder
first to principal amounts overdue then to principal amounts currently due and
then to installments of principal due in the future in the inverse order of
their maturity.
The Company agrees to pay all reasonable costs of collection,
including attorneys' fees, paid or incurred by the registered Holder in
enforcing this Note on default or the rights and remedies herein provided.
The indebtedness evidenced by the Subordinated Notes, including the
principal of and interest on the Subordinated Notes, shall be subordinate and
junior to Senior Indebtedness. For purposes of this Note, the following term
shall have the ascribed meaning: "SENIOR INDEBTEDNESS" shall mean and include
all obligations (whether now outstanding or hereafter incurred), for the payment
of which the Company is responsible or liable as obligor, guarantor or
otherwise, other than the following: (1) any indebtedness as to which, in the
instrument evidencing such indebtedness or pursuant to which such indebtedness
was issued, it is expressly provided that such indebtedness is subordinate in
right of payment to all indebtedness of the Company not expressly subordinated
to such indebtedness; and (2) any indebtedness which by its terms refers
explicitly to the Subordinated Notes and states that such indebtedness shall not
be senior, but shall be pari passu or shall be subordinated in right of payment
to the Subordinated Notes. Notwithstanding anything to the contrary in the
foregoing, "SENIOR INDEBTEDNESS" shall not include: (a) indebtedness of or
amounts owed by the Company for compensation to employees, or for goods or
materials purchased in the ordinary course of business, or for services, or (b)
indebtedness of the Company to a subsidiary or an affiliate of the Company.
The Company, for itself and for any guarantors, sureties, endorsers
and/or any other person or persons now or hereafter liable hereon, if any,
hereby waives demand of payment, presentment for payment, protest, notice of
nonpayment or dishonor -and any and all other notices and demands whatsoever,
and any and all delays or lack of diligence in the collection hereof, and
expressly consents and agrees to any and all extensions or postponements of the
time of payment hereof from time to time at or after -maturity and any other
indulgence and waives all notice thereof.
No delay or failure by the registered Holder in exercising any right,
power, privilege or remedy hereunder shall affect such right, power, privilege
or remedy or be deemed to be a waiver of the same or any part thereof; nor shall
any single or partial exercise thereof or any failure to
4
<PAGE>
exercise the same in any instance preclude any further or future exercise
thereof, or exercise of any other right, power, privilege or remedy, and the
rights and privileges provided for hereunder are cumulative and not
exclusive. The delay or failure to exercise any right hereunder shall not
waive such right.
This Note is a registered Note and upon surrender of this Note for
registration of transfer, duly endorsed, or accompanied by a written instrument
of transfer duly executed, by the registered Holder hereof or such Holder's
attorney duly authorized in writing, a new Note for a like principal amount, or
in the case of a partial transfer in the amount of $5,000 or any integral
multiple thereof, will be issued to, and registered in the name of, the
transferee. Prior to due presentment for registration of transfer, the Company
may treat the person in whose name this Note is registered as the owner hereof
for the purpose of receiving payment and for all other purposes, and the Company
shall not be affected by any notice to the contrary.
By executing this Note the Company represents to the registered Holder
that he is duly authorized and empowered to execute and deliver this Note and
that this Note constitutes the legal and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
The Company will not amend any Subordinated Notes unless the Company
shall have obtained the prior written consent to such amendment of the holders
of not less than 51 % of the aggregate principal amount of the Subordinated
Notes outstanding, except (i) that the provisions of the Subordinated Notes
requiring a greater percentage to take any actions shall require such greater
percentage in order to effect an amendment to such provisions, and (ii) that
without the written consent of the holders of all Subordinated Notes, no
amendment to the Subordinated Notes shall change the maturity of any
Subordinated Notes, or change the principal of, or the rate or time of payment
of interest payable with respect to any Subordinated Notes, or affect the amount
or allocation of any required prepayment thereon.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA.
IN WITNESS WHEREOF, the undersigned has duly caused this Note to be
executed and delivered at the place specified above and as of the date first
written above.
PAPER WAREHOUSE, INC.
By:
------------------------------
Name : Yale T. Dolginow
Title: President
5
<PAGE>
AMORTIZATION SCHEDULE
PAPER WAREHOUSE, INC.
10% SUBORDINATED NOTES
The principal amortization for each date listed on this schedule shall be equal
to (x) the stated principal amount of the Note to which this Amortization
Schedule is attached, MULTIPLIED by (y) the aggregate amount of principal
amortization for such date for all Subordinated Notes, as set forth below as a
Required Principal Installment Payment, DIVIDED by (z) the original aggregate
principal amount of all Subordinated Notes, as set forth below, such principal
amount to be subject to adjustment for any prior optional prepayments of
principal.
Amount of Required Principal
Payment Date Installment Payment
------------ -------------------
November 30, 2001 $ 575,000
November 30, 2002 $ 575,000
November 30, 2003 $ 575,000
November 30, 2004 $ 575,000
-------
$ 2,300,000
=============
6
<PAGE>
WARRANT CONVERSION AGREEMENT
This Warrant Conversion Agreement (the "Agreement") is made and entered
into as of the date indicated on the signature page attached hereto by and
between Paper Warehouse, Inc., a Minnesota corporation (the "Company") and each
warrant holder ("Warrant Holder") who is a holder of notes ("Notes") and a
signatary to this Agreement.
A. The Warrant Holder is the record holder of a Warrant to purchase 106.3
shares, subject to adjustment, of Common Stock of the Company, par value $.01
per share (the "Warrant Shares"), at an exercise price of $47.04 per share,
subject to adjustment (the "Exercise Price").
B. The Warrant Holder and the Company are parties to a Warrant Agreement
dated as of December 7, 1994 (the "Warrant Agreement"), and Registration Rights
Agreement dated as of December 7, 1994 (the "Registration Rights Agreement").
C. The Registration Rights Agreement provides that the Warrant Holder is
entitled to notice of a proposed registration of the Company's securities and
has the right to request registration of the Warrant Shares.
D. The Company proposes to undertake an initial public offering of the
Company's securities pursuant to a registered public offering (the "IPO"), and
the underwriters of the IPO have informed the Company that they do not intend to
include in the IPO any shares held by shareholders, including Warrant Shares,
and have further informed the Company that it would be in the best interests of
the Company to have the Warrants converted into shares of Common Stock in
connection with the IPO.
E. The Warrant Agreement provides that the Exercise Price be paid in cash
and does not provide for a cashless exercise or conversion provision.
F. The Warrant Holder and the Company desire to amend the Warrant
Agreement to provide for such a conversion provision.
G. The Warrant Holder desires to convert their Warrants into Warrant
Shares pursuant to a cashless exercise contingent with the Company's IPO being
completed prior to June 30, 1997.
Accordingly, and in consideration of the above recitals, the parties hereto
agree as follows:
<PAGE>
1. CONVERSION OF WARRANT AGREEMENT. Article 5 of the Warrant Agreement
is hereby amended, effective upon the closing date of the IPO, to include the
following provision:
In addition to and without limiting the rights of the Warrant Holder
under the terms of this Warrant, the Warrant Holder shall have the
right (the "Conversion Right") to convert this Warrant into shares of
Common Stock as provided in this paragraph at any time or from time to
time prior to its expiration. Upon exercise of the Conversion Right
with respect to a particular number of shares of Warrant Stock (the
"Converted Warrant Shares"), the Company shall deliver to the Warrant
Holder, without payment by the Warrant Holder of any exercise price or
any cash or other consideration, that number of shares of Common Stock
equal to the quotient obtained by dividing the Net Value (as
hereinafter defined) of the Converted Warrant Shares by the fair
market value of a single share of Common Stock, determined in each
case as of the close of business on the Conversion Date (as
hereinafter defined) (but which shall be, as of the closing date of a
public offering of the Common Stock, the public offering price for
such offering). The "Net Value" of the Converted Warrant Shares shall
be determined by subtracting the aggregate Warrant Exercise Price of
the Converted Warrant Shares from the aggregate fair market value of
the Converted Warrant Shares.
2. EXERCISE OF WARRANT CONVERSION RIGHT. The Warrant Holder hereby
agrees to irrevocably exercise, and the Company agrees to accept such
irrevocable exercise, the Warrant Holder's Conversion Right with respect to all
of the Warrant Shares underlying the Warrants on the closing date of the IPO.
The Warrant Holder agrees to transmit to the Company the Form of Election to
Exercise Conversion Right attached to this Warrant Conversion Agreement, along
with the Warrant, no later than January 31, 1997, unless such date is extended
in the sole discretion of the Company.
3. TERMINATION OF WARRANT CONVERSION RIGHT AND EXERCISE. The Company
will return the Warrant and Form of Election to Exercise Conversion Right to the
Warrant Holder and the amendment of Article 5 of the Warrant Agreement provided
for by Section 1 above and the exercise of the Warrant Conversion Right provided
for by Section 2 above, shall not be effective in the event that:
a. LSG Corporation, or any assignee thereof, does not exercise,
prior to the IPO, its option pursuant to that Restated Option Agreement
dated October 6, 1994 between the Company and LSG Corporation.
b. The Registration Statement relating to the IPO is not declared
effective prior to 5:00 p.m. Minneapolis time on June 30, 1997.
4. REPRESENTATIONS OF WARRANT HOLDER. The Warrant Holder represents and
warrants to the Company that it:
-2-
<PAGE>
a. Has received the Letter of the Company dated January 13, 1997
relating to the cashless exercise.
b. Understands that the Warrant Shares issued upon exercise of the
Warrant are "Restricted Securities" as such term is defined in the
Securities Act of 1933, as amended, and may only be resold pursuant to
registration thereunder or pursuant to an exemption thereunder,
including Rule 144.
4. MISCELLANEOUS.
a. This Agreement shall be construed and enforced in accordance with
the laws of the State of Minnesota.
b. This Agreement may not be altered or amended except in writing
signed by each party.
The parties hereto have signed Agreement as the date last written below in
duplicate original.
PAPER WAREHOUSE, INC.
- ---------------------- -------------------------
Dated By: Yale T. Dolginow
WARRANT HOLDER
- ---------------------- -------------------------
Dated
-3-
<PAGE>
FORM OF
ELECTION TO EXERCISE CONVERSION RIGHTS
(To be executed if holder desires to convert the Warrant Certificate.)
TO PAPER WAREHOUSE, INC.:
The undersigned, subject to the terms of that certain Warrant Conversion
Agreement, hereby irrevocably elects to exercise the Conversion Rights with
respect to all Warrant Shares represented by the Warrant effective on the
closing date of the IPO to acquire the shares of Common Stock issuable upon the
exercise of such conversion right and requests that certificates for such shares
be issued in the name of:
Please insert social security or other identifying number
- ---------------
- ---------------
- --------------------------------------------------------------------------------
(Please print name and address)
-----------------------------
Signature
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
Signature Guaranteed:
<PAGE>
EXTENSION OF WARRANT CONVERSION AGREEMENT
This Extension of Warrant Conversion Agreement is made and entered into as
of the date indicated below to the left of the signatures.
WHEREAS, the undersigned previously executed a Warrant Conversion Agreement
(the "Conversion Agreement") whereby the undersigned agreed to convert their
Warrants into Warrant Shares (as defined therein) if Paper Warehouse, Inc. (the
"Company") effects a public offering prior to June 30, 1997.
WHEREAS, the Conversion Agreement also amended certain provisions to the
Warrant Agreement as defined therein.
WHEREAS, the effect of the Conversion Agreement terminates if the Company
does not affect an IPO prior to June 30, 1997 (the "Termination Date").
WHEREAS, the undersigned desires to extend the Termination Date until
December 31, 1997.
NOW, THEREFORE, the undersigned does hereby extend the Termination Date, as
set forth in paragraph 3 of the Conversion Agreement from June 30, 1997 until
January 31, 1998. This Certificate shall have the effect of amending the
Conversion Agreement.
WARRANT HOLDER
- ------------------------------ -----------------------------------
Date
PAPER WAREHOUSE, INC.
- ------------------------------ -----------------------------------
Date Yale T. Dolginow
President and CEO
<PAGE>
Exhibit 5
[LETTERHEAD]
November 4, 1997
96-1810
Paper Warehouse, Inc.
7630 Excelsior Blvd.
Minneapolis, MN 55426
Ladies and Gentlemen:
We have acted on behalf of Paper Warehouse, Inc., a Minnesota
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-1, File No. 333-36911 (the "Registration
Statement"), originally filed by the Company with the Securities and Exchange
Commission on October 1, 1997 and amended on November 4, 1997 relating to the
registration under the Securities Act of 1933, as amended, of 1,916,667
shares (the "Shares") of the Company's Common Stock, $0.01 par value,
including up to 50,000 shares which will be offered and sold by a shareholder
of the Company.
Upon examination of such corporate documents and records as we have
deemed necessary or advisable for the purposes hereof and including and in
reliance upon certain certificates by the Company, it is our opinion that:
1. The Company is a validly existing corporation in good standing
under the laws of the State of Minnesota.
2. The Shares have been duly authorized, and when issued as described
in the Registration Statement, will be validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the references to our firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
Maslon Edelman Borman & Brand, LLP
By: s/ Russell F. Lederman, P.A.
------------------------------------
Russell F. Lederman, P.A, Partner
<PAGE>
PAPER WAREHOUSE, INC.
1997 STOCK OPTION AND COMPENSATION PLAN
1. PURPOSE. The purpose of the 1997 Stock Option and Compensation Plan
(the "Plan") of Paper Warehouse, Inc. (the "Company") is to increase shareholder
value and to advance the interests of the Company by furnishing a variety of
economic incentives ("Incentives") designed to attract, retain and motivate
employees. Incentives may consist of opportunities to purchase or receive
shares of Common Stock, $.01 par value, of the Company ("Common Stock"),
monetary payments or both on terms determined under this Plan.
2. ADMINISTRATION. The Plan shall be administered by the compensation
committee (the "Committee") of the Board of Directors of the Company. The
Committee shall consist of not less than two directors of the Company and shall
be appointed from time to time by the Board of Directors of the Company. Each
member of the Committee shall be a non-employee director within the meaning of
Rule 16b-3 of the Securities Exchange Act of 1934 ("Non-Employee Directors"),
and the regulations promulgated thereunder (the "1934 Act"). The Board of
Directors of the Company may from time to time appoint members of the Committee
in substitution for, or in addition to, members previously appointed, and may
fill vacancies, however caused, in the Committee. The Committee shall select
one of its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of the Committee's members shall
constitute a quorum. All action of the Committee shall be taken by the majority
of its members. Any action may be taken by a written instrument signed by
majority of the members and actions so taken shall be fully effective as if it
had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary, shall keep minutes of its meetings and shall
make such rules and regulations for the conduct of its business as it shall deem
advisable. The Committee shall have complete authority to award Incentives
under the Plan, to interpret the Plan, and to make any other determination which
it believes necessary and advisable for the proper administration of the Plan.
The Committee's decisions and matters relating to the Plan shall be final and
conclusive on the Company and its participants.
3. ELIGIBLE EMPLOYEES. Employees of the Company (including officers and
directors, but excluding Non-Employee Directors shall become eligible to receive
Incentives under the Plan when designated by the Committee. Employees may be
designated individually or by groups or categories (for example, by pay grade)
as the Committee deems appropriate. Participation by officers of the Company
and any performance objectives relating to such officers must be approved by the
Committee. Participation by others and any performance objectives relating to
others may be approved by groups or categories (for example, by pay grade) and
authority to designate participants who are not officers and to set or modify
such targets may be delegated.
4. TYPES OF INCENTIVES. Incentives under the Plan may be granted in any
one or a combination of the following forms: (a) incentive stock options and
non-statutory stock options (section 6); (b) stock appreciation rights ("SARs")
(section 7); (c) stock awards (section 8); (d) restricted stock (section 8);
(e) performance shares (section 9); and (f) cash awards (section 10).
5. SHARES SUBJECT TO THE PLAN.
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section
11.6, the number of shares of Common Stock which may be issued under the
Plan shall not exceed 525,000 shares of Common Stock, subject to
approval by the shareholders of the Company at the next meeting of
shareholders.
<PAGE>
5.2. CANCELLATION. To the extent that cash in lieu of shares of
Common Stock is delivered upon the exercise of a SAR pursuant to Section
7.4, the Company shall be deemed, for purposes of applying the limitation
on the number of shares, to have issued the greater of the number of shares
of Common Stock which it was entitled to issue upon such exercise or on the
exercise of any related option. In the event that a stock option or SAR
granted hereunder expires or is terminated or canceled unexercised as to
any shares of Common Stock, such shares may again be issued under the Plan
either pursuant to stock options, SARs or otherwise. In the event that
shares of Common Stock are issued as restricted stock or pursuant to a
stock award and thereafter are forfeited or reacquired by the Company
pursuant to rights reserved upon issuance thereof, such forfeited and
reacquired shares may again be issued under the Plan, either as restricted
stock, pursuant to stock awards or otherwise. The Committee may also
determine to cancel, and agree to the cancellation of, stock options in
order to make a participant eligible for the grant of a stock option at a
lower price than the option to be canceled.
5.3. TYPE OF COMMON STOCK. Common Stock issued under the Plan in
connection with stock options, SARs, performance shares, restricted stock
or stock awards, may be authorized and unissued shares.
6. STOCK OPTIONS. A stock option is a right to purchase shares of Common
Stock from the Company. Each stock option granted by the Committee under this
Plan shall be subject to the following terms and conditions:
6.1. PRICE. The option price per share shall be determined by the
Committee, subject to adjustment under Section 11.6.
6.2. NUMBER. The number of shares of Common Stock subject to the
option shall be determined by the Committee, subject to adjustment as
provided in Section 11.6. The number of shares of Common Stock subject to
a stock option shall be reduced in the same proportion that the holder
thereof exercises a SAR if any SAR is granted in conjunction with or
related to the stock option.
6.3. DURATION AND TIME FOR EXERCISE. Subject to earlier termination
as provided in Section 11.4, the term of each stock option shall be
determined by the Committee but shall not exceed ten years and one day from
the date of grant. Each stock option shall become exercisable at such time
or times during its term as shall be determined by the Committee at the
time of grant. No stock option may be exercised during the first twelve
months of its term. Except as provided by the preceding sentence, the
Committee may accelerate the exercisability of any stock option. Subject
to the foregoing and with the approval of the Committee, all or any part of
the shares of Common Stock with respect to which the right to purchase has
accrued may be purchased by the Company at the time of such accrual or at
any time or times thereafter during the term of the option.
6.4. MANNER OF EXERCISE. A stock option may be exercised, in whole or
in part, by giving written notice to the Company, specifying the number of
shares of Common Stock to be purchased and accompanied by the full purchase
price for such shares. The option price shall be payable in United States
dollars upon exercise of the option and may be paid by cash; uncertified or
certified check; bank draft; by delivery of shares of Common Stock in
payment of
2
<PAGE>
all or any part of the option price, which shares shall be
valued for this purpose at the Fair Market Value on the date such option is
exercised; by instructing the Company to withhold from the shares of Common
Stock issuable upon exercise of the stock option shares of Common Stock in
payment of all or any part of the option price, which shares shall be
valued for this purpose at the Fair Market Value or in such other manner as
may be authorized from time to time by the Committee. Prior to the
issuance of shares of Common Stock upon the exercise of a stock option, a
participant shall have no rights as a shareholder.
6.5. INCENTIVE STOCK OPTIONS. Notwithstanding anything in the Plan to
the contrary, the following additional provisions shall apply to the grant
of stock options which are intended to qualify as Incentive Stock Options
(as such term is defined in Section 422A of the Internal Revenue Code of
1986, as amended):
(a) The aggregate Fair Market Value (determined as of the time
the option is granted) of the shares of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by
any participant during any calendar year (under all of the Company's
plans) shall not exceed $100,000.
(b) Any Incentive Stock Option certificate authorized under the
Plan shall contain such other provisions as the Committee shall deem
advisable, but shall in all events be consistent with and contain all
provisions required in order to qualify the options as Incentive Stock
Options.
(c) All Incentive Stock Options must be granted within ten years
from the earlier of the date on which this Plan was adopted by Board
of Directors or the date this Plan was approved by the shareholders.
(d) Unless sooner exercised, all Incentive Stock Options shall
expire no later than 10 years after the date of grant.
(e) The option price for Incentive Stock Options shall be not
less than the Fair Market Value of the Common Stock subject to the
option on the date of grant.
(f) No Incentive Stock Options shall be granted to any
participant who, at the time such option is granted, would own (within
the meaning of Section 422A of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the
employer corporation or of its parent or subsidiary corporation.
7. STOCK APPRECIATION RIGHTS. A SAR is a right to receive, without
payment to the Company, a number of shares of Common Stock, cash or any
combination thereof, the amount of which is determined pursuant to the formula
set forth in Section 7.4. A SAR may be granted (a) with respect to any stock
option granted under this Plan, either concurrently with the grant of such stock
option or at such later time as determined by the Committee (as to all or any
portion of the shares of Common Stock subject to the stock option), or (b)
alone, without reference to any related stock option. Each SAR granted by the
Committee under this Plan shall be subject to the following terms and
conditions:
7.1. NUMBER. Each SAR granted to any participant shall relate to such
number of shares of Common Stock as shall be determined by the Committee,
subject to adjustment as provided in Section 11.6. In the case of an SAR
granted with respect to a stock option, the number of shares of Common
Stock to which the SAR pertains shall be reduced in the same proportion
that the holder of the option exercises the related stock option.
3
<PAGE>
7.2. DURATION. Subject to earlier termination as provided in Section
11.4, the term of each SAR shall be determined by the Committee but shall
not exceed ten years and one day from the date of grant. Unless otherwise
provided by the Committee, each SAR shall become exercisable at such time
or times, to such extent and upon such conditions as the stock option, if
any, to which it relates is exercisable. No SAR may be exercised during
the first twelve months of its term. Except as provided in the preceding
sentence, the Committee may in its discretion accelerate the exercisability
of any SAR.
7.3. EXERCISE. A SAR may be exercised, in whole or in part, by giving
written notice to the Company, specifying the number of SARs which the
holder wishes to exercise. Upon receipt of such written notice, the
Company shall, within 90 days thereafter, deliver to the exercising holder
certificates for the shares of Common Stock or cash or both, as determined
by the Committee, to which the holder is entitled pursuant to Section 7.4.
7.4. PAYMENT. Subject to the right of the Committee to deliver cash
in lieu of shares of Common Stock (which, as it pertains to officers and
directors of the Company, shall comply with all requirements of the 1934
Act), the number of shares of Common Stock which shall be issuable upon the
exercise of a SAR shall be determined by dividing:
(a) the number of shares of Common Stock as to which the SAR is
exercised multiplied by the amount of the appreciation in such shares
(for this purpose, the "appreciation" shall be the amount by which the
Fair Market Value of the shares of Common Stock subject to the SAR on
the exercise date exceeds (1) in the case of a SAR related to a stock
option, the purchase price of the shares of Common Stock under the
stock option or (2) in the case of a SAR granted alone, without
reference to a related stock option, an amount which shall be
determined by the Committee at the time of grant, subject to
adjustment under Section 11.6); by
(b) the Fair Market Value of a share of Common Stock on the
exercise date.
In lieu of issuing shares of Common Stock upon the exercise of a SAR,
the Committee may elect to pay the holder of the SAR cash equal to the Fair
Market Value on the exercise date of any or all of the shares which would
otherwise be issuable. No fractional shares of Common Stock shall be
issued upon the exercise of a SAR; instead, the holder of the SAR shall be
entitled to receive a cash adjustment equal to the same fraction of the
Fair Market Value of a share of Common Stock on the exercise date or to
purchase the portion necessary to make a whole share at its Fair Market
Value on the date of exercise.
8. STOCK AWARDS AND RESTRICTED STOCK. A stock award consists of the
transfer by the Company to a participant of shares of Common Stock, without
other payment therefor, as additional compensation for services to the Company.
A share of restricted stock consists of shares of Common Stock which are sold or
transferred by the Company to a participant at a price determined by the
Committee (which price shall be at least equal to the minimum price required by
applicable law for the issuance of a share of Common Stock) and subject to
restrictions on their sale or other transfer by the participant. The transfer
of Common Stock pursuant to stock awards and the transfer and sale of restricted
stock shall be subject to the following terms and conditions:
8.1. NUMBER OF SHARES. The number of shares to be transferred or sold
by the Company to a participant pursuant to a stock award or as restricted
stock shall be determined by the Committee.
4
<PAGE>
8.2. SALE PRICE. The Committee shall determine the price, if any, at
which shares of restricted stock shall be sold to a participant, which may
vary from time to time and among participants and which may be below the
Fair Market Value of such shares of Common Stock at the date of sale.
8.3. RESTRICTIONS. All shares of restricted stock transferred or sold
hereunder shall be subject to such restrictions as the Committee may
determine, including, without limitation any or all of the following:
(a) a prohibition against the sale, transfer, pledge or other
encumbrance of the shares of restricted stock, such prohibition to
lapse at such time or times as the Committee shall determine (whether
in annual or more frequent installments, at the time of the death,
disability or retirement of the holder of such shares, or otherwise);
(b) a requirement that the holder of shares of restricted stock
forfeit, or (in the case of shares sold to a participant) resell back
to the Company at his cost, all or a part of such shares in the event
of termination of his employment during any period in which such
shares are subject to restrictions;
(c) such other conditions or restrictions as the Committee may
deem advisable.
8.4. ESCROW. In order to enforce the restrictions imposed by the
Committee pursuant to Section 8.3, the participant receiving restricted
stock shall enter into an agreement with the Company setting forth the
conditions of the grant. Shares of restricted stock shall be registered in
the name of the participant and deposited, together with a stock power
endorsed in blank, with the Company. Each such certificate shall bear a
legend in substantially the following form:
The transferability of this certificate and the shares of
Common Stock represented by it are subject to the terms and
conditions (including conditions of forfeiture) contained in
the 1997 Stock Option and Compensation Plan of Paper
Warehouse, Inc. (the "Company"), and an agreement entered
into between the registered owner and the Company. A copy
of the Plan and the agreement is on file in the office of
the secretary of the Company.
8.5. END OF RESTRICTIONS. Subject to Section 11.5, at the end of any
time period during which the shares of restricted stock are subject to
forfeiture and restrictions on transfer, such shares will be delivered free
of all restrictions to the participant or to the participant's legal
representative, beneficiary or heir.
8.6. SHAREHOLDER. Subject to the terms and conditions of the Plan,
each participant receiving restricted stock shall have all the rights of a
shareholder with respect to shares of stock during any period in which such
shares are subject to forfeiture and restrictions on transfer, including
without limitation, the right to vote such shares. Dividends paid in cash
or property other than Common Stock with respect to shares of restricted
stock shall be paid to the participant currently.
5
<PAGE>
9. PERFORMANCE SHARES. A performance share consists of an award which
shall be paid in shares of Common Stock, as described below. The grant of
performance share shall be subject to such terms and conditions as the Committee
deems appropriate, including the following:
9.1. PERFORMANCE OBJECTIVES. Each performance share will be subject
to performance objectives for the Company or one of its operating units to
be achieved by the end of a specified period. The number of performance
shares granted shall be determined by the Committee and may be subject to
such terms and conditions, as the Committee shall determine. If the
performance objectives are achieved, each participant will be paid in
shares of Common Stock or cash. If such objectives are not met, each grant
of performance shares may provide for lesser payments in accordance with
formulas established in the award.
9.2. NOT SHAREHOLDER. The grant of performance shares to a
participant shall not create any rights in such participant as a
shareholder of the Company, until the payment of shares of Common Stock
with respect to an award.
9.3. NO ADJUSTMENTS. No adjustment shall be made in performance
shares granted on account of cash dividends which may be paid or other
rights which may be issued to the holders of Common Stock prior to the end
of any period for which performance objectives were established.
9.4. EXPIRATION OF PERFORMANCE SHARE. If any participant's employment
with the Company is terminated for any reason other than normal retirement,
death or disability prior to the achievement of the participant's stated
performance objectives, all the participants rights on the performance
shares shall expire and terminate unless otherwise determined by the
Committee. In the event of termination of employment by reason of death,
disability, or normal retirement, the Committee, in its own discretion may
determine what portions, if any, of the performance shares should be paid
to the participant.
10. CASH AWARDS. A cash award consists of a monetary payment made by the
Company to a participant as additional compensation for his services to the
Company. Payment of a cash award will normally depend on achievement of
performance objectives by the Company or by individuals. The amount of any
monetary payment constituting a cash award shall be determined by the Committee
in its sole discretion. Cash awards may be subject to other terms and
conditions, which may vary from time to time and among participants, as the
Committee determines to be appropriate.
11. GENERAL.
11.1. EFFECTIVE DATE. The Plan will become effective upon its
approval by the affirmative vote of the holders of a majority of the voting
power of the shares of the Company's Common Stock present and entitled to
vote at a meeting of its shareholders and upon the date that the Company's
Registration Statement in its initial public offering is determined to be
effective as declared by the Securities and Exchange Commission. Unless
approved within one year after the date of the Plan's adoption by the Board
of Directors, the Plan shall not be effective for any purpose.
11.2. DURATION. The Plan shall remain in effect until all
Incentives granted under the Plan have either been satisfied by the
issuance of shares of Common Stock or the payment of cash or been
terminated under the terms of the Plan and all restrictions imposed on
shares of Common Stock in connection with their issuance under the Plan
have lapsed. No Incentives may be granted
6
<PAGE>
under the Plan after the tenth anniversary of the date the Plan is
approved by the shareholders of the Company.
11.3. NON-TRANSFERABILITY OF INCENTIVES. No stock option, unless
otherwise permitted by the Committee in the stock option agreement of the
holder, SAR, restricted stock or performance award may be transferred,
pledged or assigned by the holder thereof (except, in the event of the
holder's death, by will or the laws of descent and distribution to the
limited extent provided in the Plan or in the Incentive) and the Company
shall not be required to recognize any attempted assignment of such rights
by any participant. During a participant's lifetime, an Incentive may be
exercised only by him or by his guardian or legal representative.
11.4. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH. In the event
that a participant ceases to be an employee of the Company for any reason,
including death, any Incentives may be exercised or shall expire at such
times as may be determined by the Committee.
11.5. ADDITIONAL CONDITION. Notwithstanding anything in this Plan
to the contrary: (a) the Company may, if it shall determine it necessary or
desirable for any reason, at the time of award of any Incentive or the
issuance of any shares of Common Stock pursuant to any Incentive, require
the recipient of the Incentive, as a condition to the receipt thereof or to
the receipt of shares of Common Stock issued pursuant thereto, to deliver
to the Company a written representation of present intention to acquire the
Incentive or the shares of Common Stock issued pursuant thereto for his own
account for investment and not for distribution; and (b) if at any time the
Company further determines, in its sole discretion, that the listing,
registration or qualification (or any updating of any such document) of any
Incentive or the shares of Common Stock issuable pursuant thereto is
necessary on any securities exchange or under any federal or state
securities or blue sky law, or that the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of,
or in connection with the award of any Incentive, the issuance of shares of
Common Stock pursuant thereto, or the removal of any restrictions imposed
on such shares, such Incentive shall not be awarded or such shares of
Common Stock shall not be issued or such restrictions shall not be removed,
as the case may be, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Company.
11.6. ADJUSTMENT. In the event of any merger, consolidation or
reorganization of the Company with any other corporation or corporations,
there shall be substituted for each of the shares of Common Stock then
subject to the Plan, including shares subject to restrictions, options, or
achievement of performance share objectives, the number and kind of shares
of stock or other securities to which the holders of the shares of Common
Stock will be entitled pursuant to the transaction. In the event of any
recapitalization, stock dividend, stock split, combination of shares or
other change in the Common Stock, the number of shares of Common Stock then
subject to the Plan, including shares subject to restrictions, options or
achievements of performance shares, shall be adjusted in proportion to the
change in outstanding shares of Common Stock. In the event of any such
adjustments, the purchase price of any option, the performance objectives
of any Incentive, and the shares of Common Stock issuable pursuant to any
Incentive shall be adjusted as and to the extent appropriate, in the
discretion of the Committee, to provide participants with the same relative
rights before and after such adjustment.
11.7. INCENTIVE PLANS AND AGREEMENTS. Except in the case of stock
awards or cash awards, the terms of each Incentive shall be stated in a
plan or agreement approved by the Committee. The Committee may also
determine to enter into agreements with holders of options
7
<PAGE>
to reclassify or convert certain outstanding options, within the terms
of the Plan, as Incentive Stock Options or as non-statutory stock options
and in order to eliminate SARs with respect to all or part of such options
and any other previously issued options.
11.8. WITHHOLDING.
(a) The Company shall have the right to withhold from any
payments made under the Plan or to collect as a condition of payment,
any taxes required by law to be withheld. At any time when a
participant is required to pay to the Company an amount required to be
withheld under applicable income tax laws in connection with a
distribution of Common Stock or upon exercise of an option or SAR, the
participant may satisfy this obligation in whole or in part by
electing (the "Election") to have the Company withhold from the
distribution shares of Common Stock having a value up to the amount
required to be withheld. The value of the shares to be withheld shall
be based on the Fair Market Value of the Common Stock on the date that
the amount of tax to be withheld shall be determined ("Tax Date").
(b) Each Election must be made prior to the Tax Date. The
Committee may disapprove of any Election, may suspend or terminate the
right to make Elections, or may provide with respect to any Incentive
that the right to make Elections shall not apply to such Incentive.
An Election is irrevocable.
(c) If a participant is an officer or director of the Company
within the meaning of Section 16 of the 1934 Act, then an Election is
subject to the following additional restrictions:
(1) No Election shall be effective for a Tax Date which
occurs within six months of the grant of the award, except that
this limitation shall not apply in the event death or disability
of the participant occurs prior to the expiration of the six-month
period.
(2) The Election must be made either six months prior to
the Tax Date or must be made during a period beginning on the
third business day following the date of release for publication
of the Company's quarterly or annual summary statements of sales
and earnings and ending on the twelfth business day following
such date.
11.9. NO CONTINUED EMPLOYMENT OR RIGHT TO CORPORATE ASSETS. No
participant under the Plan shall have any right, because of his or her
participation, to continue in the employ of the Company for any period of
time or to any right to continue his or her present or any other rate of
compensation. Nothing contained in the Plan shall be construed as giving
an employee, the employee's beneficiaries or any other person any equity or
interests of any kind in the assets of the Company or creating a trust of
any kind or a fiduciary relationship of any kind between the Company and
any such person.
11.10. DEFERRAL PERMITTED. Payment of cash or distribution of any
shares of Common Stock to which a participant is entitled under any
Incentive shall be made as provided in the Incentive. Payment may be
deferred at the option of the participant if provided in the Incentive.
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11.11. AMENDMENT OF THE PLAN. The Board may amend or discontinue
the Plan at any time. However, no such amendment or discontinuance shall,
subject to adjustment under Section 11.6, (a) change or impair, without the
consent of the recipient, an Incentive previously granted, (b) increase the
maximum number of shares of Common Stock which may be issued to all
participants under the Plan, (c) change or expand the types of Incentives
that may be granted under the Plan, (d) change the class of persons
eligible to receive Incentives under the Plan, or (e) materially increase
the benefits accruing to participants under the Plan.
11.12. IMMEDIATE ACCELERATION OF INCENTIVES. Notwithstanding any
provision in this Plan or in any Incentive to the contrary, (a) the
restrictions on all shares of restricted stock award shall lapse
immediately, (b) all outstanding options and SARs will become exercisable
immediately, and (c) all performance shares shall be deemed to be met and
payment made immediately, if subsequent to the date that the Plan is
approved by the Board of Directors of the Company, any of the following
events occur unless otherwise determined by the Board of Directors and a
majority of the Continuing Directors (as defined below):
(1) any person or group of persons becomes the beneficial owner
of 30% or more of any equity security of the Company entitled to vote
for the election of directors;
(2) a majority of the members of the Board of Directors of the
Company is replaced within the period of less than two years by
directors not nominated and approved by the Board of Directors; or
(3) the shareholders of the Company approve an agreement to
merge or consolidate with or into another corporation or an agreement
to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation).
For purposes of this Section 11.12, beneficial ownership by a person or
group of persons shall be determined in accordance with Regulation 13D (or any
similar successor regulation) promulgated by the Securities and Exchange
Commission pursuant to the 1934 Act. Beneficial ownership of more than 30% of
an equity security may be established by any reasonable method, but shall be
presumed conclusively as to any person who files a Schedule 13D report with the
Securities and Exchange Commission reporting such ownership. If the
restrictions and forfeitability periods are eliminated by reason of provision
(1), the limitations of this Plan shall not become applicable again should the
person cease to own 30% or more of any equity security of the Company.
For purposes of this Section 11.12, "Continuing Directors" are directors
(a) who were in office prior to the time any of provisions (1), (2) or (3)
occurred or any person publicly announced an intention to acquire 20% or more of
any equity security of the Company, (b) directors in office for a period of more
than two years, and (c) directors nominated and approved by the Continuing
Directors.
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11.13. DEFINITION OF FAIR MARKET VALUE. For purposes of this Plan, the
"Fair Market Value" of a share of Common Stock at a specified date shall, unless
otherwise expressly provided in this Plan, be the amount which the Committee
determines in good faith to be 100% of the fair market value of such a share as
of the date in question; provided, however, that notwithstanding the foregoing,
if such shares are listed on a U.S. securities exchange or are quoted on the
NASDAQ National Market System ("NASDAQ"), then Fair Market Value shall be
determined by reference to the last sale price of a share of Common Stock on
such U.S. securities exchange or NASDAQ on the applicable date. If such U.S.
securities exchange or NASDAQ is closed for trading on such date, or if the
Common Stock does not trade on such date, then the last sale price used shall be
the one on the date the Common Stock last traded on such U.S. securities
exchange or NASDAQ.
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PAPER WAREHOUSE, INC.
DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of the Paper Warehouse, Inc. Director Stock
Option Plan (the "Plan") is to advance the interests of Paper Warehouse, Inc.
(the "Company") and its shareholders by encouraging increased share ownership
by members of the Board of Directors of the Company (the "Board") who are not
employees of the Company or any of its subsidiaries, in order to promote
long-term shareholder value through continuing ownership of the Company's
Common Stock.
2. ADMINISTRATION. The plan shall be administered by the Board. The
Board shall have all the powers vested in it by the terms of the Plan, such
powers to include authority (within the limitations described herein) to
prescribe the form of the agreement embodying awards of nonqualified stock
options made under the Plan ("Options"). The Board shall, subject to the
provisions of the Plan, grant Options under the Plan and shall have the power
to construe the Plan, to determine all questions arising thereunder and to
adopt and amend such rules and regulations for the administration of the Plan
as it may deem desirable. Any decisions of the Board in the administration
of the Plan, as described herein, shall be final and conclusive. The Board
may act only by a majority of its members in office, except that the members
thereof may authorize any one or more of their number or any other officer of
the Company to execute and deliver documents on behalf of the Board. No
member of the Board shall be liable for anything done or omitted to be done
by him or by any other member of the Board in connection with the Plan,
except for his own willful misconduct or as expressly provided by statute.
3. PARTICIPATION. Each member of the Board who is a non-employee
director (a "Non-Employee Director") as such term is defined in Rule 16b-3 of
the Securities Exchange Act of 1934, as amended, shall be eligible to receive
an Option in accordance with Paragraph 5 below.
4. AWARDS UNDER THE PLAN.
(a) Awards under the Plan shall include only Options, which are rights
to purchase common stock of the Company having a par value of $0.01 per share
(the "Common Stock"). Such Options are subject to the terms, conditions and
restrictions specified in Paragraph 5 below.
(b) There may be issued under the Plan pursuant to the exercise of
Options an aggregate of not more than 114,641 shares of Common Stock,
subject to adjustment as provided in Paragraph 6 below. If any Option is
canceled, terminates or expires unexercised, in whole or in part, any shares
of Common Stock that would otherwise have been issuable pursuant thereto will
be available for issuance under new Options.
(b) A Non-Employee Director to whom an Option is granted (and any
person succeeding to such a Non-Employee Director's rights pursuant to the
Plan) shall have no rights as a shareholder with respect to any Common Stock
issuable pursuant to any such Option until the date of the issuance of a
stock certificate to him for such shares. Except as provided in Paragraph
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6 below, no adjustment shall be made for dividends, distributions or other
rights (whether ordinary or extraordinary, and whether in cash, securities or
other property) for which the record date is prior to the date such stock
certificate is issued.
5. NONQUALIFIED STOCK OPTIONS. Each Option granted under the Plan
shall be evidenced by an agreement in such form as the Board shall prescribe
from time to time in accordance with the Plan and shall comply with the
following terms and conditions:
(a) The Option exercise price shall be the "Fair Market Value" (as
herein defined) of the Common Stock subject to such Option on the date the
Option is granted. Fair Market Value shall be the closing sales price of a
share of Common Stock on the date of grant as reported on the Nasdaq National
Market (the "Market") or, if the Market is closed on that date, on the last
preceding date on which the Market was open for trading, but in no event will
such Option exercise price be less than the par value of the Common Stock.
(b) The Option shall not be transferable by the optionee otherwise than
by will or the laws of descent and distribution, and shall be exercisable
during his lifetime only by him.
(c) Options shall not be exercisable:
(i) before the expiration of one year from the date it is
granted and after the expiration of ten years from the
date it is granted, and may be exercised during such
period as follows: twenty (20%) of the total number of
shares covered by the Option shall become exercisable
each year beginning with the first anniversary of the
date it is granted, provided, however, that the Board
of Directors can approve an accelerated vesting
schedule based upon the length of time that a
Non-Employee Director has served in such capacity prior
to the adoption of this Plan. Notwithstanding anything
to the contrary herein, an Option shall automatically
become immediately exercisable in full (i) in the
event of the death of a Non-Employee Director; (ii)
upon the removal of the Non-Employee Director from the
Board without cause; (iii) in the event the Non-Employee
Director is not re-nominated or re-elected as a Director;
(iv) in the event of a "change in control" of the Company,
as defined in any existing agreements between the Company and
its senior officers; or (v) in the event the Non-Employee
Director voluntarily resigns from the Board, if a majority of
the Board (excluding the Non-Employee Director) agrees to
accelerate the vesting of the Option and determines in good
faith that such acceleration is in the best interest of the
Company;
(d) Each Non-Employee Director who serves in such capacity at the
time of the effectiveness of this Plan shall receive an Option to purchase
10,000 shares of Common Stock. Each Non-Employee Director shall receive an
Option to purchase 10,000 shares of Common Stock upon becoming a director of
the Company.
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(ii) unless payment in full is made for the shares
of Common Stock being acquired thereunder at
the time of exercise, such payment shall be
made in United States dollars by cash or check,
or in lieu thereof, by tendering to the Company
Common Stock owned by the person exercising the
Option and having a Fair Market Value equal to
the cash exercise price applicable to such
Option, or by a combination of United States
dollars and Common Stock as aforesaid; and
(iii) unless the person exercising the Option has
been at all times during the period beginning
with the date of grant of the Option and ending
on the date of such exercise, a Non-Employee
Director of the Company, except that
(A) if such person shall cease to be such a
Non-Employee Director for reasons other than death, while
holding an Option that has not expired and has not
been fully exercised, such person may, at any time
within three years of the date he ceased to be a Non-Employee
Director (but in no event after the Option
has expired under the provisions of subparagraph
5(d)(i) above), exercise the Option with respect to
any Common Stock as to which he could have exercised
on the date he ceased to be such a Non-Employee
Director; or
(B) if any person to whom an Option has been granted
shall die holding an Option that has not expired and
has not been fully exercised, his executors,
administrators, heirs or distributees, as the case may
be, may, at any time within one year after the date of
such death (but in no event after the Option has
expired under the provisions of subparagraph 5(d)(i)
above), exercise the Option with respect to any shares
subject to the Option.
6. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in
the outstanding Common Stock of the Company by reason of any stock split,
stock dividend, split-up, split-off, spin-off, recapitalization, merger,
consolidation, rights offering, reorganization, combination or exchange of
shares, a sale by the Company of all or part of its assets, any distribution
to shareholders other than a normal cash dividend, or other extraordinary or
unusual event, the number or kind of shares that may be issued under the Plan
pursuant to subparagraph 4(b) above, and the number or kind of shares subject
to, and the Option price per share under, all outstanding Options shall be
automatically adjusted so that the proportionate interest of the participant
shall be maintained as before the occurrence of such event; such adjustment
in outstanding Options shall be made without change in the total Option
exercise price applicable to the unexercised portion of such Options and with
a corresponding adjustment in the Option exercise price per share, and such
adjustment shall be conclusive and binding for all purposes of the Plan.
7. MISCELLANEOUS PROVISIONS.
(a) Except as expressly provided for in the Plan, no Non-Employee
Director or other person shall have any claim or right to be granted an
Option under the Plan. Neither the Plan nor
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any action taken hereunder shall be construed as giving any Non-Employee
Director any right to be retained in the service of the Company.
(b) A participant's rights and interest under the Plan may not be
assigned or transferred, hypothecated or encumbered in whole or in part
either directly or by operation of law or otherwise (except in the event of a
participant's death, by will or the laws of descent and distribution),
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner, and no such right or
interest of any participant in the Plan shall be subject to any obligation or
liability of such participant.
(c) Common Stock shall not be issued hereunder unless counsel for
the Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign securities, securities exchange
and other applicable laws and requirements.
(d) It shall be a condition to the obligation of the Company to
issue Common Stock upon exercise of an Option, that the participant (or any
beneficiary or person entitled to act under subparagraph 5(d)(iii)(B) above)
pay to the Company, upon its demand, such amount as may be requested by the
Company for the purpose of satisfying any liability to withhold federal,
state, local or foreign income or other taxes. If the amount requested is
not paid, the Company may refuse to issue such Common Stock.
(e) The expenses of the Plan shall be borne by the Company.
(f) By accepting any Option or other benefit under the Plan, each
participant and each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and ratification of, and
consent to, any action taken under the Plan by the Company or the Board.
(g) The appropriate officers of the Company shall cause to be filed
any reports, returns or other information regarding Options hereunder or any
Common Stock issued pursuant hereto as may be required by Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, or any other applicable
statute, rule or regulation.
8. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any
time and from time to time by the Board as the Board shall deem advisable;
provided, however, that no amendment shall become effective without
shareholder approval if such shareholder approval is required by law, rule or
regulation, and in no event shall the Plan be amended more than once every
six months, other than to comport with changes in the Internal Revenue Code
of 1986, as amended, the Employee Retirement Income Security Act or the rules
thereunder. No amendment of the Plan shall materially and adversely affect
any right of any participant with respect to any Option theretofore granted
without such participant's written consent.
9. TERMINATION . This Plan shall terminate upon the earlier of the
following dates or events to occur upon the adoption of a resolution of the
Board terminating the Plan or ten years from the date the Plan is initially
approved and adopted by the shareholders of the Company. No
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termination of the Plan shall materially and adversely affect any of the
rights or obligations of any person, without his consent, under any Option
theretofore granted under the Plan.
10. EFFECTIVE DATE OF PLAN. The Plan will become effective on the
date that the Company's Registration Statement in its initial public offering
is determined to be effective as declared by the Securities and Exchange
Commission.
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Exhibit 10.7
CORPORATION TAX ALLOCATION
AND INDEMNIFICATION AGREEMENT
THIS CORPORATION TAX ALLOCATION AND INDEMNIFICATION AGREEMENT (the
"Agreement") is made and entered into this 26th day of September, 1997 between
PAPER WAREHOUSE, INC., a Minnesota corporation (the "Company"), and YALE T.
DOLGINOW and BRENT D. SCHLOSSER (collectively, the "Stockholders") (the Company
and the Stockholders are hereinafter referred to individually as a "party" and
collectively as the "parties").
W I T N E S S E T H
WHEREAS, the Company contemplates an initial public offering of its Common
Stock in order to raise additional equity capital for the purpose of expanding
its stores, reducing indebtedness of the Company, making payment of an S
Corporation distribution and other corporate purposes (the "Public Offering");
WHEREAS, the Company distributed on September 18, 1997 a dividend to the
Stockholders in an aggregate amount equal to the Company's estimate of its
accumulated taxable income from the time of its S Corporation election through
the first six months of fiscal 1997 to the extent such taxable income had not
previously been distributed (the "First Dividend");
WHEREAS, upon completion of such Public Offering, the Company plans to
distribute a second dividend (the "Second Dividend") (collectively with the
First Dividend, the "Dividend") to the Stockholders in an amount equal to the
balance of any accumulated taxable income from the date of the First Dividend
through the close of the Short S Year (as hereinafter defined);
WHEREAS, the Company and the Stockholders have entered into this Agreement
as a condition to the foregoing distribution and the contemplated Public
Offering;
WHEREAS, from its inception through January 31, 1993, the Company was taxed
as a C corporation (as defined in the Code), and the Company became an S
corporation (as defined in section 1361 of the Code) on February 1, 1993 and
will continue to be an S corporation until the Termination Date (as hereinafter
defined), after which it will again be taxed as a C corporation;
WHEREAS, the Stockholders currently are the only stockholders of the
Company, and will continue to be so until immediately prior to the effectiveness
of the Public Offering; and
WHEREAS, the Company and the Stockholders wish to provide for a tax
allocation and indemnification agreement in connection with the Company's
termination as an S corporation.
NOW, THEREFORE, the parties agree as follows:
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ARTICLE 1
DEFINITIONS
1.1 Definitions. The following terms, as used herein, have the following
meanings:
"C Short Year" means that portion of the S Termination Year of the Company
defined in Section 1362(e)(1)(B) of the Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"S Corporation Period" means the period commencing February 1, 1993 and ending
on the Termination Date.
"S Corporation Taxable Income" means the taxable income of the Company from all
sources during the S Corporation Period.
"S Short Year" means that portion of the S Termination Year of the Company
defined in Section 1362(e)(1)(A) of the Code.
"S Termination Year" shall have the meaning set forth in Section 1362(e)(4) of
the Code.
"Termination Date" means the date on which the S corporation status of the
Company is terminated pursuant to section 1362(d)(l) of the Code.
ARTICLE 2
ELECTION TO TERMINATE; S TERMINATION YEAR
2.1 TERMINATION OF S STATUS. The parties intend to terminate the
Company's status as an S corporation by electing to do so under Code Section
1362(d)(l).
2.2 EFFECTIVE DATE. Pursuant to Section 1362(d)(1) of the Code, the
election to terminate the Company's status as an S corporation shall be
effective on the date immediately preceding the date of the Public Offering
which shall be the "Termination Date."
2.3 S TERMINATION YEAR. The Company's fiscal year in which the S
corporation status of the Company is terminated will be an S Termination Year
for federal tax purposes.
2.4 S SHORT YEAR. Pursuant to Section 1362(e)(1) of the Code, the S
Termination Year of the Company shall be divided into two short taxable years:
an S Short Year and a C Short Year. The S Short Year of the Company shall be
that portion of the Company's S Termination Year beginning on the first day of
such fiscal year and ending on the day immediately preceding the Termination
Date. For federal income tax purposes, the Company will be treated as an S
corporation during its S Short Year.
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2.5 C SHORT YEAR. Pursuant to Section 1362(e)(1)(B) of the Code, that
portion of the S Termination Year of the Company beginning on the Termination
Date and ending on the last day of the 1997 fiscal year, shall be the C Short
Year of the Company. For federal income tax purposes, the Company will be taxed
as a C corporation during its C Short Year.
ARTICLE 3
ALLOCATION OF INCOME
3.1 ALLOCATION ELECTION. The Company intends to allocate tax items to its
S Short Year and C Short Year pursuant to the method contained in Section
1362(e) (3) of the Code, but may allocate pursuant to any other permitted method
under Section 1362(e) of the Code.
ARTICLE 4
TAXES
4.1 LIABILITY FOR TAXES INCURRED DURING S CORPORATION YEARS INCLUDING S
SHORT YEAR. The Stockholders, severally and not jointly, covenant and agree
that they shall pay any and all taxes attributable to their allocable shares of
taxable income of the Company they are required to pay for all taxable periods
(or that portion of any period including the S Short Year) during which the
Company was an S corporation.
4.2 LIABILITY FOR TAXES INCURRED DURING C CORPORATION YEARS INCLUDING C
SHORT YEARS. The Company covenants and agrees that the Company shall pay any
and all taxes attributable to taxable income of the Company required to be paid
by the Company for the C Short Year and all taxable periods thereafter during
which the Company is a C corporation.
4.3 COMPANY'S INDEMNIFICATION FOR TAX LIABILITIES. The Company hereby
agrees to indemnify, defend and hold harmless each Stockholder from and against
any and all losses, liabilities, obligations, damages, impositions, assessments,
fines, deficiencies, costs and expenses, including without limitation,
attorneys' and accountants' fees and expenses, with respect to all federal and
state income taxes of any kind whatsoever (computed at the highest federal
and/or state income tax rate in effect for the year of adjustment) including
interest, penalties and additions to taxes, imposed upon a Stockholder as a
result of any final determination of an adjustment (by reason of an amended
return, claim for refund, audit or otherwise) including any increase in items of
income or gain or any decrease in items of loss, deduction or credit, reported
to such Stockholder by the Company with respect to the Company's S Corporation
Period, but such adjustment or change shall not include (i) an adjustment or
change which results in an increase in an item of income or gain reported to a
Stockholder by the Company with respect to one or more of the taxable years
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falling within the Company's S Corporation Period and a corresponding decrease
in an item of income or gain with respect to one or more of the other taxable
years falling within the Company's S Corporation Period; or (ii) an adjustment
or change which results in a decrease in an item of loss, deduction or credit
reported to a Stockholder by the Company with respect to one or more of the
taxable years falling within the Company's S Corporation Period and a
corresponding increase in an item of loss, deduction or credit with respect one
or more of the other taxable years falling within the Company's S Corporation
Period. Any such payment to a Stockholder pursuant to this Section 4.3 shall be
made on a "grossed-up" basis, so that in the event any amount received hereunder
by a Stockholder constitutes taxable income to such Stockholder, the amount of
such payment hereunder shall be computed so that the Stockholder receives full
indemnification hereunder on an after-tax basis.
The Company acknowledges further that it shall be solely responsible for any
federal, state and local taxes (including interest and penalties, if any)
relating to the Built-In Gains tax imposed by Section 1374 of the Code and the
tax on Excess Passive Investment Income imposed by Section 1375 of the Code.
4.4 STOCKHOLDERS' INDEMNIFICATION FOR TAX LIABILITIES. The Stockholders,
severally (according to the percentage of the outstanding shares of the
Company's Common Stock owned by each Stockholder for the years of adjustment)
and not jointly, hereby agree to indemnify, defend and hold harmless the Company
from and against all liability with respect to all federal and state income
taxes of any kind whatsoever (computed at the highest federal and/or state
income tax rate in effect for the year of adjustment) including interest,
penalties and additions to taxes resulting from any final determination of an
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to the Stockholders' taxable income resulting in a decrease in the
Stockholders' S corporation taxable income and a corresponding increase in the
federal or state, as the case may be, income tax liability payable by the
Company. Notwithstanding the foregoing, the amount of the payments made by a
Stockholder pursuant to this Section 4.4 shall not exceed an amount, if any, by
which (i) the amount of the reduction in the federal and state income tax
liability and interest thereon of the Stockholder which results from the
shifting of S corporation taxable income to a C corporation taxable year of the
Company, exceeds (ii) all reasonable costs incurred by the Stockholder
reasonably attributable to securing such reduction in tax liability.
4.5 PAYMENTS. The Stockholders or the Company, as the case may be, shall
make any payment required under this Agreement within thirty (30) calendar days
after receipt of notice from the other party that a payment is due by such party
to the appropriate taxing authority.
4.6 SUBROGATION. The party (or parties) providing the indemnity under
either Section 4.3 or Section 4.4 (defined solely for purposes of this
Section 4.6 as the "Indemnifying Party") shall be subrogated to all rights of
recovery (the "Subrogation Claims") that the party (or parties) being
indemnified under Section 4.3 or Section 4.4, respectively (defined solely
for purposes of this Section 4.6 as the "Indemnified Party"), may have
against any person or organization in respect of the tax liabilities for
which the Indemnifying Party is providing indemnity. Such right of
subrogation shall not exceed the amount paid by the Indemnifying Party to the
Indemnified Party. The Indemnified Party shall execute and deliver
instruments and papers and do whatever else is reasonably necessary to secure
such rights of subrogation for the Indemnifying Party. The
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Indemnified Party shall provide all reasonable assistance as requested by the
Indemnifying Party in order for the Indemnifying Party to pursue the
Subrogation Claims. The Indemnified Party shall do nothing after any
Subrogation Claim arises to prejudice the rights of the Indemnifying Party.
4.7 PAYMENTS AFTER POST-TERMINATION TRANSITION PERIOD. If any Stockholder
is required to include any payment received pursuant to this Agreement after the
expiration of the "post-termination transition period" (as defined in Section
1377(b) of the Code) in computing his gross income in a tax return, other than
any payment made under Section 4.3 where the Stockholder failed to give the
Company timely notice to allow the Company to make such payment prior to the
expiration of the "post-termination transition period", then (i) the Stockholder
shall notify the Company of such inclusion in income, and (ii) in addition to
all other payments made under this Agreement, the Company shall also pay to the
Stockholder an amount which, when added to the payment so included, will place
the recipient Stockholder in the same net after-tax position that he would have
been in had the payment not been so included.
4.8 NOTICES OF AUDITS AND ADJUSTMENTS.
(a) If any Stockholder receives notice of an intention by a taxing authority to
audit any return of the Stockholder that includes any item of income, gain,
deduction, loss or credit reported by the Company with respect to the Company's
S Corporation Period, such Stockholder shall inform the Company, in writing, of
the audit promptly after receipt of such notice If any Stockholder receives
notice from a taxing authority of any proposed adjustment for which the Company
may be required to indemnify the Stockholder hereunder (a "Proposed
Adjustment"), the Stockholder shall give notice to the Company of the Proposed
Adjustment promptly after receipt of such notice from a taxing authority. Upon
receipt of such notice from a Stockholder, the Company may, by in turn giving
prompt written notice to each of the Stockholders, request that the Stockholders
contest such Proposed Adjustment. If the Company shall request that any
Proposed Adjustment be contested, then the Stockholders shall, at the Company's
expense, contest the Proposed Adjustment or permit the Company and its
representatives, at the Company's request and expense, to contest the Proposed
Adjustment (including pursuing all administrative and judicial appeals and
processes). The Company shall pay to the Stockholders on demand all costs and
expenses (including attorneys' and accountants' fees) that the Stockholders may
incur in contesting such Proposed Adjustments. No Stockholder shall make,
accept or enter into a settlement or other compromise with respect to any taxes
indemnified hereunder, or forego or terminate any proceeding undertaken
hereunder without the consent of the Company, which consent shall not be
unreasonably withheld.
(b) If the Company receives notice of an intention by a taxing authority to
audit any return of the Company that includes any item of income, gain,
deductions, loss or credit reported by the Company with respect to the period
during which the Company was a S corporation, the Company shall inform the
Stockholders, in writing, of the audit promptly after receipt of such notice. If
the Company receives notice from a taxing authority of any proposed adjustment
for
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which any of the Stockholders may be required to indemnify the Company
hereunder (a "Company Proposed Adjustment"), the Company shall give notice to
each of the Stockholders of the Company Proposed Adjustment promptly after
receipt of such notice from a taxing authority. Upon receipt of such notice
from the Company, any of the Stockholders may, by in turn giving prompt
written notice to the Company, request that the Company contest such Company
Proposed Adjustment. If any of the Stockholders shall request that any
Company Proposed Adjustment be contested, then the Company shall contest the
Company Proposed Adjustment (including pursuing all administrative and
judicial appeals and processes) at the Company's expense and shall permit the
Stockholder to participate in such proceeding. The Company shall not make,
accept or enter into a settlement or other compromise with respect to any
taxes indemnified hereunder, or forego or terminate any proceeding undertaken
hereunder without the consent of the Stockholders, which consent shall not be
unreasonably withheld.
ARTICLE 5
DISTRIBUTIONS
5.1 DISTRIBUTION OF ACCUMULATED ADJUSTMENTS ACCOUNT. Prior to the
consummation of the Public Offering, the Company's board of directors shall
declare the Second Dividend payable to the Stockholders. The Second Dividend
will be equal to the Company's estimated accumulated adjustments account (as the
term is defined in Section 1368 of the Code) (the "ALA") as of the Termination
Date. The Company agrees to pay the Second Dividend to the Stockholders
promptly following the Public Offering and that: (a) if the Second Dividend
exceeds the ALA as finally determined by the Company's accountants in the course
of preparing the Company's tax returns for the 1997 year (the "Final ALA"). such
excess shall be paid by the Stockholders to the Company, and (b) if the Final
ALA exceeds the Second Dividend, such excess shall be paid by the Company to the
Stockholders, in either case, within thirty (30) days of the date of such
determination and together with interest thereon, at the Applicable Federal Rate
(as defined in Section 1274 of the Code) in effect as of the date of such
payment, for the period from the date the Second Dividend was paid to the date
of such payment. The Final ALA shall be determined by the Company's tax return
for the Company's S Short Year in a manner consistent with prior practice.
ARTICLE 6
MISCELLANEOUS
6.1 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which counterparts
collectively shall constitute one instrument representing the Agreement between
the parties hereto.
6.2 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto
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or their respective successors and assigns, any rights or remedies under or
by reason of this Agreement.
6.3 COST OF ENFORCEMENT; INTEREST. If, within thirty (30) days after
demand to comply with the obligations of one of the parties to this Agreement
served in writing on the other, compliance or reasonable assurance of compliance
is not forthcoming, and the other party engages the services of an attorney to
enforce rights under this Agreement, the prevailing party in any action shall be
entitled to recover all reasonable costs and expenses (including reasonable fees
of attorneys and legal assistants, whenever incurred, whether before trial or
appellate proceeding, at trial, on appeal or otherwise).
6.4 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with the laws of the State of Minnesota, other than those
provisions relating to the conflict of laws of different jurisdictions if the
effect of the application of such provisions would be to cause the laws of a
jurisdiction other than Minnesota to apply hereto.
6.5 NOTICES. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed to have been duly
given when received, if personally delivered; when transmitted, if transmitted
by electronic fax, telecopy or similar electronic transmission method; the day
after it is sent, if sent by recognized expedited delivery service; and five
days after it is sent, if mailed, first class mail, postage prepaid each case
notice shall be sent to the parties at 7630 Excelsior Boulevard, St. Louis Park,
Minnesota 55426, or to such other address as any party shall have specified by
notice in writing to the other parties.
6.6 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified
or supplemented only by a written agreement executed by all of the parties
hereto.
6.7 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns, but neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties, nor is
this Agreement intended to confer upon any other person except the parties any
rights or remedies hereunder.
6.8 INTERPRETATION. The title, article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
6.9 SEVERABILITY. In the event that any one or more of the provisions of
this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality, or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable
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provisions with an enforceable provision approximating, to the extent
possible, the original intent of the parties.
6.10 ENTIRE AGREEMENT This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
PAPER WAREHOUSE, INC.
By /S/ Cheryl W. Newell
---------------------------------
Name: Cheryl W. Newell
Title: Chief Financial Officer
/S/ Yale T. Dolginow
---------------------------------
Yale T. Dolginow
/S/ Brent D. Schlosser
---------------------------------
Brent D. Schlosser
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Exhibit 10.10
COMBINATION MORTGAGE
AND
SECURITY AGREEMENT
AND
FIXTURE FINANCING STATEMENT
THIS INDENTURE (hereinafter referred to as "Mortgage"), is made this 9th
day of June, 1995, by and between PAPER WAREHOUSE, INC., a Minnesota
corporation, whose post office address is 7634 Golden Triangle Drive, Tech 8
Center, Eden Prairie, Minnesota 55344 and whose federal taxpayer identification
number is 41-1612534 ("Mortgagor"), and RICHFIELD BANK & TRUST CO., a Minnesota
banking Corporation, whose post office address is 6625 Lyndale Avenue South,
Richfield, Minnesota 55423 ("Mortgagee").
THIS MORTGAGE SECURES INDEBTEDNESS INCURRED FOR THE CONSTRUCTION OF
IMPROVEMENTS ON THE REAL PROPERTY ENCUMBERED HEREBY.
To secure the payment to the Mortgagee, its successors and assigns, of the
sum of NINE HUNDRED FORTY-FIVE THOUSAND AND NO/100 DOLLARS ($945,000.00)
according to the terms of that certain Secured Promissory Note of even date
herewith, in the original principal sum of $945,000.00, issued by Mortgagor to
the order of Mortgagee ("Note"), together with all extensions, amendments and
renewals thereof, plus interest thereon at the rate stated in the Note, the
balance of the Note being due and payable on December 1, 2015, to secure the
payment to the Mortgagee, its successors and assigns, at the times demanded and
with interest thereon at the same rates specified in the Note of all sums
advanced in protecting the lien of this Mortgage, in payment of taxes on the
Premises (as hereinafter defined), in payment of insurance premiums covering
improvements thereon, in payment of principal and interest on prior liens, in
payment of expenses and attorneys' fees herein provided for and all sums
advanced for any other purpose authorized herein (the amounts actually advanced
by Mortgagee to Mortgagor under the Note and all such sums, together with
interest thereon, being collectively referred to herein as the "Indebtedness
Secured Hereby"), and to secure the performance of all of the covenants and
agreements contained in the Note, any extensions, amendments and renewals
thereof, and this Mortgage, and in consideration of the sum of $1.00 paid by the
Mortgagee to the Mortgagor and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Mortgagor does
hereby MORTGAGE, GRANT, BARGAIN, SELL AND CONVEY unto the Mortgagee, its
successors and assigns, forever, and GRANTS A SECURITY INTEREST to the
Mortgagee,
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its successors and assigns, in the following properties (all of the following
being hereafter collectively referred to as the "Premises"):
A. REAL PROPERTY
All the tracts or parcels of real property lying and being in the County of
Hennepin, State of Minnesota, all as more fully described in EXHIBIT A attached
hereto and made a part hereof, together with all the estates and rights in and
to the real property and in and to lands lying in streets, alleys and roads
adjoining the real property and all buildings, structures, improvements,
fixtures, annexations, access rights, easements, rights of way or use,
servitudes, licenses, tenements, hereditaments, appurtenances, minerals, mineral
rights, water and water rights, now or hereafter belonging or pertaining to the
real property; and
B. PERSONAL PROPERTY
All buildings, equipment, fixtures, improvements, building supplies and
materials and personal property now or hereafter attached to or necessary to the
use of the improvements on the premises including, but without being limited to
all machinery, fittings, fixtures, apparatus, equipment or articles used to
supply heating, gas, electricity, air conditioning, water, light, waste
disposal, power, refrigeration, ventilation, and fire and sprinkler protection,
as well as all elevators, escalators, overhead cranes, hoists and assists, and
the like, and all draperies, maintenance and repair equipment, floor coverings,
screens, storm windows, blinds, awnings, shrubbery and plants, as well as
renewals, replacements, proceeds, additions, accessories, increases, parts,
fittings and substitutes thereof, together with all interest of the Mortgagor in
any such items hereafter acquired, and all products and proceeds thereof,
including without limitation all accounts, instruments, chattel paper, other
rights to payment, money, insurance proceeds and general intangibles related to
the foregoing property, and all refunds of insurance premiums due or to become
due under all insurance policies covering the foregoing property, all of which
personal property mentioned herein shall be deemed fixtures and accessory to the
freehold and a part of the realty and not severable in whole or in part without
material injury to the Premises, but excluding therefrom the trade fixtures,
inventory and removable personal property of any tenant or license of the
Premises; and
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C. RENTS LEASES AND PROFITS
All rents, leases and profits now due or which may hereafter become due
under or by virtue of any lease, license, sublease, or agreement, whether
written or verbal, for the use or occupancy of the Premises or any part thereof,
whether before or after foreclosure or during any redemption period after
Sheriff's foreclosure sale (and the Mortgagee hereby shall have the power
irrevocably to manage, control and lease the Premises and collect such rents,
leases and profits); and
D. JUDGMENTS AND AWARDS
Any and all awards or compensation made by any governmental or other lawful
authorities for the taking or damaging by eminent domain of the whole or any
part of the Premises, including any awards for a temporary taking, change of
grade of streets or taking of access.
COVENANTS AND AGREEMENTS
The Mortgagor makes and includes in this Mortgage the Statutory Covenants
and other provisions set forth in Minnesota Statutes Section 507.15 or in any
future Minnesota Statute providing for a statutory form of real estate mortgage,
and the Mortgagor makes the following additional warranties, covenants and
agreements with the Mortgagee:
1. The Mortgagor has good title to the Premises in fee simple, free and clear
of all liens and encumbrances, except as set forth in EXHIBIT B attached
hereto and made a part hereof; the Mortgagor has good right to mortgage,
sell and convey the Premises; the Mortgagor will forever warrant and defend
the Premises against the claims of all persons, and all improvements on the
Premises; and the Mortgagor's use of the Premises now complies, and will
continue to comply, with all applicable building restrictions and codes and
all zoning and other ordinances.
2. The Mortgagor will duly and punctually pay each and every installment of
principal and interest on the Note and all other Indebtedness Secured
Hereby, as and when the same shall become due, and shall duly and
punctually perform and observe all of the covenants, agreements and
provisions contained herein, in the Note, and in any other instrument given
as security for the payment of the Note. No payment or collection of any
of the Indebtedness Secured Hereby shall reduce the amount secured by this
Mortgage.
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3. The Mortgagor will keep and maintain the Premises in good condition, repair
and operating condition free from any waste or misuse, and will comply with
all requirements of law, municipal ordinances and regulations, restrictions
and covenants affecting the Premises and their use, and will promptly
repair or restore any buildings, improvements or structures now or
hereafter on the Premises which may become damaged or destroyed to their
condition prior to any such damage or destruction. The Mortgagor will
comply with the requirements of the Americans with Disabilities Act ("ADA")
and the ADA Accessibility Guidelines when making any alterations to the
Premises. The Mortgagor will not, without the prior written consent of the
Mortgagee, expand any improvements on the Premises, erect any new
improvements or make any material alterations in any improvements which
will alter the basic structure, adversely affect the market value or change
the existing architectural character of the Premises, and the Mortgagor
will complete within a reasonable time any buildings now or at any time in
the process of erection on the Premises. The Mortgagor will not acquiesce
in any rezoning classification, modification or restriction affecting the
Premises. The Mortgagor will not vacate or abandon the Premises.
4. The Mortgagor will pay all operating costs and expenses of the Premises;
keep the Premises free from mechanics', materialmens' and other liens not
expressly subordinated to the lien of this Mortgage, keep the Premises free
from levy, execution or attachment, and pay when due all indebtedness which
may be secured by mortgage, lien or charge on the Premises superior to or
equal to the lien of this Mortgage, and upon request exhibit to the
Mortgagee satisfactory evidence of such payment and discharge.
5. The Mortgagor shall pay when due and before any penalty accrues, all taxes,
assessments, water charges, sewer charges, and other fees, taxes, charges
and assessments of every kind and nature whatsoever assessed or charged
against or constituting a lien on the Premises or any interest therein, or
the Indebtedness Secured Hereby ("Impositions"), and will upon demand
furnish to the Mortgagee proof of the payment of any such Impositions. In
the event of a court decree or an enactment after the date hereof by any
legislative authority of any law imposing upon a mortgagee the payment of
the whole or any part of the Impositions herein required to be paid by the
Mortgagor, or changing in any way the laws relating to the taxation of
mortgages or debts secured by mortgages or a mortgagee's interest in
mortgaged premises, so as to impose
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such Impositions on the Mortgagee or on the interest of the Mortgagee in
the Premises, then, in any such event, the Mortgagor shall bear and pay
the full amount of such Impositions, provided that if for any reason
payment by the Mortgagor of any such Impositions would be unlawful, or
if the payment thereof would constitute usury or render the Indebtedness
Secured Hereby wholly or partially usurious, the Mortgagee, at its
option, may declare the whole sum Secured by this Mortgage with interest
thereon to be immediately due and payable, without prepayment premium,
or the Mortgagee, at its option, may pay that amount or portion of such
Impositions as renders the Indebtedness Secured Hereby unlawful or
usurious, in which event the Mortgagor shall concurrently therewith pay
the remaining lawful and non-usurious portion or balance of said
Impositions. The Mortgagor shall not be required to pay, discharge or
remove any Impositions, so long as the Mortgagor shall in good-faith
contest the same or the validity thereof by appropriate legal
proceedings which shall operate to prevent the collection of the
Impositions so contested and the sale of the Premises, or any part
thereof to satisfy the same, provided that the Mortgagor shall, prior to
the date such Impositions are due and payable, have given such
reasonable security as may be demanded by the Mortgagee to insure such
payments and prevent any sale or forfeiture or the Premises by reason of
such non-payment. Any such contest shall be prosecuted with due
diligence and the Mortgagor shall promptly after final determination
thereof pay the amount of any such Impositions so determined, together
with all interest and penalties which may be payable in connection
therewith. Notwithstanding the provisions of this Section, the Mortgagor
shall (and if the Mortgagor shall fail to do so, the Mortgagee may, but
shall not be required to) pay any such Impositions notwithstanding such
contest if, in the reasonable opinion of the Mortgagee, the Premises
shall be in jeopardy or in danger of being forfeited or foreclosed.
6. The Mortgagor will promptly notify the Mortgagee of and appear in and
defend any suit, action or proceeding that affects the value of the
Premises, the Indebtedness Secured Hereby or the rights or interest of the
Mortgagee hereunder. The Mortgagee may elect to appear in or defend any
such action or proceeding, and the Mortgagor agrees to indemnify and
reimburse the Mortgagee from any and all loss, damage, expense or cost
arising out of or incurred in connection with any such suit, action, or
proceeding, including costs of evidence of title and reasonable attorney's
fees.
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7. The Mortgagor warrants that no toxic or hazardous substance, waste or
constituent, as defined in any local, state or federal law governing
liability for any such substance, waste or constituent is, or has been in
the past, located on or released from the Premises in violation of such
applicable laws. The Mortgagor shall not, nor shall the Mortgagor permit
others to, use the Premises at any time to generate, transport, store,
process, treat, or dispose of a toxic or hazardous substance, waste or
constituent in violation of any such applicable laws and regulations. The
Mortgagor shall not take, fail to take or permit any action which may
result in a release of any toxic or hazardous substance, waste or
constituent from the Premises. The Mortgagor warrants that the Mortgagor
has no actual knowledge of any existing or pending claim to which any
local, state or federal law governing liability for any such substance,
waste or constituent may apply with respect to the Premises. Within ten
(10) days after learning of the occurrence of (a) any event relating to any
toxic or hazardous substance, waste or constituent with respect to the
Premises, or (b) the commencement of any litigation, arbitration or other
Proceeding that affects the Premises, or (a) notice from any government or
governmental agency that the Premises or any operations thereon are not in
compliance with any local, state or federal law or notice that the
Mortgagor or all or part of the Premises is subject to any investigations
relating to any toxic or hazardous substance, waste or constituent, the
Mortgagor shall give the Mortgagee oral and written notice thereof,
describing the same and the steps that will be taken by the Mortgagor with
respect thereto.
8. The Mortgagor will, upon reasonable request by the Mortgagee, execute and
deliver such further instruments, financing statements under the Uniform
Commercial Code and assurances and do such further acts as may be necessary
or proper to carry out more effectively the purposes of this Mortgage and
without limiting the foregoing, to make subject to the lien hereof any
property agreed to be subjected hereto or covered by the granting clause
hereof, or intended so to be. The Mortgagor will pay any recording fees,
filing fees, stamp taxes and other charges arising out of or incident to
the filing or recording of this Mortgage, such further assurances and
instruments and the issuance and delivery of the Note.
9. Mortgagor shall deliver to Mortgagee as soon as available, and in any event
within 90 days after the end of each fiscal year of the Mortgagor, a copy
of the annual audit report of the Mortgagor together with the unqualified
opinion of the
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independent certified public accountants selected by the
Mortgagor and reasonably acceptable to Mortgagee, which report shall
include the balance sheet of the Mortgagor as of the end of such fiscal
year, and the related statements of income, retained earnings and cash
flows of the Mortgagor for such fiscal year, including all supporting
schedules and notes, all in reasonable detail, prepared in accordance with
generally accepted accounting principles applied on a basis consistent with
the accounting practices applied in the annual financial statements
Previously furnished by Mortgagor to Mortgagee. In the event that the
Mortgagor fails to furnish any such statements, the Mortgagee may cause an
audit to be made of the respective books and records at the sole cost and
expense of the Mortgagor. The Mortgagee also shall have the right to
examine at their place of safe keeping, at reasonable times, all books,
accounts and records relating to the operation of the Premises.
10. In the event the Mortgagor sells, leases, conveys, transfers, further
mortgages or encumbers or disposes of the Premises, or any part thereof, or
any interest therein, or agrees so to do, without the written consent of
the Mortgagee being first obtained, then at the sole option of the
Mortgagee, the Mortgagee may declare the entire Indebtedness Secured Hereby
due and payable in full and call for payment of the same in full at once,
without notice to the Mortgagor Consent as to any one transaction shall not
be deemed to be a waiver of the right to require consent to future or
successive transactions.
11. The Mortgagor shall obtain and keep in full force and effect during the
term of this Mortgage at its sole cost and expense, the following insurance
coverages:
a. "all risk" insurance against loss by fire, lightning and risk
customarily covered by standard extended coverage endorsement,
including the cost of debris removal, together with a vandalism and
malicious mischief endorsement, all in the amounts of not less than
the full replacement cost of the improvements on the Premises, without
deduction for depreciation; and
b. if steam boilers or similar equipment for the generation of steam are
located in, or about the Premises, insurance against loss or damage by
explosion, rupture or bursting of such equipment and appurtenances
thereto, without a co- insurance clause, in an amount satisfactory to
Mortgagee; and
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c. flood insurance in the maximum obtainable amount unless evidence is
provided that the Premises are not located within a flood plain as
defined by the Federal Insurance Administration; and
d. business interruption insurance covering risk of loss due to the
occurrence of any hazards insured against under the required "all
risk" insurance in such amount as is acceptable to Mortgagee.
All insurance policies shall be written on forms and with insurance
companies satisfactory to the Mortgagee, shall name the Mortgagee as a loss
payee and an additional insured as its interest may appear, shall provide
for at least thirty (30) business days' prior written notice to the
Mortgagee of any cancellation or material modification of such policies,
shall be in amounts sufficient to prevent the Mortgagor from becoming a
co-insurer of any loss thereunder, and shall bear a satisfactory mortgagee
clause in favor of the Mortgagee, with loss proceeds under any such
policies to be made payable to the Mortgagee.
The Mortgagor shall also obtain and keep in full force and effect during
the term of this Mortgage commercial general liability insurance covering
the legal liability of the Mortgagor against claims for bodily injury,
death or property damage occurring on, in or about the Premises in such
amounts and with such limits as the Mortgagee may reasonably require.
The Mortgagor shall, within thirty (30) days prior to the expiration of any
such policy, deliver other original policies or certificates of the insurer
evidencing the renewal of such insurance together with evidence of the
payment of current premiums therefor. In the event of a foreclosure of
this Mortgage or any acquisition of the Premises by the Mortgagee, all such
policies and any proceeds payable therefrom, whether payable before or
after a foreclosure sale, or during the period of redemption, if any, shall
become the absolute property of the Mortgagee to be utilized at its
discretion. In the event of foreclosure or the failure to obtain and keep
any required insurance, the Mortgagor empowers the Mortgagee to effect
insurance upon the Premises at the Mortgagor's expense and for the benefit
of the Mortgagee in the amounts and types aforesaid for a period of time
covering the time of redemption from foreclosure sale, and if necessary
therefore, to cancel any or all existing insurance policies. The Mortgagor
agrees to furnish the Mortgagee with copies of all
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inspection reports and insurance recommendations received by the
Mortgagor from any insurer.
12. This Mortgage shall constitute a security agreement as defined in the
uniform Commercial Code ("Code"), and SHALL BE EFFECTIVE AS A FINANCING
STATEMENT FILED AS A FIXTURE FILING which is to be filed in the real estate
records of the County where the Premises are situate. The name of the
record owner of said real estate is the Mortgagor set forth in page one to
this Mortgage. Information concerning the security interest created by
this instrument may be obtained from the Mortgagee, as secured party, at
its address as set forth in page one of this Mortgage. The name and
address of the Mortgagor, as debtor, and the name and address of the
Mortgagee, as Secured party, are as set forth in page one to this Mortgage.
This document covers goods which are, or are to become, fixtures.
13. The Mortgagor will give the Mortgagee prompt notice of any damage to or
destruction of the Premises and in case of loss covered by policies of
insurance the Mortgagee (whether before or after foreclosure sale) is
hereby authorized at its option and without the consent of the Mortgagor to
settle and adjust any claim arising out of such policies and collect and
receipt for the proceeds payable therefrom, provided, that the Mortgagor
may itself adjust and collect for any losses arising out of a single
occurrence aggregating not in excess of $75,000.00. Any expense incurred
by the Mortgagee in the adjustment and collection of insurance proceeds
(including the cost of any independent appraisal of the loss or damage on
behalf of the Mortgagee) shall be reimbursed to the Mortgagee first out of
any proceeds. The proceeds or any part thereof shall be applied to
reduction of the Indebtedness Secured Hereby then most remotely to be paid,
whether due or not, without the application of any prepayment premium, or
to the restoration or repair of the Premises, the choice of application to
be solely at the discretion of the Mortgagee. Notwithstanding the
foregoing, the Mortgagor shall have the right to use the insurance proceeds
for the restoration or repair of the Premises, provided that all of the
following conditions precedent are, in the sole opinion of Mortgagee, then
satisfied: (i) the insurance proceeds from such loss do not exceed
$250,000.00; (ii) no Event of Default exists hereunder at the time the
insurance proceeds are received; (iii) the value of the Premises shall be
preserved after Mortgagor's restoration; (iv) the amount of the insurance
proceeds are adequate to complete the repair and restoration of the
Premises, or Mortgagor shall contribute such additional funds as are
necessary to fully restore and repair the
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Premises; (v) the insurance proceeds shall be distributed to the title
insurance company insuring this Mortgage, to ensure Mortgagee's
continuing lien priority; (vi) Mortgagee shall approve all plans and
specifications for the restoration of the Premises; and (vii) Mortgagor
shall pay all of Mortgagee's costs and expenses incurred in connection
with the restoration of the Premises.
14. The Mortgagor will give the Mortgagee prompt notice of any action, actual
or threatened, in condemnation of eminent domain and hereby assigns,
transfers, and sets over to the Mortgagee the entire proceeds of any award
or claim for damages for all or any part of the Premises taken or damaged
under the power of eminent domain or condemnation, the Mortgagee being
hereby authorized to intervene in any such action in the name of the
Mortgagor and to collect and receive from the condemning authorities and
give proper receipts and acquittances for such proceeds. Any expenses
incurred by the Mortgagee in intervening in such action or collecting such
proceeds shall be reimbursed to the Mortgagee first out of the proceeds.
The proceeds or any part thereof shall be applied upon or in reduction of
the Indebtedness Secured Hereby then most remotely to be paid, whether due
or not, without the application of any prepayment premium, or to the
restoration or repair of the Premises, the choice of application to be
solely at the discretion of the Mortgagee. Notwithstanding the foregoing,
Mortgagor shall have the right to receive that portion of such proceeds
that are specifically allocated by the condemning authority for restoration
of the remaining portion of the Premises and for specifically allocated
relocation expenses.
15. Should any insurance or condemnation proceeds be applied to the restoration
or repair of the Premises the restoration or repair shall be done under the
supervision of an architect acceptable to the Mortgagee and pursuant to
plans and specifications approved by the Mortgagee. In such case the
proceeds shall be held by the Mortgagee for such purposes and will from
time to time be disbursed by the Mortgagee to defray the costs of such
restoration or repair under such safeguards and controls as the Mortgagee
may reasonably require to assure completion in accordance with the approved
plans and specifications and free of liens or claims. Any surplus which
may remain after payment of all costs of restoration or repair may at the
option of the Mortgagee be applied on account of the Indebtedness Secured
Hereby then most remotely to be paid, whether due or not, without
application of any prepayment premium, or shall be returned to the
Mortgagor as its interest
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may appear, the choice of application to be solely at the discretion of
the Mortgagee.
16. The Mortgagor will, at its own cost and expense, perform, comply with and
discharge all of the obligations of the Mortgagor under all leases and
agreements for the use of the Premises and use its best efforts to enforce
or secure the performance of each obligation and undertaking of the
respective tenants under such leases and will appear in and defend, at its
own cost and expense, any action or proceeding arising out of or in any
manner connected with the Mortgagor's interest in any leases of the
Premises. The Mortgagor shall permit no surrender nor assignment of any
tenant's interest under said leases unless the right to assign or surrender
is expressly reserved under the lease nor anticipate any installment of
rent for more than one month in advance of its due date nor execute any
mortgage or create or permit a lien which may be or become superior to any
such leases, nor permit a subordination of any lease to such mortgage or
lien. The Mortgagor will not modify or amend the terms of any such leases,
nor borrow against or pledge the rentals from such leases nor exercise or
waive any default of the tenant thereunder without the prior consent of the
Mortgagee. The Mortgagor agrees to obtain the Mortgagee's prior written
approval before entering into any lease with a term of five (5) years or
more. Should the Mortgagor fail to perform, comply with or discharge any
obligations of the Mortgagor under any lease or should the Mortgagee become
aware of or be notified by any tenant under any lease of a failure on the
part of the Mortgagor to so perform, comply with or discharge its
obligations under said lease, the Mortgagee may, but shall not be obligated
to, and without further demand upon the Mortgagor, and without waiving or
releasing the Mortgagor from any obligation in this Mortgage contained,
remedy such failure, and the Mortgagor agrees to repay upon demand all sums
incurred by the Mortgagee in remedying any such failure together with
interest at the rate as specified in the Note. All such sums, together
with interest as aforesaid, shall become so much additional Indebtedness
Secured Hereby, but no such advance shall be deemed to relieve the
Mortgagor from any default hereunder.
17. If the Mortgagor shall fail to comply with any of the covenants or
obligations of this Mortgage, the Mortgagee may, but shall not be obligated
to, without further demand upon the Mortgagor, and without waiving or
releasing the Mortgagor from any obligation in this Mortgage contained,
remedy such failure, and the Mortgagor agrees to repay upon demand all
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sums incurred by the Mortgagee in remedying any such failure together with
interest at the rate as specified in the Note. All such sums, together
with interest as aforesaid, shall become so much additional Indebtedness
Secured Hereby, but no such advance shall be deemed to relieve the
Mortgagor from any failure hereunder.
18. Nothing contained in this Mortgage shall constitute any consent or request
by the Mortgagee, express or implied, for the performance of any labor or
services or for the furnishing of any materials or other property in
respect of the Premises or any part thereof, nor as giving the Mortgagor or
any party in interest with the Mortgagor any right, power or authority to
contract for or permit the performance of any labor or services or the
furnishing of any materials or other property in such fashion as would
create any personal liability against the Mortgagee in respect thereof or
would permit the making of any claim that any lien based on the performance
of such labor or services or the furnishing of any such materials or other
property is prior to the lien of this Mortgage.
19. The Mortgagor will permit the Mortgagee's authorized representatives to
enter the Premises at all times for the purpose of inspecting the same;
provided, the Mortgagee shall have no duty to make such inspections and
shall not incur any liability or obligation for making or not making any
such inspections.
20. Without affecting the liability of any party liable for payment of any
Indebtedness Secured Hereby or performance of any obligation contained
herein, and without affecting the rights of the Mortgagee with respect to
any security not expressly released in writing, the Mortgagee may, at any
time, and without notice to or the consent of the Mortgagor or any party in
interest with the Premises or the Note (a) release any person liable for
payment of all or any part of the Indebtedness Secured Hereby or for
performance of any obligation herein, (b) make any agreement extending the
time or otherwise altering the terms of payment of all or any part of the
Indebtedness Secured Hereby or modifying or waiving any obligation, or
subordinating, modifying or otherwise dealing with the lien or charge
hereof, (c) accept any additional security, (d) release or otherwise deal
with any property, real or personal, including any or all of the Premises,
including making partial releases of the Premises, or (e) resort to any
security agreements, pledges, contracts of guaranty, assignments of rents
and leases or other securities, and exhaust any one or more of said
securities and the
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security hereunder, either concurrently or independently and in such order
as it my determine. No act or thing, except full payment of the
Indebtedness Secured Hereby, which but for this provision could act as a
release, termination, satisfaction or impairment of this Mortgage
shall in any way release, terminate, satisfy or impair this Mortgage.
21. Each right, power or remedy herein conferred upon the Mortgagee is
cumulative and in addition to every other right, power or remedy, express
or implied, now or hereafter arising, available to the Mortgagee, at law or
in equity, or under the Uniform Commercial Code or other law, or under any
other agreement, and each and every right, power and remedy herein set
forth or otherwise so existing may be exercised from time to time as often
and in such order as may be deemed expedient by the Mortgagee and shall not
be a waiver of the right to exercise at any time thereafter any other
right, power or remedy. No delay or omission by the Mortgagee in the
exercise of any right, power or remedy arising hereunder or arising
otherwise shall impair any such right, power or remedy or the right of the
Mortgagee to resort thereto at a later date or be construed to be a waiver
of any default or event of default under this Mortgage or the Note.
22. Any agreement hereafter made by the Mortgagor and the Mortgagee pursuant to
this Mortgage shall be superior to the rights of the holder of any
intervening lien or encumbrance.
23. The Mortgagor hereby waives to the full extent lawfully allowed the benefit
of any homestead, appraisement, evaluation, stay and extension laws now or
hereafter in force. The Mortgagor hereby waives any rights available with
respect to marshaling of assets so as to require the separate sales of any
portion of the Premises, or as to require the Mortgagee or any other person
to exhaust its remedies against a specific portion of the Premises before
proceeding against the other and does hereby expressly consent to and
authorize the sale of the Premises or any part thereof as a single unit or
parcel.
24. The occurrence of any of the following events shall be an event of default
under this Mortgage: (a) failure to pay any amount on the Note when due;
or (b) failure to pay any other Indebtedness Secured Hereby when due; or
(c) default or breach of any covenant or agreement of the Mortgagor or any
co-maker, endorser, guarantor or surety contained in the Note, this
Mortgage, or any other agreement, instrument or writing contemplated by or
made or delivered pursuant to or in connection with the Note or this
Mortgage; or (d) any
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statement made by the Mortgagor or any such co-maker, endorser,
guarantor or surety to the Mortgagee at any time shall prove to have
been incorrect or misleading in any material respect when made; (e) the
Mortgagor or any such comaker, endorser, guarantor or surety shall be or
become insolvent, or initiate or have initiated against it any act,
process or proceeding under any insolvency, bankruptcy or similar law;
or (f) the Mortgagor or any such co-maker, endorser, guarantor or surety
shall die, be dissolved or liquidated, merge, consolidate, transfer a
substantial part of its property, or, if a partnership, suffer the
death, dissolution or liquidation of any partner.
25. If an event of default shall occur, the Mortgagee may immediately and
without notice to the Mortgagor declare the entire unpaid principal balance
of the Note together with all other Indebtedness Secured Hereby to be
immediately due and payable and thereupon all such unpaid principal balance
of the Note together with all accrued interest thereon and all other
Indebtedness Secured Hereby shall be and become immediately due and
payable, and the Mortgagor hereby authorizes and fully empowers the
Mortgagee to foreclose this Mortgage by judicial proceedings or by
advertisement with full authority to sell the Premises at public auction
and convey the same to the purchaser in fee simple all in accordance with
and in the manner prescribed by law, and out of the proceeds arising from
sale and foreclosure to retain the principal and interest due on the Note
and the Indebtedness Secured Hereby together with all such sums of money as
the Mortgagee shall have expended or advanced pursuant to this Mortgage or
pursuant to statute together with interest thereon as herein provided and
all costs and expenses of such foreclosure, including lawful attorney's
fees, with the balance, if any, to be paid to the persons entitled thereto
by law.
26. The Mortgagee shall be entitled as a matter of right without notice and
without giving bond and without regard to the solvency or insolvency of the
Mortgagor, or waste of the Premises or adequacy of the security of the
Premises, to apply for the appointment of a receiver in accordance with the
statutes and law made and provided for who shall collect the rents, and all
other income of any kind; manage the Premises so to prevent waste; execute
leases within or beyond the period of receivership, pay all expenses for
normal maintenance of the premises and perform the terms of this Mortgage
and apply the rents, issues and profits in the following order to (i)
payment of the reasonable fees of said receiver, (ii) application of tenant
security deposits as
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required by Minnesota Statutes Section 504.20, (iii) payment when due of
prior or current real estate taxes or special assessments with respect
to the Premises or if required by this Mortgage, payment of the periodic
escrow for payment of the taxes or special assessments, (iv) the payment
when due of premiums for insurance of the type required by this Mortgage
or if required by this Mortgage, payment of the Periodic escrow for the
payment of the premiums, (v) keeping of the covenants required of a
lessor or licensor pursuant to Minnesota Statutes Section 504.18, and
(vi) as further provided in any Assignment of Rents executed by the
Mortgagor as further security for the Indebtedness Secured Hereby
(whether included in this Mortgage or separate instrument), including
but not limited to applying the same to the costs and expenses of the
receivership, including reasonable attorney's fees, to the repayment of
the Indebtedness Secured Hereby and to the operation, maintenance,
upkeep and repair of the Premises, including payment of taxes on the
Premises and payments of premiums of insurance on the Premises. The
Mortgagor does hereby irrevocably consent to such appointment. Nothing
contained in this Mortgage and no actions taken pursuant to this
Mortgage shall be construed as constituting the Mortgagee a mortgagee in
possession.
27. In addition to the rights available to a mortgagee of real property, the
Mortgagee shall also have all the rights, remedies and recourse available
to a secured party under the Uniform Commercial Code, including without
limitation the right to proceed under the provisions of the Uniform
Commercial Code governing default as to any Personal Property which may be
included in the Premises or which may be deemed non-realty in a foreclosure
of this Mortgage or to proceed as to such personal property in accordance
with the procedures and remedies available pursuant to a foreclosure of
real estate.
28. THE MORTGAGOR HEREBY CONSENTS AND AGREES TO THE FORECLOSURE AND SALE OF THE
PREMISES BY ACTION PURSUANT TO MINNESOTA STATUTES CHAPTER 581 OR, AT THE
OPTION OF THE MORTGAGEE, BY ADVERTISEMENT PURSUANT TO MINNESOTA STATUTES
CHAPTER 580 (OR PURSUANT TO ANY SIMILAR OR REPLACEMENT STATUTES HEREAFTER
ENACTED), WHICH PROVIDES FOR SALE AFTER SERVICE OF NOTICE THEREOF UPON THE
OCCUPANT OF THE PREMISES AND PUBLICATION OF SAID NOTICE FOR SIX WEEKS IN
THE COUNTY IN MINNESOTA WHERE THE PREMISES ARE SITUATED; ACKNOWLEDGES THAT
SERVICE NEED NOT BE MADE UPON THE MORTGAGOR PERSONALLY (UNLESS THE
MORTGAGOR IS AN OCCUPANT) AND THAT NO HEARING OF ANY TYPE IS REQUIRED IN
CONNECTION WITH THE SALE; AND EXCEPT AS MAY BE PROVIDED IN
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<PAGE>
SAID STATUTES EXPRESSLY WAIVES ANY AND ALL RIGHT TO PRIOR NOTICE OF SALE
OF THE PREMISES AND ANY AND ALL RIGHTS TO A PRIOR HEARING OF ANY TYPE IN
CONNECTION WITH THE SALE OF THE PREMISES. The Mortgagor further
understands that in the event of such default the Mortgagee may also
elect its rights under the Uniform Commercial Code and take possession
of the Personal Property (as defined in this Mortgage) and dispose of
the same by sale or otherwise in one or more parcels provided that at
least ten (10) days' prior notice of such disposition must be given, all
as provided for by the Uniform Commercial Code, as hereafter amended or
by any similar or replacement statute hereafter enacted. THE MORTGAGOR
ACKNOWLEDGES THAT IT IS REPRESENTED BY LEGAL COUNSEL; THAT BEFORE
SIGNING THIS DOCUMENT, THIS PARAGRAPH AND THE MORTGAGOR'S RIGHTS WERE
FULLY EXPLAINED BY SUCH COUNSEL AND THAT THE MORTGAGOR UNDERSTANDS THE
NATURE AND EXTENT OF THE RIGHTS WAIVED HEREBY AND THE EFFECT OF SUCH
WAIVER.
29. When all Indebtedness Secured Hereby has been paid, this Mortgage and all
assignments herein contained shall be void and this Mortgage shall be
released by the Mortgagee at the cost and expense of the Mortgagor,
otherwise to remain in full force and effect.
30. This Mortgage is made and executed under the laws of the State of Minnesota
and is intended to be governed by the laws of said State.
31. This Mortgage and each and every covenant, agreement and other provision
hereof shall be binding upon the Mortgagor and its successors and assigns
including without limitation each and every from time to time record owner
of the Premises and any other person having an interest therein, shall run
with the land and shall inure to the benefit of the Mortgagee and its
successors and assigns. As used herein the words "successors and assigns"
shall also be deemed to include the heirs, representatives, administrators
and executors of any natural person who is a party to this Mortgage.
32. The unenforceability or invalidity of any provisions hereof shall not
render any other provision or provisions herein contained unenforceable or
invalid.
33. The captions and headings of the various sections of this Mortgage are for
convenience only and are not to be construed as confining or limiting in
any way the scope or intent of the provisions hereof. Whenever the context
requires or permits the singular shall include the plural, the plural shall
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include the singular and the masculine, feminine and neuter shall be freely
interchangeable.
34. Any notice which any party hereto may desire or may be required to give to
any other party shall be in writing and the mailing thereof by certified
mail to their respective addresses as set forth herein, or to such other
places any party hereto may hereafter by notice in writing designate shall
constitute service of notice hereunder.
THE MORTGAGOR REPRESENTS, CERTIFIES, WARRANTS AND AGREES THAT THE MORTGAGOR
HAS READ ALL OF THIS MORTGAGE AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS
MORTGAGE. THE MORTGAGOR ALSO AGREES THAT THE MORTGAGEE'S COMPLIANCE WITH THE
EXPRESS PROVISIONS OF THIS MORTGAGE SHALL CONSTITUTE GOOD FAITH AND SHALL BE
CONSIDERED REASONABLE FOR ALL PURPOSES.
IN WITNESS WHEREOF, the undersigned have executed this Mortgage as of the
day and year first above written.
PAPER WAREHOUSE, INC.
By /s/ Yale T. Dolginow
---------------------------------------------
Yale T. Dolginow
Its President
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
This instrument was acknowledged before me this 9th day of June, 1995, by
Yale T. Dolginow, the president of Paper Warehouse, Inc., a Minnesota
corporation, on behalf of the corporation.
/s/ James Meunier
------------------------------------------------
Notary Public
This instrument was drafted by:
DOHERTY, RUMBLE & BUTLER (DXB)
Professional Association
2800 Minnesota World Trade Center
30 East Seventh Street (Notary Seal)
St. Paul, Minnesota 55101-4999
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EXHIBIT A
LEGAL DESCRIPTION OF PREMISES
The land referred to is situated in the State of MINNESOTA, County of HENNEPIN,
and is described as follows:
PAR 1:
That part at the Northwest Quarter of the Southwest Quarter, Section 20,
Township 117, Range 21 described as beginning at a point on the North line
at said Northwest Quarter of the Southwest Quarter distant 700 feet West
from the Northeast corner of said Northwest Quarter of the Southwest
Quarter; thence West along said North line 185.3 feet; thence South
deflecting to the left 90 degrees 00 minutes 29 seconds to the center line
of Excelsior Boulevard; thence Easterly along said center line to its
intersection with a line drawn South, parallel with the West line of said
Northwest Quarter of the Southwest Quarter from the point of beginning;
thence North along said parallel line to the point of beginning; except
that part thereof lying Northerly of a line drawn Westerly, parallel with
the center line of Excelsior Boulevard from a point on the East line of
said above described tract distant 461 feet North along said East line from
the center line of Excelsior Boulevard, according to the Government Survey
thereof.
PAR 2:
The West 49 feet of the Southerly 461 feet of the premises described as
follows:
That part of the Northwest Quarter of the Southwest Quarter of Section 20,
Township 117, Range 21 described as follows: Commencing at the Northeast
corner of said Quarter-Quarter, thence Westerly along the North line
thereof 700 feet; thence Southerly along a line parallel with the West line
of said Quarter-Quarter 642.5 feet to the center line of Excelsior Avenue;
thence Easterly along the center line of Excelsior Avenue to the East line
of said Quarter-Quarter; thence Northerly along said East line to point of
beginning.
TOGETHER WITH an easement for water main purposes as contained in Deed
dated July 11, 1968, recorded November 1, 1968, as Doc. No. 925612.
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<PAGE>
EXHIBIT B
[Permitted Encumbrances]
1. All assessments and taxes due and payable in 1995, and thereafter.
2. The following Recital appears in the Certificate of Title, and will be
carried forward to any new Certificate of Title:
The North line of said tract is marked by Judicial Landmarks set pursuant
to Torrens Case No. 12986. (as to Parcel 1)
3. The following recital appears in the Certificate of Title, and will be
carried forward to any new Certificate of Title:
Subject to an easement to the City of Hopkins over the West 34 feet of the
above described land for sewer, water mains and other utilities and for
public street. (as to Parcel 1)
4. Easement for sewer and water main purposes in favor of the Village of St.
Louis Park as contained in Deed dated July 29, 1950, recorded August 7,
1950 as Doc. No. 318097.
5. Easement for water main purposes as contained in Quit Claim Deed dated July
11, 1968, recorded November 1, 1968, as Doc. No. 925612.
6. Easement for highway purposes in favor of the County of Hennepin as
contained in Deed dated December 9, 1982, recorded March 14, 1983 as Doc.
No. 1504645.
7. Right of way for Excelsior Boulevard as shown on Hennepin County State Aid
Highway Number 3, Plat 59, dated November 23, 1987, recorded November 24,
1987 as Doc. No. 1890398, and as presently laid out and travelled.
19
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SECURED PROMISSORY NOTE
$945,000.00 Richfield, Minnesota
June 9, 1995
FOR VALUE RECEIVED, the undersigned, PAPER WAREHOUSE, INC., A MINNESOTA
CORPORATION, promises to pay to the order of RICHFIELD BANK & TRUST CO. (the
"Bank"), at its office in Richfield, Minnesota, or at such other place as the
holder hereof may designate from time to time, in lawful money of the United
States of America the principal sum of Nine Hundred Forty-five Thousand and
no/100 Dollars ($945,000.00), together with interest thereon at the rate
specified hereinafter, payable in the manner described below. Interest shall
be computed on the basis of the actual number of days elapsed and a 360-day
year.
Interest shall accrue on the unpaid principal balance of this Note from
and after the date hereof at an annual rate of 9.75%; provided, however, that
the interest rate on this Note shall be adjusted on December 1, 1995 and on
the first day of December in years 1998, 2001, 2004, 2007, 2010, 2013, 2016
and 2019 (the "Adjustment Dates") to a rate equal to 350 basis points (3.50%)
over the Index, as defined hereinafter. The "Index" is the published weekly
average of yield on United States Treasury Bills adjusted to a constant
maturity of three (3) years for the most recent week available on the
Adjustment Date, as published and made available by the Federal Reserve Board
pursuant to its FEDERAL RESERVE STATISTICAL RELEASE H.15 (519) rounded up to
the nearest 1/8 of one percent; provided, however, that in the event such
weekly average yield is no longer available, the Index shall be a
substantially comparable index selected by the Bank in its discretion.
Notwithstanding the foregoing, if the transaction evidenced by this Note
is described in Minnesota Statutes Section 334.01, Subdivision 2, any
principal and interest past due more than 10 days shall bear interest from
the date due until paid at 2% per annum in excess of the rate otherwise then
in effect, which rate shall continue to vary based on further changes in the
Index.
The undersigned shall pay interest only commencing on the first day of
July, 1995 and on the first day of each month thereafter to and including the
first day of December, 1995. Commencing on the first day of the first month
following each Adjustment Date, and on the first day of each month thereafter
to and including the next occurring Adjustment Date (and with respect to the
period following the last Adjustment Date, to and including November 1, 2015),
the undersigned shall make equal monthly payments of principal and interest
in an amount equal to the amount that would be required to fully amortize the
principal balance as of each Adjustment Date, together with interest at the
rate established on each such Adjustment Date, on a monthly basis over
<PAGE>
a period ending November 30, 2015, and sufficient to provide for payment of
accrued interest on an unpaid principal balance. On December 1, 2015, a
final payment of all remaining unpaid principal, together with accrued
interest, shall be due and payable in full.
All or any part of the unpaid balance of this Note may be prepaid at any
time without penalty. All payments made hereunder, including any prepayment,
shall be applied first to the payment of other charges under this Note,
second to the payment of interest accrued through the date of payment, third,
to installments of principal then due under this Note and fourth to payment
of future installments of principal under this Note in inverse order of
maturity. The undersigned represents, certifies and agrees that all advances
under this Note shall be used solely for business purposes.
This Note is secured by a Combination Mortgage and Security Agreement and
Fixture Financing Statement, and an Assignment of Leases and Rents, both
dated the date hereof (the "Mortgage" and the "Assignment of Leases")
covering certain real property and improvements thereon owned by the
undersigned and located in Hennepin County, Minnesota.
In the event of any default in the payment of this Note or the occurrence
of an "event of default" under the terms of the Mortgage or the Assignment of
Leases, or in any other note, obligation, agreement, mortgage or writing
heretofore, herewith or hereafter given to or acquired by the holder of this
Note to which any maker, endorser, guarantor or surety of this Note or any
other person providing security for this Note or for any guaranty for this
Note is a party, then in any such event the holder of this Note may, at its
option, declare this Note to be immediately due and payable and thereupon
this Note shall become due and payable for the entire unpaid principal
balance of this Note plus accrued interest and other charges on this Note
without any presentment, demand, protest or other notice of any kind.
The undersigned (i) waives demand, presentment, protest, notice of protest,
notice of dishonor and notice of nonpayment of this Note; (ii) agrees to
promptly provide all present and future holders of this Note from time to time
with financial statements of the undersigned and such other information
respecting the financial condition, business and property of the undersigned
as any such holder of this Note may reasonably request, in form and substance
acceptable to such holder of this Note; (iii) agrees that when or at any time
after this Note becomes due the then holder of this Note may offset or charge
the full amount owing on this Note against any account then maintained by the
undersigned with such holder of this Note as long as the undersigned is
promptly notified of any such action; (iv) agrees to pay on demand all costs
and expenses of all present and future holders of this Note in
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<PAGE>
connection with this Note and any security and guaranties for this Note,
including but not limited to reasonable attorneys' fees and legal expenses,
plus interest on such amounts at the rate set forth in this Note; and
(v) consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related
in any way to this Note or any security or guaranty for this Note, waives any
argument that venue in such forums is not convenient, and agrees that any
litigation initiated by the undersigned against the Bank or any other present
or future holder of this Note relating in any way to this Note or any
security or guaranty for this Note shall be venued in either the District
Court of Hennepin County, Minnesota, or the United States District Court,
District of Minnesota, Fourth Division. Interest on any amount under this
Note shall continue to accrue, at the option of any present or future holder
of this Note, until such holder receives final payment of such amount in
collected funds in form and substance acceptable to such holder.
No waiver of any right or remedy under this Note shall be valid unless in
writing executed by the holder of this Note, and any such waiver shall be
effective only in the specific instance and for the specific purpose given.
All rights and remedies of all present and future holders of this Note shall
be cumulative and may be exercised singly, concurrently or successively.
This Note shall bind the undersigned and the heirs, representatives,
successors and assigns of the undersigned. This Note shall be governed by
and construed in accordance with the laws of the State of Minnesota.
PAPER WAREHOUSE, INC.
By /s/ Yale T. Dolginow
------------------------------------------
Yale T. Dolginow
Its President
3
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[SEAL] U.S. SMALL BUSINESS ADMINISTRATION
610-C BUTLER SQUARE
100 NORTH SIXTH STREET
MINNEAPOLIS, MN 55403-1563
(612) 370-2324
CDC L837046 3001MN
------------------
SBA Loan Number
AUTHORIZATION AND DEBENTURE GUARANTY
CERTIFIED DEVELOPMENT COMPANY
504 PROGRAM
Twin Cities-Metro Certified Development Company
Suite 170, Arden Woods
4105 Lexington Avenue North
Arden Hills, MN 55126
The Small Business Administration (SBA) hereby authorizes and agrees to
guaranty a Debenture in the amount of $433,000.00 in order to assist Paper
Warehouse, Inc., 7630 Excelsior Blvd., St. Louis Park, MN, a Small Business
Concern (SBC) pursuant to Section 504 of the Small Business Investment Act of
1958, as amended, subject to the following terms and conditions:
1. This Authorization is subject to:
a. The representations made in the application by the CDC and the SBC,
including the supporting documents thereto, the conditions set
forth herein and any other conditions which may be imposed by SBA
not inconsistent with the Regulations and this Authorization.
b. SBA's determination in its sole discretion, that there has been no
unremedied adverse change in the financial or any other condition
of CDC and SBC since date of application, which would warrant
withholding or not making any such disbursement.
c. CDC and SBC are required to furnish SBA Form 159, "Compensation
Agreement for Services in Connection with Application and Debenture
Guaranty".
d. SBC to provide additional equity funds to cover additional project
costs incurred as a result of overruns or unanticipated expenses in
financing the project.
e. SBC agrees that any and all outstanding obligations may be
accelerated and payments called for by CDC and SBA if the SBC during
the term of this loan effects a change of ownership or control of
the business without the prior written consent of SBA.
SBA Form 1248 (10-81)
<PAGE>
f. Execution of all collateral documents required.
g. In consideration of this agreement, in the event of default by the
SBC on its promissory note to the CDC (assigned to SBA) and payment
by SBA (under its guaranty) of the debenture issued by the CDC, to
the holder of the debenture, SBA agrees that (except in cases of
fraud, gross negligence, or payments held by the CDC) it will limit
its recovery to foreclosure of the collateral securing the note of
the SBC, and an action against such SBC for any deficiency. The CDC
agrees that the amount due includes unpaid principal and accrued
interest plus any prepayment penalty established by the debenture
holder. A prepayment premium will be applicable during the first
half of the stated term. A schedule of the dollar amount of the
premium will be provided after the sale of the debenture.
h. If, during the term of this guaranteed debenture, the SBC or its
affiliates acquire, directly or indirectly, in excess of 10%
ownership or interest in the CDC, this Debenture shall immediately
become due and payable.
i. Debenture closing and disbursement of proceeds must occur not later
than twelve (12) months from the date of this Authorization, unless
such time is extended, in writing, by SBA.
2. Terms of Debenture:
a. The debenture shall have a maturity of twenty years. The interest
rate will be set at the date the debenture is sold. At that date
the monthly principal and interest installment will be established
over the life of the debenture.
b. The CDC must inject $105,000.00 prior to any disbursement of this
debenture, in the form of cash or kind, acceptable to SBA: if any
of said funds are loaned, repayment terms must be for a term
equal, at least, to the terms of this agreement, and be subordinate
to the liens securing this loan. If any portion of said funds are
borrowed, the CDC will supply to District Director copies of debt
instruments. This CDC injection may not be repaid at a rate faster
than SBA debenture herein authorized.
c. DEBENTURE PROCEEDS to be used approximately as follows:
(1) Pay interim debt of approximately $420,000.00 due to Richfield
Bank & Trust Co. which proceeds represent the final 40% of
$1,050,000.00 which is the total 504 project cost. (Specific
items of the 504 project cost are set below.)
(a) Purchase land and building $800,000.00
(b) Building renovation $238,902.00
(c) Pay eligible professional fees $5,000.00
(d) Pay overruns and interim financing
interest expense $6,098.00
TOTAL 504 PROJECT COST $1,050,000.00
Page 2
<PAGE>
(2) Pay administrative expenses
Net Debenture Proceeds (40% of total project costs) $420,000.00
(a) .005 Reserve Deposit $2,100.00
(b) .0025 Funding Fee $1,050.00
(c) .015 CDC Processing Fee $6,300.00
(d) Legal Closing Costs (CDC) $450.00
TOTAL DEBENTURE AMOUNT $9,900.00
(Net Debenture Proceeds plus # 1-4 divided
by .99375 and rounded up to next thousand.)
Underwriting Fee
(.00625 X Total Debenture Amt) $2,706.25
3. Collateral:
a. Promissory Note - 504 Program (SBA Form 1505, assigned to SBA)
executed by SBC, evidencing CDC's loan to SBC of debenture proceeds
in the amount of $433,000.00.
b. Assignment of Real Estate Mortgage on real property located at 7630
Excelsior Blvd., St. Louis Park, MN executed by SBC to CDC in the
amount of $433,000.00, subject to a prior mortgage executed by SBC
to Richfield Bank & Trust Co., having an approximate unpaid balance
of $525,000.00. In addition, SBC agrees to furnish to SBA each May
and October evidence that the real estate taxes have been paid.
Title insurance policy satisfactory to CDC and SBA to be obtained
prior to sale of debenture. CDC to file Request for Notice pursuant
to Minnesota Statute Section 580.032.
At least four weeks prior to execution of documents evidencing this
504 loan, CDC and SBA shall be provided copies of any environmental
analysis, testing, audit, report or checklist which has been
required or will be obtained by the first mortgage lender. After
review of this material, CDC or SBA may require, in their sole
discretion:
(1) Additional environmental testing; and/or,
(2) Certification or documentation from the SBC that any testing,
clean-up or other action recommended in the environmental report
has been or will be completed in compliance with the rules and
regulations of the Minnesota Pollution Control Agency; and/or,
(3) Certification or documentation from the SBC that the cost of any
required testing, clean-up or other action will not have a
material adverse affect on the financial stability of the SBC or
prevent completion of the 504 project.
Page 3
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As evidence that the property is not located within a special hazard
area subject to flooding, mudslides, erosions or earthquakes, the CDC
may rely on a determination of flood zone or special hazard area status
by the applicant's property and casualty insurance company, real estate
appraiser, title insurance company, a local government agency or other
authoritative source approved by SBA which would ordinarily have
knowledge of the special hazard area status for the property being
financed.
c. The above Note to be executed by those corporate officers duly
authorized by corporate board resolution.
d. The above Real Estate Mortgage to be executed by those corporate
officers duly authorized by corporate board resolution.
4. Other provisions agreed to by the CDC/SBC.
a. The CDC and SBC must enter into a loan agreement or contract
evidencing the loan by CDC of debenture proceeds to SBC, said
agreement to conform to provisions of Title 13, Code of Federal
Regulations, Part 108 and the requirements of this Authorization and
Debenture Guaranty. (See 504 Letter of Instructions)
b. Interim financing for total 504 project costs, less the
specified CDC injection, to be provided by Richfield Bank & Trust
Co. and prior to issuance of the debenture, CDC and SBA must be
satisfied that construction and/or equipment purchase/installation
has been completed in accordance with final plans and
specifications, that no unpaid labor or material liens exist, that
504 project costs have not exceeded $1,050,000.00, that there exists
a small business concern with the ability to repay its obligation to
the CDC and that such concern has not suffered a material adverse
change since the date of this Authorization.
c. Execution of SBA Form 601.
d. Prior to first disbursement, the Lender must be in receipt
of evidence of the kind described below from an independent
authoritative source which is sufficient to indicate to the Lender
that the property is not in a special hazard area. If such evidence
is not provided to the Lender, the borrower must obtain, and
maintain, Federal Flood Insurance or other appropriate special
hazard insurance in amounts and coverages equal to the lesser of (1)
the insurable value of the property or (2) the maximum limit of
coverage available. Evidence that required flood or special hazard
insurance has been acquired may be in the form of proof of payment
to any licensed insurance agent specifically relative to the
required flood or hazard insurance or a copy of the required flood
or hazard insurance policy which has been issued. Borrower will not
be eligible for either any future disaster assistance or SBA
business loan assistance if this flood or special hazard insurance
is not maintained as stipulated herein throughout the entire term of
this loan.
e. Prior to closing, CDC shall be in possession of evidence
that SBC is not subject to State hazardous waste generator laws or
that SBC has filed a license application form with the Hennepin
County Hazardous Waste Office.
Page 4
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f. Guaranty on SBA Form 148 of Yale Dolginow.
g. Collateral assignment of life insurance (existing or new) in
favor of SBA on the life of Yale Dolginow in the approximate amount
of $400,000.00. The insurance may be decreasing term or a permanent
type of insurance. Assignment of life insurance shall be an absolute
collateral assignment properly acknowledged by home office of
insurer. SBA should NOT be named as beneficiary.
h. SBC agrees that, prior to sale of debenture, CDC to be in
receipt of evidence that Paper Warehouse, Inc. has injected not less
than $105,000.00 into the business as equity capital, $105,000.00 of
which was injected into this 504 project as required by paragraph
B(2).
i. SBC agrees that it will not authorize or issue additional
shares of its capital stock or reclassify any of its outstanding
shares of stock while this loan is outstanding without prior written
approval from SBA.
j. Prior to sale of debenture, SBA to be in receipt of a copy
of the Articles of Incorporation and either a Certificate of
Incorporation or a Certificate of Good Standing.
k. Prior to closing SBC shall furnish CDC with a certified
appraisal of the subject real property collateral. Should the
appraisal show a value of less than $1,050,000.00., SBC shall provide
additional investment, additional collateral, or reduce the size of
the project, as appropriate.
l. SBC shall provide and maintain hazard insurance coverage on
land and buildings, machinery and equipment, located at 7630
Excelsior Blvd., St. Louis Park, MN, in an amount equal to its
insurable value, with a "Lender's Loss Payable Clause" similar in
nature to the New York Standard Mortgagee Clause, in favor of SBA.
m. SBC agrees to provide and maintain liability and worker's
compensation covering the business operations at 7630 Excelsior
Blvd., St. Louis Park, MN
n. SBC will, at all times, keep proper books of account in a
manner satisfactory to CDC/SBA. SBC hereby authorized CDC/SBA to
make or cause to be made, at SBC's expense and in such manner and at
such times as CDC/SBA may require, (a) inspections and auditors of
any books, records and papers in the custody of or control of SBC or
others, relating to SBC's financial or business conditions,
including the making of copies thereof and extracts therefrom, and
(b) inspections and appraisals of any of SBC's assets. SBC will
furnish to CDC and SBA for the twelve month period ending January 31
and semiannually thereafter (no later than two months following the
expiration of any such period) and at such times and in such form as
CDC/SBA may prescribe, SBC's financial and operating statements. Annual
statements to be prepared on a audit basis. SBC hereby authorizes all
Federal, State and municipal authorities to furnish reports of
examination, records, and other information relating to the conditions
and affairs of SBC and any desired information from reports, returns,
files and records of such authorities upon request therefore by CDC/SBA.
Page 5
<PAGE>
o. SBC will not, without the prior written consent of CDC and
SBA, (a) if SBC is a corporation, declare or pay any dividend or
make any distribution upon its capital stock, or purchase or retire
any of its capital stock, or consolidate, or merge with any other
company, or give any preferential treatment, make any advance,
directly or indirectly, by way of loan, gift, bonus, or otherwise,
to any company directly or indirectly controlling or affiliated with
or controlled by SBC, or any other company, or to any officer,
director or employee of SBC, or of any such company; provided,
however that if the SBC has elected to be taxed under Subchapter S
of the Internal Revenue Code, then the SBC shall be permitted,
notwithstanding the foregoing, to annually distribute cash dividends
to all the then shareholders of the SBC in an amount equal to the
combined federal and state income tax liability (if any) of the
shareholders arising from their respective allocable share of the
earnings and profits of the SBC for such year, with each
shareholder's federal and state income tax liability, including any
minimum tax liability, to be computed on the basis of the highest
marginal tax rate for individuals under the Internal Revenue Code of
1986, as amended, and relevant state law (provided such
distributions shall be made in accordance with the law and in
proportion to the record date for distributions as determined by the
Board of Directors of the SBC and such distributions shall be made on a
quarterly basis in such a manner as to allow the shareholders of the SBC
to make timely quarterly payments of estimated liability, and in no
event shall such distributions be made later than the date prescribed by
law for the filing of individual tax returns), or (b) if SBC is a
partnership or individual, make any distribution of assets of the
business of SBC, other than reasonable compensation for services, or
give any preferential treatment, make any advance, directly or
indirectly, by way of loan, gift, bonus or otherwise, to any partner
or any of its employees, or to any company directly or indirectly
controlling or affiliated with or controlled by SBC, or any other
company.
p. SBC will not, without prior consent of CDC and SBA, convey
real property collateral or create, assume or otherwise suffer to
exist any mortgage, pledge or other encumbrance upon any of the real
or tangible personal property collateral of the Undersigned, whether
now owned or hereafter acquired, except liens for taxes or other
governmental charges not delinquent or being contested in good
faith, and the $525,000.00 first mortgage to Richfield Bank & Trust
Co. referred to in paragraph 3 above.
q. Terms and conditions of the first mortgage to Richfield Bank
& Trust Co. must be satisfactory to SBA (in accordance with the
Lender's commitment letter to SBC/CDC dated May 8, 1995). Copy of
Note and mortgage to be supplied to SBA prior to sale of debenture.
r. SBC agrees to accept management assistance as required by
SBA at any time during the course of the loan. Said assistance shall
be at no cost to SBC.
s. SBC will comply with SBA Form 793 and display SBA Form 722
as required.
t. SBC agrees, to the extent feasible, to purchase only
American-made equipment and products with the proceeds of this loan.
Page 6
<PAGE>
The CDC and SBC acknowledge acceptance of the conditions under which the
Debenture Guaranty will be issued by signing the ACCEPTANCE OF THE CDC AND
SBC on one of the enclosed copies of this Authorization and Debenture
Agreement and returning it to this office with ten days from date of receipt.
PHILIP LADER
ADMINISTRATOR
By: /s/ Mark Lautenschlager Date: May 25, 1995
----------------------------------------------------------------------------
Mark Lautenschlager, Senior Credit Officer
ACCEPTANCE OF THE CDC AND SBC.
In consideration for financial assistance provided by SBA to the CDC, to
assist the SBC, we the CDC and SBC hereby acknowledge the terms and
conditions of this Authorization and Debenture Agreement and agree to comply
with the terms and conditions imposed herein.
TWIN CITIES-METRO CERTIFIED PAPER WAREHOUSE, INC.
Development Company
(CDC Name) (SBC Name)
4105 LEXINGTON AVENUE NORTH, SUITE 170 7630 EXCELSIOR BLVD.
ARDEN HILLS, MN 55126 ST. LOUIS PARK, MN
(Address) (Address)
By: /s/ R A [illegible] /s/ [illegible]
------------------------------------ -----------------------------------
Attest: /s/ Peter [illegible] Attest: /s/ [illegible]
-------------------------------- -----------------------------------
ASST (Secretary)
- ------------------------------------------------------------------------------
NOTE: Corporate borrowers must execute this Authorization, in corporate name,
by duly authorized officer, and, if required, seal must be affixed and duly
attested; partnership borrowers must execute in firm name, together with
signatures of all general partners.
Page 7
<PAGE>
Exhibit 10.20
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT ("Amendment") is entered into as of
October 1, 1997, by and between Paper Warehouse, Inc., a Minnesota corporation
("Borrower"), Yale T. Dolginow, a resident of Minnesota ("Guarantor") and
Richfield Bank & Trust Co., a Minnesota banking corporation ("Bank").
R E C I T A L S :
WHEREAS, the Borrower is bound by the terms and conditions of that
certain Loan Agreement dated January 29, 1997 ( the "Loan Agreement") by and
between the Borrower, Yale T. Dolginow, as Guarantor (the "Guarantor") and the
Bank, pursuant to which the Bank granted to the Borrower a Line of Credit of
$7,500,000 (the "Loan");
WHEREAS, the Loan is evidenced by a Revolving Promissory Note in the
principal amount of $7,500,000 dated January 29, 1997, given by the Borrower to
the Bank (the "Note");
WHEREAS, the Borrower has requested an extension of the term of the
Loan and the Guarantor has requested that he be released from his obligations
under the terms of his Guaranty of the Loan upon receipt by the Borrower of
additional equity capital; and
WHEREAS, the Bank is willing to grant such an extension and so release
the Guarantor and the Borrower, the Guarantor and the Bank have agreed to amend
the Loan Agreement to reflect such extension to be effective on the satisfaction
of the conditions set forth below;
NOW, THEREFORE, the Loan Agreement is hereby amended and the Bank, the
Borrower and the Guarantor agree as follows:
1. Upon satisfaction of the conditions set forth in paragraph 7 below, Section
2.01 of the Loan Agreement shall be deleted in its entirety and the following
inserted in lieu thereof:
Section 2.01 REVOLVING LOAN. The Bank shall, on the terms and
subject to the conditions hereinafter set forth, make Advances to the
Borrower from time to time during the period from the date hereof to and
including May 31, 1999, in an aggregate amount not to exceed at any time
outstanding taken together with the available amount of all issued and
outstanding Letters of Credit issued by the Bank pursuant to Section 2.07,
the lesser of $7,500,000 or the following amounts: the lesser of (a) the
Borrowing Base plus $1,500,000 or (b) 65% of the aggregate value of
Eligible Inventory of Borrower, (the "Line of Credit").
1
<PAGE>
Notwithstanding the foregoing, the Bank shall not be obligated at any time
to make Advances under the Line of Credit, if, after giving effect to the
Advance requested, the unpaid principal amount of Advances made by the Bank
exceeds the lesser of $7,500,000 or the maximum amount of Advances
permitted under this Section. Further, in a period of at least 60
consecutive days during each fiscal year, Borrower shall limit the amount
outstanding under the Line of Credit to the maximum amount of the
Borrowing Base in effect for such period. Within the limits of the Line
of Credit, the Borrower may borrow, prepay, and reborrow under this
Section 2.01.
In addition, at such time, the reference to May 31, 1998 appearing at the end of
Section 2.05 of the Loan Agreement shall be amended to refer to May 31, 1999.
2. Upon the effectiveness of the amendment described in the preceding paragraph,
all references to the Note in the Loan Agreement shall mean and refer to the
Amended and Restated Revolving Promissory Note dated as of the date of the
effectiveness of such amendment, executed by the Borrower in the original
principal amount of $7,500,000 and payable to the order of the Bank in the form
attached hereto as Exhibit A.
3. Upon satisfaction of the conditions set forth in paragraph 7 below, Section
5.17 of the Loan Agreement shall be deleted in its entirety and the following
inserted in lieu thereof:
Section 5.17 DEBT TO TANGIBLE NET WORTH RATIO. The Borrower shall
achieve a ratio of Debt (exclusive of Subordinated Debt) to Tangible Net
Worth as of the end of Borrower's fiscal years ending in January 1998 and
January 1999 of not more than 2.00 to 1.
4. Upon satisfaction of the conditions set forth in paragraph 7 below, Section
5.18 of the Loan Agreement shall be deleted in its entirety and the following
inserted in lieu thereof:
Section 5.18 MINIMUM NET INCOME. During the fiscal years ending in
January 1998 and January 1999, the Borrower shall achieve a net income
before distributions to shareholders of not less than $1,500,000.
5. Upon satisfaction of the conditions set forth in paragraph 7 below, Section
5.19 of the Loan Agreement shall be deleted in its entirety and the following
inserted in lieu thereof:
Section 5.19 MINIMUM TANGIBLE NET WORTH. The Borrower shall have a
minimum Tangible Net Worth of not less than $6,000,000 as of the end of its
fiscal year ending in January 1998 and January 1999.
2
<PAGE>
6. Upon satisfaction of the conditions set forth in paragraph 7 below, Section
5.20 of the Loan Agreement shall be deleted in its entirety and the following
inserted in lieu thereof:
Section 5.20 CURRENT RATIO. The Borrower shall achieve a ratio of
its current assets to its current liabilities of not less than 1 to 1 as of
the end of its fiscal years ending in January 1998 and January 1999..
7. As a condition to this Amendment, the following documents, agreements and
other items shall have been timely executed and/or delivered to the Bank by the
Borrower, each of which documents, agreements and other items shall be in form
and substance acceptable to the Bank:
a. Borrower shall have delivered to the Bank evidence in form and
substance reasonably satisfactory to the Bank that Borrower has
received proceeds from the sale of its capital stock in an amount
not less than $13,000,000.
b. The obligations evidenced by the Note shall be amended and
restated in their entirety pursuant to the terms of the
Amended and Restated Revolving Promissory Note in the form
set forth in Exhibit A attached hereto and made a part
hereof.
8. The Borrower hereby acknowledges, agrees and confirms that the Security
Agreement dated January 29, 1997 between the Borrower, as Debtor therein, and
the Bank, as Secured Party therein (the "Security Agreement") and any other
agreements, instruments, certificates, documents and other certificates relating
to or securing the obligations of the Borrower to the Bank under the Loan
Agreement, the Note, and all other writings heretofore executed and delivered by
the Borrower to the Bank in connection with the Loan Agreement remain in full
force and effect and secure or relate to the Amended and Restated Revolving
Promissory Note.
5. The Bank acknowledges and agrees that upon satisfaction of the condition set
forth in clause a. of paragraph 7 the Guarantor shall be released from any
further liability under the terms of the Loan Agreement and the Guaranty
delivered by the Guarantor pursuant to the terms of the Loan Agreement. All
provision of the Loan Agreement to the extent they relate to obligations of the
Guarantor or the Guaranty shall thereupon be deemed to be deleted from the Loan
Agreement and of no further force and effect and the Bank agrees to return the
original of such Guaranty to the Guarantor.
6. Except as specifically provided herein, all terms and conditions of the
Loan Agreement remain in full force and effect, without waiver or modification.
All terms defined in the Loan Agreement shall have the same meaning when used in
this Amendment, except as otherwise specifically provided herein. This
Amendment and the Loan Agreement shall be read together, as one document.
3
<PAGE>
7. The Borrower hereby warrants that the representations and warranties
contained in Article IV of the Loan Agreement and in Section 2 of the Security
Agreement are true and correct with the same force and effect as if made on and
as of the date hereof.
8. In addition to the costs and expenses which the Bank is entitled to recover
from the Borrower under the Loan Agreement, the Borrower agrees to reimburse the
Bank for all costs and expenses, including reasonable attorney's fees, expended
or incurred by the Bank in the negotiation and preparation of this Amendment and
in the negotiation or review of any documentation thereto which may be required
by or delivered to the Bank in connection with the Loan Agreement, and in
connection with the enforcement of the Loan Agreement and this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first written above.
BORROWER:
Paper Warehouse, Inc.
By /s/ Yale T. Dolginow
---------------------------------------------
Title President and CEO
---------------------------------------------
BANK:
RICHFIELD BANK & TRUST CO.
By /s/ Daniel J. Robert
----------------------------------------------
Title Assistant Vice President
----------------------------------------------
GUARANTOR
/s/ Yale T. Dolginow
------------------------------------------------
Yale T. Dolginow
Acknowledged and agreed to as of the first day of October, 1997.
Firstar Bank Milwaukee, N.A., a participant in the Loan.
By Illegible
---------------------------
Title Vice President
-----------------------
4
<PAGE>
Exhibit A
AMENDED AND RESTATED REVOLVING PROMISSORY NOTE
THIS AMENDED AND RESTATED REVOLVING PROMISSORY NOTE amends and restates in
its entirety that certain Revolving Promissory Note in the principal amount of
$7,500,000 dated January 29, 1997, given by the Borrower to the Bank.
REVOLVING PROMISSORY NOTE
$7,500,000 Richfield, Minnesota
____________, 199_
FOR VALUE RECEIVED, on May 31, 1999, the undersigned promises to pay to
the order of Richfield Bank & Trust Co. (the "Bank") at the Bank's office in
Richfield, Minnesota, or at such other place as the holder hereof may
designate from time to time, the principal sum of (i) $7,500,000, or (ii) the
aggregate unpaid principal amount of all advances of credit made by the Bank
to the undersigned pursuant to Section 2.01 or Section 2.07 of that certain
Loan Agreement of even date herewith, by and between the undersigned, Yale T.
Dolginow and the Bank, as it may be amended from time to time (the
"Agreement"), whichever is less, plus interest thereon from the date of each
advance in whole or in part included in such amount, computed on the basis of
the actual number of days elapsed in a 360-day year, at an annual rate that
shall always be one half of one percent (0.50%) in excess of the Bank's Base
Rate and that shall change when and as said Base Rate shall change. Interest
is payable on the earlier of the 30th or last day of each month commencing
________, 199_, and at maturity. The term "Base Rate" means the rate
publicly announced by the Bank from time to time as its Base Rate; the Bank
may lend to its customers at rates that are at, above or below the Base Rate.
Notwithstanding the foregoing, if the transaction evidenced by this Note is
described in Minnesota Statutes Section 334.01, Subdivision 2, any principal
and interest past due more than 10 days shall bear interest from the date due
until paid at 2% per annum in excess of the rate otherwise then in effect,
which rate shall continue to vary based on further changes in the Base Rate.
All or any part of the unpaid balance of this Note may be prepaid at any
time without penalty. Amounts may be readvanced hereunder in accordance with
the terms of the Agreement, provided the principal balance outstanding shall not
exceed the amount first above written. The undersigned represents, certifies
and agrees that all advances and readvances under this Note shall be used solely
for those business purposes permitted under the Agreement.
In the event of any default in the payment of this Note or the occurrence
of an Event of Default under the terms of the Agreement or any of the "Loan
Documents" (as defined therein), or in any other note, obligation, agreement,
mortgage or writing heretofore, herewith or hereafter given to or acquired by
the holder of this Note to which any maker, endorser, guarantor or surety of
this Note or any other person providing security for this Note or for any
guaranty for this Note is a party; then in any such event the holder of this
Note may, at its option, declare this Note to be immediately due and payable and
thereupon this Note shall become due and payable for the entire unpaid
1
<PAGE>
principal balance of this Note plus accrued interest and other charges on
this Note without any presentment, demand, protest or other notice of any
kind.
The undersigned and each endorser, guarantor and surety hereof jointly and
severally agree to pay this Note; guarantee payment hereof; waive demand,
presentment, protest, notice of protest, notice of dishonor and notice of
nonpayment of this Note; consent to any extensions and renewals hereof without
notice; consent to the release of any of them by the holder hereof with or
without consideration or notice; exonerate the holder hereof from all duty and
obligation to make demand on anyone for payment of any collateral now or
hereafter securing this Note or to give notice to anyone of nonpayment thereof
or to collect or sell the same; consent to the extension, renewal, exchange,
surrender or release of any such collateral by the holder hereof with or without
consideration or notice; agree that no act, omission or thing, except full
payment of this Note, which but for this provision could act as a release or
impairment of their liability, shall in any way release, impair or affect the
liability of any of them; agree that when or at any time after this Note becomes
due the holder of this Note may offset or charge the full amount owing on this
Note against any account then maintained by any of them with the holder of this
Note without notice; agree to pay on demand all costs and expenses of the holder
of this Note in connection with the enforcement of this Note and any security
and guaranties for this Note, including without limitation reasonable attorneys'
fees, plus interest on such amounts at the rate set forth in this Note; and
consent to the personal jurisdiction of the state and federal courts located in
the State of Minnesota in connection with any controversy related in any way to
this Note or any security or guaranty of this Note, waive any argument that
venue in such forum is not convenient, and agree that any litigation initiated
by any of them against the Bank or any other holder of this Note relating in any
way to this Note or any security or guaranty for this Note shall be venued in
either the District Court of Hennepin County, Minnesota, or the United States
District Court, District of Minnesota, Fourth Division. Interest on any amount
under this Note shall continue to accrue, at the option of the holder of this
Note, until such holder receives final payment of such amount in collected funds
in form and substance acceptable to such holder.
No waiver of any right or remedy hereunder shall be valid unless in writing
executed by the holder hereof, and any such waiver shall be effective only in
the specific instance and for the specific purpose given. All rights and
remedies of the holder of this Note are cumulative and may be exercised singly,
concurrently or successively. This Note shall be governed by and construed in
accordance with the laws of the United States of America and the State of
Minnesota.
PAPER WAREHOUSE, INC.
By
-----------------------------------------
Title
--------------------------------------
2
<PAGE>
MASTER LEASE
LESSOR: Targa Financial, Inc.
a Minnesota corporation
ADDRESS: Carlson Center, Suite 250
One Carlson Parkway North
Plymouth, MN 55447
LESSEE: Paper Warehouse, Inc.
ADDRESS: 7630 Excelsior Boulevard
Minneapolis, MN 55426-4504
DATE: October 22, 1997
This contract is a Master Lease. All Supplements to this agreement shall be
bound by the terms and conditions as contained herein, whether said Supplement
is executed at the time of this agreement or at any subsequent time. In the
event of a conflict between the Master Lease and any Supplement hereto, the
Supplement shall control in respect to that Supplement.
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor (Targa
Financial, Inc., its assigns or any affiliated group within the meaning of
I.R.C. Sec. l504), in accordance with the terms and conditions set forth herein,
and in each Supplement, the equipment described in any and all Supplements and
in any attachments thereto together with all replacements, parts, repairs,
additions and accessories incorporated therein or now or hereafter affixed
thereto.
l. LEASE TERM. This Lease shall be effective from the date hereof. As to any
particular item of equipment, the term shall be as set forth in the Supplement
listing that particular equipment. After the equipment has been installed by
the manufacturer thereof, Lessee agrees both to advise Lessor on the date the
equipment is acceptable for use and thereupon to accept ("Acceptance") the
equipment on behalf of the Lessor. However, Lessee shall have no obligation with
respect to the lease of any item of equipment hereunder unless and until
Supplement I-A shall have been so executed and delivered by Lessee with respect
to such item of equipment. The duration of the Lease Term for any particular
item of equipment shall be specified in Supplement I.
2. PAYMENTS OF RENT. The Monthly Rent payable with respect to each item of
equipment shall be set forth for such item in Supplement I. All rental and
other payments by Lessee under this Lease shall be made to Lessor at its address
stated above or at such other address as Lessor may designate, and payment shall
arrive at such address on or before the date the rental payment shall be due.
This Lease provides for a net lease, and the rent and other amounts due
hereunder from Lessee to Lessor shall not be subject to any abatement,
recoupment, defense, claim, counterclaim, reduction, setoff, or any other
adjustment of any kind for any reason.
Any payment received from Lessee may be applied by Lessor at any time against
any obligation due and owing by Lessee under the Lease or any lease schedule
hereto, in Lessor's sole discretion, notwithstanding any statement on or
referred to in any remittance from Lessee or any prior application of such
payment. In the event any bankruptcy proceedings are instituted by or against
Lessee under the U.S. Bankruptcy Code within 90 days after receipt by Lessor of
any such payment, such payment shall be deemed applicable to unpaid obligations
then due hereunder in the inverse order of maturity.
3. MAINTENANCE. Lessee, at its own cost and expense, shall keep the
equipment in good repair, condition and working order, and shall furnish any and
all parts, mechanisms, and devices required to keep the equipment in good
working order in accordance with the manufacturer's operating, inspection,
repair, maintenance, and service manuals and any applicable service bulletins
and reasonable recommendations issued or made by the manufacturer and Lessor.
Lessee will maintain complete and accurate logs and records of all service,
maintenance and repairs. Lessee will make all such logs and records available
for inspection requirements.
If the manufacturer of the equipment offers a maintenance contract with
respect to the equipment, then the Lessee shall either purchase such maintenance
contract, or shall maintain the equipment to manufacturer's specifications to
make it continuously eligible for such a contract both during the term hereof
and as of the last day of the Lease Term; however, if the Lessor, in its sole
discretion, determines that the equipment is not being so maintained, the Lessor
may require Lessee to purchase such a maintenance contract or may itself
purchase such a maintenance contract and the Lessee shall pay the cost thereof
to Lessor upon demand as additional rent.
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<PAGE>
Lessee agrees to make the equipment available for inspection, as scheduled by
Lessor, to insure compliance with the terms of this section. If Lessor, or its
agent, determines that Lessee has violated any provision of this section, and,
after written notice of such deficiency, Lessee fails to cure the violation
within sixty (60) days after receipt of written notice from Lessor, Lessee shall
be in default under the Lease and Lessor may proceed to protect its interest in
the manner herein provided.
4. ENCUMBRANCES ON EQUIPMENT BY LESSEE. Lessee shall keep the equipment free
and clear of all levies, charges, encumbrances and claims, including without
limitation any levies, liens, charges, encumbrances or claims of the holders of
any interest in the real estate on which it is located or of any personal
property to which it is connected. Further Lessee will, upon request by Lessor,
obtain and deliver to Lessor a waiver of such liens or claims as to the
equipment in recordable form at sole cost of Lessee. If Lessee fails to provide
such waiver, the Lessor may, at its sole option, obtain such waiver and the cost
of obtaining said waiver, including reasonable attorneys' fees and maximum
interest allowed by law, will be added to the remaining balance of the Lease and
fully amortized over said period or, at Lessor's option, said added costs may be
immediately due and payable by Lessee.
5. INDEMNIFICATION OF LESSOR FROM LIABILITY FOR TAXES. Lessee agrees to pay
and does hereby indemnify Lessor against, and hold Lessor harmless from, all
income, franchise, sales, use, personal property, ad valorem, value added,
leasing, leasing use, stamp or any and all other taxes, levies, imports, duties,
charges, or withholdings of any nature, together with any and all penalties,
fines or interest thereon, arising out of the transactions contemplated by this
Lease and imposed against Lessor, Lessee or the equipment by any federal, state,
local or foreign government or taxing authority upon or with respect to the
equipment or upon the sale, purchase, ownership, delivery, leasing, possession,
use, operation, return or other disposition thereof, or upon the rentals,
receipts or earnings arising therefrom, or upon or with respect to this Lease
excluding, however, any such imposition on, or measured solely by, the net
income of Lessor. All amounts payable by Lessee under this section shall be
immediately payable. In case any report or return is required to be made with
respect to any obligation of Lessee arising out of this section, Lessee will, at
Lessor's request, either make such report or return in such manner as to show
the respective interest of Lessor or will notify Lessor of such requirement and
make such report or return in such manner as shall be satisfactory to Lessor.
Lessee covenants and agrees to pay any such taxes to the appropriate taxing
authority, and discharge before the same become delinquent, all taxes, fees, or
other charges of any nature whatsoever, without proration, together with any
related interest or penalties ("Imposition") now or hereafter imposed, assessed
or payable during the term of the relevant Equipment Schedule including any
extension thereof or an Imposition relating to a record date or status date that
fell within the term of the relevant Equipment Schedule including any extension
thereof or is otherwise associated with Lessee's leasing, possession or use of
the Equipment against Lessor, Lessee or the Equipment. Because the payment due
date or reimbursement date for an Imposition may occur after the expiration or
termination of the term of the relevant Equipment Schedule, it is understood and
agreed that Lessee's liability for such Impositions shall survive the expiration
or termination of the term of the relevant Equipment Schedule.
6. WARRANTIES.
(a) Lessee warrants that each item of equipment will be installed at the
location designated in the Supplement and will be kept in good repair, condition
and working order and that upon satisfactory inspection and certification for
maintenance by manufacturer Lessee will fully and finally accept each item of
equipment under this Lease. On occurrence of the aforementioned events, Lessee
will execute concurrently herewith Supplement I-A. LESSEE HAS SELECTED BOTH THE
EQUIPMENT AND THE MANUFACTURER OR OTHER SUPPLIER OF THE EQUIPMENT. LESSOR HAS
NOT MADE AND MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER,
INCLUDING THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR
ANY PARTICULAR PURPOSE, AND EXPRESSLY DISCLAIMS THE SAME, AND, AS TO LESSOR,
LESSEE LEASES THE EQUIPMENT AS IS. LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR
ANY CLAIM, LOSS OR DAMAGE, WHETHER INCIDENTAL OR CONSEQUENTIAL, CAUSED OR
ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY ANY OF THE EQUIPMENT, BY ANY
INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN, BY ANY INCIDENT WHATSOEVER
IN CONNECTION THEREWITH, ARISING IN STRICT LIABILITY, NEGLIGENCE, GROSS
NEGLIGENCE OR OTHER MALFEASANCE, OR IN ANY RELATED TO OR ARISING OUT OF THIS
AGREEMENT AND WHETHER INVOLVING PERSONAL INJURY, PROPERTY DAMAGE OR OTHERWISE.
Notwithstanding the foregoing, Lessee shall be entitled to the benefit of any
applicable manufacturer's warranties, and, to the extent assignable, such
warranties are hereby assigned, until termination of said warranty or expiration
of this Lease, whichever occurs first, and so long as no default has occurred
and is continuing, by Lessor to Lessee for the benefit of Lessee.
(b) Lessee warrants that Lessee shall keep the equipment in good and
efficient working order, condition and repair, reasonable wear and tear
excepted, and acceptable for maintenance under the manufacturer's maintenance
agreement at the expiration of the Lease Term.
7. AUTHORITY OF LESSEE TO ENTER LEASE. Lessee hereby warrants and represents
to Lessor, its respective successors and assigns that Lessee is a corporation
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and the jurisdiction(s) where the equipment will be located and
has adequate corporate power to enter into and perform this Lease. Lessee
warrants that this Lease has been duly authorized, executed and delivered by
Lessee and constitutes a valid, legal, and binding agreement of Lessee,
enforceable in accordance with its terms. Lessee warrants that the entering
into and performance of this Lease will not violate any judgment, order, law or
regulation applicable to
2
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Lessee. Lessee warrants that this Lease will not result in a breach of any
provision of Lessee's Articles of Incorporation or Bylaws. Lessee warrants
that this Lease will not result in the creation of any lien, charge, security
interest or other encumbrance upon any assets of Lessee or on the equipment
leased herein and Lessee will not default on any instrument to which Lessee
is a party or by which it or its assets may be bound. Lessee warrants that
no consent or approval of, giving of notice to, registration with, or taking
of any other action in respect of, any state, Federal, or other governmental
authority or agency is required with respect to the execution, delivery and
performance by the Lessee of this Lease or, if any such approval, notice,
registration or action is required, it has been obtained. Lessee warrants
that there are no actions, suits or proceedings pending or, to the knowledge
of the Lessee, threatened against or affecting the Lessee in any court or
before any governmental commission, board or authority which, if adversely
determined, will have a materially adverse effect on the ability of the
Lessee to perform its obligation under this Lease.
8. COVENANT OF QUIET ENJOYMENT. Lessor hereby covenants that so long as
Lessor shall have received from Lessee the Total Monthly Rent as set forth in
Supplement I on or before the tenth day of each month following the Rental
Commencement Date and that so long as no default or breach under the Lease has
occurred and is continuing hereunder, Lessee shall and may quietly have, hold
and enjoy the equipment and every part thereof leased hereunder for the term of
this Lease, as such term may be extended hereunder, free from disturbance by
Lessor or its officers, agents, employees, successors or assigns, or by anyone
claiming by, through or under Lessor.
9. LOCATION OF EQUIPMENT. The equipment shall be kept by Lessee, subject to
inspection by Lessor, at Lessee's address, as stated on each Supplement I, and
shall not be relocated without prior written consent of Lessor. Such consent
shall not be unreasonably withheld.
10. LESSEE'S DUTY OF DUE CARE. Lessee shall use the equipment with due care
to prevent injury thereto, and to any person or property, in conformity with all
applicable laws, ordinances, rules, regulations and other requirements of any
insurer or governmental body with respect to the use, maintenance and operation
of equipment subject to this Lease. In case any additional or other equipment,
appliance or alteration is required to be made or installed on any item of
equipment in order to comply with such laws, regulations, requirements and
rules, Lessee agrees to make or install such equipment, appliance or alteration
at its own cost and expense, and upon such installation, title thereto shall
immediately vest in Lessor without any further act by Lessor and Lessee.
11. EQUIPMENT MODIFICATION AND IDENTIFICATION. Notwithstanding the above,
Lessee shall not modify any equipment without the prior written approval of
Lessor, which approval shall not be unreasonably withheld, provided, however,
that Lessee shall be entitled, from time to time during the term of this Lease,
to acquire and install, at Lessee's expense, such additional features, options,
or modifications as may be available and which will not impair the originally
intended function or use of the equipment in which they are installed and which
will not interfere with Lessee's ability to obtain and maintain the maintenance
contract. Lessee shall add such safety modifications as are recommended from
time to time by the manufacturer. Such additional features, options or
modifications shall be readily removable without damage to the equipment and
shall be removed by Lessee before the equipment is returned to Lessor. Should
any damage occur, Lessee shall repair all damage to the equipment resulting from
such installation and removal so as to restore the equipment to the condition in
which it existed prior to the installation. Any part or accessories not so
removed shall become the property of Lessor. It is the intention and
understanding of both Lessor and Lessee that the equipment shall be and at all
times remain separately identifiable personal property. Lessee shall not permit
any equipment to be installed in, or used, stored or maintained with, any
personal property in such manner or under such circumstances that such equipment
might be or become an accession to or confused with such other personal property
or realty.
12. INSURANCE. Lessee shall provide, maintain and pay for any insurance
against casualty to the equipment and for the full replacement value thereof as
determined by Lessor. The full replacement value shall not be less than
casualty value. Said insurance shall name Lessor or any of its assigns as the
loss payee. Lessee shall also provide, maintain and pay for public liability
and property damage insurance, which shall name Lessor as additional insured.
Lessee shall also provide, maintain and pay for such additional insurance
protection as Lessor shall reasonably require. Lessee shall, upon request of
Lessor or the Lender, provide evidence of such insurance coverage.
13. RETURN OF EQUIPMENT. Upon the expiration or earlier termination of this
Lease with respect to any item of equipment, Lessee shall dismantle and return,
at Lessee's expense, the same to Lessor (at a location designated by Lessor
within the Continental United States) in the condition described in Section 3.
Lessee shall arrange and pay for all such repairs and work on any item of
equipment as may be necessary for the manufacturer to accept the equipment at
the time of surrender under contract maintenance at its then standard rates.
14. CASUALTY. Lessee hereby assumes and shall bear the entire risk of
casualty, whether or not insured against, of the equipment from any and every
cause whatsoever, and from requisition for use by governmental authority under
the power of eminent domain or otherwise (Requisition of Use), from the date of
commencement of this Lease.
(a) In the event any item of equipment is physically damaged to a
material extent by any occurrence whatsoever, the Lessee shall immediately
notify the Lessor of such damage.
(b) In the event the equipment is damaged, Lessor shall have the option
of requiring Lessee to: (1) Have the damage repaired, at its expense, in
conformance with Section 3 of this Lease, without interruption of monthly rental
and other payments; or (2) continue all payments where the equipment cannot be
repaired, without interruption, as if no such damage had occurred, and purchase
in Lessor's name equipment identical to the equipment so damaged and cause such
3
<PAGE>
equipment to be delivered to the equipment location whereupon such equipment
shall become subject to all of the terms and conditions of this Lease, free of
all liens and encumbrances; or (3) pay to Lessor, on the following date on which
the next monthly rental payment is due and payable, an amount equal to the
casualty value together with the monthly rental charges and other charges
accrued and unpaid as of this date, whereupon this Lease shall be terminated.
(c) Following performance of Lessee pursuant to either (b)(2) or (b)(3)
of Section 14 above, title to the damaged equipment shall pass to Lessee.
15. INDEMNIFICATION OF LESSOR FROM LIABILITY. Lessee shall and does hereby
indemnify Lessor and Lender against, and hold Lessor and Lender harmless from,
any and all claims, actions, suits, proceedings, damages, costs,
expenses,obligations, liabilities and liens, including without limitation any of
the foregoing arising or imposed without Lessor's fault or negligence, or in
connection with latent or other defects, or any claim for patent, trademark or
copyright infringement or under the doctrine of strict liability, negligence,
gross negligence or any other malfeasance, on account of personal injury,
property damage or otherwise, imposed on or incurred by or asserted against
Lessor or Lender or their successors or assigns, including without limitation
attorney's fees incurred on account of any of the foregoing, in any way relating
to this Lease or any Supplement thereby, or in any way relating to the
manufacture, purchase, acceptance, rejection, ownership, delivery, installation,
lease, sublease, possession, use, operation, maintenance, condition,
registration, sale, return, replacement, storage or disposition of any item of
equipment, or any accident in connection therewith, or by operation of law.
Lessee shall give Lessor and Lender prompt written notice of any matter hereby
indemnified against and agrees that unless directed to the contrary by notice by
Lessor and/or Lender, Lessee shall assume full responsibility for the defense
thereof. Lessee shall not assert against Lender any defense, counterclaim, or
offset that Lessee may have against Lessor.
16. TRANSFER BY LESSOR. Lessor may assign, grant a security interest in, or
otherwise dispose of, or transfer all or any portion of its right, title and
interest in, to and under this Lease and/or the equipment, together or
separately, to one or more persons or entities (individually or collectively
"Lender") without notice to or consent of Lessee. Upon any such transfer, this
Lease shall remain in full force and effect. If Lessee is given notice of any
such transfer, it shall acknowledge receipt thereof in writing, and execute such
further instruments as may be reasonably requested by Lender with respect to
such transfer. Unless otherwise expressly agreed by Lender, Lender shall not
assume any of the obligations of Lessor under this Lease.
17. LESSEE'S OBLIGATIONS UNCONDITIONAL. Lessee's obligation to pay all Rent,
and the rights of Lessor and the Lender in and to such payments, shall be
absolute and unconditional and shall not be subject to any abatement, reduction,
setoff, defense, counterclaim or recoupment for any reason, including without
limitation any such amount due or alleged to be due to, or by reason of, any
past, present or future claims which Lessee may have against Lessor, the
manufacturer or any other seller of the equipment, Lender or any other person or
entity, for any reason. Except as otherwise expressly provided herein, this
Lease shall not terminate, nor shall the respective obligations of the Lessor or
the Lessee be affected, by reason of defect in or casualty to or obsolescence of
the equipment from any cause, or by the interference with the use thereof by any
private person, corporation or governmental authority, or any other disability
of the Lessee to use the equipment, or for any other cause, whether similar or
dissimilar to the foregoing, including, but not limited to, war, act of God,
governmental regulations, any present or future law or regulation to the
contrary notwithstanding. It is the express intention of the Lessor and the
Lessee that all Rent payable by the Lessee hereunder shall be, and continue to
be, payable in all events unless the obligation to pay the same shall be
terminated pursuant to the express provisions of this Lease.
18. ASSIGNMENT AND SUBLEASE. WITHOUT PRIOR WRITTEN CONSENT OF LESSOR, LESSEE
SHALL NOT ASSIGN, PLEDGE, HYPOTHECATE OR IN ANY OTHER WAY TRANSFER THIS LEASE,
THE EQUIPMENT OR ANY PART THEREOF, OR ANY INTEREST THEREIN. Lessee shall not
permit the equipment or any part thereof to be used by anyone other than Lessee
or Lessee's employees; provided, however, that Lessee may assign its rights
hereunder to any other party that agrees to perform Lessee's obligations
hereunder, with the prior written consent of Lessor and Lender, which consent
shall not be unreasonably withheld. Any such assignment, pledge, hypothecation
or transfer for which consent is required hereby and which is made without such
consent shall be void. The consent of Lessor to any of the foregoing applies
only to the specific instance in which consent is given, and shall not be deemed
a consent to any subsequent like act by Lessee or any other person. Subject to
the foregoing, and to Section 16 hereof, this Lease inures to the benefit of,
and is binding upon, the successors and assigns of the parties hereto. Lessee's
interest herein shall not be assigned by operation by law.
19. DEFAULT. Default shall occur if the Lessee fails to pay any rent or any
other amount when due and such failure continues for a period of ten days, or if
the Lessee fails to perform any other term or condition of this Lease and such
failure continues for a period of fifteen days after written notice is received
by Lessee at the address indicated for Lessee notification, or if Lessee becomes
insolvent or admits in writing its inability to pay its debts as they mature, or
applies for, consents to, or acquiesces in the appointment of a trustee or a
receiver for it or any of its property, or, in the absence of such application,
consent or acquiescence, a trustee or receiver is appointed for Lessee or for a
substantial part of its property and is not discharged within thirty days, or if
any bankruptcy or insolvency law, or any dissolution or liquidation proceeding,
is instituted by or against Lessee, and if instituted against Lessee is
consented to or acquiesced in by Lessee or remains for thirty days undismissed.
Upon the occurrence of any events of default, Lessor may exercise any one or
more of the following rights but is not limited to the remedies set forth
herein:
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<PAGE>
(a) Lessor may proceed by appropriate court action(s) to enforce
performance by Lessee of this Lease or to recover damages for the breach
thereof.
(b) Lessor may repossess any or all units of equipment without prejudice
to any other remedy or claim.
(c) After giving ten days notice to Lessee, Lessor may sell any or all
equipment at one or more public or private sale(s), or may lease any or all
units of equipment, and recover from Lessee as damages for Lessee's default
hereunder an amount equal to the amount, if any, by which the sum of (1) all
rent theretofore and thereafter payable hereunder; (2) all costs and expenses
incurred in locating, removing, storing, repairing, restoring and selling or
leasing such units of equipment; (3) all other amounts owing by Lessee
hereunder; and (4) all costs and expenses, including, but not limited to,
reasonable attorney's fees and other legal expenses, incurred by Lessor as a
result of Lessee's default hereunder, exceeds (i) the amount of total rent,
discounted to present value at the discount rate required for financing any
subsequent lease, as to any equipment so leased by Lessor, or (ii) the amount
received by Lessor upon a public or private sale of any equipment, or (iii) in
the event of no subsequent lease or sale, the fair market value, as determined
by the average of three independent appraisers, of any equipment; provided,
however, that upon receipt of payment in full of such amount from Lessee, Lessor
shall transfer to Lessee, without any representation or warranty of any kind,
expressed or implied, whatever title Lessor may then have to any units of
equipment which Lessor elects not to sell or lease.
(d) Lessor may, by notice to Lessee, declare this Lease terminated
without prejudice to Lessor's rights in respect to obligations then accrued and
remaining unsatisfied.
(e) Lessor may avail itself of any other remedy or remedies provided for
by any statute or otherwise available by law, in equity or in bankruptcy or
insolvency proceedings. The remedies set forth herein or referred to shall be
cumulative and not exclusive.
20. GENERAL.
(a) Lessee shall pay Lessor interest at the lesser of eighteen percent
(18%) per annum or the maximum interest rate permitted by applicable law, on any
amount past due from ten days after the date it is required to make any payment
of rent or other amount hereunder to the date such payment is made.
(b) Promptly upon Lessor's written request, Lessee agrees at Lessor's
expense to execute, acknowledge and deliver such instruments, and to take such
other action, as may reasonably be necessary in the opinion of the Lessor, or
Lessor's counsel, to protect Lessor's or any Lender's interests in the
equipment, this Lease and any Rent, including, but without limitation, the
obtaining and execution of landlord and mortgagee waivers, Uniform Commercial
Code financing statements in recordable form, and a search for any judgments or
liens against Lessee. Lessee also agrees to provide such financial information
relating to Lessee as Lessor may from time to time reasonably request. Lessor
may file or record a copy of this Lease, as a financing statement or for any
other purpose.
(c) This Agreement is, and is intended to be, a lease, and Lessee does
not acquire hereby any right, title or interest in or to the equipment except
the right to use the same as Lessee under the terms hereof.
(d) This Lease and all Supplements duly executed and attached hereto from
time to time constitute the entire agreement between the parties hereto with
respect to the equipment, and any change or modification hereto and any related
agreement must be in writing and signed by the parties hereto. To the extent,
if any, that this Lease constitutes chattel paper, as such term is defined in
the Uniform Commercial Code as in effect in any applicable jurisdiction, no
security interest therein may be created through the transfer or possession of
this Lease or of any counterpart of this Lease other than the original,
provided that if any Supplement to this Lease other than Supplement attached
hereto is executed by the parties hereto, (i) each such Supplement shall
constitute a new lease between the parties; (ii) there shall be a single
executed original of each such Supplement marked "Original"; (iii) all other
counterparts of such Supplement shall be marked "Duplicate"; and (iv) to the
extent, if any, that any such Supplement constitutes chattel paper (as defined
above) no security interest therein may be created through the transfer or
possession of the Original of this Lease or any counterpart of such Supplement
other than the Original of such Supplement.
(e) Lessor is not, and shall not be deemed to be, an agent, employee or
representative of Lessee or any manufacturer of any equipment, for any purpose
whatsoever.
(f) Lessee shall notify Lessor of any change in Lessee's mailing address
ten days prior to such change.
(g) If this Lease or any provision hereof shall be deemed invalid,
illegal or unenforceable in any respect or in any jurisdiction, the validity,
legality and enforceability of this Lease in other respects and in other
jurisdictions shall not be in any way impaired or affected thereby. No covenant
or condition of this Lease can be waived except by the written consent of the
party to be bound by such waiver.
(h) This Lease is made under and shall be governed by the laws of the
State of Minnesota.
(i) This Master Lease may be canceled by Lessee in writing, provided all
outstanding Supplements hereunder have either expired or have been terminated
with respect to their individual termination provisions, and that no Events of
Default are continuing under any Supplements, and Lessee has fulfilled all
obligations under all such Supplements.
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(j) Any notice hereunder required shall be in writing and shall be deemed
to be given when delivered or, if mailed, on the third day after mailing by
registered or certified mail, postage prepaid and addressed to Lessee or Lessor
at its respective address shown on the first page hereof.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be duly
executed, all as of the date first above written.
LESSOR: LESSEE:
TARGA FINANCIAL, INC. PAPER WAREHOUSE, INC.
By: /s/ Keith L. Swenson By: /s/ Yale T. Dolginow
------------------------------ ---------------------------
Print Name: Keith L. Swenson Print Name: Yale T. Dolginow
---------------------- -------------------
Title: Executive Vice President Title: President and CEO
--------------------------- ------------------------
6
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SUPPLEMENT NO. I(2)
EQUIPMENT SCHEDULE
PURPOSE: This Supplement No. I(2) is being executed and delivered pursuant to
that certain Master Lease Agreement ("Master Lease") bearing the date set forth
below, between Targa Financial, Inc. ("Lessor") and the Lessee named below, the
provisions of which are hereby incorporated herein by reference as to the
Equipment identified below. This Supplement, together with the terms and
conditions of the Master Lease incorporated by reference herein, constitutes the
Lease (hereinafter the "Lease") between the parties covering said Equipment.
LESSEE: Paper Warehouse, Inc.
MASTER LEASE AGREEMENT DATE: October 22, 1997
SUPPLEMENT AGREEMENT DATE: October 22, 1997
SUPPLEMENT COMMENCEMENT DATE: Defined as the date on which Lessee shall deliver
to Targa Financial, Inc. or its assignee a Certificate of Acceptance (Supplement
I-A) with respect to the Equipment covered hereby.
EQUIPMENT:
Qty. Type/Model Serial Number Description
--- ---------- ------------- -----------
1 IBM Software N/A OS/400 Facsimile Support,
Client Access, App. Dev.
Toolset, RPG/400, Performance
Tools Query
1 JDA Software N/A Retail System
1 Services N/A Implementation
Lessee shall own software at end of Basic Term for $1.00
TOTAL MONTHLY RENT FOR THIS EQUIPMENT: $ 18,382.00
--------------
EQUIPMENT INVOICE
LOCATION: 7630 Excelsior Boulevard LOCATION:
Minneapolis, MN 55426-4504
Attn: Cheryl Newell
(612) 936-1000
ACCEPTANCE: The Equipment to be accepted by delivery of a Certificate of
Acceptance in accordance with the Master Lease Agreement referred to above.
BASIC LEASE TERM AND RENTAL PAYMENT: The initial term ("Basic Term") shall be
36 months. The Basic Term shall commence on the first day of the calendar month
following the Supplement Commencement Date (or the Supplement Commencement Date
when it falls on the first day of a month). The first payment shall include a
pro rata portion of the monthly rent for the balance of the month after the
Supplement Commencement Date and be due on the first rental payment date as set
out in Supplement I-A. Thereafter, monthly rental payments shall be payable in
advance on or before the first day of each month during the term of the Lease.
<PAGE>
CASUALTY VALUE: The casualty value ("Casualty Value") for each Item of
Equipment shall be an amount equal to the sum of the product of the Monthly Rent
for such Item of Equipment multiplied by 35 less 1.39 percent of such product
for each Monthly Rental payment paid up to the time of the Casualty.
RENEWAL OPTIONS: Lessee must give written notice to Lessor not less than 60
days and not more than 90 days prior to the end of the Lease Term if Lessee
intends to negotiate a new lease for an additional period. If Lessee does not
notify Lessor, Lessee may not thereafter terminate this Lease or require removal
of the Equipment by Lessor except upon 60 days' prior written notice by Lessee
to Lessor. During any period beyond the Lease Term during which Lessee retains
the Equipment, the rental charge and all other terms of this Lease shall remain
in effect.
LESSOR: LESSEE:
TARGA FINANCIAL, INC. PAPER WAREHOUSE, INC.
By: /s/ Keith L. Swenson By: /s/ Yale T. Dolginow
------------------------------- ----------------------------
Print Name: Keith L. Swenson Print Name: Yale T. Dolginow
----------------------- --------------------
Title: Executive Vice President Title: President and CEO
---------------------------- -------------------------
Date: October 22, 1997 Date:
----------------------------- --------------------------
2
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SUPPLEMENT I-A
ACCEPTANCE CERTIFICATE
Pursuant to the Master Lease dated October 22, 1997, between
Targa Financial, Inc., Lessor, and the undersigned, Lessee, Lessee
hereby certifies that:
(1) The equipment as specified in Supplement No. I(2) has been
delivered to the location of Lessee set forth in Supplement
No. I(2) of the Master Lease and is the equipment described in
that Supplement.
(2) The equipment as specified in Supplement No. I(2) has been
inspected by authorized representatives of the Lessee.
(3) The equipment as specified in Supplement No. I(2) is in good
repair, working order and condition.
(4) The equipment as specified in Supplement No. I(2) has been
fully and finally accepted by Lessee.
(5) The first rental payment is due on November 1, 1997.
(6) No event of default has occurred and is continuing.
LESSEE:
PAPER WAREHOUSE, INC.
By: /s/ Yale T. Dolginow
----------------------------
Print Name: Yale T. Dolginow
--------------------
Title: President and CEO
-------------------------
Date:
--------------------------
<PAGE>
ATTACHMENT I
The property described herein is located initially at 7630 Excelsior Boulevard,
Minneapolis, Minnesota 55426-4504 and is being leased by the party named herein
as "Debtor" from the party named herein as "Secured Party" under a true Lease
dated as of October 22, 1997 and Supplement No. I(2) dated October 22, 1997.
Neither the execution nor the filing hereof shall in any manner imply that the
relationship between such parties is other than as Lessee and Lessor,
respectively. This financing statement is filed solely as a precautionary
measure to protect the interests of the parties in the event of contrary
assertions by any third party.
EQUIPMENT:
Qty. Type/Model Serial Number Description
--- ---------- ------------- -----------
1 IBM Software N/A OS/400 Facsimile Support,
Client Access, App. Dev.
Toolset, RPG/400, Performance
Tools Query
1 JDA Software N/A Retail System
1 Services N/A Implementation
LESSEE:
PAPER WAREHOUSE, INC.
By: /s/ Yale T. Dolginow
-----------------------------
Print Name: Yale T. Dolginow
---------------------
Title: President and CEO
--------------------------
Date:
---------------------------
<PAGE>
UCC Financing Statement
(deleted)
<PAGE>
SUPPLEMENT NO. I(1)
EQUIPMENT SCHEDULE
PURPOSE: This Supplement No. I(1) is being executed and delivered pursuant to
that certain Master Lease Agreement ("Master Lease") bearing the date set forth
below, between Targa Financial, Inc. ("Lessor") and the Lessee named below, the
provisions of which are hereby incorporated herein by reference as to the
Equipment identified below. This Supplement, together with the terms and
conditions of the Master Lease incorporated by reference herein, constitutes the
Lease (hereinafter the "Lease") between the parties covering said Equipment.
LESSEE: Paper Warehouse, Inc.
MASTER LEASE AGREEMENT DATE: October 22, 1997
SUPPLEMENT AGREEMENT DATE: October 22, 1997
SUPPLEMENT COMMENCEMENT DATE: Defined as the date on which Lessee shall deliver
to Targa Financial, Inc. or its assignee a Certificate of Acceptance (Supplement
I-A) with respect to the Equipment covered hereby.
EQUIPMENT:
Qty. Type/Model Serial Number Description
--- ---------- ------------- -----------
1 9406 620-2179 280WM IBM AS/400 System Unit w/
F.C. #'s (3) 0350, 2664, 2721,
2724, 2726, (2) 3002, 5532,
5534, (13) 6807, 7128,
Software Version V4R1
1 3570-B01 22543 IBM Magstar Tape Subsystem
1 7852-40Z 6BMRLW IBM AS/400 Modem
1 9910-B52 6BMRLX Unity UPS, w/(2) Battery Packs
1 3486-BG3 6BMRLY IBM AS/400 Display
TOTAL MONTHLY RENT FOR THIS EQUIPMENT: $ 3,758.00
--------------
EQUIPMENT INVOICE
LOCATION: 7630 Excelsior Boulevard LOCATION:
Minneapolis, MN 55426-4504
Attn: Cheryl Newell
(612) 936-1000
ACCEPTANCE: The Equipment to be accepted by delivery of a Certificate of
Acceptance in accordance with the Master Lease Agreement referred to above.
BASIC LEASE TERM AND RENTAL PAYMENT: The initial term ("Basic Term") shall be
36 months. The Basic Term shall commence on the first day of the calendar month
following the Supplement Commencement Date (or the Supplement Commencement Date
when it falls on the first day of a month). The first payment shall include a
pro rata portion of the monthly rent for the balance of the month after the
Supplement Commencement Date and be due on the first rental payment date as set
out in Supplement I-A. Thereafter, monthly rental payments shall be payable in
advance on or before the first day of each month during the term of the Lease.
<PAGE>
CASUALTY VALUE: The casualty value ("Casualty Value") for each Item of
Equipment shall be an amount equal to the sum of the product of the Monthly Rent
for such Item of Equipment multiplied by 42 less 1.39 percent of such product
for each Monthly Rental payment paid up to the time of the Casualty.
RENEWAL OPTIONS: Lessee must give written notice to Lessor not less than 60
days and not more than 90 days prior to the end of the Lease Term if Lessee
intends to negotiate a new lease for an additional period. If Lessee does not
notify Lessor, Lessee may not thereafter terminate this Lease or require removal
of the Equipment by Lessor except upon 60 days' prior written notice by Lessee
to Lessor. During any period beyond the Lease Term during which Lessee retains
the Equipment, the rental charge and all other terms of this Lease shall remain
in effect.
FAIR MARKET VALUE OPTION: So long as no Event of Default has occurred and is
continuing hereunder and Lessee has provided a 60 days prior written notice to
Lessor, Lessee may renew or purchase the Equipment at the expiration of the
Basic Term for Fair Market Value. Lessee may add and/or upgrade the Equipment
at any time during the Basic Term and Lease for Fair Market Value.
If Lessee and Lessor cannot agree upon a Fair Market Value, Lessor and Lessee
will obtain three independent bona fide bids each from dealers/brokers/lessors
who are members in good standing with the Computer Dealers and Lessors
Association, "CDLA". Upon written receipt of all six bona fide bids, the lowest
and highest bids will be eliminated and the Fair Market Value will be the
average of the remaining four bids.
LESSOR: LESSEE:
TARGA FINANCIAL, INC. PAPER WAREHOUSE, INC.
By: /s/ Keith L. Swenson By: /s/ Yale T. Dolginow
------------------------------- ----------------------------
Print Name: Keith L. Swenson Print Name: Yale T. Dolginow
----------------------- --------------------
Title: Executive Vice President Title: President and CEO
---------------------------- -------------------------
Date: October 22, 1997 Date:
----------------------------- --------------------------
2
<PAGE>
SUPPLEMENT I-A
ACCEPTANCE CERTIFICATE
Pursuant to the Master Lease dated October 22, 1997, between Targa
Financial, Inc., Lessor, and the undersigned, Lessee, Lessee hereby certifies
that:
(1) The equipment as specified in Supplement No. I(1) has been delivered to the
location of Lessee set forth in Supplement No. I(1) of the Master Lease and
is the equipment described in that Supplement.
(2) The equipment as specified in Supplement No. I(1) has been inspected by
authorized representatives of the Lessee.
(3) The equipment as specified in Supplement No. I(1) is in good repair,
working order and condition.
(4) The equipment as specified in Supplement No. I(1) has been fully and
finally accepted by Lessee.
(5) The first rental payment is due on November 1, 1997.
(6) No event of default has occurred and is continuing.
LESSEE:
PAPER WAREHOUSE, INC.
By: /s/ Yale T. Dolginow
---------------------------
Print Name: Yale T. Dolginow
-------------------
Title: President and CEO
------------------------
Date:
-------------------------
<PAGE>
ATTACHMENT I
The property described herein is located initially at 7630 Excelsior Boulevard,
Minneapolis, Minnesota 55426-4504 and is being leased by the party named herein
as "Debtor" from the party named herein as "Secured Party" under a true Lease
dated as of October 22, 1997 and Supplement No. I(1) dated October 22, 1997.
Neither the execution nor the filing hereof shall in any manner imply that the
relationship between such parties is other than as Lessee and Lessor,
respectively. This financing statement is filed solely as a precautionary
measure to protect the interests of the parties in the event of contrary
assertions by any third party.
EQUIPMENT:
Qty. Type/Model Serial Number Description
--- ---------- ------------- -----------
1 9406 620-2179 280WM IBM AS/400 System Unit w/
F.C. #'s (3) 0350, 2664, 2721,
2724, 2726, (2) 3002, 5532,
5534, (13) 6807, 7128,
Software Version V4R1
1 3570-B01 22543 IBM Magstar Tape Subsystem
1 7852-40Z 6BMRLW IBM AS/400 Modem
1 9910-B52 6BMRLX Unity UPS, w/(2) Battery Packs
1 3486-BG3 6BMRLY IBM AS/400 Display
LESSEE:
PAPER WAREHOUSE, INC.
By: /s/ Yale T. Dolginow
-----------------------------
Print Name: Yale T. Dolginow
---------------------
Title: President and CEO
--------------------------
Date:
---------------------------
<PAGE>
UCC Financing Statement
(deleted)
<PAGE>
LOAN AGREEMENT
SBA Debenture No. COC L 837046 3001 MN
To induce TWIN CITIES-METRO CERTIFIED DEVELOPMENT COMPANY (hereinafter
called "CDC") to make, and in consideration of the making of a loan or any
part thereof (hereinafter called "Loan") to Paper Warehouse, Inc.
(hereinafter "Borrower") of the proceeds of a Debenture issued by the CDC and
pursuant to Authorization and Debenture Guaranty of Small Business
Administration (which Authorization and all amendments thereof, heretofore
and hereafter issued, are hereinafter collectively called "Authorization"),
Borrower hereby represents, and warrants to and agrees with, CDC, its
successors and assigns, and each of them that:
1. NOTICE. The loan shall be evidenced by a Note dated August 15, 1995
executed by the Borrower, in proper form, and such Note and all provisions
thereunder shall be wholly incorporated into this Agreement and made a part
hereof. The Note shall provide the CDC with total funds not to exceed those
necessary to: repay the principal and interest on the aforementioned Debenture
and recover expenses related to servicing the Loan. The Loan Interest Rate
shall be derived by computing the sum of the Debenture Interest Rate, the
Issuer's Servicing Fee, the Fiscal Agent's Servicing Fee, and a factor to
account for different frequencies of repayment as between the Loan and
Debenture. The Issuer's Servicing Fee shall be 1/2 percent per annum of the
unpaid balance of Debenture and may not exceed this rate. The Fiscal Agent's
Servicing Fee shall be set by the Servicing Agency Agreement referred to in
Section 2, supra.
2. SERVICE AGENT AGREEMENT. The CDC and Borrower shall execute a
Servicing Agent Agreement (hereinafter called "SAA") which shall provide for
lending and repayment of debenture proceeds to be handled through an escrow
arrangement with Colson Services Corp. (hereinafter called "Colson"). The CDC
shall prepare the SAA, including therein all known information, and the SAA
shall be subject to the terms of the Master Servicing Agency Agreement between
the United States Small Business Administration (hereinafter called "SBA") and
Colson. The SAA and all provisions thereunder shall be wholly incorporated into
this agreement and made a part hereof, and a breach of the underlying SAA, shall
be construed as breach of this Agreement.
3. LOAN PROCESSING FEE. The Loan Processing Fee shall be a one-time
charge assessed by the CDC, payable to CDC from the proceeds of the Debenture,
of no more than 1.5 percent of the face amount of the Debenture, which shall be
used to cover the following allowable costs: general administration and
overhead expenses, contractual expenses (i.e., staff services) and expenses
related to the preparation of the application. The CDC shall provide an
itemized justification for the fee assessed and the fee shall be subject to
review and approval by SBA.
4. DEBENTURE PROCEEDS. If the proceeds of the Debenture are insufficient
to cover all disbursements required by the terms of the SAA, Borrower shall be
solely responsible for providing whatever additional funds may be needed to
comply with the SAA. These disbursements, which
<PAGE>
shall be specified in the SAA, may include, without being limited to,
principal and accrued interest of interim lender, the Reserve Fund, the
Processing Fee of CDC and the initial fee of the Servicing Agent.
5. INJECTED FUNDS. The CDC shall inject One Hundred Five Thousand and
No/100----- dollars ($105,000.00) into the project prior to any disbursement
of debenture proceeds, in the form of cash or kind, acceptable to SBA; if any
of said funds are borrowed by CDC, repayment terms must be for a term equal,
at least, to the terms of the Debenture, and any collateral subordinate to
the liens securing the Debenture or the Loan. If any portion of said funds
are borrowed, the CDC will supply to SBA copies of debt instruments. This
CDC injection may not be repaid at a rate faster than the Debenture.
Borrower to provide to the CDC, on or before the final closing date, those
funds referenced above to be injected by the CDC into the project.
6. REIMBURSABLE EXPENSES. In addition to all costs evidenced by the
Note, the Borrower shall, on demand, reimburse CDC for all expenses incurred, or
which may be hereafter incurred, by CDC in connection with or associated with
the closing of this Loan. Such reasonable costs may include, without being
limited to, site survey, plant survey, title company reports, filing, recording
fees and legal fees. These costs shall be paid by Borrower from its own funds
(not from injection in the project cost) and are not part of project costs.
7. CHANGE OF OWNERSHIP. Borrower hereby agrees that any sale, transfer,
assignment or delivery, for collateral or any other purposes, of all or any pat
of the shares of capital stock of Borrower sufficient to effect a change of
ownership or control of the business, without prior written consent of SBA,
shall constitute a default under the Note, which has been wholly incorporated
into this Agreement. The entire unpaid balance of principal and interest shall
upon any such sale, transfer, assignment or delivery, and at the CDC's or SBA's
option, become immediately due and payable, without notice or demand.
8. CDC OWNERSHIP OR INTERESTS. If, during the term of the Note, the
Borrower or its affiliates acquire, directly or indirectly, in excess of 10
percent ownership or interest in the CDC, the Note shall immediately become due
and payable.
9. BOOKS, RECORDS, AND REPORTS. Borrower shall at all times keep proper
books of account in a manner satisfactory to the CDC and SBA. Borrower hereby
authorizes the CDC or SBA to reasonably make or cause to be made, at Borrower's
expense and in such manner and at such times as the CDC or SBA may require, (a)
inspections and audits of any books, records and papers in the custody or
control of Borrower or others, relating to Borrower's financial or business
conditions, including the making of copies thereof and extracts therefrom, and
(b) inspections and appraisals of any of Borrower's assets. Borrower hereby
authorizes all Federal, State and Municipal authorities (a) to furnish reports
of examinations, records, and other information relating to the conditions and
affairs of Borrower and any desired information or reports, returns, files, and
records of such authorities upon request therefor by the CDC or SBA, and (b) to
permit representatives of the CDC or SBA to have full access from time to time,
and make copies of any extracts from, any and all
2
<PAGE>
reports or returns by, or with respect to Borrower, and all reports of
examiners or other information concerning Borrower contained in the files and
records of examiners or other information concerning Borrower contained in
the files and records of such authorities. The record books documented and
accounting procedures and practices of the Borrower relating to this
agreement shall be subject to audit examination by the CDC.
10. DISTRIBUTION. Borrower will not, without the prior written consent of
the CDC and SBA, declare or pay any dividend or make any distribution upon its
capital stock, or purchase or retire any of its capital stock, or consolidate,
or merge with any other company, or give any preferential treatment, make any
advance, directly or indirectly, by way of loan, gift, bonus or otherwise, to
any company directly or indirectly controlling or affiliated with or controlled
by SBC, or to any officer, director or employee of SBA or of any such company;
provided, however, that if the SBC has elected to be taxed under Subchapter S of
the Internal Revenue Code, the SBC shall be permitted, notwithstanding the
foregoing, to annually distribute cash dividends to all the then shareholders of
SBC in an amount equal to the combined federal and state income tax liability
(if any) of the shareholders arising from their respective allocable share of
the earnings and profits of the SBC for such year, with each shareholder's
federal and state income tax liability, including any minimum tax liability, to
be computed on the basis of the highest marginal tax rate for individuals under
the Internal Revenue Code of 1986, as amended, and relevant state law (provided
such distributions shall be made in accordance with the law and in proportion to
the record date for distributions shall be made on a quarterly basis in such a
manner as to allow the shareholders of SBC to make timely quarterly payments of
estimated liability, and in no event shall such distributions be made later than
the date prescribed by law for filing of individual tax returns) and further
provided that the foregoing prohibitions shall not apply to sale of product or
other transactions with affiliates of SBC in the normal course of business nor
to any salary or bonus paid to any employee, officer or director of the Company
in accordance with annual compensation applicable to said employees, officers
and/or directors.
11. UNANTICIPATED EXPENSES. The Borrower shall be solely responsible to
provide for additional equity funds to cover additional project costs incurred
as result of overruns or unanticipated expenses in financing the project.
12. AUTHORIZATION AND DEBENTURE GUARANTY. The Authorization and Debenture
Guaranty ("Authorization") issued by the Small Business Administration,
Minneapolis District Office, on May 25. 1995 and acknowledged and accepted by
the CDC and Borrower, in a timely fashion, shall be wholly incorporated into
this Agreement and made a part hereof. Any discrepancies or inconsistencies
arising between the provisions of the Authorization and this Agreement shall be
construed in favor of the interpretation given the Authorization which shall be
controlling.
13. PARTIES AFFECTED. This Agreement shall be binding upon Borrower and
Borrower's successors and assigns and shall inure to the benefit of the CDC and
its successors and assigns.
3
<PAGE>
14. INDEMNIFICATION. The Borrower agrees to indemnify and save the CDC or
its assigns harmless against any and all liability with respect to, or resulting
from any delay in discharging any obligation of the Borrower.
IN WITNESS WHEREOF, Borrower has executed or caused to duly executed this
Agreement on this 15th day of August, 1995.
------------------------------------
------------------------------------
------------------------------------
Paper Warehouse, Inc.
------------------------------------
Borrower
Attest: By:
--------------------------------- ---------------------------------
TWIN CITIES-METRO
CERTIFIED DEVELOPMENT COMPANY
Attest: By:
--------------------------------- ---------------------------------
Assistant President President
Prepared by: Twin Cities-Metro Certified Development Company
4105 Lexington Avenue North, Suite 170
Arden Hills, MN 55126
4
<PAGE>
EXHIBIT 11
Paper Warehouse, Inc.
<TABLE>
<CAPTION>
- All amounts in thousands (except per share amounts) -
FYE January 1997 2Q YTD August 1, 1997
----------------------- ---------------------
Primary Computations
- --------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Net Earnings 808 293
Average common shares
outstanding 2,203 2,203
Average number of common
share equivalents:
Stock Options 127 128
Warrants 184 184
----- -----
Adjusted common equivalent
shares outstanding - primary 2,514 2,515
------- -------
Primary earnings per share $ 0.32 $ 0.12
------- -------
------- -------
<CAPTION>
Fully Diluted computations
- --------------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Net Earnings 808 293
Average common equivalent
shares outstanding - primary 2,514 2,515
Additional common share
equivalents:
Stock Options 0 1
Warrants - -
----- -----
Adjusted common equivalent
shares outstanding -
fully diluted 2,514 2,516
------- -------
Fully diluted earnings
per share $ 0.32 $ 0.12
------- -------
------- -------
</TABLE>
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Paper Warehouse, Inc.
We consent to the use of our report included herein and to the references to
our firm under the headings "Selected Financial and Operating Data" and
"Independent Public Accountants" in the prospectus.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 5, 1997
