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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition Period From ____ To ____
Commission file number 0-23389
PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1612534
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
7630 Excelsior Boulevard
Minneapolis, MN 55426
-----------------------------------------------------
(Address of principal executive offices including zip code)
(612) 936-1000
-----------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock, $0.01 par value per share outstanding as of
December 14, 1998
4,557,187
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PAPER WAREHOUSE, INC.
Consolidated Balance Sheets
October 30, 1998 and January 30, 1998
<TABLE>
<CAPTION>
October 30, January
1998 30,
ASSETS (Unaudited) 1998
------ ----------- ----
<S> <C> <C>
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 594,425 2,059,737
Inventories, net. . . . . . . . . . . . . . . . . . . . . 16,291,892 11,161,549
Accounts receivable, net. . . . . . . . . . . . . . . . . 569,523 451,937
Prepaid expenses and other current assets . . . . . . . . 630,191 153,968
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . . 18,086,031 13,827,191
Property and equipment, net . . . . . . . . . . . . . . . . 9,137,761 6,798,228
Other assets, net . . . . . . . . . . . . . . . . . . . . . 803,775 391,918
------------ ------------
$28,027,567 21,017,337
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - line of credit . . . . . . . . . . . . . . 1,800,000 --
Current maturities of long-term debt. . . . . . . . . . . 156,301 305,585
Current maturities of capital lease obligations . . . . . 209,850 179,671
Accounts payable. . . . . . . . . . . . . . . . . . . . . 8,274,350 2,989,016
Accrued liabilities:
Payroll and related expenses . . . . . . . . . . . . . 283,615 369,486
Accrued expenses . . . . . . . . . . . . . . . . . . . 721,632 349,718
Accrued interest . . . . . . . . . . . . . . . . . . . 11,157 10,317
Other. . . . . . . . . . . . . . . . . . . . . . . . . 511,338 240,765
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . 11,968,243 4,444,558
Capital lease obligations, less current maturities. . . . . 210,196 355,927
Long-term debt, less current maturities . . . . . . . . . . 871,210 911,409
Deferred rent credits and other . . . . . . . . . . . . . . 983,701 711,659
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 14,033,350 6,423,553
Stockholders' equity:
Serial preferred stock, 10,000,000 shares authorized;
none issued or outstanding . . . . . . . . . . . . . . -- --
Common stock, $.01 par value. Authorized
40,000,000 shares; issued and
outstanding 4,557,187 shares . . . . . . . . . . . . . 45,572 45,572
Additional paid-in capital. . . . . . . . . . . . . . . . 13,683,807 13,683,807
Retained earnings . . . . . . . . . . . . . . . . . . . . 264,838 864,405
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . 13,994,217 14,593,784
------------ ------------
Commitments and contingencies
$ 28,027,567 21,017,337
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
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PAPER WAREHOUSE, INC.
Consolidated Statements of Operations
Three Months Ended October 30, 1998 and October 31, 1997 and the
Nine Months October 30, 1998 and October 31, 1997
<TABLE>
<CAPTION>
Three Months Ending Nine Months Ending
-----------------------------------------------------------
October 30, October 31, October 30, October 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Company-owned stores. . . . . . . . . . . . . . . . . . . $ 16,649,889 13,267,942 43,590,462 37,473,747
Franchise related fees. . . . . . . . . . . . . . . . . . 351,192 285,190 979,166 827,540
------------ ------------ ------------ ------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . 17,001,081 13,553,132 44,569,628 38,301,287
Costs and expenses:
Costs of products sold and occupancy costs. . . . . . . . 11,201,413 8,745,109 29,487,517 25,013,800
Store operating expenses. . . . . . . . . . . . . . . . . 3,949,119 3,159,360 10,016,759 8,054,837
General and administrative expenses . . . . . . . . . . . 2,046,889 1,388,139 5,713,244 4,014,932
------------ ------------ ------------ ------------
Operating income (loss) . . . . . . . . . . . . . . . . . (196,340) 260,524 (647,892) 1,217,718
Interest expense. . . . . . . . . . . . . . . . . . . . . . (65,946) (243,707) (128,917) (722,728)
Income (loss) before income taxes . . . . . . . . . . . . . (262,286) 16,817 (776,809) 494,990
Income tax (expense) benefit. . . . . . . . . . . . . . . . 104,915 -- 310,724 (5,038)
------------ ------------ ------------ ------------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . ($157,371) 16,817 (466,085) 489,952
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share:
Weighted average shares outstanding . . . . . . . . . . . 4,557,187 4,557,187
------------ ------------
------------ ------------
Net earnings (loss) per share . . . . . . . . . . . . . . ($.03) ($0.10)
------------ ------------
------------ ------------
Diluted earnings per share:
Weighted average shares outstanding plus equivalents. . . 4,557,187 4,557,187
------------ ------------
------------ ------------
Net earnings (loss) per share . . . . . . . . . . . . . . ($.03) ($0.10)
------------ ------------
------------ ------------
Proforma net earnings . . . . . . . . . . . . . . . . . . . $10,427 $303,770
Proforma basic earnings per share:
Weighted average shares outstanding . . . . . . . . . . . 2,202,818 2,202,818
------------ ------------
------------ ------------
Net earnings (loss) per share . . . . . . . . . . . . . . $0.00 $0.14
------------ ------------
------------ ------------
Proforma diluted earnings per share:
Weighted average shares outstanding plus equivalents. . . 2,202,818 2,202,818
------------ ------------
------------ ------------
Net earnings (loss) per share . . . . . . . . . . . . . . $0.00 $0.14
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
3
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PAPER WAREHOUSE, INC.
Consolidated Statements of Cash Flows
Nine months ended October 30, 1998 and October 30, 1997
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
October 30, October 31,
1998 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (466,085) $ 489,952
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 1,219,581 836,836
Gain on sale of property and equipment . . . . . . . . . . . . . . . (277) (1,892)
Changes in operating assets and liabilities, net of the
effect of the purchase of the assets of a business:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . (117,586) (10,632)
Prepaid expenses and other current assets . . . . . . . . . . . . (476,223) (196,956)
Merchandise inventories, net. . . . . . . . . . . . . . . . . . . (4,717,184) (3,513,473)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 5,285,334 4,400,839
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 829,498 883,151
----------- -----------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . 1,557,058 2,887,825
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets of business. . . . . . . . . . . . . . . . . . . . . (879,533) --
Proceeds from sale of property and equipment. . . . . . . . . . . . . . 5,504 7,807
Purchases of property and equipment . . . . . . . . . . . . . . . . . . (3,406,865) (1,982,580)
Other assets, net of effect of asset acquisition. . . . . . . . . . . . (102,959) (37,298)
----------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (4,383,853) (2,012,071)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit. . . . . . . . . . . . . . . . . . . . 1,800,000 --
Net proceeds from (payments on) notes payable to bank . . . . . . . . . -- (870,000)
Principal payments on long-term debt. . . . . . . . . . . . . . . . . . (189,483) (16,376)
Net proceeds from (payments on) capital lease . . . . . . . . . . . . . (115,552) 578,055
Distribution of Subchapter S Corporation accumulated earnings . . . . . (133,482) --
Distribution of earnings. . . . . . . . . . . . . . . . . . . . . . . . -- (142,663)
----------- -----------
Net cash provided by (used in) financing activities. . . . . . . . . . . . 1,361,483 (450,984)
----------- -----------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . (1,465,312) 424,770
Cash:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 2,059,737 357,167
----------- -----------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 594,425 781,937
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,439 634,946
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 5,038
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Notes to Consolidated Financial Statements
Paper Warehouse, Inc.
(1) BASIS OF PRESENTATION
Paper Warehouse, Inc. (the "Company") is a paper and party goods retailer
operating 88 company-owned stores in the states of Minnesota, Missouri,
Iowa, Kansas, Oklahoma, Colorado, Washington, and Wisconsin. Paper
Warehouse, Inc. also sells Paper Warehouse franchises through its
wholly-owned subsidiary, Paper Warehouse Franchising, Inc. Paper Warehouse
operates under the names "Paper Warehouse" and "Party Universe."
The financial statements of the Company represent the consolidated
financial statements of Paper Warehouse, Inc. and Paper Warehouse
Franchising, Inc. as of October 30, 1998 and for the three months ended
October 30, 1998 and October 31, 1997 and the nine months ended October 30,
1998 and October 31, 1997. The results of all intercompany transactions
have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) considered necessary for fair
presentation have been included. Interim results may not be indicative of
annual results. For further information, refer to the financial statements
and footnotes included in the Company's report on Form 10K.
(2) INCOME TAXES - S CORPORATION ELECTION
Prior to November 25, 1997, the Company elected to be taxed as an S
corporation under the Internal Revenue Code. The Company's earnings or
losses for the S Corporation period were allocated to its then current
stockholders for inclusion in their individual tax returns. As a result,
no provision for federal taxes was required at the corporate level for that
period. The Company 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. A provision was made for state taxes during the S
Corporation period as some states impose a tax on S Corporations. Prior to
such termination of S Corporation status, the Company distributed to its
then current stockholders substantially all accumulated S Corporation
earnings as of the termination date.
Pro forma net income and pro forma net income per share for the three month
period ended October 31, 1997 and the nine month period ended October 31,
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. The pro forma tax benefit was $6,390 and $186,182 respectively.
Federal and state income taxes are provided for by the Company for third
quarter and year to date 1998.
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(3) ACQUISITIONS
During the three months ended October 30, 1998, the Company acquired the
assets of two franchisees. The assets and operations of the business
acquired have been included in the accompanying consolidated financial
statements since the date of acquisition.
Subsequent to the end of the third quarter the Company acquired the assets
of four additional franchisees.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Form 10-Q contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-Q that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may be materially different. It is not
reasonably possible to itemize all of the many factors and specific events that
could affect the outlook of the Company's operations. Some of the factors that
could cause actual results to differ materially include, but are not limited to,
product demand, failure to anticipate and/or respond to merchandising trends,
delay or increased expense associated with implementation of new information
systems, changes in consumer preferences and general economic conditions and
competitive factors. For additional factors that could cause actual results to
differ materially, please see "Certain Factors" contained in the Company's Form
10-K for the fiscal year ending January 30, 1998.
The following discussion of the Company's results of operations and its
liquidity and capital resources should be read in conjunction with the Financial
Statements of the Company and related Notes thereto appearing elsewhere in this
10Q.
OVERVIEW
Paper Warehouse is a 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 the Minneapolis/St. Paul metropolitan area.
In 1987, the Company began granting franchises. Over the past twelve years, the
Company has grown to an aggregate of 137 stores, including 88 Company-owned
stores and 49 franchise stores throughout 24 states. In growing the number of
Company-owned stores, management has employed a strategy of clustering stores in
the Company's principal markets in an effort to provide its customers with
convenient store locations, expand its total market share and achieve favorable
economies of scale.
The Company completed its initial public offering on November 28, 1997.
The total offering was for 1,778,000 shares of common stock, all of which were
offered by the Company. Proceeds to the Company, net of offering expenses, were
approximately $11.7 million. On December 24, 1997, the underwriters partially
exercised their over-allotment option and the Company sold an additional 207,800
shares of common stock. Proceeds to the Company, net of offering expenses, were
approximately $1.4 million. The proceeds from the sale of common stock were
used to retire the Company's revolving line of credit, prepay Subordinated Debt,
and retire indebtedness. The balance of the proceeds were used to finance new
store openings and additional growth.
Prior to November 28, 1997, the Company elected to be treated for Federal
and state income tax purposes as an S Corporation under the Internal Revenue
Code of 1986, as amended, and comparable state tax laws. For the purpose of
discussion and analysis, the Company has presented a pro forma tax provision and
pro forma net income. These pro forma amounts represent what the income tax
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provision and the net income would have been if the Company had been a C
Corporation and thus was subject to Federal income taxation for the entire
period. This pro forma provision is computed using a combined Federal and state
income tax rate of 38% for 1997.
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 the franchise signs the lease for the store.
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 that are relocated, are no longer included
in the comparable store sales base until 12 months have passed. Cost of
products sold and occupancy costs includes the direct cost of merchandise,
plus handling and distribution, 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 administrative
expenses include corporate administrative expense for Company-owned stores
and expenses relating to franchising. Franchise expenses are primarily
payroll, legal, travel, and advertising.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 30, 1998, COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997
REVENUE. Company-owned store sales increased 25.4% to $16.6 million for
the three months ended October 30, 1998, from $13.3 million for the comparable
period of fiscal 1997. Of this increase, approximately $14.0 million is
attributable to comparable store sales and approximately $2.6 million is
attributable to new and remodeled Company-owned stores. Stores open in the
third quarter of fiscal 1997 had a 7.6% same store sales increase for third
quarter of fiscal 1998. During third quarter of 1998, the Company opened eight
new company-owned stores, and purchased two franchise stores increasing the
total number of Company-owned stores to 88 as of October 30, 1998. This
compares to 70 Company-owned stores as of October 31, 1997.
Franchise revenue increased 23.1% to $351,000 for the three months ended
October 30, 1998, from $285,000 for the comparable period of fiscal 1997.
Initial franchise fees increased due to an increase in franchise store openings
in the three months ended October 30, 1998. The increase in initial franchise
fees was augmented by increased royalty payments resulting from higher sales in
the franchise stores. In the third quarter, the Company opened two new
franchises, purchased two of the franchise stores, and terminated two franchise
stores, decreasing the total number of franchise stores to 49, as of October 30,
1998. This compares to 51 franchise stores as of October 31, 1997.
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs for the three months ended October 30, 1998, were $11.2 million,
or 67.3% of Company-owned stores revenue, as compared to $8.7 million, or 65.9%
of Company-owned stores revenues, for the comparable period of fiscal 1997. The
increase as a percentage of Company-owned store revenues was primarily
attributable to increasing occupancy costs.
STORE OPERATING EXPENSES. Store expenses for the three months ended
October 30, 1998 were $3.9 million, or 23.7% of Company-owned store revenue, as
compared to $3.2 million, or 23.8% of Company-owned store revenue, for the
comparable period of fiscal 1997. The increase in terms of dollars is due to
the increased number of Company-owned stores, as well as increased payroll
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expense due to tight labor markets, and continued increases in the average
hourly compensation. The balance of the variance is due to increased credit
card discount expense, and depreciation related to enhanced technology at the
stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended October 30,1998 were $2.0 million as
compared to $1.4 million in the prior year period. The increase was
primarily attributable to the increase in senior management positions and
additional depreciation expense on the Company's new integrated inventory
management system.
INTEREST EXPENSE. Interest expense decreased 72.9% to $66,000, or .4% of
total revenue for the three months ended October 30, 1998 from $244,000, or 1.8%
for the comparable period of fiscal 1997. This is the result of using the
proceeds of the initial public offering to repay bank debt. Interest rates have
been stable.
NET EARNINGS (LOSS). As a result of the factors discussed above, the net
loss was $157,000 or .9% of total revenue for the three months ended October 30,
1998, compared to a pro forma net income of $10,000, or .1% of total revenue for
the comparable period of fiscal 1997. Pro forma net income for the three months
ended October 31, 1997 includes a provision for federal and state income taxes.
NINE MONTHS ENDED OCTOBER 30, 1998, COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1997
REVENUE. Company-owned store sales increased 16.3% to $43.6 million for
the nine months ended October 30, 1998, from $37.4 million for the comparable
period of fiscal 1997. Of this increase, approximately $35.6 million is
attributable to comparable store sales and approximately $8.0 million is
attributable to new and remodeled Company-owned stores. Stores open in the nine
months ended October 30, 1997 had a 2.7% same store sales increase for nine
months ended October 30, 1998. During the first nine months of fiscal 1998, the
Company opened 11 new company-owned stores, purchased five franchise stores, and
closed one Company store, increasing the total number of Company-owned stores to
88 as of October 30, 1998. This compares to 70 Company-owned stores as of
October 31, 1997.
Franchise revenue increased 18.3% to $979,000 for the nine months ended
October 30, 1998, from $828,000 for the comparable period of fiscal 1997.
Initial franchise fees increased due to an increase in franchise store openings
in the nine months ended October 30, 1998. The increase in initial franchise
fees was augmented by increased royalty payments resulting from higher sales in
the franchise stores. During the nine months ended October 30, 1998, the
Company opened six new franchises, purchased five of the franchise stores, and
terminated three franchise stores, decreasing the total number of franchise
stores to 49, as of October 30, 1998. This compares to 51 franchise stores as
of October 31, 1997.
COST PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs for the nine months ended October 30, 1998, was $29.5 million,
or 67.6% of Company-owned stores revenue, as compared to $25.0 million, or 66.7%
of Company-owned stores revenues, for the comparable period of fiscal 1997. The
increase as a percentage of Company-owned store revenues was primarily
attributable to increasing occupancy costs.
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STORE OPERATING EXPENSES. Store expenses for the nine months ended October
30, 1998 were $10.0 million, or 23.0% of Company-owned store revenue, as
compared to $8.1 million, or 21.5% of Company-owned store revenue, for the
comparable period of fiscal 1997. Over two-thirds of the variance is due to
increased payroll expenses, the result of additional company-owed stores, tight
labor markets, and continued increases in the average hourly compensation. The
balance of the variance is due to increased credit card discount expense, and
depreciation related to enhanced technology at the stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended October 30, 1998 were $5.7 million as compared to $4.0
million in the prior year period. The increase was primarily attributable to
the increase in senior management positions, additional lease expense on new
cash registers, and depreciation expense on the Company's new integrated
inventory management system.
INTEREST EXPENSE. Interest expense decreased 82.2% to $129,000, or .3% of
total revenue for the nine months ended October 30, 1998 from $723,000 or 1.9%
for the comparable period of fiscal 1997. This is the result of using the
proceeds of the initial public offering to repay bank debt. Interest rates have
been stable.
NET EARNINGS (LOSS): As a result of the factors discussed above, the
net loss was $466,000 or 1.1% of total revenue for the nine months ended
October 30, 1998, compared to a proforma net income of $304,000, or .8% of
total revenue for the nine months ended October 31, 1997. Pro forma net
income for the nine months ended October 31, 1997 includes a provision for
federal and state income taxes.
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
line of credit and the Subordinated Notes.
At October 30, 1998 and January 30, 1998, the Company's working capital was
$6.1 million and $9.4 million, respectively. Cash provided by operating
activities for the first nine months of fiscal 1998 and fiscal 1997 was $1.6
million and $2.9 million respectively.
At October 30, 1998, and January 30, 1998, the Company's accounts payable
were $8.3 million and $3.0 million, respectively. The increase in accounts
payable was primarily attributable to increased merchandise inventory.
Historically, the amount of the Company's obsolete inventory has been
immaterial.
Net cash used in investing activities for the first nine months of fiscal
1998 and the comparable period of fiscal 1997 was $4.4 million and $2.0 million,
respectively.
Net cash provided by financing activities during the first nine months
of fiscal 1998 was $1.4 million. Net cash used in financing activities
during the first nine months of fiscal 1997 was $451,000. The Company had
$1.8 million outstanding at October 30, 1998, and had no amounts
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outstanding at January 30, 1998, under its existing line of credit. In
November, 1997, the Company paid its revolving credit facility in full from
the proceeds of its initial public offering. The credit facility expires on
May 31, 1999. The Company made the final distribution of S Corporation
accumulated earnings to its former S Corporation stockholders in third
quarter, 1998.
During the period from November 28, 1997, through October 30, 1998, the net
proceeds of the offering have been applied as follows: (i) to repay borrowings
outstanding under the Company's revolving credit facility in the amount of $5.8
million, (ii) to prepay the 10% Subordinated Notes due November 30, 2004 in the
amount of $2.1 million, and (iii) to repay shareholder notes in the amount of
$2.1 million to Yale T. Dolginow and Brent D. Schlosser. The remaining $3.1
million have been used for other general corporate purposes.
The Company believes it will have sufficient funds available to meet
current and future commitments.
IMPACT OF YEAR 2000
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20", instead of the current
"19". If not corrected, many computer applications could fail or create
erroneous results. The extent of the potential impact of the year 2000 problem
is not yet known, and if not timely corrected, could affect the global economy.
It is possible that the Company's currently installed computer systems,
software, or other business systems, or those of the Company's suppliers, will
not accept input of, store, or manipulate output dates for the years 2000 and
beyond without error or manipulation.
STATE OF READINESS: Management of the Company is actively engaged in
the process of evaluating the status of the Company's internal Information
Technology ("IT") and non-IT systems for compliance with the Year 2000
issues. In addition, the Company is attempting to verify the readiness for
the Year 2000 of third parties with whom the Company has a material
relationship, such as its largest vendors and suppliers. The majority of the
Company's exposure is in the readiness of third parties, where the situation
is much less within the Company's ability to predict or control. The first
phase, evaluating the Company's internal systems is substantially complete.
The second phase, evaluating third party systems, was commenced in second
fiscal quarter, 1998, and is expected to be substantially complete by
mid-fiscal 1999.
Non-IT systems. Management believes that the failure of any internal
non-IT systems, e.g. alarms, telephone system, voicemail, access cards, locks,
heating and cooling systems, etc., to be compliant for the Year 2000 would
have little effect on the business, operations, or financial condition of the
Company as a whole. Management has reviewed its non-IT systems, and upgraded
the non-IT Systems as necessary. Management will continue to take steps to
modify or replace non-IT systems as necessary to be Year 2000 compliant. The
anticipated expenses for such replacement/conversions are not expected to be
material. Management believes that any additional modifications/replacements
will not have a material impact on its business, operations, or financial
condition.
Major IT Systems. During 1997 and 1998, the Company upgraded or
replaced it's mission critical data processing system which controls the
Company's financial records, inventory management, and purchasing, and
believes that these systems will function properly with respect to dates in
the year 2000 and beyond. The Company has received certification from many
of its hardware and software suppliers of the upgraded or replaced systems
that the systems should function correctly in year 2000 and beyond. In the
ordinary course of business, the Company upgrades and replaces its cash
registers and
11
<PAGE>
personal computers. All registers will have been upgraded or replaced by the
year 2000. Management believes that any additional modifications/replacements
will not have a material impact on its business, operations, or financial
condition.
Third Party Systems. The Company has been in contact with its major
suppliers and service providers to understand their state of Year 2000
readiness, asked its major suppliers and service providers to complete a
survey on their state of Year 2000 readiness, and is assessing the possible
effects an adverse impact could have on the Company. The failure by a vendor
or supplier to be Year 2000 compliant may interrupt the flow of products to
the Company's stores for sale. Depending on how long product supply to the
stores is interrupted, the impact could have a material adverse effect.
Multiple sources of product supply mitigate this concern. The Company may
experience some inconvenience if one or more of its infrastructure (utility)
providers are not Year 2000 compliant. If the utility providers are not able
to provide electricity, water, heat, etc., to a store or stores following
January 1, 2000, the Company will, nonetheless, attempt to open all stores.
If an infrastructure failure would continue for more than several days, the
result could have a material adverse effect on the Company's revenues,
earnings, and cash flow.
COSTS TO ADDRESS YEAR 2000 ISSUES. To date, the cost associated with Year
2000 readiness has been immaterial. Management expects that any additional
costs of being year 2000 compliant will be immaterial.
RISKS TO THE COMPANY FOR YEAR 2000 ISSUES. Some risks associated with
the Year 2000 problem are beyond the ability of the Company to control,
including the extent to which the Company's suppliers and service providers
can address the Year 2000 problem. Therefore, the Company cannot estimate
the impact to the Company if third parties are not Year 2000 compliant. The
failure by a third party vendor or supplier to adequately address the Year
2000 issue could have a material adverse affect on the third party, and
therefore could have an adverse affect on the Company.
CONTINGENCY PLANS. The Company has not developed a formal contingency plan
for the Year 2000 problem for its operations. If the need arises, the Company
may consider creating a contingency plan.
The costs of the Company's Year 2000 compliance programs and the timetable
on which the Company plans to complete such programs are based on management's
best estimates, and reflect assumption regarding the availability and cost of
personnel trained in this area, the compliance plans of third parties and
similar uncertainties. However, due to the complexity and pervasiveness of the
year 2000 issue, and in particular the uncertainty regarding the compliance
programs of third parties, no assurance can be given that these estimates will
be achieved, and actual results could differ materially from those anticipated.
SUBSEQUENT EVENTS
The Company purchased four of its franchise stores in Tucson, AZ on
November 9, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Securities and Exchange Commission (the "SEC") has recently amended
Rule 14a-4, which governs the Company's use of discretionary voting authority
with respect to certain stockholder proposals. Rule 14a-4(c)(1) allows Company
management to use their discretionary authority to vote proxies on stockholder
proposals, without a discussion of the matter in the proxy statement, if the
proponent of such proposal fails to notify the Company at least 45 days prior to
the mailing date of the prior year's proxy statement. In order to provide
stockholders with notice of the deadline for the submission of such proposals
for the Company's 1999 Annual Meeting of Stockholders, the Company hereby
notifies all stockholders that after March 31, 1999, any stockholder proposal
submitted outside the process of SEC Rule 14a-8 will be considered untimely for
purposes of SEC Rules 14a-4 and 14a-5(e).
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Listing of Exhibits:
QUARTERLY REPORT ON FORM 10Q
FOR THE
QUARTER ENDED OCTOBER 30, 1998
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
11 Computation of Net Earnings per Common Share
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
October 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAPER WAREHOUSE, INC.
Date: December 14, 1998 /s/ Yale T. Dolginow
-----------------------------------
Yale T. Dolginow
President and Chief Executive Officer
Date: December 14, 1998 /s/ Cheryl W. Newell
-----------------------------------
Cheryl W. Newell
Chief Financial Officer
(Principal Financial Officer)
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
11 Computation of Net Income per Common Share Filed herewith
electronically
27 Financial Data Schedule Filed herewith
electronically
</TABLE>
15
<PAGE>
Exhibit 11
Paper Warehouse, Inc.
Computation of Actual and Pro Forma Earnings (Loss)
Per Share (In thousands of dollars, except per
share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
Actual Pro forma (1) Actual Pro forma (1)
10/30/98 10/31/97 10/30/98 10/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC
Actual/Pro forma net
earnings (loss) $ (157,371) $ 10,427 $ (466,085) $ 303,770
Weighted average shares of
common stock outstanding 4,557,187 2,202,818 4,557,187 2,202,818
Basic Actual/pro forma
earnings (loss) per share of
common stock $ (0.03) $ 0.00 $ (0.10) $ 0.14
DILUTED
Actual/Pro forma net
earnings (loss) $ (157,371) $ 10,427 $ (466,085) $ 303,770
Weighted average shares of
common stock outstanding 4,557,187 2,202,818 4,557,187 2,202,818
Common stock equivalents -- -- -- --
Weighted average shares of
common stock and common
stock equivalents 4,557,187 2,202,818 4,557,187 2,202,818
Diluted actual/pro forma
earnings (loss) per share of
common stock and common
stock equivalents $ (.03) $ 0.00 $ (0.10) $ 0.14
</TABLE>
- ------------------------
(1) Pro forma to reflect an income tax benefit resulting from the Company's
termination of its S Corporation election.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-29-1999 JAN-29-1999
<PERIOD-START> AUG-01-1998 JAN-31-1998
<PERIOD-END> OCT-30-1998 OCT-30-1998
<CASH> 594 594
<SECURITIES> 0 0
<RECEIVABLES> 570 570
<ALLOWANCES> 0 0
<INVENTORY> 16,292 16,292
<CURRENT-ASSETS> 18,086 18,086
<PP&E> 9,138 9,138
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 28,028 28,028
<CURRENT-LIABILITIES> 11,968 11,968
<BONDS> 1,027 1,027
0 0
0 0
<COMMON> 46 46
<OTHER-SE> 13,948 13,948
<TOTAL-LIABILITY-AND-EQUITY> 28,028 28,028
<SALES> 16,650 43,540
<TOTAL-REVENUES> 17,001 44,570
<CGS> 11,201 29,488
<TOTAL-COSTS> 17,197 45,218
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 66 129
<INCOME-PRETAX> (262) (777)
<INCOME-TAX> (105) (311)
<INCOME-CONTINUING> (157) (466)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (157) (466)
<EPS-PRIMARY> (.03) (.10)
<EPS-DILUTED> (.03) (.10)
</TABLE>
