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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 JULY 31, 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
September 14, 1998:
4,557,187
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
PAPER WAREHOUSE, INC.
Consolidated Balance Sheets
July 31, 1998, January 30, 1998 and August 1, 1997
<TABLE>
<CAPTION>
July 31 January August 1,
1998 30, 1997
(Unaudited) 1998 (Unaudited)
----------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 289,769 2,059,737 359,516
Inventories, net. . . . . . . . . . . . . . . . . 13,047,886 11,161,549 11,949,521
Accounts receivable, net. . . . . . . . . . . . . 341,921 451,937 183,908
Prepaid expenses and other current assets . . . . 938,376 153,968 414,202
----------- ---------- ----------
Total current assets. . . . . . . . . . . . . . . 14,617,952 13,827,191 12,907,147
Property and equipment, net. . . . . . . . . . . . . 7,911,560 6,798,228 5,681,746
Other assets, net. . . . . . . . . . . . . . . . . . 794,631 391,918 496,615
----------- ---------- ----------
$23,324,143 21,017,337 19,085,508
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit. . . . . . . . . . 1,080,000 -- --
Notes payable - related party . . . . . . . . . . -- -- 2,136,193
Current maturities of long-term debt. . . . . . . 189,747 305,585 22,015
Current maturities of capital lease obligations . 198,600 179,671 --
Accounts payable. . . . . . . . . . . . . . . . . 4,620,729 2,989,016 4,357,481
Accrued liabilities:
Payroll and related expenses . . . . . . . . . 453,510 369,486 312,816
Accrued expenses . . . . . . . . . . . . . . . 345,803 349,718 --
Accrued interest . . . . . . . . . . . . . . . 29,417 10,317 69,593
Other. . . . . . . . . . . . . . . . . . . . . 235,925 240,765 448,426
----------- ---------- ----------
Total current liabilities. . . . . . . . . . . 7,153,731 4,444,558 7,346,524
Capital lease obligations, less current maturities . 271,642 355,927 --
Notes payable. . . . . . . . . . . . . . . . . . . . -- -- 5,775,000
Long-term debt, less current maturities. . . . . . . 900,427 911,409 3,198,893
Deferred rent credits and other. . . . . . . . . . . 713,273 711,659 624,846
----------- ---------- ----------
Total liabilities . . . . . . . . . . . . . . . . 9,039,073 6,423,553 16,945,263
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, 4,557,187 and 2,202,818
shares, respectively . . . . . . . . . . . . . 45,572 45,572 22,028
Additional paid-in capital. . . . . . . . . . . . 13,683,807 13,683,807 572,472
Retained earnings . . . . . . . . . . . . . . . . 555,691 864,405 1,545,745
----------- ---------- ----------
Total stockholders' equity . . . . . . . . . . . . . 14,285,070 14,593,784 2,140,245
----------- ---------- ----------
Commitments and contingencies (note 5)
----------- ---------- ----------
$23,324,143 21,017,337 19,085,508
----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
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PAPER WAREHOUSE, INC.
Consolidated Statements of Operations
Three Months Ended July 31, 1998 and August 1, 1997 and the
Six Months Ended July 31, 1998 and August 1, 1997
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
--------------------------------------------------------------
July 31 August 1 July 31 August 1
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Company-owned stores........................................ $14,748,314 13,309,436 26,940,573 24,205,806
Franchise related fees...................................... 324,792 309,582 627,974 542,350
----------- ---------- ---------- ----------
Total revenue............................................... 15,073,106 13,619,018 27,568,547 24,748,156
Costs and expenses:
Costs of products sold and occupancy costs.................. 9,831,377 8,757,849 18,286,104 16,267,318
Store operating expenses.................................... 2,880,676 2,320,057 6,067,640 4,895,477
General and administrative expenses......................... 1,959,524 1,368,392 3,666,355 2,628,166
----------- ---------- ---------- ----------
Operating income............................................ 401,529 1,172,720 (451,552) 957,195
Interest expense................................................. (35,885) (238,026) (62,971) (479,021)
----------- ---------- ---------- ----------
Income (loss) before income taxes................................ 365,644 934,694 (514,523) 478,174
Income tax (expense) benefit..................................... (146,258) -- 205,809 (5,039)
----------- ---------- ---------- ----------
Net income (loss)................................................ $219,386 934,694 (308,714) 473,135
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Earnings (loss) per share: Basic 0.05 (0.07)
Weighted average shares outstanding 4,557,187 4,557,187
Diluted 0.05 (0.07)
Weighted average shares outstanding 4,557,187 4,557,187
Pro forma net earnings: 560,816 293,344
Pro forma basic earnings per share:
Weighted average shares outstanding 2,202,818 2,202,818
Net earnings per share 0.25 0.13
Pro forma diluted earnings per share:
Weighted average shares outstanding 2,202,818 2,202,818
Net earnings per share 0.25 0.13
</TABLE>
See accompanying notes to consolidated financial statements
3
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PAPER WAREHOUSE, INC.
Consolidated Statements of Cash Flows
Six months ended July 31, 1998 and August 1, 1997
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------
July 31, 1998 August 1, 1997
(Unaudited) (Unaudited)
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ (308,714) $ 473,135
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization...................................... 780,248 546,818
Gain on sale of property and equipment............................. (198) (1,892)
Changes in operating assets and liabilities, net of the
effect of the purchase of the assets of a business:
Accounts receivable, net...................................... 110,016 77,516
Prepaid expenses and other current assets..................... (784,408) (295,149)
Merchandise inventories, net.................................. (1,665,597) (2,380,841)
Accounts payable.............................................. 1,631,713 2,235,196
Accrued liabilities........................................... 95,983 340,100
---------- ---------
Net cash provided by (used in) operating activities.......................... (140,957) 994,883
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets of business.......................................... (626,447)
Proceeds from sale of property and equipment............................ 4,991 7,807
Purchases of property and equipment..................................... (1,817,163) (745,466)
Other assets, net of effect of asset acquisition........................ (78,216) (21,770)
---------- ---------
Net cash used in investing activities........................................ (2,516,835) (759,429)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit........................................ 1,080,000 --
Net payments on notes payable to bank................................... (115,838) (95,000)
Principal payments on long-term debt.................................... (10,982) (12,681)
Payments on capital lease............................................... (65,356) --
Distribution of earnings................................................ -- (125,424)
---------- ---------
Net cash provided by (used in) financing activities.......................... 887,824 (233,105)
---------- ---------
Net increase (decrease) in cash.............................................. (1,769,968) 2,349
Cash:
Beginning of period..................................................... 2,059,737 357,167
--------- -------
End of period........................................................... $ 289,769 359,516
---------- ---------
---------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................... 71,173 426,836
Income taxes....................................................... -- 5,039
</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 78 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 July 31, 1998 and for the three months and six
months ended July 31, 1998 and August 1, 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 28, 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 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 and the six month period ended 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. The
pro forma tax expense was $373,878 and $179,791 respectively. Federal
and state income taxes have been provided for by the Company for each
quarter in 1998.
5
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(3) ACQUISITIONS
During the three months ended July 31, 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 second quarter the Company acquired the assets
of two 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 Minneapolis/St. Paul metropolitan area. In
1987, the Company began granting franchises. Over the past ten years, the
Company has grown to an aggregate of 129 stores, including 78 Company-owned
stores and 51 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 will be 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
7
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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 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 40% 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
goods sold 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 JULY 31, 1998, COMPARED TO THREE MONTHS ENDED AUGUST 1, 1997
REVENUE. Company-owned store sales increased 10.8% to $14.7 million for
the three months ended July 31, 1998, from $13.3 million for the comparable
period of fiscal 1997. Of the $14.7 million in Company-owned store sales,
approximately $13.1 million is attributable to comparable store sales and
approximately $1.7 million is attributable to new and remodeled Company-owned
stores. Stores open in the second quarter of fiscal 1997 had a .01% same
store sales increase for second quarter of fiscal 1998. During first quarter
of 1998, the Company opened one new company-owned store, and purchased two
franchise stores increasing the total number of Company-owned stores to 78 as
of July 31, 1998. This compares to 68 Company-owned stores as of August 1,
1997.
Franchise revenue increased 4.9% to $325,000 for the three months ended
July 31, 1998, from $310,000 for the comparable period of fiscal 1997. Initial
franchise fees increased due to an increase in franchise store openings in the
three months ended July 31, 1998. The increase in initial franchise fees was
augmented by increased royalty payments resulting from higher sales in the
franchise stores. The Company opened one new franchise and purchased two of the
franchise stores, increasing the total number of franchise stores to 51, as of
July 31, 1998. This compares to 50 franchise stores as of August 1, 1997.
COST OF GOODS SOLD. Cost of goods sold for the three months ended July 31,
1998, was $9.8 million, or 66.7% of Company-owned stores revenue, as compared to
$8.8 million, or 65.8% 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 July
31, 1998 were $2.9 million, or 19.5% of Company-owned store revenue, as compared
to $2.3 million, or 17.4% of
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Company-owned store revenue, for the comparable period of fiscal 1997. Over 75%
of the variance is due to tight labor markets and continued increases in the
average hourly compensation. The balance of the variance is due 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 July 31, 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 lease expense on new
cash registers.
INTEREST EXPENSE. Interest expense decreased 85.0% to $36,000, or .2% of
total revenue for the three months ended July 31, 1998 from $238,000, 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 INCOME (LOSS). As a result of the factors discussed above, net income
decreased 60.9% to $219,000, or 1.5% of total revenue for the three months ended
July 31, 1998, from a pro forma net income of $561,000, or 4.1% of total revenue
for the comparable period of fiscal 1997. Pro forma net income for the three
months ended August 1, 1997 includes a provision for federal and state income
taxes.
SIX MONTHS ENDED JULY 31, 1998, COMPARED TO SIX MONTHS ENDED AUGUST 1, 1997
REVENUE. Company-owned store sales increased 11.3% to $26.9 million for
the six months ended July 31, 1998, from $24.2 million for the comparable
period of fiscal 1997. Of the $26.9 million in Company-owned store sales,
approximately $22.8 million is attributable to comparable store sales and
approximately $4.1 million is attributable to new and remodeled Company-owned
stores. Stores open in the six months ended July 31, 1997 had a 1.0% same
store sales increase for six months ended July 31, 1998. During the first
six months of fiscal 1998, the Company opened four new company-owned stores,
purchased three franchise stores, and closed one Company store, increasing
the total number of Company-owned stores to 78 as of July 31, 1998. This
compares to 68 Company-owned stores as of August 1, 1997.
Franchise revenue increased 15.8% to $628,000 for the six months ended July
31, 1998, from $542,000 for the comparable period of fiscal 1997. Initial
franchise fees increased due to an increase in franchise store openings in the
six months ended July 31, 1998. The increase in initial franchise fees was
augmented by increased royalty payments resulting from higher sales in the
franchise stores. During the six months ended July 31, 1998, the Company opened
four new franchises, purchased three of the franchise stores, and closed one
franchise store, decreasing the total number of franchise stores to 51, as of
July 31, 1998. This compares to 50 franchise stores as of August 1, 1997.
COST OF GOODS SOLD. Cost of goods sold for the six months ended July 31,
1998, was $18.3 million, or 67.9% of Company-owned stores revenue, as compared
to $16.3 million, or 67.2% of
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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 six months ended July
31, 1998 were $6.1 million, or 22.5% of Company-owned store revenue, as
compared to $4.9 million, or 20.2% of Company-owned store revenue, for the
comparable period of fiscal 1997. Over 60% of the variance is 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 six months ended July 31, 1998 were $3.7 million as compared to $2.6
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 86.9% to $63,000, or .2% of
total revenue for the six months ended July 31, 1998 from $479,000, 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 INCOME (LOSS): As a result of the factors discussed above, the net
loss was ($309,000) or (1.1%) of total revenue for the six months ended July
31, 1998, compared to a proforma net income of $293,000, or 1.2% of total
revenue for the six months ended August 1, 1997. Pro forma net income for the
six months ended August 1, 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 July 31, 1998 and January 30, 1998, the Company's working capital was
$7.5 million and $9.4 million, respectively. Cash provided by (used in)
operating activities for the first six months of fiscal 1998 and fiscal 1997 was
($141,000) and $995,000 respectively.
At July 31, 1998, and January 30, 1998, the Company's accounts payable were
$4.6 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.
10
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Net cash used in investing activities for the first six months of fiscal
1998 and the comparable period of fiscal 1997 was $2.5 million and $759,000,
respectively.
Net cash provided by (used in) financing activities during the first six
months of fiscal 1998 was $888,000. Net cash used in financing activities
during the first six months of fiscal 1997 was ($233,000). The Company had $1.1
million outstanding at July 31, 1998, and had no amounts 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.
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. The Company does not have a formal Year
2000 plan for its operations. To date, the cost associated with Year 2000
readiness has been immaterial. However, during 1997 and 1998, the Company
upgraded or replaced it's mission critical data processing systems 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. All registers
will have been upgraded or replaced by the year 2000. Management has also
reviewed its non-information technology systems, such as alarms, and upgraded
the non-information technology as necessary. Management believes that any
additional modifications will not have a material impact on its business,
operations, or financial condition. Accordingly, management has not developed a
formal contingency plan for the Year 2000 problem.
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. The Company has been
in contact with its major suppliers and service providers to understand their
state of Year 2000 readiness, and is assessing the possible effects an adverse
impact could have on the Company. The failure by a third party to adequately
address the Year 2000 issue could have a material adverse affect on a third
party, and therefore could have an adverse affect on the Company. Multiple
sources of product supply mitigate this concern.
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SUBSEQUENT EVENTS
The Company purchased two of its franchise stores in Fort Dodge, IA, and
Cedar Falls, IA on August 14, 1998, and August 21, 1998 respectively.
USE OF INITIAL PUBLIC OFFERING PROCEEDS
On November 25, 1997 the Company commenced an initial public offering of
1,778,000 shares of its common stock, par value $.01 per share in the United
States. The Company's registration statement on Form S-1 (Registration No.
333-36911) with respect to the Offering was declared effective by the Securities
and Exchange Commission on November 20, 1997. All 1,778,000 shares were offered
and sold by the Company. As part of the offering, the Company and a Selling
Shareholder granted to the underwriters an over-allotment option to purchase up
to an additional 266,700 shares of common stock. The offering terminated on
November 25, 1997. On December 22, 1997, the underwriters exercised the
over-allotment, purchasing 207,800 shares of common stock from the Company. The
offering price of the 1,985,800 shares of common stock (including the
over-allotment) was $7.50 per share. The proceeds to the Company, after
deduction of the underwriting discount and expenses associated with the
Offering, were $13.1 million.
During the period from November 28, 1997, through December 30, 1997, the
aggregate amount of expenses incurred by the Company in connection with the
issuance and distribution of the shares of common stock offered and sold in the
offering, including the underwriter's over-allotment, was approximately $1.8
million. This includes underwriting discounts and commissions (of approximately
$1.0 million) and expenses paid for accounting, legal, printing, and other
expenses.
The sole underwriter for the offering was Dain Rauscher Incorporated f/k/a
Dain Bosworth Incorporated ("Dain"). As sole underwriter for the offering, Dain
received all of the underwriting commissions and discounts paid by the Company.
During the period from November 28, 1997, through July 31, 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.
12
<PAGE>
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).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Listing of Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
11 Computation of 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
July 31, 1998.
13
<PAGE>
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: September 14, 1998 /s/ Yale T. Dolginow
-----------------------------
Yale T. Dolginow
President and Chief Executive Officer
Date: September 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
- ----------- ----------- --------
<C> <S> <C>
11 Computation of Earnings per Common Share
27 Financial Data Schedule
</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 Six Months Ended
------------------------ ------------------------
Actual Pro forma (1) Actual Pro forma(1)
7/31/98 8/1/97 7/31/98 8/1/97
------- ------ ------- ------
<S> <C> <C> <C> <C>
BASIC
Actual/Pro forma net
earnings (loss) $219,386 $560,816 $(308,714) $293,344
--------- --------- --------- ---------
--------- --------- --------- ---------
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 $0.05 $0.25 $(0.07) $0.13
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED
Actual/Pro forma net
earnings (loss) $219,386 $560,816 $(308,714) $293,344
--------- --------- --------- ---------
--------- --------- --------- ---------
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 $0.05 $0.25 $(0.07) $0.13
--------- --------- --------- ---------
--------- --------- --------- ---------
</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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-29-1999 JAN-29-1999
<PERIOD-START> MAY-02-1998 JAN-31-1998
<PERIOD-END> JUL-31-1998 JUL-31-1998
<CASH> 290 290
<SECURITIES> 0 0
<RECEIVABLES> 342 342
<ALLOWANCES> 0 0
<INVENTORY> 13,048 13,048
<CURRENT-ASSETS> 14,618 14,618
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 23,324 23,324
<CURRENT-LIABILITIES> 7,154 7,154
<BONDS> 1,090 1,090
0 0
0 0
<COMMON> 46 46
<OTHER-SE> 14,239 14,239
<TOTAL-LIABILITY-AND-EQUITY> 23,324 23,324
<SALES> 15,073 27,568
<TOTAL-REVENUES> 15,073 27,568
<CGS> 9,831 18,286
<TOTAL-COSTS> 14,672 28,020
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 36 63
<INCOME-PRETAX> 366 (515)
<INCOME-TAX> (146) 206
<INCOME-CONTINUING> 219 (309)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 219 (309)
<EPS-PRIMARY> .05 (.07)
<EPS-DILUTED> .05 (.07)
</TABLE>
