<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to__________
Commission File No. 0-23389
-------------------------
PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1612534
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 936-1000
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, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
On June 14, 1999, there were 4,627,936 shares of Common Stock, $.01 par value,
of Paper Warehouse, Inc. outstanding.
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<PAGE>
PAPER WAREHOUSE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1: Financial Statements
Consolidated Balance Sheets
As of April 30, 1999 and January 29, 1999 1
Consolidated Statements of Operations
For the Three Months ended April 30, 1999
and May 1, 1998 2
Consolidated Statements of Cash Flows
For the Three Months ended April 30, 1999
and May 1, 1998 3
Notes to Consolidated Financial Statements 4-5
Item 2: Management's Discussion and Analysis of
Results of Operations and Financial Condition 6-12
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 29,
1999 1999
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 791,133 $ 64,507
Merchandise inventories, net............................................. 18,997,829 16,302,070
Accounts receivable...................................................... 938,296 1,105,262
Prepaid expenses and other current assets................................ 1,336,537 613,584
---------------- -----------------
Total current assets............................................... 22,063,795 18,085,423
Property and equipment, net.............................................. 10,012,196 9,976,450
Other assets, net........................................................ 1,303,256 1,466,613
---------------- -----------------
Total assets..................................................... $33,379,247 $29,528,486
---------------- -----------------
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit........................................... $ 6,558,908 $ 6,850,000
Current maturities of long-term debt..................................... 142,069 151,993
Current maturities of capital lease obligation........................... 526,249 308,566
Accounts payable......................................................... 8,399,767 4,390,525
Accrued liabilities...................................................... 1,254,550 1,172,056
---------------- -----------------
Total current liabilities.......................................... 16,881,543 12,873,140
Capital lease obligation, less current maturities........................... 1,418,852 635,204
Long-term debt, less current maturities..................................... 1,076,420 861,827
Deferred rent credits....................................................... 1,129,787 1,068,331
---------------- -----------------
Total liabilities................................................ 20,506,602 15,438,502
Stockholders' equity:
Serial preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding............................................ --- ---
Common stock, $.01 par value; 40,000,000 shares authorized;
4,627,936 shares issued and outstanding............................... 46,279 46,279
Additional paid-in capital................................................ 13,833,442 13,833,442
Accumulated (deficit) earnings............................................ (1,007,076) 210,263
---------------- -----------------
Total stockholders' equity......................................... 12,872,645 14,089,984
---------------- -----------------
Total liabilities and stockholders' equity....................... $33,379,247 $29,528,486
---------------- -----------------
---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
April 30, May 1,
1999 1998
---------------- --------------
<S> <C> <C>
Revenues:
Company-owned stores......................................... $ 16,419,572 $12,192,259
Franchise related fees....................................... 272,857 303,185
---------------- --------------
Total revenues............................................. 16,692,429 12,495,444
Costs and expenses:
Costs of products sold and occupancy costs................... 11,406,845 8,454,727
Store operating expenses..................................... 4,673,890 3,186,973
General and administrative expenses.......................... 2,247,013 1,706,830
---------------- --------------
Total costs and expenses................................... 18,327,748 13,348,530
Operating loss............................................. (1,635,319) (853,086)
Interest expense, net........................................... 216,040 27,086
---------------- --------------
Loss before income taxes and
cumulative effect of accounting change...................... (1,851,359) (880,172)
Income tax benefit ............................................. 742,526 352,069
---------------- --------------
Net loss before cumulative effect of accounting change.......... (1,108,833) (528,103)
---------------- --------------
Cumulative effect of accounting change, net (Note 2)............ (108,506) ---
---------------- --------------
Net loss................................................... $(1,217,339) $(528,103)
---------------- --------------
---------------- --------------
Basic and diluted loss per share:
Weighted average shares outstanding........................ 4,627,936 4,557,187
Basic and diluted loss per share before cumulative
effect of accounting change........................ $ (.24) $ (.12)
Cumulative effect of accounting change..................... (.02) ---
---------------- --------------
Basic and diluted loss per share........................... $ (.26) $ (.12)
---------------- --------------
---------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
April 30, May 1,
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................. $(1,217,339) $(528,103)
Adjustments to reconcile net loss to net cash provided by
(used for) operations:
Depreciation and amortization................................... 535,235 367,753
Gain on sale of property and equipment.......................... (1,414) (107)
Deferred taxes.................................................. (812,883) (352,069)
Other noncash items affecting earnings.......................... 189,123 ---
Changes in operating assets and liabilities, net of the effect of the
purchase of assets of a business:
Accounts receivable............................................. 166,966 99,625
Prepaid expenses and other current assets....................... 89,930 (312,988)
Merchandise inventories, net.................................... (2,695,759) (857,941)
Accounts payable................................................ 4,009,242 1,284,356
Accrued liabilities............................................. 82,494 114,217
Deferred rent credits........................................... 61,456 (3,523)
--------------- ---------------
Net cash provided by (used for) operations.................... 407,051 (188,780)
--------------- ---------------
INVESTING ACTIVITIES:
Purchase of assets of a business..................................... --- (148,710)
Proceeds from sale of property and equipment......................... 16,010 3,967
Purchases of property and equipment.................................. (574,102) (816,487)
Other assets, net of effect of asset acquisition..................... --- (49,170)
--------------- ---------------
Net cash used for investing activities........................ (558,092) (1,010,400)
--------------- ---------------
FINANCING ACTIVITIES:
Net payments on notes payable to bank................................ (291,092) ---
Proceeds from refinancing of mortgage................................ 1,100,000 ---
Principal payments on long-term debt................................. (895,331) (65,666)
Payment of debt acquisition fees..................................... (37,241) ---
Net proceeds from (payments on) capital leases....................... 1,001,331 (24,490)
--------------- ---------------
Net cash provided by (used for) financing activities.......... 877,667 (90,156)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents.......... 726,626 (1,289,336)
Cash and cash equivalents, beginning of period....................... 64,507 2,059,737
--------------- ---------------
Cash and cash equivalents, end of period............................. $ 791,133 $770,401
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period............................. $ 210,949 $ 30,305
Income taxes paid during the period......................... --- ---
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Paper Warehouse, Inc. (the Company) is a growing chain of retail
stores specializing in party supplies and paper goods, operating under
the names "Paper Warehouse" and "Party Universe." At April 30, 1999,
the Company had a total of 142 stores, consisting of 97 company-owned
stores and 45 franchise stores, operating in 24 states. The Company
sells Paper Warehouse franchises through its wholly-owned subsidiary,
Paper Warehouse Franchising, Inc.
The unaudited consolidated financial statements included herein have
been prepared by the Company pursuant to the Rules and Regulations of
the Securities and Exchange Commission ("SEC"), and represent the
consolidated financial statements of Paper Warehouse, Inc. and Paper
Warehouse Franchising, Inc. as of April 30, 1999 and May 1, 1998 and
for the three month periods then ended. The information furnished in
these financial statements includes normal recurring adjustments and
reflects all adjustments, which are, in the opinion of management,
necessary for a fair presentation of such financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's 1998 Annual
Report to Shareholders and its Form 10-K filed with the SEC.
Due to the seasonality of the Company's business, revenues and
operating results for the three months ended April 30, 1999 are not
necessarily indicative of the results to be expected for the full
year.
(2) ACCOUNTING CHANGE
The Company adopted Statement of Position (SOP) No. 98-5, "Reporting
on the Costs of Start-Up Activities" during first quarter 1999. This
SOP requires that costs of start-up activities and organization costs
be expensed as incurred. Prior to the adoption of SOP No. 98-5, the
Company's policy was to capitalize lease acquisition fees and amortize
them over the related lease term using the straight-line method. The
net impact of the change of approximately $109,000 or $.02 per share,
is shown as a cumulative effect of accounting change in the
Consolidated Statement of Operations for the three months ended April
30, 1999.
(3) FINANCING ARRANGEMENTS
On April 8, 1999, the Company refinanced its corporate office
building. The $1.1 million term note is payable in monthly
installments of $8,612, including interest at 7.125%, through May
2009. The note is secured by a first mortgage on the Company's office
headquarters.
On June 7, 1999, the Company obtained a $15 million three-year
revolving line of credit facility for general working capital
purposes, that replaced its previous $7.5 million facility.
Borrowings outstanding under the new line of credit bear interest, at
a variable rate and are secured by substantially all of the assets of
the Company. The agreement with respect to the credit facility
contains covenants, which require the Company to satisfy certain
financial tests, and restrictions on the Company's ability to pay
dividends.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) FINANCING ARRANGEMENTS (CONTINUED)
Subsequent to first quarter 1999, the Company filed a Registration
Statement with the SEC for the public sale of a new issue of an
aggregate principal amount of $4 million of Convertible Subordinated
Debentures due 2005. Proceeds from the issuance will be used to
develop and implement an Internet website for the sale of party
supplies and paper goods, to repay indebtedness and for other general
corporate purposes.
(4) COMMON STOCK AND STOCK OPTION TRANSACTIONS
During first quarter the Company granted options to selected
management of the Company to purchase 14,100 shares of the Company's
Common Stock at a range of $1.88 to $2.75 per share. The options vest
over three years and expire 10 years from the date of grant.
(5) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OVERVIEW
We are a growing chain of retail stores specializing in party supplies and paper
goods operating under the names PAPER WAREHOUSE and PARTY UNIVERSE. Two members
of our current management team purchased the business in 1986 and incorporated
it in Minnesota in 1987. At the time of the acquisition, we consisted of three
stores located in the Minneapolis/St. Paul metropolitan area. In 1987, we began
granting franchises. Over the past 12 years, we have grown to a total of 142
stores, including 97 Company-owned stores and 45 franchise stores throughout 24
states. In growing the number of Company-owned stores, our management has
employed a strategy of clustering stores in our principal markets to provide our
customers with convenient store locations, expand our total market share and
achieve favorable economies of scale.
RESULTS OF OPERATIONS
NET LOSS
The Company reported a net loss of approximately $1.2 million, or $.26 per
share, for the first quarter ended April 30, 1999, compared to a net loss of
approximately $528,000, or $.12 per share for the first quarter ended May 1,
1998. The net loss for first quarter 1999 included the net impact of a
cumulative effect of accounting change of approximately $109,000 ($.02 per
share) from the adoption in the first quarter of a newly issued accounting
pronouncement. The principal reasons for the loss in first quarter of fiscal
1999 were the seasonality of revenues and the large number of stores opened in
the past nine months which have expenses without a fully established revenue
base.
REVENUES
Total revenues consist of Company-owned stores sales and franchise revenues.
Company-owned stores enter the comparable store sales base at the beginning of
their 13th month of operations. During the first quarter of 1999, the Company
changed its comparable store sales definition to be more in line with industry
standards. Prior to the change, a store would not have been included in the
comparable store sales base until 12 months had passed, if its retail square
footage had increased more than 50%, or if it had been relocated.
Franchise revenues consist of royalties received on sales, generally 4% of the
store's sales and initial franchise fees. We recognize initial franchise fees
at the time a franchisee signs a lease for the store, at which time we have
substantially performed all of our services.
COMPANY-OWNED STORES SALES
During the first quarter ended April 30, 1999, the Company opened one new
Company-owned store, and closed one Company-owned store, keeping the total
Company-owned stores at 97 as of April 30, 1999, compared to 75 at the end of
the first fiscal quarter of 1998. First fiscal quarter 1999 comparable store
sales increased 4.6% over the prior year comparable period. This growth rate
favorably compares with a comparable store sales increase of 3.6% for the first
fiscal quarter of 1998.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
REVENUES (CONTINUED)
FRANCHISE RELATED FEES
Franchise related fees for the first quarter ended April 30, 1999 of
approximately $273,000 decreased 10.0% from franchise related fees of
approximately $303,000 for the first quarter ended May 1, 1998. The
year-over-year decrease reflects the Company's purchases throughout fiscal
1998 of 10 franchise stores, reducing the Company's royalties received on
product sales from these former franchise stores. During the first fiscal
quarter of 1999, the Company closed one franchise store, bringing the total
to 45 franchise stores at the end of first fiscal quarter 1999 compared with
52 franchise stores at the end of first fiscal quarter 1998.
COSTS OF PRODUCTS SOLD AND OCCUPANCY COSTS
Cost of products sold and occupancy costs includes the direct cost of
merchandise, plus handling and distribution, and certain occupancy costs.
Cost of products sold and occupancy costs totaled $11.4 million or 69.5% of
Company-owned stores sales for the first quarter ended April 30, 1999, as
compared to $8.5 million or 69.3% of Company-owned stores sales for the first
quarter ended May 1, 1998. The increase primarily reflects higher occupancy
costs, resulting from the increased store base, partially offset by higher
product margins.
STORE OPERATING EXPENSES
Store operating expenses include all costs incurred at the store level, such
as advertising, credit card processing fees and store payroll. Store
operating expenses for the first quarter ended April 30, 1999 were $4.7
million or 28.5% of Company-owned stores sales, as compared to $3.2 million
or 26.1% of Company-owned stores sales for the comparable period in the prior
year. The unfavorable variance reflects the Company's new store growth, and
corresponding store labor expense increases, in addition to continued
increases in hourly compensation due to tight labor markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include corporate administrative expense for
Company-owned stores and expenses relating to franchising, primarily payroll,
legal, travel and advertising. For the first quarter ended April 30, 1999,
general and administrative expenses were $2.2 million or 13.5% of total revenues
compared to $1.7 million or 13.7% of total revenues for the comparable period in
the prior year. The dollar increase is primarily the result of higher payroll
and benefit costs resulting from the addition of several corporate positions,
necessary to support the Company's continued growth.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
INTEREST EXPENSE, NET
Interest expense, net of interest income, of approximately $216,000 or 1.3% of
total revenues for the first quarter ended April 30, 1999, increased $189,000,
over net interest expense for the first quarter ended May 1, 1998. The increase
reflects the Company's borrowings under its revolving credit facility during the
first three months of 1999 necessary to fund working capital requirements. The
Company did not borrow under its revolving credit facility during the first
three months of 1998. The Company expects interest expense to increase
throughout the remainder of the year, primarily related to the anticipated
issuance of $4 million of Convertible Subordinated Debentures, which will bear
interest at 9%.
INCOME TAX BENEFIT
The Company's estimated annual effective income tax rate is 40% for 1999,
unchanged from the first quarter 1998 estimated annual rate.
ANALYSIS OF FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for ongoing operations, principally
inventory and capital improvements to support the continued growth of new
Company-owned stores as well as the remodeling or relocation of existing
Company-owned stores. Our primary sources of liquidity have been:
- cash from operations
- payment terms from vendors
- borrowings under our revolving line of credit
- proceeds from financings such as our initial public offering
Our liquidity as measured by our working capital, was $5.2 million at April 30,
1999 and at January 29, 1999. The Company's current ratio was 1.3 to 1.0 at
April 30, 1999 compared to 1.4 to 1.0 at January 29, 1999.
Merchandise inventories have increased approximately $2.7 million from the end
of fiscal 1998, reflecting necessary purchases in order to support the new store
base and for upcoming seasonal events. This inventory growth was more than
fully funded by a $4.0 million increase in accounts payable.
Net cash provided by operations totaled approximately $407,000 for the first
quarter ended April 30, 1999 compared to net cash used for operations of
approximately $189,000 for the same period in 1998. The increase in cash flows
from operations primarily reflects the increase in merchandise inventories and
accounts payable related to new store growth, in addition to enhanced accounts
payable leveraging.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used for investing activities was approximately $558,000 for the first
quarter ended April 30, 1999 and $1.0 million for the first quarter ended May 1,
1998. These expenditures were primarily related to opening and remodeling
existing Company-owned stores and upgrading our information systems.
During the first three months of fiscal 1999, we made capital expenditures of
approximately $574,000, compared with approximately $816,000 of capital
expenditures for the prior year comparable period. Capital expenditures in the
first quarter of fiscal 1999 included approximately $121,000 of costs related to
new stores. We have invested and will continue to evaluate our needs for
additional investment in information technology and infrastructure capabilities
in order to gain operational efficiencies. We anticipate that we will spend an
aggregate of approximately $2.7 million on capital expenditures during fiscal
1999. If the number of Company-owned stores we plan to open in fiscal 1999
increases or decreases, this estimate may change accordingly. The number of
Company-owned stores may vary from plan primarily based upon the availability of
suitable locations on acceptable terms. These capital expenditures will be for
new store openings, fixturing, remodeling or relocating existing stores, and
information systems. We intend to continue to finance all of our new store
fixtures and equipment with long-term capital leases, assuming availability and
reasonable terms.
We anticipate opening up to ten Company-owned stores during fiscal 1999. In
addition, we may seek to acquire existing stores from franchisees. At present,
we have no agreement to acquire any franchise store. We expect that the average
new store cost for Company-owned stores will be approximately $186,000. These
expenditures include approximately $131,000 for fixtures and equipment,
including point-of-sale equipment, and $55,000 for store inventory, net of
accounts payable. Pre-opening expenses are expensed as incurred. We seek to
lease sites for our Company-owned stores rather than own real estate. Typically
we lease approximately 8,500 square feet for our Company-owned stores.
Out of our planned Company-owned stores to be opened in fiscal 1999, as of
April 30, 1999, we have signed leases for five new locations. Most of these
leases are for ten-year terms, with five-year renewal options.
Net cash provided by financing activities was approximately $878,000 for the
first fiscal quarter of 1999 compared to net cash used for financing activities
of $90,000 for the first fiscal quarter of 1998. The year-over-year increase
reflects the net proceeds received during the first fiscal quarter of 1999 from
the refinancing of our mortgage and the financing of our capital leases.
We expect to fund our operations, capital expenditures and the growth in our
business, from cash generated from operations, available borrowing capacity
under our replacement revolving credit facility and proceeds from our
anticipated issuance of $4 million of Convertible Subordinated Debentures.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
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 our currently installed computer systems, software, or other
business systems, or those systems of our suppliers, will not accept input of,
store, or manipulate output dates for the years 2000 and beyond without error or
manipulation.
STATE OF READINESS: We are actively engaged in the process of evaluating the
status of our internal Information Technology ("IT") and non-IT systems for
compliance with Year 2000 issues. We have hired an outside consultant to assist
us with this process and to document our efforts and results regarding Year 2000
compliance in a Year 2000 depository to be maintained at our headquarters. We
continue to solicit verification from our largest suppliers, as well as other
business partners, that they are Year 2000 compliant. The majority of our
exposure is in the readiness of third parties, where the situation is much less
within our ability to predict or control. The first phase, evaluating our
internal systems, is substantially complete. The second phase, evaluating third
party systems, was commenced in the second quarter of fiscal 1998, and we expect
to be substantially complete by mid-fiscal 1999. In addition, while we value
our established relationships with our key suppliers, we are in the process of
identifying secondary vendors in the event that certain of our business partners
are delayed in achieving Year 2000 compliance. We monitor our progress in
achieving Year 2000 compliance on a regular basis and regularly report our
progress to our management and board of directors.
NON-IT SYSTEMS. We believe 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 our business, operations, or financial condition as a whole. We
continue to review our non-IT systems, and will continue to take steps to
modify, upgrade or replace non-IT systems as necessary to be Year 2000
compliant. We do not anticipate that expenses for these replacements or
conversions will be material. We believe that any additional modifications or
replacements will not have a material impact on our business, operations, or
financial condition.
MAJOR IT SYSTEMS. During 1998 and 1997, we upgraded or replaced our mission
critical data processing system, which controls our financial records, inventory
management and purchasing. We believe that these systems will function properly
with respect to dates in the Year 2000 and beyond. We have received
certification from many of our hardware and software suppliers of the upgraded
or replaced systems that the systems should function correctly in Year 2000 and
beyond. We are in the process of testing the certification received from our
hardware and software suppliers, which should be completed by third quarter
1999. We are in the process of upgrading our cash registers and personal
computers as necessary, in order to achieve Year 2000 compliance. All registers
that are not Year 2000 compliant will be upgraded by December 31, 1999. We
believe that any additional modifications or replacements will not have a
material impact on our business, operations or financial condition.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
THIRD PARTY SYSTEMS. We have been in contact with our major suppliers and
service providers to understand their state of Year 2000 readiness. We have
asked our major suppliers and service providers to complete a survey on their
state of Year 2000 readiness, and we are assessing how this could hurt us. A
supplier's failure to be Year 2000 compliant may interrupt the flow of products
to our stores for sale. Depending on how long product supply to our stores is
interrupted, our business could suffer. Multiple sources of product supply
available to us, however, lessen this concern. We may also experience some
inconvenience if one or more of our utility providers are not Year 2000
compliant. Even if utility providers are not able to provide electricity,
water, heat, etc., to our stores following January 1, 2000, we will still
attempt to open all stores. If a utility failure would continue for more than
several days, the result could decrease our revenues, earnings and cash flow.
COSTS TO ADDRESS YEAR 2000 ISSUES. To date, our costs associated with Year 2000
readiness have been immaterial. We expect that any additional costs of being
Year 2000 compliant will also be immaterial.
RISKS TO THE COMPANY FOR YEAR 2000 ISSUES. Some risks associated with the Year
2000 problem are beyond our ability to control, including the extent to which
our suppliers and service providers can address their Year 2000 problems. We
cannot estimate, therefore, the impact on us if third parties are not Year 2000
compliant. The failure by a supplier to adequately address the Year 2000 issue
could hurt the supplier and disrupt our business. Our most likely worst case
Year 2000 scenario is if one or more of our stores does not have power, heat or
water. The stores affected could still open for business, however, using a cash
box to make sales and flashlights to provide light.
CONTINGENCY PLANS. We expect to develop a formal contingency plan related to
the Year 2000 problem upon further identification and assessment of all of our
risks.
The costs of our Year 2000 compliance programs and the timetable on which we
plan to complete these programs are based on our best estimates, and reflect
assumptions 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,
these estimates may not be achieved, and our actual results could be
significantly different from those anticipated.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
FINANCING
On April 8, 1999, we refinanced our corporate office building. The $1.1 million
term note is payable in monthly installments of $8,612, including interest at
7.125% per year, through May 2009. This note is secured by a first mortgage on
our corporate headquarters.
On June 7, 1999, we obtained a $15 million three-year revolving line of credit
facility with BankBoston Retail Finance for general working capital purposes,
that replaced our previous $7.5 million credit facility. Borrowings outstanding
under the new line of credit bear interest, at a variable rate and are secured
by substantially all of our assets. The agreement with respect to the credit
facility contains covenants, which require us to satisfy certain financial
tests, and restrictions on our ability to pay dividends.
Subsequent to first quarter 1999, we filed a Registration Statement with the SEC
for the public sale of a new issue of an aggregate principal amount of $4
million of Convertible Subordinated Debentures due 2005. Proceeds from the
issuance will be used to develop and implement an Internet website for the sale
of party supplies and paper goods, to repay indebtedness and for other general
corporate purposes.
INFLATION
We believe that inflation has not had a material impact upon our historical
operating results, and do not expect it to have such an impact in the future.
There can be no assurance the our business will not be affected by inflation in
the future.
FORWARD-LOOKING INFORMATION
This report contains certain statements of a forward-looking nature relating to
future events or our future performance. These forward-looking statements are
based on our current expectations, assumptions, estimates and projections about
our industry and us. When used in this report, the words "expects," "believes,"
"anticipates," "estimates," "intends," and similar expressions are intended to
identify forward-looking statements.
These forward-looking statements are only predictions and are subject to risks
and uncertainties that could cause actual events or results to differ materially
from those projected. The cautionary statements made in this report should be
read as being applicable to all related forward-looking statements wherever they
appear in this report. We assume no obligation to update these forward-looking
statements publicly for any reason. Actual results could differ materially form
those anticipated in these forward-looking statements, even if new information
becomes available or other events occur in the future.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
Exhibit 27 - Financial Data Schedule
b. REPORTS ON FORM 8-K:
Registrant did not file any reports on Form 8-K during the
quarter ended April 30, 1999.
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: June 14, 1999
By: /s/ Yale T. Dolginow
----------------------------------------
Name: Yale T. Dolginow
Title: President and Chief Executive Officer
By: /s/ Cheryl W. Newell
----------------------------------------
Name: Cheryl W. Newell
Title: Chief Financial Officer
(Principal Financial Officer)
By: /s/ Diana G. Purcel
----------------------------------------
Name: Diana G. Purcel
Title: Controller
(Principal Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- ---------
<S> <C> <C>
27 Financial Data Schedule File herewith, electronically
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-2000
<PERIOD-START> JAN-30-1999
<PERIOD-END> APR-30-1999
<CASH> $ 791
<SECURITIES> 0
<RECEIVABLES> 938
<ALLOWANCES> 0
<INVENTORY> 18,998
<CURRENT-ASSETS> 22,064
<PP&E> 15,630
<DEPRECIATION> 5,618
<TOTAL-ASSETS> 33,379
<CURRENT-LIABILITIES> 16,882
<BONDS> 2,495
0
0
<COMMON> 46
<OTHER-SE> 12,826
<TOTAL-LIABILITY-AND-EQUITY> 33,379
<SALES> 16,692
<TOTAL-REVENUES> 16,692
<CGS> 16,080
<TOTAL-COSTS> 16,080
<OTHER-EXPENSES> 2,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216
<INCOME-PRETAX> (1,851)
<INCOME-TAX> 743
<INCOME-CONTINUING> (1,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (109)
<NET-INCOME> $(1,217)
<EPS-BASIC> $(.26)
<EPS-DILUTED> $(.26)
</TABLE>
