<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
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 (Primary standard industrial (I.R.S. employer
of classification code number) identification number)
incorporation or organization)
</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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING
SECURITIES TO BE REGISTERED PRICE(1)
<S> <C>
Common Stock, $0.01 par value..................................................... $19,166,670
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE(1)
<S> <C>
Common Stock, $0.01 par value..................................................... $5,810.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 OCTOBER 1, 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, cancel or modify 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 124 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-OWNED 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 (1) COLORADO (5) LOUISIANA (4) Fargo
KANSAS (9) Westminster Hammond Grand Forks
Kansas City Metro Area (9) Wheat Ridge Mandeville Minot
MISSOURI (9) Longmont Baton Rouge Bismarck
Kansas City Metro Area (7) Boulder Lafayette SOUTH DAKOTA (4)
Columbia (1) Greeley MARYLAND (2) Rapid City
St. Joseph (1) 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 (1) Savannah MISSISSIPPI (1) Memphis
Rochester (1) ILLINOIS (3) Hattiesburg Madison
Mankato (1) 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 (1) Sioux City Cheyenne
Eau Claire (1) 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
37.90-FOR-1 STOCK SPLIT TO BE EFFECTED PRIOR TO THE CONSUMMATION OF THIS
OFFERING, AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION. SEE "UNDERWRITING." REFERENCES IN THIS PROSPECTUS TO THE NUMBER OF
STORES OPEN IN FISCAL 1997 IS BASED ON STORES THAT THE COMPANY EXPECTS TO OPEN
BY NOVEMBER 1, 1997. 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 the leading party supplies and paper goods retailer 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 stimulate customers to purchase
additional products.
According to PAPER AND PARTY RETAILER, a trade publication for the party
goods industry, total United States retail sales of party and special occasion
merchandise (including greeting cards, party supplies, gift wrap and related
items) grew to approximately $8.8 billion in 1996. 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 the leading supplier
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, rapidly achieve a
dominant position in new markets and maximize operating leverage, the Company
employs the following growth strategy: (i) cluster multiple Company-owned stores
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
3
<PAGE>
metropolitan markets where the Company has existing stores, (iii) establish
franchise stores in other markets, and (iv) continuously refresh, remodel and
expand existing stores.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 1,666,667 shares
Common Stock to be outstanding
after the offering.............. 4,264,275 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) 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 185,725 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)......................... 0.13 0.24 0.31 0.31 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
375,396 shares immediately prior to this offering, 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.
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."
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."
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 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.
6
<PAGE>
SEASONALITY AND QUARTERLY 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. 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, as
well as other key personnel. 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, Mr. Schlosser or other key personnel 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."
MERCHANDISING RISKS
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 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."
7
<PAGE>
COMPETITION
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."
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, 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.
8
<PAGE>
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 approximately 52.1% 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."
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
9
<PAGE>
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, 4,264,275 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 2,597,608 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 demand promissory notes accruing interest at 5.63% per annum (the
"First Shareholder Notes"). 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 demand promissory notes accruing interest at 5.63% per annum (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 of any 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
historically has incurred a gain in its third fiscal quarter, the Second
Dividend may be a material amount. 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 January 31, 1999, (ii) approximately $2.3 million to repay the
Shareholder Notes, which accrues interest at 5.63% per annum, and (iii)
approximately $2.3 million to repay the Subordinated Notes, which accrue
interest at 10% per annum. 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 restricts the
payment of cash dividends by the Company.
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 375,396 shares immediately
prior to this offering, (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; 2,222,212 shares
issued and outstanding, actual; 2,597,608 shares issued and outstanding, pro
forma; 4,264,275 shares issued and outstanding, pro forma as adjusted(1)....... 22 26 43
Additional paid-in capital....................................................... 572 568 13,966
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 185,725 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 $0.76 per share, after giving
pro forma effect to the exercise of options and warrants to purchase an
aggregate of 375,396 shares immediately prior to this offering 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 375,396 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 $3.61 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 $5.39 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.... $ 0.76
Increase per share attributable to investors in this offering.... 2.85
---------
Pro forma net tangible book value per share after this offering
(1).............................................................. 3.61
---------
Dilution per share to new investors................................ $ 5.39
---------
---------
</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 185,725 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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE 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)........... 0.13 0.24 0.31 0.31 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.
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, or 10.6% of total
revenue, as compared to $2.1 million, or 10.6% of total revenue, for the
comparable period of fiscal 1996. The decrease as a percentage of total revenue
was primarily attributable to numerous small decreases in various line items.
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
17
<PAGE>
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, or 9.9% of total revenue, in fiscal 1996, as compared to $3.5
million, or 10.3% of total revenue in fiscal 1995. The decrease in general and
administrative expenses as a percentage of total revenues was due to total
revenues increasing at a rate outpacing the growth of general and administrative
expenses.
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.
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.
18
<PAGE>
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, or 10.3% of total revenue, as compared to
$2.5 million, or 10.3% of total revenue for fiscal 1994.
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.
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. 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
19
<PAGE>
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.
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 million,
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. 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 January 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 restricts 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
20
<PAGE>
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 the leading party supplies and paper goods retailer 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 27.6% to $24.2 million from $19.0 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 stimulate customers to
purchase additional products.
Paper Warehouse's goal is to maintain its position as the leading supplier
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. According to PAPER AND PARTY RETAILER, a trade
publication for the party goods industry, total United States retail sales of
party and special occasion merchandise (including greeting cards, party
supplies, gift wrap and related items) grew to approximately $8.8 billion in
1996. 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, rapidly achieve a
dominant position in new markets and maximize operating leverage, the Company
employs the following expansion strategy: (i) cluster multiple Company-owned
stores 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. As of September 30, 1997, the Company has entered into four leases
for new Company-owned stores and has eight more leases under current review for
new stores. 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
24
<PAGE>
shopping experience. The focal point of the Company's stores is the seasonal
display located at the front of 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.
TYPICAL PAPER WAREHOUSE STORE LAYOUT
(a line drawing of a typical store floor plan)
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.
25
<PAGE>
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 clustering stores in
metropolitan markets promotes customer convenience and creates favorable
economies of scale for marketing, advertising and operations.
LOCATIONS. As of November 1, 1997 Paper Warehouse will have 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 stimulate customers to purchase
additional products.
The Company's merchandise offering consists of four major product
categories:
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 licensed use of
movie and television figures, animated characters and celebrity likenesses.
26
<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.
27
<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.
28
<PAGE>
FRANCHISING
The Company has offered franchises of its Paper Warehouse store concept
since October 1987. As of November 1, 1997, the Company will have 51 franchise
stores. Additional franchise stores will open during the remainder of fiscal
1997.
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 franchises the right to prevent the Company or other franchises from
establishing stores within a particular territory. However, the Company has
entered, and may in the future enter, into multiple store development agreements
with franchises granting to them certain exclusive rights to develop stores in
specified markets, so long as the franchise meets a stated development schedule
and complies with other provisions of the development agreement and the
franchise agreement.
29
<PAGE>
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 franchises, 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 franchise is granted a license from the Company 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 (including other superstores), card shops and designated departments
in mass merchandisers, discount retailers, toy stores, drug stores, supermarkets
and department stores. 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,
30
<PAGE>
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 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
approximately $921,000. 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. 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.
32
<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 for 20 stores 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.
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. 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 5,685 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
35
<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 162,984
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 5,685 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 22,741 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 five 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.
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<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 $41,000, $56,000 and $80,000, respectively. On January 8, 1996, the Company
loaned Prickly Pear $80,000, at an annualized interest rate of 8.0%. Such loans
were 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 $17,000 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 $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.
Prior to January 1997, the Company had borrowed pursuant to a $6.5 million
revolving credit facility with Richfield Bank & Trust Co. Mr. Dolginow serves on
the Board of Directors of Richfield Bank and Trust Co.
37
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of August 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
- --------------------------------------------------------------- ----------------- --------------- ---------------
<S> <C> <C> <C>
Yale T. Dolginow............................................... 1,933,316 87.0% 45.3%
Brent D. Schlosser............................................. 288,896 13.0% 6.8%
Diane C. Dolginow.............................................. --(1) -- --
Arthur H. Cobb................................................. -- -- --
Marvin Goldstein............................................... -- -- --
Martin A. Mayer................................................ 38,661(2) 1.7% *
Jeffrey S. Halpern............................................. -- -- --
LSG Corporation................................................ 202,464(3) 8.4% 4.7%
All directors and executive officers as a group
(eight persons).............................................. 2,222,212 100.0% 52.1%
</TABLE>
- ------------------------
* Less than 1%
(1) Does not include shares beneficially owned by Yale T. Dolginow, Ms.
Dolginow's husband.
(2) Represents 38,661 shares issuable upon exercise of a stock option granted by
Mr. Dolginow which is exercisable within 60 days of this Prospectus.
(3) 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, on a cashless basis. 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. If such 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 152,464 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 2,222,212 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 222,225 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 222,225 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
39
<PAGE>
to the aggregate book value per share of the shares calculated as of the end of
the immediately preceding 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 of the
date of this Prospectus, there have been no capital or equity contributions made
to the Company since December 1, 1992. 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 and has granted the Underwriter an option to purchase an
additional 50,000 shares to cover over-allotments for $150,000. 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 185,345 shares of Common Stock at an
exercise price of $1.24 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 203,842 shares of Common Stock at an exercise
price of $1.37. 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, holders of all of the Warrants have agreed to
convert their Warrants into an aggregate of 203,842 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.
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
40
<PAGE>
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, 4,264,275 shares of Common Stock will be
outstanding (4,464,275 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 2,597,608 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 its consolidated subsidiary (the Company) as of
February 2, 1996 and January 31, 1997, 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. 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. 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>
FEBRUARY 2, JANUARY 31, AUGUST 2, AUGUST 1,
1996 1997 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 885,440 $ 357,167 $ 604,142 $ 359,516
Inventories, net................................ 7,716,758 9,568,680 9,144,189 11,949,521
Accounts receivable............................. 479,164 261,424 163,859 183,908
Prepaid expenses and other current assets....... 132,312 119,053 210,429 414,202
------------- ------------- ------------- -------------
Total current assets........................ 9,213,674 10,306,324 10,122,619 12,907,147
Property and equipment, net..................... 5,193,485 5,461,219 5,514,005 5,681,746
Other assets, net............................... 527,032 502,639 513,055 496,615
------------- ------------- ------------- -------------
$ 14,934,191 $ 16,270,182 $ 16,149,679 $ 19,085,508
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................... $ 4,763,939 $ 5,870,000 $ 5,473,939 $ 0
Notes payable--related party.................... 0 0 0 2,136,193
Current maturities of long-term debt............ 23,040 22,015 22,668 22,015
Accounts payable................................ 2,610,505 2,122,285 2,875,901 4,357,481
Accrued liabilities:
Payroll and related expenses.................. 218,302 268,046 287,852 312,816
Accrued interest.............................. 87,788 17,407 107,726 69,593
Other......................................... 585,508 305,433 561,891 448,426
------------- ------------- ------------- -------------
Total current liabilities................... 8,289,082 8,605,186 9,329,977 7,346,524
Notes payable (note 10(b)) 0 0 0 5,775,000
Notes payable--related party...................... 0 2,136,193 0 0
Long-term debt, less current maturities........... 3,233,656 3,211,575 3,223,702 3,198,893
Deferred rent credits and other................... 287,878 524,694 261,849 624,846
------------- ------------- ------------- -------------
Total liabilities........................... 11,810,616 14,477,648 12,815,528 16,945,263
Stockholders' equity (note 10(a)):
Serial preferred stock, 10,000,000 shares
authorized; none issued or outstanding........ 0 0 0 0
Common stock, $.01 par value.
Authorized 40,000,000 shares; issued and
outstanding 2,222,212 shares................ 22,222 22,222 22,222 22,222
Additional paid-in capital...................... 572,278 572,278 572,278 572,278
Retained earnings............................... 2,529,075 1,198,034 2,739,651 1,545,745
------------- ------------- ------------- -------------
Total stockholders' equity.................. 3,123,575 1,792,534 3,334,151 2,140,245
Commitments and contingencies (note 5)............
------------- ------------- ------------- -------------
$ 14,934,191 $ 16,270,182 $ 16,149,679 $ 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..................... 2,222,212 2,222,212 2,222,212 2,222,212 2,222,212
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........................... $ 0.31 $ 0.31 $ 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) (12,682)
Payment of debt acquisition fees................ (251,546) (8,000) 0 0 0
Distribution of earnings........................ (963,037) (808,490) (2,633,992) 0 (125,423)
------------- ------------- ------------- ------------- -------------
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(b)). 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 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 assets are considered to be impaired, the
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)
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's compensation expense been significant, proforma
effects on net income would have been provided as if the fair value based method
defined in Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, 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 dilutive common
share equivalents outstanding.
The Company will adopt Statement of Financial Standards 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 106.3 shares of common stock,
$.01 par value, of the Company at a price of $47.04 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) 5,863 (3) 11/30/97
1998 option................... 1/1/98 5,863 (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
37.90295924 to 1 common stock split increasing the number of common shares
issued and outstanding from 58,629 to 2,222,212. 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 January 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. 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 $300,000 and, following
payment, was loaned back to the Company by the shareholders pursuant to demand
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 (in thousands):
<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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
- ------------------------
* to be supplied by amendment.
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
II-1
<PAGE>
otherwise with Yale T. Dolginow and/or Brent D. Schlosser or any of their
respective affiliates or associates (as defined in the MBCA).
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 4,029 shares of Common Stock at $1.24
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.
Concurrent with the consumation of this offering, each warrant holder will
receive a warrant to purchase an additional 401 shares of Common Stock. In
addition, the exercise price of all such warrants increase to $1.37 per share.
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
202,464 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 172,932 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(1).
3.1 Amended and Restated Articles of Incorporation.
3.2 Amended and Restated By-laws.
4.1 Form of Subordinated Note.(1)
4.2 Form of Warrant Agreement
4.3 Form of Warrant Conversion Agreement, as extended.(1)
5 Opinion of Maslon Edelman Borman & Brand, LLP(1).
10.1 Restated Option Agreement by and between the Company and LSG dated October
6, 1994.
10.2 Form of Registration Rights Agreement.
10.3 1997 Stock Option and Compensation Plan.(1)
10.4 Directors Stock Option Plan.(1)
10.5 January 13, 1997 Shareholder Promissory Note issued to Yale T. Dolginow.
10.6 January 13, 1997 Shareholder Promissory Note issued to Brent D. Schlosser
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.7 Form of Tax Allocation and Indemnification Agreement by and between the
Company and Yale T. Dolginow(1).
10.8 Employment Agreement by and between the Company and Yale T. Dolginow dated
February 7, 1997.
10.9 Employment Agreement by and between the Company and Brent D. Schlosser
dated February 7, 1997.
10.10 Mortgage relating to Company's headquarters and cross-dock distribution
facility dated June 9, 1995.(1)
10.11 Secured Promissory Note of the Company relating to the Mortgage dated
August 15, 1995.(1)
10.12 Authorization and Debenture Guaranty of the Company dated June 9, 1995.(1)
10.13 Employment Agreement by and between the Company and Cheryl W. Newell dated
July 14, 1997.
10.14 October 1, 1997 Shareholder Promissory Note issued to Yale T. Dolginow.
10.15 October 1, 1997 Shareholder Promissory Note issued to Brent D. Schlosser
10.16 Loan Agreement between Paper Warehouse, Inc., Yale T. Dolginow and
Richfield Bank & Trust Co., dated January 29, 1997
10.17 Revolving Promissory Note to Richfield Bank & Trust Co. dated January 29,
1997.
10.18 Security Agreement between the Company and Richfield Bank & Trust Co.
dated January 29, 1997.
10.19 Guaranty of Yale T. Dolginow dated January 29, 1997.
11.1 Earnings per share calculation(1)
21 Subsidiaries of Company.
23.1 Consent of Maslon Edelman Borman & Brand, LLP(1).
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney(2).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) To be filed by amendment.
(2) Included on Page II-5.
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, 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
II-3
<PAGE>
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 Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Minneapolis,
State of Minnesota, on September 30, 1997.
<TABLE>
<S> <C> <C>
PAPER WAREHOUSE, INC.
By: /s/ YALE T. DOLGINOW
-----------------------------------------
Yale T. Dolginow
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each Person whose signature appears below constitutes and appoints Brent D.
Schlosser and Russell F. Lederman and each of them individually, such person's
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, to sign a registration statement
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and this power of attorney has been signed below on the
30th day of September, 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)
/s/ BRENT D. SCHLOSSER
- ------------------------------ Executive Vice President
Brent D. Schlosser and Director
/s/ CHERYL W. NEWELL Chief Financial Officer
- ------------------------------ (Principal Financial
Cheryl W. Newell Officer)
/s/ DIANE C. DOLGINOW
- ------------------------------ Secretary and Director
Diane C. Dolginow
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ MICHAEL A. ANDERSON Controller/Treasurer
- ------------------------------ (Principal Accounting
Michael A. Anderson Officer)
/s/ ARTHUR H. COBB
- ------------------------------ Director
Arthur H. Cobb
/s/ MARVIN W. GOLDSTEIN
- ------------------------------ Director
Marvin W. Goldstein
/s/ MARTIN A. MAYER
- ------------------------------ Director
Martin A. Mayer
/s/ JEFFREY S. HALPERN
- ------------------------------ Director
Jeffrey S. Halpern
</TABLE>
II-6
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PAPER WAREHOUSE, INC.
The undersigned, President of Paper Warehouse, Inc., a corporation existing
under Chapter 302A of the Minnesota Statutes (the "Corporation"), does hereby
certify that the following Amended and Restated Articles of Incorporation were
adopted pursuant to Chapter 302A of the Minnesota Business Corporation Act, by
written action of the Shareholders of the Corporation dated January 13, 1997 and
by the Board of Directors of the Corporation at a meeting duly held January 13,
1997, to replace and supersede in their entirety, the Corporation's Articles of
Incorporation filed with the Secretary of State of Minnesota on July 28, 1987.
ARTICLE 1
NAME
The name of the Corporation is Paper Warehouse, Inc.
ARTICLE 2
REGISTERED OFFICE
The address of the registered office of the Corporation is 7630 Excelsior
Boulevard, Minneapolis, Minnesota 55426.
ARTICLE 3
CAPITAL
The aggregate number of shares of stock which the corporation shall have
authority to issue is fifty million (50,000,000) shares, forty million
(40,000,000) of which shall be designated common stock, $0.01 par value
(hereinafter referred to as "Common Stock") and ten million (10,000,000) of
which shall be designated preferred stock, $0.01 par value (hereinafter referred
to as "Preferred Stock"). The Board of Directors is authorized to establish,
from the authorized shares of Preferred Stock, one or more classes or series of
shares, to designate each such class and series, and to fix the rights and
preferences of each such class and series. Without limiting the authority of
the Board of Directors granted hereby, each such class or series of Preferred
Stock shall have such voting powers, full or limited, or no voting powers, such
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions as shall be stated and
expressed in the resolution or resolutions providing for the issue of such class
or series of Preferred Stock as may be adopted from time to time by the Board
of Directors prior to the issuance of any shares thereof. Except as provided in
the resolution or resolutions of the Board of Directors creating any class or
series of Preferred Stock, the shares of Common Stock shall have the exclusive
right to vote for the
<PAGE>
election and removal of directors and for all other purposes. Each holder of
Common Stock shall be entitled to one vote for each share held.
ARTICLE 4
SHAREHOLDER RIGHTS
A. No shareholder of the Corporation shall have any preemptive rights.
B. No shareholder of the Corporation shall have any cumulative voting
rights.
ARTICLE 5
WRITTEN ACTION BY LESS THAN ALL OF THE DIRECTORS
Any action required or permitted to be taken at a Board meeting, other than
an action requiring shareholder approval, may be taken by written action of the
Board of Directors if signed by the number of directors that would be required
to take the same action at a meeting at which all directors were present.
ARTICLE 6
LIMITED LIABILITY OF DIRECTORS
To the fullest extent permitted by law, a director shall have no personal
liability to the Corporation or its shareholders for breach of fiduciary duty as
a director. Any amendment to or repeal of this Article 6 shall not adversely
affect any right or protection of a director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
IN WITNESS WHEREOF, I have signed my name this 6th day of February, 1997.
s/ Yale T. Dolginow
-------------------
Yale T. Dolginow, President
-2-
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
PAPER WAREHOUSE, INC.
ARTICLE 1
OFFICES
1.1 REGISTERED OFFICE. The registered office of the Corporation shall be
located within the State of Minnesota as set forth in the Articles of
Incorporation. The Board of Directors shall have authority to change the
registered office of the Corporation and a statement evidencing any such change
shall be filed with the Secretary of State of Minnesota as required by law.
1.2 OFFICES. The Corporation may have other offices, including its
principal business office, either within or without the State of Minnesota.
ARTICLE 2
CORPORATE SEAL
2.1 CORPORATE SEAL. The Board of Directors shall determine whether or not
the Corporation will adopt a corporate seal. If a corporate seal is adopted,
inscribed on the corporate seal shall be the name of the Corporation and the
words "Corporate Seal," and when so directed by the Board of Directors, a
duplicate of the seal may be kept and used by the Secretary of the Corporation.
ARTICLE 3
SHAREHOLDERS
3.1 REGULAR MEETINGS. Regular meetings of the shareholders shall be held
at the Corporation's registered office or at such other place within or without
the State of Minnesota as is designated by the Board of Directors. Regular
meetings may be held annually or on a less frequent periodic basis, as
established by a resolution of the Board of Directors, or may be held on call by
the Board of Directors from time to time as and when the Board determines. At
each regular meeting, the shareholders shall elect qualified successors for
directors who serve for an indefinite term or whose terms have expired or are
due to expire within six (6) months after the date of the meeting, and may
transact such other business which properly comes before them. Notwithstanding
the foregoing, if a regular meeting of the shareholders has not been held for a
period of fifteen (15) months, a shareholder or group of shareholders holding
three percent (3%) or more of the issued and outstanding voting shares of the
Corporation may demand that a regular meeting of the shareholders be held by
giving written notice to the President or Treasurer of the Corporation. Within
thirty (30) days after receipt of the notice, the Board shall cause a regular
meeting of the shareholders to be called and held within ninety (90) days after
receipt of the notice. Any regular meeting held pursuant to such a demand by a
shareholder or shareholders shall be held within the county where the principal
executive office of the Corporation is located.
<PAGE>
3.2 SPECIAL MEETING. Special meetings of the shareholders may be called
by the President, by a Vice-President in the absence of the President, by the
Treasurer, or by the Board of Directors or any two or more members thereof.
Special meetings may also be called by one or more shareholders holding ten
percent (10%) or more of the issued and outstanding voting shares of the
Corporation by delivering to the President or Treasurer a written demand for a
special meeting, which demand shall state the purposes of such meeting. Within
thirty (30) days after receipt of the written demand, the Board of Directors
shall call a special meeting of the shareholders to be held within ninety (90)
days after receipt of the written demand. Any special meeting held pursuant to
such written demand shall be held within the county where the principal
executive office of the Corporation is located.
3.3 QUORUM. Business may be transacted at any duly held meeting of the
shareholders at which a quorum is present. The holders of a majority of the
voting power of the shares entitled to vote at a meeting are a quorum. The
shareholders present at the meeting may continue to transact business until
adjournment, even though a number of shareholders withdraw leaving less than a
quorum. If a quorum is not present at any meeting, those shareholders present
have the power to adjourn the meeting from time to time until the requisite
number of voting shares are present. The date, time and place of the reconvened
meeting shall be announced at the time of adjournment and notice of the
reconvened meeting shall be given to all shareholders who were not present at
the time of adjournment. Any business which might have been transacted at the
meeting which was adjourned may be transacted at the reconvened meeting.
3.4 VOTING. At each shareholders' meeting, every shareholder having the
right to vote is entitled to vote in person or by proxy. Shareholders have one
(1) vote for each share having voting power standing in their name on the books
of the Corporation, unless otherwise provided in the Articles of Incorporation,
or these By-Laws, or in the terms of the shares. All elections and questions
shall be decided by a majority vote of the number of shares entitled to vote and
represented at any meeting at which there is a quorum, except as otherwise
required by statute, the Articles of Incorporation, these By-Laws, or by
agreement among the shareholders.
3.5 NOTICE OF MEETING. Notice of regular or special meetings of the
shareholders shall be given by an officer or agent of the Corporation to each
shareholder shown on the books of the Corporation to be the holder of record of
shares entitled to vote at the meeting. If the notice is to be mailed, then the
notice must be mailed to each shareholder at the shareholder's address as shown
on the books of the Corporation at least five (5) calendar days prior to the
meeting. If the notice is not mailed, then the notice must be given at least
forty-eight (48) hours prior to the meeting. The notice must contain the date,
time and place of the meeting, and in the case of a special meeting, must also
contain a statement of the purpose of the meeting. In no event shall notice be
given more than sixty (60) days prior to the meeting. If a plan of merger,
exchange, sale or other disposition of all or substantially all of the assets of
the Corporation is to be considered at a meeting of shareholders, notice of such
meeting shall be given to every shareholder, whether or not entitled to vote,
not less than fourteen (14) days prior to the date of such meeting. A
shareholder may orally or in writing waive notice of the meeting. Attendance by
a shareholder
2
<PAGE>
at a meeting of the Board of Directors also constitutes a waiver of notice of
such meeting, unless the shareholder objects at the beginning of the meeting to
the transaction of business because the meeting allegedly is not lawfully called
or convened and such shareholder does not participate thereafter in the meeting.
3.6 PROXIES. At all meetings of shareholders, a shareholder may vote by
proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxies must be filed with an officer of the Corporation
before or at the time of the meeting. No proxy shall be valid after eleven (11)
months from the date of its execution, unless otherwise provided in the proxy.
3.7 CLOSING TRANSFER BOOKS. The Board of Directors may close the stock
transfer books for a period of time which does not exceed sixty (60) days
preceding any of the following: the date of any meeting of shareholders; the
payment of dividends; the allotment of rights; or the change, conversion, or
exchange of shares.
3.8 MEETING BY ELECTRONIC COMMUNICATIONS. A conference among shareholders
by any means of communication through which the shareholders may simultaneously
hear each other during the conference constitutes a meeting of the shareholders
if the number of shares held by the shareholders participating in the conference
would be sufficient to constitute a quorum at a meeting, and if the same notice
is given of the conference as would be required for a shareholders meeting under
these Bylaws. In any shareholders meeting, a shareholder may participate by any
means of communication through which the shareholder, other shareholders so
participating, and all shareholders physically present at the meeting may
simultaneously hear each other during the meeting.
3.9 RECORD DATE. In lieu of closing the stock transfer books, the Board
of Directors may fix in advance a date, not exceeding sixty (60) days preceding
the date of any of the events described in Section 3.7, as a record date for the
determination of which shareholders are entitled (I) to notice of and to vote at
any meeting and any meeting subsequent to adjournment, (ii) to receive any
dividend or allotment of rights, or (iii) to exercise the rights in respect to
any change, conversion, or exchange of shares. If a record date is fixed by the
Board of Directors, only those shareholders of record on the record date shall
be entitled to receive notice of and to vote at the meeting and any meeting
subsequent to adjournment or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation after
the record date so fixed. If the share transfer books are not closed and no
record date is fixed for determination of the shareholders of record, then the
date on which notice of the meeting is mailed or the date of adoption of a
resolution of the Board of Directors declaring a dividend, allotment of rights,
change, conversion or exchange of shares, as the case may be, shall be the
record date for such determination.
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3.10 PRESIDING OFFICER. The President of the Corporation shall preside
over all meetings of the shareholders. In the absence of the President, the
shareholders may choose any person present to act as presiding officer.
3.11 WRITTEN ACTION BY SHAREHOLDERS. Any action which may be taken at a
meeting of the shareholders may be taken without a meeting and notice if a
consent in writing, setting forth the action so taken, is signed by all of the
shareholders entitled to notice of a meeting for such purpose.
ARTICLE 4
DIRECTORS
4.1 GENERAL POWERS. The property, affairs and business of the Corporation
shall be managed by the Board of Directors which shall consist of not less than
one (1) nor more than seven (7) directors. In addition to the powers and
authorities by these By-Laws expressly conferred upon it, the Board may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by law, the Articles of Incorporation or these By-Laws directed or required
to be exercised or done by the shareholders.
4.2 NUMBER. The number of directors may be either increased or decreased
by resolution of the shareholders at their regular meetings or at a special
meeting called for that purpose. The number of directors may be increased by
resolution adopted by the affirmative vote of a majority of the Board of
Directors. Any newly created directorships established by the Board of
Directors shall be filled by a majority vote of the directors serving at the
time of increase.
4.3 QUALIFICATIONS AND TERM OF OFFICE. Directors need not be shareholders
or residents of the State of Minnesota. The Board of Directors shall be elected
by the shareholders at their regular meeting and at any special shareholders'
meeting called for that purpose. A director shall hold office until the annual
meeting for the year in which his or her term expires and until the director's
successor is elected and qualifies, or until the earlier death, resignation,
removal, or disqualification of the director.
4.4 QUORUM. A majority of the Board of Directors constitutes a quorum for
the transaction of business; provided, however, that if any vacancies exist by
reason of death, resignation, or otherwise, a majority of the remaining
directors constitutes a quorum. If less than a quorum is present at any
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice.
4.5 ACTION OF DIRECTORS. The acts of a majority of the directors present
at a meeting at which a quorum is present are the acts of the Board of
Directors.
4.6 MEETINGS. Meetings of the Board of Directors may be held from time to
time at any place, within or without the State of Minnesota, that the Board of
Directors may select. If the
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Board of Directors fails to select a place for a meeting, the meeting shall be
held at the principal executive office of the Corporation. The President or any
director may call a meeting of the Board of Directors by giving notice to all
directors of the date, time and place of the meeting. If the notice is to be
mailed, then the notice must be mailed to each director at least five (5)
calendar days prior to the meeting. If the notice is not to be mailed, then the
notice must be given at least forty-eight (48) hours prior to the meeting. If
the date, time and place of the meeting of the Board of Directors has been
announced at a previous meeting of the Board of Directors, no additional notice
of such meeting is required, except that notice shall be given to all directors
who were not present at the previous meeting. Notice of the meeting of the
Board of Directors need not state the purpose of the meeting. A director may
orally or in writing waive notice of the meeting. Attendance by a director at a
meeting of the Board of Directors also constitutes a waiver of notice of such
meeting, unless the director objects at the beginning of the meeting to the
transaction of business because the meeting allegedly is not lawfully called or
convened and such director does not participate thereafter in the meeting.
4.7 MEETING BY ELECTRONIC COMMUNICATIONS. A conference among directors by
any means of communication through which the directors may simultaneously hear
each other during the conference constitutes meeting of the Board of Directors
if the number of directors participating in the conference would be sufficient
to constitute a quorum at a meeting, and if the same notice is given of the
conference as would be required for a Board of Directors meeting under these
By-Laws. In any Board of Directors meeting, a director may participate by any
means of communication through which the director, other directors so
participating, and all directors physically present at the meeting may
simultaneously hear each other during the meeting.
4.8 COMPENSATION. Directors may receive such compensation as may be
determined from time to time by resolution of the Board of Directors.
4.9 COMMITTEE. By the affirmative vote of a majority of the directors,
the Board of Directors may establish a committee or committees having the
authority of the Board of Directors in the management of the business of the
Corporation to the extent provided in the resolution adopted by the Board of
Directors. A committee shall consist of one or more persons, who need not be
directors, that have been appointed by affirmative vote of a majority of the
directors present. A majority of the members of the committee present at any
meeting of the committee is a quorum for the transaction of business, unless a
larger or smaller proportion or number is provided in the resolution approved by
the Board of Directors. Minutes of any meetings of committees created by the
Board of Directors shall be available upon request to members of the committee
and to any director.
4.10 ACTION BY ABSENT DIRECTOR. A director may give advance written
consent or opposition to a proposal to be acted upon at a Board of Directors
meeting by giving a written statement to the President, Treasurer, or any
director which sets forth the proposal to be voted on and contains a statement
of the director's voting preference with regard to the proposal. An advance
written statement does not constitute presence of the director for purposes of
determining
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a quorum, but the advance written statement shall be counted in the vote on the
subject proposal provided that the proposal acted on at the meeting is
substantially the same or has substantially the same effect as the proposal set
forth in the advance written statement. The advance written statement by a
director on a proposal shall be included in the records of the Board of
Directors' action on the proposal.
4.11 REMOVAL OF DIRECTORS BY BOARD OF DIRECTORS. Any director who has been
elected by the Board of Directors to fill a vacancy on the Board of Directors,
or to fill a directorship created by action of the Board of Directors, and who
has not subsequently been reelected by the shareholders, may be removed by a
majority vote of all directors constituting the Board, exclusive of the director
whose removal is proposed.
4.12 VACANCIES. Any vacancy on the Board of Directors may be filled by
vote of the remaining directors, even though less than a quorum.
4.13 WRITTEN ACTION BY LESS THAN ALL OF DIRECTORS. Any action required or
permitted to be taken at a Board meeting, other than an action requiring
shareholder approval, may be taken by written action of the Board of Directors
if signed by the number of directors that would be required to take the same
action at a meeting at which all directors were present.
4.14 DISSENT FROM ACTION. A director of the Corporation who is present at
a meeting of the Board of Directors at which any action is taken shall be
presumed to have assented to the action taken unless the director objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not participate thereafter, or unless
the director votes against the action at the meeting, or is prohibited from
voting on the action.
ARTICLE 5
OFFICERS
5.1 ELECTION OF OFFICERS. The Board of Directors shall from time to time,
elect a Chief Executive Officer, who may also be designated as President, and a
Chief Financial Officer, who may also be designated as Treasurer. The Board of
Directors may elect, but shall not be required to elect, a Secretary, one or
more Vice Presidents, and a Chairman of the Board. In addition, the Board of
Directors may elect such other officers and agents as it may deem necessary.
The officers shall exercise such powers and perform such duties as are
prescribed by applicable statutes, the Articles of Incorporation, the By-Laws,
or as may be determined from time to time by the Board of Directors. Any number
of offices may be held by the same person.
5.2 TERM OF OFFICE. The officers shall hold office until their successors
are elected and qualify; provided, however, that any officer may be removed with
or without cause by the affirmative vote of a majority of the directors present
at a Board of Directors meeting at which a quorum is present.
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5.3 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall:
(a) Have general active management of the business of the Corporation;
(b) When present, preside at all meetings of the shareholders;
(c) When present, and if there is not a Chairman of the Board, preside at
all meetings of the Board of Directors;
(d) See that all orders and resolutions of the Board of Directors are
carried into effect;
(e) Sign and deliver in the name of the Corporation any deeds, mortgages,
bonds, contracts or other instruments pertaining to the business of
the Corporation, except in cases in which the authority to sign and
deliver is required by law to be exercised by another person or is
expressly delegated by the Articles of Incorporation or By-Laws or by
the Board of Directors to some other officer or agent of the
Corporation;
(f) Maintain records of and, whenever necessary, certify all proceedings
of the Board of Directors and the shareholders; and
(g) Perform all other duties prescribed by the Board of Directors.
All other officers shall be subject to the direction and authority of the Chief
Executive Officer.
5.4 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall:
(a) Keep accurate financial records for the Corporation;
(b) Deposit all money, drafts and checks in the name of and to the credit
of the Corporation in the banks and depositories designated by the
Board of Directors;
(c) Endorse for deposit all notes, checks and drafts received by the
Corporation as ordered by the Board of Directors, making proper
vouchers therefor;
(d) Disburse corporate funds and issue checks and drafts in the name of
the Corporation, as ordered by the Board of Directors;
(e) Render to the Chief Executive Officer and the Board of Directors,
whenever requested, an account of all transactions by the Chief
Financial Officer and of the financial condition of the Corporation;
and
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(f) Perform all other duties prescribed by the Board of Directors or by
the Chief Executive Officer.
5.5 PRESIDENT. Unless otherwise determined by the Board of Directors, the
President shall be the Chief Executive Officer of the Corporation. If an
officer other than the President is designated Chief Executive Officer, the
President shall perform such duties as may from time to time be assigned by the
Board of Directors.
5.6 VICE PRESIDENT. Each Vice President, if any, shall have such powers
and perform such duties as may be specified in these By-Laws or prescribed by
the Board of Directors. If the Chief Executive Officer is absent or disabled,
the Vice President shall succeed to the President's powers and duties. If there
are two or more Vice Presidents, the order of succession shall be determined by
seniority of election or as otherwise prescribed by the Board of Directors.
5.7 SECRETARY. The Secretary, if any, shall attend all meetings of the
shareholders and the Board of Directors. The Secretary shall act as clerk and
shall record all the proceedings of the meetings in the minute book of the
Corporation and shall give proper notice of meetings of shareholders and the
Board of Directors. The Secretary shall keep the seal of the Corporation, if
any, and shall affix the seal to any instrument requiring it and shall attest
the seal, and shall perform such other duties as may be prescribed from time to
time by the Board of Directors.
5.8 TREASURER. Unless otherwise determined by the Board of Directors, the
Treasurer shall be the Chief Financial Officer of the Corporation. If an
officer other than the Treasurer is designated Chief Financial Officer, the
Treasurer shall perform such duties as may from time to time be assigned by the
Board of Directors.
5.9 CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall
preside at all meetings of the Board of Directors and shall perform such other
duties as may from time to time be assigned by the Board of Directors.
5.10 ASSISTANT OFFICERS. In the event of absence or disability of any Vice
President, Secretary or the Chief Financial Officer, the assistant to such
officer, if any, shall succeed to the powers and duties of the absent officer
until the principal officer resumes his duties or a replacement is elected by
the Board of Directors. If there are two or more assistants, the order of
succession shall be determined through seniority by the order in which elected
or as otherwise prescribed by the Board of Directors. The assistant officers
shall exercise such other powers and duties as may be delegated to them from
time to time by the Board of Directors or the principal officer under whom they
serve, but at all times shall remain subordinate to the principal officers they
are designated to assist.
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ARTICLE 6
INDEMNIFICATION
The Corporation shall indemnify its officers, directors, employees and
agents to the full extent permitted by the laws of the State of Minnesota, as
now in effect, or as the same may be hereafter modified.
ARTICLE 7
SHARES AND THEIR TRANSFER
7.1 CERTIFICATES OF SHARES. Unless the Board of Directors has provided
that the Corporation's shares are to be uncertified, every owner of shares of
the Corporation shall be entitled to a certificate, to be in such form as the
Board of Directors prescribes, certifying the number of shares owned by such
shareholder. The certificates for shares shall be numbered in the order in
which they are issued and shall be signed in the name of the Corporation by the
Chief Executive Officer, the President or a Vice President and by the Secretary
or Assistant Secretary, or the Chief Financial Officer, or any other officer of
the Corporation authorized by the Board of Directors and shall have the
corporate seal, if any, affixed thereto. A record shall be kept of the name of
the person owning the shares represented by each certificate, the respective
issue dates thereof, and in the case of cancellation, the respective dates of
cancellation. Except as provided in Section 7.5 of this Article 7, every
certificate surrendered to the Corporation for exchange or transfer shall be
canceled, and no other certificate shall be issued in exchange for any existing
certificate until such existing certificate is canceled.
7.2 UNCERTIFICATED SHARES. The Board of Directors by a majority vote of
directors present at a duly called meeting may provide that any or all shares of
classes or series of shares are to be uncertificated shares. In that case, any
shareholder who is issued uncertificated shares shall be provided with the
information legally required to be disclosed in a certificate.
7.3 ISSUANCE OF SHARES. The Board of Directors is authorized to issue
shares of the capital stock of the Corporation up to the number of shares
authorized by the Articles of Incorporation. Shares may be issued for any
consideration (including, without limitation, money or other tangible or
intangible property received by the Corporation or to be received by the
Corporation under a written agreement, or services rendered to the Corporation
or to be rendered to the Corporation under a written agreement) which is
authorized by a resolution approved by the affirmative vote of a majority of the
directors present, valuing all nonmonetary consideration and establishing a
price in money or other consideration, or a minimum price, or a general formula
or method by which the price will be determined. Upon authorization by
resolution approved by the affirmative vote of a majority of the directors
present, the Corporation may, without any new or additional consideration, issue
shares of its authorized and unissued capital stock in exchange for or in
conversion of its outstanding shares, or issue its own shares pro rata to its
shareholders or the shareholders of one or more classes or series, to effectuate
share dividends or splits, including reverse share splits. No shares of a class
or series shall be issued to the holder of the
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shares of another class or series, unless issuance is either expressly provided
for in the Articles of Incorporation or is approved at a meeting by the
affirmative vote of the holders of a majority of the voting power of all shares
of the same class or series as the shares to be issued.
7.4 TRANSFER OF SHARES. Transfer of shares on the books of the
Corporation may be authorized only by the shareholder named in the certificates
or the shareholder's representative or duly authorized attorney-in-fact and only
upon surrender for cancellation of the certificate for such shares. The
shareholder in whose name shares stand on the books of the Corporation shall be
considered the owner thereof for all purposes regarding the Corporation.
7.5 LOST CERTIFICATES. Any shareholder claiming a certificate for shares
has been lost or destroyed shall make an affidavit or affirmation of that fact
in such form as the Board of Directors may require and shall, if the directors
so require, give the Corporation a bond of indemnity in form and with one or
more sureties satisfactory to the Board of Directors and in an amount determined
by the Board of Directors, to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss or destruction of the
certificate. A new certificate may then be issued in the same tenor for the
same number of shares as the one alleged to have been lost or destroyed.
7.6 TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one
or more transfer agents or transfer clerks and one or more registrars and may
require all certificates for shares to bear the signature or signatures of any
of them.
7.7 FACSIMILE SIGNATURE. When any certificate is manually signed by a
transfer agent, a transfer clerk, or a registrar appointed by the Board of
Directors to perform such duties, a facsimile or engraved signature of the
officers and a facsimile corporate seal, if any, may be inscribed on the
certificate in lieu of the actual signatures and seal.
ARTICLE 8
FINANCIAL AND PROPERTY MANAGEMENT
8.1 CHECKS. All checks, drafts, other orders for the payment of money,
notes or other evidences of indebtedness issued in the name of the Corporation
shall be signed by the President or Treasurer, or any other officer or officers,
agent or agents of the Corporation, as may from time to time be determined by
resolution of the Board of Directors.
8.2 DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies, or other depositories as the Board of Directors may select.
8.3 VOTING SECURITIES HELD BY CORPORATION. The President, or other
officer or agent designated by the Board of Directors, shall have full power and
authority on behalf of the Corporation to attend, act at, and vote at any
meeting of security or interest holders of other
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corporations or entities in which the Corporation may hold securities or
interests. At the meeting, the President or other designated agent shall
possess and exercise any and all rights and powers incident to the ownership of
the securities or interest which the Corporation holds.
ARTICLE 9
AMENDMENTS
The Board of Directors of the Corporation is expressly authorized to make
By-Laws of the Corporation and from time to time to adopt, amend or repeal
By-Laws so made to the extent and in the manner prescribed in the Minnesota
Statutes. The Board of Directors shall not adopt, amend, or repeal a By-Law
fixing a quorum for meetings of shareholders, prescribing procedures for
removing directors or filling vacancies in the Board of Directors, or fixing the
number of directors or their classifications, qualifications, or terms of
office, but may adopt or amend a By-Law to increase the number of directors.
The authority in the Board of Directors is subject to the power of the voting
shareholders to adopt, change or repeal the By-Laws by a vote of shareholders
holding a majority of the shares entitled to vote and present or represented at
any regular meeting or special meeting called for that purpose.
ARTICLE 10
BUSINESS COMBINATIONS
Pursuant to Section 302A.673, Subd. 3(c)(3) of the Minnesota Business
Corporation Act (the "MBCA"), Section 302A.673 of the MBCA is not applicable to
any Business Combination (as defined in the MBCA) of the Corporation 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).
Date of Adoption: September 15, 1997 /s/ Jaqueline Rausch
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Assistant Secretary
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WARRANT AGREEMENT
WARRANT AGREEMENT (the "Warrant Agreement") is made and entered into
as of the Initial Closing Date between PAPER WAREHOUSE, INC., a Minnesota
corporation (the "Company"), and each Warrant Holder (as hereinafter defined).
WITNESSETH:
WHEREAS, pursuant to the terms of a Confidential Private Placement
Memorandum, dated as of November 4, 1994 (the "Private Placement Memorandum"),
the Company is issuing as of the Initial Closing Date up to an aggregate of 46
units of securities (each a "Unit"), each Unit consisting of a $50,000 10%
Subordinated Note due November 30, 2004 of the Company (a "Note") and one
Warrant (a "Warrant"), subject to certain adjustments, exercisable into 106.3
shares (the Warrant Shares") of common stock, par value $.01 per share, of the
Company (the "Common Stock") at an exercise price of $47.04 per share; and
WHEREAS, the Warrant Holders (as hereinafter defined) are willing to
have their rights with respect to the ownership of the Warrants and the Warrant
Shares (as hereinafter defined) governed by the provisions of this Agreement.
NOW, THEREFORE, in consideration of the above recitals, the mutual
promises contained herein and for other good and valuable consideration, the
parties hereto agree as follows:
1. DEFINITIONS. The following words and terms shall have the
following meanings:
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a
day on which commercial banks in Minneapolis, Minnesota are required or
authorized to be closed.
"CODE" shall mean the Internal Revenue Code of 1986, as amended and
supplemented from time to time, and shall include proposed, temporary,
interim and permanent regulations of the United States Treasury Department
applicable thereunder.
"COMPANY REDEMPTION" shall have the meaning ascribed to such term in
Section 11(b) hereof.
"EBITA" shall mean, with reference to any period, net earnings of the
Company for such period plus all deductions for interest expense, income
taxes and amortization for such period.
"EXERCISE PERIOD" shall have the meaning set forth in Section 5.
<PAGE>
"EXERCISE PRICE" shall mean $47.04 per Warrant Share.
"INITIAL CLOSING DATE" shall mean the first date upon which the
Company shall schedule a closing with respect to the purchase of Units by
subscribers for Units.
"QUALIFIED TRANSACTION" shall mean a public offering of capital stock
by the Company or sale by the Company of all or substantially all of its
stock or assets.
"REDEMPTION PRICE" shall mean, as of any calculation date, an amount
for each share of Common Stock issuable upon exercise of the Warrant the
greater of: (i) EBITA for the immediately preceding full fiscal year
multiplied by seven less the aggregate amount of long-term and short-term
debt for such fiscal year divided by the number of shares then issued and
outstanding; or (ii) the book value of the Company as of the immediately
preceding fiscal year end divided by the number of shares then issued and
outstanding; PROVIDED, HOWEVER, that with respect to a Company Redemption
(x) in the event the Company Redemption occurs concurrently with a
Qualified Transaction, the Redemption Price shall equal the consideration
received in the Qualified Transaction and (y) in the event the Company
Redemption occurs and within 12 months thereafter the Company engages in a
Qualified Transaction, the Company shall pay to each Warrant Holder the
positive difference calculated on a per share basis, if any, between the
consideration received by the Company in the Qualified Transaction and the
amount paid to such Warrant Holder at the time of the Company Redemption.
"REGISTRATION RIGHTS AGREEMENT" shall mean that certain Registration
Right Agreement, dated as of the date hereof, among the Company and the
holders of Warrant Shares.
"WARRANT HOLDER(S)" shall mean each subscriber of Units whose
subscription is accepted by the Company and each permitted transferee of
Warrants held by such subscriber.
"WARRANT HOLDER REDEMPTION" shall have the meaning ascribed to such
term in Section 11(a) hereof.
"WARRANT SHARES" shall mean any shares of Common Stock or other
securities issuable upon exercise of the Warrants.
2. ISSUANCE OF WARRANTS: FORM OF WARRANT. The Company will issue,
sell and deliver a Warrant to each Warrant Holder upon execution of the Omnibus
Signature Page. The text of the Warrant and the form of election to purchase
shares to be attached thereto shall be substantially as set forth in Exhibit A
attached hereto. Each Warrant shall be executed on behalf of the Company by the
manual or facsimile signature of the present or any future President, Vice
President, or Chief Financial Officer of the Company, under its corporate seal,
affixed or in
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facsimile, attested by the manual or facsimile signature of the present or any
future Secretary or Assistant Secretary of the Company.
3. REGISTERED FORM. The Warrant shall be registered in a Warrant
Register as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person.
4. TRANSFER OF WARRANTS. The Warrant and Warrant Shares will not be
transferable, in part or in whole, except only on the books of the Company upon
delivery thereof duly endorsed by the Warrant Holder or by his duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment or authority to transfer. The Warrant Holder shall provide the
Company with five Business Days prior written notice of a proposed transfer. In
all cases of transfer by an attorney, the original power of attorney, duly
approved, or an official copy thereof, duly certified, shall be deposited with
the Company. In case of transfer by executors, administrators, guardians or
other legal representatives, duly authenticated evidence of their authority
shall be produced, and may be required to be deposited with the Company in its
discretion. Upon any registration of transfer, the Company shall deliver a new
Warrant or Warrants to the persons entitled thereto. The Warrants may be
exchanged at the option of the then Warrant Holder thereof, for another Warrant,
or other Warrant of different denominations, of like tenor and representing in
the aggregate the right to purchase a like number of Warrant Shares upon
surrender to the Company or its duly authorized agent. Notwithstanding the
foregoing, the Company shall have no obligation to cause Warrants to be
transferred on its books to any person, unless the Warrant Holder or Warrant
Holders thereof shall furnish to the Company reasonably satisfactory evidence of
compliance with the Securities Act of 1933, as amended (the "Act"), in
accordance with the provisions of Section 13 of this Agreement.
5. TERM OF WARRANTS; EXERCISE OF WARRANTS. Each Warrant entitles
the Warrant Holder thereof to purchase 106.3 shares of Common Stock at the
Exercise Price at any tune after November 30, 1995 (the "Effective Date") and
before 5:00 p.m., prevailing Central Time, on November 30, 2004 (the "Expiration
Date"). On the Expiration Date, all rights evidenced by the Warrants shall
cease and the Warrants shall become void. The period from the Effective Date to
the Expiration Date is sometimes hereinafter referred to as the "Exercise
Period." The Exercise Price and the Warrant Shares issuable upon exercise of
the Warrant Shares are subject to adjustment upon the occurrence of certain
events, pursuant to the provisions of Section 9 of this Agreement. Subject to
the provisions of this Agreement and upon five Business Days prior written
notice to the Company, each Warrant Holder shall have the right, which may be
exercised as set forth in such Warrants to purchase from the Company (and the
Company shall issue and sell to such Warrant Holder) the number of fully paid
and nonassessable shares of Common Stock specified in such Warrant, upon
surrender to the Company, or its duly authorized agent, of such Warrants, with
the form of election to purchase attached thereto duly completed and signed,
with signatures guaranteed by a member firm of a
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national securities exchange, a commercial bank (not a savings bank or savings
and loan association) or trust company located in the United States or a member
of the NASD, and upon payment to the Company of the Exercise Price, as adjusted
in accordance with the provisions of Section 9 of this Agreement, for the number
of Warrant Shares in respect of which such Warrants are then exercised. Payment
of such Exercise Price may be made in cash or by check payable to the order of
the Company or by the surrender and delivery of Notes in an aggregate principal
amount equal to the Exercise Price. Upon each surrender of Warrants and payment
of the Exercise Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Warrant Holder of such Warrants and (subject to receipt of evidence of
compliance with the Act in accordance with the provisions of Section 13 of this
Agreement) in such name or names as such Warrant Holder may designate, a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of such Warrants, together with cash, as provided in Section
12 of this Agreement, in respect of any fractional Warrant Shares otherwise
issuable upon such surrender. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of Warrants and payment of the Exercise Price as aforesaid;
PROVIDED, HOWEVER, that if, at the date of surrender of such Warrants and
payment of such Exercise Price, the transfer books for the Common Stock or other
class of stock purchasable upon the exercise of such Warrants shall be closed,
the certificates for the shares shall be issuable as of the next succeeding date
on which such books shall be opened and until such date the Company shall be
under no duty to deliver any certificate for such Warrant Shares; PROVIDED,
FURTHER, that the transfer books, unless otherwise required by law, shall not be
closed at any one time for a period longer than 20 days. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Warrant
Holders thereof, in full.
6. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the issuance of Warrant Shares upon the exercise
of Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of any certificates for Warrant Shares in a name other than
that of the Warrant Holder of Warrants in respect of which such Warrant Shares
are issued.
7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall
be mutilated, lost, stolen or destroyed, the Company may, in its discretion,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen
or destroyed, a new Warrant for the number of Warrants represented by the
Warrant so mutilated, lost, stolen or destroyed but only receipt of evidence of
such loss, theft or destruction of such Warrant, and of the ownership thereof,
and the indemnity, if requested, all satisfactory to the Company. An applicant
for such substitute Warrants shall also comply with such other reasonable
regulations and pay such other reasonable charges incidental thereto as the
Company may prescribe.
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<PAGE>
8. RESERVATION OF WARRANT SHARES. ETC. The Company shall at all
times after the Effective Date keep reserved, out of the authorized and unissued
Common Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the outstanding Warrants. The
Company will keep a copy of this Agreement on file at its principal offices.
All Warrants surrendered in the exercise of the rights thereby evidenced shall
be cancelled, and such cancelled Warrants shall constitute sufficient evidence
of the number of shares of Common Stock that have been issued upon the exercise
of such Warrants. No shares of Common Stock shall be subject to reservation in
respect of unexercised Warrants subsequent to the Expiration Date.
9. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The
Exercise Price and the number and kind of securities purchasable upon exercise
of each Warrant shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(i) In case the Company shall (a) declare a dividend on its Common
Stock in shares of Common Stock or make a distribution in shares of Common
Stock, (b)subdivide its outstanding shares of Common Stock into a greater
number of shares, (c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (d) issue by reclassification
of its shares of Common Stock other securities of the Company (including
any such reclassification in connection with a consolidation or merger in
which the Company is the continuing corporation), the number of Warrant
Shares purchasable upon exercise of each Warrant immediately prior thereto
shall be adjusted so that the Warrant Holder of each Warrant shall be
entitled to receive the kind and number of Warrant Shares or other
securities of the Company which he would have owned or have been entitled
to receive after the happening of any of the events described above, had
such Warrant been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant
to this clause (i) shall become effective immediately after the effective
date of such event retroactive to immediately after the record date, if
any, for such event.
(ii) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as provided in this Section 9, the
Exercise Price shall be adjusted by multiplying such Exercise Price
immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment, and of which the denominator shall be
the number of Warrant Shares so purchasable immediately thereafter.
(iii) For the purpose of this Section 9, the term "shares of
Common Stock" shall mean (a) the class of stock, designated as the Common
Stock of the Company at the date of this Agreement or (b) any other class
of stock resulting from successive changes or reclassification of such
shares consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any
tune, as a
-5-
<PAGE>
result of an adjustment made pursuant to clause (i) above, the Warrant
Holders shall become entitled to purchase any shares of capital stock of
the Company other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each Warrant and the
Exercise Price of such shares shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in clauses (i) and
(ii), inclusive, above, and clauses (iv) through (vii), inclusive, of this
Section 9, and the provisions of Sections 5, 6, 8 and 16, with respect to
the Warrant Shares, shall apply on like terms to any such other shares.
(iv) The Company may at its option, at any time during the term of the
Warrants, reduce the then current Exercise Price to any amount deemed
appropriate by the Board of Directors of the Company; PROVIDED, HOWEVER,
that in no event shall the Exercise Price be adjusted below the par value
per share of the Common Stock.
(v) In case of any consolidation or merger of the Company with or
into another corporation or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially
as an entirety, the Company or such successor or purchasing corporation (or
an affiliate of such successor or purchasing corporation), as the case may
be, agrees that each Warrant Holder shall have the right thereafter upon
payment of the Exercise Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and
other securities and property (including cash) which he would have owned or
have been entitled to receive after the happening of such consolidation,
merger, sale or conveyance had such Warrant been exercised immediately
prior to such action. The provisions of this clause (v) shall similarly
apply to successive consolidations, mergers, sales or conveyances.
(vi) Notwithstanding any adjustments in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants
pursuant to this Section 9 of Agreement, certificates for Warrants issued
prior or subsequent to such adjustments may continue to express the same
price and number and kind of shares as are stated in the Warrants initially
issuable pursuant to this Agreement.
10. SPECIAL ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES.
(a) In the event the Company shall issue shares of Common Stock to
USG Corporation ("LSG") pursuant to the Restated Option Agreement, dated October
6, 1994, between the Company and LSG, the number of Warrant Shares purchasable
upon exercise of each Warrant immediately prior thereto shall be adjusted so
that the Warrant Holder of each Warrant shall be entitled to receive an
additional 10.6 Warrant Shares of the Company. An adjustment made pursuant to
this clause (a) shall become effective immediately after the
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<PAGE>
effective date of such event retroactive to immediately after the record date,
if any, for such event.
(b) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as provided in Section 10(a), the Exercise
Price shall be adjusted by multiplying such Exercise Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number of
shares purchasable upon the exercise of each Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
so purchasable immediately thereafter.
(c) Notwithstanding any adjustments in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants pursuant
to Section 10 of this Agreement, certificates for Warrants issued prior or
subsequent to such adjustments may continue to express the same price and number
and kind of shares as are stated in the Warrants initially issuable pursuant to
this Agreement.
11. REDEMPTION OF WARRANT.
(a) Commencing on November 30, 1998, and at any time thereafter,
subject to the terms and conditions hereof the Warrant Holder may, at its
option, require the Company to redeem its Warrant (a "Holder Redemption") at the
Redemption Price. In the event of a Holder Redemption, the Warrant Holder shall
notify the Company in writing of its election not more than 60 or less than 30
days prior to the date fixed by the Warrant Holder for redemption (the "Warrant
Holder Redemption Date").
(b) The Company, at its option, may redeem all of the Warrants (a
"Company Redemption") at the Redemption Price (i) commencing on November 30,
1999 and at any time thereafter; or (ii) at any time after the date hereof, if a
proposed transfer of a Warrant in accordance with Section 4 hereof, or a
proposed exercise of a Warrant in accordance with Section 3 hereof, would, in
either case, jeopardize the Company's ejection to be treated as an S Corporation
in accordance with Section 1362 of the Code. In the event of a Company
Redemption, the Company shall notify the Warrant Holder in writing of its
election not more than 60 or less than 30 days prior to the date fixed by
Company for redemption; PROVIDED, HOWEVER, that circumstances of the Company
Redemption results from an event described in clause (ii) of the immediately
preceding sentence, then the Company shall notify the Warrant Holder in writing
of its election at least two days prior to the date of the proposed transfer and
shall redeem the Warrant on or prior to the date of the proposed transfer (the
"Company Redemption Date").
(c) On a Warrant Holder Redemption Date or a Company Redemption Date,
the Warrant Holder shall surrender the Warrant to the Company and the Company
shall deliver payment of the Redemption Price in full, in cash or certified or
cashier's check to the Warrant Holder.
-7-
<PAGE>
12. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractions of shares of Common Stock on the exercise of Warrants. If more than
one Warrant shall be presented for exercise in full at the same time by the same
Warrant Holder, the number of Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a share of Common Stock would, except for the provisions of this
Section 12, be issuable on the exercise of any Warrant (or specified portions
thereof), the Company shall purchase such fraction for an amount in cash equal
to the same fraction of the current market price per share of Common Stock on
the date of exercise which price shall be the last sale price, or in case no
sale takes place on such day, the average of the closing bid and asked prices on
the principal national securities exchange on which the Common Stock of the
Company is traded, or if not traded on any national exchange, then the average
of the closing bid and asked prices as quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or as reported by the
National Quotation Bureau, Inc., or similar reporting organization. If the
Common Stock is not then listed or admitted to trading on any United States
national securities exchange and if no closing bid and asked prices thereof are
so quoted or published in the over-the-counter market, market price shall mean
the higher of (x) the book value per share of Common Stock, as determined on a
fully diluted basis in accordance with generally accepted accounting principles
by a firm of independent public accountants of recognized standing (which may be
its regular auditors) selected by the Board of Directors of the Company as of
the last day of any month ending within 60 days preceding the date as of which
the determination is to be made or (y) the fair value per share of Common Stock,
as determined on a fully diluted basis in good faith by an investment banking
firm (as selected by the Board of Directors of the Company), as of a date which
is 15 days preceding the date as of which the determination is to be made.
13. RESTRICTIONS ON DISPOSITIONS. The Warrants and the Warrant
Shares have not been registered under the Securities Act of 1933, as amended.
The Warrant Holder represents and warrants to the Company that it understands
that neither the Warrants nor the Warrant Shares may be transferred except
pursuant to (i) an effective Registration Statement under the Act, or (ii) any
available rule or exemption from registration under the Act permitting such
disposition of securities and an opinion of counsel, reasonably satisfactory to
counsel for the Company, that an exemption from such registration is available.
14. CERTIFICATES TO BEAR LEGENDS. The Warrants shall be subject to a
stop-transfer order and the certificate or certificates therefor shall bear the
following legend:
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE 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 SO REGISTERED OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THIS
COMPANY
-8-
<PAGE>
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.
The Warrant Shares or other securities issued upon exercise of the
Warrants shall be subject to a stop transfer order and the certificate or
certificates evidencing any such Warrant Shares or securities shall bear a
legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE 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 SO REGISTERED OR AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE AND THIS 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.
15. REGISTRATION RIGHTS AGREEMENT. Each Warrant Holder is entitled
to the benefits of the Registration Rights Agreement and by purchases of the
Units each Warrant Holder agrees to be bound by the terms of the Registration
Rights Agreement.
16. NOTICES TO WARRANT HOLDERS.
(a) Nothing contained in this Agreement or in any of the Warrants
shall be construed as conferring upon the Warrant Holders thereof the right to
vote or to receive dividends or to consent or to receive notice as stockholders
in respect of the meetings of stockholders or the election of directors of the
Company or any other matter, or any rights whatsoever as stockholders of the
Company; PROVIDED, HOWEVER, that in the event that a meeting of stockholders
shall be called to consider and take action on a proposal for the voluntary
dissolution of the Company, then and in that event the Company shall cause a
notice thereof to be sent by first class mail, postage prepaid, at least 10 days
prior to the date fixed as a record date or the date of closing the transfer
books in relation to such meeting, to each registered Warrant Holder of Warrants
at such Warrant Holder's address appearing on the Warrants at such Warrant
Holder's address appearing on the Warrant register; but failure to mail or to
receive such notice or any defect therein or in the mailing thereof shall not
affect the validity of any action taken in connection with such voluntary
dissolution. If such notice shall have been so given and if such a voluntary
dissolution shall be authorized at such meeting or any adjournment thereof, then
from and after the date on which such voluntary dissolution shall have been duly
authorized by the shareholders and all other rights with respect thereto shall
cease and terminate.
-9-
<PAGE>
(b) In the event the Company intends to make any distribution on its
Common Stock (or other securities which may be purchasable in lieu thereof upon
the exercise of Warrants), including, without limitation, any such distribution
to be made in connection with a consolidation or merger in which the Company is
the continuing corporation, or to issue subscription rights or warrants to
holders of its Common Stock the Company shall cause a notice of its intention to
make such distribution, to each registered Warrant Holder of Warrants at such
Warrant Holder's address appearing on the Warrant register, but failure to mail
or to receive such notice or any defect therein or in the mailing thereof shall
not affect the validity of any action taken in connection with such
distribution.
17. NOTICES. Any notice pursuant to this Agreement to be given or
made by the Warrant Holder of any Warrant to or on the Company shall be
sufficiently given or made if sent by first class mail, postage prepaid,
addressed as follows:
Paper Warehouse, Inc.
7634 Golden Triangle Drive
Eden Prairie, MN 55344
Attention: Yale T. Dolginow
Notices or demands authorized by this Agreement to be given or made by
the Company to the Warrant Holder of any Warrants and/or Warrant Shares shall be
sufficiently given or made (except as otherwise provided in this Agreement) if
sent by first class mail, postage prepaid, addressed to such Warrant Holder at
the address of such Warrant Holder as shown on the Warrant Register.
Each such notice shall be effective if given by mail, three (3) days
after such communication is deposited in the mails with first class postage
prepaid, addressed as aforesaid.
18. AMENDMENT. This Agreement may be amended only if the Company
shall have obtained the prior written consent to such amendment of the Warrant
Holders holding a majority of the Warrant Shares, whether or not the Warrants
have been exercised. Each Warrant Holder at the time or thereafter outstanding
shall be hound by any consent authorized by this section 18, whether or not the
Warrants shall have been marked to indicate such consent.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so. executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
20. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT ISSUED HEREUNDER
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF
THE STATE OF MINNESOTA.
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<PAGE>
21. SIGNATURE. THIS WARRANT AGREEMENT WILL BE DEEMED TO HAVE BEEN
EXECUTED FOR ALL PURPOSES WHEN THE SUBSCRIBER SIGNS AND DATES THE OMNIBUS
SIGNATURE PAGE.
-11-
<PAGE>
EXHIBIT A
(Form of Warrant Certificate)
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE 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 SO REGISTERED OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THIS
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.
No. _______________
VOID AFTER 5:00 P.M. CENTRAL TIME
On November 30, 2004
PAPER WAREHOUSE, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received ___________, or registered
assigns, is the registered holder of the number of Warrants set forth above,
each of which entitles the owner thereof to purchase upon giving five (5)
Business Days prior written notice to the Company at any time after November 30,
1995 (the "Effective Date") until (5:00 P.M. prevailing Central Time on November
30, 2004 (the "Expiration Date"), one hundred six and three tenths fully paid
and nonassessable shares of the common stock, par value $.01 per share (the
"Common Stock"), of Paper Warehouse, Inc., a Minnesota corporation (the
"Company"), at the exercise price of $47.04 per share (the "Exercise Price"),
subject to certain adjustments, upon presentation and surrender of this Warrant
Certificate with the Form of Election to Purchase duly executed. Upon the
Expiration Date, all rights evidenced by this Warrant shall cease and the
Warrants shall become void. The number of Warrants evidenced by this Warrant
Certificate (and the number of shares which may be purchased upon exercise
thereof) set forth above, and the Exercise Price per share set forth above, are
the number and Exercise Price as of the date of original issuance of the
Warrants, based on the shares of Common Stock of the Company as constituted at
such date. As provided in the Warrant Agreement referred to below, the Exercise
Price and the number or kind of shares which may be purchased upon the exercise
of the Warrants evidenced by this Warrant Certificate are, upon the happening of
certain events, subject to modification and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of an agreement dated as of the
date hereof (the "Warrant
<PAGE>
Agreement") between the Company, the registered holder hereof and certain other
holders of Warrant Certificates, which Warrant Agreement is hereby incorporated
herein by reference and made a part hereof and to which Warrant Agreement
reference is hereby made for a full description of the rights, limitations of
rights, duties and immunities hereunder of the Company and the holders of the
Warrant Certificates. Copies of the Warrant Agreement are on file at the
principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled such holder to purchase. If this
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise
of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained in the Warrant Agreement
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue of stock, reclassification of stock, change of par value
or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or, except as provided in the Warrant Agreement, to receive notice of
meetings, or to receive dividends or subscription rights or otherwise, until.
the Warrant or Warrants evidenced by this Warrant Certificate shall have been
exercised and the shares of Common Stock shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock or
other class of stock purchasable upon the exercise of this Warrant are closed
for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such exercise until the date of the
reopening of said transfer books.
This Warrant Certificate may be redeemed under the circumstances
described in the Warrant Agreement.
114087-1
<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>
RESTATED OPTION AGREEMENT
THIS RESTATED OPTION AGREEMENT, is made this 6th day of October, 1994 by
and between Paper Warehouse, Inc., a Minnesota corporation (the "Corporation")
and LSG Corporation, a Minnesota corporation ("LSG").
WHEREAS, the Corporation and LSG are parties to an Option Agreement dated
December 1, 1992 (the "Option Agreement");
WHEREAS, the Option Agreement contained material inconsistencies and
ambiguities regarding the amount of capital stock of the Corporation obtainable
by LSG pursuant to the options granted thereunder; and
WHEREAS, the Corporation and LSG each desire to clarify the ambiguities
contained in the Option Agreement by restating the Option Agreement in its
entirety.
NOW, THEREFORE, the Corporation and LSG hereby agree as follows:
1. GRANT OF OPTIONS TO ACQUIRE COMMON STOCK. The Corporation hereby
grants LSG a conditional option (the "Event Option") to acquire 5,863 shares of
common stock of the Corporation (which represent 10% of common stock of the
Corporation outstanding as of the date of the Option Agreement) upon the
occurrence of a Triggering Event. "Triggering Event" as used herein shall mean
the effective date of any merger between the Corporation and any unrelated
entity or the offering of capital stock of the Corporation pursuant to a public
offering registered under the Securities Act of 1933, as amended. The
Corporation also grants to LSG, effective January 1, 1998 a conditional option
(the "1998 Option") to acquire 5,863 shares of common stock of the Corporation
(the "1998 Option Shares") which represent 10% of the common stock
<PAGE>
of the Corporation outstanding as of the date of Option Agreement. The
effectiveness of the 1998 Option is conditioned on the non-exercise of the Event
Option.
2. PUT OPTION. Upon receipt of the 1998 Option Shares, LSG has the
right to put the 1998 Option Shares back to the Corporation (the "Put Option")
at a price equal to the aggregate book value per share of the 1998 Option Shares
calculated as of the end of the immediately preceding fiscal year of the
Corporation (the "Put Price"). The first $150,000 of the Put Price shall be
paid in cash and the balance, if any, shall be paid pursuant to a three-year,
unsecured promissory note of the Corporation bearing interest at a rate equal to
the lessor of the referenced rate established by First Bank, National
Association or the Federal short-term rate as defined in Section 1274(d) of the
Internal Revenue Code of 1986, as amended.
3. EXERCISE PRICE OF THE 1998 OPTION AND EVENT OPTION. Upon exercise of
either the 1998 Option or the Event Option, LSG shall pay the Corporation
$150,000 PLUS an amount equal to ten percent (10%) of all capital and equity
contributions made to the Corporation between December 1, 1992 and the date of
such exercise.
4. MISCELLANEOUS. All notices, instructions and other communications
provided for herein to the Corporation shall be deemed valid, made and served if
in writing and either delivered personally or sent by certified or registered
mail, postage prepaid, and addressed to the Corporation as follows:
Paper Warehouse, Inc.
c/o Yale T. Dolginow
7634 Golden Triangle Drive
Eden Prairie, Minnesota 55344
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<PAGE>
LSG shall provide 60 days written notice to the Corporation of a date upon
which it will exercise either the Event Option, the Put Option or the 1998
Option. All transactions provided for herein shall occur no later than five (5)
business days from the date notice is received by the Corporation of the
intention of LSG to exercise either the Event Option or the 1998 Option. The
closing of any transaction provided for herein shall occur at the office of the
Corporation at such time as may be agreed upon by the parties hereto. The terms
of this agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs. This agreement is not assignable without the
prior written consent of the other party. This agreement shall be governed by
construed in accordance with the laws of the State of Minnesota. This agreement
supersedes and replaces in its entirety the Option Agreement, no term of which
shall have any further force or effect.
5. TERMINATION OF OPTIONS. The Event Option shall terminate on
November 30, 1997. The 1998 Option and the Put Option shall become effective
January 1, 1998 and shall terminate on December 31, 1998. The 1998 Option shall
also immediately terminate upon the exercise by LSG of the Event Option.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed as of the date and year first above written.
PAPER WAREHOUSE, INC.
By /s/ Yale T. Dolginow
----------------------------------------
Its President
--------------------------------------
LSG CORPORATION
By /s/ Stanford A. Wein
----------------------------------------
Its Vice President
--------------------------------------
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, is made and entered into as of the Initial
Closing Date (as hereinafter defined), among PAPER WAREHOUSE, INC., a Minnesota
corporation (the "Company"), and the Holders (as hereinafter defined).
W I T N E S S E T H:
WHEREAS, pursuant to the terms of a Confidential Private Placement
Memorandum, dated as of November 4, 1994 (the "Private Placement Memorandum"),
the Company is issuing as of the Initial Closing Date up to an aggregate of 46
units of securities (each a "Unit"), each Unit consisting of a $50,000 10%
Subordinated Note due November 30, 1994 of the Company (a "Note") and one
warrant (a "Warrant"), subject to certain adjustments, exercisable into 106.3
shares (the "Warrant Shares") of common stock, par value $.01 per share, of the
Company (the "Common Stock") at an exercise price of $47.04 per share; and
WHEREAS, the Holders are willing to have all of their rights with respect
to registration of all or any portion of their respective Warrant Shares (as
hereinafter defined) under the Securities Act (as hereinafter defined), governed
by the provisions of this Agreement (as hereinafter defined).
NOW, THEREFORE, in consideration of the above recitals, the mutual promises
contained herein and for other good and valuable consideration, the parties do
hereby agree as follows:
1. DEFINITIONS. As used herein, unless the context otherwise requires,
the following terms have the following respective meanings:
"AGREEMENT" shall mean this Registration Rights Agreement, dated as of
the Initial Closing Date.
"COMMISSION" shall mean the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
"COMMON STOCK" shall have the meaning ascribed thereto in the
preamble.
"COMPANY" shall mean Paper Warehouse, Inc., a Minnesota corporation,
and its successors.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934 shall include a
reference to the comparable section, if any, of any such similar Federal
statute.
"HOLDERS" shall mean any Person (as hereinafter defined) holding
Registrable Securities (as hereinafter defined).
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"INITIAL CLOSING DATE" shall mean the first date upon which the
Company shall schedule a closing with respect to the purchase of Units by
subscribers for Units.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"PERSON" shall mean a corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.
"REGISTRABLE SECURITIES" shall mean (a) any Warrant Shares, and (b)
any securities issued or issuable with respect to the Common Stock or other
securities referred to in the foregoing subdivision by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or
otherwise. As to any particular Registrable Securities, once issued such
securities shall cease to be Registrable Securities when (a) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, (b) they shall
have been distributed to the public pursuant to Rule 144 (or any successor
provision) under the Securities Act, (c) new certificates for them not
beaning a legend restricting further transfer shall have been delivered by
the Company and subsequent disposition of them shall not require
registration or qualification of them under the Securities Act or any
similar state law then in force, or (d) they shall have ceased to be
outstanding. For the purposes of determining the holders of Registrable
Securities hereunder on any date, the Warrants shall be deemed to have been
exercised as of such date to acquire the number of shares of Common Stock
covered thereby.
"REGISTRATION EXPENSES" shall mean all out-of-pocket expenses incident
to the Company's performance of or compliance with Section 2, including,
without limitation, all registration, filing and NASD fees, all fees and
expenses of complying with securities or blue sky laws, all word
processing, duplicating and printlaws, all word processing, duplicating and
printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits required other
than because of the liming of the offering or "cold comfort" letters
required by or incident to such performance and compliance, the fees and
disbursements of one counsel for all holders retained by the holder or
holders of a majority of the Registrable Securities being registered,
premiums and other costs of policies of insurance against liabilities
arising out of the public offering of the Registrable Securities being
registered, obtained at the request of the underwriter of any public
offering of Registrable Securities, and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities
(including fees paid to a "qualified independent underwriter" required by
the rules of the NASD in connection with a distribution), but excluding
underwriting discounts and commissions, and transfer taxes, if any,
PROVIDED that, in any case where Registration Expenses are not to be borne
by the Company, such expenses shall not include
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salaries of Company personnel or general overhead expenses of the Company,
auditing fees, premiums or other expenses relating to liability insurance
required by underwriters of the Company or other expenses for the
preparation of financial statements or other data normally prepared by the
Company in the ordinary course of its business or which the Company would
have incurred in any event.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as of the same shall be in effect at the time.
References to a particular section of the Securities Act of 1933 shall
include a reference to the comparable section, if any, of any such similar
Federal statute.
"SUBSCRIPTION PRICE" shall mean the amount paid to the Company in
consideration of the initial issuance of the Registrable Securities or the
securities from which the Registrable Securities were issued, whether by
way of conversion, stock dividend, stock-split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
"WARRANT SHARES" shall mean any shares of Common Stock or other
securities issuable upon exercise of the Warrants.
"WARRANTS" shall have the meaning ascribed thereto in the preamble.
2. REGISTRATION UNDER SECURITIES ACT. ETC.
2.1. INCIDENTAL REGISTRATION. (a) RIGHT TO INCLUDE REGISTRABLE
SECURITIES. If the Company proposes to register any of its securities under the
Securities Act (other than by a registration on Form S-4 or S-8 or any successor
or similar forms) whether or not for sale for its own account, it will each such
time give prompt written notice to all Holders of its intention to do so and of
such Holders' rights under this section 2.1. Upon the written request of any
such Holder made within 30 days after the receipt of any such notice (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder and the intended method of disposition thereof), the Company will
use its best efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the Holders thereof, to the extent requisite to permit the reasonable
disposition (in accordance with the intended methods thereof as aforesaid) of
the Registrable Securities so to be registered; PROVIDED HOWEVER, that if, at
any time after giving written notice of its intention to register any securities
and prior to the effective date of the registration statement filed in
connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities, the Company may, at
its election, give written notice of such determination to each Holder and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities,
for the same period as the delay in
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registering such other securities. The Company will pay all Registration
Expenses in connection with each registration of Registrable Securities pursuant
to this section 2.1.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If (i) a registration
pursuant to this section 2.1 involves an underwritten offering of the securities
so being registered, whether or not for sale for the account of the Company, to
be distributed by or through one or more underwriters of recognized standing
under underwriting terms appropriate for such a transaction, (ii) the
Registrable Securities so requested to be registered for sale for the account of
Holders are not also to be included in such underwritten offering (either
because the Company has not been requested so to include such Registrable
Securities pursuant to section 2.4(b) or, if requested to do so, is not
obligated to do so under section 2.4(b)), and (iii) the managing underwriter of
such underwriter offering shall inform the Company and the Holders requesting
such registration by letter of its belief that the number of securities
requested to be included in such registration exceeds the number which can be
sold in (or during the time of) such offering, then the Company will include in
such registration, to the extent of the number which the Company is sol advised
can be sold in (or during the time of) such offering, FIRST, all securities
proposed by the Company to be sold for its own account, and SECOND, such
Registrable Securities and other securities of the Company requested to be
included in such registration PRO RATA among the Holders on the basis of the
number of shares of such securities so proposed to be sold and so requested to
be included.
2.2. REGISTRATION PROCEDURES. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in section 2.1, the Company will
as expeditiously as possible:
(i) prepare and (as soon thereafter as possible, but in any event
within 90 days after the period within which requests for registration may
be given to the Company) file with the Commission the requisite
registration statement to effect such registration and thereafter use its
best efforts to cause such registration statement to become effective;
PROVIDED, HOWEVER, that the Company may discontinue any registration of its
securities which are not Registrable Securities (and, under the
circumstances specified in section 2.1(a), its securities which are
Registrable Securities) at any time prior to the effective date of the
registration statement relating thereto;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a minimum period of 180 consecutive days and
to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration
statement until such time as all of such securities have been disposed
of in accordance with the intended methods of disposition by the
seller or sellers thereof set forth in such registration statement;
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(iii) furnish to each seller of Registrable Securities covered by
such registration statement and each requesting Holder such number of
conformed copies of such registration statement and of each such amendment
and supplement thereto (in each case including all exhibits), such number
of copies of the prospectus contained in such registration statement
(including each preliminary prospectus and any summary prospectus) and any
other prospectus filed under Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request;
(iv) use its best efforts to register or quality all Registrable
Securities and other securities covered by such registration statement
under such other securities or blue sky laws of such jurisdictions as each
seller thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement remains
in effect, and take any other action which may be reasonably necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the securities owned by such seller; PROVIDED, HOWEVER,
that the Company shall not for any such purpose be required to quality
generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this subdivision (iv) be
obligated to be so qualified or to consent to general service of process in
any such jurisdiction;
(v) use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable
the seller or sellers thereof to consummate the disposition of such
Registrable Securities;
(vi) furnish to each seller of Registrable Securities and each
requesting holder a signed counterpart, addressed to such seller (and the
underwriters, if any) of
(x) an opinion of counsel for the Company dated the effective
date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the
closing under the underwriting agreement), and
(y) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants
who have certified the Company's financial statements included in such
registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the
accountants' letter, such other financial
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<PAGE>
matters, and, in the case of the legal opinion, such other legal matters,
as such seller or such holder (or the underwriters, if any) may reasonably
request;
(vii) notify each seller of Registrable Securities covered by such
registration statement and each requesting Holder, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event as
a result of which, the prospectus included in such registration statement,
as then in effect, includes an untrue statement of a material fact or omits
to state any 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 at the request of any such
seller or holder promptly prepare and Furnish to such seller or holder a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include 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 not
misleading in the light of the circumstances under which they were made;
(viii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, but not more than eighteen months,
beginning with the first full calendar month after the effective date of
such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act, and will finnish to each
such seller at least five business days prior to the filing thereof a copy
of any amendment or supplement to such registration statement or prospectus
and shall not file any thereof to which any such seller shall have
reasonably objected on the grounds that such amendment or supplement does
not comply in all material respects with the requirements of the Securities
Act or of the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and registrar
for all Registrable Securities covered by such registration statement from
and after a date not later than the effective date of such registration
statement; and
(x) use its best efforts to list all Registrable Securities covered
by such registration statement on any securities exchange on which any of
the Registrable Securities is then listed.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to finnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
2.3. UNDERWRITTEN OFFERINGS. (a) INCIDENTAL UNDERWRITTEN OFFERINGS.
If the Company at any time proposes to register any of its securities under the
Securities Act as contemplated by section 2.1 and such securities are to be
distributed by or through one or more
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underwriters, the Company will, if requested by any Holder as provided in
section 2.1 and subject to the provisions of section 2.1(b), use its best
efforts to arrange for such underwriters to include all the Registrable
Securities to be offered and sold by such Holder among the securities to be
distributed by such underwriters. Such Holders shall be parties to the
underwriting agreement between the Company and such underwriters and may, at
their option, require that any or all of the representations and warranties by,
and the other agreements on the part of, the Company to and for the benefit of
such underwriters shall also be made to and for the benefit of such Holders and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of such Holders. Any such Holder shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding such
Holder, such Holder's Registrable Securities and such Holder's intended method
of distribution and any other representation required by law.
(b) HOLDBACK AGREEMENTS. (i) Each Holder agrees by acquisition of
such Registrable Securities, if so required by the managing underwriters, not to
effect any public sale or distribution of any equity securities of the Company,
during the seven days prior to and the 180 days after any underwritten
registration pursuant to section 2.1 has become effective, except as part of
such underwritten registration.
(ii) The Company agrees (x) not to effect any public sale or
distribution of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the seven days
prior to and the 90 days after any underwritten registration pursuant to Section
2.1 has become effective, except as part of such underwritten registration and
except pursuant to registrations on Form S-8 or any successor or similar forms
thereto, and (y) to use its best efforts to cause each holder of its equity
securities or any securities convertible into or exchangeable or exercisable for
any such securities, in each ease purchased from the Company at any time after
the date of this Agreement (other than in a public offering), to agree not to
effect any such public sale or distribution of such securities, during such
period.
2.4. PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel and accountants, the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission, and each amendment thereof or
supplement thereto, and, upon a Holder agreeing to keep such information
confidential, will give each of them access to its books and records and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be reasonably necessary, in the opinion of such Holders' and such
underwriters' respective counsel, to conduct a reasonable investigation within
the meaning of the Securities Act. In addition, if any such registration
statement refers to any Holder of Registrable Securities by name or otherwise as
the Holder of any securities of the Company, then such Holder shall have the
right to require (a) the insertion therein of language, in
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form and substance satisfactory to such Holder, to the effect that the holding
by such Holder of such securities does not necessarily make such Holder a
"controlling person" of the Company within the meaning of the Securities Act and
is not to be construed as a recommendation by such Holder of the investment
quality of the Company's debt or equity securities covered thereby and that such
holding does not imply that such Holder will assist in meeting any future
financial requirements of the Company, or (b) in the event that such reference
to such Holder by name or otherwise is not required by the Securities Act or any
rules and regulations promulgated thereunder, the deletion of the reference to
such Holder.
2.5. FURNISH INFORMATION. The holder or holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such holder or holders, the Registrable Securities held by
them and the distribution proposed by such holder or holders as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 2.
2.6. ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will
not effect or permit to occur any combination or subdivision of shares which
would adversely affect the ability of the Holders to include such Registrable
Securities in any registration of its securities contemplated by this Section 2
or the marketability of such Registrable Securities under any such registration.
2.7. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. In the
event of any registration of any securities of the Company under the Securities
Act, the Company will, and hereby does, indemnity and hold harmless
(1) in the case of any registration statement filed pursuant to
Section 2.1, the seller of any Registrable Securities covered by such
registration statement, its directors and officers, each other Person
who participates as an underwriter (including any "qualified
independent underwriter" required by the rules of the NASD) in the
offering or sale of such securities and each other Person, if any, who
controls such seller or any such underwriter within the meaning of the
Securities Act, and
(ii) in the case of any registration statement of the Company,
any requesting holder, its directors and officers and each other
Person, if any, who controls such requesting holder within the meaning
of the Securities Act,
against any losses, claims, damages or liabilities, joint or several, to which
such seller or requesting holder or any such director or officer or underwriter
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to
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be stated therein or necessary to make the statements therein not misleading,
and the Company will reimburse such seller, such requesting holder and each such
director, officer, underwriter and controlling person for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; PROVIDED that
the Company shall not be liable in any such ease to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus, amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by such seller or
requesting holder, as the case may be, specifically stating that it is for use
in the preparation thereof. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such seller or
such requesting holder or any such director, officer, underwriter or controlling
person and shall survive the transfer of such securities by such seller.
(b) INDEMNIFICATION BV THE SELLERS. The Company may require, as a
condition to including any Registrable Securities in any registration statement
filed pursuant to Sections 2.1, that the Company shall have received an
undertaking satisfactory to it from the prospective seller of such securities,
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in subdivision (a) of this Section 2.7) the Company, each director of the
Company, each officer of the Company and each other person, if any, who controls
the Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such seller specifically stating
that it is for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement. Such indemnity shall remain in full force and effect, regardless of
any investigation made by or on behalf of the Company or any such director,
officer or controlling person and shall survive the transfer of such securities
by such seller. Notwithstanding the foregoing, the liability of each seller
under this Section 2.7(b) shall be limited to an amount equal to the proceeds to
each such seller of such securities sold as contemplated herein, unless such
liability arises out of or is based on willful conduct by such seller.
(c) NOTICES OF CLAIMS. ETC. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in the preceding subdivisions of this Section 2.7, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action, PROVIDED that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.7, except to the extent that
the indemnifying party is actually prejudiced by such failure to give notice.
In ease any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and
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indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from ail liability
in respect to such claim or litigation.
(d) OTHER INDEMNIFICATION. Indemnification similar to that specified
in the preceding subdivisions of this Section 2.7 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority other than the Securities Act.
(e) INDEMNIFICATION PAYMENTS. The indemnification required by this
Section 2.7 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss damage or liability is incurred.
(f) CONTRIBUTION. If the indemnification provided for in this
Agreement shall for any reason be unavailable or insufficient to an indemnified
party under Section 2.7(a), 2.7(b) or 2.7(d) hereof in respect to any loss,
claim, damage or liability, or any action in respect thereof, or referred to
therein, then each indemnifying party shall, in lieu of indemnifying such party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, in such
proportion as shall be appropriate to reflect (i) the relative benefits received
by the Company on the one hand and the holders of the Registrable Securities
included in the offering on the other hand, from the offering of the Registrable
Securities, and (ii) the relative fault of the Company on the one hand and the
holders of the Registrable Securities included in the offering on the other,
with respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the holders of the Registrable Securities on the other with respect
to such offering shall be deemed to be in the same proportion as the sum of the
total Subscription Price paid to the Company in respect of the Registrable
Securities plus the total net proceeds from the offering of the securities
(before deducting expenses) received by the Company bears to the amount by which
the total net proceeds from the offering of the securities (before deducting
expenses) received by the holders of the Registrable Securities with respect to
such offering exceeds the Subscription Price paid to the Company in respect of
the Registrable securities, and in each case the net proceeds received from such
offering shall be determined as set forth on the table of 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
omission or alleged omission to state a material fact relates to information
supplied
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by the Company or the holders of the Registrable Securities, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the holders of
the Registrable Securities agree that it would not be just and equitable if
contribution pursuant to this Section 2 were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable consideration referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to in this Section 2 shall be deemed to
include, for purposes of this Section 2, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
3. EFFECTIVENESS; AMENDMENTS AND WAIVERS. This Agreement shall
become effective upon the Initial Closing Date. This Agreement may be amended
only if the Company shall have obtained the prior written consent to such
amendment of the Holder or Holders of a majority of the Registrable Securities;
PROVIDED, HOWEVER, that this Agreement may be amended to include as party hereto
a subscriber that consummates the purchase of Units on a date other than the
Initial Closing Date without the consent of the Holders and such amendment shall
be evidenced only by execution of such subscriber of the Omnibus Signature Page.
Each Holder of any Registrable Securities at the time or thereafter outstanding
shall be bound by any consent authorized by this Section 3, whether or not such
Registrable Securities shall have been marked to indicate such consent.
4. NOMINEES FOR BENEFICIAL OWNERS. In the event that any
Registrable Securities are held by a nominee for the beneficial owner thereof,
the beneficial owner thereof may, at its election, be treated as the Holder for
purposes of any request or other action by any Holder or Holders pursuant to
this Agreement or any determination of any number or percentage of shares of
Registrable Securities held by any Holder or Holders contemplated by this
Agreement. If the beneficial owner of any Registrable Securities so elects, the
Company may require assurances reasonably satisfactory to it of such owner's
beneficial ownership of such Registrable Securities.
5. NOTICES. All communications provided for hereunder shall be sent
by first class mail and (a) if to any Holder, to the address that such Holder
shall have furnished to the Company in writing or (b) if to the Company, to 7634
Golden Triangle Drive, Eden Prairie, MN 55344, Attention: Yale T. Dolginow, or
to such other address as the Company shall have furnished to each Holder in
writing.
6. ADDITIONAL HOLDERS. Each Person purchasing Units pursuant to the
Private Placement Memorandum will be a party to this Agreement and such Person
shall be bound by all the obligations and entitled to all of the rights of a
Holder under this Agreement.
7. ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition,
-11-
<PAGE>
and whether or not any express assignment shall have been made, the provisions
of this Agreement which are for the benefit of the parties hereto other than the
Company shall also be for the benefit of and enforceable by any subsequent
holder of any Registrable Securities, subject to the provisions respecting the
minimum numbers or percentages of shares of Registrable Securities required in
order to be entitled to certain rights, or take certain actions, contained
herein. Without limiting the foregoing, the registration rights set forth in
Section 2.1 shall be assignable at the option of each of the holders of
Registrable Securities, in whole or in part, to any transferee of the Warrants
or Registrable Securities.
8. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE STATE OF MINNESOTA.
11. SIGNATURE. THIS REGISTRATION RIGHTS AGREEMENT WILL BE DEEMED TO
HAVE BEEN EXECUTED FOR ALL PURPOSES WHEN THE SUBSCRIBER SIGNS AND DATES THE
OMNIBUS SIGNATURE PAGE.
-12-
<PAGE>
PROMISSORY NOTE
$1,858,488 January 13, 1997
FOR VALUE RECEIVED, PAPER WAREHOUSE, INC., a Minnesota corporation,
("Borrower") promises to pay to the order of Yale T. Dolginow (the "Holder") the
sum of One Million Eight Hundred Fifty-Eight Thousand Four Hundred Eighty-Eight
and no/100 Dollars ($1,858,488.00), together with interest on the unpaid balance
thereof at five and 63/100 percent (5.63%) per annum, calculated on the basis of
actual days elapsed in a 365 day year.
Accrued interest shall be payable one year from the date hereof, and
continuing so long as any portion of the principal balance hereof remains
unpaid.
The principal balance shall be due one year from the date hereof.
Borrower shall make all payments to Holder hereunder at 7630 Excelsior
Boulevard, St. Louis Park, Minnesota 55426, or as otherwise directed in writing
by Holder.
This Note may be prepaid at any time without penalty.
Borrower promises to pay all costs of collection of this Note, including,
but not limited to, attorneys' fees, paid or incurred by Holder on account of
such collection, whether or not suit is filed with respect thereto and whether
or not such costs are paid or incurred, or to be paid or incurred, prior to or
after entry of judgment.
Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived.
This Note shall be governed by and construed in accordance with the laws of
the state of Minnesota.
REPAYMENT OF ALL PRINCIPAL, INTEREST AND COSTS OF THIS NOTE SHALL BE FULLY
SUBORDINATED TO THE PAYMENT OF BORROWER'S REAL ESTATE MORTGAGE PAYABLE TO
THE UNITED STATES SMALL BUSINESS ADMINISTRATION, TO THE PAYMENT OF THE
BORROWER'S OBLIGATIONS TO ANY SENIOR LENDER PROVIDING THE BORROWER WORKING
CAPITAL FINANCING AND TO THE PAYMENT OF THE BORROWER'S OBLIGATIONS WITH
RESPECT TO THE 10% SUBORDINATED NOTES DUE NOVEMBER 30, 2004.
PAPER WAREHOUSE, INC.
By /s/ Brent D. Schlosser
-----------------------------
Brent D. Schlosser, Executive
Vice President
<PAGE>
PROMISSORY NOTE
$277,705 January 13, 1997
FOR VALUE RECEIVED, PAPER WAREHOUSE, INC., a Minnesota corporation,
("Borrower") promises to pay to the order of Brent D. Schlosser (the "Holder")
the sum of Two Hundred Seventy-Seven Thousand Seven Hundred Five and no/100
Dollars ($277,705.00), together with interest on the unpaid balance thereof at
five and 63/100 percent (5.63%) per annum, calculated on the basis of actual
days elapsed in a 365 day year.
Accrued interest shall be payable one year from the date hereof, and
continuing so long as any portion of the principal balance hereof remains
unpaid.
The principal balance shall be due one year from the date hereof.
Borrower shall make all payments to Holder hereunder at 7630 Excelsior
Boulevard, St. Louis Park, Minnesota 55426, or as otherwise directed in writing
by Holder.
This Note may be prepaid at any time without penalty.
Borrower promises to pay all costs of collection of this Note, including,
but not limited to, attorneys' fees, paid or incurred by Holder on account of
such collection, whether or not suit is filed with respect thereto and whether
or not such costs are paid or incurred, or to be paid or incurred, prior to or
after entry of judgment.
Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived.
This Note shall be governed by and construed in accordance with the laws of
the state of Minnesota.
REPAYMENT OF ALL PRINCIPAL, INTEREST AND COSTS OF THIS NOTE SHALL BE FULLY
SUBORDINATED TO THE PAYMENT OF BORROWER'S REAL ESTATE MORTGAGE PAYABLE TO
THE UNITED STATES SMALL BUSINESS ADMINISTRATION, TO THE PAYMENT OF THE
BORROWER'S OBLIGATIONS TO ANY SENIOR LENDER PROVIDING THE BORROWER WORKING
CAPITAL FINANCING AND TO THE PAYMENT OF THE BORROWER'S OBLIGATIONS WITH
RESPECT TO THE 10% SUBORDINATED NOTES DUE NOVEMBER 30, 2004.
PAPER WAREHOUSE, INC.
By /s/ Yale T. Dolginow
-------------------------------------
Yale T. Dolginow, President and
Chief Executive Officer
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made as of February 6, 1997 by and between PAPER
WAREHOUSE, INC., a Minnesota corporation (the "Company"), and YALE T. DOLGINOW
(the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ Executive in accordance with the
terms and conditions stated in this Agreement; and
WHEREAS, Executive desires to accept that employment pursuant to the terms
and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein, the parties hereto agree as follows:
I. EMPLOYMENT
1.1 EMPLOYMENT AS PRESIDENT AND CHIEF EXECUTIVE OFFICER. The Company
hereby employs Executive as President and Chief Executive Officer and Executive
accepts such employment pursuant to the terms of this Agreement. Executive
shall report to the Company's Board of Directors. The Executive will perform
those duties which are usual and customary for a president and chief executive
officer of a publicly-traded party goods retailer. Executive shall be employed
at the Company's corporate offices. He shall perform his duties in a manner
reasonably expected of a president and chief executive officer of a
publicly-traded party goods retailer.
1.2 TERM. Employment shall be for a term commencing the date hereof and
continuing until the earlier of (i) two years or (ii) the date Executive's
employment terminates pursuant to Article III hereof.
II. COMPENSATION, BENEFITS AND PERQUISITES
2.1 BASE SALARY. During the term and effectiveness of this Agreement, the
Company shall pay Executive an annualized base salary ("Base Salary") at the
annual rate of $285,000. The Base Salary shall be payable in equal installments
in the time and manner that other employees of the Company are compensated. The
Board of Directors of the Company will review the Base Salary at least annually,
and may, in its sole discretion increase it to reflect performance, appropriate
industry guideline data or other factors.
2.2 VACATIONS. Executive shall be entitled to four weeks paid vacation,
or such greater amount of time as determined by the Company's Board of
Directors.
<PAGE>
2.3 EMPLOYEE BENEFITS. Executive shall be entitled to the benefits
which the Company provides to its other executives under its employee benefit
plans. Executive's participation in such benefit plans shall be on the same
basis as applies to other executives of the Company. Executive shall pay any
contributions which are generally required of executives to receive any such
benefits.
III. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 TERMINATION OF EMPLOYMENT. Executive's employment under this
Agreement may be terminated by the Company or Executive at any time for any
reason; provided, however, that if Executive's employment is terminated by the
Company during the term of this Agreement for a reason or disability other than
for cause as defined in Section 3.2 below, he shall continue to receive his Base
Salary under Section 2.1 for a period of twelve months from the date of
termination. Executive's employment under this Agreement may be terminated by
Executive at any time for any reason. The termination shall be effective as of
the date specified by the party initiating the termination in a written notice
delivered to the other party, which date shall not be earlier than the date such
notice is delivered to the other party. This Agreement shall terminate in its
entirety immediately upon the death of Executive. Except as expressly provided
to the contrary in this section or applicable law, Executive's rights to pay and
benefits shall cease on the date his employment under this Agreement terminates.
3.2 CAUSE. For purposes of this Article III, "cause" shall mean only
the following: (i) commission of a felony; (ii) theft or embezzlement of
Company property or commission of similar acts involving moral turpitude; or
(iii) the failure by Executive to substantially perform his material duties
under this Agreement (excluding nonperformance resulting from Executive's
disability) which willful failure is not cured within thirty (30) days after
written notice from the Board of Directors of the Company specifying the act of
willful nonperformance or within such longer period (but no longer than ninety
(90) days in any event) as is reasonably required to cure such willful
nonperformance. Notwithstanding the foregoing, Executive shall not be deemed to
have been terminated for "cause" unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by the affirmative
vote of the Board at a meeting of the Board called and held for this specific
purpose.
3.3 DISABILITY. If Executive has become disabled such that he cannot
perform the essential functions of his job with or without reasonable
accommodation, and the disability has continued for a period of more than ninety
(90) days, the Board of Directors of the Company may, in its discretion,
terminate his employment under this Agreement. Upon any such termination for
disability, Executive shall be entitled to such disability, medical, life
insurance, and other benefits as may be provided generally for disabled
employees of the Company during the period he remains disabled.
3.4 NOTICE. Executive must provide the Company with at least 30 days
written notice if Executive desires to terminate his employment under this
Agreement.
2
<PAGE>
IV. CONFIDENTIALITY
4.1 PROHIBITIONS AGAINST USE. Both parties to this Agreement
acknowledge and agree that during the term of this Agreement they may have
access to various trade secrets and confidential business information
("Confidential Information") of each other. Each party agrees that it shall use
such Confidential Information solely in connection with his obligations under
this Agreement and shall maintain in strictest confidence and shall not disclose
any such Confidential Information, directly or indirectly or use such
information in any other way during the term of this Agreement or for a period
of one (1) year after the termination of this Agreement. The parties further
agree to take all reasonable steps necessary to preserve and protect the
Confidential Information. The provisions of this Section shall be equally
applicable to each parties' officers, directors, agents or employees. The
provisions of this Section shall not apply to information which (i) was in
possession of a party prior to receipt from the other party, or (ii) is or
becomes generally available to the public other than as a result of a disclosure
by a party, its directors, officers, employees, agents or advisors, or (iii)
becomes available to a party from a third party having the right to make such
disclosure.
4.2 REMEDIES. Executive acknowledges that the Company's remedy at law
for any breach or threatened breach by Executive of Section 4.1 will be
inadequate. Therefore, the Company shall be entitled to injunctive and other
equitable relief restraining Executive from violating those requirements, in
addition to any other remedies that may be available to the Company under this
Agreement or applicable law.
V. NON-COMPETITION
5.1 AGREEMENT NOT TO COMPETE. Executive agrees that, on or before the
date which is two (2) years after the date Executive's employment under this
Agreement terminates, he will not, unless he receives the prior approval of the
Board of Directors of the Company, directly or indirectly engage in any of the
following actions:
(a) Own an interest in (except as provided below), manage,
operate, join, control, lend money or render financial or other
assistance to, or participate in or be connected with, as an officer,
employee, partner, stockholder, consultant or otherwise, any entity whose
products or services could be considered part of the party goods
industry. However, nothing in this subsection (a) shall preclude
Executive from holding less than one percent of the outstanding capital
stock of any corporation required to file periodic reports with the
Securities and Exchange Commission under Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the securities of which are
listed on any securities exchange, quote on the National Association of
Securities Dealers Automated Quotation System or traded in the
over-the-counter market.
(b) Intentionally solicit, endeavor to entice away from the
Company, or otherwise interfere with the relationship of the Company, any
person who is employed by
3
<PAGE>
or otherwise engaged to perform services for the Company (including, but
not limited to, any independent sales representatives or organizations),
whether for Executive's own account or for the account of any other
individual, partnership, firm, corporation or other business
organization.
If the scope of the restrictions in this section are determined by a court of
competent jurisdiction to be too broad to permit enforcement of such
restrictions to their full extent, then such restrictions shall be construed or
rewritten (blue-lined) so as to be enforceable to the maximum extent permitted
by law, and Executive hereby consents, to the extent he may lawfully do so, to
the judicial modification of the scope of such restrictions in any proceeding
brought to enforce them.
VI. MISCELLANEOUS
6.1 AMENDMENT. This Agreement may be amended only in writing, signed by
both parties.
6.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard thereto. This Agreement supersedes all prior agreements
relating to the employment of Executive by the Company.
6.3 ASSIGNMENT. This Agreement shall be binding upon, and shall inure
to the benefit of parties and their respective successors, assigns, heirs and
personal representatives and any entity with which the Company may merge or
consolidate or to which the Company may sell substantially all of its assets.
6.4 NOTICES. Any notice required to be given under this Agreement shall
be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested. Any notice by mail shall be
addressed as follows:
If to the Company, to:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Martin A. Mayer
If to Executive, to:
Yale T. Dolginow
6404 Harold Woods Lane
Edina, MN 55436
4
<PAGE>
or to such other addresses as either party may designate in writing to the other
party from time to time.
6.6 WAIVER OF BREACH. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
6.7 SEVERABILITY. If any one or more of the provisions (or portions
thereof) of this Agreement shall for any reason be held by a final determination
of a court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions (or portions of the provisions) of this Agreement, and the
invalid, illegal or unenforceable provisions shall be deemed replaced by a
provision that is valid, legal and enforceable and that comes closest to
expressing the intention of the parties hereto.
6.8 GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Minnesota, without giving effect to
conflict of law principles.
6.9 ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach of this Agreement or the breach of any exhibits
attached to this Agreement shall be settled by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, and a
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction. The arbitration award shall be subject to review
only in the manner provided in the Uniform Arbitration Act as adopted in Chapter
572, Minnesota Statutes, as the Act is amended at the time of submission of the
issue to arbitration. The arbitrator(s) shall have the authority to award the
prevailing party its costs and reasonable attorney's fees which shall be paid by
the non-prevailing party. In the event the parties hereto agree that it is
necessary to litigate any dispute hereunder in a court, the non-prevailing party
shall pay the prevailing party its costs and reasonable attorney's fees.
Notwithstanding anything in this Section 6.9 to the contrary, Executive shall be
entitled to seek specific performance of Executive's rights to be paid until the
date of termination during the pendency of any dispute or controversy arising
under or in connection with this Agreement or exhibits attached to this
Agreement. Further, the Company shall be entitled to seek an injunction or
restraining order in a court of competent jurisdiction to enforce the provision
of Article IV and Article V.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
PAPER WAREHOUSE, INC.
By s/ Martin A. Mayer
-----------------------------------
Martin A. Mayer
Chairman of Compensation Committee
s/ Yale T. Dolginow
----------------------------------------
Yale T. Dolginow
6
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made as of February 6, 1997 by and between PAPER
WAREHOUSE, INC., a Minnesota corporation (the "Company"), and BRENT D. SCHLOSSER
(the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ Executive in accordance with the
terms and conditions stated in this Agreement; and
WHEREAS, Executive desires to accept that employment pursuant to the terms
and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein, the parties hereto agree as follows:
I. EMPLOYMENT
1.1 EMPLOYMENT AS EXECUTIVE VICE PRESIDENT. The Company hereby employs
Executive as Executive Vice President and Executive accepts such employment
pursuant to the terms of this Agreement. Executive shall report to the
Company's President and Chief Executive Officer. The Executive will perform
those duties which are usual and customary for an executive vice president of a
publicly-traded party goods retailer. Executive shall be employed at the
Company's corporate offices. He shall perform his duties in a manner reasonably
expected of an executive vice president of a publicly-traded party goods
retailer.
1.2 TERM. Employment shall be for a term commencing the date hereof and
continuing until the earlier of (i) two years or (ii) the date Executive's
employment terminates pursuant to Article III hereof.
II. COMPENSATION, BENEFITS AND PERQUISITES
2.1 BASE SALARY. During the term and effectiveness of this Agreement, the
Company shall pay Executive an annualized base salary ("Base Salary") at the
annual rate of $150,000. The Base Salary shall be payable in equal installments
in the time and manner that other employees of the Company are compensated. The
Board of Directors of the Company will review the Base Salary at least annually,
and may, in its sole discretion increase it to reflect performance, appropriate
industry guideline data or other factors.
2.2 VACATIONS. Executive shall be entitled to four weeks paid vacation,
or such greater amount of time as determined by the Company's Board of
Directors.
<PAGE>
2.3 EMPLOYEE BENEFITS. Executive shall be entitled to the benefits
which the Company provides to its other executives under its employee benefit
plans. Executive's participation in such benefit plans shall be on the same
basis as applies to other executives of the Company. Executive shall pay any
contributions which are generally required of executives to receive any such
benefits.
III. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 TERMINATION OF EMPLOYMENT. Executive's employment under this
Agreement may be terminated by the Company or Executive at any time for any
reason; provided, however, that if Executive's employment is terminated by the
Company during the term of this Agreement for a reason or disability other than
for cause as defined in Section 3.2 below, he shall continue to receive his Base
Salary under Section 2.1 for a period of twelve months from the date of
termination. Executive's employment under this Agreement may be terminated by
Executive at any time for any reason. The termination shall be effective as of
the date specified by the party initiating the termination in a written notice
delivered to the other party, which date shall not be earlier than the date such
notice is delivered to the other party. This Agreement shall terminate in its
entirety immediately upon the death of Executive. Except as expressly provided
to the contrary in this section or applicable law, Executive's rights to pay and
benefits shall cease on the date his employment under this Agreement terminates.
3.2 CAUSE. For purposes of this Article III, "cause" shall mean only
the following: (i) commission of a felony; (ii) theft or embezzlement of
Company property or commission of similar acts involving moral turpitude; or
(iii) the failure by Executive to substantially perform his material duties
under this Agreement (excluding nonperformance resulting from Executive's
disability) which willful failure is not cured within thirty (30) days after
written notice from the Board of Directors of the Company specifying the act of
willful nonperformance or within such longer period (but no longer than ninety
(90) days in any event) as is reasonably required to cure such willful
nonperformance. Notwithstanding the foregoing, Executive shall not be deemed to
have been terminated for "cause" unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by the affirmative
vote of the Board at a meeting of the Board called and held for this specific
purpose.
3.3 DISABILITY. If Executive has become disabled such that he cannot
perform the essential functions of his job with or without reasonable
accommodation, and the disability has continued for a period of more than ninety
(90) days, the Board of Directors of the Company may, in its discretion,
terminate his employment under this Agreement. Upon any such termination for
disability, Executive shall be entitled to such disability, medical, life
insurance, and other benefits as may be provided generally for disabled
employees of the Company during the period he remains disabled.
3.4 NOTICE. Executive must provide the Company with at least 30 days
written notice if Executive desires to terminate his employment under this
Agreement.
2
<PAGE>
IV. CONFIDENTIALITY
4.1 PROHIBITIONS AGAINST USE. Both parties to this Agreement
acknowledge and agree that during the term of this Agreement they may have
access to various trade secrets and confidential business information
("Confidential Information") of each other. Each party agrees that it shall use
such Confidential Information solely in connection with his obligations under
this Agreement and shall maintain in strictest confidence and shall not disclose
any such Confidential Information, directly or indirectly or use such
information in any other way during the term of this Agreement or for a period
of one (1) year after the termination of this Agreement. The parties further
agree to take all reasonable steps necessary to preserve and protect the
Confidential Information. The provisions of this Section shall be equally
applicable to each parties' officers, directors, agents or employees. The
provisions of this Section shall not apply to information which (i) was in
possession of a party prior to receipt from the other party, or (ii) is or
becomes generally available to the public other than as a result of a disclosure
by a party, its directors, officers, employees, agents or advisors, or (iii)
becomes available to a party from a third party having the right to make such
disclosure.
4.2 REMEDIES. Executive acknowledges that the Company's remedy at law
for any breach or threatened breach by Executive of Section 4.1 will be
inadequate. Therefore, the Company shall be entitled to injunctive and other
equitable relief restraining Executive from violating those requirements, in
addition to any other remedies that may be available to the Company under this
Agreement or applicable law.
V. NON-COMPETITION
5.1 AGREEMENT NOT TO COMPETE. Executive agrees that, on or before the
date which is two (2) years after the date Executive's employment under this
Agreement terminates, he will not, unless he receives the prior approval of the
Board of Directors of the Company, directly or indirectly engage in any of the
following actions:
(a) Own an interest in (except as provided below), manage,
operate, join, control, lend money or render financial or other
assistance to, or participate in or be connected with, as an officer,
employee, partner, stockholder, consultant or otherwise, any entity whose
products or services could be considered part of the party goods
industry. However, nothing in this subsection (a) shall preclude
Executive from holding less than one percent of the outstanding capital
stock of any corporation required to file periodic reports with the
Securities and Exchange Commission under Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the securities of which are
listed on any securities exchange, quote on the National Association of
Securities Dealers Automated Quotation System or traded in the
over-the-counter market.
(b) Intentionally solicit, endeavor to entice away from the
Company, or otherwise interfere with the relationship of the Company, any
person who is employed by
3
<PAGE>
or otherwise engaged to perform services for the Company (including, but
not limited to, any independent sales representatives or organizations),
whether for Executive's own account or for the account of any other
individual, partnership, firm, corporation or other business
organization.
If the scope of the restrictions in this section are determined by a court of
competent jurisdiction to be too broad to permit enforcement of such
restrictions to their full extent, then such restrictions shall be construed or
rewritten (blue-lined) so as to be enforceable to the maximum extent permitted
by law, and Executive hereby consents, to the extent he may lawfully do so, to
the judicial modification of the scope of such restrictions in any proceeding
brought to enforce them.
VI. MISCELLANEOUS
6.1 AMENDMENT. This Agreement may be amended only in writing, signed
by both parties.
6.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard thereto. This Agreement supersedes all prior agreements
relating to the employment of Executive by the Company.
6.3 ASSIGNMENT. This Agreement shall be binding upon, and shall inure
to the benefit of parties and their respective successors, assigns, heirs and
personal representatives and any entity with which the Company may merge or
consolidate or to which the Company may sell substantially all of its assets.
6.4 NOTICES. Any notice required to be given under this Agreement
shall be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested. Any notice by mail shall be
addressed as follows:
If to the Company, to:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Yale T. Dolginow
If to Executive, to:
Brent D. Schlosser
15909 White Pine Drive
Wayzata, MN 55391
4
<PAGE>
or to such other addresses as either party may designate in writing to the other
party from time to time.
6.6 WAIVER OF BREACH. Any waiver by either party of compliance with
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any other provision of this Agreement, or of any
subsequent breach by such party of a provision of this Agreement.
6.7 SEVERABILITY. If any one or more of the provisions (or portions
thereof) of this Agreement shall for any reason be held by a final determination
of a court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions (or portions of the provisions) of this Agreement, and the
invalid, illegal or unenforceable provisions shall be deemed replaced by a
provision that is valid, legal and enforceable and that comes closest to
expressing the intention of the parties hereto.
6.8 GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Minnesota, without giving effect to
conflict of law principles.
6.9 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement or the breach of this Agreement or the breach of any exhibits
attached to this Agreement shall be settled by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, and a
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction. The arbitration award shall be subject to review
only in the manner provided in the Uniform Arbitration Act as adopted in Chapter
572, Minnesota Statutes, as the Act is amended at the time of submission of the
issue to arbitration. The arbitrator(s) shall have the authority to award the
prevailing party its costs and reasonable attorney's fees which shall be paid by
the non-prevailing party. In the event the parties hereto agree that it is
necessary to litigate any dispute hereunder in a court, the non-prevailing party
shall pay the prevailing party its costs and reasonable attorney's fees.
Notwithstanding anything in this Section 6.9 to the contrary, Executive shall be
entitled to seek specific performance of Executive's rights to be paid until the
date of termination during the pendency of any dispute or controversy arising
under or in connection with this Agreement or exhibits attached to this
Agreement. Further, the Company shall be entitled to seek an injunction or
restraining order in a court of competent jurisdiction to enforce the provision
of Article IV and Article V.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
PAPER WAREHOUSE, INC.
By s/ Yales T. Dolginow
--------------------------------------
Yale T. Dolginow
President and Chief Executive Officer
s/ Brent D. Schlosser
-------------------------------------------
Brent D. Schlosser
6
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EMPLOYMENT AGREEMENT
This Agreement is made as of July 14, 1997 by and between PAPER
WAREHOUSE, INC., a Minnesota corporation (the "Company"), and CHERYL W. NEWELL
(the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ Executive in accordance with the
terms and conditions stated in this Agreement; and
WHEREAS, Executive desires to accept that employment pursuant to the
terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, the parties hereto agree as follows:
I. EMPLOYMENT
1.1 EMPLOYMENT AS CHIEF FINANCIAL OFFICER. The Company hereby employs
Executive as Chief Financial Officer and Executive accepts such employment
pursuant to the terms of this Agreement. Executive shall report to the
Company's President and Chief Executive Officer. The Executive will perform
those duties which are usual and customary for a chief financial officer of a
party goods retailer. Executive shall be employed at the Company's corporate
offices. She shall perform her duties in a manner reasonably expected of a chief
financial officer of a party goods retailer.
1.2 TERM. Employment shall be for a term commencing not later than
August 1, 1997 and continuing until Executive's employment terminates pursuant
to Article III hereof.
II. COMPENSATION, BENEFITS AND PERQUISITES
2.1 BASE SALARY. During the term and effectiveness of this Agreement,
the Company shall pay Executive an annualized base salary ("Base Salary") at the
annual rate of One Hundred Fifteen Thousand Dollars ($115,000). The Base Salary
shall be payable in equal installments in the time and manner that other
employees of the Company are compensated. The Board of Directors of the Company
will review the Base Salary at least annually, and may, in its sole discretion
increase it to reflect performance, appropriate industry guideline data or other
factors.
2.2 BONUS COMPENSATION. In addition to Base Salary, Executive shall
have the opportunity to earn additional compensation based upon the Company and
Executive achieving certain results articulated in the Senior Management Group
Compensation Plan, which the parties intend to finalize within sixty (60) days
of the execution of this Agreement.
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2.3 STOCK OPTION. In the event the company makes an initial public
offering of its stock, Executive shall receive, pursuant to the Company Employee
Stock Option Plan, incentive stock options equal to four hundred fifty (450)
shares of the Company's capital stock which is issued and outstanding as of the
date of this Agreement. The number of stock options shall be adjusted for all
stock splits and stock dividends. Stock options will have a strike price equal
to the initial public offering price per share.
2.4 EMPLOYEE BENEFITS. Executive shall be entitled to the vacation and
other benefits which the Company provides to its other executives under its
employee benefit plans for employees with ten (10) years of service.
Executive's participation in such benefit plans shall be on the same basis as
applies to other executives of the Company. Executive shall pay any
contributions which are generally required of executives to receive any such
benefits. Executive shall be reimbursed up to Two Hundred Forty Dollars ($240)
a month for Executive's membership in a private club of Executive's choice. The
Company shall further reimburse Executive for COBRA expenses incurred by
Executive, while such COBRA expenses are necessary to satisfy the pre-existing
conditions limitation under the Company's health insurance plan, up to a maximum
cumulative reimbursement of Three Thousand Dollars ($3,000) and for a maximum
duration of six (6) months following the effective date of employment.
III. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 TERMINATION OF EMPLOYMENT. Executive's employment under this
Agreement may be terminated by the Company or Executive at any time for any
reason; provided, however, that if Executive's employment is terminated by the
Company during the first eighteen months (18) of the term of this Agreement for
disability or a reason other than for cause as defined in Section 3.2 below, she
shall continue to receive her Base Salary under Section 2.1 for a period ending
on the earlier of (i) twelve months from the date of termination or (ii)
eighteen (18) months after execution of this Agreement. Executive's employment
under this Agreement may be terminated by Executive at any time for any reason.
The termination shall be effective as of the date specified by the party
initiating the termination in a written notice delivered to the other party,
which date shall not be earlier than the date such notice is delivered to the
other party. This Agreement shall terminate in its entirety immediately upon
the death of Executive. Except as expressly provided to the contrary in this
section or applicable law, Executive's rights to pay and benefits shall cease on
the date her employment under this Agreement terminates.
3.2 CAUSE. For purposes of this Article III, "cause" shall mean only
the following: (i) commission of a felony; (ii) theft or embezzlement of
Company property or commission of similar acts involving moral turpitude; or
(iii) the failure by Executive to substantially perform her material duties
under this Agreement (excluding nonperformance resulting from Executive's
disability) which willful failure is not cured within thirty (30) days after
written notice from the Board of Directors of the Company specifying the act of
willful nonperformance or within such longer period (but no longer than ninety
(90) days in any event) as is reasonably required to cure such willful
nonperformance. Notwithstanding the foregoing, Executive shall not be deemed to
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have been terminated for "cause" unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by the affirmative
vote of the Board at a meeting of the Board called and held for this specific
purpose.
3.3 DISABILITY. If Executive has become disabled such that she cannot
perform the essential functions of her job with or without reasonable
accommodation, and the disability has continued for a period of more than ninety
(90) days, the Board of Directors of the Company may, in its discretion,
terminate her employment under this Agreement. Upon any such termination for
disability, Executive shall be entitled to such disability, medical, life
insurance, and other benefits as may be provided generally for disabled
employees of the Company during the period she remains disabled.
3.4 NOTICE. Executive must provide the Company with at least 30 days
written notice if Executive desires to terminate her employment under this
Agreement.
IV. CONFIDENTIALITY
4.1 PROHIBITIONS AGAINST USE. Both parties to this Agreement
acknowledge and agree that during the term of this Agreement they may have
access to various trade secrets and confidential business information
("Confidential Information") of each other. Each party agrees that it shall use
such Confidential Information solely in connection with Executive's obligations
under this Agreement and shall maintain in strictest confidence and shall not
disclose any such Confidential Information, directly or indirectly or use such
information in any other way during the term of this Agreement or for a period
of one (1) year after the termination of this Agreement. The parties further
agree to take all reasonable steps necessary to preserve and protect the
Confidential Information. The provisions of this Section shall be equally
applicable to each parties' officers, directors, agents or employees. The
provisions of this Section shall not apply to information which (i) was in
possession of a party prior to receipt from the other party, or (ii) is or
becomes generally available to the public other than as a result of a disclosure
by a party, its directors, officers, employees, agents or advisors, or (iii)
becomes available to a party from a third party having the right to make such
disclosure.
4.2 REMEDIES. Executive acknowledges that the Company's remedy at law
for any breach or threatened breach by Executive of Section 4.1 will be
inadequate. Therefore, the Company shall be entitled to injunctive and other
equitable relief restraining Executive from violating those requirements, in
addition to any other remedies that may be available to the Company under this
Agreement or applicable law.
V. NON-COMPETITION
5.1 AGREEMENT NOT TO COMPETE. Executive agrees that, on or before the
date which is two (2) years after the date Executive's employment under this
Agreement terminates, she will
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not, unless she receives the prior approval of the Board of Directors of the
Company, directly or indirectly engage in any of the following actions:
(a) Own an interest in (except as provided below), manage,
operate, join, control, lend money or render financial or other
assistance to, or participate in or be connected with, as an officer,
employee, partner, stockholder, consultant or otherwise, any entity whose
products or services could be considered part of the party goods
industry. However, nothing in this subsection (a) shall preclude
Executive from holding less than one percent of the outstanding capital
stock of any corporation required to file periodic reports with the
Securities and Exchange Commission under Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the securities of which are
listed on any securities exchange, quote on the National Association of
Securities Dealers Automated Quotation System or traded in the
over-the-counter market.
(b) Intentionally solicit, endeavor to entice away from the
Company, or otherwise interfere with the relationship of the Company, any
person who is employed by or otherwise engaged to perform services for
the Company (including, but not limited to, any independent sales
representatives or organizations), whether for Executive's own account or
for the account of any other individual, partnership, firm, corporation
or other business organization.
If the scope of the restrictions in this section are determined by a court of
competent jurisdiction to be too broad to permit enforcement of such
restrictions to their full extent, then such restrictions shall be construed or
rewritten (blue-lined) so as to be enforceable to the maximum extent permitted
by law, and Executive hereby consents, to the extent she may lawfully do so, to
the judicial modification of the scope of such restrictions in any proceeding
brought to enforce them.
VI. MISCELLANEOUS
6.1 AMENDMENT. This Agreement may be amended only in writing, signed
by both parties.
6.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard thereto. This Agreement supersedes all prior agreements
relating to the employment of Executive by the Company.
6.3 ASSIGNMENT. This Agreement shall be binding upon, and shall inure
to the benefit of the parties and their respective successors, assigns, heirs
and personal representatives and any entity with which the Company may merge or
consolidate or to which the Company may sell substantially all of its assets.
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6.4 NOTICES. Any notice required to be given under this Agreement
shall be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested. Any notice by mail shall be
addressed as follows:
If to the Company, to:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, MN 55426
Attention: Yale T. Dolginow
If to Executive, to:
Cheryl W. Newell
18417 Beaverwood Hill
Minnetonka, MN 55345
or to such other addresses as either party may designate in writing to the other
party from time to time.
6.6 WAIVER OF BREACH. Any waiver by either party of compliance with
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any other provision of this Agreement, or of any
subsequent breach by such party of a provision of this Agreement.
6.7 SEVERABILITY. If any one or more of the provisions (or portions
thereof) of this Agreement shall for any reason be held by a final determination
of a court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions (or portions of the provisions) of this Agreement, and the
invalid, illegal or unenforceable provisions shall be deemed replaced by a
provision that is valid, legal and enforceable and that comes closest to
expressing the intention of the parties hereto.
6.8 GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Minnesota, without giving effect to
conflict of law principles.
6.9 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement or the breach of this Agreement or the breach of any exhibits
attached to this Agreement shall be settled by arbitration in accordance with
the Employee Arbitration Rules of the American Arbitration Association, and a
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction. The arbitration award shall be subject to review
only in the manner provided in the Uniform Arbitration Act as adopted in Chapter
572, Minnesota Statutes, as the Act is amended at the time of submission of the
issue to arbitration.
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The arbitrator(s) shall have the authority to award the prevailing party its
costs and reasonable attorney's fees which shall be paid by the non-prevailing
party. In the event the parties hereto agree that it is necessary to litigate
any dispute hereunder in a court, the non-prevailing party shall pay the
prevailing party its costs and reasonable attorney's fees. Notwithstanding
anything in this Section 6.9 to the contrary, Executive shall be entitled to
seek specific performance of Executive's rights to be paid until the date of
termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement or exhibits attached to this Agreement.
Further, the Company shall be entitled to seek an injunction or restraining
order in a court of competent jurisdiction to enforce the provision of Article
IV and Article V.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
PAPER WAREHOUSE, INC.
BY s/ YALE T. DOLGINOW
---------------------------------------
YALE T. DOLGINOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
s/ CHERYL W. NEWELL
--------------------------------------------
CHERYL W. NEWELL
6
<PAGE>
PROMISSORY NOTE
$144,000 October 1, 1997
FOR VALUE RECEIVED, PAPER WAREHOUSE, INC., a Minnesota corporation,
("Borrower") promises to pay to the order of Yale T. Dolginow (the "Holder") the
sum of One Hundred Forty Four Thousand and no/100 Dollars ($144,000.00),
together with interest on the unpaid balance thereof at five and 63/100 percent
(5.63%) per annum, calculated on the basis of actual days elapsed in a 365 day
year.
Accrued interest shall be payable one year from the date hereof, and
continuing so long as any portion of the principal balance hereof remains
unpaid.
The principal balance shall be due October 2, 1998.
Borrower shall make all payments to Holder hereunder at 7630 Excelsior
Boulevard, St. Louis Park, Minnesota 55426, or as otherwise directed in writing
by Holder.
This Note may be prepaid at any time without penalty.
Borrower promises to pay all costs of collection of this Note, including,
but not limited to, attorneys' fees, paid or incurred by Holder on account of
such collection, whether or not suit is filed with respect thereto and whether
or not such costs are paid or incurred, or to be paid or incurred, prior to or
after entry of judgment.
Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived.
This Note shall be governed by and construed in accordance with the laws of
the state of Minnesota.
REPAYMENT OF ALL PRINCIPAL, INTEREST AND COSTS OF THIS NOTE SHALL BE FULLY
SUBORDINATED TO THE PAYMENT OF BORROWER'S REAL ESTATE MORTGAGE PAYABLE TO
THE UNITED STATES SMALL BUSINESS ADMINISTRATION, TO THE PAYMENT OF THE
BORROWER'S OBLIGATIONS TO ANY SENIOR LENDER PROVIDING THE BORROWER WORKING
CAPITAL FINANCING AND TO THE PAYMENT OF THE BORROWER'S OBLIGATIONS WITH
RESPECT TO THE 10% SUBORDINATED NOTES DUE NOVEMBER 30, 2004.
PAPER WAREHOUSE, INC.
By s/ Cheryl W. Newell
----------------------------------------
Cheryl W. Newell, Vice President and
Chief Financial Officer
<PAGE>
PROMISSORY NOTE
$22,000 October 1, 1997
FOR VALUE RECEIVED, PAPER WAREHOUSE, INC., a Minnesota corporation,
("Borrower") promises to pay to the order of Brent D. Schlosser (the "Holder")
the sum of Twenty Two Thousand and no/100 Dollars ($22,000.00), together with
interest on the unpaid balance thereof at five and 63/100 percent (5.63%) per
annum, calculated on the basis of actual days elapsed in a 365 day year.
Accrued interest shall be payable one year from the date hereof, and
continuing so long as any portion of the principal balance hereof remains
unpaid. The principal balance shall be due October 2, 1998.
Borrower shall make all payments to Holder hereunder at 7630 Excelsior
Boulevard, St. Louis Park, Minnesota 55426, or as otherwise directed in writing
by Holder.
This Note may be prepaid at any time without penalty.
Borrower promises to pay all costs of collection of this Note, including,
but not limited to, attorneys' fees, paid or incurred by Holder on account of
such collection, whether or not suit is filed with respect thereto and whether
or not such costs are paid or incurred, or to be paid or incurred, prior to or
after entry of judgment.
Demand, presentment, protest and notice of nonpayment and dishonor of this
Note are hereby waived. This Note shall be governed by and construed in
accordance with the laws of the state of Minnesota.
REPAYMENT OF ALL PRINCIPAL, INTEREST AND COSTS OF THIS NOTE SHALL BE FULLY
SUBORDINATED TO THE PAYMENT OF BORROWER'S REAL ESTATE MORTGAGE PAYABLE TO
THE UNITED STATES SMALL BUSINESS ADMINISTRATION, TO THE PAYMENT OF THE
BORROWER'S OBLIGATIONS TO ANY SENIOR LENDER PROVIDING THE BORROWER WORKING
CAPITAL FINANCING AND TO THE PAYMENT OF THE BORROWER'S OBLIGATIONS WITH
RESPECT TO THE 10% SUBORDINATED NOTES DUE NOVEMBER 30, 2004.
PAPER WAREHOUSE, INC.
By s/ Cheryl W. Newell
----------------------------------------
Cheryl W. Newell, Vice President and
Chief Financial Officer
<PAGE>
LOAN AGREEMENT
BETWEEN
PAPER WAREHOUSE, INC.
YALE T. DOLGINOW
AND
RICHFIELD BANK & TRUST CO.
JANUARY 29, 1997
<PAGE>
LOAN AGREEMENT
TABLE OF CONTENTS
ARTICLE I. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. Amount and Terms of Loan. . . . . . . . . . . . . . . . . . . 4
Section 2.01 Revolving Loan. . . . . . . . . . . . . . . . . . . . . 4
Section 2.02 Borrowing Base; Borrowing Certificate . . . . . . . . . 5
Section 2.03 Making the Revolving Loan . . . . . . . . . . . . . . . 5
Section 2.04 Note. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.05 Payments. . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.06 Use of Proceeds . . . . . . . . . . . . . . . . . . . . 6
Section 2.07 Letters of Credit . . . . . . . . . . . . . . . . . . . 6
Section 2.08 Origination Fee . . . . . . . . . . . . . . . . . . . . 7
ARTICLE III. Conditions of Lending. . . . . . . . . . . . . . . . . . . . 7
Section 3.01 Required Documents. . . . . . . . . . . . . . . . . . . 7
Section 3.02 Other Conditions. . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV. Representations and Warranties. . . . . . . . . . . . . . . . 9
Section 4.01 Corporate Existence and Power . . . . . . . . . . . . . 9
Section 4.02 Authorization . . . . . . . . . . . . . . . . . . . . . 9
Section 4.03 Legal Agreements. . . . . . . . . . . . . . . . . . . . 10
Section 4.04 Financial Statements. . . . . . . . . . . . . . . . . . 10
Section 4.05 No Adverse Change . . . . . . . . . . . . . . . . . . . 10
Section 4.06 Titles and Liens. . . . . . . . . . . . . . . . . . . . 10
Section 4.07 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.08 Litigation. . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.09 Margin Stock. . . . . . . . . . . . . . . . . . . . . . 11
Section 4.10 Employee Benefit Plans. . . . . . . . . . . . . . . . . 11
Section 4.11 No Stock or Securities. . . . . . . . . . . . . . . . . 11
Section 4.12 Information . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.13 Absence of Default. . . . . . . . . . . . . . . . . . . 11
Section 4.14 Insurance . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE V. Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.01 Financial Statements and Other Information. . . . . . . 12
Section 5.02 Books and Records . . . . . . . . . . . . . . . . . . . 13
Section 5.03 Taxes and Other Claims. . . . . . . . . . . . . . . . . 13
Section 5.04 Maintenance of Properties . . . . . . . . . . . . . . . 13
Section 5.05 Insurance . . . . . . . . . . . . . . . . . . . . . . . 14
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Section 5.06 Corporate Existence . . . . . . . . . . . . . . . . . . 14
Section 5.07 Liens . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.08 Indebtedness. . . . . . . . . . . . . . . . . . . . . . 14
Section 5.09 Guaranties . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.10 Sale of Assets . . . . . . . . . . . . . . . . . . . . 15
Section 5.11 Corporate Structure. . . . . . . . . . . . . . . . . . 15
Section 5.12 Nature of Business . . . . . . . . . . . . . . . . . . 15
Section 5.13 Investments. . . . . . . . . . . . . . . . . . . . . . 15
Section 5.14 Sale and Leaseback . . . . . . . . . . . . . . . . . . 15
Section 5.15 Compliance with Laws . . . . . . . . . . . . . . . . . 15
Section 5.16 Transactions with Affiliates . . . . . . . . . . . . . 15
Section 5.17 Debt to Tangible Net Worth Ratio . . . . . . . . . . . 16
Section 5.18 Minimum Net Income . . . . . . . . . . . . . . . . . . 16
Section 5.19 Minimum Tangible Net Worth . . . . . . . . . . . . . . 16
Section 5.20 Current Ratio. . . . . . . . . . . . . . . . . . . . . 16
Section 5.21 Bank Accounts. . . . . . . . . . . . . . . . . . . . . 16
Section 5.22 Dividends. . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VI. Events of Default, Rights and Remedies. . . . . . . . . . . . 16
Section 6.01 Events of Default. . . . . . . . . . . . . . . . . . . 16
Section 6.02 Rights and Remedies . . . . . . . . . . . . . . . . . . 18
ARTICLE VII. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 18
Section 7.01 Waiver and Amendment. . . . . . . . . . . . . . . . . . 18
Section 7.02 Costs, Expenses and Taxes . . . . . . . . . . . . . . . 19
Section 7.03 Addresses . . . . . . . . . . . . . . . . . . . . . . . 19
Section 7.04 Binding Effect, Assignment; Severability. . . . . . . . 20
Section 7.05 Jurisdiction and Venue. . . . . . . . . . . . . . . . . 20
Section 7.06 Headings. . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.07 Governing Law . . . . . . . . . . . . . . . . . . . . . 21
Section 7.08 Further Assurances. . . . . . . . . . . . . . . . . . . 21
EXHIBITS
A BORROWING CERTIFICATE
B REVOLVING PROMISSORY NOTE
C SECURITY AGREEMENT
D CERTIFICATE OF AUTHORITY
E CERTIFICATE OF INDEBTEDNESS AND LIENS
F GUARANTY
G FORM OF SUBORDINATION AGREEMENT
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LOAN AGREEMENT
THIS AGREEMENT is entered into as of this 29th day of January, 1997,
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").
WHEREAS, Borrower is bound by the terms and conditions of that certain Loan
Agreement dated as of March 4, 1996 by and between the Borrower, the Guarantor,
the Bank and Boatmen's First National Bank of Kansas City, a national banking
association, ("Boatmen's") pursuant to which the Bank and Boatmen's granted to
the Borrower a revolving line of credit up to a maximum of $6,500,000 (the
"Prior Loan Agreement" and the "Prior Loan"); and
WHEREAS, the Borrower has requested a revised and increased revolving loan
as well as a facility for the issuance of letters of credit, and
WHEREAS, the Bank is willing to grant such increased revolving loan on the
terms and conditions set forth herein and is willing to provide such letter of
credit facility;
NOW THEREFORE, in consideration of the mutual agreements set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by the parties, the parties hereto agree as
follows:
ARTICLE I.
DEFINITIONS
Section 1.01 DEFINITIONS. For purposes of this Agreement, except as
otherwise expressly provided:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles.
"Advance" means an advance of credit by the Bank to Borrower pursuant
to Article II.
"Affiliate" means (i) a person, directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 10% of the outstanding voting stock of such other person,
(iii) any officer, director or partner of such person, and (iv) if such other
person is an officer, director or partner, any entity for which such person acts
in such capacity. For the purposes of this definition, "control" (including
with correlative meanings, the terms "controlling," "controlled by," and "under
common control with"), as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
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and policies of that Person, whether through the ownership of voting securities
or by contract or otherwise.
"Borrower Documents" means this Agreement, the Note, the Borrowing
Certificates, the Security Agreement, the Life Insurance Assignment, all
financing statements and writings required under Section 3.01(c), any Letter of
Credit or Letter of Credit Application contemplated by Section 2.07 and all
other writings, documents, instruments, certificates and statements contemplated
hereunder to be executed or supplied by Borrower together with any and all
amendments, replacements, substitutions, extensions, or other modifications of
any of the foregoing.
"Borrowing Certificate" has the meaning specified in Section 2.02.
"Borrowing Base" has the meaning specified in Section 2.02.
"Closing Date" means the date on which the Bank makes the initial
Advance under the Line of Credit.
"Debt" means (i) all items of indebtedness or liability which in
accordance with generally accepted accounting principles would be included in
determining total liabilities as shown on the liabilities side of a balance
sheet as at the date as of which Debt is to be determined, and (ii) indebtedness
secured by any mortgage, pledge, lien or security interest on property of the
Person whose indebtedness is being determined, whether or not the indebtedness
secured thereby shall have been, assumed, and (iii) guaranties, endorsements
(other than for purposes of collection in the ordinary course of business) and
other contingent obligations in respect of, or to purchase or otherwise acquire
indebtedness of others.
"Eligible Accounts Receivable" means only such accounts receivable of
the Borrower as the Bank, in its sole discretion, shall deem eligible. Without
limiting the discretion of the Bank to consider any other account receivable not
to be an Eligible Account Receivable, and by way of example only of types of
accounts receivable that the Bank will consider not to be Eligible Accounts
Receivable, notwithstanding any earlier classification of eligibility, the
following accounts receivable shall not be considered Eligible Accounts
Receivable: (i) any account receivable which is more than 61 days past invoice
date; (ii) any account receivable as to which any warranty is breached; (iii)
any account receivable as to which the account debtor or other obligor disputes
liability or makes any claim; (iv) any account receivable owed by any Affiliate
or any officer, director or shareholder of the Borrower or any Affiliate or any
of their relatives or any partnership, corporation, association, joint venture
or other business entity wholly or partly owned or controlled directly or
indirectly by any of them or any of their relatives; (v) any account receivable
owed by any person as to whom a petition in bankruptcy or other application for
relief is filed under any bankruptcy, reorganization, moratorium, insolvency or
similar law; (vi) any account receivable owed by any person who is deceased,
makes an assignment for the benefit of creditors, becomes insolvent, fails,
suspends business, goes out of business or is in receivership; (vii) any
account receivable owed by the United States government or any agency of the
United States government; (viii) any account receivable owed by any person if
10% or more in amount of the accounts receivable owed by such person to the
Borrower are more than 61 days past invoice date or are otherwise considered
ineligible; (ix) consignment receivables; (x) bonded receivables; (xi) any
account receivable constituting a retainage;
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(xii) any account receivable for goods which have not been shipped or work which
has not been fully performed; (xiii) any account receivable owed by any person
outside the United States of America; (xiv) any account receivable sold to a
factor and (xv) any account receivable owed by any person with whose
creditworthiness the Bank becomes dissatisfied. In the event the Borrower owes
any amount to any person that owes an account receivable to the Borrower, such
amount owed by the Borrower shall be deducted from that portion of the account
receivable which would otherwise qualify as an Eligible Account Receivable and
only the difference thereof shall be considered an Eligible Account Receivable.
No account receivable which does not qualify as an Eligible Account Receivable
shall be considered an Eligible Account Receivable unless the Bank, upon the
written request of the Borrower, states in writing that such account receivable
is to be considered an Eligible Account Receivable.
"Eligible Inventory" means the lesser of cost or fair market value of
only such inventory of the Borrower as the Bank, in its sole discretion, shall
deem eligible, computed on a first-in, first-out basis in accordance with
generally accepted accounting principles consistently applied. Without limiting
the discretion of the Bank to consider any other inventory not to be Eligible
Inventory, notwithstanding any earlier classification of eligibility, the
following inventory shall not be considered Eligible Inventory: (i) any
inventory that does not constitute finished goods; (ii) any inventory which does
not meet all standards imposed by any governmental agency; (iii) any inventory
which has not been physically received by the Borrower at one of its locations
described in the Security Agreement; (iv) any inventory which is obsolete, or
which is not usable by the Borrower in the normal course of its business; (v)
any inventory which is on consignment to or from any other person, or which has
been sold to any other person, or which is subject to any bailment or lease; (v)
any inventory which is not held for sale by the Borrower in the normal course of
its business, or which is not saleable by the Borrower in the normal course of
its business; and (vi) any inventory in which the Bank does not have a perfected
security interest constituting a first lien.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" has the meaning specified in Section 6.01.
"Guarantor Documents" means the Guaranty and all writings, documents,
instruments, certificates and statements contemplated hereunder to be delivered
by the Guarantor together with any and all amendments, replacements,
substitutions, extensions, or other modifications of any of the foregoing.
"Guaranty" has the meaning specified in Section 3.01(g).
"Letter of Credit" has the meaning specified in Section 2.08.
"Letter of Credit Application" has the meaning specified in Section
2.07.
"Life Insurance Assignment" has the meaning specified in Section
3.01(k).
"Line of Credit" has the meaning specified in Section 2.01.
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"Loan" means Advances under the Line of Credit.
"Loan Documents" means collectively, the Borrower Documents, the
Guarantor Documents, and all other writings, documents, instruments,
certificates and statements contemplated hereunder together with any and all
amendments, replacements, substitutions, extensions, or other modifications of
any of the foregoing.
"Note" has the meaning specified in Section 2.04.
"Person" means any natural person, corporation, joint venture,
partnership, trust, association, limited liability entity, governmental
authority or unit, or any other entity, whether acting in an individual,
fiduciary, or other capacity.
"Plan" has the meaning specified in Section 4.10.
"Prohibited Transaction" has the meaning assigned to that term in
ERISA.
"Reportable Event" has the meaning assigned to that term in ERISA.
"Security Agreement" has the meaning specified in Section 3.01(b).
"Subordinated Debt" means Debt, the payment of which is subordinate to
Debt due the Bank.
"Subordination Agreement" has the meaning specified in
Section 3.01(l).
"Tangible Net Worth" means the aggregate of Borrower's paid in
capital, retained earnings and Subordinated Debt reduced by the aggregate value
of (i) all patents, trademarks, tradenames, copyrights, licenses, good will,
rights under noncompete agreements, deferred charges or treasury stock or any
securities or Debt of Borrower or any other securities (unless the same are
readily marketable in the United States of America) and debt acquisition fees,
and (ii) any write-up in the book value of any assets.
ARTICLE II.
AMOUNT AND TERMS OF LOAN
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, 1998, 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").
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
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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.
Section 2.02 BORROWING BASE; BORROWING CERTIFICATE.
(a) The availability of Advances shall be determined by reference to
the "Borrowing Base", which means the sum of (i) 75% of Eligible Accounts
Receivable of Borrower and (ii) 50% of Eligible Inventory of Borrower.
(b) Within 30 days after the end of each month as long as the Note is
outstanding, Borrower shall deliver to the Bank a borrowing certificate in the
form of Exhibit A hereto (the "Borrowing Certificate"), dated as of such date
and properly completed and executed by an officer of Borrower, which Borrowing
Certificate shall state the amount of assets constituting elements of the
Borrowing Base formula and the amount of the Borrowing Base, all such amounts to
be determined as of the close of business on a day reasonably satisfactory to
the Bank, and shall certify that the representations and warranties contained in
Article IV are correct in all material respects as of the date of the Borrowing
Certificate and that no event has occurred or would result from any requested
Advance which constitutes an Event of Default or would constitute an Event of
Default with notice or the passage of time or both. In the event that the
amount outstanding under the Line of Credit exceeds the maximum amount of the
Line of Credit permitted under the terms of Section 2.01, Borrower shall pay to
the Bank within 15 days of demand thereto, the amount of such excess, which
payment shall be applied to the Note.
Section 2.03 MAKING THE REVOLVING LOAN. Each Advance shall be made on
prior written request from Borrower to the Bank or telephonic request from any
person purporting to be authorized to request Advances on behalf of Borrower,
which request shall be made prior to 1:00 p.m. on the date on which the
requested Advance is to be made and shall specify the date of the requested
Advance and the amount thereof. Upon fulfillment of the terms and conditions
hereof, the Bank shall disburse the amount of the requested Advance by crediting
the same to Borrower's demand deposit account maintained with the Bank or in
such other manner as the Bank and Borrower may from time to time agree.
Borrower shall promptly confirm each telephonic request for an Advance by
executing and delivering to the Bank an appropriate written confirmation in such
form as the Bank requests. Borrower shall be obligated to repay all Advances
notwithstanding the failure of the Bank to receive such confirmations and
notwithstanding the fact that the person requesting the Advance was not
authorized to do so. Any request for an Advance shall be deemed to be a
representation that the statements set forth in Sections 3.02(c) and 3.02(d) are
correct as of the date of such request. On the Closing Date, any amounts due
under the terms of the Prior Loan shall be deemed to be due under the terms of
the Note.
Section 2.04 NOTE. The obligation to repay the Advances together with
interest and other charges thereon shall be evidenced by a promissory note of
the Borrower in the principal amount of $7,500,000 payable to the order of the
Bank in the form of Exhibit B hereto (the "Note"), dated effective the date of
this Agreement. Interest shall accrue on the unpaid principal balance due under
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the Note at a rate that shall always be one half of one percent (0.50%) in
excess of the Bank's base rate which rate shall change when and as such base
rate shall change. All interest shall be calculated on the number of days
elapsed in a 360 day year. Interest at the rate specified in the Note is due
and payable on the thirtieth day of each month (or the last day of the month of
February) commencing February 28, 1997 and the entire unpaid principal balance
due thereunder together with all accrued but unpaid interest thereon, plus all
other charges under the Note and hereunder, shall be due and payable on May 31,
1998.
Section 2.05 PAYMENTS. All payments (including prepayments) made by the
Borrower on account of principal, interest and fees shall be made without set
off or counterclaim and shall be made to the Bank at the Bank's principal
office, in each case in lawful money of the United States of America and in
immediately available funds. If any payment hereunder becomes due and payable
on a day other than a business day, such payment shall be extended to the next
succeeding business day, and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
Whenever any payment received by the Bank under this Agreement or the Note is
insufficient to pay in full all amounts then due and payable to the Bank under
this Agreement and the Note, such payment shall be distributed and applied by
the Bank in the following order: FIRST, to the payment of all expenses and other
amounts due and payable to the Bank; SECOND, to the payment of interest then due
and payable under the Note; and THIRD, to the payment of the principal amount of
the Note which is then due and payable. Borrower agrees that the amount shown
on the books and records of the Bank as being the unpaid balance of principal,
accrued interest and other charges, fees and expenses under the Note and this
Agreement shall be prima facie evidence thereof. Borrower hereby irrevocably
authorizes the Bank, if and to the extent payment is not promptly made pursuant
hereto, to set off and charge against any amount owing by the Bank to Borrower
an amount equal to the principal, accrued interest and other charges, fees and
expenses then due. In addition, Borrower hereby irrevocably authorizes the Bank
to collect interest and other charges, fees and expenses, under the Note and
this Agreement when due from time to time by charging Borrower's demand deposit
accounts at the Bank and grants to the Bank all rights of banker's lien provided
by applicable law.
Section 2.06 USE OF PROCEEDS. Proceeds from the Loan shall be used
exclusively to repay the Prior Loan, for working capital and for capital
expenditures for creation of new retail locations. Upon application of Advances
to payment of the Prior Loan, the Prior Loan Agreement and the agreements
related thereto shall terminate. The Bank shall thereupon return to Borrower
and the Guarantor the originals of any promissory notes and guaranties delivered
by Borrower or Guarantor pursuant to the Prior Loan Agreement.
Section 2.07 LETTERS OF CREDIT. From time to time as requested by
Borrower, Bank agrees to issue on Borrower's behalf one or more Letters of
Credit in favor of parties designated by Borrower to secure the performance of
obligations of Borrower. Such letters of credit, and any renewals thereof,
shall be issued for Borrower's account. (Each such Letter of Credit is referred
to herein as a "Letter of Credit".) The face amount of all Letters of Credit
issued on Borrower's behalf and outstanding hereunder shall not exceed at any
time the sum of $500,000. No Letter of Credit shall have an expiration date
later than one year from the date of issue. Any Letters of Credit issued by the
Bank for the benefit of Borrower prior to the date of this Agreement and
outstanding as of the date hereof shall be deemed to have been issued under the
terms of this Section as of the effective
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date of this Agreement. Each Letter of Credit shall be issued in accordance
with the Bank's customs and practices in effect from time to time pursuant to a
Letter of Credit application to be entered into between Borrower and the Bank in
such form as may be required by the Bank (each a "Letter of Credit
Application"). Upon the issuance of any Letter of Credit, the Borrower shall
pay to the Bank an issuance fee of $200 which shall be the sole fee payable with
respect to the issuance of said Letters of Credit. All amounts disbursed by the
Bank in response to a draw on any of the Letters of Credit shall be deemed to be
an advance under the terms of the Note and shall be repaid together with
interest thereon in accordance with the terms of the Note.
Section 2.08 ORIGINATION FEE. Borrower shall pay to the Bank an
Origination Fee of $7,500 on the Closing Date.
ARTICLE III.
CONDITIONS OF LENDING
Section 3.01 REQUIRED DOCUMENTS. The making of the initial Advance under
the Line of Credit shall be subject to the condition precedent that the Bank
shall have received prior thereto a duly executed copy of this Agreement
together with all of the following, in form and substance reasonably
satisfactory to the Bank:
(a) The Note properly executed on behalf and in the name of Borrower.
(b) A security agreement, in the form of Exhibit C hereto (the
"Security Agreement"), properly executed on behalf and in the name of Borrower.
(c) All financing statements, certificates of title and other
writings, properly executed, which are deemed by the Bank to be necessary or
desirable to grant the Bank a perfected security interest constituting a first
lien on the property described in the Security Agreement subject only to the
liens described in Section 5.07.
(d) A certificate of insurance covering the tangible property
described in the Security Agreement, in such amounts, against such risks and in
such companies as shall be reasonably acceptable to the Bank, which certificate
shall name the Bank as loss payee or additional insured as its interest may
appear, and certificates of all other insurance required by Section 5.05.
(e) A certificate of the Secretary of Borrower, attested by a
director of the Borrower and showing the corporate seal, if any, of Borrower, in
the form of Exhibit D hereto. The Bank may conclusively rely on such
certificate until the Bank shall receive a further certificate of the Secretary
of Borrower, in form and substance satisfactory to the Bank, canceling or
amending the prior certificate and containing and certifying the signatures of
the officers named in such further certificate.
(f) A certificate of indebtedness and liens, in the form of Exhibit E
hereto, properly completed and executed by an officer of Borrower and attested
by one other officer of Borrower.
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(g) A guaranty agreement, in the form of Exhibit F hereto (the
"Guaranty"), properly executed by the Guarantor.
(h) An opinion of counsel to the Borrower in form and substance
satisfactory to the Bank certifying as to such matters as the Bank may request
including by way of example and not limitation (i) that the Borrower is duly
organized and validly existing under the laws of the State of Minnesota; and is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where its ownership, lease or operation of property, or the
conduct of its business requires such qualification except where the failure to
be so qualified would not have a material adverse effect on the business or
financial condition of the Borrower; (ii) that the Borrower Documents have been
duly authorized by all necessary action of the Borrower; (iii) that the Loan
Documents have been duly executed and delivered, are the legal, valid, and
binding obligations of the Borrower, the Guarantor and other signatories
thereto, and are enforceable in accordance with their terms subject to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
(iv) that to the best of such counsel's knowledge and belief, there is no
action, proceeding or investigation pending or threatened which involves the
Borrower or the Guarantor or which might materially adversely affect the ability
of the Borrower or the Guarantor to perform their obligations under the Loan
Documents; and (v) that, to the best of such counsel's knowledge and belief, the
transactions contemplated hereby will not result in any violation of or be in
conflict with any term of the Borrower's organizational documents or of any
mortgage, indenture, lease, assignment, agreement or other instrument or any
license, permit, judgment, decree, order, statute, law, ordinance, or
governmental rule or regulation applicable to the Borrower or result in the
creation of any lien upon any of its properties or assets, other than as
contemplated hereby.
(i) A current certificate of good standing or due qualification for
Borrower issued by the Secretaries of State for Minnesota, Missouri, Oklahoma,
Kansas, Colorado, Iowa, and Wisconsin.
(j) A properly completed and executed Federal Reserve Form U-1 from
the Borrower.
(k) An assignment of Life Insurance Policy as Collateral relating to
Policy No. 4102683 issued by Principal Mutual Life Insurance Company on the life
of the Guarantor (the "Life Insurance Assignment"). The parties agree that the
assignment of insurance policy executed and delivered by Borrower to the Bank
dated February 21, 1990 shall constitute the Life Insurance Assignment for the
purposes of this Agreement and shall secure any and all liabilities to the Bank
under the terms of the Borrower Documents. Borrower agrees to maintain the Life
Insurance Policy in full force and effect so long as any amounts remain due the
Bank under any of the Loan Documents.
(l) Subordination agreements (collectively, the "Subordination
Agreement") in the form of Exhibit G hereto properly executed by the Borrower
and all Affiliates of Borrower to whom Borrower is indebted.
(m) Such other documents as the Bank may reasonably request.
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The obligation of the Bank to make the initial Advance under the Line
of Credit shall be subject to the additional condition precedent that the
following have occurred to the satisfaction of the Bank:
(n) Borrower shall have paid in full or shall pay out of the proceeds
of the Loan all amounts due with respect to the Prior Loan.
(o) Borrower shall have paid the Origination Fee described in Section
2.08.
Section 3.02 OTHER CONDITIONS. Each Advance (including the initial
Advance) shall be subject to the further conditions precedent that prior to such
Advance:
(a) The Bank shall have received all Borrowing Certificates required
to be delivered by Borrower in accordance with Section 2.02; and
(b) The most recent Borrowing Certificate shall show, to the
satisfaction of the Bank, that the amount outstanding under the Line of Credit
plus the amount of the requested Advance is less than the maximum amount
permitted under the terms of Section 2.01; and
(c) The representations and warranties contained in Article IV are
correct in all material respects as of the date of such Advance as though made
as of such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
(d) No event has occurred and is continuing, or would result from
such Advance, which constitutes an Event of Default or would constitute an Event
of Default with notice or passage of time or both.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Borrower and the Guarantor represent and warrant to the Bank as follows
insofar as each such representation and warranty applies to them or their
actions:
Section 4.01 CORPORATE EXISTENCE AND POWER. The Borrower is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Minnesota, is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary, and has all requisite power and authority to own its property and
carry on its business. The Borrower has all requisite power and authority to
execute and deliver and to perform all of its obligations under the Borrower
Documents.
Section 4.02 AUTHORIZATION. The execution, delivery and performance by
the Borrower of the Borrower Documents have been duly authorized by all
requisite action and do and will not (a) require any consent or approval of any
person or governmental authority, (b) violate any law, rule, regulation, order,
writ, injunction or decree, or the articles of incorporation or bylaws of the
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Borrower, (c) result in a breach of or constitute a default under any contract,
agreement or other writing to which the Borrower is a party or by which the
Borrower or any property of the Borrower may be bound or affected, or (d) result
in, or require the creation or imposition of, any mortgage, security interest or
other interest, encumbrance, claim or charge of any nature, except in favor of
the Bank, upon or with respect to any property of the Borrower.
The execution, delivery and performance by the Guarantor of the Guarantor
Documents will not (a) require any consent or approval of any person or
governmental authority, (b) violate any law, rule, regulation or order, writ,
injunction or decree, (c) result in a breach of or constitute a default under
any contract, agreement or other writing to which the Guarantor is a party or by
which the Guarantor or his property is bound or affected, or (d) result in or
require the creation or imposition of any mortgage, security interest or other
interest, encumbrance, claim or charge of any nature, except in favor of the
Bank, upon or with respect to any property of the Guarantor.
Section 4.03 LEGAL AGREEMENTS. The Borrower Documents constitute, or when
executed, will constitute, the legal, valid and binding obligations of the
Borrower; and the Guarantor Documents constitute, or when executed, will
constitute, the legal, valid and binding obligations of the Guarantor; and all
said agreements are enforceable in accordance with their respective terms,
subject to the effect of bankruptcy, insolvency, reorganization or other similar
laws affecting the rights and remedies of creditors generally, statutes of
limitation and the effect of general principles of equity.
Section 4.04 FINANCIAL STATEMENTS. The Borrower has furnished the Bank
with a copy of Borrower's financial statements and accompanying annual audit
report for the fiscal year ending January 26, 1996, and a copy of Borrower's
unaudited financial statements for the ten month period ending November 30,
1996, in the form contemplated by Section 5.01, including all schedules and
notes pertaining thereto. Such financial statements were prepared in accordance
with generally accepted accounting principles consistently applied, and fully
and fairly present the financial condition of the Borrower on the date thereof
and the results of its operations for the periods covered thereby. The
Guarantor has furnished the Bank with his personal compiled financial statement
as of a recent date which statement fully and fairly presents the financial
condition of the Guarantor as of the date thereof.
Section 4.05 NO ADVERSE CHANGE. There has been no material adverse change
in the business, property or condition (financial or otherwise) of the Borrower
since the date of the latest financial statement referred to in Sections 4.04
and 5.01, and there has been no material adverse change in the financial
condition of the Guarantor since the date of his latest financial statement
referred to in Sections 4.04 and 5.01.
Section 4.06 TITLES AND LIENS. The Borrower has good title to all of the
properties reflected in the latest balance sheets referred to in Sections 4.04
and 5.01, and in all Borrowing Certificates free and clear of all mortgages,
security interests and other interests, encumbrances, claims and charges, except
for liens permitted by Section 5.07 and covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with the business or operations of the Borrower.
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Section 4.07 TAXES. Except as permitted by Section 5.03, the Borrower and
the Guarantor have filed all required tax returns, have paid all due and payable
taxes, assessments and other governmental charges levied or imposed upon any of
them or upon any of their income or profits or upon any of their property, and
have made adequate provision for the payment of such taxes, assessments and
other charges accruing but not yet due and payable.
Section 4.08 LITIGATION. There is no pending or threatened notice, claim,
litigation, proceeding or investigation against or affecting the Borrower or the
Guarantor or any property of any of them, whether or not covered by insurance,
that would involve the payment by the Borrower or the Guarantor of $100,000 or
more in the aggregate or would otherwise have a material adverse effect on the
financial condition, business, prospects, property or operations of the Borrower
or the Guarantor, and, to their best knowledge and belief, there is no basis for
any such order, notice, claim, litigation, proceeding or investigation.
Section 4.09 MARGIN STOCK. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
Section 4.10 EMPLOYEE BENEFIT PLANS. No Reportable Event or Prohibited
Transaction has occurred with respect to any employee benefit plan or other plan
maintained for employees of the Borrower ("Plan"). Each Plan is in compliance
with all applicable requirements of ERISA and all applicable rulings and
regulations thereunder.
Section 4.11 NO STOCK OR SECURITIES. The Borrower has no subsidiaries and
owns no shares of stock or securities of any non-governmental entities.
Section 4.12 INFORMATION. No information furnished or to be furnished by
or on behalf of the Borrower or the Guarantor to the Bank for the purposes of or
in connection with this Agreement or any transaction contemplated hereby
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact required to be stated therein or necessary
in order to make the statements made therein, in light of the circumstances
under which they are made, not materially misleading.
Section 4.13 ABSENCE OF DEFAULT. No event has occurred which either of
itself or with the lapse of time or the giving of notice or both, would give any
creditor of either the Borrower or the Guarantor the right to accelerate the
maturity of any indebtedness of such party for borrowed money. The Borrower and
the Guarantor are not in default under any other lease, agreement or instrument,
or any law, rule, regulation, order, writ, injunction, decree, determination or
award, non-compliance with which could materially adversely affect the property,
financial condition or business operations of such party.
Section 4.14 INSURANCE. The Borrower carries all insurance required by
law and such other insurance, to such extent and against such hazards and
liabilities, as is customarily maintained by companies similarly situated.
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ARTICLE V.
COVENANTS
So long as the Note or any amendment, extension, renewal or replacement
thereof shall remain outstanding, the Borrower and the Guarantor shall comply
with the following requirements:
Section 5.01 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Borrower
shall deliver to the Bank, in form and substance reasonably satisfactory to the
Bank:
(a) As soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the annual audit report of
the Borrower together with the unqualified opinion of the independent certified
public accountants selected by the Borrower and reasonably acceptable to the
Bank, which report shall include the balance sheet of the Borrower as of the end
of such fiscal year, and the related statements of income, retained earnings and
cash flows of the Borrower 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 Borrower to the Bank and a report signed by such accountants
stating that in making the investigations in connection with their review of the
financial statements they obtained no knowledge, except as specifically stated,
of any Event of Default or of any event which with notice of lapse of time or
both would constitute an Event of Default, all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not the Borrower is
in compliance with the requirements set forth in Sections 5.17 through 5.20.
(b) As soon as available and in any event within 30 days after the
end of each month the balance sheet of the Borrower as of the end of such month
and related statements of income and retained earnings of the Borrower for such
month and for the year to date, including all supporting schedules and notes,
all in reasonable detail, prepared and certified by an officer of the Borrower
to have been prepared on a basis consistent with the accounting practices
applied in the financial statements referred to in Section 5.01(a), subject,
however, to year-end adjustments.
(c) As promptly as practicable (but in any event not later than five
business days) after any officer of the Borrower obtains knowledge thereof,
written notice of all orders, notices, claims, litigation, proceedings and
investigations against or affecting the Borrower or any property of the type
described in Section 4.08.
(d) As promptly as practicable (but in any event not later than five
business days) after any officer of the Borrower obtains knowledge of the
occurrence of any event which constitutes an Event of Default or would
constitute an Event of Default with notice or passage of time or both, written
notice of such occurrence, together with a detailed statement by such
responsible officer of the Borrower of the steps being taken by such corporation
to cure the effect of such event.
(e) Promptly after the Bank's request therefor, such other
information respecting the condition, financial or otherwise, business or
property of the Borrower as the Bank may from time to time reasonably request.
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The Guarantor shall deliver to the Bank, in form and substance satisfactory
to the Bank:
(f) As soon as available, and in any event within 90 days after the
end of each calendar year, financial statements showing the financial condition
of the Guarantor as of December 31 of such year.
(g) As promptly as practicable, but in any event within five business
days after obtaining knowledge thereof, written notice of all orders, notices,
claims, litigation, proceedings and investigations against or affecting the
Guarantor or his property of the kind described in Section 4.08.
(h) As promptly as practicable, but in any event within five business
days after obtaining knowledge of the occurrence of an Event of Default or any
event which constitutes an Event of Default or would constitute an Event of
Default with notice or passage of time or both written notice of such
occurrence, together with a detailed statement by a responsible officer of the
Borrower or the Guarantor of the steps being taken by the Borrower or the
Guarantor to cure the effect of such event.
(i) Promptly after the Bank's request therefor, such other
information respecting the condition, financial or otherwise, business or
property of the Guarantor as the Bank may from time to time reasonably request.
Section 5.02 BOOKS AND RECORDS. The Borrower shall keep accurate books
and records in which true and complete entries will be made in accordance with
generally accepted accounting principles consistently applied. Upon request of
the Bank, the Borrower during normal business hours, shall give representatives
of the Bank access to and permit such representatives to examine, copy and make
extracts from all books, records and other writings in its possession, to
inspect its property and to discuss its finances, accounts, property and
business with any of its officers and directors.
Section 5.03 TAXES AND OTHER CLAIMS. The Borrower and the Guarantor shall
file when due all required tax returns, shall pay when due all taxes,
assessments and other governmental charges levied or imposed upon them or upon
their income or profits or upon any of their property, and shall pay when due
all lawful claims for labor, materials and supplies which, if unpaid, might
become a lien or charge upon any property; provided, that neither the Borrower
nor the Guarantor shall be required to pay any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings, and for which a proper reserve has been established
in accordance with generally accepted accounting principles.
Section 5.04 MAINTENANCE OF PROPERTIES. The Borrower shall keep and
maintain its inventory, equipment, real estate and other property necessary or
useful in its business in good condition and repair and shall pay when due all
rental and mortgage payments due on such property; provided, that nothing in
this Section shall prevent the Borrower from discontinuing the operation and
maintenance of any such property if such discontinuance is, in the judgment of
the Borrower, desirable in the conduct of its business and not disadvantageous
in any material respect to the Bank as holder of the Note.
13
<PAGE>
Section 5.05 INSURANCE. The Borrower shall obtain and maintain insurance
with insurers that are reasonably acceptable to the Bank, in such amounts and
with such coverages (including without limitation commercial general liability
insurance, fire, hazard and extended coverage property insurance on all of its
assets, business interruption insurance, necessary workers, compensation
insurance and all other coverages as are consistent with industry practice) as
are reasonably acceptable to the Bank. All insurance policies shall name the
Bank as loss payees or additional insured, as appropriate, and shall contain a
provision whereby they cannot be canceled except after 30 days, written notice
to the Bank. In the event the Borrower fails to pay any premium on any such
insurance, the Bank may do so, and the Borrower shall reimburse the Bank for any
such payment on demand. The Borrower hereby assigns to Bank all returned or
unearned premiums that may be payable to the Borrower upon cancellation of any
such policies for any reason (other than as a result of an intentional change by
the Borrower of its insurance carrier), and all proceeds of such insurance, and
agrees that upon the occurrence of and during the continuance of an Event of
Default the Bank may direct the insurers to pay the Bank all such amounts. The
Borrower hereby grants the Bank a limited power of attorney to endorse any check
or other remittance payable to the Borrower to collect such returned or unearned
premiums and the proceeds of such insurance, and any amount so collected may be
applied by the Bank to any obligations due the Bank by the Borrower as the Bank,
in its discretion, deem appropriate.
Section 5.06 CORPORATE EXISTENCE. The Borrower shall preserve and
maintain its corporate existence and all of its rights, privileges and
franchises, and comply with all applicable laws and regulations.
Section 5.07 LIENS. The Borrower shall not create, incur or permit to
exist in favor of any person other than the Bank any mortgage, deed of trust,
security interest or other lien on any of its property now owned or hereafter
acquired, except mortgages, deeds of trust, security interests and other liens
securing any indebtedness for borrowed money in existence on the date hereof and
listed in the certificate of indebtedness and liens described in Exhibit E and
purchase money security interests securing indebtedness permitted by Section
5.08(d).
Section 5.08 INDEBTEDNESS. The Borrower shall not incur, create, assume
or permit to exist any indebtedness for borrowed money or any other indebtedness
or liability evidenced by notes, bonds, debentures or similar obligations,
except:
(a) Indebtedness to the Bank;
(b) Indebtedness in existence on the date hereof (other than the
Prior Loan) and listed in Exhibit E hereto, but not including any extensions or
renewals thereof, (other than extensions or renewals of Subordinated Debt);
(c) Indebtedness and extensions and renewals thereof, which is
subordinated in right of payment to all indebtedness of the Borrower to the
Bank; and
(d) Indebtedness incurred in the purchase (or borrowing for the
purchase) or lease of equipment.
14
<PAGE>
Section 5.09 GUARANTIES. The Borrower shall not guarantee, endorse,
assume or otherwise become directly or contingently liable in connection with
any obligation of any other person, except by the endorsement of negotiable
instruments by the Borrower for deposit or collection or similar transactions in
the ordinary course of business.
Section 5.10 SALE OF ASSETS. The Borrower shall not sell, lease, assign,
transfer or otherwise dispose of all or a substantial part of its assets
(whether in one transaction or in a series of transactions) to any person other
than in the ordinary course of business.
Section 5.11 CORPORATE STRUCTURE. The Borrower shall not consolidate
with or merge into any other person, or permit any other person to merge into
it, or acquire (in a transaction analogous in purpose or effect to a
consolidation or merger) all or substantially all of the assets of any other
person.
Section 5.12 NATURE OF BUSINESS. The Borrower shall not engage in any
line of business materially different from that presently engaged in by the
Borrower without consent of the Bank.
Section 5.13 INVESTMENTS. The Borrower shall not purchase or hold
beneficially any shares of stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other person, except:
(a) Certificates of deposit issued by a bank having deposits in
excess of $100,000,000.00 and whose deposits are insured by the Federal Deposit
Insurance Corporation;
(b) Obligations of, or guaranteed by the United States Government or
any agency thereof;
(c) Travel advances to officers and employees of the Borrower; and
(d) Advances in the form of progress payments, prepaid rent or
security deposits.
Section 5.14 SALE AND LEASEBACK. The Borrower shall not enter into any
arrangement, directly or indirectly, with any other person whereby the Borrower
shall sell or transfer any real or personal property and then or thereafter rent
or lease as lessee such property or any part thereof or any other property which
the Borrower intends to use for substantially the same purpose as the property
being sold or transferred.
Section 5.15 COMPLIANCE WITH LAWS. The Borrower will comply with the
requirements of applicable laws and regulations, the noncompliance with which
would materially and adversely affect its business or the financial condition of
the Borrower.
Section 5.16 TRANSACTIONS WITH AFFILIATES. The Borrower will not
directly or indirectly, enter into any transaction, whether or not in the
ordinary course of business, with any Affiliate other than on terms and
conditions at least as favorable to the Borrower, as those that would be
obtained through an arm's length negotiation with an unaffiliated third party.
15
<PAGE>
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 July 31, 1997 of not more than 2.25 to 1 and as of the end of Borrower's
fiscal year ended January 1998 of not more than 2.00 to 1.
Section 5.18 MINIMUM NET INCOME. During the fiscal year ending in January
1998, the Borrower shall achieve a net income before distributions to
shareholders of not less than $1,500,000.
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.
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 year ending in January 1998.
Section 5.21 BANK ACCOUNTS. So long as any amounts remain outstanding
under the terms of the Note, the Borrower shall maintain its primary
disbursement accounts with the Bank.
Section 5.22 DIVIDENDS. The Borrower shall not declare or pay any
dividends or other payments (other than dividends payable solely in stock of
such entity) on account of any shares of its stock, in excess of amounts
necessary to permit shareholders of Borrower to pay income taxes attributable to
them by reason of any election by Borrower to be taxed as a S Corporation.
ARTICLE VI.
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 6.01 EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an "Event of Default":
(a) Default in the payment of any amount due under this Agreement or
the Note and the continuance of such default for a period of 10 days; or
(b) Any statement, representation or warranty of the Borrower or the
Guarantor (or any officer, employee, Bank or attorney of the Borrower or the
Guarantor) to the Bank at any time, including without limitation any statement,
representation or warranty made in this Agreement or in any writing contemplated
by this Agreement, shall be incorrect or misleading in any material respect when
made; or
(c) Default in the performance or breach of any covenant or agreement
of the Borrower or the Guarantor in this Agreement, any writing contemplated by
this Agreement or any other agreement with the Bank, or any of the documents
contemplated thereby, and the continuance of such default for a period of 30
days; or
(d) The Borrower or the Guarantor shall become insolvent, be unable
or admit in writing its or their inability to pay its or their debts as they
mature, make an assignment for the benefit of creditors, apply for or consent to
the application or suffer the appointment of any receiver, trustee or similar
officer, die, or initiate or have initiated against it or him or them any act,
process or
16
<PAGE>
proceeding under any insolvency, bankruptcy, dissolution, liquidation or similar
law (provided that the filing of an involuntary petition in bankruptcy against
the Borrower or the Guarantor shall constitute an Event of Default only if the
petition is not dismissed within 60 days after filing); or
(e) A default continuing for more than 10 days after notice thereof
under any lease, conditional sales contract or any other agreement, bond,
debenture, note or other evidence of indebtedness (other than Subordinated Debt)
of the Borrower involving $50,000 or more (or any note in favor of the Bank
without regard to amount) or under any indenture or other writing under which
any such evidence of indebtedness has been issued or by which it is governed if
such default results in the acceleration of payment of any such indebtedness or
gives the holder thereof the right to accelerate such indebtedness; or
(f) The Borrower or the Guarantor shall suffer a final judgment or
other order for the payment of money in the amount of $25,000 or more and shall
not discharge the same within a period of 30 days in a manner acceptable to the
Bank; or
(g) The issuance or levy of any writ, warrant, attachment, execution
or similar process (other than garnishment summons or the like relating to
employee wages) against or the attachment of any tax lien to, any property of
the Borrower or the Guarantor and, in the case of any such tax lien, the same is
not discharged in a manner acceptable to the Bank within a period of 30 days, or
such tax lien has become prior to the lien or security interest of the Bank in
any such property; or
(h) The occurrence of any Reportable Event or Prohibited Transaction
with respect to any Plan, or any Plan shall not be in compliance with all
applicable requirements of ERISA and all applicable rules and regulations
thereunder, or any Plan shall terminate, or a trustee or receiver is appointed
to administer any Plan, or the Pension Benefit Guaranty Corporation shall
institute any proceeding with respect to any Plan provided that no such Event of
Default shall exist if such occurrence may be cured under applicable law without
any material adverse effect on the Borrower and the Borrower is diligently
attempting to do so; or
(i) The Borrower or the Guarantor shall, for any reason, take any
action to revoke, terminate, contest the validity or enforceability of, declare
to be null and void, or to otherwise deny that such party has any or further
liability or obligation under any Loan Document or any other guaranty, liability
or agreement in favor of the Bank, or any Loan Document or other such guaranty,
liability or agreement shall otherwise for any reason cease to be in full force
and effect; or
(j) There is a material adverse change in the condition (financial or
otherwise), business or property of the Borrower or the Guarantor; or
(k) Borrower's audited financial statements for the fiscal year ended
in January 1997 disclose that (i) Borrower achieved a net income for the twelve
month period then ended of less than $750,000; or (ii) Borrower achieved a ratio
of Debt (exclusive of Subordinated Debt) to Tangible Net Worth as of the end of
such fiscal of more than 2.25:1; or (iii) Borrower had a minimum Tangible Net
Worth as of the end of such fiscal year of less than $5,000,000; or (iv)
17
<PAGE>
Borrower had a ratio of its current assets to its current liabilities as of the
end of such fiscal year of less than 1:1; or
(l) Borrower shall fail for a period of at least 60 consecutive days
during each fiscal year of Borrower to limit the amount outstanding under the
Line of Credit to less than the maximum amount of the Borrowing Base in effect
for such period; or
(m) The Bank shall in good faith believe that the prospect for due
and punctual payment or performance of any obligation under any of the Loan
Documents is impaired.
Section 6.02 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default or at any time thereafter until such Event of Default is cured to the
reasonable satisfaction of the Bank, the Bank may exercise any and all of the
following rights and remedies:
(a) The Bank may, by notice to Borrower, declare the Line of Credit
to be terminated, whereupon the same shall terminate and the Bank's obligations
to make any Advances thereunder shall terminate.
(b) The Bank may, by notice to Borrower, declare its obligation to
issue Letters of Credit pursuant to the provisions of Section 2.07 to be
terminated, whereupon the same shall terminate and the Bank's obligations to
issue any Letters of Credit hereunder shall terminate.
(c) The Bank may declare all principal, interest and other charges
and amounts under the Note, and this Agreement to be due and payable, whereupon
the same shall become due and payable, without presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived by Borrower.
(d) The Bank may, without prior notice to Borrower or any other
person, apply any and all money owing by the Bank to Borrower to the payment of
principal, interest and other charges and amounts under the Note, and this
Agreement. Upon exercise of this remedy, the Bank shall promptly notify
Borrower.
(e) The Bank may exercise and enforce their rights and remedies under
any of the other Loan Documents, the Uniform Commercial Code and any other
applicable law.
ARTICLE VII.
MISCELLANEOUS
Section 7.01 WAIVER AND AMENDMENT. No provision of the Loan Documents can
be waived, modified, amended, abridged, supplemented or terminated, except by a
writing executed by the Bank. A waiver shall be effective only in the specific
instance and for the specific purpose given. No delay or failure by the Bank to
exercise any right or remedy shall be a waiver thereof, nor shall any single or
partial exercise by the Bank of any right or remedy preclude any other exercise
thereof or the
18
<PAGE>
exercise of any other right or remedy. All rights and remedies of the Bank
under this Agreement and any other writing are cumulative and not exclusive.
Section 7.02 COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all reasonable out-of-pocket costs and expenses of the Bank in connection
with the evaluation, preparation and processing of Borrower's loan request, the
preparation, execution, delivery, amendment and administration of the Loan
Documents and all other instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith, including, but
not limited to, fees and out-of-pocket costs and expenses of counsel to the Bank
and counsel to the Participant, closing costs, lien searches,, filing and
recording fees, appraisers fees, the costs of pre-loan collateral audits
performed by the Bank or the Participant, and any subsequent audits and
examinations performed by the Bank. Such costs and expenses shall be payable to
the Bank regardless of whether the Loan is funded and may be deducted from the
proceeds of the Loan. The Borrower further agrees to pay on demand all
reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees and legal expenses) incurred by the Bank in connection with the enforcement
of this Agreement, the Loan Documents or any such other instruments or documents
during the continuance of any Event of Default. In addition, the Borrower
agrees to pay, and to save the Bank harmless from all liability for, any stamp
or similar taxes which may be payable in connection with the execution or
delivery of this Agreement, the borrowings hereunder, the issuance of the Note,
the recording or filing of any Loan Documents and any instruments or documents
provided for herein or delivered or to be delivered hereunder or in connection
herewith. All obligations provided for in this Section 7.02 shall survive any
termination of this Agreement. For the purposes of this Section 7.02, the term
"Participant" means Firstar Bank Milwaukee N. A., a national banking
association, which will purchase a participation in the Loan from the Bank.
Section 7.03 ADDRESSES. All notices, requests, demands and other
communications provided for under this Agreement and the other Loan Documents
shall be in writing and shall be delivered in person, by facsimile transmission
or deposited in the mail, postage prepaid, addressed as follows:
If to the Borrower or the Guarantor:
Paper Warehouse, Inc.
Attention: Mr. Yale T. Dolginow
7630 Excelsior Boulevard
St. Louis Park, Minnesota 55426-4504
With a copy to:
Maslon, Edelman, Borman and Brand
Attention: Mr. Leon I. Steinberg
3300 Norwest Center
Minneapolis, Minnesota 55402
19
<PAGE>
If to the Bank:
Richfield Bank & Trust Co.
6625 Lyndale Avenue South
Richfield, Minnesota 55423
Attention: Mr. Daniel J. Roberts
With a copy to:
Doherty, Rumble & Butler
Professional Association
Attention: C. Robert Beattie
3500 Fifth Street Towers
150 South Fifth Street
Minneapolis, Minnesota 55402
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section. All such notices, requests, demands and other communications
shall be effective when actually delivered, or deposited in the mail, except
that notices and requests to the Bank pursuant to Article II shall not be
effective until received by the Bank.
Section 7.04 BINDING EFFECT, ASSIGNMENT; SEVERABILITY. The Loan Documents
shall be binding upon and inure to the benefit of the parties hereto and thereto
and their respective successors and assigns, except that Borrower shall not have
any right to assign any of its rights hereunder or thereunder or any interest
herein or therein without the prior written consent of the Bank. The Bank
reserves the right to sell or transfer all or a portion of its interest in the
Loan and in connection therewith to disclose to any purchaser or potential
purchaser of such interest any information furnished to the Bank by Borrower or
the Guarantor and to assign to any such purchaser all or a portion of the Bank's
rights and interests under the terms of the Loan Documents. If any provision or
application of any of the Loan Documents is held unlawful or unenforceable, in
any respect, such illegality or unenforceability shall not affect the other
provisions or applications which can be given effect, and the Loan Documents
shall be construed as if the unlawful or unenforceable provision or application
had never been contained herein or therein or prescribed hereby or thereby.
Section 7.05 JURISDICTION AND VENUE. Borrower and Guarantor 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 the Loan
Documents, waive any argument that venue in such forums is not convenient, and
agree that any litigation initiated by Borrower or the Guarantor, against the
Bank in connection with the Loan Documents shall be venued in either the
District Court of Hennepin County, Minnesota, or the United States District
Court, District of Minnesota, Fourth Division.
20
<PAGE>
Section 7.06 HEADINGS. Article and Section headings in this Agreement are
for convenience of reference only, and shall not constitute a part of this
Agreement for any other purpose or a limitation of the scope of the particular
Articles or Sections to which they refer.
Section 7.07 GOVERNING LAW. This Agreement and the other Loan Documents
(except as otherwise stated therein), shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Section 7.08 FURTHER ASSURANCES. The Borrower and the Guarantor will, at
any time and from time to time, execute and deliver, and use their best efforts
to cause to be executed and delivered by all necessary persons, such further
instruments and take such further action as may be reasonably requested by the
Bank in order to cure any defects in the execution and delivery of, or to comply
with, or to accomplish the purposes, covenants and agreements contained in this
Agreement, the Note, or any other Loan Document, and in connection therewith,
the Borrower and the Guarantor shall deliver to the Bank such other documents
and take such further actions as the Bank shall, from time to time, reasonably
request.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
PAPER WAREHOUSE, INC.
(Borrower)
By /s/ Yale T. Dolginow
------------------------------
Title President
---------------------------
/s/ Yale T. Dolginow
- --------------------------------
Yale T. Dolginow
(Guarantor)
RICHFIELD BANK & TRUST CO.
(Bank)
By /s/ [ILLEGIBLE]
------------------------------
Title [ILLEGIBLE]
---------------------------
21
<PAGE>
REVOLVING PROMISSORY NOTE
$7,500,000 Richfield, Minnesota
January 29, 1997
FOR VALUE RECEIVED, on May 31, 1998, 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 February 28, 1997, 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 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
<PAGE>
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 /s/ Yale T. Dolginow
----------------------------------------------
Title President
-------------------------------------------
2
<PAGE>
SECURITY AGREEMENT
Date: January 29, 1997
<TABLE>
<CAPTION>
<S><C>
Debtor: Paper Warehouse, Inc. Secured Party: Richfield Bank & Trust Co.
Address: 7630 Excelsior Boulevard Addresses: 6625 Lyndale Ave. S.
St. Louis Park, MN 55426-4504 Richfield, MN 55423
</TABLE>
1. SECURITY INTEREST. To secure the payment and performance of each and
every debt, liability and obligation of every type and description which the
Debtor may now or at any time owe to the Secured Party, under the terms of that
certain Loan Agreement of even date herewith between Debtor, Secured Party, and
Yale T. Dolginow, as it may be amended from time to time, (the "Loan Agreement")
and any of the Loan Documents (as that term is defined therein) related thereto
(the "Obligations"), the Debtor grants the Secured Party a security interest
(hereinafter the "Security Interest") in the following property (hereinafter the
"Collateral"):
All inventory, work in process and raw materials of the Debtor and all
warehouse receipts, bills of lading and other documents of title covering such
inventory, whether now owned or hereafter acquired;
All equipment, motor vehicles, machinery and furniture of the Debtor,
together with all accessions, accessories, attachments, fittings, increases,
parts, supplies, tools, fixtures, dies, tooling, repairs, renewals and
substitutions of all or any part thereof, and all warehouse receipts, bills of
lading and other documents of title covering such equipment, whether now owned
or hereafter acquired;
All accounts, instruments, chattel paper, other rights to payment of money,
contract rights and general intangibles of the Debtor, including but not limited
to patents, copyrights, patent applications, royalty rights, trademarks,
trademark applications, tradenames, service marks, service mark applications,
trade secrets, goodwill, customer lists, permits, franchises, licenses,
partnership interests and the right to use Debtor's name together with all
rights, liens, security interests and other interests which the Debtor may at
any time have by law or agreement against any account debtor or obligor
obligated to make any such payment or against any of the property of such
account debtor or obligor, whether now owned or hereafter acquired;
All of Debtor's now owned or hereinafter acquired personal property;
and all substitutions and replacements for and all products and proceeds of
the foregoing property, 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.
<PAGE>
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Debtor represents,
warrants and agrees as follows:
a. The Debtor is a corporation, and the address of the Debtor's chief
executive office is shown at the beginning of this Agreement. The Debtor shall
give Secured Party prior written notice of any change in such address. The
Debtor has authority to execute and perform this Agreement. The Debtor's
Federal Tax Identification number is 41-1459589.
b. Except as contemplated by the Loan Agreement, the Debtor is the
owner of the Collateral, or will be the owner of the Collateral hereafter
acquired, free of all security interests, liens and encumbrances other than the
Security Interest and other liens approved by the Secured Party in writing. The
Debtor shall defend the Collateral against the claims and demands of all persons
other than the Secured Party and those permitted liens contemplated by the Loan
Agreement, and shall promptly pay all taxes, assessments and other government
charges upon or against the Debtor, any Collateral and the Security Interest.
Except as contemplated by the first sentence of this paragraph b, no financing
statement covering any Collateral is on file in any public office. If any
Collateral is or will become a fixture, the Debtor, at the request of the
Secured Party, shall furnish the Secured Party with a statement or statements
executed by all persons who have or claim an interest in the real estate, which
statement or statements shall provide that such persons consent to the Security
Interest.
c. The Debtor shall not sell or otherwise dispose of any Collateral
or any interest therein without the prior written consent of the Secured Party,
except that, until the occurrence of an Event of Default or the revocation by
the Secured Party of the Debtor's right so to do, the Debtor may sell or lease
any Collateral constituting inventory in the ordinary course of business and
worn and obsolete equipment at prices constituting the fair market value
thereof. For purposes of this Agreement, a transfer in partial or total
satisfaction of a debt, obligation or liability shall not constitute a sale or
lease in the ordinary course of business.
d. Each account, instrument, chattel paper, other right to payment
and general intangible constituting Collateral is, or will be when acquired, the
valid, genuine and legally enforceable obligation of the account debtor or other
obligor named therein or in the Debtor's records pertaining thereto as being
obligated to pay such obligation, subject to no defense, setoff or counterclaim.
The Debtor shall not agree to any material modification or amendment or agree to
any cancellation of any such obligation without the prior written consent of the
Secured Party, and shall not subordinate any right to payment of any such
obligation to the claim of any other creditor of such account debtor or obligor.
e. Other than inventory in transit, and motor vehicles in use, all
tangible Collateral shall be located at the address(es) set forth on Schedule A,
as such Schedule A may be amended from time to time. The Debtor shall provide
the Secured Party with an updated Schedule A once every six months; provided,
however, that if any additional address is in a state not previously set forth
on such Schedule A, such updated schedule shall be delivered to the Secured
Party prior to the location of any Collateral at such new location. No such
Collateral shall be located at any state other than those listed on such
Schedule A without the prior written consent of the Secured Party.
2
<PAGE>
f. The Debtor shall (i) keep all tangible Collateral in good
condition and repair, normal depreciation excepted; (ii) from time to time
replace any worn, broken or defective parts thereof; (iii) promptly notify the
Secured Party of any loss of or material damage to any Collateral or of any
adverse change in the prospect of payment of any account, instrument, chattel
paper, other right to payment or general intangible constituting Collateral;
(iv) not permit any Collateral to be used or kept for any unlawful purpose or in
violation of any federal, state or local law; (v) keep all tangible Collateral
insured in such amounts, against such risks and in such companies as shall be
reasonably acceptable to the Secured Party, with loss payable clauses in favor
of the Secured Party to the extent of their interest in form satisfactory to the
Secured Party, and deliver policies or certificates of such insurance to the
Secured Party; (vi) at the Debtor's chief executive office, keep accurate and
complete records pertaining to the Collateral and the Debtor's business and
financial condition, and submit to the Secured Party such periodic reports
concerning the Collateral and the Debtor's business and financial condition as
the Secured Party may from time to time reasonably request; (vii) at all
reasonable times permit the Secured Party and its representatives to examine and
inspect any Collateral, and to examine, inspect and copy the Debtor's records
pertaining to the Collateral and the Debtor's business and financial condition;
(viii) at the Secured Party's request, promptly execute, endorse and deliver
such financing statements and other instruments, documents, chattel paper and
writings and take such other actions deemed by the Secured Party to be necessary
or desirable to establish, protect, perfect or enforce the Security Interest and
the rights of the Secured Party under this Agreement, and pay all costs of
filing financing statements and other writings in all public offices where
filing is deemed by the Secured Party to be necessary or desirable.
3. COLLECTION RIGHTS. At any time before or after an Event of Default,
the Secured Party may, and at the request of the Secured Party the Debtor shall,
promptly notify any account debtor or obligor of any account, instrument,
chattel paper, other right to payment or general intangible constituting
Collateral that the same has been assigned to the Secured Party and direct such
account debtor or obligor to make all future payments to the Secured Party for
the benefit of the Secured Party.
4. LIMITED POWER OF ATTORNEY. If the Debtor at any time fails to perform
or observe any agreement herein, the Secured Party, in the name and on behalf of
the Debtor or, at its option, in its own name, may perform or observe such
agreement and take any action which the Secured Party may deem necessary or
desirable to cure or correct such failure. The Debtor irrevocably authorizes
the Secured Party and grants the Secured Party a limited power of attorney in
the name and on behalf of the Debtor or, at its option, in its own name, to
collect, receive, receipt for, create, prepare, complete, execute, endorse,
deliver and file any and all financing statements, insurance applications,
remittances, instruments, documents, chattel paper and other writings, to grant
any extension to, compromise, settle, waive, notify, amend, adjust, change and
release any obligation of any account debtor, obligor, insurer or other person
pertaining to any Collateral, and to take any other action deemed by the Secured
Party to be necessary or desirable to establish, perfect, protect or enforce the
Security Interest. All advances, charges, costs and expenses, including
reasonable attorneys' fees, incurred or paid by the Secured Party in connection
with the enforcement of the Obligations and in the protection and exercise of
any rights or remedies hereunder, together with interest thereon from the date
incurred or paid by the Secured Party at the highest rate then applicable to any
of the Obligations, shall be secured hereunder and shall be paid by the Debtor
to the Secured Party on demand.
3
<PAGE>
5. EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default": (a) default in the payment or
performance of any of the Obligations and the continuation of such default for a
period of 10 days or (b) default or breach of any covenant or agreement of the
Debtor or any endorser, guarantor or surety of any of the Obligations in this
Agreement or any agreement, instrument or writing contemplated by or made or
delivered pursuant to or in connection with this Agreement or any of the
Obligations and the continuation of such default for a period of 30 days; or (c)
any statement, representation or warranty made by the Debtor or any such
endorser, guarantor or surety to the Secured Party at any time shall prove to
have been incorrect or misleading in any material respect when made.
6. REMEDIES. Upon the occurrence of and during the continuance of any
Event of Default and at any time thereafter, the Secured Party may, at its
option, exercise any one or more of the following rights and remedies: (a)
declare all Obligations to be immediately due and payable, and the same shall
thereupon be immediately due and payable, without presentment or other notice or
demand; (b) require the Debtor to assemble all or any part of the Collateral and
make it available to the Secured Party at a place to be designated by the
Secured Party which is reasonably convenient to all parties; (c) exercise and
enforce any and all rights and remedies available upon default under this
Agreement, the Uniform Commercial Code, and any other applicable agreements and
laws. If notice to the Debtor of any intended disposition of Collateral or
other action is required, such notice shall be deemed reasonably and properly
given if mailed by regular or certified mail, postage prepaid, to the Debtor at
the address stated at the beginning of this Agreement or at the most recent
address shown in the Secured Party's records, at least 10 days prior to the
action described in such notice. The Debtor consents to the personal
jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this Agreement, waives any
argument that venue in such forums is not convenient, and agrees that any
litigation initiated by the Debtor against the Secured Party in connection with
this Agreement or any of the Obligations shall be venued in either the District
Court of Hennepin County, Minnesota, or the United States District Court,
District of Minnesota, Fourth Division.
7. MISCELLANEOUS. A carbon, photographic or other reproduction of this
Agreement is sufficient as a financing statement. This Agreement cannot be
waived, modified, amended, abridged, supplemented, terminated or discharged and
the Security Interest cannot be released or terminated, except by a writing duly
executed by the Secured Party. A waiver shall be effective only in the specific
instance and for the specific purpose given. No delay or failure to act shall
preclude the exercise or enforcement of any of the Secured Party's rights or
remedies. All rights and remedies of the Secured Party shall be cumulative and
may be exercised singularly, concurrently or successively, at the Secured
Party's option, and the exercise or enforcement of any one such right or remedy
shall not be a condition to or bar the exercise or enforcement of any other.
This Agreement shall be binding upon and inure to the benefit of the Debtor and
the Secured Party and their respective successors and assigns and shall take
effect when executed by the Debtor and delivered to the Secured Party, and the
Debtor waives notice of the Secured Party's acceptance hereof. If any provision
or application of this Agreement is held unlawful or unenforceable in any
respect, such illegality or unenforceability shall not affect other provisions
or applications which can be given effect, and this Agreement shall be construed
as if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby. All representations and warranties
contained in this Agreement shall survive the execution, delivery and
performance of this
4
<PAGE>
Agreement and the creation, payment and performance of the Obligations. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Minnesota.
PAPER WAREHOUSE, INC.
(Debtor)
By /s/ Yale T. Dolginow
-----------------------
Title President
-------------------
<PAGE>
GUARANTY
Richfield, Minnesota
January 29, 1997
For valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and in consideration of and to induce financial accommodations of
any kind, with or without security, given or to be given or continued at any
time and from time to time by Richfield Bank & Trust Co.(hereinafter called the
"Bank") to or for the account of Paper Warehouse, Inc. (hereinafter called the
"Borrower"), the undersigned absolutely and unconditionally guarantees to the
Bank the full and prompt payment when due, whether at maturity or earlier by
reason of acceleration or otherwise, of all promissory notes executed and
delivered by the Borrower to the Bank pursuant to the terms of a Loan Agreement
of even date herewith between the Borrower, the undersigned and the Bank with
interest and other charges as therein provided, and all amendments, extensions,
renewals and replacements thereof (hereinafter collectively referred to as the
"Indebtedness"); and the undersigned agrees to pay on demand all of the Bank's
costs, expenses and attorneys' fees in connection with the enforcement of this
guaranty, plus interest on such amounts at the highest rate then applicable to
any of the Indebtedness.
Notwithstanding the aggregate amount of Indebtedness which may be payable
at any time or from time to time, the liability of the undersigned hereunder
shall not exceed the principal sum of $1,500,000, plus accrued interest on such
amount and the costs, expenses and attorneys' fees described herein. Such
liability shall not be released, impaired or affected if at any time the
Indebtedness exceeds that amount, and the Bank may apply first in payment of
such excess all sums received from the Borrower, from security for the
Indebtedness, or from any other source without releasing, impairing or affecting
such liability. If the liability of the undersigned is limited by this
paragraph, any payment made by the undersigned under this guaranty shall be
effective to reduce or discharge such liability only if accompanied by a written
statement, received by the Bank, advising the Bank that such payment is made
under this guaranty for such purpose.
The Bank may at any time and from time to time, without consent of or
notice to the undersigned, without incurring responsibility to the undersigned,
without releasing, impairing or affecting the liability of the undersigned
hereunder, upon or without any terms or conditions, and in whole or in part: (1)
sell, pledge, surrender, compromise, settle, release, renew, subordinate,
extend, alter, substitute, exchange, change, modify or otherwise dispose of or
deal with in any manner and in any order any Indebtedness, any evidence thereof,
or any security or other guaranty therefor; (2) accept any security for or other
guarantors of any Indebtedness; (3) fail, neglect or omit to obtain, realize
upon or protect any Indebtedness or any security therefor, to exercise any lien
upon or right to any money, credit or property toward the liquidation of the
Indebtedness, or to exercise any other right against the Borrower, the
undersigned, any other guarantor or any other person; and (4) apply any payments
and credits to the Indebtedness in any manner and in any order. No act,
omission or thing, except full payment and discharge of the Indebtedness, which
but for this provision could act as a release or impairment of the liability of
the undersigned hereunder, shall in any way release, impair
<PAGE>
or otherwise affect the liability of the undersigned hereunder, and the
undersigned waives any and all defenses of the Borrower pertaining to the
Indebtedness, any evidence thereof, and any security therefor, except the
defense of discharge by payment. The failure of any person or persons to sign
this or any other guaranty shall not release, impair or affect the liability of
the undersigned hereunder. This guaranty is a primary obligation of the
undersigned and the Bank shall not be required to first resort for payment of
the Indebtedness to the Borrower or any other person, their properties or
estates, or any security or other rights or remedies whatsoever. The
undersigned shall be and remain liable for any deficiency remaining after
foreclosure of any mortgage or security interest securing the Indebtedness,
whether or not the liability of the Borrower or any other person for such
deficiency is discharged pursuant to statute, judicial decision or otherwise.
The liability of the undersigned under this guaranty is in addition to and
shall be cumulative with all other liabilities of the undersigned to the Bank,
as guarantor or otherwise, without any limitation as to amount, unless the
writing evidencing or creating such other liability specifically provides to the
contrary. If any payment applied by the Bank to the Indebtedness is thereafter
set aside, recovered, rescinded or required to be returned for any reason
(including without limitation the bankruptcy, insolvency or reorganization of
the Borrower or any other person), the Indebtedness to which such payment was
applied shall for the purposes of this guaranty be deemed to have continued in
existence, notwithstanding such application, and this guaranty shall be
enforceable as to such Indebtedness as fully as if such application had never
been made.
The undersigned waives: (1) notice of acceptance of this guaranty and of
the creation and existence of the Indebtedness; (2) presentment, demand for
payment, notice of dishonor, notice of nonpayment, and protest of any instrument
evidencing the Indebtedness; and (3) all other demands and notices to the
undersigned or any other person and all other actions to establish the liability
of the undersigned hereunder. The undersigned consents to the personal
jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this guaranty, waives any argument
that venue in such forums is not convenient, and agrees that any litigation
initiated by the undersigned against the Bank in connection with this guaranty
shall be venued in either the District Court of Hennepin County, Minnesota, or
the United States District Court, District of Minnesota, Fourth Division.
All property of the undersigned, now or hereafter in the possession,
control or custody of or in transit to the Bank for any purpose, including
without limitation the balance of every account of the undersigned with and each
claim of the undersigned against the Bank, shall be subject to a lien and
security interest in favor of the Bank, as security for all liabilities of the
undersigned to the Bank, and shall be subject to be set off against any and all
such liabilities, and the Bank may at any time and from time to time at its
option and without notice appropriate and apply any such property toward the
payment of any and all such liabilities. The undersigned agrees to promptly
provide the Bank from time to time with financial statements of the undersigned
and such other information respecting the condition (financial and otherwise),
business and property of the undersigned as the Bank may request, in form and
substance acceptable to the Bank.
The undersigned hereby agrees that the Bank shall have no duty to advise
the undersigned of information now or hereafter known to the Bank regarding the
financial or other condition of the Borrower or any other person primarily or
secondarily liable on the Indebtedness or regarding any
2
<PAGE>
circumstance bearing on the risk of non-payment of the Indebtedness. It is
understood that the undersigned is and will remain informed of Borrower's
financial condition, the status of other guarantors, if any, and of all other
circumstances which bear upon the risk of nonpayment of the Indebtedness.
The undersigned waives all claims, rights and remedies which the
undersigned may now have or hereafter acquire against any person at any time now
or hereafter liable to payment of any of the Indebtedness and as to any
collateral security, including but not limited to all claims, rights and
remedies of contribution, indemnification, exoneration, reimbursement, recourse
and subrogation, whether or not such claim, right or remedy arises in equity,
under contract, by statute, under common law or otherwise, until the
Indebtedness has been fully paid. No delay or failure by the Bank in exercising
any right, and no partial or single exercise thereof shall constitute a waiver
thereof. No waiver of any rights thereof shall constitute a waiver thereof. No
waiver of any rights hereunder, and no modification or amendment of this
guaranty shall be effective unless the same is in writing duly executed by the
Bank, and each such waiver, if any, shall apply only with respect to the
specific instance involved and shall not impair or affect the rights of the Bank
or the provisions of this Guaranty in any other respect at any other time. This
guaranty shall continue until written notice of revocation of this guaranty,
executed by the undersigned, has been received by the Bank; provided, no
revocation of this guaranty shall affect in any manner any liability of the
undersigned under this guaranty with respect to Indebtedness arising before the
Bank receive such written notice of revocation, and the sole effect of
revocation of this guaranty shall be to exclude from this guaranty Indebtedness
thereafter arising which is unconnected with Indebtedness theretofore arising or
transactions theretofore entered into.
Any invalidity or unenforceability of any provision or application of
this guaranty shall not affect other lawful provisions and applications hereof
and to this end the provisions of this guaranty are declared to be severable.
This guaranty shall be binding upon the undersigned and upon the heirs,
representatives, successors and assigns of the undersigned, and of each of them
respectively, and shall inure to the benefit of the Bank, its successors and
assigns. This guaranty shall be governed by and construed in accordance with
the laws of the State of Minnesota.
/s/ Yale T. Dolginow
--------------------------------------------------
Yale T. Dolginow
3
<PAGE>
EXHIBIT 21
List of Subsidiaries of the Company
Paper Warehouse Franchising, Inc.
<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
October 1, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS REGISTRATION STATEMENT, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JAN-31-1997 AUG-01-1997 <F1>
<PERIOD-START> FEB-03-1996 FEB-01-1997
<PERIOD-END> JAN-31-1997 AUG-01-1997
<CASH> 357 360
<SECURITIES> 0 0
<RECEIVABLES> 261 184
<ALLOWANCES> 0 0
<INVENTORY> 9,569 11,950
<CURRENT-ASSETS> 10,306 12,907
<PP&E> 8,481 9,221
<DEPRECIATION> 3,020 3,539
<TOTAL-ASSETS> 16,270 19,086
<CURRENT-LIABILITIES> 8,605 7,347
<BONDS> 5,873 9,599
0 0
0 0
<COMMON> 22 22
<OTHER-SE> 1,770 2,118
<TOTAL-LIABILITY-AND-EQUITY> 16,270 19,086
<SALES> 41,892 24,206
<TOTAL-REVENUES> 43,002 24,748
<CGS> 27,947 16,267
<TOTAL-COSTS> 36,680 21,162
<OTHER-EXPENSES> 4,243 2,628
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 772 479
<INCOME-PRETAX> 1,308 478
<INCOME-TAX> 5 5
<INCOME-CONTINUING> 1,303 473
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,303 473
<EPS-PRIMARY> 0.32 0.12 <F2>
<EPS-DILUTED> 0.32 0.12
<FN>
<F1> The Company's fiscal year ends on the Friday closest to January 31.
<F2> EPS reflects a Pro forma provision for income taxes as if the Company were
a C Corporation.
</FN>
</TABLE>
