<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
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MINNESOTA 5943 41-1612534
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
--------
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(612) 936-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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YALE T. DOLGINOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(612) 936-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
BRUCE A. MACHMEIER, ESQ. DANIEL A. YARANO, ESQ.
Oppenheimer Wolff & Donnelly LLP Fredrikson & Byron, P.A.
Plaza VII, Suite 3400 Suite 1100
45 South Seventh Street 900 Second Avenue South
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 607-7000 (612) 347-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class Proposed maximum Proposed maximum
of securities Amount to be offering price per aggregate offering Amount of
to be registered registered security price registration fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9% Convertible Subordinated Debentures due June _, 2005... $6,000,000 $1,000 $6,000,000 $1,668
Common Stock, $.01 par value.............................. (1) (1) (1) (1)
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</TABLE>
(1) We are also registering an indeterminate number of shares of our common
stock as may be required for issuance upon conversion of the Debentures. We
will not receive any additional consideration upon conversion of the
Debentures. Under Rule 457, no additional registration fee for these shares
is required.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities. This prospectus is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 24, 1999
(PAPER WAREHOUSE, INC. LOGO )
[Cover of prospectus has a collection of balloons superimposed on it]
$6,000,000
9% CONVERTIBLE SUBORDINATED DEBENTURES DUE JUNE __, 2005
ISSUE PRICE: $1,000 PER DEBENTURE
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We are a growing chain of retail stores specializing in party supplies
and paper goods operating under the names PAPER WAREHOUSE and PARTY UNIVERSE. We
currently have a total of 143 stores, including 97 Company-owned stores and 46
franchise stores, operating in 24 states. Our common stock trades on the Nasdaq
National Market under the trading symbol "PWHS." On May 20, 1999, the last
reported sale price of our common stock was $3.06 per share.
The Debentures will mature and their principal will be payable on
June __, 2005. They will bear interest at a rate of 9% per year, and we will
make the first interest payment on September 15, 1999. After that, we will
pay interest on the Debentures each year on the 15th of December, March, June
and September. The Debentures are convertible into shares of our common stock
initially at the price of $___ per share. They are unsecured obligations and
your right to payment is subordinated in right of payment to all of our
senior indebtedness. We have the right to redeem the Debentures after June
__, 2002. You may require us to repurchase the Debentures if we experience a
change of control.
We plan to use the proceeds from this offering to develop an internet
website to sell party supplies and paper goods, to reduce our outstanding
indebtedness and for other general corporate purposes. The Debentures will not
be listed on any securities exchange or quoted on Nasdaq or any over-the-counter
market. Miller & Schroeder may make a market in the Debentures, but it is not
obligated to do so. We will issue a fully registered Debenture in each
purchaser's name.
<TABLE>
<CAPTION>
Per Debenture Total
<S> <C> <C>
Public offering price: $1,000 $6,000,000
Underwriting discounts and commissions: $ 70 $ 420,000
Proceeds to Paper Warehouse: $ 930 $5,580,000
</TABLE>
THIS INVESTMENT INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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MILLER & SCHROEDER FINANCIAL, INC.
THIS PROSPECTUS IS DATED JUNE ___, 1999
<PAGE>
The inside front cover of this prospectus contains 6 photos depicting products
sold in our stores. Three of the photos depict individuals celebrating the
following special occasions: children's birthday, theme parties and graduations.
The other three photos depict products we sell in our stores to celebrate
Valentine's Day, Halloween and Christmas. Below these pictures, running across
the bottom of the page, is a banner carrying the names of various celebratory
events and sayings, such as Father's Day, Fourth of July, Trick or Treat,
Thanksgiving, Merry Christmas, etc.
PAPER WAREHOUSE-Registered Trademark-, Party Universe-Registered Trademark- and
Party Smart-TM- are our trademarks.
<PAGE>
PROSPECTUS SUMMARY
IN THIS PROSPECTUS, "PAPER WAREHOUSE," "COMPANY," "WE," "OUR," AND
"US" REFER TO PAPER WAREHOUSE, INC. AND OUR SUBSIDIARY, BUT NOT TO MILLER &
SCHROEDER. "YOU" REFERS TO THE READER OF THIS PROSPECTUS. THIS SUMMARY
HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BECAUSE
THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY
BE IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THIS OFFERING, WE
ENCOURAGE YOU TO READ THIS ENTIRE PROSPECTUS AND THE DOCUMENTS WE REFER YOU
TO. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES TO FISCAL
YEARS IN THIS PROSPECTUS REFER TO THE FISCAL YEAR ENDING ON THE FRIDAY
NEAREST JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. FOR EXAMPLE, FISCAL 1998
ENDED ON JANUARY 29, 1999.
PAPER WAREHOUSE
Paper Warehouse is a growing chain of retail stores specializing in
party supplies and paper goods. As of January 29, 1999, we had 143 stores,
including 97 Company-owned stores and 46 franchise stores. These stores are
conveniently located in major retail trade areas to provide customers with easy
access to our stores. We operate these stores under the names PAPER WAREHOUSE
and PARTY UNIVERSE. Our seven principal markets are:
- - Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- - Oklahoma City/Tulsa, OK - Seattle, WA - Tucson, AZ
- - Omaha, NE and Des Moines, IA
Our stores offer an extensive selection of party supplies and paper
goods, at everyday low prices. We offer party supplies and paper goods for a
wide variety of celebratory occasions, everyday uses and seasonal events,
including:
CELEBRATORY OCCASIONS AND EVERYDAY USES SEASONAL EVENTS
- - birthdays - Valentine's Day - Halloween
- - weddings - Easter - Christmas
- - baby showers - Fourth of July - Hanukkah
- - graduations - Thanksgiving - New Year's
- - other family and religious celebrations
Through our 8,500 square foot prototype, we offer a comprehensive
selection of over 19,000 different products. This selection provides customers
the convenience of one-stop shopping for all party supplies and paper goods. Our
merchandise is organized by party themes. The prominent signage and wide aisles
in our stores allow customers easy access to coordinate the merchandise required
for all party occasions. We believe that our extensive and readily available
merchandise selection often stimulates customers to purchase additional
products.
We believe that total United States retail sales of party supplies and
paper goods, including greeting cards, gift wrap, catering supplies and related
items, was approximately $9.4 billion in 1998. Larger sized stores, such as our
8,500 square foot prototype, have become the fastest growing retail format
within the party supplies and paper goods industry by offering
3
<PAGE>
consumers a broader selection of merchandise at lower prices compared to
traditional party goods retailers.
STRATEGY
Our goal is to be one of the leading suppliers of party supplies and
paper goods in our principal markets and to establish a dominant position in
new markets. During fiscal 1998 we added 27 Company-owned stores and we
opened 9 new franchise stores. We plan to open up to ten new Company-owned
stores in fiscal 1999. We also expect to establish between 10 and 15
franchise stores in fiscal 1999.
To achieve our goal, we are pursuing the following strategies:
- differentiate Paper Warehouse from its competitors through
store layout and design, merchandising, customer service and
party planning services
- cluster multiple Company-owned stores in new and existing
metropolitan markets
- selectively open Company-owned stores in secondary markets
that can support one or two stores and that are close to
metropolitan markets where we have existing stores
- establish franchise stores in other markets
- continuously refresh, remodel and expand existing
Company-owned stores
- expand our sales and name recognition by developing and
implementing an internet website to sell our party supplies
and paper goods
BACKGROUND
The first Paper Warehouse store opened in Minneapolis, Minnesota in
1983. Two members of our current management team purchased the Paper Warehouse
business in 1986. We incorporated Paper Warehouse in Minnesota in 1987. Our
principal executive offices are located at 7630 Excelsior Boulevard,
Minneapolis, Minnesota, 55426. Our telephone number is (612) 936-1000.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Issuer......................... Paper Warehouse
Debentures Offered............. $6,000,000 principal amount of 9%
Convertible Subordinated Debentures due
June __, 2005
Principal Due.................. We will not pay principal over the term of
the Debenture. We will pay the entire
principal balance of the outstanding
Debentures on June __, 2005
Price per Debenture............ $1,000
Interest....................... Annual fixed rate - 9%
Payment frequency:
- First payment: September 15, 1999
- Remaining payments on the 15th day of
each December, March, June and September
Ranking........................ The Debentures are unsecured, and are
subordinate in right of payment to all of
our senior indebtedness, as more fully
described in "Description of Debentures"
under the heading "Subordination."
Conversion Rights.............. You may convert the Debentures into our
common stock at any time at a conversion
price of $ ____. This means that for each
$1,000 Debenture you convert you will
receive ____ shares of our common stock. The
conversion price may be adjusted for certain
reasons described in "Description of
Debentures" under the heading "Conversion."
Optional Redemption by Us...... After June __, 2002, we may redeem the
Debentures at $1,000 per Debenture plus
accrued interest, plus a premium if we redeem
them before June __, 2004. See "Description
of Debentures" under the heading "Optional
Redemption by Us."
Mandatory Repurchase........... If we experience a change of control, you
can require us to purchase all, or part, of
your Debentures at $1,020 per Debenture plus
accrued interest. See "Description of
Debentures" under the heading "Repurchase at
Option of Holder."
Use of Proceeds................ We will use a portion of the proceeds from
this offering to develop and implement an
internet website for the sale of party
supplies and paper goods as described in
"Business" under the heading "Internet and
E-commerce." We will use the remaining
proceeds to repay outstanding debt and for
other general corporate purposes.
Trustee........................ Norwest Bank Minnesota, N.A.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For Years Ended January 29, January 30, January 31, February 2, January 27,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $ 63,491 $ 52,949 $ 43,002 $ 33,478 $ 24,084
Operating (loss) income ......................... (590) 983 2,080 1,781 1,494
Net (loss) income ............................... (521) (191) 1,303 1,286 1,281
Net loss per share .............................. (.11) N/A N/A N/A N/A
Pro forma net (loss) income(1)................... N/A (207) 808 797 794
Pro forma diluted
net (loss) income per share(1)................ N/A (.08) .32 .32 .32
BALANCE SHEET DATA (AT YEAR-END):
Working capital ................................. 5,212 9,383 1,701 925 2,301
Total assets .................................... 29,528 21,017 16,270 14,934 8,211
Total long-term debt,
net of current maturities ................. 862 911 3,212 3,234 2,300
Total debt,
excluding capital lease obligations ....... 7,864 1,217 11,240 8,021 3,619
Total stockholders' equity ...................... $ 14,090 $ 14,594 $ 1,793 $ 3,124 $ 2,646
OTHER DATA:
Ratio of earnings to fixed charges(2)............ --- --- 1.58 1.81 2.43
EBITDA (3) ...................................... $ 1,167 $ 1,905 $ 3,077 $ 2,512 $ 1,941
Ratio of EBITDA to
Interest Expense ............................ 4.2 2.3 3.8 4.8 8.7
OPERATING DATA (AT YEAR-END):
Number of stores open :
Company-owned stores ......................... 97 73 64 55 42
Franchise stores ............................. 46 51 50 53 29
Comparable store sales increase(4)............... 2.4% 8.3% 7.8% 13.6% 16.6%
</TABLE>
- -------------------
(1) From February 1993 to November 1997, we were an S-Corporation and
not generally subject to corporate income taxes. The Statement of
Operations Data during this period reflects a pro forma provision
for income taxes as if we were subject to corporate income taxes for
that period. This pro forma provision for income taxes is computed
using a combined federal and state tax rate of 38%.
(2) In computing the ratio of earnings to fixed charges, earnings have
been based on income from continuing operations before income taxes
and fixed charges. Fixed charges consist of interest expense and the
estimated interest portion of rents (at one-third of rent expense).
Earnings were not adequate to cover fixed charges by approximately
$844,000 in fiscal 1998 and by $75,000 in fiscal 1997. Assuming this
issuance had occured at the beginning of the last fiscal year, earnings
would not have been adequate to cover fixed charges by approximately
$1.3 million.
(3) EBITDA consists of earnings before interest, income taxes,
depreciation and amortization. EBITDA is presented as additional
information because it is a commonly used financial measure. We also
believe it to be a useful indicator of our ability to meet our debt
service requirements. We do not, however, intend it as an alternative
measure of operating results or cash flow from operations.
(4) For purposes of computing the increase in comparable store sales, this
computation assumes fiscal 1995 was a 52-week year.
6
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS BEFORE BUYING THE
DEBENTURES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO ADVERSELY IMPAIR OUR BUSINESS OPERATIONS
OR FINANCIAL CONDITION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY BE NEGATIVELY
EFFECTED. THIS COULD CAUSE US TO DEFAULT ON THE DEBENTURES. IT COULD ALSO
CAUSE THE PRICE OF OUR DEBENTURES AND COMMON STOCK TO DECLINE. YOU COULD LOSE
ALL OR A PART OF YOUR INVESTMENT.
WE HAVE RECENTLY EXPERIENCED LOSSES AND MAY NOT BE PROFITABLE
We incurred a net loss of $521,000 for fiscal 1998 and a pro forma
net loss of $207,000 for fiscal 1997. We attribute these losses principally
to:
- increases in competition among party supplies and paper goods
retailers in our geographic markets
- increases in store labor expenses due to the rise in the average
hourly wage rates and the additional staff needed to support our
growth
- increases in general and administrative expenses necessary to
support implementation of our growth strategy
- increases in amortization expenses of goodwill from our purchases
of franchise stores
- expenses associated with a canceled acquisition and repayment of
debt in 1997
Based upon our current business plans, start-up costs associated with our
internet strategy, and amortization of financing costs associated with these
Debentures, it is likely that we will not be profitable for fiscal 1999.
We cannot assure you that we will generate sufficient revenues, or control
operating expenses, to achieve or sustain profitability in later years.
WE MAY NOT BE ABLE TO PROFITABLY GROW OUR BUSINESS
In order to profitably grow our business we need to increase sales
in our existing markets and open stores in new markets. Opening additional
Company-owned stores in existing markets, however, could reduce sales from
our stores located in or near those markets. Also, stores opened in new
markets may not be profitable.
WE MAY NOT BE ABLE TO EFFECTIVELY EXECUTE OUR GROWTH STRATEGY
Our growth strategy requires effective planning and management.
Once a new geographic market is identified, we must obtain suitable store
sites on acceptable terms. Also, the competitive and merchandising challenges
we face in new geographic markets may be different from the challenges we
face in our existing geographic markets. We may have to adapt to regional
tastes and customs and compete against established and familiar local
businesses with innovative or unique techniques for marketing party supplies
and paper goods. Entering new markets may also place significant demands on
our management, financial controls, operations and information systems. This
may cause us to incur higher costs relating to marketing and operations.
Expansion will require an increase in our personnel, particularly store
managers and sales associates, to operate our new stores.
7
<PAGE>
OUR CLUSTERING STRATEGY MAY NOT BE PROFITABLE
Our growth strategy focuses on clustering stores in metropolitan
markets and selectively placing stores in secondary markets that are close to
the metropolitan markets in which we already have stores. Our growth strategy
requires us to be able to identify new geographic markets where the
demographics support our strategy to cluster Company-owned stores. Although
we believe that this is the right strategy for Paper Warehouse, this strategy
may not be profitable.
OUR PLANS TO REMODEL AND RELOCATE STORES MAY REDUCE PROFITABILITY
In fiscal 1999 we plan to remodel approximately 20 stores and
relocate 4 existing stores. This plan is subject to several risks, including:
- the loss of sales during the remodeling or relocation period
- cost overruns of the remodeling or relocation
- failure to achieve increased sales after the remodeling or
relocation
We remodel our stores periodically to maintain a fresh look for the customer,
standardize store layout and fixtures, and improve merchandise presentation.
Remodeling may be as simple as repainting or creating new signage to as
extensive as conducting a total makeover. We relocate a store when it is too
small and there is no room to expand at the existing location or when a store
is not performing in its present location and a better location is available.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUPPORT OUR GROWTH STRATEGY
We may need to raise additional capital in the future to fund our
operations and support our growth strategy. If we decide to raise additional
funds through debt financing, this financing may be senior in right of
payment to the Debentures. If you convert your Debenture into our common
stock and we then raise additional funds by issuing equity securities, your
percentage ownership of our outstanding common stock will be reduced. These
new equity securities may also have rights, preferences or privileges senior
to those of our common stock. Financial difficulties of our competitors may
affect our ability to obtain financing even though our business is
performing. Any additional financing may not be available, or may not be
available on favorable terms. If adequate funds are not available or are not
available on acceptable terms, we may be unable to make payments on the
Debentures, develop or enhance our products and services, implement our
growth strategy, take advantage of future opportunities or respond to
competitive pressures.
OUR ANNUAL RESULTS ARE DEPENDENT ON SECOND AND FOURTH QUARTERS
We generate a significant portion of our operating income in our
second and fourth fiscal quarters because of the seasonality of our revenues
and promotional expenses. Any factor that negatively affects our revenues or
increases our operating expenses during the second and fourth fiscal quarters
could negatively affect our annual results of operations. As a result of the
seasonality of our revenues, we expect to incur a loss in the first quarter
of each year for the foreseeable future. Due to increased promotional
activities during our third quarter, we have historically experienced reduced
operating income for this quarter.
8
<PAGE>
COMPETITION MAY REDUCE OUR REVENUES AND OPERATING INCOME
Increased competition by existing or future competitors may reduce
our sales and cause us to incur a loss. As a result of competition from other
specialty party supplies and paper goods retailers, we have experienced
reduced sales growth in our existing stores and incurred additional marketing
and promotional expenses. Our stores compete with a variety of smaller and
larger retailers, including:
- specialty party supplies and paper goods retailers, including other
superstores
- card shops and designated departments in mass merchandisers
- discount retailers
- toy stores
- drug stores
- supermarkets
- department stores
Many of our competitors have substantially greater financial and
personnel resources than we do. We may also encounter additional competition
from new entrants in the future in our existing markets.
OUR BUSINESS DEPENDS ON CONTINUED GOOD RELATIONS WITH OUR SUPPLIERS
Our failure to maintain good relationships with our principal
suppliers or the loss of our principal suppliers would hurt our business. In
fiscal 1998, our largest supplier accounted for approximately 14% of our
purchases and our eight largest suppliers represented approximately 51% of
our purchases. Many of our principal suppliers currently provide us with
incentives like volume purchasing allowances and trade discounts.
If our suppliers were to reduce or discontinue these incentives, prices from
our suppliers would increase and our profitability would be reduced. We do
not have long-term contracts with any of our suppliers, and any supplier
could discontinue selling to us at any time.
WE NEED TO ATTRACT AND RETAIN QUALITY EMPLOYEES
Our success depends on attracting and retaining a large and growing
number of quality employees. Many of our employees are in entry level or
part-time positions with historically high rates of turnover. Our ability to
meet our labor needs while controlling costs is subject to external factors
such as unemployment levels, minimum wage legislation and changing
demographics.
WE MAY MOVE TO THE NASDAQ SMALLCAP MARKET
In April 1999, the Nasdaq Stock Market notified us that we were not
then in compliance with one of its maintenance standards requiring that we
maintain at least $5.0 million of "public float"--the total market value of
our common stock held by stockholders who are not insiders. The Nasdaq Stock
Market also informed us that we have 90 calendar days to regain compliance
with this standard. Based on the number of our shares owned by non-insiders,
the closing bid price of our common stock must average at least $2.06 for at
least 10 consecutive trading days within the 90-day period. If this does not
happen before July 14, 1999, we may move our common stock to the Nasdaq
SmallCap Market as early as July 16, 1999. Any move of our common stock from
the Nasdaq National Market could cause the market price of our common stock
to decline and could make it more difficult to buy and sell our common stock.
9
<PAGE>
WE MAY EXPERIENCE "YEAR 2000" PROBLEMS
A significant amount of our Year 2000 exposure is in the readiness
of third parties with which we do business, where Year 2000 issues are much
less within our ability to predict or control. A supplier's failure to be
Year 2000 compliant may interrupt the flow of products to our stores. We may
also experience a loss in revenues, earnings and cash flow if one or more of
our utility providers are not Year 2000 compliant and our stores are not able
to open because they do not have power, heat or water. It is possible that
our currently installed computer systems, software or other business systems,
or those of our suppliers, will not accept input of data, store data, or
manipulate data for the years 2000 and beyond without error or manipulation.
We are currently developing a formal contingency plan for the Year 2000
problem for our operations.
OUR FAILURE TO EXECUTE OUR FRANCHISE PROGRAM MAY REDUCE OUR PROFITABILITY
Our continued growth and success depends in part upon our ability to
attract, contract with and retain qualified franchisees. It also depends upon
the ability of those franchisees to operate their stores successfully and
promote and develop the Paper Warehouse store concept. During fiscal 1999 we
plan to establish approximately 10 to 15 new franchise stores. Although we
have established criteria to evaluate prospective franchisees, and our
franchise agreements include certain operating standards, each franchisee
operates its store independently. Various laws limit our ability to influence
the day-to-day operations of our franchise stores. We cannot assure you that
franchisees will be able to operate Paper Warehouse stores successfully and
in a manner consistent with our concepts and standards. As a result, our
franchisees may operate their stores in a manner that reduces the gross
revenues of these stores, and therefore reduces our franchise revenues.
Paper Warehouse, as a franchisor, is subject to both regulation by
the Federal Trade Commission and state laws regulating the offer and sale of
franchises. These regulations limit our ability to terminate or refuse to
renew franchises. Our franchisees are also subject to labor laws, including
minimum wage requirements, overtime, working and safety conditions and
citizenship requirements. Our failure to obtain or maintain approvals to sell
franchises, or a franchisee's violation of any labor law, could cause us to
lose or reduce our franchise revenues.
A CHANGE IN CONSUMER PREFERENCES COULD NEGATIVELY AFFECT OUR BUSINESS
If consumer demand for single-use, disposable party goods were to
diminish, the party supplies and paper goods industry and our revenues would
be negatively affected. For example, if cost increases in raw materials such
as paper or plastic were to cause our prices to increase significantly,
consumers might decide to forgo the convenience associated with single-use,
disposable products and use standard dinnerware and flatware. Similarly,
changes in consumer
10
<PAGE>
preferences away from disposable products and in favor of reusable products
for environmental or other reasons could reduce the demand for our products.
REGIONAL RISKS MAY AFFECT OUR BUSINESS
Because our operations are located principally in seven metropolitan
areas, we are subject to certain regional risks, such as the economy, weather
conditions, natural disasters and governmental regulations. If any region in
which we operate stores were to suffer an economic downturn or other adverse
regional risks were to occur, our sales and profitability could decline and our
ability to implement our growth strategy would be hindered.
OUR INTERNET STRATEGY MAY NOT BE PROFITABLE
We intend to use a portion of the proceeds from this offering to
develop an internet website for the sale of party supplies and paper goods.
Our website may not generate any profits and we may not recapture the money
invested in our internet strategy.
OUR FORMER STATUS AS AN S-CORPORATION COULD EXPOSE US TO LIABILITY
From February 1993 to November 1997, we were treated as an
S-Corporation under the Internal Revenue Code of 1986. In connection with the
completion of our initial public offering, we converted to a C-Corporation.
If the IRS or any state taxing authority were to challenge our prior
S-Corporation status, we could be liable to pay corporate taxes on our
income, at the effective corporate tax rate, for all or a part of the period
we were an S-Corporation, plus interest and possibly penalties.
WE NEED TO ANTICIPATE AND RESPOND TO MERCHANDISING TRENDS
Our success depends in part on our ability to anticipate and respond
in a timely manner to changing merchandise trends and consumer demands. We
make merchandising decisions well in advance of the seasons during which we
will sell the merchandise. As a result, if we fail to identify and respond
quickly to emerging trends, consumer acceptance of the merchandise in our
stores could diminish and we may experience a reduction in revenues. We sell
certain licensed products that are in great demand for short time periods,
making it difficult to project our inventory needs for these products.
Significantly greater or less-than-projected product demand, particularly for
our licensed products, could lead to one or more of the following:
- lost sales due to insufficient inventory
- higher carrying costs associated with slower turning inventory
- reduced or eliminated margins due to mark downs on excess
inventory
OUR INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL POSITION
After this offering, we expect to have $__________ of borrowings
outstanding. We may be able to incur additional indebtedness in the future.
Our level of indebtedness could:
- prevent us from making interest and principal payments on the
Debentures
11
<PAGE>
- prevent us from satisfying other debt obligations
- affect our ability to fund our operations
- impair our ability to obtain additional financing
- make us more vulnerable to industry downturns and competitive
pressures
- cause a substantial portion of our cash flow from operations to be
spent on principal and interest payments
- prevent us from meeting certain financial tests contained in our
debt obligations, which could lead to a default on those
obligations
THE SUBORDINATION PROVISIONS MAY NEGATIVELY AFFECT THE DEBENTURE HOLDERS
The Debentures will be unsecured and subordinated in right of
payment to all our present and future senior indebtedness, as described in
"Description of the Debentures--Subordination." As a result, if we file for
bankruptcy or liquidate our business our assets will be available for payment
of the Debentures only after all our senior debt has been paid in
full. After payment of all senior debt there may not be sufficient
assets remaining to pay the principal and accrued interest on the Debentures.
The Indenture, as described in "Description of the Debentures," does not
prohibit us from incurring additional senior debt. If we were to
incur additional senior debt, our ability to pay the Debentures could
be substantially impaired.
WE MAY BE UNABLE TO REPURCHASE THE DEBENTURES
At your option, we will be obligated to repurchase the Debentures if
we experience certain types of changes of control. See "Description of the
Debentures--Repurchase at Option of Holder." We may not have sufficient funds
to pay the repurchase price if you require us to repurchase your Debentures.
If we are required to repurchase the Debentures because of a change of
control, the subordination provisions in the Indenture may prevent us from
making any payment to you, including any payment of the repurchase price,
unless we first obtain the consent of the holders of our senior debt or repay
our senior debt in full. We will not set aside any funds to repurchase the
Debentures. We will not pay principal over the term of the Debenture. We
will pay the entire principal balance of outstanding Debentures on June
__, 2005.
THERE IS NO ACTIVE TRADING MARKET FOR THE DEBENTURES
We have no present intention to have the Debentures authorized for
quotation on the Nasdaq system or listed on any securities exchange. Although
Miller & Schroeder has told us that it presently plans to make a market in
the Debentures, it may stop making a market in the Debentures at any time for
any reason. As a result, an active trading market for the Debentures may not
develop or, if one does develop, it may not be maintained. If an active
market for the Debentures does not develop, or cannot be sustained, your
ability to sell your Debenture may be limited or you may not be able to get
the best price for your Debenture.
OUR FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
This prospectus 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 us and our industry. When used
in this prospectus, the words "expects," "believes," "anticipates,"
"estimates," "intends," and
12
<PAGE>
similar expressions are intended to identify forward-looking statements.
These statements include, but are not limited to, statements of our plans,
strategies and prospects under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in
this prospectus.
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 prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this prospectus. We assume
no obligation to update these forward-looking statements publicly for any
reason, or to update the reasons. Actual results could differ materially from
those anticipated in these forward-looking statements, even if new
information becomes available or other events occur in the future.
USE OF PROCEEDS
The net proceeds to us from the sale of the Debentures are estimated
to be approximately $5.2 million, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. We intend to use
approximately $1.5 million of the net proceeds to develop our internet
website to sell party supplies and paper goods online. See
"Business--Internet and E-commerce." We intend to use the remaining proceeds
to repay outstanding indebtedness under our replacement revolving credit
facility. This debt will bear interest at LIBOR plus 2.5%, which rate was
7.41% on May 14, 1999. This debt matures in 2002. We used the borrowings
under our credit facility for working capital purposes.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our shares of common stock have traded on the Nasdaq National Market
under the symbol "PWHS" since November 25, 1997. The Debentures will not be
listed on any securities exchange or quoted by Nasdaq. The following table
summarizes the high and low sale prices per share of our common stock for the
periods indicated, as reported on the Nasdaq National Market. These prices do
not include commission, mark-ups or mark-downs.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
<S> <C> <C>
Fourth Quarter (since November 25, 1997)...... $8 5/8 $5 5/8
<CAPTION>
FISCAL YEAR 1998
----------------
<S> <C> <C>
First Quarter................................. $7 1/4 $4 5/8
Second Quarter................................ 5 1/4 3 7/8
Third Quarter................................. 4 1/4 1 5/8
Fourth Quarter................................ 4 3/16 1 29/32
<CAPTION>
FISCAL YEAR 1999
----------------
<S> <C> <C>
First Quarter................................. $2 5/16 $1 5/8
</TABLE>
13
<PAGE>
For a recent closing price of our common stock, see the cover page
of this prospectus. As of March 31, 1999 there were approximately 63 holders
of record of our common stock.
Other than S-Corporation distributions paid to our stockholders with
respect to periods when we were taxed as an S-Corporation, we have never
declared or paid any cash or stock dividends with respect to our common stock
since we have been a C-Corporation. We do not contemplate payment of
dividends in the foreseeable future. We anticipate that any earnings in the
near future will be retained to develop and expand our business. Some of our
credit agreements require the consent of the lender before we can pay
dividends. The Indenture governing the Debentures, as described in
"Description of the Debentures," includes restrictions on paying dividends or
making distributions on our capital stock. See "Description of
Debentures--Restrictive Covenants."
14
<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and
capitalization:
- as it existed on January 29, 1999
- as adjusted to give effect to the issuance of the Debentures
and the application of the estimated net proceeds from this
offering
- as adjusted to give effect to the conversion of the Debentures
into our common stock assuming a conversion price of $3.00
per share
- not adjusted for expenses associated with our internet
strategy which may increase short-term debt approximately $1.5
million
This table should be read together with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
January 29, 1999
-----------------------------------------------------------
Adjusted Adjusted
(In thousands) Actual for Offering for Conversion
------ ------------ --------------
<S> <C> <C> <C>
Short-term debt
(including capital lease obligations).................. $7,311 $2,161 $2,161
--------- --------- ---------
--------- --------- ---------
Long-term debt
(including capital lease obligations).................. $1,497 $7,497 $1,497
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 ....................................... 46 46 66
Additional paid-in capital........................... 13,834 13,834 19,814
Retained earnings.................................... 210 210 210
Total stockholders' equity.................. 14,090 14,090 20,090
--------- --------- ---------
Total capitalization........................ $15,587 $21,587 $21,587
--------- --------- ---------
--------- --------- ---------
Total shares issued and outstanding(1)...................... 4,627,936 4,627,936 6,627,936
</TABLE>
- -----------------------
(1) As of January 29, 1999, excludes stock options to purchase 412,200
shares of our common stock granted to employees and directors at a
weighted average exercise price of $4.96 per share. Also excludes a
warrant for 50,000 shares of our common stock to be issued to Miller
& Schroeder in connection with this offering. See "Management -- 1997
Stock Option Plan" and Note 9 of the Consolidated Financial
Statements -- Stock Options.
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<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data are
derived from our Consolidated Financial Statements. The selected consolidated
financial and operating data should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and Notes thereto appearing elsewhere in
this prospectus. The consolidated statement of operations data, and the
consolidated balance sheet data, as of and for the five years ended January 29,
1999 are derived from our consolidated financial statements, which have been
audited by KPMG Peat Marwick LLP, independent auditors.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 2, JANUARY 27,
($ in thousands, except per share data) 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Company-owned stores .............................. $ 62,219 $ 51,788 $ 41,892 $ 32,414 $ 23,641
Franchise related fees ............................ 1,272 1,161 1,110 1,064 443
----------- ----------- ----------- ----------- -----------
Total revenues .................................. 63,491 52,949 43,002 33,478 24,084
Costs and expenses:
Costs of products sold and occupancy costs ........ 41,253 34,966 27,946 21,880 15,474
Store operating expenses .......................... 15,185 11,484 8,733 6,367 4,635
General and administrative expenses ............... 7,643 5,516 4,243 3,450 2,481
----------- ----------- ----------- ----------- -----------
Total costs and expenses ........................ 64,081 51,966 40,922 31,697 22,590
----------- ----------- ----------- ----------- -----------
Operating (loss) income ......................... (590) 983 2,080 1,781 1,494
Interest expense, net ............................. 254 797 772 490 208
Expenses of canceled acquisition .................. - 261 - - -
----------- ----------- ----------- ----------- -----------
(Loss) income before income taxes and
extraordinary charge ........................... (844) (75) 1,308 1,291 1,286
Income tax benefit (expense) ...................... 323 (6) (5) (5) (5)
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary charge ......... (521) (81) 1,303 1,286 1,281
Extraordinary charge, net ......................... - (110) - - -
----------- ----------- ----------- ----------- -----------
Net (loss) income ............................... $ (521) $ (191) $ 1,303 $ 1,286 $ 1,281
----------- ----------- ----------- ----------- -----------
Net loss per share .............................. $ (0.11) N/A N/A N/A N/A
----------- ----------- ----------- ----------- -----------
Pro forma provision for income taxes (1) ............ N/A (16) (495) (489) (487)
Pro forma net (loss) income (1) ..................... N/A (207) 808 797 794
----------- ----------- ----------- -----------
Pro forma diluted net (loss) income per share (1) ... N/A $ (0.08) $ 0.32 $ 0.32 $ 0.32
----------- ----------- ----------- -----------
SELECTED OPERATING DATA (AT YEAR END):
Number of stores open:
Company-owned stores .............................. 97 73 64 55 42
Franchise stores .................................. 46 51 50 53 29
Comparable store sales increase (2) ................. 2.4% 8.3% 7.8% 13.6% 16.6%
BALANCE SHEET DATA (AT YEAR END):
Working capital ..................................... $ 5,212 $ 9,383 $ 1,701 $ 925 $ 2,301
Total assets ........................................ 29,528 21,017 16,270 14,934 8,211
Total long-term debt, net of current maturities ..... 862 911 3,212 3,234 2,300
16
<PAGE>
<S> <C> <C> <C> <C> <C>
Total debt, excluding capital lease obligations ..... 7,864 1,217 11,240 8,021 3,619
Total stockholders' equity .......................... 14,090 14,594 1,793 3,124 2,646
OTHER DATA:
Ratio of earnings to fixed charges (3) .............. --- --- 1.58 1.81 2.43
EBITDA (4) .......................................... 1,167 1,905 3,077 2,512 1,941
Ratio of EBITDA to interest expense ................. 4.2 2.3 3.8 4.8 8.7
</TABLE>
(1) From February 1993 to November 1997, we were an S-Corporation and not
generally subject to corporate income taxes. The Statement of Operations
Data during this period reflects a pro forma provision for income taxes as
if we were subject to corporate income taxes for such period. This pro
forma provision for income taxes is computed using a combined federal and
state tax rate of 38%.
(2) For purposes of computing the increase in comparable store sales, this
computation assumes fiscal 1995 was a 52-week year.
(3) In computing the ratio of earnings to fixed charges, earnings have been
based on income from continuing operations before income taxes and fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rents (at one-third of rent expense). Earnings were not
adequate to cover fixed charges by approximately $844,000 in fiscal 1998
and by $75,000 in fiscal 1997. Assuming this issuance had occured at the
beginning of the last fiscal year, earnings would not have been adequate to
cover fixed charges by approximately $1.3 million.
(4) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is presented as additional information because it is a
commonly used financial measure. We also believe it to be a useful
indicator of our ability to meet our debt service requirements. We do not,
however, intend it as an alternative measure of operating results or cash
flow from operations.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 143 stores, including 97 Company-owned stores and 46 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.
We completed our initial public offering in late 1997, selling
1,985,800 shares of our common stock and raising net proceeds of $13.1 million.
The proceeds from that offering were used to retire our revolving line of
credit, prepay subordinated debt and retire other existing indebtedness. The
balance of the proceeds was used to finance new store openings and fund further
expansion.
Before November 1997, we elected to be treated for federal and state
income tax purposes as an S-Corporation under the Internal Revenue Code of 1986
and comparable state tax laws. For the purpose of discussion and analysis, we
have 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 we had been a C-Corporation and thus 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%.
Total revenues consists of Company-owned store sales and franchise
revenues. Franchise revenues are generated from royalties we receive on sales,
generally 4% of the store's sales, and initial franchise fees, which we
recognize at the time the franchisee signs a lease for a 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%, and 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, primarily payroll, legal, travel and advertising.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
costs and expenses as a percentage of total revenues and Company-owned store
sales:
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<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Costs of products sold and occupancy costs:
as % of total revenues........................ 65.0% 66.0% 65.0%
as % of Company-owned stores sales............ 66.3% 67.5% 66.7%
Store operating expenses:
as % of total revenues........................ 23.9% 21.7% 20.3%
as % of Company-owned stores sales............ 24.4% 22.2% 20.8%
General and administrative expenses:
as % of total revenues........................ 12.0% 10.4% 9.9%
as % of Company-owned stores sales............ 12.3% 10.7% 10.1%
- -------------------------------------------------------------------------------------------------------------------------
Number of Company-owned stores 97 73 64
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED JANUARY 29, 1999 (FISCAL 1998) COMPARED TO FISCAL YEAR ENDED
JANUARY 30, 1998 (FISCAL 1997)
REVENUES. Company-owned store revenues increased 20.1% to $62.2 million
for fiscal 1998 from $51.8 million for fiscal 1997, primarily due to an increase
in the number of Company-owned stores from 73 stores at the end of fiscal 1997
to 97 stores at the end of fiscal 1998. Approximately $1.1 million of the
increase in revenues was attributable to comparable store sales increases and
approximately $9.3 million was attributable to new and remodeled Company-owned
stores. Comparable store sales increased 2.4% for the fiscal year ended 1998
over the prior period. In fiscal 1998, we opened 17 Company-owned stores,
purchased 10 franchise stores and closed 3 stores. Stores whose leases expired
were either closed or relocated to larger spaces.
The number of franchise stores decreased from 51 stores at the end of
fiscal 1997 to 46 stores at the end of fiscal 1998. We opened nine new franchise
stores, purchased ten franchise stores, closed two franchise stores and
terminated two franchise stores. Franchise revenues increased 9.5% from $1.2
million for fiscal 1997 to $1.3 million for fiscal 1998. Initial franchise fees
increased 84.5% or $60,000 due to an increase in the number of franchise store
openings in fiscal 1998. The increase in initial franchise fees was augmented by
increased royalty payments resulting from increased sales in the franchise
stores. Royalty payments averaged 4% of sales in the franchise stores.
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs for fiscal 1998 were $41.3 million or 66.3% of Company-owned
store revenues, as compared to $35.0 million or 67.5% of Company-owned store
revenues for fiscal 1997. Cost of products sold and occupancy costs reflects the
direct cost of merchandise and store occupancy costs, including rent, common
area maintenance costs, and real estate taxes. The decrease as a percentage of
Company-owned store revenues was primarily related to one-time events that
decreased the cost of product.
19
<PAGE>
STORE OPERATING EXPENSES. Store operating expenses for fiscal 1998
were $15.2 million or 24.4% of Company-owned store revenues, as compared to
$11.5 million or 22.2% of Company-owned store revenues in fiscal 1997. The
increased percentage was primarily attributable to increases in store labor,
and secondarily attributable to increased store operating expenses. The
largest increase was in payroll and related benefits. The average hourly wage
rates continued to increase due to tight labor markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $7.6 million or 12.0% of total revenues in fiscal 1998 compared
to $5.5 million or 10.4% of total revenues in fiscal 1997. The increase in
general and administrative expenses was primarily attributable to increases in
necessary infrastructure and additional staff to support the growing
Company-owned store base. Amortization expense of goodwill increased due to
our purchases of franchise stores.
INTEREST EXPENSE. Interest expense, net of interest income, decreased
from $798,000 (1.5% of total revenues in fiscal 1997) to $254,000 (.4% of total
revenues in fiscal 1998). We used the net proceeds of our initial public
offering to repay certain bank debt, subordinated debt, and stockholder notes,
and to fund new store growth. We did not borrow under our bank revolving line of
credit until late in the second quarter of fiscal 1998.
NET LOSS. As a result of the factors discussed above, we had a net loss
of $521,000 in fiscal 1998. This compares to a pro forma net loss of $207,000 in
fiscal 1997. The principal reasons for the loss in fiscal 1998 were increased
competition, increased store labor expenses and increased marketing and
promotional expenses.
FISCAL YEAR ENDED JANUARY 30, 1998 (FISCAL 1997) COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997 (FISCAL 1996)
REVENUES. Company-owned store revenues increased 23.6% from $41.9
million for fiscal 1996 to $51.8 million for fiscal 1997. This increase was
partially attributable to an increase in the number of Company-owned stores from
64 stores at the end of fiscal 1996 to 73 stores at the end of fiscal 1997.
Approximately $3.0 million of the increase in revenues was attributable to
comparable store sales increases and approximately $6.9 million was attributable
to new and remodeled Company-owned stores. Comparable store sales increased 8.3%
for the fiscal year ended January 31, 1997 over the prior period.
The number of franchise stores increased from 50 franchise stores at
the end of fiscal 1996 to 51 at the end of fiscal 1997. Franchise revenues
increased 4.6% from $1.1 million for fiscal 1996 to $1.2 million for fiscal
1997. Initial franchise fees decreased 57.0% or $94,000 due to a reduction in
the number of franchise store openings in fiscal 1997. The decrease in initial
franchise fees was offset by increased royalty payments resulting from increased
sales in the franchise stores. Royalty payments averaged 4% of sales in the
franchise stores.
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs for fiscal 1997 were $35.0 million or 67.5% of Company-owned
store revenues, as compared to $27.9 million or 66.7% of Company-owned store
revenues for fiscal 1996. Cost of products sold and occupancy costs reflects the
direct cost of merchandise and store occupancy costs, including rent, common
area maintenance costs, and real estate taxes. The increase as a percentage of
20
<PAGE>
Company-owned store revenues was primarily related to increases in occupancy
costs, particularly increases in real estate taxes and common area maintenance
charges.
STORE OPERATING EXPENSES. Store operating expenses for fiscal 1997
were $11.5 million or 22.2% of Company-owned store revenues, as compared to
$8.7 million or 20.8% of Company-owned store revenues in fiscal 1996. The
increase as a percentage of Company-owned store revenues was primarily
attributable to increases in store labor, advertising and credit card fees.
The largest increase was in payroll and related benefits, resulting from an
increase in the federal minimum wage in third quarter and a tight labor
market, especially in the third and fourth quarter, which caused hourly labor
rates to increase. Advertising increased during the important Halloween and
Christmas selling seasons. A new poster flyer concept was introduced for
Halloween. Credit card fees also increased as a result of a change in our
strategy in late fiscal 1996 to begin accepting credit cards. The roll out of
credit card acceptance was completed in mid-1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $5.5 million or 10.4% of total revenues in fiscal 1997, as
compared to $4.2 million or 9.9% in fiscal 1996. The increase in general and
administrative expenses was primarily attributable to necessary infrastructure
and additional staff to support the growing Company-owned store base.
Additionally, in fiscal 1997, we added members to our senior management team.
INTEREST EXPENSE. Interest expense, net of interest income,
increased $26,000 from $772,000 or 1.8% of total revenues in fiscal 1996 to
$798,000, or l.5% of total revenues in fiscal 1997. We used the net proceeds
of our initial public offering to repay certain bank debt, subordinated notes,
and stockholder notes, changing our status from a "net borrower" to a "net
investor" by fiscal year end.
EXTRAORDINARY CHARGE AND EXPENSES OF CANCELED ACQUISITION. As a
result of the early retirement of the subordinated notes in connection with
our initial public offering, we incurred a one-time charge to earnings in the
fourth quarter of $183,000 for the unamortized portion of our expenses related
to issuance of the subordinated notes. Additionally, we took a fourth quarter
charge of $261,000 related to the expenses associated with our proposed
acquisition of The Paper Factory of Wisconsin, Inc. which we terminated on
January 26, 1998.
PRO FORMA NET (LOSS) INCOME. As a result of the factors discussed
above, we realized a pro forma net loss of $207,000 in fiscal 1997 as
compared to pro forma net income of $808,000 for fiscal 1996. Pro forma net
(loss) income includes a benefit (provision) for federal and state income
taxes. The principal reasons for the loss in fiscal 1997 were the expenses
associated with the terminated acquisition and the noncash charge associated
with the early payment of the subordinated notes.
SEASONALITY
Our results of operations have historically fluctuated from quarter
to quarter because of variations in revenues and operating expenses. We
generate a significant portion of our operating income in our second and
fourth fiscal quarters because of seasonal events. Any factor that negatively
affects our revenues or increases our operating expenses during the second
and fourth fiscal quarters could negatively affect our annual results of
operations.
21
<PAGE>
As a result of the seasonality of our revenues, we expect to incur a loss in
the first quarter of each year for the foreseeable future. Due to increased
promotional activities during our third quarter, we have historically
experienced reduced operating income for this quarter.
Our results of operations also fluctuate from quarter to quarter as a
result of our expansion strategy for the following reasons:
- the timing of new store openings
- costs associated with the opening of new stores
- expenses incurred to support our expansion strategy
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for ongoing operations,
principally inventory and capital improvements to support the opening of new
Company-owned stores and 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
At the end of fiscal 1998 our working capital was $5.2 million. At the
end of fiscal 1997 it was $9.4 million. Cash (used for) provided by operations
for each of the last three fiscal years was approximately ($2.2 million) in
fiscal 1998, $746,000 in fiscal 1997, and $85,000 in fiscal 1996. The decrease
in cash flows from operations in fiscal 1998 compared to fiscal 1997 was
primarily attributable to an increase in merchandise inventories to support new
and existing Company-owned stores.
At the end of fiscal 1998 our accounts payable were $4.4 million. At
the end of fiscal 1997 they were $3.0 million. The increase in accounts payable
was primarily attributable to increased merchandise inventory.
Net cash used for investing activities was approximately $6.7 million
for fiscal 1998, $2.5 million for fiscal 1997 and $1.2 million for fiscal 1996.
These expenditures were primarily related to opening and remodeling existing
Company-owned stores and upgrading our information systems.
During fiscal 1998, we had capital expenditures of approximately
$4.3 million, including approximately $3.2 million related to new stores.
Total capital expenditures in fiscal 1999 are estimated to be $2.7 million.
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 planned 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.
Net cash provided by financing activities was $6.9 million for fiscal
1998, $3.5 million for fiscal 1997 and $585,000 for fiscal 1996. Cash provided
by financing activities in fiscal 1998 reflects our borrowing under our
revolving line of credit with our bank. Cash provided by financing activities
in fiscal 1997 was primarily from our initial public offering.
22
<PAGE>
In January 1997, we entered into a $7.5 million revolving credit
facility. The credit facility bears interest at the bank's base rate plus 0.5%
which equaled 8.25% on January 29, 1999. This facility expires on May 31, 1999.
The credit facility is secured by substantially all of our assets. The credit
facility contains various covenants including, among others, the maintenance of
certain debt to net worth and current ratios, and minimum net income and net
worth. At January 29, 1999, we were in compliance with all the covenants under
this credit facility and there was $6.8 million outstanding. The credit facility
also prohibits us from paying dividends except for distributions in connection
with the termination of our S-Corporation status.
We have signed a commitment letter with BankBoston Retail Finance
for a $15 million three-year revolving line of credit to replace our existing
revolving credit facility. We are in the process of finalizing the loan
documents for this facility. We expect to complete the replacement of the
$7.5 million revolving line of credit with this $15 million revolving credit
facility by the time the current revolving line of credit expires. Our
failure to extend our current revolving credit facility and to secure
replacement financing could cause significant problems for us.
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.
On April 8, 1999, we refinanced our corporate office building. The new
$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.
We believe that the combination of cash flow from operations and
available borrowing capacity under a revolving credit facility will be adequate
to handle our cash requirements, including the cash needed to open new stores.
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 that our business will not be affected by
inflation in the future.
IMPACT OF YEAR 2000
OVERVIEW. The Year 2000 problem arose because many existing computer
programs use only the last two digits to refer to a year. These computer
programs, therefore, 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 impact of the Year 2000
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<PAGE>
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, 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. In addition, we are in
the process of verifying that third parties with whom we have a material
relationship, such as our largest suppliers, are Year 2000 compliant. A
significant amount of our exposure is in the readiness of third parties with
which we do business, where the situation is much less within our ability to
predict or control. The first phase, evaluating our internal systems, is
substantially complete. We commenced the second phase, evaluating third party
systems, in the second quarter of fiscal 1998, and we expect to substantially
complete this phase by mid-fiscal 1999. In addition, while we value our
established relationships with our key suppliers, we are identifying
secondary suppliers in the event that any 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 replacement 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 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.
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
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<PAGE>
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 insignificant. We expect 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 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 are in the process of developing a formal
contingency plan for the Year 2000 problem for our operations.
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.
25
<PAGE>
BUSINESS
Paper Warehouse is a growing chain of retail stores specializing in
party supplies and paper goods. As of January 29, 1999, we had 143 stores,
including 97 Company-owned stores and 46 franchise stores. These stores are
conveniently located in major retail trade areas to provide customers with easy
access to our stores. We operate these stores under the names PAPER WAREHOUSE
and PARTY UNIVERSE. Our seven principal markets are:
- - Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- - Oklahoma City/Tulsa, OK - Seattle, WA - Tucson, AZ
- - Omaha, NE and Des Moines, IA
Our stores offer an extensive selection of party supplies and paper
goods, at everyday low prices. We offer party supplies and paper goods for a
wide variety of celebratory occasions, everyday uses and seasonal events,
including:
CELEBRATORY OCCASIONS AND EVERYDAY USES SEASONAL EVENTS
- - birthdays - Valentine's Day - Halloween
- - weddings - Easter - Christmas
- - baby showers - Fourth of July - Hanukkah
- - graduations - Thanksgiving - New Year's
- - other family and religious celebrations
Through our 8,500 square foot prototype, we offer a comprehensive
selection of over 19,000 different products. This selection provides customers
the convenience of one-stop shopping for all party supplies and paper goods. Our
merchandise is organized by party themes. The prominent signage and wide aisles
in our stores allow customers easy access to coordinate the merchandise required
for all party occasions. We believe that our extensive and readily available
merchandise selection often stimulates customers to purchase additional
products.
PAPER WAREHOUSE STORES
FORMAT. We developed our current store prototype based on our
management's experience in the industry, other extensive retail experience
and customer research. We operate stores that range in size from 3,000 square
feet to 8,500 square feet of retail space. Our management introduced our
current 8,500 square foot prototype store in 1994 and believes it is the
optimal store format for our future growth. Of the 97 Company-owned stores,
approximately 87% are 6,000 square feet or larger.
Our stores are designed to create a customer-friendly environment. We
use vibrant colors, theme-oriented merchandise displays and unique products to
create a fun and festive shopping experience. The focal point of our stores is
the seasonal display located at the front of each store, which creates a
"store-within-a-store" appearance. This display maximizes the season's selling
impact and is updated continuously to promote a fresh image within the store. To
assist customers in coordinating party supplies for any occasion, we locate
related departments, such as gift-wrap and greeting cards, adjacent to one
another and display related merchandise such as party hats, plates, cups and
napkins together within a department. Customers are able to easily move about
the different departments and find specific product
26
<PAGE>
categories due to prominent, easy-to-read signage, bright lighting and wide
aisles. We believe that our store layout assists customers in finding and
coordinating their party supply needs, and also encourages browsing, impulse
purchases and repeat visits.
In 1998 we introduced the "concept store." A concept store has a
different look and feel than our other stores. These stores have more colorful
ceilings, lower shelves in the front of the store, carpeting and confetti-tiled
floors, and new vibrant uncluttered signage. We store all extra merchandise out
of sight. These features give the store a very open and organized feel, allow
customers to see merchandise throughout the store, and provide a more fun and
festive shopping atmosphere. Of our 97 Company-owned stores, 20 are concept
stores. We anticipate that new Company-owned stores will be concept stores, and
we will selectively remodel existing stores to concept stores where the revenue
potential justifies the investment. We believe that our concept stores will
assist us in creating our brand awareness, will generate strong sales per square
foot and can be readily transferred to new markets.
PARTY SMART. We are seeking to distinguish our business from our
competitors by positioning Paper Warehouse as the party expert. We believe that
we have the opportunity to create a distinct identity for ourselves, one in
which customers equate us with the word "PARTY" in every possible way. To
achieve this recognition, we are beginning to implement a program in our stores
called PARTY SMART. We will introduce the PARTY SMART concept in our stores from
May 1999 through July 1999. PARTY SMART means being able to provide a customer
with all the information and resources necessary to throw a party. Our goals for
this program are to:
- increase average purchases per customer visit
- increase the frequency of store visits
- develop customers' preference for us over our competitors
In order to get customers to think of us as PARTY SMART we plan to:
- provide helpful and engaging in-store presentations to add
value to the shopping experience
- communicate our expertise by giving customers party ideas,
decorating tips, referrals and planning advice
- create a "party planning resource center" in each store
carrying different types of brochures for different types of
parties and seasonal events such as entertainment and catering
ideas, games to play at children's birthday parties and
shopping checklists
- advertise our PARTY SMART concept through shopping bag
inserts, window and aisle signs, buttons for employees,
in-store audio messages, radio broadcasting and over the
internet
CUSTOMER SERVICE. We seek to provide a high level of customer service
to enhance our customer-friendly store environment. Store managers and sales
associates are trained to assist customers with party planning and event
coordination. In connection with our PARTY SMART program, all employees are
being trained on how to provide nontraditional customer service to our shoppers.
We want our employees to be able to offer our shoppers party ideas, decorating
tips, and referrals in addition to helping shoppers find and purchase products.
In addition, we provide party planning guides and checklists. Our "no hassle"
return policy makes it easy for
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<PAGE>
customers to return or exchange products, which we believe encourages
customers to purchase additional product quantities. Certain products that
require additional sales assistance, such as balloons and custom printing,
are located near checkout counters where sales associates can readily assist
customers. We continually monitor our level of customer service by regular
store visits and by employing anonymous "mystery shoppers." Mystery shoppers
visit all Company-owned stores at least once per quarter to evaluate
personnel on various aspects of customer service, including responsiveness,
quality of product displays and store cleanliness. A portion of store
managers' compensation is based on the results of these mystery shopper
surveys.
OPERATIONS AND TRAINING. Each Company-owned store is typically operated
by a store manager, one assistant manager and a varying number of full-time and
part-time sales associates, depending on the store size, sales volume and
selling season. Store managers are responsible for all aspects of the store's
day-to-day operations, including employee hiring and training, work scheduling,
expense control and customer service. These managers report to a district or
operations manager, each of whom is responsible for approximately 10 to 18
stores. Within each geographic market, we use floating managers to assist in
smaller stores that cannot support both a store manager and an assistant
manager. In addition, floating managers support store managers during busy
holiday seasons and substitute for store managers during vacations and other
absences. The floating managers also work with newly hired store managers to
ensure a smooth transition for sales personnel and customers.
Before opening a new Company-owned store, we usually train store
managers intensely for two weeks, depending on prior experience. During the new
store set-up, our district management team provides additional training to our
store managers. After the store opening, corporate headquarters personnel spend
considerable time overseeing the operations. Each district has a dedicated
trainer who visits the stores to work with the store managers, reinforcing prior
training and providing on-going training. We schedule periodic training sessions
for store managers in the central or district offices on various topics,
including human resources, merchandising, loss prevention and employee
supervision. We cover additional training topics at monthly managers' meetings
and through monthly mailings and our monthly newsletter.
Paper Warehouse stores are typically open:
<TABLE>
<CAPTION>
<S> <C>
Monday through Friday 9:00 a.m. to 9:00 p.m.
Saturday 9:00 a.m. to 6:00 p.m.
Sunday 11:30 a.m. to 5:00 p.m.
</TABLE>
SITE SELECTION AND LOCATIONS
SITE SELECTION. In order to select the optimal location for our stores,
we use a site selection process that considers various criteria, including:
- population density
- demographics, including age and income
- parking availability
- storefront visibility and presence
- local competition
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<PAGE>
- lease rates
- traffic counts
We locate our stores in or near visible high traffic strip mall
centers in close proximity to prominent mass merchandisers, and discount or
grocery store anchors. Our strategy of clustering stores in metropolitan
markets promotes customer convenience and creates favorable economies of
scale for marketing, advertising and operations.
LOCATIONS. As of January 29, 1999, we had 97 Company-owned stores in
the following locations:
<TABLE>
<CAPTION>
Locations Number of Stores
--------- ----------------
<S> <C>
Arizona
Tucson Metropolitan Area........................................ 4
Colorado
Denver Metropolitan Area........................................ 13
Colorado Springs................................................ 1
Iowa
Des Moines Metropolitan Area.................................... 4
Cedar Falls..................................................... 1
Fort Dodge...................................................... 1
Iowa City....................................................... 1
Sioux City...................................................... 1
Kansas/Missouri
Kansas City Metropolitan Area................................... 16
Columbia........................................................ 1
Salina.......................................................... 1
St. Joseph...................................................... 1
Minnesota
Minneapolis/St. Paul Metropolitan Area.......................... 26
Mankato......................................................... 1
Rochester....................................................... 1
St. Cloud....................................................... 1
Nebraska
Omaha Metropolitan Area......................................... 2
Oklahoma
Oklahoma City Metropolitan Area................................. 8
Tulsa........................................................... 4
Washington
Seattle Metropolitan Area....................................... 7
Wisconsin
Onalaska........................................................ 1
Eau Claire...................................................... 1
Total Company-owned stores........................................... 97
--
</TABLE>
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MERCHANDISING
OVERVIEW. Through our 8,500 square foot store prototype, we offer a
comprehensive selection of over 19,000 different products, providing customers
the convenience of one-stop shopping for all party supplies and paper goods. Our
merchandise is organized by party themes. The prominent signage and wide aisles
in our stores allow customers easy access to coordinate the merchandise required
for all party occasions. We also believe that our extensive and readily
available merchandise selection often stimulates customers to purchase
additional products.
PARTY SUPPLIES. We offer an extensive selection of complementary and
coordinating party supplies in unique and traditional patterns, colors and
designs. Our party supplies include
- - invitations - plates - napkins - party favors - streamers - giftware
- - banners - candles - balloons - party snacks - candy - seasonal novelties
Our 8,500 square foot store prototype offers over 150 ensembles of
party goods for many occasions, which include party hats, plates, napkins and
cups. A significant portion of our party goods ensembles involves the use of
movie and television figures, animated characters and celebrity likenesses
licensed to the manufacturer of these ensembles.
GIFT WRAPPING PRODUCTS. We offer a wide assortment of gift wrapping
products in various patterns and colors, including gift wrap, gift bags, gift
boxes, tissue paper, ribbons, bows, shred and gift tags. In addition to holiday
selections, we offer distinctive gift packaging products for special occasions
such as birthdays, graduations, weddings, baby showers and other family and
religious celebrations.
GREETING CARDS. We feature a wide variety of special occasion, seasonal
and everyday greeting cards. Our 8,500 square foot store prototype offers over
10,000 titles. We carry traditional, humorous and contemporary brand name
greeting cards at significantly lower prices than national greeting card chain
stores.
HOUSEHOLD AND CATERING FOOD SERVICE SUPPLIES. We offer paper supplies
such as toilet paper, paper towels, dispenser towels, plates, cups, serving
trays and bowls and table coverings. In addition to offering these products to
our regular party goods customers, we are a paper product supplier for many
commercial users of paper products, including catering companies and non-profit
organizations.
LOW PRICES. We provide customers with everyday low pricing on all
products, at discounts ranging from 10% to 50% off the manufacturer's suggested
retail price. In addition, we guarantee that we will meet or beat any advertised
price on the products we offer. We reinforce our everyday low price strategy
with signs prominently displayed throughout our stores and extensive promotional
advertising.
PRODUCT SOURCING AND INVENTORY MANAGEMENT
We purchase our merchandise from approximately 150 suppliers. In fiscal
1998, our largest supplier, Amscan Holdings, Inc., accounted for approximately
14% of our purchases and our eight largest suppliers represented approximately
51% of our purchases. We do not have long-term purchase commitments or exclusive
contracts with any of our suppliers. We believe
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<PAGE>
that alternative sources of product are available at comparable terms and
conditions. We consider numerous factors in supplier selection, including
price, payment terms, product offerings and product quality.
We negotiate pricing with suppliers on behalf of all Company-owned and
franchise stores. We believe that this buying power enables us to receive
favorable pricing terms and to more readily obtain high demand merchandise.
Although franchise stores are responsible for purchasing their own inventory,
franchisees are able to make purchases on our negotiated pricing terms. As we
add new stores, we believe we will increase the volume of our inventory
purchases and benefit further from increased discounts and trade allowances and
more favorable payment terms from our suppliers.
More than 95% of our merchandise is shipped directly from the supplier
to our stores. Shipping merchandise directly to our stores provides us with
flexibility in pursuing new markets without the geographical constraints and
costs associated with a central distribution system. Deliveries are processed
and inventory items are inspected, sorted and priced in a segregated receiving
area in the back of the store (approximately 10% of total gross square feet per
store) before being placed on the selling floor. We believe that we realize
substantial savings by not maintaining a central distribution system.
Some of our suppliers, such as overseas suppliers, will not ship
directly to our stores. These suppliers instead ship products directly to one
store in each of our major metropolitan markets, which then separates and ships
the products to our other stores within that market. This approach allows us to
make opportunistic volume purchases. We maintain space in at least one of
our stores in each of our principal markets, including Minneapolis/St. Paul,
Denver, Kansas City, Oklahoma City, Tucson, Omaha and Seattle, for the
separation and redistribution of products to our other stores within that
market. We maintain a small warehouse in Minneapolis from which we separate and
distribute merchandise systemwide, including to our franchise stores.
ADVERTISING AND MARKETING
We maintain aggressive advertising and marketing programs. Our strategy
of clustering stores in metropolitan markets enables us to cost effectively
employ a variety of media. We advertise primarily through newspaper, direct mail
inserts and radio. We also promote products through the use of direct mail
mini-catalogs as well as through in-store coupon books and party planning aids.
Our advertising efforts are designed to educate consumers about our
convenient store locations, promote the breadth and value of our product
offering and stress the customer service levels of our sales associates. Our
advertising consists primarily of full color newspaper and direct mail inserts
designed around major holidays and the spring and summer seasons. In fiscal
1998, we distributed 17 newspaper and direct mail inserts. We supplement inserts
by radio advertising for New Year's, Easter, the spring season, graduation,
Halloween, and Christmas. In addition, we typically advertise the opening of new
stores in newspaper and direct mail inserts as well as on the radio.
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We have initiated a targeted direct mail program to increase sales
for special events. We currently mail mini-catalogs of wedding and graduation
party goods to brides-to-be and families of high school graduates. We have
recently expanded this direct mail program to other special occasions such as
a child's first birthday, and to organizations purchasing basic party
supplies and paper goods for commercial or institutional use. Our
institutional customers include a variety of small businesses, caterers, food
service companies, schools, synagogues, churches, civic groups and other
organizations.
In fiscal 1998, we spent approximately 75% of our marketing budget on
full color newspaper and direct mail inserts, approximately 20% for television
and radio advertising and the remainder on direct mail mini-catalogs and
in-store sales promotions. We plan to increase our marketing efforts in fiscal
1999 to support our PARTY SMART concept and our e-commerce activities.
INFORMATION SYSTEMS
Our information systems are integral to continuing our expansion and
enhancing our competitive position in the industry. We completed the
installation of Point of Sale ("POS") terminals in all our Company-owned stores
in the third quarter of fiscal 1996. The POS terminals allow price lookup and
inventory tracking by product. By polling transaction data nightly from each
store's POS terminals, the system provides daily sales information and inventory
levels at store, department, class and product level. This information allows
the corporate office to monitor daily sales, gross profit, pricing and inventory
by product across our entire store base. Also, our automatic merchandise
replenishment system uses this information to allocate goods to individual
stores based on specific product requirements.
We completed the installation of JDA Retail Software Package in the
first quarter of fiscal 1998. The JDA Retail Software Package operates on an IBM
AS/400 platform, which required us to purchase new hardware. Switching hardware
platforms provided us with the benefit of parallel operations during the
conversion process. In addition, we have made extensive use of JDA's Minneapolis
consulting office in both the implementation and data conversion process.
The JDA system supports the complete range of retail cycle functions in
the areas of finance, merchandising and distribution, providing our management
with more sophisticated tools to utilize the information collected by our POS
terminals. Our previous information systems were already performing most of the
functions of the JDA Retail Software Package. Our management believes, however,
that JDA has improved the efficiency of these tasks. In addition, we plan to
develop enhancements such as data warehousing and electronic data interchange to
improve our ability to systematically manage our inventory.
INTERNET AND E-COMMERCE
The internet is a network linking computers throughout the U.S. and the
world. International Data Corporation ("IDC") estimates that more than 56
million people in the United States used the internet in 1998 and that more than
136 million people will use the internet by the year 2002. Women, our principal
customers, now make up half of all U.S. adult internet users, up from 18% of
users three years ago. This growing use of the internet represents a significant
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<PAGE>
opportunity for businesses to conduct commerce online. IDC projects that by
the year 2000, 46 million consumers in America will be buying online. While
online retail is still in its infancy, party supplies and paper goods online
retailing is even more underdeveloped. We believe that prior to 18 months ago
no company had a website offering party goods. Today, there appear to be only
a few substantial websites offering party goods.
We believe that the internet provides us an opportunity to grow our
business. We expect that it will allow us to attract new customers in our
existing markets and reach customers in geographic markets not currently
served by our stores. We also expect that it will enable us to better serve
our current customers. From the proceeds of this offering, we plan to design,
implement and support our online retail business. We believe that our
conventional retail infrastructure, established name recognition, management
experience and supplier relationships will support our entrance into the
online market. Additional sales of our products online will increase the
volume of our inventory purchases, allowing us to benefit further from
increased discounts and trade allowances and more favorable payment terms
from suppliers. If we are able to take advantage of additional benefits from
suppliers, we expect to be able to offer lower prices. We believe low prices
will ultimately be one of the single most important factors stimulating
purchasing on the internet.
One part of our website strategy is to offer our PARTY SMART program on
the internet. Initially we plan to promote and sell a "party in a box" concept.
This means that a customer will be able to purchase a package of party goods
containing all the items necessary to throw a specific type of party (e.g., baby
showers, birthdays, theme parties and anniversaries).
We intend to develop a website that, when fully developed, will
allow a shopper to, among other things:
- preview our store to learn more about our history, products
and services
- put together an entire party with one visit to our website
- obtain party advice, ideas and tips
- access a list of our local and national strategic partners
(e.g., entertainers, caterers, rental supply firms, and
operators of bowling alleys, skating rinks and pools)
- pay for everything at one time at a check-out screen
- return to check on the status of orders that have already been
placed
- receive e-mail from us about new items that would fit the
selected party theme, or items asked about but were
unavailable when the order was placed
- contact customer service about the products and services
available on our website
- evaluate our performance and the performance of our website
following the party
- receive other information about us, such as franchising
opportunities, investor relations and career opportunities
We designed our current website, paperwarehouse.com, to offer business
opportunities to individuals interested in owning a Paper Warehouse franchise.
This website only contains a homepage and we plan to update the content of this
website and provide links to other websites with a portion of the proceeds from
this offering.
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<PAGE>
We intend to design, develop and implement our website with a strategic
technical partner. We intend to contract with an internet fulfillment service
provider to process and ship orders, acknowledge and track orders, handle
returns and canceled orders and provide other customer services.
Our current implementation plan to launch our new website involves
three stages:
- upgrading the content of paperwarehouse.com so that visitors
will be able to easily access our other company information
which we expect to complete by the end of Summer 1999
- developing and implementing the new website, including its
e-commerce capabilities, which we expect to complete in time
for Halloween 1999
- providing maintenance and enhancements to improve our
customer's shopping experience
The costs to develop and implement our internet strategy, and the
timetable on which we plan to launch this strategy, are based on our best
estimates. The following factors, among others, may negatively impact the
success of our internet strategy:
- failure of our strategic partners to efficiently and timely
perform
- changes in technology
- failure to attract customers to our website
- increased competition in party supplies and paper goods
online retailing
- changes in consumer preferences
- problems associated with Year 2000
If any of the above were to occur, our estimates may not be achieved,
and our actual results could be significantly different from those anticipated.
FRANCHISING
We have offered franchises of our Paper Warehouse store concept since
October 1987. As of January 29, 1999, we had 33 franchisees operating 46
franchise stores located in the following states:
<TABLE>
<CAPTION>
LOCATIONS NUMBER OF STORES
--------- ----------------
<S> <C>
Arizona......................................................... 1
Colorado........................................................ 5
Florida......................................................... 1
Georgia......................................................... 2
Illinois........................................................ 3
Iowa............................................................ 2
Kansas.......................................................... 2
Kentucky........................................................ 1
Louisiana....................................................... 4
Maryland........................................................ 1
Minnesota....................................................... 1
Mississippi..................................................... 1
Missouri........................................................ 1
Montana......................................................... 2
Nebraska........................................................ 3
Nevada.......................................................... 1
North Dakota.................................................... 4
South Dakota.................................................... 5
Tennessee....................................................... 1
Texas........................................................... 3
Wyoming......................................................... 2
-
Total Franchise Stores.......................................... 46
--
</TABLE>
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<PAGE>
We establish franchise stores in markets outside of metropolitan areas
with Company-owned stores. We believe that these markets typically are not
served adequately by the party supplies and paper goods industry. In addition
to generating franchise revenues, franchise stores benefit us through increased
name recognition and increased buying power from our suppliers.
We assist franchisees in opening and operating a Paper Warehouse
store. During the pre-opening phase, our support includes:
- site evaluation and assistance with lease negotiations
- store build-out assistance
- fixture, equipment, supplies and inventory procurement
- opening advertising materials
- operations training
We make available to our franchisees services such as business
planning, operations and promotional activities. In addition, we perform the
merchandising process for our franchisees. We make periodic inspections of the
franchise stores to ensure that the franchisee is complying with our various
requirements and quality standards. We may, in the future, enter into multiple
store development agreements with franchisees granting to them certain exclusive
rights to develop stores in specified markets, so long as the franchisee meets a
stated development schedule and complies with other provisions of the
development agreement and the franchise agreement.
Our franchise revenues are comprised of initial franchise fees and
continuing royalty payments. Our current initial franchise fee ranges from
$19,000 to $25,000 for new franchisees, depending on the type of store. We may
offer a discount franchise fee for developers opening multiple stores. If a
franchisee enters into a second or third franchise agreement it will receive a
discount on the initial fee associated with the second or third store.
Franchisees are also required to pay us a continuing royalty equal to a
percentage of their weekly gross sales. Historically, this percentage has varied
from 3% to 5%. Currently, new franchises pay us a continuing royalty of 4% of
gross sales.
The franchisee's initial investment depends primarily upon store size.
This investment includes the initial franchise fee, real estate and leasehold
improvements, fixtures and equipment, signs, point-of-sale systems, deposits and
business licenses, initial inventory, opening promotional expenses and working
capital. We may also require franchisees to pay a weekly advertising fee not to
exceed 1% of gross sales, although to date we have not charged this fee. Each
franchisee is granted a license from us for the right to use certain
intellectual property rights, including the mark PAPER WAREHOUSE or PARTY
UNIVERSE and related designs. Our franchise agreements provide for a ten-year
term and contain conditional renewal options.
COMPETITION
The party supplies and paper goods retailing business is highly
competitive. In order to compete successfully against other party supplies and
paper good retailers, we believe we must maintain convenient locations, broad
merchandise selections, competitive pricing and strong customer service. Our
stores compete with a variety of smaller and larger retailers, including:
35
<PAGE>
- specialty party supply retailers
- other superstores such as Party City and Factory Card Outlet
- card shops such as Hallmark
- designated departments in mass merchandisers, discount
retailers, toy stores, drug stores, supermarkets and
department stores
Many of our competitors have substantially greater financial and
personnel resources than we do. We may also encounter additional competition
from new entrants in the future in our existing or planned new markets.
Increased competition by existing or future competitors may reduce our sales
and cause us to incur a loss.
Two of our major competitors are currently having significant financial
difficulties. In March 1999, Factory Card Outlet filed for reorganization under
Chapter 11 of the bankruptcy code. Party City has not yet released its financial
results for 1998, has experienced significant management turnover since January
1, 1999 and has defaulted under its secured credit facility. We do not believe
that the problems facing Party City and Factory Card Outlet are indicative of a
weakness in the party goods industry or with our business. We believe that the
following factors distinguish our business from that of Factory Card Outlet and
Party City:
- we have grown our number of stores in a more controlled manner
- our clustering growth strategy creates a critical mass of
stores in our principal markets, which allows us to promote
customer convenience and create favorable economies of scale
for marketing, advertising and operations
- we have a strong senior management team and board of directors
with significant retail experience
We expect competition in the e-commerce market to increase from a
growing number of companies selling goods and services over the internet,
including companies focusing exclusively on party goods and services.
Increased competition from these and other sources could require us to
respond to competitive pressures by establishing pricing, marketing and other
programs or seeking out additional strategic alliances or acquisitions that may
be less favorable to us than we could otherwise establish or obtain. This could
negatively effect our business.
TRADEMARKS AND SERVICE MARKS
We use the marks PAPER WAREHOUSE, PARTY UNIVERSE and PARTY SMART. PAPER
WAREHOUSE and PARTY UNIVERSE are federally registered trademarks. We have
recently submitted an application to register the trademark PARTY SMART. We are
aware of the common law usage of the name PAPER WAREHOUSE by several companies
in various parts of the United States, which may prevent us from using that name
in certain regional markets. In markets where we cannot use PAPER WAREHOUSE, we
intend to use the name PARTY UNIVERSE. Because of our regional approach to
advertising and store clustering, we believe that the use of a single trademark
within each market is more important to our growth and business strategy than
the use of one mark nationally.
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<PAGE>
GOVERNMENT REGULATION
As a franchiser, we comply with rules and regulations adopted by the
Federal Trade Commission and with state laws that regulate the offer and sale
of franchises. We also comply with a number of state laws that regulate certain
substantive aspects of the franchiser-franchisee relationship. These laws
regulate the franchise relationship, for example, by requiring the franchisor
to deal with franchisees in good faith, by prohibiting interference with the
right of free association among franchisees and by regulating illegal
discrimination among franchises with regard to charges, royalties or fees. To
date, those laws have not kept us from seeking franchisees in any given area
and have not effected our operations.
All of our stores comply with regulations adopted by federal agencies
and with licensing and other regulations enforced by state and local health,
sanitation, safety, fire and other departments. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors and difficulties or failures in obtaining the required
licenses or approvals can delay and sometimes prevent the opening of a new
store. In addition, we comply with the Fair Labor Standard Act and various
state laws governing matters such as minimum wage, overtime and other working
conditions. We also comply with the provisions of the Americans with
Disabilities Act of 1990, which generally requires that employers provide
reasonable accommodation for employees with disabilities and that stores be
accessible to customers with disabilities.
EMPLOYEES
As of April 30, 1999, we employed approximately 325 full-time and
approximately 870 part-time employees. We consider our relationships with our
employees to be good. None of our employees are covered by a collective
bargaining agreement.
FACILITIES
We own a 23,000 square foot building in a suburb of Minneapolis,
Minnesota, in which our headquarters are located. We lease a 17,000 square foot
building in a suburb of Minneapolis, Minnesota for warehouse space. We lease
all the locations for our 97 Company-owned stores. We anticipate that our new
Company-owned stores will typically have ten-year leases with at least one
five-year renewal option.
LEGAL PROCEEDINGS
We are not a party to any material litigation. We are not aware of any
threatened litigation that would negatively impact our business.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The following table contains certain information about our directors
and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Yale T. Dolginow (2)................ 56 President, Chief Executive Officer and Chairman of the
Board
Brent D. Schlosser.................. 45 Executive Vice President and Director
Cheryl W. Newell.................... 46 Vice President and Chief Financial Officer
Diane C. Dolginow................... 55 Secretary and Director
Steven P. Durst..................... 31 Vice President of Merchandising
Arthur H. Cobb (1).................. 48 Director
Marvin W. Goldstein (1) (2)......... 55 Director
Martin A. Mayer (1) (2)............. 56 Director
Jeffrey S. Halpern.................. 56 Director
</TABLE>
The following table contains certain information about other key
personnel:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Diana G. Purcel..................... 32 Controller
Michael A. Anderson................. 38 Vice President of Franchising
Steven R. Anderson.................. 52 Vice President and Chief Information Officer
Carol A. Carroll.................... 48 Vice President of Stores
Willard V. Lewis.................... 64 Vice President of Store Development
Kristen Lenn........................ 31 Director of Human Resources
</TABLE>
- --------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
YALE T. DOLGINOW currently serves as President, Chief Executive
Officer and a director and was part of the original management team that
purchased the Paper Warehouse business in 1986. Mr. Dolginow has been in the
retail business since 1968 and has served in various capacities with numerous
retail and mail-order companies, such as President and Chief Executive Officer
of Carlson Catalog Showrooms, Inc., Assistant to the President of Dayton Hudson
Corporation, President of Modern Merchandising, Inc. and Chief Executive
Officer and President of Dolgin's, Inc. Mr. Dolginow and Diane C. Dolginow are
husband and wife.
BRENT D. SCHLOSSER currently serves as Executive Vice President and a
director and was also part of the original management team that purchased the
Paper Warehouse business in 1986. From 1982 to 1986, Mr. Schlosser served in
various capacities, including Vice President Marketing/Buying and Executive Vice
President Marketing/Merchandising at Carlson Catalog Showrooms, Inc.
38
<PAGE>
From 1977 to 1982, Mr. Schlosser served as director of Marketing for Modern
Merchandising, Inc. From 1975 to 1977, Mr. Schlosser was advertising director
for Dolgin's, Inc.
CHERYL W. NEWELL currently serves as Vice President and Chief Financial
Officer and joined us in August 1997. From 1991 to August 1997, Ms. Newell was a
Vice President with the Corporate Banking Group at U.S. Bancorp, a bank holding
company, responsible for management of desktop technology, disaster recovery and
training and development. From 1986 to 1991, Ms. Newell was a Vice President
with Citicorp, a bank holding company. From 1976 to 1986, Ms. Newell was a Vice
President at Norwest Bank n/k/a Wells Fargo Corporation.
DIANE C. DOLGINOW currently serves as our Secretary and a director and
joined us in 1986. Ms. Dolginow was a director of Dolgin's Inc. from 1968 to
1976, and since 1994 has been a director on the National Advisory Board of the
School of Education at University of Kansas. Ms. Dolginow and Mr. Dolginow are
husband and wife.
STEVEN P. DURST currently serves as Vice President of Merchandising and
joined us in 1995. Mr. Durst joined us as Director of Information Systems,
became Vice President of Information Systems in 1997 and assumed his current
position in 1998. From 1995 to 1997 Mr. Durst served as Director of Information
Systems for the Company. From 1990 to 1995 Mr. Durst was employed by Exxon
Corporation where he performed various engineering and business planning
functions. Mr. Durst is the son-in-law of Mr. and Mrs. Dolginow.
ARTHUR H. COBB has served as a director since 1992. He is a consultant
and certified public accountant. Since 1978, he has been engaged in providing
financial consulting services and is President of Cobb & Associates, Ltd. Mr.
Cobb was a partner with Peat Marwick Mitchell & Co., n/k/a KPMG Peat Marwick
LLP, a public accounting firm.
MARVIN W. GOLDSTEIN has served as a director since 1996. Mr. Goldstein
is currently a financial consultant. From April 1997 through August 1997, Mr.
Goldstein was Executive Vice President and Chief Operating Officer of Regis
Corp., a national chain of hair salons. From August 1995 through April 1997, Mr.
Goldstein was Chairman of the Board, Chief Executive Officer and President of
Pet Food Warehouse, Inc., a specialty retailer. From February 1988 to September
1994, Mr. Goldstein served in various positions at the Department Store Division
of Dayton Hudson Corporation, including President and Chief Operating Officer,
Chairman and Chief Executive Officer. Mr. Goldstein is a director, and serves on
the compensation committee, of each of the following companies: Wilson's, The
Leather Experts, Inc., Buffet's, Inc., A.R.C.A., Inc., Greenspring, Inc. and
kidBoard, inc.
MARTIN A. MAYER has served as a director since 1992. He has been an
adjunct professor of marketing at the University of San Diego since 1995 and has
been an independent financial consultant since 1992. Mr. Mayer was a partner
with Peat Marwick Mitchell & Co., n/k/a KPM Peat Marwick LLP, a public
accounting firm, from 1973 until 1992. Mr. Mayer is a certified public
accountant.
JEFFREY S. HALPERN has served as a director since 1997. He has been
Chairman of the Board and Chief Executive Officer of Southwest Casino and Hotel
Corp. since 1993. Mr. Halpern was a partner in the law firm of Popham, Haik,
Schnobrich & Kaufman, Ltd. from 1989 until 1993, and a founding partner of
Halpern & Druck from 1980 to 1989.
DIANA G. PURCEL currently serves as Controller and joined us in April
1999. Before joining the Company and since March 1998, Ms. Purcel was Divisional
Controller for Corporate Planning and Reporting for Damark International, Inc.
From 1994 to 1998, Ms. Purcel was a Senior Analyst with Dayton Hudson
Corporation. Before joining Dayton Hudson Corporation and since 1988, Ms. Purcel
was an auditor with Arthur Andersen, LLP.
39
<PAGE>
MICHAEL A. ANDERSON currently serves as Vice President of Franchising
and joined us in 1991. Mr. Anderson joined us as Controller and assumed his
current position in 1999. From 1987 to 1991, Mr. Anderson was an accountant at
Luri, Eiger, Besikof & Company, a Minneapolis public accounting firm. From 1982
to 1986, Mr. Anderson was a staff accountant with Marvin O. Anderson, LPA, a
public accounting firm located in Minnesota.
STEVEN R. ANDERSON currently serves as Vice President and Chief
Information Officer of the Company and joined us in December 1998. From May 1997
until June 1998, Mr. Anderson was Senior Vice President and Chief Information
Officer for County Seat, a publicly-held specialty soft goods retailer. From
1986 to 1997, Mr. Anderson held a number of information systems positions,
including Senior Vice President and Chief Information Officer at Best Buy Co., a
publicly-held specialty retailer.
CAROL A. CARROLL currently serves as Vice President of Stores and
joined us in 1994. Ms. Carroll joined us as Director of Stores and until she
assumed her current position in 1997. From 1992 to 1994, Ms. Carroll was
Director of Stores of CBR, Inc., a privately-owned retailer, specializing in
airport retail. From 1976 to 1992, Ms. Carroll served as a District Manager,
managing 17 stores in a five-state area, for Best Products, Inc.
WILLARD V. LEWIS currently serves as Vice President of Store
Development and joined us in 1992. Mr. Lewis joined us as Director of
Development and assumed his current position in 1997. From 1990 to 1992, Mr.
Lewis served as Vice President of Network Facilities Professionals, Inc., a
Minnesota-based computer software firm. Mr. Lewis was employed by Dolgin's, Inc.
from 1970 to 1985.
KRISTEN LENN currently serves as Director of Human Resources and joined
us in August 1997. From 1994 to 1997, Ms. Lenn was a Senior Consultant with
McGladrey & Pullen, LLP, a public accounting firm, and provided a wide range of
human resources generalist services to clients.
DIRECTOR COMPENSATION
DIRECTORS' FEES. We pay non-employee directors $1,000 for each meeting
attended, plus we reimburse all out-of-pocket expenses incurred on behalf of
Paper Warehouse.
DIRECTOR OPTIONS. Eligible directors participate in the Director Stock
Option Plan (the "Director Plan"). The Board administers the Director Plan.
Under the terms of the Director Plan, the Board automatically grants each newly
elected non-employee director a non-statutory option to purchase 10,000 shares
of our common stock at an exercise price equal to the fair market value of our
common stock on the date of grant. These options vest in one-third
40
<PAGE>
increments beginning on the first anniversary of the date of grant and on each
of the next two anniversaries of this date. On November 24, 1997, the Board
granted each of the non-employee directors an option to acquire 10,000 shares
of our common stock at an exercise price of $7.50 per share. These options have
a term of ten years from November 24, 1997 and vest in one-third increments on
each of November 24, 1998, 1999 and 2000.
On June 4, 1998, the Board granted each of the non-employee directors a
non-statutory option outside of the Director Plan to acquire 5,000 shares of our
common stock at an exercise price of $4.25 per share, the closing sale price of
our common stock on the date of grant. On December 7, 1998, the Board granted
each of the non-employee directors another non-statutory option outside of the
Director Plan to acquire 6,250 shares of our common stock at an exercise price
of $2.75 per share, the closing sale price of our common stock on the date of
grant. All options granted to non-employee directors outside of the Director
Plan, have a term of ten years from the date of grant and vest in one-third
increments beginning on the first anniversary of the date of grant and on each
of the next two anniversaries of this date.
All options granted to these non-employee directors will become
immediately exercisable in full if any of the following events occur:
- the death of the director
- the removal of the director from the Board without cause
- the director is not re-nominated or re-elected as a director
- a change in control of Paper Warehouse, as defined in any
existing agreements between us and our senior officers
- the director voluntarily resigns from the Board
CONSULTING FEES. In fiscal 1998, we paid Martin A. Mayer $1,800 plus
expenses for strategic planning services Mr. Mayer rendered to us in connection
with senior management strategic planning meetings. We also paid Marvin W.
Goldstein $12,000 in fiscal 1998 for consulting services Mr. Goldstein rendered
to us in connection with providing merchandising training and strategic
planning.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
AUDIT COMMITTEE. Our board of directors has an Audit Committee. The
Audit Committee is currently comprised of Messrs. Cobb, Goldstein and Mayer. The
Audit Committee:
- assists the Board with its accounting, auditing, operating and
reporting practices
- reviews our annual financial statements
- selects and works with our independent auditors
- monitors the adequacy of our internal controls for compliance
with corporate policies and directives
41
<PAGE>
COMPENSATION COMMITTEE. Our board of directors also has a
Compensation Committee. The Compensation Committee is currently comprised of
Messrs. Dolginow, Mayer and Goldstein. The Compensation Committee:
- reviews and recommends to the Board the compensation of our
directors, executive officers and key employees
- administers our 1997 Stock Option and Compensation Plan
EXECUTIVE COMPENSATION
The following table provides summary information concerning cash and
non-cash compensation for each of the last three fiscal years paid to or
earned by our President and Chief Executive Officer and our three other most
highly compensated executive officers, each of whose total annual salary and
bonus exceeded $100,000 in the fiscal year ended January 29, 1999 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION ($)(1)
- ------------------ ---- --------- -------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Yale T. Dolginow 1998 $285,000 $ --- --- $27,405
PRESIDENT AND 1997 285,000 --- --- 27,335
CHIEF EXECUTIVE OFFICER 1996 285,000 --- --- 27,005
Brent D. Schlosser 1998 145,000 --- --- 1,394
EXECUTIVE VICE PRESIDENT 1997 145,000 --- --- 1,450
1996 145,000 --- --- 1,394
Cheryl W. Newell (2) 1998 125,000 15,000 17,000 481
VICE PRESIDENT AND 1997 62,749 --- 17,000 ---
CHIEF FINANCIAL OFFICER 1996 ---- --- --- ---
Steven P. Durst 1998 93,462 10,000 11,200 787
VICE PRESIDENT OF 1997 70,000 5,000 11,200 700
MERCHANDISING 1996 55,000 --- --- 254
</TABLE>
- -----------------------------
(1) Represents amounts of matching contributions we made to the Named Executive
Officers' respective 401(k) accounts, except for Mr. Dolginow which amounts
also include $25,727 in
42
<PAGE>
each of 1998, 1997 and 1996 as the value of benefits for Mr. Dolginow,
determined as prescribed by the SEC for this type of valuation, under a
"split dollar" life insurance arrangement.
(2) Ms. Newell has been Vice President and Chief Financial Officer of the
Company since August 1997.
43
<PAGE>
OPTION GRANTS
The following table summarizes option grants during the fiscal year
ended January 29, 1999 to the Named Executive Officers and the potential
realizable value of the options.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR 1998
% OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED (#) YEAR 1998 ($/SHARE) DATE 5% 10%
- ------------------------ ----------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cheryl W. Newell 17,000 9.3% $2.75 12/07/08 $69,228 $110,234
Steven P. Durst 11,200 6.2% 2.75 12/07/08 45,609 72,625
</TABLE>
- -----------------------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises depend upon our common stock's
future performance, overall market conditions and the executive's continued
involvement with us. The amounts represented in this table will not
necessarily be achieved.
(2) All options set forth in the above table vest in one-third increments
beginning on the first anniversary of the date of grant and on each of the
next two anniversaries of this date with all options granted becoming fully
vested three years from the date of grant. See "Stock Option Plans --
Employee Stock Option Plans" for change in control provisions.
44
<PAGE>
OPTION EXERCISES
The following table summarizes option exercises during the fiscal
year ended January 29, 1999 and the number and value of options held by the
Named Executive Officers as of January 29, 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND 1998 FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES VALUE JANUARY 29, 1999(#) AT JANUARY 29, 1999($)(1)(2)
ACQUIRED ON REALIZED ------------------- ----------------------------
NAME EXERCISE(#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Yale T. Dolginow --- $ --- --- --- $ --- $ ---
Brent D. Schlosser --- --- --- --- --- ---
Cheryl W. Newell 0 0 5,666 28,334 0 0
Steven P. Durst 0 0 3,733 18,667 0 0
</TABLE>
- -----------------------------
(1) Based on the January 29, 1999 closing price of the common stock of
$2.125.
(2) The "Value Realized" and the "Value of Unexercised In-the-Money
Options" amounts are calculated based on the excess of the market
value of our common stock on the date of exercise or January 29,
1999 over the exercise price. The exercise price of options may be
paid in cash or in shares of our common stock valued at fair market
value on the day prior to the date of exercise.
EMPLOYMENT AGREEMENTS
In July 1997, Cheryl W. Newell entered into an employment agreement
with us to serve as Chief Financial Officer. Ms. Newell will receive an annual
base salary of $115,000, subject to increase by the Board based upon her
performance, appropriate industry guideline data and other factors. Ms. Newell
may also receive an annual bonus based upon her performance. Upon the completion
of our initial public offering of common stock, Ms. Newell received an option to
purchase 17,000 shares of our common stock as provided in her employment
agreement. Under her agreement, Ms. Newell may not disclose confidential
information about us for the term of the agreement and for one year thereafter
and may not compete with us for a two-year period after termination of her
employment with us. Ms. Newell may terminate her employment with us upon 30
days' written notice to us at any time for any reason.
45
<PAGE>
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN. We have adopted a 1997 Stock Option and
Compensation Plan (the "Employee Stock Plan"). We may grant officers, key
employees, and subject to stockholder approval, non-employee directors and
independent contractors, stock options, stock appreciation rights, stock
awards, performance shares and cash awards under the Employee Stock Plan.
Subject to stockholder approval, we have reserved an aggregate 1,025,000 shares
of our common stock for issuance under the Employee Stock Plan.
The Compensation Committee of our Board administers the Employee
Stock Plan. The Compensation Committee is authorized to determine, among
other things, the following:
- the participants to whom, and the times at which, options and
other benefits are to be granted
- the number of shares subject to each option
- the applicable vesting schedule
- the exercise price
The Compensation Committee will also determine the treatment to be
afforded to a participant in the Employee Stock Plan in the event of
termination of employment for any reason, including death, disability or
retirement.
Under the Employee Stock Plan the maximum term of a stock option is
ten years for incentive stock options and ten years plus one day for
non-statutory stock options. No option may be exercised during the first 12
months after the date of grant. Upon the occurrence of a "change in control,"
unless otherwise determined by our board of directors and a majority of the
"continuing directors" ("continuing directors" are directors who were in
office before the occurrence of or public announcement of a "change in
control," directors in office for a period of more than two years and
directors nominated and approved by the continuing directors):
- the restrictions on all shares of restricted stock awards
lapse immediately
- all outstanding options and stock appreciation rights will
become exercisable immediately
- all performance shares shall be deemed to be met and payment
made immediately
For purposes of the Employee Stock Plan, a "change in control" occurs when:
- any person or group becomes the beneficial owner of 30% or
more of any of our equity security entitled to vote for the
election of directors
- a majority of the members of our board of directors is
replaced within the period of less than two years by directors
not nominated and approved by our board of directors
- our stockholders approve an agreement to merge or consolidate
with or into another corporation or an agreement to sell or
otherwise dispose of all or substantially all of our assets
(including a plan of liquidation)
Pursuant to our Employee Stock Plan, we have granted options to
purchase an aggregate of 327,200 shares at an exercise price equal to the
fair market value on the date of grant. These options vest over a three-year
period beginning on the first anniversary of the date of grant and will
terminate in ten years.
46
<PAGE>
DIRECTORS STOCK OPTION PLAN. We have adopted a Director Stock Option
Plan (the "Director Stock Plan"). The Board administers the Director Stock
Plan. We have reserved an aggregate of 40,000 shares of our common stock for
issuance under the Director Stock Plan. See "Directors
Compensation--Directors Options."
EMPLOYEE STOCK PURCHASE PLAN
On December 7, 1998, our Board approved an Employee Stock Purchase
Plan, subject to stockholder approval. The Employee Stock Purchase Plan
reserves 150,000 shares of our common stock for issuance and purchase by our
employees to assist them in acquiring a stock ownership interest in us and to
encourage them to remain our employees. The Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code and permits
eligible employees to purchase shares of our common stock at a discount through
payroll deductions during specified six-month offering periods. No employee may
purchase more than $25,000 worth of stock in any calendar year or 5,000 shares
of our common stock in any one offering period. Our Compensation Committee
administers the Employee Stock Purchase Plan. Generally, the purchase price of
our common stock under the Employee Stock Purchase Plan must not be less than
85% of the fair market value of the common stock on the first or last day of
the offering period, whichever is lower. As of April 30, 1999, no shares have
been purchased under the Employee Stock Purchase Plan. The stockholders will be
asked to approve the Employee Stock Purchase Plan at our annual meeting on
June 11, 1999. If approved, the first offering period will begin on August 1,
1999.
47
<PAGE>
CERTAIN TRANSACTIONS
We employ Steven P. Durst as Vice President of Merchandising, a
position he has held since June 1998. Before that time Mr. Durst served as our
Vice President of Information Systems and as our Director of Information
Systems. Mr. Durst joined us in 1995 and is the son-in-law of Yale T. Dolginow,
our President and Chief Executive Officer, and Diane C. Dolginow, our Secretary.
During fiscal 1998, we paid Mr. Durst $103,462 in annual compensation.
Before our initial public offering, we were treated as an
S-Corporation under the Internal Revenue Code for federal and certain state
income tax purposes. As a result, our earnings were taxed directly to our then
current stockholders, Mr. Dolginow and Mr. Schlosser (the "S-Corporation
Stockholders") rather than to us. To provide the S-Corporation Stockholders
with the funds to pay income taxes on these earnings and as a return on their
investment, we paid annual distributions to them. In connection with our
initial pubic offering, we converted from an S-Corporation to a C-Corporation
under the Code. In January 1997, the Board declared a cash dividend payable to
the S-Corporation Stockholders, which the board of directors intended to equal
the balance of accumulated taxable income from the date of the last dividend to
the S-Corporation Stockholders (January 13, 1997) through July 31, 1997. The
precise amount of the cash dividend was to be later determined by us and our
auditors upon the completion of our tax returns. Before our initial public
offering, we estimated the cash dividend to be equal to $166,000. Because the
amount of the cash dividend was not finalized at the closing of the initial
public offering, it was not actually paid at that time. In October 1998, we
completed all of our required tax returns for the period when we were an
S-Corporation and determined that the actual amount of the cash dividend should
have been $133,000 and not $166,000. On October 8, 1998, we paid the
S-Corporation Stockholders a total of $133,000 to satisfy our obligation to pay
the S-Corporation Stockholders the cash dividend, which payment was consistent
with the tax agreement described below.
Paper Warehouse and both Messrs. Dolginow and Schlosser are parties
to an S-Corporation Tax Allocation and Indemnification Agreement relating to
their respective income tax liabilities. The tax agreement provides that we
will indemnify Messrs. Dolginow and Schlosser for any adjustments causing an
increase in their federal and state income tax liability (including interest
and penalties) related to our tax years before our initial public offering.
They are not indemnified if the adjustments result in or are related to a
corresponding decrease in their federal and state income tax liability with
respect to another S-Corporation taxable year.
Subject to certain limitations, the tax agreement also provides that
Messrs. Dolginow and Schlosser will indemnify us with respect to federal and
state income taxes (plus interest and penalties) in connection with shifting
from an S-Corporation taxable year to a C-Corporation taxable year subsequent
to our initial public offering. Since neither Mr. Dolginow nor Mr. Schlosser
have given any security for their indemnification obligations, our ability to
collect these payments depends upon their financial condition at the time any
of these indemnification obligation arises. We are not aware of any tax
adjustments that may arise under the tax agreement.
The tax agreement further provides that to the extent that our
accumulated taxable income prior to our conversion to a C-Corporation is less
than the cash dividends, Messrs. Dolginow and
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<PAGE>
Schlosser will make a payment equal to the difference to us, and if the
accumulated taxable income is greater than the aggregate amount of the cash
dividends, we will make an additional distribution equal to the difference to
them, in either case, with interest thereon. Any payment we make to them
pursuant to the tax agreement may be considered by the Internal Revenue
Service or the state taxing authorities to be nondeductible by us for income
tax purposes.
In December 1998, Paper we entered into an Asset Purchase Agreement
with Prickly Pear Paper, Inc. and Susan Hazan. Prickly Pear operated four
franchise stores in Tucson, Arizona, and Ms. Hazan was president and a 95%
stockholder of Prickly Pear. Ms. Hazan is Mr. Dolginow's sister. Mr. Dolginow
was Prickly Pear's Vice President. We purchased all of the assets of the four
franchise stores for approximately $1.2 million cash and 70,749 shares of our
common stock for an aggregate purchase price of $1,349,974. We allocated the
purchase price based on the fair market value of the net assets and recorded
any excess as goodwill. We now employ Ms. Hazan as a district manager. Before
the acquisition, Prickly Pear paid franchise, continuing and other fees to us
in fiscal 1998 in the aggregate amount of approximately $88,728.
In March 1996, we sold a Paper Warehouse store located in Lawrence,
Kansas to Sunflower Party and Paper, Inc. for an aggregate amount of $144,000
plus the assumption of some of our liabilities relating to that store.
Sunflower operates this store as a franchise store and is wholly-owned by
Larry and Patty Schlosser, the brother and sister-in-law of Mr. Schlosser.
During fiscal 1998, Sunflower paid us an aggregate of approximately $24,810
in franchise and other fees. On February 28, 1998, Sunflower renewed its
sublease with us through January 30, 2002. Total payments to us under the
terms of the sublease were approximately $66,227 during fiscal 1998.
Mr. Dolginow is a director of Richfield Bank & Trust Co. We have a
$7,500,000 line of credit with Richfield Bank, of which there was $6,800,000
outstanding on January 29, 1999. On April 8, 1999 we refinanced the loan from
Richfield Bank for our corporate headquarters. As part of the refinancing,
Mr. Dolginow was released from his personal guarantee to the U.S. Small
Business Administration in the original principal amount of $433,000, the
proceeds of which were also used to finance, in part, the acquisition of the
our corporate headquarters.
We believe that all prior transactions between us and our officers,
directors and other affiliates have been on terms no less favorable than
could have been obtained from unaffiliated third parties. Any future
transactions and loans with our officers, directors or 5% stockholders will
be on terms no less favorable to us than could be obtained from unaffiliated
third parties and will be approved by a majority of the independent outside
members of our board of directors who do not have an interest in the
transactions.
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PRINCIPAL SHAREHOLDERS AND BENEFICIAL
OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 1, 1999, unless otherwise noted by:
- each stockholder who we know beneficially owns more than 5% of
our outstanding common stock
- each director and nominee for election to our Board
- each executive officer named in the Summary Compensation Table above
- all of our executive officers and directors as a group
The address for all of our executive officers and directors is 7630
Excelsior Boulevard, Minneapolis, Minnesota 55426.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
-----------------------------
PERCENT OF
NAME AMOUNT CLASS(2)
- -------------- ---------------- -----------
<S> <C> <C>
Yale T. Dolginow....................................................... 1,617,443 (3) 34.9%
Brent D. Schlosser..................................................... 286,375 6.2%
Diane C. Dolginow ..................................................... 0 (4) *
Arthur H. Cobb......................................................... 4,333 (5) *
Marvin W. Goldstein.................................................... 13,333 (6) *
Martin A. Mayer ....................................................... 46,656 (7) 1.0%
Jeffrey S. Halpern..................................................... 3,333 (8) *
Cheryl W. Newell....................................................... 8,666 (9) *
Steven P. Durst........................................................ 3,733 (10) *
Wellington Management Company LLP
75 State Street
Boston, Massachusetts 02109............................................ 444,900 (11) 9.6%
All directors and executive officers
as a group (15 persons) ............................................... 2,003,033 (12) 42.6%
</TABLE>
- -----------------------------------
* Less than 1% of the outstanding shares.
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days
are treated as outstanding only
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when determining the amount and percent owned by the person or group.
Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to
these shares of common stock.
(2) Based on 4,627,936 shares of our common stock outstanding as of March 1,
1999.
(3) Does not include 300,000 shares held by Mr. Dolginow's daughters. Does
include 1,000 shares held in trust for Mr. Dolginow's daughters.
(4) Does not include shares beneficially owned by Yale T. Dolginow,
Ms. Dolginow's husband.
(5) Includes options to purchase 3,333 shares of our common stock exercisable
within 60 days.
(6) Includes options to purchase 3,333 shares of our common stock exercisable
within 60 days.
(7) Includes options to purchase 31,061 shares of our common stock exercisable
within 60 days, of which 27,728 shares represent shares issuable upon
exercise of a stock option granted to Mr. Mayer by Mr. Dolginow.
(8) Includes options to purchase 3,333 shares of our common stock exercisable
within 60 days.
(9) Includes options to purchase 5,666 shares of our common stock exercisable
within 60 days.
(10) Includes options to purchase 3,733 shares of our common stock exercisable
within 60 days.
(11) Based solely on a Schedule 13G dated December 31, 1998, reporting
beneficial ownership of 444,900 shares of our common stock held by
Wellington Management Company, LLP, as an investment adviser, which are
all held of record by clients of Wellington Management. Wellington
Management has shared voting power over 364,900 shares and shared
dispositive power over 444,900 shares.
(12) Includes options to purchase 64,990 shares of our common stock exercisable
within 60 days.
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DESCRIPTION OF DEBENTURES
We will issue the Debentures under an Indenture dated as of June __,
1999 between us and Norwest Bank Minnesota, N.A., as trustee. Many of the
terms and conditions applicable to the Debentures will be contained in the
Indenture. The following summarizes some, but not all, of the provisions of
the Debentures and the Indenture. Prospective buyers of the Debentures should
refer to the actual terms of the Debentures and the Indenture for the
definitive terms and conditions. Copies of the proposed forms of Indenture
and Debentures are filed as exhibits to the Registration Statement of which
this prospectus is a part. As used in this Description of Debentures, the
words "we," "us," or "our" do not include any of our subsidiaries unless
expressly stated. Capitalized terms used, but not defined, in this
Description of Debentures have the meanings given in the Indenture.
GENERAL
The total principal amount of the Debentures will be limited to
$6,000,000. The Debentures represent our general unsecured obligations and
are subordinate in right of payment to our Senior Debt as described under
"--Subordination." We will issue the Debentures in fully registered form
only, without coupons, in denominations of $1,000 each and any integral
multiple of $1,000. The Debentures will mature on June __, 2005 unless
converted, redeemed or repurchased before the maturity date. See
"--Conversion," "--Optional Redemption by Us" and "--Repurchase at Option of
Holder."
The Debentures will accrue interest at an annual rate of 9%. We will pay
the first interest payment on September 15, 1999, and quarterly after that
date on the 15th day of December, March, June and September. We will also pay
all accrued interest upon maturity, conversion, redemption and repurchase of
the Debentures. Interest will be payable to the person in whose name the
Debenture is registered at the close of business on the Regular Record Date
for the interest installment, which is the 15th day of the calendar month
preceding each Interest Payment Date. If any payment date falls on a day that
is not a business day, we will make the payment on the next business day and
we will not pay any additional interest. We will generally make all interest
payments on the Debentures by check mailed to the holders entitled to the
interest. Whenever interest is paid, the payment will include interest
accrued to, but excluding, the interest payment date or the date of
redemption, conversion, repurchase or maturity. We will compute interest on
the Debentures on the basis of a 360-day year comprised of 12 30-day months.
The Indenture restricts our ability to enter into transactions, unless
we first satisfy certain conditions described in the Indenture. If the
transaction involves a "Change of Control," you will have the right to
require us to repurchase your Debentures, in the manner described in
"--Repurchase at Option of Holder." Dividends, stock splits and other
distributions may result in an adjustment to the conversion price of the
Debentures.
The Debentures will have no sinking fund. A sinking fund is a custodial
or similar account into which regularly scheduled deposits are made for
purposes of funding the redemption or repurchase of the principal amount of
the Debentures.
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As long as we are a reporting company under the Exchange Act, we must
furnish to the Trustee and all Debenture holders all reports required to be
filed with the Commission under the Exchange Act. We must also furnish each
Debenture holder copies of any report we file with the Trustee.
We, or the holder of the Debenture, may present the Debentures for
registration, transfer or exchange at either the Minneapolis or St. Paul,
Minnesota office of Norwest Bank Minnesota, as trustee. The Trustee will
maintain a registry for the Debentures. We will not charge any fee for
registration, transfer or exchange of any Debentures. We may request
reimbursement for taxes incurred by us in connection with any registration,
transfer or exchange of Debentures. We are not required to register the
transfer or exchange of any Debenture that has been previously surrendered
for conversion or redemption.
CONVERSION
You may convert your Debenture, in whole or in part, into our common
stock at a conversion price equal to $____ principal amount of Debentures for
each share of common stock. In no event, however, will the conversion price
for the Debentures be less than $_____. You may convert your Debenture at any
time before the close of business on June __, 2005. If we call the Debentures
for redemption or repurchase the Debentures, your conversion rights will
expire at the close of business on the Redemption Date or the Repurchase
Date, as applicable.
You may exercise the right to convert your Debentures in denominations
of integral multiples of $1,000 by delivering your Debentures to the
trustee's Minneapolis or St. Paul office accompanied by a written notice that
you elect to convert your Debentures. If the date of conversion occurs after
a Regular Record Date, but before the next Interest Payment Date, and we have
not called the Debentures for redemption, we will pay you the interest due on
the next Interest Payment Date, regardless of the conversion, but only
interest to the date of conversion. If the principal amount you wish to
convert is not evenly divisible by the conversion price, instead of issuing a
fractional share, we will pay you a cash adjustment in an amount equal to the
same fraction of the conversion price per share of common stock.
If you present a Debenture for conversion, you will not be required to
pay any taxes or duties resulting from the issuance of our common stock, but
you will be required to pay any tax or duty resulting from the issuance of
common stock in the name of any other person.
The conversion price may be adjusted upon certain events including:
- our issuing common stock or other capital stock as a dividend
or distribution to the holders of our common stock
- our dividing or combining our outstanding shares of common
stock into a different number of shares
- our issuing common stock as a result of reclassification of
our common stock
- subject to certain exceptions, our fixing a record date for
making a rights offering to our stockholders
- our Board determining that a reduction is in the our best
interest, to the extent permitted by law
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<PAGE>
In the event of any reclassification or other change in our common
stock, or our consolidation, merger, or combination with or into another
entity or a sale or conveyance to another person of our property and assets
as an entirety or substantially as an entirety, that results in the holders
of our common stock becoming entitled to receive stock, other securities,
cash or other property or assets on or in exchange for their shares of common
stock, you will generally be entitled to convert your Debentures into the
type and amount of property or assets that you would have received had the
Debentures been converted immediately before the event. All references in
this Description of Debentures to "common stock" in the context of your right
to convert, should be construed to mean either our common stock or the other
property into which the Debenture is convertible.
You may, in certain circumstances, be deemed to have received a
distribution or dividend subject to U.S income tax as a result of an
adjustment (or the nonoccurrence of an adjustment) to the conversion price of
your Debentures. See "--Certain United States Federal Income Tax
Considerations."
Unless the adjustment in the conversion price requires an increase or
decrease of at least $.01 per share, we will not be required to make any
adjustments in the conversion price. Any adjustment not made will be taken into
account in subsequent adjustments.
OPTIONAL REDEMPTION BY US
On or after June __, 2002, we may elect to redeem the Debentures. If we
elect to redeem the Debentures, we must redeem all of them. We will not be
allowed to redeem the Debentures before June __, 2002. We will provide the
holders of the Debentures at least 30 but not more than 60 days before the
Redemption Date notice of our intent to redeem the Debentures.
The Redemption Price for the Debentures (expressed as a percentage of
the principal amount of each Debenture thereof) will be as follows for
Debentures redeemed in the 12-month periods beginning on June __ of each of
the following years:
YEARS PERCENTAGE OF EACH DEBENTURE
----- ----------------------------
1999-2001 No call
2002 108%
2003 104%
2004 and thereafter 100%
We will also pay accrued interest through the Redemption Date. If a
Redemption Date occurs on an Interest Payment Date, the interest will be
payable to the holder of record as of the relevant Record Date, otherwise
interest will be paid to the party to whom the principal is being paid.
54
<PAGE>
We have no right to redeem the Debentures during any period when an
Event of Default, or an event which, with notice or lapse of time or both,
would constitute an Event of Default, has occurred and is continuing.
REPURCHASE AT OPTION OF HOLDER
If we experience a Change of Control before June __, 2005, you will have
the right, at your option, to require us to repurchase all or part of your
Debentures on the 45th calendar day after the date that we mail a notice to
you of the occurrence of a Change of Control. We will pay the Repurchase
Price in cash and the Repurchase Price will be 102% of the principal amount
of the Debentures. We will also pay accrued interest up to the Repurchase
Date. If an Interest Payment Date is on or before the Repurchase Date, we
will pay the interest becoming due on the Interest Payment Date to the holder
of record on the relevant Record Date, which will satisfy our obligation to
otherwise pay interest in connection with the repurchase.
We are required to mail a notice to each holder of record within 30
calendar days after the occurrence of a Change of Control. The notice must
describe the Repurchase Date, the holder's right to elect repurchase of the
Debentures, the Repurchase Price, the date by which the repurchase right must
be exercised and the procedures to follow to exercise the repurchase right.
We must deliver a copy of the notice to the Trustee and cause a copy of the
notice to be published in a newspaper of general circulation in Minneapolis
and St. Paul, Minnesota and San Diego, California.
You may exercise your repurchase rights by delivering written notice to
the Trustee on or before the close of business on the 30th calendar day after
the date of our repurchase notice indicating, among other things, that you
have elected to exercise your repurchase rights. The notice is to be
accompanied by the Debentures, endorsed for transfer to us.
The Indenture defines "Change in Control" as follows:
- "Change in Control" of Paper Warehouse will be deemed to have occurred
at such time as any Person is or becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of shares of our capital
stock entitling such Person to exercise 50% or more of the total voting
power of all shares of our capital stock entitled to vote in elections
of directors. A "Change of Control" will not be deemed to have occurred
if either of the following has occurred:
- the closing price of our common stock equals or exceeds 125% of
the effective conversion price on any five trading days during the
ten trading-day period immediately preceding the date of the Change
of Control; or
- all the consideration (excluding cash payments for fractional
shares) to be paid for our common stock in the transaction(s)
constituting a Change of Control consists of shares of common stock
traded on a national securities exchange or quoted on the Nasdaq
National Market System and as a result of such transaction(s) the
Debentures become convertible solely into such common stock.
55
<PAGE>
In the event that we are required to repurchase the Debentures, there
can be no assurances that we will have sufficient funds to pay the repurchase
price. A Change of Control may result in a default (directly or by way of a
cross-default provision) under one or more agreements governing our Senior
Debt. In such a circumstance, the subordination provisions contained in the
Indenture may prevent us from making any payment on the Debentures, including
a payment of the Repurchase Price, unless we first obtain the consent of the
holders of defaulted Senior Debt or repay the Senior Debt in full.
Your right to require us to repurchase Debentures as a result of a
Change of Control may have the effect of delaying, deferring or preventing a
Change of Control or other attempt to acquire control of us. Consequently,
the right may make more difficult a merger, consolidation or tender offer, or
an assumption of control by a holder of a large block of our shares and the
removal of incumbent management. The Change of Control repurchase feature is
a result of negotiations between us and Miller & Schroeder and is not the
result of our knowledge of any specific effort to accumulate shares of common
stock or to obtain control of us by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by us to adopt a series of
anti-takeover provisions. We have no present intention to engage in a
transaction involving a Change of Control, although it is possible that we
would decide to do so in the future.
Rule 13e-4 under the Exchange Act requires the distribution of certain
information to security holders in the event of certain issuer tender offers
and may apply in the event of a repurchase. We will comply with this rule to
the extent applicable.
SUBORDINATION
All payments under the Debentures are, to the extent provided in the
Indenture, subordinate and junior to the prior payment in full of all Senior
Debt. The subordination provisions apply to existing Senior Debt as well as
Senior Debt incurred after the date of this prospectus. The Debentures will
be senior in right of payment to any Subordinated Debt and to any debt (other
than the Debentures) held by an affiliate of ours, whether outstanding at the
closing of this offering or created thereafter.
Upon any distribution of our assets, dissolution, winding up, liquidation
or reorganization of us, the payments on the Debentures will be subordinated
in right of payment to the prior payment in full of all Senior Debt.
Moreover, if the Debentures are accelerated following an Event of Default (as
defined), the holders of any Senior Debt then outstanding will be entitled to
payment in full before the holders of the Debentures are entitled to receive
any payment on the Debentures. However, our obligations to make payments with
respect to the Debentures will not otherwise be affected. We are the sole
obligor on the Debentures.
In addition, the subordination provisions will prevent us from making
any payments on the Debentures if:
- we fail to pay any payment of principal, interest, premium, or other
obligation, if any, due on any Senior Debt beyond the applicable grace
period
- any other default occurs and is continuing under any Senior Debt that
permits holders of the Senior Debt to accelerate the maturity of any
Senior Debt
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<PAGE>
We may resume making payments on the Debentures once the default on the
Senior Debt is cured or waived or otherwise ceases to exist.
The Indenture defines "Senior Debt" as follows:
"`Senior Debt' means the principal of, premium (if any) and interest on
(i) any and all Indebtedness of the Company (other than the Debentures,
Parity Debt and Subordinated Debt) incurred in connection with the
borrowing of money, all Indebtedness to the extent it is secured by real
estate and/or assets of the Company (including Capitalized Lease
Obligations), all Indebtedness evidenced by bonds, debentures,
mortgages, notes or other securities or other instruments, incurred,
assumed or guaranteed by the Company before, at or after the date of
execution of this Indenture, all Indebtedness evidenced by bankers'
acceptances of similar instruments, or by letters of credit, bank
guarantees or reimbursement obligations therefor, all Indebtedness under
swap or hedging transactions, and Indebtedness represented by previously
issued and outstanding debentures which have been called for redemption
and (ii) all renewals, extensions and refundings thereof; provided that
any Indebtedness shall not be Senior Debt if the instrument creating or
evidencing any such Indebtedness or pursuant to which such Indebtedness
is outstanding, provides that such Indebtedness, or such renewal,
extension or refunding thereof, is junior or is not superior in right of
payment to the Debentures."
If the Trustee or any holder of Debentures receives any payment or
distribution of our assets of any kind on the Debentures in contravention of
any of the terms of the Indenture, then the payment or distribution will be
held by the recipient in trust for the benefit of the holders of Senior Debt,
and will be immediately paid or delivered to the holders of Senior Debt or
their representative or representatives.
The Indenture does not prevent us from incurring additional Senior Debt.
As of January 29, 1999, we had approximately $____ million of outstanding
Indebtedness which is expected to be Senior Debt.
The subordination provisions of the Indenture and the Debentures will
not prevent the occurrence of any default or Event of Default or limit the
rights of any holder of Debentures to pursue any other rights or remedies
with respect to the Debentures.
As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the Debentures may receive less than other creditors (on
a ratable basis).
EVENTS OF DEFAULT AND REMEDIES
The following events are included as "Events of Default" in the Indenture:
- our failure to pay interest on the Debentures when due if the failure
continues for 30 days
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<PAGE>
- our failure to pay the principal of, or premium, if any, on any of
the Debentures when due
- our breach of a financial covenant and continuance of such breach for
a period of 30 days after the date of our report to the Trustee
- our failure to perform any covenant or warranty in the Indenture if
the failure continues for 30 days after appropriate notice is given to
the Company, the Trustee and the Debenture holders, as applicable
- a default by us on any Indebtedness (other than the Debentures) that
results in the acceleration of Indebtedness in an amount in excess of
$500,000 and the Indebtedness or the acceleration has not been
discharged for 60 days after notice is given in accordance with the
Indenture
- certain events involving bankruptcy, insolvency or reorganization of
us
- a final judgment by a court against us for the payment of money not
fully insured against in an amount in excess of $500,000 which judgment
remains unsatisfied for 30 days after the right to appeal such judgment
has expired or terminated
The Trustee will be generally required, within 60 days after its
becoming aware of a default, to provide the registered holders of the
Debentures written notice of the default. Except in the case of a payment
default, the Trustee will not be required to deliver a notice of default if
it determines in good faith that withholding the notice is in the best
interest of the holders of the Debentures.
If an Event of Default has occurred and is continuing, the Trustee, or
the holders of not less than 25% of the aggregate principal amount of the
Debentures, may declare all amounts outstanding on the Debentures to be
immediately due and payable. If an Event of Default occurs resulting from the
bankruptcy, insolvency or reorganization of us, all unpaid principal of and
accrued interest on the outstanding Debentures would become due and payable
immediately without any declaration or other act on the part of the Trustee
or holders of Debentures.
The Indenture will generally provide that the holders of a majority in
principal amount of the outstanding Debentures may direct the time, method
and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee, subject to
certain limitations. Before proceeding to exercise any right or power under
the Indenture at the direction of the holders, the Trustee will be entitled
to receive from the holders reasonable security or indemnity against any
costs, expenses and liabilities that it might incur as a result. Following an
Event of Default for nonpayment, each holder to which the default pertains
will have the absolute right to institute suit to enforce payment of any
Debentures held by it.
Generally, the holders of not less than a majority in aggregate
principal amount of the outstanding Debentures may on behalf of the holders
of all Debentures waive any default or Event of Default. The consent of all
affiliated holders will be required to waive any default and Events of
Default relating to a failure to make payment on any Debenture, convert any
Debenture into common stock or to comply with any of the provisions of the
Indenture that would require the consent of affected holders to modify.
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<PAGE>
Within 90 days of the end of each fiscal year, we will be required to
send the Trustee a statement of certain of our officers stating:
- that such officer has reviewed our activities during such year
and supervised the performance under this Indenture
- whether, to the best of such officer's knowledge based on such
review, we are in compliance with our obligations under this
Indenture or if we have defaulted on such obligations
We are also required, if certain of our officers obtain knowledge that we are
not in compliance with the terms of the Indenture or the Debentures, to deliver
to the Trustee a statement specifying the nature of the default and the action
we have taken, are taking or proposes to take to cure the default.
RESTRICTIVE COVENANTS
CONSOLIDATION, MERGER OR SALE OF ASSETS. The Indenture provides that we
may not consolidate or merge with or into another Person or convey, transfer or
lease all or substantially all of our properties and assets to another Person,
Paper Warehouse or any Subsidiary, unless,
- if we are not the surviving entity, such surviving entity
must be a U.S. business entity and expressly assume all of our
obligations under the Debentures and Indenture
- no Event of Default will exist or will occur immediately after
giving effect to the transaction
- certain other conditions are satisfied
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. We cannot, and we cannot
permit any Subsidiary, to engage in any transaction of any kind or nature with
any of our Affiliates, other than a wholly-owned Subsidiary, unless
- a majority of our Board's Independent members determines that
the transaction terms are fair to us or our subsidiary, as the
case may be
- the terms of the transaction are more beneficial to us or
Subsidiary, as the case may be, than a similar transaction
with an unrelated person under the same circumstances
- a person experienced in the nature of the transaction
certifies the transaction to the Board as fair to us or our
Subsidiary, as the case may be, and the terms are those that
would be found in similar transactions with unrelated persons
under the same circumstances
RESTRICTIONS ON DIVIDENDS AND REDEMPTIONS. We can only make
dividends or distributions that are paid in our capital stock. Neither us nor
our Subsidiary may purchase, redeem or acquire for value any of our capital
stock, unless we meet certain conditions specified in the Indenture.
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NET WORTH. We must at all times during the term of the Debentures keep
and maintain Consolidated Tangible Net Worth at an amount not less than Nine
Million Dollars ($9,000,000) plus 50% of positive Consolidated Net Income
earned after January 29, 1999.
MODIFICATIONS OF THE INDENTURE
The Indenture generally allows the Trustee and us, with the consent
of the holders of not less than a majority of the aggregate principal amount
of the outstanding Debentures, to modify the Indenture, any supplemental
indenture or the Debentures. The following modifications require the consent
of each affected Debenture holder:
- an extension of the maturity of any Debenture or any
interest payment
- a reduction in the rate or an extension of the time or payment
of interest on any Debenture
- a reduction in the principal amount of any Debenture
- a reduction in any amount payable upon redemption or
repurchase of any Debenture
- any modification to our obligation to repurchase any Debenture
upon the happening of a Change of Control if adverse to any
holder of Debentures
- any modification that impairs or adversely affects the right
of any holder to institute suit for the payment of any
Debenture
- any change in currency in which any Debenture is payable
- any modification, to the right of the holders to convert the
Debentures into common stock if adverse to any holder of
Debentures
- any modification of the subordination provisions that
adversely affects the holders of the Debentures
SATISFACTION AND DISCHARGE
We may discharge our obligations under the Indenture while the
Debentures remain outstanding if:
- all Debentures are within one year of their scheduled maturity
or the date on which they are scheduled for redemption; and
- we have deposited with the Trustee an amount sufficient to pay
all outstanding Debentures on their scheduled maturity or the
date scheduled for redemption.
GOVERNING LAW
The Indenture and the Debentures will be governed by the laws of the
State of Minnesota.
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CONCERNING THE TRUSTEE
Norwest Bank Minnesota, N.A. will serve as Trustee under the Indenture
and is also the Debenture Registrar.
The Trustee under the Indenture, has been appointed by us as the
initial paying agent, conversion agent, registrar and custodian with regard to
the Debentures. We may maintain deposit accounts and conduct other banking
transactions with the Trustee or its affiliates in the ordinary course of
business.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax
considerations applicable to U.S. holders of Debentures relating to the
purchase, ownership and disposition of the Debentures and of common stock into
which Debentures may be converted, but is not a complete analysis of all
potential tax considerations. The summary assumes that the Debentures will be
treated as "debt" and not "equity" for federal income tax purposes. This summary
is based on laws, regulations, rulings and decisions now in effect, which may
change in the future. It relates only to those of you who will hold Debentures
and common stock into which Debentures may be converted as "capital assets"
(within the meaning of Section 1221 of the Internal Revenue Code) and does not
address particular tax considerations or individual circumstances. You may be
subject to special tax rules if you are:
- subject to the alternative minimum tax;
- a bank or other financial institution;
- a tax-exempt organization;
- an insurance company;
- a foreign person or entity;
- a broker or dealer in securities or currencies;
- holding Debentures as a position in a hedging transaction,
"straddle" or "conversion transaction"; or
- deemed to sell Debentures or common stock under the
constructive sale provisions of the Internal Revenue Code.
This summary discusses the tax considerations applicable to those of
you who are the initial purchasers of the Debentures and who purchase the
Debentures at their "issue price" as defined in Section 1273 of the Internal
Revenue Code. It does not discuss the tax considerations applicable to
subsequent purchasers of the Debentures. The summary does not, therefore,
discuss application of (i) the "market discount" rules of Internal Revenue Code
Sections 1276 to 1278 or (ii) the "bond premium" amortization rules of Internal
Revenue Code Section 171. Moreover, the "original issue discount" rules of
Internal Revenue Code Sections 1271 to 1275 are not generally discussed herein
since Debentures are not anticipated to be issued at a discount from their face
value.
We have not sought any ruling from the IRS or an opinion of counsel
with respect to the statements we make and the conclusions we reach in the
following summary, and we are not
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certain that the IRS will agree with our statements and conclusions. The IRS
may successfully adopt a contrary position. Our summary does not consider the
effect of the federal estate or gift tax laws, the alternative minimum tax or
the tax laws of any applicable foreign, state, local or other jurisdiction.
Those of you considering the purchase of Debentures should consult your
own tax advisors with respect to the application of the U.S. federal income tax
laws to your particular situation as well as any tax consequences arising under
the Federal estate or gift tax rules, under the laws of any state, local or
foreign taxing jurisdiction or under any applicable tax treaty.
TAXATION OF INTEREST
Interest paid on the Debentures will be included in your income as
ordinary income at the time it is treated as received or accrued, in accordance
with your regular method of tax accounting. If there is a Change of Control, as
defined in the "Description of Debentures -- Repurchase at Option of Holders,"
we may be required to pay additional interest on the Debentures. Those payments
will result in the recognition of additional interest or original issue discount
income with respect to the Debentures. According to Treasury Regulations, the
possibility of an additional payment on a Debenture will not affect the amount
of interest or original issue discount income you recognize (or the timing of
your recognition) if the likelihood of the additional payment, as of the date
the Debentures are issued, is remote. We believe that the likelihood of a Change
of Control occurring is remote and do not intend to treat the possibility of one
occurring as affecting the yield to maturity of any Debenture. The IRS may not
agree with us.
SALE, EXCHANGE OR REDEMPTION OF THE DEBENTURES
When you sell or exchange the Debenture or the Debenture is redeemed,
other than in the case of a conversion (discussed below), you will generally
recognize capital gain or loss equal to the difference between:
- the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent the
amount is attributable to accrued interest income not previously
included in your taxable income, which will be taxable as ordinary
income, or is attributable to accrued interest that was previously
included in income, which amount may be received without generating
further taxable income); and
- your adjusted tax basis in the Debenture.
Your adjusted tax basis in a Debenture generally will equal the amount
you paid for the Debenture. Capital gain or loss will be long-term capital gain
or loss if your holding period for the Debenture is more than one year at the
time of sale, exchange or redemption.
CONVERSION OF THE DEBENTURES
You will generally not recognize any income, gain or loss upon
conversion of a Debenture into common stock except to the extent that the common
stock is considered attributable to accrued interest not previously included in
your taxable income (which is taxable
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as ordinary income) or with respect to cash received in lieu of a fractional
share of common stock. Your tax basis in the common stock received on
conversion of a Debenture will be the same as your adjusted tax basis in the
Debenture at the time of conversion (reduced by any basis allocable to a
fractional share interest), and the holding period of the common stock
received on conversion will generally include the holding period of the
converted Debenture. However, your tax basis in shares of common stock
considered attributable to any accrued interest generally will equal the
amount of the accrued interest included in income, and the holding period for
such common stock will begin on the date of conversion. An adjustment of the
conversion ratio of the Debentures, in some circumstances, could be treated
as a constructive distribution, as discussed under "Dividends" below.
Cash you receive in lieu of a fractional share of common stock upon
conversion will be treated as payment in exchange for the fractional share of
common stock. Accordingly, cash you receive in lieu of a fractional share of
common stock generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and your adjusted
tax basis in the fractional share).
DIVIDENDS
Any dividends paid to you on the common stock after a conversion
generally will be included in your taxable income as ordinary income to the
extent of our current or accumulated earnings and profits. You may, in certain
circumstances, be deemed to have received constructive distributions if the
conversion ratio of the Debentures is adjusted. Adjustments to the conversion
price made pursuant to a bona fide reasonable adjustment formula which has the
effect of preventing the dilution of your interest as a holder of the debt
instrument will generally not be considered to result in a constructive
distribution. Certain of the possible adjustments provided in the Debentures
(including, without limitation, adjustments in respect to taxable dividends to
our stockholders) will not qualify as being made pursuant to a bona fide
reasonable adjustment formula. If these adjustments are made, you, as a
Debenture holder, might be deemed to have received constructive distributions
taxable as dividends even though you have not received any cash or property as a
result of the adjustments. In certain circumstances, the failure of the
Debentures to provide for such an adjustment may result in taxable dividend
income to the holders of common stock.
SALE OF COMMON STOCK
Upon the sale or exchange of common stock, you will generally recognize
capital gain or loss equal to the difference between:
- the amount of cash and the fair market value of any property
you receive upon the sale or exchange; and
- your adjusted tax basis in the common stock.
Capital gain or loss will be long-term capital gain or loss if your holding
period in common stock is more than one year at the time of the sale or
exchange. Your basis and holding period in common stock received upon conversion
of a Debenture are determined as discussed above under "Conversion of the
Debentures."
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments
of principal, redemption premium, if any, interest on a Debenture, payments of
dividends on common stock, payments of the proceeds of the sale of a Debenture
and payments of the proceeds of the sale of common stock. A 31% backup
withholding tax may apply to some or all of these payments unless you:
- certify that you are a corporation, or come within certain
other exempt categories of recipients when required to
demonstrate this fact; or
- provide a taxpayer identification number on IRS Form W-9
promptly when requested, certify as to no loss of exemption
from backup withholding, and otherwise comply with applicable
requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules from your
payment will be allowed as a credit against your U.S. federal income tax and may
entitle you to a refund, provided that you furnish required information to the
IRS.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU SHOULD CONSULT
YOUR OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL, STATE, AND LOCAL TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR DEBENTURES AND COMMON
STOCK. YOU SHOULD ALSO CONSULT A TAX ADVISOR AS TO THE UNITED STATES ESTATE AND
GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING
AND DISPOSING OF OUR DEBENTURES AND COMMON STOCK, AS WELL AS THE CONSEQUENCES OF
ANY PROPOSED CHANGE IN APPLICABLE LAWS.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company presently consists of
50,000,000 shares, 40,000,000 of which are common stock, par value $0.01 per
share, and, 10,000,000 shares of Preferred Stock, par value $0.01 per share,
issuable in series.
COMMON STOCK
As of January 29, 1999, there were 4,627,936 shares of common stock
outstanding. All outstanding shares of common stock are fully paid and
nonassessable. The holders of common stock are entitled to one vote for each
share held of record on all matters voted upon by the stockholders. Stockholders
may not cumulate votes for the election of directors. Thus, the owners of a
majority of the shares of common stock outstanding have the power to elect all
of the directors. Subject to the rights of any future class or series of Serial
Preferred Stock that the Board may authorize and issue in the future, each share
of outstanding common stock is entitled to participate equally in any
distribution of net assets made to the stockholders in liquidation, dissolution
or winding up of Paper Warehouse and is entitled to participate equally in
dividends as and when declared by the board of directors. There are no
redemption, sinking fund,
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conversion or preemptive rights with respect to the shares of common stock.
All shares of common stock have equal rights and preferences.
SERIAL PREFERRED STOCK
Under governing Minnesota law and our Amended and Restated Articles
of Incorporation, no action by our stockholders is necessary, and only action
of the board of directors is required to authorize the issuance of any shares
or series of Serial Preferred Stock. The board of directors is empowered to
establish, and to designate the name of, each class or series of the shares
of Serial Preferred Stock and to set the terms of these shares (including
terms with respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences), any or all of
which may be greater than the rights of the holders of common stock.
Accordingly, the board of directors, without stockholder approval, may issue
shares of Serial Preferred Stock with terms (including terms with respect to
redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences) that could adversely affect the voting power
and other rights of holders of the common stock. At present, the board of
directors has not authorized or issued any shares of Serial Preferred Stock
and has no present plan to establish any such additional class or series.
The Serial Preferred Stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of common stock,
to acquire control of us with a view to effecting a merger, sale or exchange of
assets or a similar transaction. For example, the board of directors could issue
these shares as a dividend to holder of common stock or place these shares
privately with purchasers who may side with the board of directors in opposing a
takeover bid. The anti-takeover effects of the Serial Preferred Stock may deny
stockholders the receipt of a premium on their common stock and may also have a
depressive effect on the market price of the common stock.
STATE LAW PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by the
Board and to discourage an unsolicited takeover of the Company, if the Board
determines that such a takeover is not in the best interests of the Company and
our stockholders. However, these provisions could have the effect of
discouraging certain attempts to acquire us which could deprive our stockholders
of opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act (the
"MBCA") applies, with certain exceptions, to any acquisition of voting stock
of the Company (from a person other than us, and other than in connection
with certain mergers and exchanges to which we are a party) resulting in the
beneficial ownership of 20% or more of the voting stock then outstanding.
Section 302A.671 requires approval of any acquisition of this type by a
majority vote of our stockholders before the consummation of the acquisition.
In general, shares acquired in the absence of this approval are denied voting
rights and we may redeem the shares at their then fair market value within 30
days after the acquiring person has failed to
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give a timely information statement to us or the date the stockholders voted
not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the MBCA generally prohibits any business
combination by us, or any of our subsidiaries, with any stockholder that
purchases 10% or more of our voting shares (an "interested shareholder")
within four years following the interested shareholder's share acquisition
date, unless the business combination is approved by a committee of all of
the disinterested members of our board of directors before the interested
shareholder's share acquisition date.
Our Amended & Restated Bylaws provide that Section 302A.673 of the
MBCA is not applicable to any business combination (as defined in the MBCA)
of Paper Warehouse with, with respect to, proposed by or on behalf of, or
pursuant to, any written or oral agreement, arrangement, relationship,
understanding, or otherwise with Yale T. Dolginow or Brent D. Schlosser or
any of their respective affiliates or associates (as defined in the MBCA).
CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
Our Amended and Restated Articles of Incorporation limit the liability
of our directors to the fullest extent permitted by law. Specifically, our
directors will not be personally liable for monetary damages for breach of the
fiduciary duty as directors, except for liability for
- any breach of the director's duty of loyalty to us or
our stockholders
- acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law
- corporate distributions which are in contravention of
restrictions in the MBCA, our Articles or Bylaws, or any
agreement to which we are a party
- violations of Minnesota securities laws
- any transaction from which the director derives an improper
personal benefit
- any act or omission occurring before the effective date of the
provision in our Articles eliminating or limiting liability
This provision will generally not limit liability under state or federal
securities law.
Section 302A.521 of the MBCA provides that a Minnesota business
corporation must indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason
of the former or present official capacity (as defined) of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred by the person in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed
civil, criminal, administrative, arbitration or investigative proceeding,
including one by or in the right of the corporation. Section 302A.521
contains detailed terms regarding this right of indemnification and reference
is made thereto for a complete statement of these indemnification rights.
Article 6 of our Bylaws provides that each of our directors,
officers and employees will be indemnified by us in accordance with, and to
the fullest extent permissible by, applicable law.
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Insofar as indemnification for liabilities arising under the Security
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
SEC this indemnification is against public policy as expressed in the Securities
Act, and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
Firstar Trust Company is the transfer agent and registrar of the common
stock.
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UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement, Miller & Schroeder Financial, Inc. has agreed to
purchase from us and we have agreed to sell to Miller & Schroeder, Debentures,
in the total principal amount of $6,000,000. Miller & Schroeder will purchase
the Debentures from us for $5,580,000, net of its underwriting discount fee of
$420,000. We have agreed to pay Miller & Schroeder a nonaccountable expense
allowance in the amount of $150,000, 2.5% of the gross proceeds of this
offering.
Miller & Schroeder will be committed to take and pay for all of the
Debentures if any are purchased.
The Underwriting Agreement provides for reciprocal indemnification
between us, Miller & Schroeder and each of Miller & Schroeder's and our
officers, directors and controlling persons against civil liabilities in
connection with this offering, including certain liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to such indemnification provisions, we
have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Miller & Schroeder proposes to offer the Debentures to the public at
$1,000 per Debenture, and to certain selected dealers at such price less a
concession of $_______ per Debenture. Miller & Schroeder does not intend to
confirm sales to any account over which it has discretionary authority.
In connection with this offering, we have agreed to issue and sell to
Miller & Schroeder, for nominal consideration, a warrant (the "Underwriter's
Warrant") to purchase 50,000 shares of our common stock at [120% of market
price] $______ per share. The Underwriter's Warrant contain anti-dilution
provisions providing for appropriate adjustments on the occurrence of certain
events. The Underwriter's Warrant also provides certain demand and
participatory rights to require registration under the Securities Act of the
shares underlying the Underwriter's Warrant. The Underwriter's Warrant will be
exercisable commencing one year from the date of this prospectus and for a
period of four years thereafter. The Underwriter's Warrant will be restricted
from sale, transfer, assignment or hypothecation except to officers or
successors of Miller & Schroeder. Any profits realized by Miller & Schroeder
upon the sale of the Underwriter's Warrant or the securities issuable upon
exercise thereof may be deemed to constitute additional underwriting
compensation.
In order to facilitate the offering of the Debentures, Miller &
Schroeder may engage in transactions that stabilize, maintain or otherwise
affect the price of the Debentures. In addition, to stabilize the price of the
Debentures, Miller & Schroeder may bid for, and purchase, Debentures in the open
market. Miller & Schroeder may also reclaim selling concessions allowed to a
dealer for distributing Debentures in the offering, if Miller & Schroeder
repurchases previously distributed Debentures in transactions to cover its short
positions, in stabilization transactions or otherwise. Finally, Miller &
Schroeder may bid for, and purchase, Debentures in market making transactions
and impose penalty bids. These activities may stabilize or maintain the market
price of the Debentures above the market level that may
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otherwise prevail. Miller & Schroeder is not required to engage in these
activities and may end any of these activities at any time. Any such
activities will be undertaken in accordance with Regulation M under the
Exchange Act, if at all.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. Neither Miller & Schroeder
nor us make any representation or prediction as to the direction or magnitude of
any effect that the transactions described above might have on the price of the
Debentures. In addition, neither Miller & Schroeder nor us make any
representations that Miller & Schroeder will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Before the offering, there has been no public market for the
Debentures. We do not intend to list the Debentures on any securities exchange
or include them for quotation on the Nasdaq system. Miller & Schroeder has
advised us that it intends initially to make a market in the Debentures, but it
is not obligated to do so and may discontinue market making at any time without
notice.
The foregoing is a summary of the material provisions of the
Underwriting Agreement and the Underwriter's Warrant. Copies of such documents
have been filed as exhibits to the Registration Statement of which this
prospectus is a part.
The following table summarizes the compensation we will pay to Miller &
Schroeder:
<TABLE>
<CAPTION>
Form of Compensation Amount
--------------------- --------------
<S> <C>
Total underwriting discounts and commissions............ $420,000
Non-accountable expense allowance....................... $ 150,000
Warrant................................................. 50,000 shares
</TABLE>
-------------------
The following table itemizes all of the expenses we expect to incur
in connection with this offering (all expenses are estimates other than the
SEC registration and NASD fees which are actual) other than underwriting
discounts, fees and commissions which are set forth in the table above.
<TABLE>
<S> <C>
SEC registration fee........................................................................ $1,668
NASD filing fee............................................................................. 1,100
Legal fees and expenses..................................................................... 80,000
Accounting fees and expenses................................................................ 25,000
Blue Sky fees and expenses.................................................................. 5,000
Printing and engraving expenses............................................................. 50,000
Trustee and registrar fees and expenses..................................................... 10,000
Miscellaneous............................................................................... 107,232
--------
Total ............................................................................. $280,000
</TABLE>
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LEGAL MATTERS
The validity of the 9% Convertible Subordinated Debentures being sold in
this offering will be passed upon for us by Oppenheimer Wolff & Donnelly LLP,
Minneapolis, Minnesota. Fredrikson & Byron, P.A., Minneapolis, Minnesota, is
acting as counsel for Miller & Schroeder in connection with certain legal
matters relating to Debentures offered hereby.
EXPERTS
The consolidated financial statements of Paper Warehouse, Inc. as of
January 29, 1999 and January 30, 1998, and for each of the years in the
three-year period ended January 29, 1999 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the Debentures
and common stock offered by this prospectus. This prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to us and the Debentures and common stock offered in
this prospectus, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Although all material terms and
provisions of any material contract or other document filed are referred to
in this prospectus and described herein, these descriptions are not
necessarily complete, and in each instance reference is made to the copy of
the contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by the
reference.
We are subject to the periodic reporting and other informational
requirements of the Exchange Act pursuant to Section 15(d) thereof and, in
accordance therewith, file reports, proxy statements and other information
with the Commission. For further information with respect to us, reference is
hereby made to such reports and other information which, together with the
Registration Statement and the exhibits and schedules thereto, can be
inspected, without charge, at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, IL 60661, and 7 World Trade Center, Suite 1500, New York, New York
10048. Copies of all or any part of the Registration Statement can also be
obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the SEC's Public Reference Room by calling
the SEC at 1-800-SEC-0330. The Commission also maintains a website
(http.//www.sec.gov) that contains reports, proxy and information statements,
and other information that has been or will be filed by us.
Our World Wide Web site address is WWW.PAPERWAREHOUSE.COM. The
information included in our website is not made a part of this prospectus.
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PAPER WAREHOUSE, INC.
INDEX TO FINANCIAL STATEMENTS
Paper Warehouse, Inc. and Subsidiary
Consolidated Financial Statements
January 29, 1999 and January 30, 1998
Paper Warehouse, Inc. and Subsidiary
Table of Contents
Page(s)
Independent Auditors' Report............................... F-1
Financial Statements:
Consolidated Balance Sheets........................... F-2
Consolidated Statements of Operations................. F-3
Consolidated Statements of Stockholders' Equity....... F-4
Consolidated Statements of Cash Flows................. F-5
Notes to Consolidated Financial Statements................. F-6-15
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Paper Warehouse, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Paper
Warehouse, Inc. and Subsidiary (the Company) as of January 29, 1999 and
January 30, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended January 29, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Company's
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Paper
Warehouse, Inc. and Subsidiary as of January 29, 1999 and January 30, 1998,
and the results of their operations and their cash flows for each of the
years in the three-year period ended January 29, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
March 19, 1999
Minneapolis, Minnesota
F-1
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 1999 AND JANUARY 30, 1998
<TABLE>
<CAPTION>
January 29, January 30,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 64,507 $ 2,059,737
Inventories, net ....................................................... 16,302,070 11,161,549
Accounts receivable .................................................... 1,105,262 451,937
Prepaid expenses and other current assets .............................. 613,584 153,968
----------- -----------
Total current assets ............................................... 18,085,423 13,827,191
Property and equipment, net ............................................ 9,976,450 6,798,228
Other assets, net ...................................................... 1,466,613 391,918
----------- -----------
Total assets .................................................... $29,528,486 $21,017,337
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit ......................................... $ 6,850,000 $ ---
Current maturities of long-term debt ................................... 151,993 305,585
Current maturities of capital lease obligation ......................... 308,566 179,671
Accounts payable ....................................................... 4,390,525 2,989,016
Accrued liabilities:
Payroll and related expenses .................................... 563,112 369,486
Accrued expenses ................................................ 337,014 349,718
Accrued interest ................................................ 15,037 10,317
Other ........................................................... 256,893 240,765
----------- -----------
Total current liabilities ....................................... 12,873,140 4,444,558
Capital lease obligation, less current maturities ........................ 635,204 355,927
Long-term debt, less current maturities .................................. 861,827 911,409
Deferred rent credits and other .......................................... 1,068,331 711,659
----------- -----------
Total liabilities ............................................... 15,438,502 6,423,553
Stockholders' equity:
Serial preferred stock; 10,000,000 shares authorized;
none issued or outstanding ........................................... --- ---
Common stock, $.01 par value. 40,000,000 shares authorized;
4,627,936 and 4,557,187 shares issued and outstanding, respectively .... 46,279 45,572
Additional paid-in capital ............................................. 13,833,442 13,683,807
Retained earnings ...................................................... 210,263 864,405
----------- -----------
Total stockholders' equity ...................................... 14,089,984 14,593,784
Total liabilities and stockholders' equity ...................... $29,528,486 $21,017,337
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
<TABLE>
<CAPTION>
January 29, January 30, January 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Company-owned stores ..................................... $ 62,218,553 $ 51,787,842 $ 41,892,173
Franchise related fees ................................... 1,271,973 1,161,097 1,109,737
------------ ------------ ------------
Total revenues .................................... 63,490,526 52,948,939 43,001,910
Costs and expenses:
Costs of products sold and occupancy costs ............... 41,252,342 34,966,018 27,946,561
Store operating expenses ................................. 15,185,082 11,484,271 8,732,589
General and administrative expenses ...................... 7,643,011 5,515,491 4,242,960
------------ ------------ -----------
Total costs and expenses .......................... 64,080,435 51,965,780 40,922,110
Operating (loss ) income .......................... (589,909) 983,159 2,079,800
Interest expense, net .................................... 254,405 797,567 771,549
Expenses of canceled acquisition ......................... --- 260,852 ---
------------ ------------ -----------
(Loss) income before income taxes and
extraordinary charge ................................... (844,314) (75,260) 1,308,251
Income tax benefit (expense) ............................. 323,654 (5,941) (5,300)
(Loss) income before extraordinary charge ................ (520,660) (81,201) 1,302,951
------------ ------------ -----------
Extraordinary charge for extinguishment of debt .......... --- (182,611) ---
Tax benefit of extraordinary charge ...................... --- 72,846 ---
Extraordinary charge, net ................................ --- (109,765) ---
Net (loss) income ................................. $ (520,660) ($ 190,966) $ 1,302,951
------------ ------------ -----------
------------ ------------ -----------
Basic and diluted earnings per share: ......................
Weighted average shares outstanding .................... 4,572,979
Net loss per share ..................................... ($0.11)
------------
Pro forma net (loss) income ................................ ($ 206,610) $ 807,830
Pro forma basic earnings per share: ........................
Weighted average shares outstanding 2,630,811 2,202,818
(Loss) income before extraordinary charge per share .... ($0.04) $ 0.37
Extraordinary charge per share ......................... (0.04) ---
------------ -----------
Net (loss) income per share ............................ ($0.08) $ 0.37
------------ -----------
------------ -----------
Pro forma diluted earnings per share: ......................
Weighted average shares outstanding .................... 2,630,811 2,514,250
(Loss) income before extraordinary charge per share .... ($0.04) $ 0.32
Extraordinary charge per share ......................... (0.04) ---
------------ -----------
Net (loss) income per share ............................ ($0.08) $ 0.32
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
<TABLE>
<CAPTION>
Number of Additional Total
Preferred Common Common Paid-in Retained Stockholders'
Stock Shares Stock Capital Earnings Equity
----- ------ ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 2, 1996....... --- 2,202,818 $22,028 $572,472 $2,529,075 $ 3,123,575
Net income.................... --- --- --- --- 1,302,951 1,302,951
Distribution of earnings...... --- --- --- --- (2,633,992) (2,633,992)
----- --------- ------- ----------- ------------ -----------
Balance, January 31, 1997....... --- 2,202,818 22,028 572,472 1,198,034 1,792,534
Net loss...................... --- --- --- --- (190,966) (190,966)
Distribution of earnings...... --- --- --- --- (142,663) (142,663)
Exercise of event option...... --- 197,219 1,972 (1,972) --- ---
Conversion of warrants........ --- 171,350 1,714 (1,714) --- ---
Issuance of common stock
pursuant to public offering. --- 1,985,800 19,858 13,115,021 --- 13,134,879
----- --------- ------- ----------- ------------ -----------
Balance, January 30, 1998....... --- 4,557,187 45,572 13,683,807 864,405 14,593,784
Net loss...................... --- --- --- --- (520,660) (520,660)
Distribution of earnings...... --- --- --- --- (133,482) (133,482)
Issuance of common stock
(See Note 8).................. --- 70,749 707 149,635 --- 150,342
----- --------- ------- ----------- ------------ -----------
Balance, January 29, 1999....... --- 4,627,936 $46,279 $13,833,442 $ 210,263 $14,089,984
----- --------- ------- ----------- ------------ -----------
----- --------- ------- ----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
January 29, January 30, January 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net (loss) income ............................................ $ (520,660) $ (190,966) $ 1,302,951
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operations:
Write-off of subordinated debt fees ..................... --- 182,611 ---
Depreciation and amortization ........................... 1,732,220 1,140,966 959,901
Gain on sale of property and equipment .................. (277) (1,892) (4,375)
Deferred taxes .......................................... (323,654) 902 ---
Changes in operating assets and liabilities, net of the
effect of the purchase of the assets of a business:
Accounts receivable ..................................... (653,325) (190,513) 217,740
Prepaid expenses and other current assets ............... (459,616) (34,915) 13,259
Merchandise inventories, net ............................ (3,966,362) (1,592,869) (1,851,922)
Accounts payable ........................................ 1,401,509 866,731 (488,220)
Accrued liabilities ..................................... 558,442 566,365 (63,896)
------- ------- --------
Net cash (used for) provided by operations ............ (2,231,723) 746,420 85,438
----------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets of a business ............................. (2,239,165) --- ---
Proceeds from sale of property and equipment ................. 6,349 7,807 136,960
Purchases of property and equipment .......................... (4,334,787) (2,438,110) (1,317,283)
Other assets, net of effect of asset acquisition ............. (117,420) (118,390) (18,544)
--------- --------- --------
Net cash used for investing activities ................ (6,685,023) (2,548,693) (1,198,867)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net ................... --- 13,134,879 ---
(Payments on) net proceeds from related party loans .......... --- (2,136,193) 2,136,193
Net proceeds from note payable - other ....................... --- 55,353 ---
Net proceeds from (payments on) notes payable to bank ........ 6,850,000 (5,870,000) 1,106,061
Principal payments on long-term debt ......................... (203,174) (2,072,131) (23,106)
Net proceeds from capital leases ............................. 408,172 535,598 ---
Distribution of earnings ..................................... (133,482) (142,663) (2,633,992)
--------- --------- -----------
Net cash provided by financing activities ............. 6,921,516 3,504,843 585,156
--------- --------- -------
Net (decrease) increase in cash and cash equivalents .. (1,995,230) 1,702,570 (528,273)
Cash and cash equivalents, beginning of year ................. 2,059,737 357,167 885,440
Cash and cash equivalents, end of year ....................... $ 64,507 $ 2,059,737 $ 357,167
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................ $ 274,004 $ 846,538 $ 877,410
Income taxes ........................................ --- 5,039 5,300
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Paper Warehouse, Inc. (the Company) is a paper and party goods retailer
operating 97 stores in the states of Arizona, Colorado, Iowa, Kansas, Minnesota,
Missouri, Nebraska, Oklahoma, Washington and Wisconsin. The Company also sells
Paper Warehouse franchises through a wholly-owned subsidiary. In exchange for
the initial and continuing franchise fees received, the Company provides
management assistance and gives franchisees the right to use the name "Paper
Warehouse" or "Party Universe."
(b) BASIS OF PRESENTATION
Effective February 1, 1997, the Company acquired Paper Warehouse
Franchising, Inc., a company under common control. The acquisition has been
accounted for on an "as if pooled" basis and, accordingly, the accompanying
financial statements include the financial condition and results of operations
of both companies for all periods presented. Intercompany transactions have been
eliminated in consolidation.
(c) ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) FAIR VALUES OF FINANCIAL INSTRUMENTS
Due to their short-term nature, the carrying value of the Company's
financial assets and liabilities approximates their fair value. The fair value
of the Company's borrowings, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
(e) S-CORPORATION ELECTION
Prior to its initial public offering in November 1997, the Company had
elected to be taxed as an S-Corporation under the Internal Revenue Code. The
Company had 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.
F-6
<PAGE>
(f) FISCAL YEAR
The Company's fiscal year ends on the Friday closest to January 31st.
The fiscal years ended January 29, 1999, January 30, 1998, and January 31, 1997
included 52 weeks. Unless otherwise stated, references to years in this report
relate to fiscal years rather than to calendar years.
(g) MERCHANDISE INVENTORIES
Inventories, are stated at the lower of cost (as determined on a
first-in, first-out basis) or market. The Company reviews slow moving
merchandise and takes appropriate markdowns to move the inventory. Periodically
the Company reviews inventory valuations and takes appropriate write-downs, as
it deems necessary.
(h) CASH EQUIVALENTS
Cash equivalents of $4,641 at January 29, 1999, consist of short-term
investment in money market accounts with funds available at any time. For
purposes of the Consolidated Statements of Cash Flows, the Company considers all
highly liquid instruments with maturities of three months or less to be cash
equivalents.
(i) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
by the method indicated over the estimated useful lives of the assets as
follows:
<TABLE>
<CAPTION>
Estimated
Method useful lives
------ ------------
<S> <C> <C>
Computers.......................................... Straight - line 3 years
Fixtures and equipment............................. Straight - line 5 to 7 years
Building........................................... Straight - line 40 years
Land improvements.................................. Straight - line 40 years
</TABLE>
Maintenance, repairs, and minor renewals are expensed as incurred. Upon
retirement or disposal of assets, the cost and accumulated depreciation are
eliminated from the respective accounts and the related gains or losses are
credited or charged to income.
(j) INTANGIBLE ASSETS
The excess of cost over fair value of net assets resulting from the
acquisition of a store created goodwill that is being amortized over 15 years
using the straight-line method.
The costs of acquiring trademarks have been capitalized and are being
amortized on a straight-line basis over 10 years.
(k) OTHER ASSETS
Other assets consist primarily of security deposits and lease
acquisition fees. Lease acquisition fees are amortized over the related lease
term using the straight-line method.
F-7
<PAGE>
(l) DEFERRED RENT CREDIT
Certain of the Company's operating leases provide for scheduled
increases in base rentals over their terms. For these leases, the Company
recognizes the total rental amounts due over the lease terms on a straight-line
basis and, accordingly, has established corresponding deferred rent credits for
the differences between the amounts recognized and the amounts paid.
(m) PRE-OPENING COSTS
Costs associated with the opening of new stores are expensed as
incurred.
(n) STOCK-BASED COMPENSATION
Compensation expense for stock option grants is recognized in
accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees." Had Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-based Compensation," been applied, the
compensation expense would have been different; see Note 9.
(o) ADVERTISING
The Company expenses the cost of advertising as incurred or the first
time the advertisement takes place.
(p) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs and requires that these costs be expensed as
incurred. This SOP is effective for fiscal years beginning after December 15,
1998. The Company has not yet determined the impact that adoption of this SOP
will have on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This Statement is effective for fiscal
years beginning after June 15, 1999. The Company believes that adoption of this
Statement will have no impact on the Company's financial position or results of
operations.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
January 29, January 30,
1999 1998
---- ----
<S> <C> <C>
Fixtures and equipment...................................... $13,486,409 $8,860,634
Building.................................................... 1,273,088 1,041,702
Land and improvements....................................... 319,733 319,733
Accumulated depreciation and amortization................... (5,102,780) (3,423,841)
----------- -----------
Total property and equipment, net........................... $9,976,450 $6,798,228
---------- ----------
---------- ----------
</TABLE>
F-8
<PAGE>
Depreciation and amortization expense on property and equipment was
$1,678,532, $1,094,714 and $913,918 for the fiscal years ended January 29, 1999,
January 30, 1998 and January 31, 1997, respectively.
(3) NOTES PAYABLE TO BANK
The Company has a revolving line of credit agreement with its bank that
permits borrowings up to $7,500,000. Borrowings under the agreement bear
interest at the bank's prime rate (7.75% at January 29, 1999) plus .5% and are
secured by substantially all assets of the Company. The agreement contains
restrictive covenants which, among other things, require the Company to
maintain a minimum tangible net worth and minimum current ratios. At January
29, 1999, the Company was in compliance with all of the covenants under its
credit facility.
The current agreement is subject to renewal by May 31, 1999. There was
$6,850,000 borrowings outstanding under the agreement as of January 29, 1999.
There were no borrowings outstanding as of January 30, 1998.
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: January 29, January 30,
1999 1998
---- ----
<S> <C> <C>
Term note payable in monthly installments of $3,551, including interest at
6.914% through October 2015. The note is secured by a second mortgage on the
Company's office headquarters, assignment of a life insurance policy, and the
personal guarantee of the Company's majority stockholder........................ $395,281 $407,497
Term note payable in monthly installments of $4,796, including interest at 9.08%
through December 2015. The note is secured by a first mortgage on the Company's
office headquarters............................................................. 492,383 504,143
Notes payable in monthly installments of $2,711, including interest at 7.92%
through December 1999........................................................... 26,156 55,354
$2,300,000 subordinated note payable to private placement holders with interest
due quarterly at 10%. Principal installments of $575,000 due annually commencing
November 30, 2001............................................................... 100,000 250,000
------- -------
Total long-term debt............................................................ 1,013,820 1,216,994
Less current maturities......................................................... 151,993 305,585
------- -------
Long-term debt......................................................... $861,827 $911,409
-------- --------
-------- --------
</TABLE>
On December 12, 1994, the Company completed a private placement of 46
units, each unit consisting of a 10% subordinated note due in annual
installments commencing November 30, 2001 through November 30, 2004, and one
detachable common stock purchase warrant. Subject to certain adjustments, each
warrant entitles the holder thereof to purchase 3,994 shares of the Company's
common stock, $.01 par value, at a price of $1.25 per share anytime after
November 30, 1995 and before November 30, 2004. The entire proceeds of
$2,300,000 were recorded as long-term debt. The warrants were converted into
171,350 shares of common stock concurrent with the consummation of the public
offering. The Company repaid $150,000 and $2,050,000 of
F-9
<PAGE>
the debt during fiscal 1998 and in the fourth quarter of fiscal 1997,
respectively, and expects to pay the remaining $100,000 in fiscal 1999. Total
interest expense for the fiscal years ended January 29, 1999, January 30,
1998 and January 31, 1997 was $278,824, $839,449 and $809,029, respectively.
Aggregate annual maturities of long-term debt subsequent to the fiscal
year ended January 29, 1999 are as follows:
YEAR ENDING IN JANUARY:
- -----------------------
<TABLE>
<S> <C>
2000........................................................................... $ 151,993
2001........................................................................... 27,865
2002........................................................................... 30,327
2003........................................................................... 32,869
2004 and thereafter............................................................ 770,766
-------
Total maturities of long-term debt...................................................... $1,013,820
----------
----------
</TABLE>
(5) LEASES
The Company leases all of its retail stores under noncancelable
operating leases that have various expiration dates. In addition to base rents,
certain leases require the Company to pay its share of maintenance and real
estate taxes, and include provisions for contingent rentals based upon sales.
Certain of the leases contain renewal options under which the Company may extend
the terms three to five years.
Future minimum lease commitments due under noncancelable operating
leases at January 29, 1999 are as follows:
YEAR ENDING IN JANUARY:
- -----------------------
<TABLE>
<S> <C>
2000 ...................................................................... $ 8,771,636
2001 ...................................................................... 8,319,612
2002 ...................................................................... 8,191,964
2003 ...................................................................... 7,738,108
2004 ...................................................................... 7,319,693
Thereafter ...................................................................... 22,075,297
-----------
Total future minimum lease commitments.................................................. $62,416,310
-----------
-----------
</TABLE>
Rent expense for all operating leases for the years ended January 29, 1999,
January 30, 1998, and January 31, 1997 was $7,135,092, $5,337,555 and $4,309,403
respectively.
During fiscal 1998, the Company entered into a capital lease agreement
for equipment and fixtures. During fiscal 1997, the Company entered into a
capital lease agreement for software. Future maturities under these agreements
are as follows:
F-10
<PAGE>
YEAR ENDING IN JANUARY
- ----------------------
<TABLE>
<S> <C>
2000 ...................................................................... $308,566
2001 ...................................................................... 268,921
2002 ...................................................................... 119,106
2003 ...................................................................... 130,407
2004 ...................................................................... 116,770
-------
Total future maturities of capital leases............................................... $943,770
--------
--------
</TABLE>
(6) INCOME TAXES
As indicated in Note 1, 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 are allocated to its
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.
A provision was made for state taxes during the S-Corporation period as some
states impose a tax upon S-Corporations. The Company has provided federal and
state income taxes for all periods after November 28, 1997.
An income tax benefit of approximately $324,000 was recorded for the
fiscal year ended January 29, 1999. Income tax expense of $5,941 and $5,300 was
recorded for the fiscal years ended January 30, 1998 and January 31, 1997. These
amounts differed from the amounts computed by the U.S. federal income tax rate
of 34% to pretax income from continuing operations as a result of the following:
<TABLE>
<CAPTION>
Fiscal Year Ending:
-------------------
January 29, January 30, January 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense for twelve-
month period .................................................... $(287,067) $ (25,756) $ 416,944
Increase (reduction) in income taxes resulting from:
Adjustment to reflect S-Corporation election ................... --- (15,644) (416,944)
Adjustment to deferred tax assets and liabilities to
reflect adoption of SFAS 109 ................................... --- 43,251 ---
State and local income taxes, net of federal income tax benefit ... (48,548) (1,313) 5,300
Other permanent differences ....................................... 11,961 5,403 ---
------ ----- ---
Total income tax (benefit) expense ................................ $(323,654) $ 5,941 $ 5,300
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-11
<PAGE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending:
-------------------
January 29, January 30, January 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ................................................... $ --- $ --- $ ---
State ..................................................... --- 5,039 5,300
--------- ---------- ----------
--- 5,039 5,300
Deferred:
Federal ................................................... (275,106) 767 ---
State ..................................................... (48,548) 135 ---
---------- ---------- ----------
(323,654) 902 ---
Total income tax (benefit) expense .......................... $(323,654) $ 5,941 $ 5,300
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
January 29, 1999 and January 30, 1998 are presented below.
<TABLE>
<CAPTION>
As of:
------
January 29, January 30,
Deferred tax assets: 1999 1998
---- ----
<S> <C> <C>
Accounts receivable principally due to allowance for doubtful accounts............ $ --- $ 4,800
Inventories, principally due to additional costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986............................................ 156,500 103,040
Difference in timing of lease deductions.......................................... 454,911 296,874
Net operating loss carryforward................................................... 529,843 237,988
------- -------
Total gross deferred tax asset........................................... 1,141,254 642,702
--------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation and
capitalized interest.............................................................. 623,922 467,702
Software, principally due to the differences in amortization...................... 121,733 103,056
------- -------
Total gross deferred liabilities......................................... 745,655 570,758
------- -------
Net deferred tax asset................................................... $ 395,599 $ 71,944
---------- ----------
---------- ----------
</TABLE>
At January 29, 1999, the Company has a net operating loss carryforward
for federal income tax purposes of $1,324,607 which is available to offset
future federal taxable income, if any, through 2019.
(7) RELATED PARTY TRANSACTIONS
A related party of one of the Company's majority stockholders had
previously owned four of the Company's franchise stores. On November 9, 1998,
the Company purchased all the assets of these four franchise stores. The total
purchase price was $1,349,974, which was made up of both cash and stock.
Goodwill in the amount of $267,974 was recognized on this purchase. Continuing
franchise fees collected from this related party were $88,728 and $108,034, in
1998 and 1997, respectively. The Company had no outstanding receivable as of
January 29, 1999 and a $6,940 receivable from this franchisee at January 30,
1998.
F-12
<PAGE>
A related party of one of the Company's majority stockholders
substantially owns one of the Company's franchise stores. Continuing fees
collected from this related party were $24,810 and $22,777 for the years
ended January 29, 1999 and January 30, 1998, respectively. The Company had a
receivable of $708 and $317 from this franchisee as of January 29, 1999 and
January 30, 1998, respectively.
(8) EQUITY TRANSACTIONS AND WEIGHTED AVERAGE SHARE DISCLOSURE
In December 1998, the Company issued 70,749 shares of common stock
in partial consideration for the purchase of Prickly Pear Paper, Inc.
In February 1997, the board of directors of the Company increased
the number of common shares authorized for issuance from 200,000 to
40,000,000 and authorized 10,000,000 shares of serial preferred stock.
In September 1997, the board of directors of the Company declared a
37.57217275 to 1 common stock split increasing the number of common shares
issued and outstanding from 58,629 to 2,202,818. All references to share and
per share amounts in the accompanying consolidated financial statements
reflect this stock split.
In November and December 1997, the Company registered and sold a
total of 1,985,800 shares of common stock at a price of $7.50 each in a
public offering pursuant to the Securities Act of 1933. Total proceeds to the
Company were $13,850,955. This amount, net of other related costs of the
offering of $716,028 has been reflected in common stock and additional paid-
in capital in these consolidated financial statements.
In December 1997, the Company requested the holders of its 10%
subordinated notes issued in 1994 to surrender the notes. Each note had
one detachable common stock warrant good for 3,725 shares of common stock.
Accordingly, 171,350 shares of common stock were issued when the notes were
prepaid.
A reconciliation of weighted average shares used in the earnings per
share calculation is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
January 29, January 30, January 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic weighted
average shares......... 4,572,979 2,630,811 2,202,818
Potential common
shares................... -- -- 311,432
--------- --------- ---------
Diluted weighted
average shares........ 4,572,979 2,630,811 2,514,250
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
(9) STOCK OPTIONS
In order to attract and retain employees and directors, while
preserving cash resources, the Company has, since going public, utilized
stock option awards. During fiscal 1997, the Company adopted a stock option
plan (the Plan) pursuant to which the Company may grant stock options to
employees and the board of directors. The Plan authorizes grants of options
to purchase up to 639,641 shares of authorized but unissued common stock.
Stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant. All stock options have ten-year terms and
vest ratably over three years from the date of grant.
At January 29, 1999, there were options issued and outstanding to
purchase 412,200 shares of the Company's common stock issued to employees and
directors. In fiscal 1998, the Company granted stock option awards to certain
of its employees and directors for the purchase of an aggregated amount of
227,750 shares of the Company's common stock. These options are exercisable at
prices from $2.07 to $5.00 per share and expire in 2008. During fiscal 1997,
184,450 options were awarded to certain of its employees and directors. These
options are exercisable at $7.50 per share and expire in 2007.
The per share weighted-average fair value of these options using the
Black Scholes option-pricing model is $2.10 with the following weighted-average
assumptions: volatility 60%, expected dividend yield .0%, risk-free rate of
5.5%, and an expected life of 5 years.
Details of the status of stock options as of January 29, 1999 are
reflected in the table below.
<TABLE>
<CAPTION>
Weighted-
Shares Under Price Average Exercise
Option Range Price
------ ----- ------
<S> <C> <C> <C>
Unexercised options outstanding
January 31, 1997.................... -- -- --
Options granted................... 184,450 $7.50 $7.50
Options exercised................. -- -- --
Options forfeited................. -- -- --
------- ----------- -----
Unexercised options outstanding
January 30, 1998.................... 184,450 $7.50 $7.50
Options granted................... 227,750 $2.07-$5.00 $2.90
Options exercised................. -- -- --
Options forfeited................. -- -- --
------- ----------- -----
Unexercised options outstanding
January 29, 1999.................... 412,200 $2.75-$7.50 $4.96
------- ----------- -----
------- ----------- -----
</TABLE>
The following table summarizes information concerning options outstanding and
exercisable as of January 29, 1999:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
<S> <C> <C>
Number of options........................... 412,200 61,483
Weighted average remaining contractual life,
in years.................................... 9.36 8.83
Weighted average exercise price............. $4.96 $7.50
</TABLE>
F-14
<PAGE>
The Company applies ABP Opinion No. 25 in accounting for options
granted under its stock option plans and, accordingly, no compensation cost
has been recognized for its stock options granted to its employees or
directors in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1997
---------------- ----------------
<S> <C> <C>
Net loss - as reported in fiscal 1998 and as
reported pro forma assuming C-Corporation
status in fiscal 1997....................... ($520,660) ($206,610)
Net loss - pro forma........................ ($677,149) ($500,291)
Net loss per share - as reported in fiscal
1998 and as reported pro forma assuming
C-Corporation status in fiscal 1997......... ($0.11) ($0.08)
Net loss per share - pro forma.............. ($0.15) ($0.19)
</TABLE>
(10) EMPLOYEE BENEFITS
The Company has a retirement savings plan covering substantially all
employees who have completed one year of service and attained 21 years of
age, which includes a noncontributory profit sharing plan and 401(k) feature.
Employees become fully vested in the plan on a graduated scale over a
six-year period. Contributions to the profit sharing plan are made at the
discretion of the plan committee. The 401(k) feature allows for employee's
elective salary deferrals up to 15% of their compensation, but not in excess
of certain limitations. There were no discretionary contributions to the
profit sharing plan in any of the fiscal years.
The Company has a Voluntary Employee Benefit Plan and Employee
Benefit Trust for the sole and exclusive benefit of its employees. The
Company matches 25% of the first 4% of employee contributions to the plan.
Company contributions were $34,358 and $25,422 for the years ended January
29, 1999 and January 30, 1998, respectively.
On December 7, 1998, the board approved an Employee Stock Purchase
Plan to be approved by the stockholders at the 1999 Annual Meeting. If approved
by the stockholders, the first enrollment period is not expected to begin until
August 1, 1999.
(11) EXTRAORDINARY CHARGE
Upon completing the Company's initial public offering in November
1997, the Company exercised its option to repay subordinated debt. The
Company then took a one-time charge of $182,611, which represented the
unamortized portion of the fees associated with the debt. This amount is
shown as an extraordinary charge in the accompanying Consolidated Statement
of Operations for the fiscal year ended January 30, 1998.
(12) SUBSEQUENT EVENT (UNAUDITED)
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.
F-15
<PAGE>
The inside back cover of the prospectus contains a map of the United States
indicating the locations of the Company-owned stores and franchise stores.
The map has lines on it that call out the location of 26 stores in the
Minneapolis/St. Paul metropolitan area, 16 stores in the Kansas City
metropolitan area, 13 stores in the Denver metropolitan area, 8 stores in the
Oklahoma City metropolitan area and 7 stores in the Seattle metropolitan area.
Along the left-hand side of the map, we list the following states where we
have Company-owned stores and franchise stores, along with the number of
stores in each state:
<TABLE>
<CAPTION>
COMPANY STORES FRANCHISE STORES
- -------------- ----------------
<S> <C>
Arizona (4) Arizona (1)
Colorado(14) Colorado (5)
Iowa (8) Florida (1)
Kansas (9) Georgia (2)
Minnesota (29) Illinois (3)
Missouri (10) Iowa (2)
Nebraska (2) Kansas (2)
Oklahoma (12) Kentucky (1)
Washington (7) Louisiana (4)
Wisconsin (2) Maryland (1)
Minnesota (1)
Mississippi (1)
Missouri (1)
Montana (2)
Nebraska (3)
Nevada (1)
North Dakota (4)
South Dakota (5)
Tennessee (1)
Texas (3)
Wyoming (2)
</TABLE>
Below the map are the Paper Warehouse logo and the Party Universe logo and a
photo of gift-wrapped boxes.
Below these pictures, running across the bottom of the page, is a banner
carrying the names of various celebratory events and sayings, such as
Father's Day, Fourth of July, Trick or Treat, Thanksgiving, Merry Christmas,
etc.
<PAGE>
- ----------------------------------------------------------
- ----------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY
OTHER PERSON TO PROVIDE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. YOU
MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR
REPRESENTATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY THESE DEBENTURES IN
ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY
AS OF THE DATE OF THIS PROSPECTUS.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 7
Use of Proceeds.................................. 13
Price Range of Common Stock and
Dividend Policy............................ 13
Capitalization................................... 15
Selected Financial and Operating Data............ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................... 18
Business......................................... 26
Management....................................... 38
Certain Transactions............................. 48
Principal Shareholders and Beneficial
Ownership of Management..................... 50
Description of Debentures........................ 52
Description of Capital Stock..................... 64
Underwriting..................................... 68
Legal Matters.................................... 70
Experts.......................................... 70
Additional Information........................... 70
Index to Financial Statements.................... 71
</TABLE>
-----------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
$6,000,000
PAPER WAREHOUSE, INC. LOGO
[Back of prospectius has a bunch of balloons
superimposed on it]
9% CONVERTIBLE SUBORDINATED
DEBENTURES
-----------------
PROSPECTUS
-----------------
MILLER & SCHROEDER
FINANCIAL, INC.
May ____, 1999
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses we expect to incur in
connection with this offering (subject to future contingencies) (all expenses
are estimates other than the SEC registration and NASD fees which are
actual) other than underwriting discounts, commissions and fees:
<TABLE>
<S> <C>
SEC registration fee....................................... $1,668
NASD filing fee............................................ 1,100
Legal fees and expenses.................................... 80,000
Accounting fees and expenses............................... 25,000
Blue Sky fees and expenses................................. 5,000
Printing and engraving expenses............................ 50,000
Trustee and registrar fees and expenses.................... 10,000
Miscellaneous.............................................. 107,232
------------
Total............................................. $280,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles limit the liability of our directors to the fullest
extent permitted by law. Specifically, our directors will not be personally
liable for monetary damages for breach of their fiduciary duty as directors,
except for liability for (i) any breach of the director's duty of loyalty to us
or our stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) corporate
distributions which are in contravention of restrictions in the MBCA, our
Articles or Bylaws, or any agreement to which we are a party, (iv) violations
of Minnesota securities laws, (v) any transaction from which the director
derives an improper personal benefit, or (vi) any act or omission occurring
before the effective date of the provision in our Articles eliminating or
limiting liability. This provision will generally not limit liability under
state or federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business
corporation must indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason
of the former or present official capacity (as defined) of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred by the person in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed
civil, criminal, administrative, arbitration or investigative proceeding,
including one by or in the right of the corporation. Section 302A.521 also
contains detailed terms regarding this right of indemnification and reference
is made thereto for a complete statement of these indemnification rights.
II-1
<PAGE>
Article 6 of our Bylaws provides that each of our directors, officers
and employees will be indemnified by us in accordance with, and to the fullest
extent permissible by, applicable law.
Article 10 of our Bylaws provides that Section 302A.673 of the MBCA,
is not applicable to any Business Combination (as defined in the MBCA) of Paper
Warehouse with, with respect to, proposed by or on behalf of, or pursuant to,
any written or oral agreement, arrangement, relationship, understanding, or
otherwise with Yale T. Dolginow or Brent D. Schlosser or any of their
respective affiliates or associates (as defined in the MBCA).
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
us pursuant to the foregoing provisions, we have been informed that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act, and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 17 1998, we completed an acquisition of all of the
assets of four franchise stores owned by Prickly Pear Paper, Inc. To acquire
the assets, we paid Prickly Pear approximately $1.2 million in cash and
70,749 shares of our common stock for a total purchase price of $1,349,974.
We believe that the issuance of these shares of common stock is exempt from
registration under Section 4(2) of the Securities Act.
In connection with the completion of our initial public offering, we
issued 201,064 shares of our common stock to the selling stockholder in the
offering pursuant to the cashless exercise of an option. No commissions were
paid in connection with this transaction. We believe that the issuance of
these shares is exempt from registration pursuant to Section 3(a)(9) under
the Securities Act.
In connection with the completion of our initial public offering, we
issued a total of 171,350 shares of our common stock to holders of warrants
upon the cashless exercise of these warrants. We believe that the issuance of
these shares is exempt from registration pursuant to Section 3(a)(9) under
the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
Item No. Description of Item Method of Filing
- -------- ------------------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement Filed herewith electronically.
(including form of Underwriter's
Warrant)
3.1 Amended and Restated Articles Incorporated by reference to our
of Incorporation Registration Statement on Form S-1
(File No. 333-36911).
3.2 Amended and Restated By-laws Incorporated by reference to our
Registration Statement on Form S-1
(File No. 333-36911).
4.1 Form of 10% Subordinated Note Incorporated by reference to our
due November 30, 2004, Registration Statement on Form S-1
dated December 7, 1994 (File No. 333-36911).
4.2 Form of Warrant Agreement Incorporated by reference to our
Registration Statement on Form S-1
(File No. 333-36911).
4.3 Form of Warrant Incorporated by reference to our
Conversion Agreement, as Registration Statement on Form S-1
extended (File No. 333-36911).
4.4 Indenture dated June __, 1999 To be filed by amendment
between the Company and Norwest
Bank Minnesota N.A. relating to
the 9% Convertible Subordinated
Debentures due June __, 2005
4.5 Form of 9% Convertible To be filed with Indenture under
Subordinated Debenture due June Exhibit 4.4.
__, 2005
4.6 Form of Underwriter's Warrant To be filed with Form of Underwriting
Agreement under Exhibit 1.1
5.1 Opinion of Oppenheimer Wolff Filed herewith electronically.
& Donnelly LLP
10.1 1997 Stock Option and Incorporated by reference to our
Compensation Plan Registration Statement on Form S-1
(File No. 333-36911).
10.2 Directors' Stock Option Plan Incorporated by reference to our
Registration Statement on Form S-1
(File No. 333-36911).
10.3 Corporation Tax Allocation and Incorporated by reference to our
Indemnification Agreement Registration Statement on Form S-1
entered into on September 26, (File No. 333-36911).
1997 between the Company and
Yale T. Dolginow and Brent D.
Schlosser
10.4 Employment Agreement by and Incorporated by reference to our
between the Company and Yale T. Registration Statement on Form S-1
Dolginow dated February 7, 1997 (File No. 333-36911).
10.5 Employment Agreement by and Incorporated by reference to our
between the Company and Brent D. Registration Statement on Form S-1
Schlosser dated February 7, 1997 (File No. 333-36911).
II-3
<PAGE>
10.6 Amendment Number 1 to the Incorporated by reference to our
Employment Agreement by and Form 10-K for the fiscal year
between the Company and Brent D. ended January 31, 1998 (File No.
Schlosser dated September 26, 0-23389).
1997
10.7 Combination Mortgage and Incorporated by reference to our
Security Agreement and Fixture Registration Statement on Form S-1
Financing Statement dated June (File No. 333-36911).
9, 1995 by and between the
Company and Richfield Bank &
Trust Co.
10.8 Secured Promissory Note of the Incorporated by reference to our
Company in favor of Richfield Registration Statement on Form S-1
Bank & Trust Co. in the amount (File No. 333-36911).
of $945,000 dated June 9, 1995
10.9 Authorization and Note Guaranty Incorporated by reference to our
of the Company dated May 25, Registration Statement on Form S-1
1995 (File No. 333-36911).
10.10 Employment Agreement by and Incorporated by reference to our
between the Company and Cheryl Registration Statement on Form S-1
W. Newell dated July 14, 1997 (File No. 333-36911).
10.11 Loan Agreement between Paper Incorporated by reference to our
Warehouse, Inc., Yale T. Registration Statement on Form S-1
Dolginow and Richfield Bank & (File No. 333-36911).
Trust Co., dated January 29,
1997
10.12 Revolving Promissory Note to Incorporated by reference to our
Richfield Bank & Trust Co. Registration Statement on Form S-1
dated January 29, 1997 (File No. 333-36911).
10.13 Security Agreement between the Incorporated by reference to our
Company and Richfield Bank & Registration Statement on Form S-1
Trust Co. dated January 29, (File No. 333-36911).
1997
10.14 Amendment to Loan Agreement Incorporated by reference to our
entered into as of October 1, Registration Statement on Form S-1
1997 by and between the Company, (File No. 333-36911).
Yale T. Dolginow and Richfield
Bank & Trust Co.
10.15 Master Lease by and between Incorporated by reference to our
Targa Financial, Inc. and the Registration Statement on Form S-1
Company dated October 22, 1997 (File No. 333-36911).
10.16 Loan Agreement SBA Note No. Incorporated by reference to our
COCL837046 3001 MN, dated August Registration Statement on Form S-1
15, 1995 (File No. 333-36911).
10.17 Consulting Agreement entered Incorporated by reference to our
into December 1, 1992 by and Registration Statement on Form S-1
between Paper Warehouse, Inc. (File No. 333-36911).
and Stanford Weiner, Lawrence
Weiner and Gary Stone
10.18 1998 Employee Stock Purchase Incorporated by reference to our
Plan Form 10-K for the fiscal year
ended January 29, 1999 (File No.
0-23389).
II-4
<PAGE>
10.19 Asset Purchase Agreement dated Incorporated by reference to our
December 17, 1998 among the Form 10-K for the fiscal year
Company, Susan Hazan and Prickly ended January 29, 1999 (File No.
Pear Paper, Inc. 0-23389).
10.20 Second Amendment to Loan Incorporated by reference to our
Agreement dated March 31, 1998 Form 10-K for the fiscal year
between the Company and ended January 29, 1999 (File No.
Richfield Bank & Trust Co. 0-23389).
10.21 Third Amendment to Loan Incorporated by reference to our
Agreement dated March 15, 1999 Form 10-K for the fiscal year
between the Company and ended January 29, 1999 (File No.
Richfield Bank & Trust Co. 0-23389).
10.22 Mortgage Note dated April 8, Filed herewith electronically.
1999 between the Company and
Fortis Insurance Company
10.23 Mortgage and Security Agreement Filed herewith electronically.
between the Company and Fortis
Insurance Company dated April 8,
1999
12 Computation of Ratio of Earnings Filed herewith electronically.
to Fixed Charges
21 Subsidiaries of Company Incorporated by reference to our
Registration Statement on Form S-1
(File No. 333-36911).
23.1 Consent of KPMG Peat Marwick LLP Filed herewith electronically.
23.2 Consent of Oppenheimer Wolff & Included in Exhibit 5.1 filed
Donnelly LLP herewith electronically.
24.1 Power of Attorney Included on the signature page of
this Registration Statement.
27 Financial Data Schedule Incorporated by reference to our
Annual Report on Form 10-K for the
fiscal year ended January 29, 1999
(File No. 0-23389)
</TABLE>
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized in the City of Minneapolis,
State of Minnesota, on May 21, 1999.
PAPER WAREHOUSE, INC.
By: /s/ Yale T. Dolginow
--------------------------------------------
Yale T. Dolginow
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We the undersigned directors and officers of Paper Warehouse, Inc., do
hereby constitute and appoint Yale T. Dolginow and Brent D. Schlosser, or either
of them, our true and lawful attorneys and agents, to do and all acts and things
in our name and on our behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or in any of our names and in the capacities indicated below, any
and all amendments (including post-effective amendments) to this Registration
Statement, or any related Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and
we do hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 21st day of May, 1999 by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Yale T. Dolginow President, Chief Executive Officer
- -------------------------------
Yale T. Dolginow and Chairman of the Board
(Principal Executive Officer)
/s/ Brent D. Schlosser Executive Vice President and Director
- -------------------------------
Brent D. Schlosser
/s/ Cheryl W. Newell Vice President and Chief Financial Officer
- -------------------------------
Cheryl W. Newell (Principal Financial Officer)
/s/ Diane C. Dolginow Secretary and Director
- -------------------------------
Diane C. Dolginow
/s/ Diana G. Purcel Controller
- -------------------------------
Diana G. Purcel (Principal Accounting Officer)
/s/ Arthur H. Cobb Director
- -------------------------------
Arthur H. Cobb
/s/ Marvin W. Goldstein Director
- -------------------------------
Marvin W. Goldstein
/s/ Martin A. Mayer Director
- -------------------------------
Martin A. Mayer
/s/ Jeffrey S. Halpern Director
- -------------------------------
Jeffrey S. Halpern
By: /s/ YALE T. DOLGINOW
- -------------------------------
Yale T. Dolginow
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
FORM OF UNDERWRITING AGREEMENT
June ___, 1999
Miller & Schroeder Financial, Inc.
Pillsbury Center South, Suite 300
220 South Sixth Street
Minneapolis, MN 55402
Ladies and Gentlemen:
Paper Warehouse, Inc., a Minnesota corporation (the "Company"), hereby
confirms its agreement to issue and sell to you (the "Underwriter"), six
million ($6,000,000) principal amount of its 9% Convertible Subordinated
Debentures due June ____, 2005 ("Debentures"). The Debentures are to be
issued under an Indenture, dated as of June ___, 1999 (the "Indenture")
between the Company and Norwest Bank Minnesota, N.A. as trustee (the
"Trustee"). The Debentures are convertible into shares of the Company's
Common Stock, $.01 par value (the "Common Stock"). The Debentures are more
fully described in the Registration Statement and Prospectus as hereafter
defined.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to, and agrees with, the Underwriter that:
(a) A registration statement on Form S-1 (Registration No. 333-_____) with
respect to the Debentures has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "1933
Act") and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "SEC") thereunder and has been
filed with the SEC under the 1933 Act. If the Company has elected to rely
on Rule 462(b) under the 1933 Act to increase the size of the offering
registered under the 1933 Act, the Company will prepare and file with the
SEC a registration statement with respect to such increase pursuant to Rule
462(b). The Company has filed such amendments to the registration
statement and such amended preliminary prospectuses as may have been
required to be filed to the date hereof. If the Company has elected not to
rely upon Rule 430A, the Company has prepared and will promptly file an
amendment to the registration statement and an amended prospectus (provided
the Underwriter has consented to such filing). If the Company has elected
to rely upon Rule 430A, it will prepare and timely file a prospectus
pursuant to Rule 424(b) that discloses the information previously omitted
from the prospectus in reliance upon Rule 430A. Copies of such
registration statement, including a registration statement filed pursuant
to Rule 462(b), each pre-effective amendment thereto, and each related
preliminary prospectus have been delivered by the Company to the
Underwriter. Such registration statement, as amended or supplemented,
including all prospectuses included as a part thereof, financial schedules,
exhibits, the information (if any) deemed to be part thereof pursuant to
Rules 430A and 434
<PAGE>
under the 1933 Act and any registration statement filed pursuant to
Rule 462 under the 1933 Act, is herein referred to as the "Registration
Statement." The term "Prospectus" as used herein shall mean the final
prospectus, as amended or supplemented, included as a part of the
Registration Statement on file with the SEC when it becomes effective;
provided, however, that if a prospectus is filed by the Company pursuant
to Rules 424(b) and 430A or a term sheet is filed by the Company
pursuant to Rule 434 under the 1933 Act, the term "Prospectus" as used
herein shall mean the prospectus so filed pursuant to Rules 424(b) and
430A and the term sheet so filed pursuant to Rule 434. The term
"Preliminary Prospectus" as used herein means any prospectus, as amended
or supplemented, used prior to the Effective Date (as defined in Section
5(a) hereof) and included as a part of the Registration Statement,
including any prospectus filed with the SEC pursuant to Rule 424(a).
(b) Neither the SEC nor any state securities division has issued any order
preventing or suspending the use of any Preliminary Prospectus or issued a
stop order with respect to the offering of the Debentures, or requiring the
recirculation of a Preliminary Prospectus and no proceedings for that
purpose have been instituted or, to the Company's knowledge, threatened.
Each part of the Registration Statement, when such part became or becomes
effective, each Preliminary Prospectus, on the date of filing with the SEC,
and the Prospectus and any amendment or supplement thereto, on the date of
filing thereof with the SEC and on the Closing Date (as defined in Section
2 hereof), as the case may be, conformed or will conform in all material
respects with the requirements of the 1933 Act and the Rules and
Regulations and securities laws ("Blue Sky Laws") of the states where the
Debentures are to be sold (the "States:) and contained or will contain all
statements that are required to be stated therein in accordance with the
1933 Act, Rules and Regulations and Blue Sky Laws of the States. When the
Registration Statement became or becomes effective and when any post-
effective amendments thereto shall become effective, the Registration
Statement did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Neither any Preliminary
Prospectus, on the date of filing thereof with the SEC, nor the Prospectus
or any amendment or supplement thereto, on the date of filing thereof with
the SEC and on the Closing Date, contained or will contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this Subsection 1(b) shall apply to
statements in, or omissions from, the Registration Statement, Preliminary
Prospectus or the Prospectus, or any amendment thereof or supplement
thereto, which are based upon and conform to written information furnished
to the Company by the Underwriter, as identified in Section 12 herein,
specifically for use in the preparation of the Registration Statement,
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto. There is no contract or other document of the Company of a
character required by the 1933 Act or the Rules and Regulations to be
described in the Registration Statement or Prospectus, or to be filed as an
exhibit to the Registration Statement, that has not been described or filed
as required. The descriptions of all such contracts and documents or
references thereto are correct and include the information required under
the
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1933 Act and the Rules and Regulations. The conditions for use of a
Registration Statement on Form S-1 for the distribution of the Debentures
have been satisfied with respect to the Company. All descriptions in the
Registration Statement or Prospectus of statutes, regulations, legal or
governmental proceedings, the Indenture, the Debentures, or other contracts
or other documents are accurate in all material respects and fairly present
the information shown.
(c) KPMG Peat Marwick LLP, who have examined the consolidated financial
statements reported on by them and filed with the SEC as part of the
Registration Statement and the Prospectus, are independent public
accountants as required by the 1933 Act. The consolidated financial
statements of the Company and its Subsidiaries, including the related
notes, included in the Registration Statement and in the Prospectus (the
"Financial Statements") fairly present, on the basis stated therein, the
financial position, results of operations, cash flows and changes in
shareholders' equity of the Company and Paper Warehouse Franchising, Inc.
on a consolidated basis at the dates and for the periods to which they
relate. The Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied,
except as otherwise stated therein, throughout the periods involved and
comply in all material respects with the requirements of the 1933 Act. The
summaries of the Financial Statements and other financial, statistical and
related notes set forth in the Prospectus (i) fairly present the
information purported to be shown thereby as of the dates and for the
periods indicated on a basis consistent with the audited consolidated
financial statements of the Company and (ii) are in compliance in all
material respects with the requirements of the 1933 Act and the Rules and
Regulations. There are no other financial statements or schedules required
to be included in the Registration Statement or Prospectus that are not
included in the Registration Statement or Prospectus.
(d) Each of the Company and its Subsidiary, Paper Warehouse Franchising,
Inc. (the "Subsidiary" or "PWF"), are and at the Closing Date will be, duly
organized and validly existing and in good standing under the laws of their
respective states of incorporation with full power and authority (corporate
and other) to own, lease and operate their respective properties and
conduct their respective businesses as currently carried on and
contemplated and described in the Registration Statement and Prospectus and
no proceeding has been instituted in any such jurisdiction revoking,
limiting, curtailing or seeking to revoke, limit or curtail such
qualification. Each of the Company and its Subsidiaries are duly qualified
to do business as a foreign corporation in good standing in each
jurisdiction in which the character and location of their respective assets
or their respective business (existing or as contemplated by the
Prospectus) requires such qualification and which the failure to so qualify
would have a material adverse effect upon its business condition (financial
or otherwise), of the Company or PWF. No proceeding has been instituted in
any such jurisdiction revoking, limiting, curtailing or seeking to revoke,
limit or curtail such qualification.
(e) There has not been, and at the Closing Date shall not have been, any
change in the Company's Amended and Restated Articles of Incorporation and
Amended and Restated
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Bylaws from those in effect as of the date of this Agreement and filed as
exhibits or incorporated by reference to the Registration Statement. The
Company and PWF are not in violation of their respective Articles of
Incorporation, Bylaws or other governing instruments. The Company and PWF
are not in default (nor with the giving of notice or the passage of time or
both would be in default) in the performance of any obligation, agreement
or condition contained in any contract or any bond, debenture, note,
indentured loan agreement or other evidence of indebtedness or any loan
agreement, contract or joint venture agreement of the Company or PWF or
other instrument to which each is subject or by which any of their
respective property or assets are subject where such default could have a
material adverse effect on the condition (financial or otherwise),
business or properties of the Company or PWF. The Company and its
Subsidiaries are not in violation of any law, order, rule, regulation,
writ, injunction, or decree of any government, governmental instrumentality
or court, domestic or foreign, which violation is material to the business
of the Company or PWF.
(f) The Company and PWF possess all franchises, licenses, certificates,
permits, authorizations, approvals and orders of all state, federal and
other governmental regulatory officials and bodies necessary to own their
respective properties, conduct their respective business as described in
the Registration Statement and Prospectus, and perform this Agreement and
consummate the transactions contemplated hereby, or have obtained waivers
from any such applicable requirements from the appropriate state, federal
or other regulatory authorities, which will be delivered to the Underwriter
on the Closing Date. The Company and each of its Subsidiaries are
conducting their business in compliance with all material laws, rules and
regulations of the jurisdictions in which each is conducting business. All
such licenses, permits, approvals, certificates, consents, orders and other
authorizations are in full force and effect, and the Company and its
Subsidiaries have not received notice of any proceeding or action relating
to the revocation or modification of any such license, permit, approval,
certificate, consent, order or other authorization which, individually or
in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might adversely affect the conduct of the business or the
condition, financial or otherwise, or the earnings, affairs or business
prospects of the Company and the Subsidiaries taken as a whole.
(g) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, except as is described in the
Registration Statement and Prospectus through the date of this Agreement:
(i) the Company and PWF have not incurred, and will not have incurred, any
material liabilities or obligations, direct or contingent, or entered into
any transactions, in each case, other than in the ordinary course of
business; (ii) the Company and PWF have not and will not have paid or
declared any dividends or other distributions on their capital stock;
(iii) except in the ordinary course of business consistent with past
practice, there has not been and will not have been any material change in
the capital stock or outstanding debt, including any capitalized lease
obligation, of the Company or its Subsidiaries, or any issuance of options,
warrants, convertible securities other than may be issued pursuant to the
Company's 1997 Compensation Stock Option Plan and the Directors' Stock
Option Plan,
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or other rights to purchase the capital stock of the Company
or its Subsidiaries or any material adverse change or a development
involving a prospective material adverse change in or affecting the
condition (financial or otherwise), business, key personnel, properties,
assets, results of operations, or net worth of the Company and its
Subsidiaries taken as a whole; and (iv) the Company or its Subsidiaries has
not sustained any material loss or damage to their respective properties or
interference with their respective business, whether or not insured.
(h) There are no actions, suits, investigations or proceedings pending
before any court or governmental agency, authority or body, to which the
Company or its Subsidiary is a party or of which the business or property
of the Company or its Subsidiary is the subject which might: (i) result in
any material adverse change in the condition (financial or otherwise),
business or prospects of the Company; (ii) materially and adversely affect
its properties or assets; (iii) prevent consummation of the transactions
contemplated by this Agreement and Indenture; or (iv) adversely affect its
ability to repay the Debentures; and, to the best of the Company's
knowledge, no such actions, suits or proceedings are threatened. The
Company is not aware of any facts which would form the basis for the
assertion of any claim or liability which are not disclosed in the
Registration Statement or the Prospectus or adequately reserved for in the
Financial Statements which are a part thereof, except for such claims or
liabilities which are not currently expected to have a material adverse
effect on the condition (financial or otherwise) or the earnings, affairs
or business prospects of the Company or its Subsidiary. All pending legal
or governmental proceedings to which the Company or its Subsidiary is a
party or to which any of their respective property is subject, which are
not described in the Registration Statement and the Prospectus, including
ordinary routine litigation incidental to the business, are, considered in
the aggregate, not material to the Company or its Subsidiaries.
(i) The Company has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement has
been duly and validly authorized, executed and delivered by the Company and
will constitute a valid, legal and binding agreement of the Company,
enforceable in accordance with its terms, if and when this Agreement shall
have become effective in accordance with Section 9 hereof, except as
enforcement of rights to indemnity in this Agreement may be limited by
federal or state securities laws. The performance of this Agreement and
the consummation of the transactions herein contemplated will not result in
a breach or violation of any of the terms and provisions of, or constitute
a default (or with the giving of notice or the passage of time or both
would so constitute a breach or default) or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any Subsidiary pursuant to (i) any indenture, mortgage,
deed of trust, loan agreement, bond, debenture, note agreement or other
evidence of indebtedness; lease, contract or other agreement or instrument
to which the Company or any Subsidiary is a party or by which the property
or assets of the Company or any Subsidiary is bound, (ii) the Company's or
its Subsidiary's Articles of Incorporation or Bylaws or other
organizational documents or (iii) any statute or any order, rule or
regulation of any court, governmental agency or body having jurisdiction
over the Company or any Subsidiary.
5
<PAGE>
No consent, approval, authorization, order, registration, filing,
qualification, license, or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or its Subsidiaries or their properties or assets, is required
for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the
issuance, sale and delivery of the Debentures, except as may be required
under the 1933 Act, the Rules and Regulations, the Blue Sky Laws of the
States, the rules and regulations of Nasdaq and the rules and
regulations of the National Association of Securities Dealers, Inc.
("NASD") in connection with the offer and sale of the Debentures by the
Underwriter.
(j) The Company has full power and authority to execute and deliver the
Indenture and Underwriter's Warrants, as defined herein, and to perform its
obligations thereunder. The Indenture and the Underwriter's Warrants have
been duly and validly authorized and when executed and delivered by the
Company on the Closing Date, will each constitute valid, legal and binding
agreements of the Company enforceable in accordance with their terms. The
Company's performance of Indenture and the Underwriter's Warrants and the
consummation of the transactions therein contemplated by such agreements
will not result in a breach or violation of any of the terms and provisions
of, or constitute a default (or with the giving of notice or the passage of
time or both would so constitute a breach or default) or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or its Subsidiary pursuant to (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness; lease, contract or other agreement or
instrument to which the Company or any Subsidiary is a party or by which
the property or assets of the Company or any Subsidiary is bound, (ii) the
Company's or any Subsidiary's Articles of Incorporation or Bylaws or other
organizational documents or (iii) any statute or any order, rule or
regulation of any court, governmental agency or body having jurisdiction
over the Company or any Subsidiary. No consent, approval, authorization,
order, registration, filing, qualification, license, or permit of or with
any court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any Subsidiary or their properties or
assets, is required for the execution, delivery and performance of the
Indenture and Underwriter's Warrants or the consummation of the
transactions contemplated thereby. The Indenture and Underwriter's
Warrants are in the form filed as an exhibit to the Registration Statement.
(k) The Company has full power and authority to execute and deliver the
Debentures and to perform its obligations thereunder. The Debentures have
been duly and validly authorized and, when authenticated by the Trustee and
issued, delivered and sold in accordance with this Agreement and the
Indenture, will have been duly and validly executed, authenticated, issued
and delivered and will constitute valid and legally binding obligations of
the Company entitled to the benefits provided by the Indenture and
enforceable against the Company in accordance with their terms.
(l) The Company has, as of the dates set forth in the Prospectus, the duly
authorized and outstanding capitalization set forth in the Prospectus.
There are no other classes of
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stock authorized or outstanding except as described in the Prospectus,
and the outstanding consolidated indebtedness of the Company is as set
forth, as of the dates set forth therein, in the Prospectus and has been
duly authorized by the Company. The outstanding Common Stock of the
Company is duly authorized and validly issued, fully paid, and
nonassessable. All statements relating to the Debentures contained in
the Registration Statement and Prospectus conform in all material
respects to the terms of the Debentures. The shares of Common Stock
issuable upon conversion of the Debentures ("Conversion Shares") and
shares of Common Stock issuable upon exercise of the Underwriter's
Warrants ("UW Warrant Shares") have been duly authorized and when
issued, delivered and paid for pursuant to the terms of the Indenture
and Underwriter's Warrants, respectively, will be validly issued, fully
paid, and nonassessable and will conform to the description of the
Company's Common Stock contained in the Prospectus. A sufficient number
of shares of the Common Stock have been reserved for issuance upon
conversion of the Debentures and exercise of the Underwriter's Warrants.
No preemptive rights or similar rights of any security holders of the
Company exist with respect to the issuance and sale of the Debentures by
the Company or conversion of the Debentures or exercise of the
Underwriter's Warrants. The Company has no agreement with any security
holder which gives such security holder the right to require the Company
to register under the 1933 Act any securities of any nature owned or
held by such person either in connection with the transactions
contemplated by this Agreement or after a demand for registration by
such holder. Upon payment for and delivery of the Debentures pursuant
to this Agreement, the Underwriter will acquire good and marketable
title to the Debentures free and clear of all liens, encumbrances, or
claims. The certificates evidencing the Debentures and Common Stock
comply as to form with all applicable provisions of federal law and the
laws of the State of Minnesota. Except as set forth in any part of the
Registration Statement, the Company and its Subsidiaries do not have any
outstanding options to purchase or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contract
or commitments to issue or sell, any Common Stock or other securities of
the Company.
(m) The Company and its Subsidiaries have good and marketable title (in
fee simple as to real property) to all real and personal properties and
assets described in the Prospectus as being owned by them, free and clear
of all security interests, liens, charges, encumbrances, restrictions or
defects except such as are otherwise reflected in the financial statements
included in the Prospectus or described or referred to in the Prospectus or
as such do not materially affect the value of such property and do not
materially interfere with the use made of such property by the Company or
its Subsidiary. The Company and its Subsidiary hold valid and enforceable
leases for the properties (real and personal) described in the Prospectus
as leased by them; the Company and its Subsidiary are not in default (or
with the giving of notice or the passage of time or both would be in
default) in respect to any of such leases, and to the best knowledge of the
Company, no claim of any sort has been asserted by anyone adverse to the
rights of the Company and its Subsidiaries as lessee under any such lease
or questioning its right to continued use and possession of any of the
leased properties under any such lease.
7
<PAGE>
(n) Except as disclosed in the Prospectus, the Company owns or possesses
rights to use all patents, copyrights, trademarks and proprietary rights
and other similar rights necessary for the conduct of its present or
intended business as described in the Prospectus, and, except as disclosed
in the Prospectus, the Company has not received any notice of conflict with
asserted rights of others and the Company has no reason to believe that the
conduct of its business will conflict with any such rights of others.
There are no pending legal, governmental or administrative proceedings
relating to patents, copyrights, trademarks or proprietary rights or
information, to which the Company is a party or of which any property of
the Company is subject and no such proceedings are, to the best of the
Company's knowledge, threatened or contemplated against the Company by any
governmental agency or authority or others.
(i) To the best knowledge of the Company, the Company does
not infringe upon the right or claimed right of any person under
or with respect to any of the intangible rights listed above.
Except as disclosed in the Prospectus, the Company is not
obligated or under any liability whatsoever to make any payments
by way of royalties, fees or otherwise to any owner of, licensor
of, or other claimant to, any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use
thereof or in connection with the conduct of its business or
otherwise.
(ii) The Company owns and has the unrestricted right to use
all trade secrets, including know-how, customer lists,
inventions, designs, processes, computer programs and technical
data necessary to the development, manufacture, operation and
sale of all products and services sold or processed to be sold by
it, free and clear of any rights, liens and claims of others.
The Company is not using any confidential information or trade
secrets of any former employer of any of its past or present
employees.
(o) The Company has filed all necessary federal, state, local and foreign
income, franchise and other tax returns required to be filed through the
date of this Agreement and has paid all taxes shown as due thereon. All
tax liabilities are adequately provided for on the books of the Company and
there is no tax proceeding or action pending or, to the best knowledge of
the Company, threatened against the Company.
(p) The Company has not distributed and will not distribute any prospectus
or any other offering material in connection with the offering and sale of
the Debentures other than the Preliminary Prospectus or the Prospectus or
other materials permitted by the 1933 Act and Rules and Regulations to be
distributed by the Company and consented to by the Underwriter.
(q) The Company owns no capital stock or other equity or ownership or
proprietary interest in any corporation, partnership, limited liability
company, association, trust or other entity and is not affiliated (as that
term is defined under the 1933 Act) with any
8
<PAGE>
other company or business entity except as explicitly stated in the
Prospectus. Except as described in the Prospectus, the Company is not
owned or controlled, directly or indirectly, by any corporation,
association or other entity.
(r) The Company maintains a system of internal accounting controls
sufficient to provide that:
(i) transactions are executed in accordance with management's
general or specific authorization;
(ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(s) The Company maintains insurance, which is in full force and effect, of
the types and in amounts which are adequate for its business and as is
customary with insurance maintained by similar companies and businesses.
(t) No labor disturbance by the employees of the Company exists or, to the
best of the Company's knowledge, is imminent which could reasonably be
expected to have a material adverse effect on the conduct of the business,
operations, financial condition, or income of the Company.
(u) Neither the Company nor any Subsidiary is an "investment company" as
defined in the Investment Company Act of 1940, as amended and will not
become an "investment company" upon the sale of the Debentures.
(v) Neither the Company nor any employee or agent of the Company has made
any payment of funds of the Company or received or retained funds in
violation of any law, rule or regulation.
(w) The Company has not engaged any "finder" with respect to the
transactions contemplated by this Agreement and there is no outstanding
claim for services in the nature of a "finder's fee" with respect to such
financing; and the Company agrees to indemnify and hold the Underwriter
harmless from and against any claims, losses, judgments or expenses
resulting from any finder's fees payable in connection herewith.
9
<PAGE>
(x) There are no outstanding loans or advances or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of
them except as are described in the Prospectus.
(y) The Company, after giving effect to the execution, delivery and
performance of this Agreement, the Indenture, and the Debentures and the
consummation of the transactions contemplated hereby and thereby will not
be:
(i) insolvent;
(ii) left with unreasonably small capital with which to engage
in its business; or
(iii) incurring debts beyond its ability to pay such debts as
they mature.
(z) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in or which has constituted or which
constitute the stabilization or manipulation, as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act") or otherwise, of the
price of any outstanding securities of the Company to facilitate the sale
or resale of the Debentures.
(aa) The Company has timely filed all documents and amendments to
previously filed documents required to be filed by it pursuant to the 1934
Act and the Rules and Regulations. Each such document conformed in all
material respects with the requirements of the 1934 Act and contained all
information required to be stated therein in accordance with the 1934 Act.
No part of any such document contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. True copies of
each of the documents incorporated by reference, if any, into each
Preliminary Prospectus and the Prospectus have been delivered by the
Company to the Underwriter. To the best of the Company's knowledge, the
executive officers and directors of the Company and stockholders who hold
more than 5% of the Company's outstanding Common Stock, have made, and are
current with, all filings, if any, that are required under the 1934 Act.
(bb) On the Closing Date, all transfer or other taxes, if any (other than
income taxes), which are required to be paid in connection with the sale or
transfer of the Debentures will have been fully paid or provided for by the
Company and all laws imposing such taxes will have been fully complied
with.
(cc) Each acceptance by the Company of an offer for the purchase of the
Debentures and each issuance of Debentures shall be deemed an affirmation
of the Company that the representations and warranties contained herein are
true and correct at the time of such acceptance of such issuance, in each
case as though expressly made at that time. Any certificate signed by any
officer of the Company and delivered to the Underwriter or to
10
<PAGE>
counsel for the Underwriter shall be deemed a representation and warranty
by the Company to the Underwriter as to matters covered thereby.
(dd) The Company has no defined benefit pension plan or other pension plan,
except for its 401(k) Plan which has been funded; which is intended to
comply with the provisions of the Employee Retirement Income Securities Act
of 1974, as amended, except as disclosed in the Registration Statement.
(ee) The Company has sold no securities in violation of Section 5(a) of the
1933 Act.
(ff) Neither the Company, nor any affiliate thereof, does business with the
government of Cuba or with any person or affiliate located in Cuba.
(gg) All material transactions between the Company and its stockholders who
beneficially own more than 5% of any class of the Company's voting
securities have been accurately disclosed in the Prospectus, and the terms
of each such transaction are fair to the Company and on terms no less
favorable to the Company than the terms that could have been obtained from
unrelated parties.
(hh) No holders of the Company's securities who have demand or
participatory registration rights, have any right to include any of the
Company's securities in the Registration Statement nor is the Company
obligated to include any of its securities, other than the securities
described in this Agreement, in the Registration Statement.
(ii) The Company has not offered or sold any franchises or entered into any
franchise or similar agreements in violation of applicable federal, state
or local laws or regulations governing franchises or similar business
arrangements. All registrations or filings required to be made by the
Company in connection with the offer and sale of franchises or the
establishment or maintenance of franchise agreements or similar
arrangements have been made and remain in full force and effect. The
Company is not in breach of any franchise or similar agreement.
2. PURCHASE, SALE, DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to the Underwriter, and the Underwriter
agrees to purchase from the Company, the Debentures at a purchase price
equal to 93% of the per Debenture price offered to the public (as set forth
in the Prospectus at $1,000 per Debenture). The Underwriter will purchase
all of the Debentures if any are purchased.
(b) The Company will deliver the Debentures to the Underwriter at the
offices of Fredrikson & Byron, P.A. unless some other place is agreed upon,
at 10:00 A.M., Minneapolis time, against payment of the purchase price at
the same place, on the third full business day after the Effective Date, or
such earlier time as may be agreed upon
11
<PAGE>
between the Underwriter and the Company, such time and place being herein
referred to as the "Closing Date."
(c) Certificates for the Debentures to be delivered will be registered in
such names and issued in such denominations as the Underwriter shall
request of the Company at least three full business days prior to the
Closing Date. The certificates will be made available to the Underwriter
in definitive form for the purpose of inspection and packaging at least 24
hours prior to the Closing Date.
(d) Payment for the Debentures shall be made by wire transfer to a
designated account of the Company, certified or official bank check or
checks in Clearing House funds, payable to the order of the Company.
(e) The Underwriter will make a public offering of the Debentures directly
to the public (which may include selected dealers who are members in good
standing with the NASD or foreign dealers not eligible for membership in
the NASD but who have agreed to abide by the interpretation of the NASD's
Board of Governors with respect to free-riding and withholding) as soon as
the Underwriter deems practicable after the Registration Statement becomes
effective at the initial public price set forth on the cover page of the
Prospectus, subject to the terms and conditions of this Agreement and in
accordance with the Prospectus. Such concessions from the public offering
price may be allowed selected dealers of the NASD as the Underwriter
determines, and the Underwriter will furnish the Company with such
information about the distribution arrangements as may be necessary for
inclusion in the Registration Statement. It is understood that the public
offering price and concessions may vary after the initial public offering
of the Debentures. The Underwriter shall offer and sell the Debentures
only in jurisdictions in which the offering of Debentures has been duly
registered or qualified, or is exempt from registration or qualification,
and shall take reasonable measures to effect compliance with applicable
state and local securities laws.
3. UNDERWRITER'S WARRANTS. On the Closing Date, the Company shall sell
to you for $50 the Underwriter's Warrants, which shall first become exercisable
one year after the Effective Date and shall remain exercisable for a period of
four years thereafter. The Underwriter's Warrants shall be subject to certain
transfer restrictions and shall be in substantially the form filed as an exhibit
to the Registration Statement and attached as Appendix A hereto.
4. COVENANTS OF THE COMPANY. The Company hereby covenants and agrees
with the Underwriter as follows:
(a) If the Registration Statement has not become effective prior to the
date hereof, the Company will use its best efforts to cause the
Registration Statement and any subsequent amendments thereto to become
effective as promptly as possible. The Company will notify the Underwriter
promptly, after the Company shall receive notice thereof, of the time when
the Registration Statement, or any subsequent amendment thereto, has become
effective or any supplement to the Prospectus has been filed. Following
the execution and delivery of
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<PAGE>
this Agreement, the Company will prepare, and timely file or transmit
for filing with the SEC in accordance with Rules 430A, 424(b) and 434,
as applicable, copies of the Prospectus, or, if necessary, a
post-effective amendment to the Registration Statement (including the
Prospectus), in which event, the Company will take all necessary action
to have such post-effective amendment declared effective as soon as
possible. The Company will notify the Underwriter promptly upon the
Company's obtaining knowledge of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceedings for that purpose and will
use its best efforts to prevent the issuance of any stop order and, if a
stop order is issued, to obtain as soon as possible the withdrawal or
lifting thereof. The Company will promptly prepare and file at its own
expense with the SEC any amendments of, or supplements to, the
Registration Statement or the Prospectus which may be necessary in
connection with the distribution of the Debentures by the Underwriter.
During the period when a Prospectus relating to the Debentures is
required to be delivered under the 1933 Act, the Company will promptly
file any amendments of, or supplements to, the Registration Statement or
the Prospectus which may be necessary to correct any untrue statement of
a material fact or any omission to state any material fact necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company will notify the Underwriter
promptly of the receipt of any comments from the SEC regarding the
Registration Statement or Prospectus or request by the SEC for any
amendment thereof or supplement thereto or for any additional
information. The Company will not file any amendment of, or supplement
to, the Registration Statement or Prospectus, whether prior to or after
the Effective Date, which shall not previously have been submitted to
the Underwriter and its counsel a reasonable time prior to the proposed
filing or to which the Underwriter shall have reasonably objected.
(b) The Company has used and will continue to use its best efforts to
register or qualify the Debentures for sale under the securities laws of
such jurisdictions as the Underwriter may designate and the Company will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification. In each
jurisdiction in which the Debentures shall have been registered or
qualified as above provided, the Company will continue such registrations
or qualifications in effect for so long as may be required for purposes of
the distribution of the Debentures, provided, however, that in no event
shall the Company be obligated to qualify to do business as a foreign
corporation in any jurisdiction in which it is not now so qualified or to
take any action which would subject it to the service of process in suits,
other than those arising out of the offering or sale of the Debentures in
any jurisdiction where it is not now so subject. In each jurisdiction
where any of the Debentures shall have been so qualified, the Company will
file such statements and reports as are or may be reasonably required by
the laws of such jurisdiction to continue such qualification in effect for
so long as the Debentures are outstanding. The Company will notify the
Underwriter immediately of, and confirm in writing, the suspension of
qualification of the Debentures or the threat of such action in any
jurisdiction. The Company will use its best efforts to qualify or register
its Common Stock and Debentures for sale in nonissuer transactions under
(or obtain exemptions from the application of) the securities laws of such
states designated by the Underwriter (and thereby
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permit market-making transactions and secondary trading in its Common
Stock and Debentures in such states), and will comply with such
securities laws and will continue such qualifications, registrations and
exemptions in effect for so long as the Debentures are outstanding.
(c) The Company will furnish to the Underwriter, as soon as available,
copies of the Registration Statement (one of which will be signed and which
shall include all exhibits), the Preliminary Prospectus, the Prospectus and
any amendments or supplements to such documents, including any prospectus
prepared to permit compliance with Section 10(a)(3) of the 1933 Act, all in
such quantities as the Underwriter may from time to time reasonably request
prior to the printing of each such document. The Company specifically
authorizes the Underwriter and all dealers to whom any of the Debentures
may be sold by the Underwriter to use and distribute copies of such
Preliminary Prospectuses and Prospectuses in connection with the offer and
sale of the Debentures as and to the extent permitted by the federal and
applicable state and local securities laws.
(d) As soon as practicable (but in no event later than 90 days after the
close of the period covered thereby) the Company will make generally
available to its security holders, including Debenture holders, and furnish
to you, an earnings statement of the Company covering the period of 12
months beginning not later than the first day of the next fiscal quarter
following the Effective Date of the Registration Statement which will
satisfy the requirements of Section 11(a) or Rule 158 of the 1933 Act and
which need not be certified or audited by independent public accountants.
(e) For as long as the Company has more than 100 beneficial owners, but in
no event more than six years after the Effective Date, the Company will
furnish to the Underwriter, without need of request, concurrently with
furnishing such reports to its stockholders, the following reports: (i) as
soon as they are available, copies of all other reports (financial or
otherwise) mailed to security holders; and (ii) as soon as they are
available, copies of all reports and financial statements furnished to, or
filed with, the SEC, the NASD, any securities exchange or any state
securities commission by the Company. During such period, the foregoing
financial statements shall be on a consolidated basis to the extent that
the accounts of the Company and any Subsidiary or Subsidiaries are
consolidated and shall be accompanied by similar financial statements for
any significant subsidiary which is not so consolidated.
(f) For a period of at least six years after the Effective Date, the
Company will continue to file with the SEC all reports and other documents
as may be required by the 1933 Act, the Rules and Regulations and the 1934
Act.
(g) Prior to or as of the Closing Date, the Company shall have performed
each condition to closing required to be performed by it pursuant to
Section 5 hereof, unless waived by the Underwriter in writing.
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(h) Other than as permitted by the 1933 Act and the Rules and Regulations,
the Company will not distribute any Prospectus or other offering material
in connection with the Offering.
(i) The Company will promptly comply with all filing requirements pursuant
to Item 701 of Regulation SK of the 1933 Act.
(j) The Company will cause all holders of its securities who have any
demand or participatory registration rights to waive any demand or
participatory registration rights which they may have in connection with
the offer and sale of the Debentures, in connection with any other offer or
sale of other securities of the Company, or as a result of "demand"
registration rights for a period of one year from the date of this
Agreement.
(k) For as long as the Debentures are outstanding, the Company will cause
its Subsidiaries to maintain all mutual licenses, permits, and approvals
described in the Prospectus as being held by the Company and its
Subsidiary.
(l) The Company will apply the net proceeds from the sale of the
Debentures substantially in accordance with the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(m) The Company agrees that from the date of its execution of this
Agreement to the Closing Date, it will issue press releases, make public
statements and respond to inquiries of the press and securities analysts in
connection with this Offering only (i) in accordance with its obligations
under the 1934 Act after conferring with its counsel and (ii) after
conferring with its counsel and with the consent of the Underwriter.
(n) The Company will not claim the benefit of any usury laws against any
holders of the Debentures.
(o) The Company will provide the Underwriter with copies of certificates
and supporting documentation furnished to the Trustee pursuant to the
Indenture or otherwise.
(p) The Company will continue to appoint its current auditors or any
replacement firm of auditors acceptable to the Underwriter to audit its
financial statements.
(q) The Company agrees that the necessary legal work for drafting and
preparing the Indenture and for registration, qualification or perfection
of exemptions of the Debentures for sale under the Blue Sky Laws of such
States as the Underwriter may designate shall be performed by counsel for
the Underwriter. All Blue Sky filing fees and fees and expenses of
Underwriter's counsel shall be payable by the Company, and fees and
expenses of Underwriter's counsel incurred in connection with the
preparation of the Indenture shall be payable by the Company regardless of
whether any closing shall occur and shall be in addition to the
Underwriter's fees, expenses and commission described in this Agreement.
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(r) The Company will pay, in addition to the Blue Sky and Indenture fees
described in the paragraph (q) of this Section, all costs and expenses
related to the performance of its obligations under this Agreement
including, but not limited to: (i) all expenses incident to the issuance
and delivery of the Debenture, including taxes, if any; (ii) all expenses
incident to the preparation, filing and delivery of the Registration
Statement, each Preliminary Prospectus, the Prospectus, and any amendments,
supplements or submissions related thereto (including exhibits); (iii) all
expenses incident to the filing, delivery and qualification of the
Indenture and any amendments, supplements or submissions related thereto
(including fees and disbursements of Underwriters' counsel, who has the
responsibility for such preparation); (iv) all NASD fees incurred by the
Underwriter in connection with the review of your compensation by the NASD;
(v) the cost of preparing and printing as many amendments to the
Registration Statement as may be necessary; (vi) the cost of all
certificates representing the Debentures; (vii) the fees and expenses of
the Trustee and paying agent under the Indenture; (viii) the cost of
printing and distributing all documents related to the offering of the
Debentures; (ix) the fees and expenses of the Company's independent
accounts, including the cost of "cold comfort" review; (x) the fees and
expenses of legal counsel for the Company; (xi) the cost of furnishing and
delivering to the Underwriter and dealers participating in the distribution
of the Debentures copies of the Registration Statement (including
Exhibits), Preliminary Prospectuses, the Prospectuses and any amendments
of, or supplements to, any of the foregoing; (xii) the nonaccountable
expense allowance of the Underwriter in an amount equal to 2.5% of the
aggregate principal amount of the Debenture sold by the Company, less the
$25,000 deposit paid by the Company to the Underwriter on May 13, 1999,
provided, however, if this transaction is abandoned for any reason, the
Company will reimburse the Underwriter only for its actual out-of-pocket
accountable expenses in an amount not to exceed $50,000.
(s) The Company will not take, and will use its best efforts to cause each
of its officers and directors not to take, directly or indirectly, any
action designed to or which might reasonably be expected to cause or result
in the manipulation of the price of any security of the Company to
facilitate the sale or resale of the Debentures.
(t) The Company will use its best efforts to maintain the listing of its
Common Stock on The Nasdaq National Market.
5. CONDITIONS OF THE UNDERWRITER OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Debentures as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, as
of the date hereof and the Closing Date, to the performance by the Company of
its obligations hereunder, and to the satisfaction of the following additional
conditions on or before the Closing Date:
(a) The Registration Statement shall have become effective not later than
5:00 P.M. Minneapolis time, on the first full business day following the
date of this Agreement, or such later date as shall be consented to in
writing by the Underwriter (the "Effective Date").
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If the Company has elected to rely upon Rule 430A, the information
concerning the price of the Debentures and price-related information
previously omitted from the effective Registration Statement pursuant to
Rule 430A shall have been transmitted to the SEC for filing pursuant to
Rule 424(b) within the prescribed time period, and prior to the Closing
Date the Company shall have provided evidence satisfactory to the
Underwriter of such timely filing (or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the 1933 Act and the Rules and
Regulations). No stop order suspending the effectiveness thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or the Underwriter,
threatened by the SEC or any state securities commission or similar
regulatory body. Any request of the SEC for additional information (to
be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Underwriter and its legal counsel. The NASD, upon review of the terms
of the Offering, shall not have objected to the terms of the
Underwriters' participation in the Offering.
(b) The Underwriter shall not have been advised that the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto,
contains any untrue statement of a material fact which omits to state a
material fact and which is required to be stated therein or is necessary to
make the statements contained therein, in light of the circumstances under
which they were made, not misleading.
(c) Subsequent to the date as of which information is given in the
Registration Statement and Prospectus, there shall not have occurred any
change, or any development involving a prospective change, which materially
and adversely affects the business or properties of the Company and which,
in the reasonable opinion of the Underwriter, materially and adversely
affects the market for the Debentures.
(d) The Underwriter and Underwriter's counsel shall have been furnished
with such documents and information as the Underwriter or they may have
requested.
(e) The Underwriter shall have received the opinion of Oppenheimer Wolff &
Donnelly LLP, counsel for the Company, dated as of the Closing Date and
satisfactory in form and substance to the Underwriter and its counsel, to
the effect that:
(i) The Company and its Subsidiaries have been duly organized
and are validly existing in good standing under the laws of their
respective states of organization with the requisite corporate
power and authority to own or lease properties and conduct their
respective businesses as described in the Prospectus. The
Company and its Subsidiaries are duly qualified to do business as
a foreign corporation in good standing in all jurisdictions where
the ownership or leasing of their properties or the conduct of
their respective businesses requires such qualification, except
where the failure to so qualify would not have a material adverse
effect on the Company and its Subsidiaries taken as a whole.
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(ii) The Company does not own any stock or other equity
interest in any corporation, partnership, joint venture,
unincorporated association or other entity other than PWF. The
outstanding shares of capital stock of each such subsidiary have
been duly authorized and validly issued, are fully paid and
nonassessable and are owned directly or indirectly, by the
Company, free and clear of all liens, encumbrances and security
interests, other than security interests specifically disclosed
in the Prospectus. To the best knowledge of such counsel, no
options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any
obligations into any shares of capital stock or ownership
interests in each such subsidiary are outstanding.
(iii) The number of authorized and the number of issued and
outstanding shares of capital stock of the Company are as set
forth in the Prospectus, excluding the issuance of Capital Stock
upon the conversion of the Debentures, or the exercise of the
Underwriter's Warrant, and all such issued and outstanding
capital stock has been duly authorized and is validly issued,
fully paid, and nonassessable. The Company has all requisite
power and authority to issue and sell the Debentures in
accordance with and upon the terms and conditions set forth in
this Agreement, and all action required to be taken by the
Company for the due and proper authorization, issuance, sale and
delivery of the Debentures has been validly and sufficiently
taken. The Debentures to be issued and sold, upon issuance and
delivery of and payment for the Debentures hereunder will be duly
authorized, validly issued and fully paid. The Company's Amended
and Restated Articles of Incorporation, as amended and Amended
and Restated Bylaws contain no preemptive rights. To the best
knowledge of such counsel, no preemptive rights, contractual or
otherwise, of securities holders of the Company exist with
respect to the issuance or sale of the Debentures by the Company
pursuant to this Agreement or the issuance of the Conversion
Shares upon conversion of the Debentures to shares of the
Company's Common Stock and there are no rights to require
registration of shares of Common Stock or other securities of the
Company which may be exercised in connection with the filing of
the Registration Statement. The Debentures, Underwriter's
Warrants and Common Stock conform as to matters of law in all
material respects to the description of these securities made in
the Prospectus, and such description accurately sets forth the
material legal provisions thereof required to be set forth in the
Prospectus.
(iv) The Common Stock to be issued upon conversion of the
Debentures has been duly authorized and when converted pursuant
to the terms of the Indenture will be validly issued, fully paid
and nonassessable.
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A sufficient number of shares of Common Stock of the Company have
been reserved for issuance upon conversion of the Debentures.
(v) The certificates evidencing the Debentures and Common
Stock comply as to form with the applicable provisions of the
laws of the State of Minnesota.
(vi) The Underwriter's Warrants have been duly authorized,
executed and delivered by the Company and are the valid and
binding obligations of the Company, enforceable in accordance
with their terms, except as enforcement of rights to indemnity
and contribution in this Agreement may be limited by federal or
state securities laws or principals of public policy and subject
to the qualification that the enforceability of the Company's
obligations hereunder and thereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors'
rights generally, and by general equitable principals when
applied by a court of law or equity. The Common Stock when
issued and paid for in accordance with the terms of the
Underwriter's Warrants will be validly issued, fully paid and
nonassessable. A sufficient number of shares of Common Stock has
been reserved for issuance upon exercise of the Underwriter's
Warrants.
(vii) The Registration Statement has become and is effective
under the 1933 Act, the Prospectus has been filed as required by
Rule 424(b), if necessary, and to the best knowledge of such
counsel, no stop orders suspending the effectiveness of the
Registration Statement have been issued and no proceedings for
that purpose have been instituted or are pending or contemplated
under the Act.
(viii) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the 1933 Act and the Rules and
Regulations (except that such counsel need express no opinion as
to the financial statements and related schedules included
therein).
(ix) Such counsel does not know of any contracts, agreements,
documents or instruments required to be filed as exhibits to the
Registration Statement or described in the Registration Statement
or the Prospectus which are not so filed or described as
required; and insofar as any statements in the Registration
Statement or the Prospectus constitute summaries of any contract,
agreement, document or instrument to which the Company or any of
its subsidiaries is a party, such statements are accurate
summaries and fairly present the information called for with
respect to such matters.
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<PAGE>
(x) To the best knowledge of such counsel, there are no legal
or governmental proceedings pending, or threatened, before any
court or administrative body or regulatory agency, to which the
Company or its Subsidiaries is a party or to which any of the
properties of the Company or its Subsidiaries are subject, that
are required to be disclosed in the Registration Statement or
Prospectus that are not so described, nor to the knowledge of
such counsel legal or governmental proceedings pending or
threatened, that are required to be described in the Registration
Statement or Prospectus that are not so described.
(xi) No consent, approval, authorization, order or other
action of any court or governmental agency or body is required
for the execution and delivery of this Agreement and issuance and
sale of the Debentures as contemplated herein, except for the
order of the SEC making the Registration Statement effective and
similar authorizations required under the Blue Sky laws (as to
which such counsel need express no opinion) of any jurisdiction
in connection with the purchase and distribution of the
Debentures by the Underwriter and such other approvals (specified
in such opinion) as have been obtained.
(xii) The Company has full legal right, power and authority to
enter into this Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of the Company, enforceable in accordance with its
terms, except as enforcement of rights to indemnity and
contribution in this Agreement may be limited by federal or state
securities laws or principals of public policy and subject to the
qualification that the enforceability of the Company's
obligations hereunder and thereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors'
rights generally, and by general equitable principals when
applied by a court of law or equity.
(xiii) The Indenture has been duly and validly authorized,
executed and delivered by the Company, is exempt from
qualification under the Trust Indenture Act, is in the form filed
as an exhibit to the Registration Statement and constitutes a
valid and legally binding obligation of the Company enforceable
against the Company in accordance with its terms, except as
enforcement of rights to indemnity and contribution in this
Agreement may be limited by federal or state securities laws or
principals of public policy and subject to the qualification that
the enforceability of the Company's obligations hereunder and
thereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights
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generally, and by general equitable principals when applied by a
court of law or equity.
(xiv) The execution or delivery of this Agreement, Indenture
and Underwriters' Warrant and the consummation of the
transactions described herein and therein will not result in a
violation of or default under, the Company's Amended and Restated
Articles of Incorporation, as amended, Amended and Restated
Bylaws or other governing documents, or violate any law, order,
rule, regulation, writ, franchise, injunction, or decree of any
government, governmental agency or court having jurisdiction over
the Company or its Subsidiaries or any of their properties, and,
to such counsel's knowledge, the Company is not, nor with the
giving of notice or lapse of time or both would be, in violation
of or default under, nor will the execution and delivery of this
Agreement, Indenture, and Underwriters' Warrant and the
consummation of the transactions described therein result in a
violation of or default under the terms or provisions of any
bond, debenture, note, or other evidence of indebtedness or any
contract, license, indenture, mortgage, loan agreement, joint
venture or partnership agreement, lease, agreement or instrument
to which the Company or its Subsidiaries are a party or by which
the Company or its Subsidiaries or any of their properties are
bound which are described in the Prospectus or attached to the
Registration Statement as an Exhibit.
(xv) The Debentures conform to the description thereof
contained under the heading "Description of Debentures" in the
Prospectus.
(xvi) The statements (i) in the Prospectus under the captions
"Government Regulation, Properties, -- Legal Proceedings,"
Management -- Employment Agreements, -- Stock Option Plans, --
"Director Compensation -- Employee Stock Purchase Plan," "Certain
Transactions," "Description of Debentures," "Certain Federal
Income Tax Considerations," "Description of Capital Stock,"
"Share Eligible for Future Sale," and (ii) in the Registration
Statement in Item 14 insofar as such statements constitute a
summary of statutes, legal and governmental proceedings,
contracts and other documents, are accurate summaries in all
material respects and fairly present the information called for
with respect to such matters.
(xvii) The Company holds, and is operating in compliance in all
material respects with, all grants, authorizations, licenses,
permits, easements, consents, certificates and orders of any
governmental or self-regulatory body required for the conduct of
its business and all such grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid
and in full force and effect.
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(xviii) Such counsel has no reason to believe that, as of its
Effective Date, the Registration Statement or any further
amendment thereto made by the Company prior to the Closing Date
(other than the financial statements and related schedules
therein, as to which such counsel need express no opinion),
contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to the Closing Date (other than
the financial statements and related schedules therein, as to
which such counsel need express no opinion), contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as
of the Closing Date, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by
the Company prior to the Closing Date (other than the financial
statements and related schedules therein, as to which such
counsel need express no opinion), contains an untrue statement of
a material fact or omits to state a material fact necessary to
make the statements therein, in light of the circumstances in
which they were made, not misleading; and such counsel does not
know of any amendment to the Registration Statement required to
be filed.
(f) The Underwriter shall receive the opinion of Gray Plant Mooty Mooty &
Bennett, P.A., special franchise counsel for the Company, dated as of the
Closing Date and satisfactory in form and substance to the Underwriter and
its counsel, to the effect that:
(i) Each of the franchise agreements and development
agreements entered into by the Company or its subsidiary relating
to its conveyance of franchise and development rights have been
duly authorized, executed and delivered by, and, assuming due
execution and delivery by the other parties thereto, are valid,
legal and binding obligations of, and are enforceable by, the
Company and its subsidiary.
(ii) The Company's uniform franchise offering circulars, dated
April ____, 1998 and April ____, 1999, inclusive of attached
exhibits ("UFOCS") contained information substantially in
compliance, as of the effective date of the respective UFOCS,
with the disclosure provisions of the FTC franchise and business
opportunity laws and regulations ("FTC Rule") and the franchise
disclosure laws of those states with which the Company has filed
such UFOCS. The UFOCS are substantially in compliance as to form
with the FTC Rule and the franchise disclosure laws of those
states with which the Company has filed such UFOCS.
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<PAGE>
(iii) The Company holds, and is operating in compliance in all
material respects with, all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates and orders
of any governmental or self-regulatory body required for the
conduct of its business and all such franchises, grants,
authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect.
(iv) The descriptions of federal and state franchise
regulations set forth in the Prospectus under the captions "Risk
Factors -- Our Failure to Execute Our Franchise Program May
Reduce Our Profitability," "Business -- Franchising," and
"Business -- Government Regulation." fairly and accurately
describe the status of the material governmental franchise
regulations pertaining to the Company's franchising activities.
(v) The description of the Company's franchising agreements
set forth in the Prospectus under the caption "Business --
Franchising" fairly and accurately describes the material terms
of the Company's franchise agreements.
(vi) The Company has not received any notice of violation of
any FTC Rule or any state franchise registration or franchise
disclosure law.
In the addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot guarantee
the accuracy, completeness or fairness of any of the statements contained in the
Registration Statement or Prospectus as they relate to the Company's franchise
operations, in connection with such counsel's representation of the Company in
the preparation of the disclosures in the Registration Statement relating to the
Company's franchise operations, nothing has come to the attention of such
counsel which causes them to believe that the disclosures regarding the
Company's franchise operations contained in the Registration Statement or
Prospectus (except as to the financial and statistical information, as to which
no opinion need be expressed) contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading.
(g) In addition, as of the Closing Date, the Company shall have delivered
to the Underwriter an opinion, satisfactory to the Underwriter, of Merchant
Gould, P.A., special intellectual property counsel for the Company, dated
as of the Closing Date, and satisfactory in form and substance to the
Underwriter and its counsel, to the effect that:
(i) To the best of such counsel's knowledge, and except as
stated below, there are no legal, governmental or administrative
proceedings pending or threatened against the Company that relate
to trademarks, service marks, trade name, trade dress or other
intellectual property.
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(ii) To the best of such counsel's knowledge, the Company has
not received any notice of conflict with the asserted rights of
others in respect of any trademarks, services marks, trade names,
trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets, patents, patent
applications, know-how, or similar rights, nor of any threatened
actions with respect thereto, which, if determined adversely to
the Company, would individually or in the aggregate have a
material adverse effect on the general affairs, financial
position, net worth or results of operations of the Company.
(iii) To the best of such counsel's knowledge, the Company
owns, possesses or is licensed under all such material
trademarks, trademark applications, trademark registrations,
service marks, service mark registrations, copyrights, patents,
patent applications and licenses as are described in the
Prospectus and which are necessary for the Company's present or
planned future business as described in the Prospectus.
(iv) The description of the Company's and its Subsidiary's
intellectual property rights set forth in the Prospectus under
the caption "Business -- Trademarks and Service Marks" fairly and
accurately describe the status of the Company's and its
Subsidiary's trademark and service mark rights.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that, although such counsel cannot guarantee the
accuracy, completeness or fairness of any of the statements regarding
intellectual property matters contained in the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto in connection with
such counsel's representation of the Company in connection with intellectual
property matters and in preparation of the intellectual property portions of the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto, nothing has come to the attention of such counsel which causes them to
believe that the intellectual property portions of the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto (other than the
financial statements and supporting financial and statistical data included or
incorporated therein, as to which such counsel need express no opinion) contains
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading; provided,
however, that such opinion of counsel does not require any statement concerning
statements in, or omissions from, the Registration Statement, Prospectus, or any
amendment thereof or supplement thereto, which are based upon and conform to
written information, identified in Section 12 herein, furnished to the Company
by the Underwriter specifically for use in the preparation of the Registration
Statement, Prospectus, or any such amendment or supplement.
(h) At the time of execution of this Agreement and also at the Closing
Date, the Underwriter shall have received from KPMG Peat Marwick LLP a
letter or letters, dated the date of delivery thereof, in the form and
substance satisfactory to the Underwriter,
24
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stating that they are independent public accountants with respect to the
Company on a consolidated basis within the meaning of the 1933 Act and
that:
(i) In their opinion, the Financial Statements included in
the Registration Statement and Prospectus and reported on therein
by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and related
published rules and regulations;
(ii) On the basis of a limited review (but not an examination
in accordance with generally accepted auditing standards)
consisting of a reading of the unaudited financial statements
included in the Registration Statement and Prospectus (if any)
and the latest available interim financial statements of the
Company subsequent thereto; a reading of the minutes of the board
of directors and shareholders of the Company subsequent thereto;
and inquiries of officials of the Company and its Subsidiaries
responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter and
agreed upon by you, nothing has come to their attention that
causes them to believe that:
a) The unaudited financial statements included in the
Registration Statement and Prospectus, if any, do not
comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and
with the published Rules and Regulations or that such
financial statements are not fairly presented in
conformity with generally accepted accounting principles
applied on a basis consistent with that of the audited
financial statements included in the Registration
Statement and Prospectus;
b) As of a specified date not more than five days
prior to the date of this Agreement in the case of the
first letter and not more than two business days prior to
the date of the Closing Date in the case of the second
letter, there have been any changes in the capital stock,
increases in debt, decreases in total accounts
receivable, or total inventories of the Company or any
increase in liabilities or decreases in assets or
stockholders' equity of the Company, in each case, as
compared with amounts shown in the most recent balance
sheet included in the Prospectus; and
c) For the period from the date of the most recent
balance sheet included therein to such specified date,
there was any decrease, as compared with the
corresponding period of the previous year, debt or total
stockholder's equity, net revenues or any decrease in
income from operations or net income or in basic or
diluted per share amounts of net income except, in each
case, for
25
<PAGE>
such decreases which the Prospectus discloses have occurred
or may occur or which are described in such letter.
(iii) In addition to the examination referred to in their
report included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures
referred to in clause (ii) above, they have carried out certain
specified procedures requested by you, not constituting an audit
in accordance with generally accepted auditing standards with
respect to certain amounts, percentages and other financial
information which are derived from the accounting records and
other financial and statistical data of the Company and its
Subsidiaries which appear in the Prospectus including the
information set forth under the captions "Financial Highlights,"
"Capitalization," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," and which are specified by you and have
compared certain of such amounts, percentages and financial
information with the accounting records and other appropriate
data of the Company and its Subsidiaries and have found them to
be in agreement. In the event that the letters to be delivered
pursuant to this Subsection 6(i) shall set forth any changes,
increases or decreases, it shall be a further condition to the
Underwriter obligations that you, in your sole discretion, shall
have determined, after discussion with officers of the Company
responsible for financial and accounting matters, that such
changes, increases or decreases as set forth in such letters do
not reflect a material adverse change in the capital stock, debt,
net assets, net worth, assets, total accounts receivable, total
inventories or stockholders' equity of the Company on a
consolidated basis as compared with the amount shown in the most
recent consolidated balance sheet of the Company included in the
Prospectus or material adverse change in revenues or the total or
per share amounts of net income (loss).
(i) On the Closing Date, you shall have received a certificate, dated such
date, of the president and the chief financial officer of the Company to
the effect that:
(i) The representations and warranties of the Company in
Section 1 of this Agreement are true and correct as if made on
and as of such date and the Company has performed all obligations
and satisfied all conditions on its part to be performed or
satisfied at or prior to such date;
(ii) The SEC has not issued any order preventing or suspending
the use of any prospectus or issued a stop order suspending the
effectiveness of the Registration Statement and no proceedings
for that purpose have been instituted or are pending or to their
knowledge threatened under the 1933 Act;
26
<PAGE>
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto contain all
statements and information required to be included therein and
neither the Registration Statement nor the Prospectus nor any
amendment nor any supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and since the Effective Date, there has
occurred no event required to be set forth in an amendment to the
Registration Statement or supplement to the Prospectus which has
not been so set forth.
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus
and prior to the date of such certificate, and except as set
forth or contemplated in the Registration Statement or the
Prospectus: (A) neither the Company nor its Subsidiary has
incurred, except in the ordinary course of business, any lease
obligations or any direct or contingent liabilities or
commitments, (B) the Company has not entered into any transaction
other than in the ordinary course of business, (C) neither the
Company nor its Subsidiary has paid or declared any dividends or
other distributions on its capital stock, (D) there has not been
any change in the capital stock or any material adverse change,
(increase or decrease) in the outstanding debt, total accounts
receivable, total inventories, net assets, net worth, or
stockholders' equity of the Company or its Subsidiary or any
material adverse change in or affecting the condition (financial
or otherwise), business, key personnel, properties, assets,
results of operations (present or prospective), or net worth of
the Company and (E) no legal or governmental proceeding affecting
the Company or the transactions contemplated hereby has been
instituted or threatened; and
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, the conduct of the business and operations of the
Company or its Subsidiaries has not, except as otherwise stated
therein, been materially interfered with by strike, fire, flood,
hurricane, accident, or other calamity (whether or not insured)
or by any court, arbitrator or governmental action, order or
decree and, except as otherwise expressly stated therein, the
properties of the Company or its Subsidiaries have not sustained
any material loss or damage (whether or not insured) as a result
of any such occurrence.
(j) The Underwriter shall have received all necessary written consents
from the Company's and its Subsidiary' lenders and any other person whose
consent is required in connection with this Agreement and the transactions
contemplated thereby.
27
<PAGE>
(k) The Debentures shall have been qualified for sale under the Blue Sky
Laws of the States and in such amounts as shall have been specified by the
Underwriter.
(l) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred:
(i) Any change or development involving a prospective change
in or affecting particularly the business or properties of the
Company which in the judgment of the Underwriter materially
impairs the investment quality of the Debentures;
(ii) Any suspension or limitation of trading in securities
generally on the New York Stock Exchange, the American Stock
Exchange, Nasdaq, or any setting of minimum prices for trading on
either such exchange or on Nasdaq or any suspension of trading of
any securities of the Company;
(iii) Any banking moratorium;
(iv) Any outbreak or escalation of major hostilities in which
the United States is involved, any declaration of war by Congress
or any other substantial national or international calamity or
emergency if, in the judgment of the Underwriter, the effect of
any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of
the sale of and payment for the Debentures;
(v) Any material adverse change in existing financial,
political or economic conditions in the United States or
elsewhere which change, in the opinion of the Underwriter, has
materially and adversely affected the market for the Debentures
or other securities of the Company or the prospects for the
Company, its business or its properties; or
(vi) Any substantial loss to the Company by strike, fire,
flood, accident or other calamity of such a character as to
interfere materially with the conduct of the business and
operations of the Company regardless of whether such loss shall
have been insured.
(m) The Underwriter shall have received, dated as of the Closing Date,
from the Secretary of the Company a certificate of incumbency certifying
the names, titles and signatures of the officers authorized to execute this
Agreement according to the resolutions of the Board of Directors of the
Company authorizing and approving the execution, delivery and performance
of this Agreement, a copy of such resolutions to be attached to such
certificate, certifying such resolutions and certifying that the Company's
Amended and Restated Articles of Incorporation, as amended, and the
Company's Amended and Restated Bylaws have been validly adopted and have
not been amended or modified.
28
<PAGE>
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to the Underwriter and to its counsel. If any of the conditions
specified in this section shall not have been fulfilled when and as required by
this Agreement, this Agreement and all obligations of the Underwriter hereunder
may be canceled at, or at any time prior to the Closing Date by the Underwriter.
Any such cancellation shall be without liability of the Underwriter to the
Company and shall be in writing or by telegraph or telephone and confirmed in
writing. The Underwriter may waive in writing the nonperformance by the Company
of any one or more of the foregoing conditions or extend the time for
performance of such conditions. Each such waiver shall be applicable only to
the item to which it relates and the closing to which it relates and no waiver
or series of waivers shall be deemed to have waived any condition at any time
other than the condition at the time explicitly waived.
6. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the 1933 Act against any losses, claims,
damages or liabilities to which the Underwriter or each such controlling
person may become subject, under the 1933 Act, the 1934 Act, the Blue Sky
Laws, the common law or otherwise, insofar as such losses, claims, damages
or liabilities (or judicial or governmental actions or proceedings in
respect thereof) arise out of, or are based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, or the omission or alleged
omission to state in the Registration Statement or any amendment thereof a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus if used prior to
the Effective Date of the Registration Statement or in the Prospectus (as
amended or as supplemented, if the Company shall have filed with the SEC
any amendment thereof or supplement thereto), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact contained
in any application or other statement executed by the Company or based upon
written information furnished by the Company filed in any jurisdiction in
order to qualify the Debentures under, or exempt the Debentures or the sale
thereof from qualification under, the Blue Sky Laws of such jurisdiction,
or the omission or alleged omission to state in such application or
statement a material fact required to be stated therein or necessary to
make the statements threin, in light of the circumstances under which they
were made, not misleading; and the Company will reimburse the Underwriter
and each such controlling person for any legal or other expenses reasonably
incurred by the Underwriter or controlling person (subject to the
limitation set forth in Section 6(c) hereof) in connection with
investigating or defending against any such loss, claim, damage, liability
or action; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage
29
<PAGE>
or liability arises out of, or is based upon, an untrue statement, or
alleged untrue statement, omission or alleged omission, made in reliance
upon and in conformity with written information furnished to the Company
by, or on behalf of, the Underwriter specifically for use in the
preparation of the Registration Statement or any such post effective
amendment thereof, any such Preliminary Prospectus or the Prospectus or
any such amendment thereof or supplement thereto, or in any application
or other statement executed by the Company or any Underwriter filed in
any jurisdiction in order to qualify the Debentures under, or exempt the
Debentures or the sale thereof from qualification under, the Blue Sky
Laws of such jurisdiction. This indemnity agreement is in addition to
any liability which the Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the Company,
each of the Company's directors, each of the Company's officers who has
signed the Registration Statement and each person who controls the Company
within the meaning of Section 15 of the 1933 Act against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject, under the 1933 Act, the
1934 Act, the Blue Sky Laws, the common law, or otherwise, insofar as such
losses, claims, damages, or liabilities (or judicial or governmental
actions or proceedings in respect thereof) arise out of, or are based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, or the
omission or alleged omission to state in the Registration Statement or any
amendment thereof, a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus if used prior to the Effective Date of the
Registration Statement or in the Prospectus (as amended or as supplemented,
if the Company shall have filed with the SEC any amendment thereof or
supplement thereto), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; or (iii) any untrue statement or alleged untrue
statement of a material fact contained in any application or other
statement executed by the Company or by the Underwriter and filed in any
jurisdiction in order to qualify the Debentures under, or exempt the
Debentures or the sale thereof from qualification under, the Blue Sky Laws
of such jurisdiction, or the omission or alleged omission to state in such
application or statement a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; in each case to the extent, but
only the extent, that such untrue statement, alleged untrue statement,
omission or alleged omission, was made in reliance upon and in conformity
with written information furnished to the Company by, or on behalf of, the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof or
supplement thereto, or in any application or other statement executed by
the Company or by the Underwriter and filed in any jurisdiction; and the
Underwriter will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer or controlling person in
connection with investigating or defending against any such loss, claim,
damage, liability or action. This
30
<PAGE>
indemnity agreement is in addition to any liability which the Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 6 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under
this Section 6, notify in writing the indemnifying party of the
commencement thereof. The omission so to notify the indemnifying party
will not relieve it from any liability under this Section 6 as to the
particular item for which indemnification is then being sought, unless such
omission so to notify prejudices the indemnifying party's ability to defend
such action. In case any such action is brought against any indemnified
party and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel who shall be reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party under this Section 6 for
any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of
the indemnified party, it is advisable for such parties and controlling
persons to be represented by separate counsel, any indemnified party shall
have the right to employ separate counsel to represent it and all other
parties and their controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriter against the Company or by the Company against the Underwriter
hereunder, in which event the fees and expenses of such separate counsel
shall be borne by the indemnifying party and paid as incurred. Any such
indemnifying party shall not be liable to any such indemnified party on
account of any settlement of any claim or action effected without the prior
written consent of such indemnifying party.
7. CONTRIBUTION.
(a) If the indemnification provided for in Section 6 is unavailable under
applicable law to, or insufficient to hold harmless, any indemnified party
in respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Underwriter from the
offering of the Debentures or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Underwriter in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The Company and the Underwriter agree that contribution
determined by pro rata allocation (even if the Underwriter was considered a
single person) would not be
31
<PAGE>
equitable. The respective relative benefits received by the Company on
the one hand, and the Underwriter, on the other hand, shall be deemed to
be in the same proportion (A) in the case of the Company, as the total
price paid to the Company for the Debentures by the Underwriter (net of
underwriting discount received but before deducting expenses) bears to
the aggregate public offering price of the Debentures and (B) in the
case of the Underwriter, as the aggregate underwriting discount and
commissions received by them bears to the aggregate public offering
price of the Debentures, in each case as reflected in the Prospectus.
The relative fault of the Company and the Underwriter shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fct relates to information supplied by the
Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. Notwithstanding the provisions of this
Section 7, the Underwriter shall not be required to contribute any
amount in excess of the amount by which the total price at which the
Debentures underwritten by it and offered to the public exceeds the
amount of any damages which the Underwriter has otherwise been required
to pay by reason of any untrue or alleged untrue statement or omission
or alleged omission in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto. The
Underwriter's obligation to contribute pursuant to this section are
several and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person who
controls an Underwriter within the meaning of the 1933 Act or the 1934
Act shall have the same rights to contribution as such Underwriter, each
person who controls the Company within the meaning of the 1933 Act or
the 1934 Act shall have the same rights to contribution as the Company
and each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company.
(b) Promptly after receipt by a party to this Agreement of notice of the
commencement of any action, suit or proceeding, such person will, if a
claim for contribution in respect thereof is to be made against another
party (the "Contributing Party"), notify the Contributing Party of the
commencement thereof, but the omission so to notify the Contributing Party
will not relieve the Contributing Party from any liability which it may
have to any party other than under this Section 7, unless such omission so
to notify prejudices the indemnifying party's ability to defend such
action. Any notice given pursuant to Section 6 hereof shall be deemed to
be like notice hereunder. In case any such action, suit or proceeding is
brought against any party, and such person notifies a Contributing Party of
the commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing
Party similarly notified.
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<PAGE>
8. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND
REPRESENTATIONS. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Section 1 hereof and
the covenants of the Company set forth in Section 4 hereof shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriter, the Company, any of its officers and
directors, or any controlling person referred to in Sections 6 and 7, and shall
survive the delivery of and payment for the Debentures. The aforesaid indemnity
and contribution agreements shall also survive any termination or cancellation
of this Agreement. Any successor of any party or of any such controlling
person, or any legal representative of such controlling person, as the case may
be, shall be entitled to the benefit of the respective indemnity and
contribution agreements.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 8:00 a.m., Minnesota time, on
the first full day following the Effective Date, after which the
Underwriter shall commence selling the Debentures to the public, or such
earlier time as the Underwriter shall release the Debentures for sale to
the public. The Underwriter shall notify the Company immediately after the
Underwriter has taken any action which causes this Agreement to become
effective. Until this Agreement is effective, it may be terminated by the
Company or by the Underwriter by giving notice as hereinafter provided,
except that the provisions of Sections 4(q) and (r) and Sections 6, 7, 9,
12 and 13 shall at all times be effective. For purposes of this Agreement,
the release of the Debentures for sale to the public shall be deemed to
have been made when the Underwriter releases, by facsimile or otherwise,
firm offers of the Debentures to securities dealers or release for
publication a newspaper advertisement relating to the Debentures, whichever
occurs first.
(b) Until the Closing Date, this Agreement may be terminated by the
Underwriter, at its option, by giving notice to the Company, if (i) the
Company shall have sustained a loss by fire, flood, accident or other
calamity which is material with respect to the business of the Company; the
Company shall have become a party to material litigation, not disclosed in
the Registration Statement or the Prospectus; or the business or financial
condition of the Company shall have become the subject of any material
litigation, not disclosed in the Registration Statement or the Prospectus;
or there shall have been, since the respective dates as of which
information is given in the Registration Statement or the Prospectus, any
material adverse change in the general affairs, business, key personnel,
capitalization, financial position or consolidated net worth of the
Company, whether or not arising in the ordinary course of business, which
loss or change, in the reasonable judgment of the Underwriter, shall render
it inadvisable to proceed with the delivery of the Debentures, whether or
not such loss shall have been insured; (ii) trading in securities generally
on the New York Stock Exchange, American Stock Exchange, Nasdaq National
Market, Nasdaq SmallCap Market or the over-the-counter market shall have
been suspended or minimum prices shall have been established on such
exchange by the SEC or by such exchanges or markets; (iii) a general
banking moratorium shall have been declared by federal, New York or
Minnesota authorities; (iv) there shall have been such a material adverse
change in
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<PAGE>
general economic, monetary, political or financial conditions, or the
effect of international conditions on the financial markets in the
United States shall be such that, in the judgment of the Underwriter,
makes it inadvisable to proceed with the delivery of the Debentures; (v)
the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of either of any court or
other governmental authority whih, in the judgment of the Underwriter,
materially and adversely affects or will materially and adversely affect
the business or operations of the Company; (vi) there shall be a
material outbreak of hostilities or material escalation and
deterioration in the political and military situation between the United
States and any foreign power, or a formal declaration of war by the
United States of America shall have occurred; (vii) the Company shall
have failed to comply with any of the provisions of this Agreement on
its part to be performed on or prior to such date or if any of the
conditions, agreements, representations or warranties of the Company
shall not have been fulfilled within the respective times provided for
in this Agreement; (viii) the Company is no longer registered under the
1934 Act; or (ix) the Company's Common Stock is no longer listed on The
Nasdaq National Market or Nasdaq SmallCap Market. Any such termination
shall be without liability of any party to any other party, except as
provided in Sections 6, 7, 9, 12 and 13 hereof; provided, however, that
the Company shall remain obligated to pay costs and expenses to the
extent provided in Sections 4(q) and (r) of Section 4 of this Agreement.
(c) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, it
shall notify the Company promptly by telegram or telephone, confirmed by
letter sent to the address specified in Section 10 hereof. If the Company
shall elect to prevent this Agreement from becoming effective, it shall
notify the Underwriter promptly by telegram or telephone, confirmed by
letter sent to the address specified in Section 10 hereof.
10. NOTICES. All communications hereunder shall be in writing and, if
sent to the Underwriter, shall be mailed by certified or registered mail or hand
delivered or sent by facsimile transmission and confirmed in writing to Miller &
Schroeder Financial, Inc., Pillsbury Center, Minneapolis, Minnesota 55440 with a
copy to Daniel A. Yarano, Esq., Fredrikson & Byron, P.A., 900 Second Avenue
South, Minneapolis, MN 55402 and if sent to the Company, shall be mailed by
certified or registered mail or hand delivered or sent by facsimile
transmission, and confirmed in writing to the Company at Paper Warehouse, Inc.,
7630 Excelsior Boulevard, St. Louis Park, MN 55426, Attention: Chief Financial
Officer, with a copy to Bruce Machmeier, Oppenheimer Wolff & Donnelly LLP, Plaza
VII, 45 South Seventh Street, Suite 3400, Minneapolis, MN 55402.
11. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Underwriter, the Company, and their successors, assigns and
legal representatives, and nothing in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person, except that the representations and warranties of the Company
contained in this Agreement shall also be for the
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<PAGE>
benefit of any person or persons who control the Underwriter within the meaning
of Section 15 of the 1933 Act. No purchaser of Debentures will be deemed a
successor because of such purchase.
12. INFORMATION FURNISHED BY UNDERWRITER. The statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the only written information furnished by, or on behalf of, the
Underwriter specifically for use with reference to the Underwriter referred to
in Section 1(b) and Section 6 hereof.
13. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with the substantive laws of the State of Minnesota without regard to
its choice of laws provisions.
14. COUNTERPARTS. This Agreement may be signed in any number of
counterparts and all such counterparts taken together shall constitute the
single Agreement of the parties.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicate of this Agreement, whereupon
it will become a binding agreement between the Company and the Underwriter in
accordance with its terms.
Very truly yours,
PAPER WAREHOUSE, INC.
By
---------------------------
Its
---------------------------
ACCEPTANCE
The foregoing Underwriting Agreement is
hereby confirmed and accepted by us as of
the date first written above.
MILLER & SCHROEDER FINANCIAL, INC.
By
---------------------------
Its
---------------------------
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<PAGE>
APPENDIX A
FORM OF UNDERWRITER'S WARRANT
-----------------------------
To Purchase 50,000 Shares of Common Stock
of
Paper Warehouse, Inc.
THIS CERTIFIES THAT, for good and valuable consideration, Miller &
Schroeder Financial, Inc. (the "Underwriter"), or its registered assigns, is
entitled to subscribe for and purchase from Paper Warehouse, Inc., a Minnesota
corporation (the "Company"), at any time after June __, 2000, up to and
including June __, 2004, Fifty Thousand (50,000) fully paid and nonassessable
shares of the Common Stock of the Company at the price of $___ [120% of market
price immediately prior to effective date] per share (the "Warrant Exercise
Price"), subject to the antidilution provisions of this Warrant. Reference is
made to this Warrant in the Underwriting Agreement dated June __, 1999, by and
between the Company and the Underwriter. The shares which may be acquired upon
exercise of this Warrant are referred to herein as the "Warrant Shares." As
used herein, the term "Holder" means the Underwriter, any party who acquires all
or a part of this Warrant as a registered transferee of the Underwriter, or any
record holder or holders of the Warrant Shares issued upon exercise, whether in
whole or in part, of the Warrant; the term "Common Stock" means and includes the
Company's presently authorized common stock, $.01 par value, and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution, or winding up of the
Company; and the term "Convertible Securities" means any stock or other
securities convertible into, or exchangeable for, Common Stock.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised by the Holder
hereof, in whole or in part (but not as to a fractional share of Common Stock),
by written notice of exercise (in the form attached hereto) delivered to the
Company at the principal office of the Company prior to the expiration of this
Warrant and accompanied or preceded by the surrender of this Warrant along with
a check in payment of the Warrant Exercise Price for such shares or without
payment of cash pursuant to Section 10 hereof.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred, other than by will or pursuant to the
operation of law, except to a person who is an officer or partner of the
Underwriter or an officer or partner of any syndicate member participating in
the offer and sale of the Company's securities. Further, this Warrant may not
be
1
<PAGE>
sold, transferred, assigned, hypothecated or divided into two or more Warrants
of smaller denominations, nor may any Warrant shares issued pursuant to exercise
of this Warrant be transferred, except as provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT. Subject to Sections l and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. ISSUANCE OF THE WARRANT SHARES.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the
next section, certificates for the Warrant Shares so purchased shall be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after the rights represented by this Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the right to
purchase the number of Warrant Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the Holder
within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such
2
<PAGE>
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company, or the registrations made, for
the issuance of the Warrant Shares.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. ANTIDILUTION ADJUSTMENTS. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into
a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (b) the total number of shares of Common Stock outstanding
immediately after such event (including the maximum number of shares of Common
Stock issuable in respect of any securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this Subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this
3
<PAGE>
Subsection shall be made to the nearest cent or to the nearest 1/100 of a share,
as the case may be. In the event that at any time as a result of an adjustment
made pursuant to this Subsection, the holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the Warrant Exercise Price
of such other shares so receivable upon exercise of any Warrant shall be subject
to adjustment from time to time in a manner and on terms as nerly equivalent as
practicable to the provisions with respect to Common Stock contained in this
Section.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to Section
5(a) above, the Holder of each Warrant shall thereafter (until another such
adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the
number of shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result of all
adjustments in the Warrant Exercise Price in effect prior to such adjustment) by
the Warrant Exercise Price in effect prior to such adjustment and dividing the
product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), there shall be no adjustment under Subsection (a)
of this Section above but the Holder of each Warrant then outstanding shall have
the right thereafter to convert such Warrant into the kind and amount of shares
of stock and other securities and property which he would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory
exchange, sale, or conveyance had such Warrant been converted immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale,
or conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this Section with
respect to the rights and interests thereafter of any Holders of the Warrant, to
the end that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
on the exercise of the Warrant. The provisions of this Subsection shall
similarly apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
4
<PAGE>
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "1933 Act") and applicable state
securities laws; and provided further that the prospective transferee or
purchaser shall execute such documents and make such representations,
warranties, and agreements as may be required solely to comply with the
exemptions relied upon by the Company for the transfer or disposition of the
Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this Section
7, the proposed transfer or disposition of this Warrant or such Warrant Shares
described in the written notice given pursuant to this Section 7 may not be
effected without registration or qualification of this Warrant or such Warrant
Shares the Company shall promptly give written notice thereof to the Holder, and
the Holder will limit its activities in respect to such as, in the opinion of
both such counsel, are permitted by law.
8. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the last reported sale price or, if none, the average of the last reported
closing bid and asked prices on any national securities exchange or quoted in
the National Association of Securities Dealers, Inc.'s Automated Quotations
System (NASDAQ), or if not listed on a national securities exchange or quoted in
NASDAQ, the average of the last reported closing bid and asked prices as
reported by Metro Data Company, Inc. from quotations by
5
<PAGE>
market makers in such Common Stock on the Minneapolis-St. Paul local
over-the-counter market.
9. REGISTRATION RIGHTS.
(a) If the Company at any time within two (2) years after complete
exercise of this Warrant, but no more than seven (7) years from the date of this
Warrant, proposes to register under the 1933 Act (except by a Form S-4 or Form
S-8 Registration Statement or any successor forms thereto) or qualify for a
public distribution under Section 3(b) of the 1933 Act, any of its securities,
it will give written notice to all Holders of this Warrant, any Warrants issued
pursuant to Section 2 and/or Section 3(a) hereof, and any Warrant Shares of its
intention to do so and, on the written request of any such Holder given within
twenty (20) days after receipt of any such notice (which request shall specify
the interest in this Warrant or the Warrant Shares intended to be sold or
disposed of by such Holder and describe the nature of any proposed sale or other
disposition thereof), the Company will use its best efforts to cause all such
Warrants and Warrant Shares, the Holders of which shall have requested the
registration or qualification thereof, to be included in such registration
statement proposed to be filed by the Company; provided, however, that if a
greater number of Warrants and Warrant Shares is offered for participation in
the proposed offering than in the reasonable opinion of the managing underwriter
of the proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant and Warrant Shares proposed to be
offered by such Holders for registration, as well as the number of securities of
any other selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) Further, on a one-time basis only, during the four year period
commencing one year after the date of this Warrant, upon request by the Holder
or Holders of a majority in interest of this Warrant, of any Warrants issued
pursuant to Section 2 and/or Section 3(a) hereof, and of any Warrant Shares, the
Company will promptly take all necessary steps to register or qualify, under the
1933 Act and the securities laws of such states as the holders may reasonably
request, this Warrant and such number of Warrant Shares issued and to be issued
upon conversion of the Warrants requested by such holders in their request to
the Company. The Company shall keep effective and maintain any registration,
qualification, notification, or approval specified in this Paragraph (b) for
such period as may be reasonably necessary for such Holder or Holders of such
Warrants and/or such Warrant Shares to dispose thereof and from time to time
shall amend or supplement the prospectus used in connection therewith to the
extent necessary in order to comply with applicable law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if the Company is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public
6
<PAGE>
offering, and legal fees and disbursements and other expenses of complying with
state securities laws of any jurisdictions in which the securities to be offered
are to be registered or qualified. Fees and disbursements of special counsel
and accountants for the selling Holders, underwriting discounts and commissions,
and transfer taxes for selling Holders and any other expenses relating to the
sale of securities by the selling Holders not expressly included above shall be
borne by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant and
of any Warrant Shares, and the officers and directors, if any, who control such
Holders, within the meaning of Section 15 of the 1933 Act, against all losses,
claims, damages, and liabilities caused by (1) any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement or
Prospectus (and as amended or supplemented if the Company shall have furnished
any amendments thereof or supplements thereto), any Preliminary Prospectus or
any state securities law filings; (2) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses, claims,
damages, or liabilities are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such Holder expressly for
use therein; and each such Holder by its acceptance hereof severally agrees that
it will indemnify and hold harmless the Company, each of its officers who signs
such Registration Statement, and each person, if any, who controls the Company,
within the meaning of Section 15 of the 1933 Act, with respect to losses,
claims, damages, or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein.
10. ADDITIONAL RIGHT TO CONVERT WARRANT.
(a) The holder of this Warrant shall have the right to require the Company
to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this Section 10. Upon exercise of the Conversion Right, the
Company shall deliver to the holder (without payment by the holder of any
Warrant Exercise Price) that number of shares of Company Common Stock equal to
the quotient obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate Warrant
Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value for the
Warrant Shares immediately prior to the exercise of the Conversion Right) by (y)
the Fair Market Value of one share of Company Common Stock immediately prior to
the exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the holder, at any time or
from time to time, prior to its expiration, on any business day by delivering a
written notice in the form attached hereto (the "Conversion Notice") to the
Company at the offices of the Company exercising the Conversion Right and
specifying (i) the total number of shares of Stock the Holder will purchase
pursuant to such conversion and (ii) a place and date not less than one or more
than 20 business days from the date of the Conversion Notice for the closing of
such purchase.
7
<PAGE>
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common stock
issuable upon such conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the Holder a new warrant
representing the number of shares, if any, with respect to which the warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular date
(the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, then the average closing or
last sale prices, respectively, reported for the ten (10) business days
immediately preceding the Determination Date, and
(ii) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System but is traded on the
over-the-counter market, then the average closing bid and asked prices
reported for the ten (10) business days immediately preceding the
Determination Date.
IN WITNESS WHEREOF, Paper Warehouse, Inc. has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated June ___,
1999.
PAPER WAREHOUSE, INC.
By:
------------------------------------
Its:
------------------------------
8
<PAGE>
To: Paper Warehouse, Inc.
NOTICE OF EXERCISE OF WARRANT -
To Be Executed by the Registered Holder in Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, _________________ of the shares issuable upon the exercise of
such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
-----------------------------------
(Print Name)
Please insert social security
or other tax identification
number of registered holder of
certificate (______________) Address:
-----------------------------------
-----------------------------------
Date:
----------------- -----------------------------------
Signature*
*The signature on the Notice of Exercise of Warrant must correspond exactly to
the name as written upon the face of the Warrant in every particular without
alteration or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto _____________________________, the assignee, whose address is
______________________ and whose tax identification or social security number is
__________________ the right represented by the foregoing Warrant to purchase
_______ shares of the Common Stock of Paper Warehouse, Inc. to which the within
Warrant relates and appoints _____________, attorney, to transfer said right on
the books of Paper Warehouse, Inc. with full power of substitution in the
premises.
Name of Warrant Holder/Assignor
Dated:
----------------- ----------------------------------
(Signature)*
Address of Warrant Holder/Assignor:
Tax Identification No. or Social ----------------------------------
Security No. of Warrant Holder/Assignor
----------------------------------
- ------------------------------------
*Note: The above signature should correspond exactly with the name on the first
page of the Warrant or with the name of the assignee appearing on a duly
executed assignment form.
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
The undersigned hereby irrevocably elects a cashless exercise of the right
of purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ______________ shares of Common Stock, as provided for in Section 10
therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
Name
-------------------------------------
(Please print Name)
Address
----------------------------------
-----------------------------------------
Tax Identification No. or Social
Security No.
----------------------------
Signature
--------------------------------
NOTE: The above signature should correspond exactly with the name on the
first page of this Warrant Certificate or with the name of the assignee
appearing on a duly executed assignment form.
And if said number of shares shall not be all the shares purchasable under
the within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
<PAGE>
May 24, 1999
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, MN 55426
Re: Paper Warehouse, Inc.
Registration Statement on Form S-1
$6,000,000 Principal Amount of Convertible
Subordinate Debentures Due 2005
File No. 333-___________________
Ladies and Gentlemen:
We are acting as counsel for Paper Warehouse, Inc., a Minnesota corporation (the
"Company"), in connection with the registration by the Company of the principal
amount of $6,000,000 Convertible Subordinated Debentures due 2005 (the
"Debentures"), and such indeterminate number of shares of the Company's Common
Stock, $.01 par value per share, as shall be issuable upon conversion of the
Debentures (the "Debenture Shares"), all pursuant to the Company's Registration
Statement on Form S-1 as initially filed with the Securities and Exchange
Commission ("SEC") on May 24, 1999 (the "Registration Statement"). The
Debentures are to be issued pursuant to an indenture (the "Indenture") between
the Company and Norwest Bank Minnesota, N.A., as trustee (the "Trustee").
In acting as counsel for the Company and arriving at the opinions expressed
below, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
Based upon the foregoing, and upon our examination of such other matters as we
deem necessary in order to furnish this opinion, it is our opinion that:
1. The Company has the corporate authority to issue the Debentures and the
Debenture Shares, in the manner and under the terms set forth in the
Registration Statement and the Indenture.
2. The Debentures, when duly authorized by the Pricing Committee of the Board
of Directors of the Company, and when executed and authenticated in
accordance with the terms of the Indenture following execution and delivery
of the Indenture by the Company
<PAGE>
Paper Warehouse, Inc.
May 24, 1999
Page 2
and the Trustee and when delivered to and paid for by Miller & Schroeder
Financial, Inc. ("Miller & Schroeder"), in accordance with the Underwriting
Agreement between the Company and Miller & Schroeder referred to in the
Registration Statement, will be legal, valid and binding obligations of the
Company entitled to the benefits provided by the Indenture and enforceable
in accordance with their terms and the terms of the Indenture, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws relating to or affecting the enforcement of
creditors' rights generally.
3. The Debenture Shares, when duly authorized and reserved for issuance by the
aforesaid Pricing Committee and when issued upon conversion in accordance
with the terms of the Indenture, will be validly issued, fully paid and
nonassessable.
The foregoing opinions are based upon and limited exclusively to the laws of the
State of Minnesota and the United States of America.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, to its use as part of the Registration Statement, and to
the reference of our firm name under the caption "Legal Matters" in the
Prospectus forming a part of the Registration Statement.
We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement as described above. It is not to be
used, circulated, quoted or otherwise referred to for any other purpose. Other
than the Company, no one is entitled to rely on this opinion.
Very truly yours,
OPPENHEIMER WOLFF & DONNELLY LLP
<PAGE>
EXHIBIT 10.22
Loan No. 30381
MORTGAGE NOTE
$1,100,000.00 ST. LOUIS PARK, MINNESOTA APRIL 8, 1999
FOR VALUE RECEIVED, PAPER WAREHOUSE, INC., a Minnesota corporation
having an office at 7630 Excelsior Boulevard, Minneapolis, Minnesota
55426-4504 (hereinafter called "Borrower"), promises to pay to the order of
FORTIS INSURANCE COMPANY, a Wisconsin corporation, having an office at 501
West Michigan, Milwaukee, Wisconsin 53201-3050 (hereinafter called
"Lender"), or order, at said office or at such other place as may be
designated, from time to time, in writing by Lender, the principal sum of One
Million One Hundred Thousand and No/100 Dollars ($1,100,000.00), or so much
thereof as may be disbursed hereunder, in lawful money of the United States
of America, with interest thereon from and including the date of this Note
to, but not including, the date this Note is paid in full calculated in the
manner hereinafter set forth, as follows:
(i) one (1) installment of interest only on the Principal
Balance (hereinafter defined) calculated in the manner hereinafter set
forth shall be due and payable on the date hereof, representing interest
on the Principal Balance from the date hereof through and including the
last day of the month in which this Note is dated;
(ii) one hundred twenty (120) equal, consecutive monthly
installments of principal and interest in the amount of $8,612.00 each
shall be due and payable on June 1, 1999 and on the first day of each
calendar month thereafter to and including May 1, 2009, each of which
installments shall be applied first to the payment in full of interest
accrued and unpaid on the Principal Balance calculated in the manner
hereinafter set forth and then in reduction of the Principal Balance; and
(iii) the entire Principal Balance, together with all interest
accrued and unpaid thereon calculated in the manner hereinafter set
forth and all other sums due under this Note, shall be due and payable
on the Maturity Date.
The monthly installments described in clause (ii) above are based on a
twenty (20) year amortization schedule. All amounts due under this Note are
payable without setoff, counterclaim or any other deduction whatsoever.
1. DEFINITIONS. The following terms as used in this Note shall have
the following meanings:
<PAGE>
(i) "Debt" shall mean all principal, interest and other sums of
any nature whatsoever which may or shall become due to Lender in
accordance with the provisions of this Note, the Mortgage or any of the
other Loan Documents.
(ii) "Default" shall mean the occurrence of a "Default", as
defined in the Mortgage.
(iii) "Default Rate" shall mean a rate per annum equal to eighteen
percent (18%), calculated on the actual number of days elapsed in a 360
day year consisting of twelve (12) thirty (30) day months.
(iv) "Event of Default" shall mean an event which would, with the
giving of notice or the passage of time, or both, give rise to a Default
under this Note, the Mortgage or any of the other Loan Documents.
(v) "Interest Rate" shall mean a fixed rate per annum equal to
seven and one-eighth percent (7.125%).
(vi) "Loan" shall mean the loan in the principal sum of
$1,100,000.00 made by Lender to Borrower which is evidenced by this Note
and secured by the Mortgage and the other Loan Documents.
(vii) "Loan Documents" shall mean all and any of the documents
other than this Note now or hereafter executed by Borrower or others and
by or in favor of Lender which wholly or partially secure or guarantee
payment of this Note, or which otherwise pertain to the Loan.
(viii) "Maturity Date" shall mean May 1, 2009.
(ix) "Mortgage" shall mean a certain Mortgage and Security
Agreement dated the date hereof securing payment of this Note in the
principal sum of $1,100,000.00 given by Borrower to or for the benefit
of Lender covering the fee estate of Borrower in certain premises
located in Hennepin County, Minnesota, as more particularly described
therein, and intended to be duly recorded in said County.
(x) "Mortgaged Property" shall mean the property covered by the
lien of the Mortgage, as more particularly described therein.
(xi) "Principal Balance" shall mean the outstanding principal
alance of this Note from time to time.
2. INTEREST RATE. Subject to the provisions of this Note hereinafter set
forth, the entire Principal Balance shall bear interest at the Interest Rate.
The Interest Rate shall
-2-
<PAGE>
be calculated on the basis of the actual number of days elapsed over a
360-day year consisting of twelve (12) thirty (30) day months.
3. PREPAYMENT.
(a) Borrower shall have the privilege of prepaying the Principal
Balance in whole, but not in part, together with all accrued and unpaid
interest thereon and all other charges and fees due hereunder and under the
Loan Documents, on the first day of any calendar month subsequent to the
second (2nd) anniversary of the date of this Note upon thirty (30) days prior
written notice of intent to prepay, subject to the payment of the Prepayment
Premium contemporaneously with the amount otherwise required to prepay the
Debt in full. Borrower and Lender intend that the original Principal Balance
will yield to Lender an annual return after the date this Note is prepaid of
not less than the Interest Rate for the entire term hereof. If this Note is
prepaid at a time when the annual yield on institutional quality investments
then being made by Lender for a term concurrent with the remaining term
hereof is less than the Interest Rate, Lender will lose the intended benefit
of its loan bargain and will incur delay and transactional costs in
reinvesting the prepaid amount. The Prepayment Premium is intended to
reimburse Lender for such loss and costs.
(b) Accordingly, Borrower and Lender agree that the prepayment premium
shall be equal to the greater of (such sum being hereinafter called the
Prepayment Premium):
(i) One percent (1.0%) of the Principal Balance at the time of
prepayment, or
(ii) An amount equal to the present value of an annuity having n
monthly payments of Xn, utilizing an annual discount rate of R (R is an
annual rate and therefore is divided by 12 for calculation purposes to
accommodate the monthly frequency of the annuity), where:
"n" equals the number of months or fraction thereof
remaining from the date the indebtedness evidenced by this Note is
prepaid in full to the Maturity Date;
"Xn" equals (aa) the difference obtained by subtracting the
Current Yield Rate from the Interest Rate, (bb) multiplying said
difference by the Principal Balance of this Note to be prepaid, and
(cc) dividing the resultant product by twelve (12); and
"R" equals the Current Yield Rate.
The term "Current Yield Rate" shall mean the sum of twenty five basis points
(0.25%) plus the then current percentage annual yield determined on a date
not earlier than
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ten (10) business days prior to the prepayment date (hereinafter called the
"Calculation Date") of a United States Treasury Note having a maturity date
closest to the Maturity Date. For purposes of determining the Current Yield
Rate, if there shall exist on the Calculation Date more than one United
States Treasury Note having the same maturity date, then the Treasury Note
whose Current Yield Rate is closest to the Interest Rate in effect hereunder
shall be used to calculate the Prepayment Premium. The annuity used to
calculate the loss of yield for this Note shall be a series of variable
declining payments made at equal time intervals at the end of each interval.
The payment period and interest compounding periods shall be monthly. The
annuity monthly cash flow, Xn, shall be recalculated as above for each month
until the scheduled Maturity Date based on the scheduled Principal Balance at
the end of each month.
(c) For purposes of this Note, "prepayment" shall mean any instance
wherein the Debt is fully satisfied in any manner prior to the Maturity Date,
whether voluntarily or involuntarily (excluding scheduled payments required
hereunder, the application of net insurance proceeds or the net proceeds of
any condemnation or eminent domain proceeding or award) pursuant to the terms
of the Mortgage or any other of the other Loan Documents. Prepayment shall
include, but not be limited to: (i) any payment after an Event of Default
under this Note, the Mortgage or the other Loan Documents; (ii) payment to
Lender by any holder of a subordinate or superior interest in the Mortgaged
Property; (iii) any payment after the Maturity Date is accelerated for any
reason permitted hereunder including, without limitation, any acceleration of
the Maturity Date resulting from the exercise of Lender's rights under this
Note, the Mortgage or the other Loan Documents; (iv) payment resulting from
any sale or transfer of the Mortgaged Property pursuant to foreclosure, sale
under power, judicial order or trustee's sale under the Mortgage; and (v)
payment by sale, transfer or offsetting credit in connection with or under
any bankruptcy, insolvency, reorganization, assignment for the benefit of
creditors, or receivership proceedings under any statute of the United States
or any State thereof involving Borrower and/or the Mortgaged Property. If
the Maturity Date is accelerated, the amount due hereunder shall include the
charge which would be due under the Prepayment Premium calculated if a
voluntary prepayment at the time of such acceleration had been tendered, and
the date of acceleration of the Maturity Date will be deemed to be the date
of prepayment. Partial prepayments resulting from application of casualty
proceeds or condemnation awards shall be applied to the Principal Balance in
inverse order of maturity and shall not reduce or delay the scheduled monthly
installments payable hereunder.
(d) Borrower and Lender hereby acknowledge that applicable law
regarding the enforceability of the Prepayment Premium under certain
circumstances may not be fully settled. Accordingly, Borrower and Lender
have resolved such issue in advance by negotiation, both parties being
represented by counsel (or having the opportunity to consult counsel) and
both parties being experienced in commercial real estate finance. Borrower
hereby expressly covenants and agrees: (i) that the Prepayment Premium
provided for herein is reasonable; (ii) that it shall pay the Prepayment
Premium, even upon acceleration of the Maturity Date; (iii) that the
Prepayment Premium shall be
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payable notwithstanding the then prevailing market rates existing at the time
prepayment is made; (iv) that there has been a course of conduct between
Borrower and Lender giving specific consideration in this transaction for
such agreement to pay the Prepayment Premium, and (v) that Borrower shall be
estopped hereafter from claiming differently than as set forth in this
paragraph. Borrower expressly acknowledges and agrees that its agreement to
pay the Prepayment Premium to Lender as herein described is a material
inducement to Lender to make the Loan and without which inducement Lender
would not make the Loan.
(e) Notwithstanding the foregoing, no Prepayment Premium shall be due
if the Borrower voluntarily prepays this Note in full within a period of
ninety (90) days immediately preceding the Maturity Date, provided on such
date prepayment is made there is no Event of Default under this Note, the
Mortgage or the other Loan Documents.
4. ACCELERATION. If Borrower fails to pay when due any one of the
installments due under this Note within ten (10) days after the date on which
it is due, or upon the occurrence of any other Default, the entire Debt,
including Principal Balance, and all other sums paid or advanced by Lender to
or on behalf of Borrower pursuant to the terms of this Note, the Mortgage or
any of the Loan Documents, together with all unpaid interest thereon and all
other applicable late charges, fees and prepayment premiums, shall at the
option of Lender become immediately due and payable without further notice or
demand and Lender may forthwith exercise the remedies available to Lender at
law and in equity as well as those remedies set forth in this Note and the
Loan Documents and one or more executions may forthwith issue on any judgment
or judgments obtained by virtue thereof. Upon exercise of this option by
Lender, the entire Principal Balance and any other amounts owed to Lender
hereunder or under any of the Loan Documents shall bear interest until paid
at the Default Rate. Any tender of payment of the amount necessary to
satisfy the entire indebtedness evidenced hereby made following acceleration
shall be subject to and must include payment of the Prepayment Premium. All
of the terms, covenants and provisions contained in the Mortgage and the Loan
Documents which are to be kept and performed by Borrower are hereby made part
of this Note to the same extent and with the same force and effect as if they
were fully set forth herein. The rights, remedies and powers of Lender under
this Note are cumulative and concurrent and not exclusive of any rights or
remedies which Lender would otherwise have, and may be pursued singly,
successively or together against Borrower, any Responsible Party (if any),
the Mortgaged Property or any other security given at any time for the Debt,
in Lender's sole and absolute discretion.
5. LATE CHARGE. If any installment of principal, interest or other
sum payable under this Note or the Loan Documents is not paid within ten (10)
days after the date on which it is due, Borrower shall pay to Lender upon
demand an amount equal to four percent (4%) of such unpaid installment as a
late payment charge in order to defray part of the increased cost of
collection occasioned by any late payments, as liquidated damages and not as
a penalty, since actual damages are impossible to determine at this time.
This charge shall be in addition to, and not in lieu of, any other remedy
Lender may
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have and is in addition to any reasonable fees and charges of any agents or
attorneys which Lender is entitled to employ on any defaults hereunder,
whether authorized herein or by law.
6. DEFAULT RATE. In addition to any late payment charge which may be
due under this Note, (a) in the event of any failure to pay any installment
under this Note within ten (10) days after the date on which it is due
(including if the Debt is not paid in full on the Maturity Date), or (b)
after the occurrence of any Default other than such failure to pay, and for
so long as such Default continues regardless of whether or not there has been
an acceleration of the Debt, Borrower shall thereafter pay interest on the
Principal Balance at the Default Rate from the date of such failure to pay
any installment or such Default, as the case may be, until the date that such
installment is paid in full (prior to such Event of Default ripening into a
Default) or the Principal Balance is paid in full, as the case may be, which
interest at the Default Rate shall accrue from the earlier of the time when
such payment was due or the time of the event which gave rise to such Default
and all such accrued interest shall be paid in full as a condition precedent
to the curing of such Event of Default, the acceptance of any cure of a
Default and the reinstatement of the Loan (provided that Lender shall not be
obligated to accept any such cure after an Event of Default has ripened into
a Default) or the repayment of the Debt in full, provided, however, that such
interest rate shall in no event exceed the maximum interest rate which
Borrower may by law pay.
7. WAIVERS. Borrower hereby waives presentment and demand for
payment, notice of dishonor, notice of nonpayment, protest of any dishonor,
and notice of protest and all other notices and demands in connection with
the delivery, acceptance, performance, default or enforcement of this Note.
Borrower and all endorsers or other parties to this Note hereby jointly and
severally waive and renounce for itself, its heirs, successors and assigns,
all rights to the benefit of any statute of limitations and any moratorium,
reinstatement, marshaling, forbearance, valuation, stay, extension,
redemption, appraisement, exemption and homestead now provided, or which may
hereafter be provided by the Constitution and laws of the United States of
America and of any state thereof, both as to itself and in and to all of its
property, real and personal, against the enforcement and collection of the
obligations evidenced by this Note, any renewal thereof, or any indebtedness
represented hereby.
8. COSTS. Borrower agrees to pay immediately upon demand all costs
and expenses of Lender, including, but not limited to, reasonable attorneys'
fees and expenses (i) if after an Event of Default this Note is placed in the
hands of any attorney or attorneys for collection, (ii) if Lender finds it
necessary or desirable upon an Event of Default to secure the services or
advice of one or more attorneys with regard to collection of this Note
against Borrower, any Responsible Party (if any), any guarantor (if any) or
any other party liable therefor or for the protection of its rights under
this Note or under any Loan Documents, (iii) if Lender seeks to have the
Mortgaged Property abandoned by any estate in bankruptcy, or attempts to have
any stay or injunction prohibiting the enforcement or collection of the Note,
or prohibiting the enforcement of any Loan Document lifted by
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any bankruptcy or other court, and any subsequent proceedings or appeals from
any order or judgment entered in any such proceeding or proceedings, (iv) if
Lender shall be made a party to or shall intervene in any action or
proceeding, whether in court or before any governmental agency or other
adjudicative authority, affecting the Mortgaged Property or the title thereto
or the interest of Lender under the Mortgage, including without limitation
any form of condemnation or eminent domain proceeding, and (v) as provided in
the Mortgage. Borrower shall reimburse Lender immediately upon demand for
all such costs, charges and reasonable attorneys' fees and expenses incurred
by Lender in any such event, and until paid, such amount shall bear interest
at the Default Rate and shall be secured by the Mortgage as a further charge
and encumbrance upon the Mortgaged Property.
9. USURY SAVINGS CLAUSE. It is the express intent hereof that
Borrower not pay and Lender not receive, directly or indirectly in any manner
whatsoever, interest in excess of that which may be legally paid by Borrower
under applicable law, and this Note is subject to the express condition that
at no time shall Borrower be obligated or required to pay, nor shall Lender
be permitted to collect, interest on the Principal Balance at a rate which
could subject Lender to either civil or criminal liability as a result of
being in excess of the maximum rate which Borrower is permitted by law to
agree to pay. If any such excess amount of interest is contracted for,
charged, paid, received or applied under the Loan Documents or this Note, or
in the event the maturity of the indebtedness secured hereby is accelerated
in whole or in part or all or part of the principal of or interest on the
Note shall be prepaid, so that under any of such circumstances the amount of
interest contracted for, charged, paid, received or applied under the Loan
Documents or this Note on the amount of principal actually outstanding from
time to time under this Note shall exceed the maximum amount of interest
permitted by applicable law, then in any such event (a) neither Borrower nor
any other person liable for payment of the indebtedness secured hereby shall
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum amount of interest permitted by applicable law, (b) any
such excess which may have been collected shall, at Lender's option, either
be applied as a credit against the then unpaid principal amount of this Note
or refunded to Borrower and (c) the effective rate of interest shall be
automatically reduced to the maximum lawful rate of interest allowed under
applicable law, as now or hereafter construed by the courts having
jurisdiction thereof. Without limiting the generality of the foregoing, all
calculations of the rate of interest contracted for, charged or received
under the Loan Documents or this Note which are made for the purposes of
determining whether such rate exceeds the maximum amount of interest
permitted by applicable law shall be made, to the extent permitted by
applicable law, by amortizing, prorating, allocating and spreading in equal
parts during the period of the full stated term of this Note, all interest at
any time contracted for, charged or received in connection with the
indebtedness evidenced by this Note.
10. JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
person or party (and, as of the date hereof, Borrower certifies that Borrower
does not consist of more than one entity), the obligations and liabilities of
each such person or party hereunder shall be joint and several.
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<PAGE>
11. COLLATERAL. This Note is secured by the Mortgage and the other
Loan Documents.
12. GOVERNING LAW. The terms of this Note shall be governed by and
construed under the laws of the State of Minnesota.
13. WRITTEN MODIFICATION ONLY. This Note may only be modified,
amended, changed or terminated by an agreement in writing signed by Lender
and Borrower. No waiver of any term, covenant or provision of this Note shall
be effective unless given in writing by Lender and if so given by Lender
shall only be effective in the specific instance in which given.
14. ENTIRE AGREEMENT. This Note sets forth the entire agreement and
understanding of Lender and Borrower, and Borrower acknowledges that no oral
or other agreements, understandings, representations or warranties exist with
respect to this Note or with respect to the obligations of Borrower under
this Note, except those specifically set forth in this Note. Borrower
acknowledges that Borrower's obligations under this Note are and shall at all
times continue to be absolute and unconditional in all respects, irrespective
of any other circumstances of any nature whatsoever which might now or
hereafter otherwise constitute a defense to the obligations of Borrower or
any other person or party relating to this Note or otherwise with respect to
the Loan. Except as set forth below, Borrower absolutely, unconditionally
and irrevocably waives any and all right to assert any defense, setoff,
counterclaim or crossclaim (a "Borrower Claim") of any nature whatsoever with
respect to this Note or the obligations of Borrower under this Note or the
obligations of any other person or party relating to this Note or the
obligations of Borrower hereunder or otherwise with respect to the Loan in
any action or proceeding (a "Lender Proceeding") brought by Lender to collect
the Debt, or any portion thereof, or to enforce, foreclose and realize upon
the liens and security interests created by the Mortgage and the Other
Security Documents. The foregoing sentence shall not alter or diminish the
right of Borrower (i) to raise in a Lender Proceeding any compulsory defenses
which, if not raised in the Lender Proceeding, would be forever barred, or
(ii) to bring any action or file any suit against Lender with respect to a
Borrower Claim in an action separate from a Lender Proceeding.
15. DELAY NOT WAIVER. No delay on the part of Lender in exercising any
right or remedy under this Note, the Mortgage or the Loan Documents or
failure to exercise the same shall operate as a waiver in whole or in part of
any such right or remedy or be construed as an election of remedies. Without
limiting the generality of the foregoing, the acceptance by Lender from time
to time of any payment under this Note which is past due or which is less
than the payment in full of all amounts due and payable at the time of such
payment, shall not (i) constitute a waiver of or impair or extinguish the
right of Lender to accelerate the maturity of this Note or to exercise any
other right or remedy at the time or at any subsequent time, or nullify any
prior exercise of any such right or remedy, (ii) constitute a waiver of the
requirement of punctual payment and performance,
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or (iii) constitute a novation in any respect. No notice to or demand on
Borrower shall be deemed to be a waiver of the obligation of Borrower or of
the right of Lender to take further action without further notice or demand
as provided in this Note, the Mortgage and the Loan Documents.
16. JURISDICTION. Borrower agrees to submit to personal jurisdiction
in the State of Minnesota in any action or proceeding arising out of this
Note and, in furtherance of such agreement, Borrower hereby agrees and
consents that, without limiting other methods of obtaining jurisdiction,
personal jurisdiction over Borrower in any such action or proceeding may be
obtained within or without the jurisdiction of any court located in Minnesota
and that any process or notice of motion or other application to any such
court in connection with any such action or proceeding may be served upon
Borrower by registered or certified mail to or by personal service at the
last known address of Borrower, whether such address be within or without the
jurisdiction of any such court.
17. VALID AND BINDING OBLIGATION. Borrower (and the undersigned
representative of Borrower, if any) represents that Borrower has full power,
authority and legal right to execute and deliver this Note and that the Debt
constitutes a valid and binding obligation of Borrower.
18. TRIAL BY JURY WAIVER. BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM, WHETHER CONTRACT,
TORT OR OTHERWISE ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO
THE LOAN, THIS NOTE, THE MORTGAGE, THE LOAN DOCUMENTS OR ANY ACTS OR OMISSIONS
OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION THEREWITH.
19. SUCCESSORS AND ASSIGNS. Whenever used, the singular number shall
include the plural, the plural the singular and the words "Lender" and
"Borrower" include their respective successors and assigns, provided,
however, that Borrower shall in no event or under any circumstance have the
right without obtaining the prior written consent of Lender to assign or
transfer its obligations under this Note, the Mortgage or the other Loan
Documents, in whole or in part, to any other person, party or entity.
20. APPLICATION OF PAYMENTS. Each payment on this Note or otherwise
collected by Lender by virtue of any Loan Document is to be applied when
received, first, to outstanding late charges and costs of collection, if any,
then to accrued but unpaid interest, and then to the payment of interest on
the Principal Balance from time to time remaining unpaid, and the remainder
shall (to the extent permitted hereunder) be used to reduce the Principal
Balance. Application of any such payment as aforesaid shall not preclude the
Lender from exercising its option to cause the Debt to become immediately due
and payable by reason of a Default.
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21. BUSINESS PURPOSES. Borrower represents and warrants to Lender that
the indebtedness evidenced hereby arises from a business loan from Lender to
Borrower for the sole purpose of permitting Borrower to carry on its business
and not for personal, family, household or agricultural purposes.
22. HEADINGS. The headings of the articles, paragraphs and
subdivisions of this Note are for convenience of reference only, are not to
be considered a part hereof and shall not modify, limit or otherwise affect
any of the terms hereof.
23. SEVERABILITY. Every provision of this Note is intended to be
severable. If any term or provision hereof is declared by a court of
competent jurisdiction to be illegal, invalid or unenforceable for any reason
whatsoever, such illegality, invalidity or unenforceability shall not affect
the balance of the terms and provisions hereof, which terms and provisions
shall remain in full force and effect and shall be liberally construed in
favor of Lender.
24. REPLACEMENT NOTE. Upon receipt by Borrower of written notice from
Lender of the loss, theft, destruction or mutilation of this Note, Borrower
will execute and deliver to Lender, in lieu thereof, a replacement note in
identical form to this Note and dated as of the date of this Note. Upon
delivery to Lender of such replacement note, all references in the Mortgage
and any other Loan Documents to this Note shall be deemed to be references to
such replacement note, and Lender shall deliver to Borrower an indemnity
regarding the lost note in form and substance acceptable to Borrower and
Lender.
25 TIME OF ESSENCE. TIME IS OF THE ESSENCE with respect to all of the
obligations and agreements under this Note.
26. RECOURSE LIABILITY. Borrower has full recourse liability under
this Note and under the Loan Documents.
IN WITNESS WHEREOF, Borrower has duly executed this Note under seal the
day and year first above written.
BORROWER:
PAPER WAREHOUSE, INC., a
Minnesota corporation
By: /s/ Yale T. Dolginow
-----------------------------------
Name: Yale T. Dolginow
-----------------------------
Title: Chief Executive Officer
----------------------------
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EXHIBIT 10.23
RECORDING REQUESTED BY AND LOAN NO. 30381
WHEN RECORDED RETURN TO:
Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: Albert E. Bender, Jr.
________________________________________________________________________
________________________________________________________________________
MORTGAGE AND SECURITY AGREEMENT
PAPER WAREHOUSE, INC., as Mortgagor,
in favor of
FORTIS INSURANCE COMPANY, as Mortgagee
Dated: As of April 8, 1999
Location: 7630 Excelsior Blvd., St. Louis Park, Hennepin County, Minnesota
THIS INSTRUMENT IS TO BE FILED AND INDEXED IN THE REAL ESTATE RECORDS AND
IS ALSO TO BE INDEXED IN THE INDEX OF FINANCING STATEMENTS. FROM THE DATE
OF ITS RECORDING, THIS INSTRUMENT SHALL BE EFFECTIVE AS A FINANCING
STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TO ALL GOODS CONSTITUTING
PART OF THE PREMISES (AS MORE PARTICULARLY DESCRIBED IN THE GRANTING CLAUSE
OF THIS INSTRUMENT) WHICH ARE OR ARE TO BECOME FIXTURES RELATED TO THE REAL
ESTATE DESCRIBED HEREIN. THE NAMES OF THE DEBTOR AND THE SECURED PARTY,
THE MAILING ADDRESS OF THE SECURED PARTY FROM WHICH INFORMATION CONCERNING
THE SECURITY INTEREST MAY BE OBTAINED, THE MAILING ADDRESS OF THE DEBTOR
AND A STATEMENT INDICATING THE TYPES, OR DESCRIBING THE ITEMS, OF
COLLATERAL, ARE AS DESCRIBED IN PARAGRAPH 16 OF ARTICLE I HEREOF AND THE
GRANTING CLAUSES HEREOF, IN COMPLIANCE WITH THE REQUIREMENTS OF THE UNIFORM
COMMERCIAL CODE, AS ENACTED IN THE STATE OF MINNESOTA, AND A CARBON OR
PHOTOGRAPHIC REPRODUCTION OF THIS INSTRUMENT MAY BE FILED AS A FINANCING
STATEMENT TO PERFECT A SECURITY INTEREST IN THE PROPERTY DESCRIBED HEREIN
IN WHICH A SECURITY INTEREST MAY BE CREATED UNDER THE UCC.
________________________________________________________________________
________________________________________________________________________
<PAGE>
MORTGAGE AND SECURITY AGREEMENT
THIS MORTGAGE AND SECURITY AGREEMENT (this "Instrument") is made as of
April ____, 1999, from PAPER WAREHOUSE, INC., a Minnesota corporation (the
"Borrower"), as Mortgagor, having an office and place of business located at
7630 Excelsior Boulevard, Minneapolis, Minnesota 55426-4504, to FORTIS
INSURANCE COMPANY, a Wisconsin corporation (the "Lender"), having a mailing
address of 501 West Michigan, Milwaukee, Wisconsin 53201-3050, as Mortgagee.
W I T N E S S E T H:
WHEREAS, Borrower is the owner of a fee estate in the premises described in
EXHIBIT A attached hereto and made a part hereof (the "Premises");
NOW THEREFORE, to secure the payment in full of an indebtedness in the
principal sum of One Million One Hundred Thousand and No/100 Dollars
($1,100,000.00), lawful money of the United States of America, to be paid with
interest (said indebtedness, interest, late charges, prepayment premiums and all
other sums which may or shall become due hereunder being hereinafter
collectively referred to as the "Debt") according to a certain mortgage note
dated the date hereof given by Borrower to Lender (the "Note"), which Note is
due and payable on or before May 1, 2009, and any renewals, extensions,
modifications or replacements of the Note, Borrower has mortgaged, given,
granted, bargained, sold, aliened, enfeoffed, conveyed, set-over, transferred,
warranted, pledged, confirmed and assigned, and by these presents does mortgage,
give, grant, bargain, sell, alien, warrant, pledge, enfeoff, convey, set over,
transfer, confirm and assign unto Lender, WITH POWER OF SALE pursuant to this
Instrument and applicable law all right, title and interest of Borrower now
owned, or hereafter acquired, in and to the following property, rights and
interests (such property, rights and interests being hereinafter collectively
referred to as the "Mortgaged Property"):
(a) the Premises;
(b) all buildings and other structures and improvements now or
hereafter located on the Premises (the "Improvements");
(c) all of the estate, right, title, claim or demand of any
nature whatsoever of Borrower, either in law or in equity, in possession or
expectancy, in and to the Premises and Improvements or any part thereof;
(d) all easements, rights-of-way, strips and gores of land,
vaults, streets, ways, alleys, passages, sewer rights, waters, water courses,
water rights and powers, and all estates, rights, titles, interests, privileges,
liberties, tenements,
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hereditaments, and appurtenances, revision or revisions, remainder or
remainders of any nature whatsoever, in any way belonging, relating or
pertaining to the Premises (including, without limitation, any and all
development rights, air rights or similar or comparable rights of any nature
whatsoever now or hereafter appurtenant to the Premises or now or hereafter
transferred to the Premises) and all land lying in the bed of any street,
road or avenue, opened or proposed, in front of or adjoining the Premises to
the center line thereof;
(e) all machinery, apparatus, equipment, fittings, fixtures and
other tangible property used in connection only with the ownership, maintenance
and operation of the physical plant of the Premises and Improvements (and not in
connection with the business operations of Borrower within the Improvements and
the Premises) and all additions thereto and renewals and replacements thereof,
and all substitutions therefor now owned or hereafter acquired by Borrower, or
in which Borrower has or shall have an interest, now or hereafter located upon
or in, or attached to, any portion of the Premises and Improvements, or
appurtenances thereto, and all building equipment, building materials and
supplies used in connection only with the ownership, maintenance and operation
of the physical plant of the Premises and Improvements (and not in connection
with the business operations of Borrower within the Improvements and the
Premises) owned by Borrower, or in which Borrower has or shall have an interest,
now or hereafter located upon the Premises and Improvements (collectively, the
"Building Equipment") (and, without limitation, Building Equipment excludes all
of Borrower's inventory, office furnishings, equipment, motor vehicles,
machinery, furniture, fittings, parts, supplies, tools, dies, tooling and other
items of personal property used in connection with the business operations of
Borrower within the Improvements and the Premises and not as part of the
ownership, maintenance and operation of the physical plant of the Premises and
Improvements, and Building Equipment excludes fixtures, equipment, machinery or
other property of tenants under any lease of or rental agreement for space in
the Premises and Improvements), including the interest of Borrower in all of the
aforesaid which are subject to lease agreements or other service contracts (but
excluding the interest of the lessor or owner of such items), and including all
extensions, additions, improvements, betterments, after-acquired property,
renewals, replacements and substitutions, or proceeds from a sale of any of the
foregoing, and the right, title and interest of Borrower in and to any of the
Building Equipment which may be subject to any security agreements (as defined
in the Uniform Commercial Code of the State in which the Premises and
Improvements are located; the "Uniform Commercial Code"), superior in lien to
the lien of this Instrument and all proceeds and products of any of the above,
and all accounts, chattel paper, documents, equipment, fixtures, farm products,
consumer goods and general intangibles but only to the extent constituting
proceeds acquired with cash proceeds of any of the property described
hereinabove, all of which are hereby declared and shall be deemed to be fixtures
and accessions to, and a part of, the Premises and Improvements as between the
parties hereto and all persons claiming by, through or under them, and which
shall be deemed to be a portion of the security for the indebtedness herein
described and to be secured by this Instrument;
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(f) all awards or payments, including interest thereon, and the
right to receive the same, which may be made with respect to the Premises,
Improvements and Building Equipment, whether from the exercise of the right of
eminent domain (including any transfer made in lieu of the exercise of said
right), for a change in grade or for any other injury to or decrease in the
value of the Premises and Improvements and the reasonable attorneys' fees, costs
and disbursements incurred by Lender in connection with the collection of such
award or payment;
(g) the interest of the owner of the Mortgaged Property in and
to all leases and other agreements affecting the use or occupancy of the
Premises and Improvements or any part thereof now or hereafter entered into
(including any such agreements entered into after filing by or against Borrower
of a petition for relief under 11 U.S.C Section 101 ET SEQ. (the "Bankruptcy
Code"), as the same may be amended from time to time) (the "Leases") and
absolutely and presently the right to receive and apply the income, rents,
issues, cash collateral, revenues, royalties, benefits and profits of the
Premises and Improvements from time to time accruing, including, without
limitation, all payments under Leases or tenancies, proceeds of insurance,
additional rents, lease termination fees, tenant security deposits and escrow
funds paid or accruing before or after the filing by or against Borrower of a
petition for relief under the Bankruptcy Code (the "Rents") to the payment of
the Debt; reserving only the right, power and authority given to Borrower as a
licensor to collect and apply the same prior to the occurrence of an Event of
Default hereunder and so long as the same are not subjected to garnishment,
levy, attachment or lien;
(h) all proceeds of any insurance policies covering the Premises
and Improvements (whether or not such policies are specifically required
hereunder and/or the requirement for such policies had been theretofore waived
or deferred by Lender), including, without limitation, the right to receive and
apply the proceeds of any insurance, judgments, or settlements made in lieu
thereof, for damage to the Premises and Improvements, and any unearned premiums
on any insurance policies covering the Premises and Improvements to the extent
such policies are specifically required hereunder;
(i) the right, in the name and on behalf of Borrower, to appear
in and defend any action or proceeding brought with respect to the Premises and
Improvements and to commence any action or proceeding to protect the interest of
Lender in the Premises and Improvements; and
(j) all refunds, rebates or credits in connection with the
reduction of Taxes (hereinafter defined) as a result of tax certiorari or any
applications or proceedings for deduction; and
(k) all and singular the rights, members and appurtenances
whatsoever, in any way belonging, relating or appertaining to any of the
Premises and Improvements
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hereinabove mentioned or which hereafter shall in any way belong, relate or
be appurtenant thereto, whether now owned or hereafter acquired by Borrower.
TO HAVE AND TO HOLD the above granted and described Mortgaged Property unto
Lender, and the successors and assigns of Lender, forever IN FEE SIMPLE, and
Borrower covenants and warrants that Borrower is lawfully seized of the
Mortgaged Property and has good right to convey the same, and that the same are
unencumbered except for those matters set forth on EXHIBIT B attached hereto and
incorporated herein by this reference (the "Permitted Title Exceptions"), and
that Borrower will warrant and forever defend the title thereto against the
claims of all persons whomsoever, except as to the Permitted Title Exceptions.
PROVIDED, HOWEVER, these presents are upon the express condition that, if
Borrower shall well and truly pay to Lender the Debt at the time and in the
manner provided in the Note and this Instrument and shall well and truly perform
all other obligations as set forth herein and each carveout and condition hereof
and in the Note, these presents and the estate hereby granted shall cease,
terminate and be void.
AND Borrower covenants and agrees with and represents and warrants to
Lender as follows:
ARTICLE I - GENERAL PROVISIONS
1.1. PAYMENT OF DEBT. Borrower will pay the Debt at the time and in the
manner provided for its payment in the Note and in this Instrument.
1.2. WARRANTY OF TITLE; OTHER REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to, and covenants with, Lender that:
(a) Borrower has good title to the Premises, the Improvements, the
Building Equipment and the balance of the Mortgaged Property, except for the
title exceptions shown in the title insurance policy insuring the lien of this
Instrument.
(b) (i) Borrower is now, and after giving effect to this Instrument,
will be in a solvent condition, (ii) there has been no material adverse change
in the financial condition of Borrower, any guarantor (if any) of the Debt or
the performance by Borrower of any of the terms of this Instrument (a
"Guarantor") or any Responsible Party (if any) (as defined in the Note) since
the date of Borrower's application for the loan secured hereby, (iii) Borrower
is not in default under any note, loan or security agreement to which it is a
party, (iv) the execution and delivery of this Instrument by Borrower does not
constitute a "fraudulent conveyance" within the meaning of the Bankruptcy Code
as now constituted or under any other applicable statute, (v) no bankruptcy or
insolvency proceedings are pending or contemplated by or against Borrower, and
(vi) there are no existing, threatened
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or pending actions or proceedings affecting any portion of the Mortgaged
Property except for possible negligence actions or proceedings which are
fully covered by insurance.
(c) Borrower (and the undersigned representative of Borrower, if any)
(i) has full power, authority and legal right to execute this Instrument, and to
mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm and assign
the Mortgaged Property pursuant to the terms hereof and to keep and observe all
of the terms of this Instrument on Borrower's part to be performed, (ii) is duly
organized, validly existing and in good standing under the laws of its state of
organization, (iii) is duly qualified to transact business and in good standing
in the State where the Mortgaged Property is located, and (iv) has all necessary
approvals, government and otherwise, and full power and authority to own the
Mortgaged Property and carry on its business as now conducted or proposed to be
conducted.
1.3. INSURANCE.
(a) Borrower will keep the Improvements and the Building
Equipment insured with:
(i) "all risks" extended coverage against loss or damage by
fire, vandalism, malicious mischief and such other hazards as Lender shall
from time to time require, in amounts approved by Lender, which amounts
shall in no event be less than 100% of the full replacement cost of the
Improvements and the Building Equipment (without deduction for physical
depreciation and exclusive of excavations, footings and foundations,
landscaping and paving), with an agreed amount endorsement and replacement
cost endorsement and shall be sufficient to meet all applicable
co-insurance requirements;
(ii) boiler, machinery and sprinkler leakage insurance covering
physical damage to the Improvements and Building Equipment and any other
major components of any central HVAC system and such other equipment as
Lender may require (without exclusion for explosion);
(iii) annual business interruption in an amount not less than
$500,000.00;
(iv) comprehensive public liability insurance, including broad
form property damage, blanket contractual and personal injury coverage;
(v) ordinance or law coverage to compensate for the cost of
development and increased cost of construction if any portion of the
Improvements are non-conforming under applicable law, including broad form
property damage, blanket contractual and personal injury coverage; and
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(vi) such other forms of insurance coverage with respect to the
Premises and Improvements as Lender shall from time to time require in
amounts approved by Lender, which requirement shall not be made if such
requirement is not commercially reasonable to protect Lender's interests in
the Premises and the Improvements.
During any period of construction, renovation or restoration of the
Improvements, Borrower shall maintain "all builder's risk" insurance, in a form
acceptable to Lender. If the Premises are improved, and any portion thereof is
located in the then applicable 100 year flood plain or in a Federally designated
"special flood hazard area", in addition to the other policies of insurance
required under this paragraph and/or any other policies of insurance obtained by
Borrower, whether or not required hereunder, including, without limitation, any
insurance Borrower elects to obtain notwithstanding a prior waiver or deferral
of such requirement by Lender (the "Policies"), a flood insurance policy
acceptable in all respects to Borrower shall be delivered by Borrower to Lender.
If no portion of the Premises is located in the then applicable 100 year flood
plain or in a Federally designated "special flood hazard area" such fact shall
be substantiated by a certificate in form satisfactory to Lender from a licensed
surveyor, appraiser or professional engineer or other qualified person
satisfactory to Lender in accordance with applicable regulations.
(b) Borrower shall at all times comply with and shall cause the
Improvements and Building Equipment and the use, occupancy, operation,
maintenance, alteration, repair and restoration thereof to comply with the
terms, conditions, stipulations and requirements of the Policies. All Policies
shall be issued by insurers having a minimum policy holders rating of "A" and a
financial class of VII or better per the latest rating publication of Property
and Casualty Insurers by A.M. Best Company, Inc. and who are lawfully doing
business in the State in which the Premises and Improvements are located and are
otherwise acceptable in all respects to Lender. All Policies shall, with
respect to the Premises and the Improvements, contain the standard Lender
non-contribution clause endorsement or its equivalent and, with respect to the
Building Equipment, contain a lender's loss payable clause endorsement or an
equivalent endorsement. All Policies shall name Lender as the person to which
all payments made by the insurer thereunder shall be paid, naming Lender as an
additional insured on required liability policies and otherwise in form and
substance satisfactory in all respects to Lender. Borrower hereby assigns the
proceeds of the Policies to Lender and directs and hereby authorizes each
insurance company to make payment for loss directly to Lender, as its interest
may appear. All Policies shall provide that the coverages evidenced thereby
shall not be terminated or materially modified without thirty (30) days prior
written notice to Lender. Blanket insurance policies shall not be acceptable
for the purposes of this paragraph unless otherwise approved to the contrary by
Lender, and if approved, shall contain a statement of values. Borrower shall
pay the premiums for the Policies as the same become due and payable. At the
request of Lender, Borrower will deliver the Policies to Lender, or copies
thereof certified by the insurer. Not later than ten (10) days prior to the
expiration date of each of the Policies, Borrower will deliver to
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Lender a renewal policy or certificates of renewal marked "premium paid" or
accompanied by other evidence of payment of premium satisfactory to Lender,
provided, however, that so long as there is then no Event of Default and no
written or oral notice from Borrower's insurance company that Borrower has
failed to pay such premiums in full, Borrower shall not be required to
evidence Borrower's monthly installments of insurance required in connection
with each annual policy of insurance. If at any time Lender is not in
receipt of written evidence that all insurance required hereunder is in full
force and effect, Lender shall have the right, without notice to Borrower, to
take such action as Lender deems necessary to protect its interest in the
Premises and Improvements, including, without limitation, the obtaining of
such insurance coverage as Lender in its sole discretion deems appropriate,
and all expenses incurred by Lender in connection with such action or in
obtaining such insurance and keeping it in effect shall be paid by Borrower
to Lender upon demand and until paid shall be secured by this Instrument in
accordance with Section 2.7 hereof.
(c) (i) If the Premises and Improvements shall be damaged or
destroyed, in whole or in part, by fire, or other casualty Borrower shall give
prompt notice thereof to Lender. Lender shall make the amount of all insurance
proceeds received by Lender (aa) of less than $25,000.00 received in any
consecutive six (6) month period immediately available to Borrower if no Event
of Default then exists under this Instrument or the other Loan Documents and
(bb) of any greater amount pursuant to the provisions of this Instrument as a
result of such damage or destruction after deduction of its reasonable costs and
expenses, if any, in collecting the same (the "Net Proceeds") available for the
repair and restoration of the Improvements, provided that:
(aa) no Event of Default shall exist under the Note or this
Instrument at the time of the casualty or any requested disbursement
hereunder;
(bb) Borrower shall proceed with the repair and restoration of
the Improvements as nearly as possible to the condition the Improvements
were in immediately prior to such fire or other casualty promptly after the
insurance claims are settled;
(cc) no lease demising more than twenty five percent (25%) of the
net rentable area of the Improvements (a "Key Lease") has been terminated
by reason of such casualty;
(dd) the loan to value ratio of the restored Improvements as
estimated in Lender's sole discretion, or at Borrower's request, as
determined by a third party MAI appraiser acceptable to Lender, does not
exceed the loan to value ratio as of the date hereof;
(ee) the Net Proceeds, together with additional funds provided by
Borrower if necessary, are sufficient to reconstruct or restore the
Improvements according to plans and specifications approved by Lender or
its Inspecting
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Engineer (as hereinafter defined), which approval shall not be
unreasonably withheld or delayed if such plans and specifications
substantially conform to the plans for the existing Improvements and which
plans and specifications shall comply with local building codes and all
other applicable laws, ordinances, rules and regulations, and
(ff) Lender has determined that all approved restoration work can
be completed not later than one hundred eighty (180) days prior to the
maturity of the Note or by such earlier date as may be required under the
Leases or pursuant to applicable law.
(ii) Upon satisfaction of each of the provisions of
subsection 1.3(c), the Net Proceeds will be disbursed by Lender to Borrower to
pay for the costs of repair and restoration of the Improvements in the manner
hereinafter set forth. The Net Proceeds shall be held by Lender in escrow until
expended in connection with the repair and restoration of the Improvements, it
being agreed that any Net Proceeds so held by Lender may be commingled with the
general funds of Lender, shall not bear interest, and shall constitute
additional security for the payment of the Debt. The Net Proceeds shall be paid
by Lender to, or as directed by, Borrower from time to time during the course of
the repair and restoration, upon receipt of evidence satisfactory to Lender
that:
(aa) all materials installed and work and labor performed (except
to the extent that they are to be paid for out of the requested payment) in
connection with the repair and restoration have been paid for in full;
(bb) there exists no notice of intention, mechanics or other
liens and encumbrances on the Premises and Improvements arising out of the
repair and restoration (except routine filings by contractors which are
customarily required in the ordinary course of business in order to
protect, in advance, any rights of the contractor to payment, and which do
not relate to any failure to pay such contractor or dispute with such
contractor, and provided that such contractor is to be paid out of the
remaining budget for the completion of the repair and restoration and that
sufficient funds remain in the budget for such restoration), and
(cc) the balance of the Net Proceeds plus the balance of any
deficiency deposits made by Borrower pursuant to the provisions of this
paragraph hereinafter set forth shall be sufficient to pay in full the
balance of the cost of the repair and restoration.
The repair and restoration shall be done and completed by Borrower in an
expeditious and diligent fashion and in compliance with all applicable laws,
rules and regulations, and all plans and specifications required in connection
with the repair and restoration shall be subject to review and approval in all
respects by an independent inspecting engineer selected by Lender (the
"Inspecting Engineer"). All costs and expenses incurred by Lender in connection
with making the Net Proceeds available for the repair and
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restoration, including, without limitation, an administrative fee of $500 for
each advance, counsel fees, travel fees and the Inspecting Engineer's fees
incurred by Lender, shall be paid by Borrower. In no event shall Lender be
obligated to make disbursements of the Net Proceeds in excess of an amount
equal to the costs actually incurred for work in place as part of the repair
and restoration, as certified by the Inspecting Engineer, MINUS 10% of such
costs (the "Retainage"). Lender shall not be obligated to make disbursements
of the Net Proceeds more than once every thirty (30) days. The Retainage
shall not be released until the Inspecting Engineer certifies that the repair
and restoration have been completed in accordance with the provisions of
Section 1.3, and Lender receives evidence satisfactory to Lender that the
costs of the repair and restoration have been paid in full or will be paid in
full out of the Retainage, and thereafter the Retainage shall be released for
payment in full of such costs. If at any time the Net Proceeds, or the
undisbursed balance thereof, shall not, in the opinion of Lender, be
sufficient to pay in full the balance of the costs which will be incurred in
connection with the completion of the repair and restoration, Borrower shall
deposit the deficiency with Lender before any further disbursement of the Net
Proceeds shall be made, which deficiency deposit may be commingled with the
general funds of Lender, shall not bear interest and shall be disbursed for
costs actually incurred in connection with the repair and restoration on the
same conditions applicable to the Net Proceeds. Any such deficiency deposit
until disbursed pursuant to this paragraph shall constitute additional
security for the payment of the Debt.
(d) All insurance proceeds received by Lender and not required
to be disbursed for the repair and restoration pursuant to the provisions of
this Section 1.3 may be retained and applied by Lender toward the payment of the
Debt whether or not then due and payable in such priority and proportions as
Lender in its discretion shall deem proper (without payment of the Prepayment
Premium) or, at the discretion of Lender, the same may be paid, either in whole
or in part, to Borrower for such purposes as Lender shall designate. If Lender
shall receive and retain such insurance proceeds, the lien of this Instrument
shall be reduced only by the amount thereof received and retained by Lender and
actually applied by Lender in reduction of the Debt.
1.4. PAYMENT OF TAXES, ETC.
(a) Borrower shall pay all real and personal property taxes,
assessments, water rates, sewer rents and other charges, including vault charges
and license fees for the use of vaults, chutes and similar areas adjoining the
Premises, now or hereafter levied, imposed or assessed against the Premises and
Improvements (collectively, the "Taxes") prior to the date upon which any fine,
penalty, interest or cost may be added thereto or imposed by law for the
nonpayment thereof, and, in the absence of such timely payment, Lender in its
sole discretion, may, but shall not be obligated to, pay same (all such payments
to be secured hereby in accordance with Section 2.7 hereof), and Borrower shall
reimburse Lender upon demand for such expenditures. Borrower shall deliver to
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Lender, within thirty (30) days of payment, receipts bills, canceled checks and
other evidence satisfactory to Lender evidencing the payment of real property
taxes and assessments (excluding those paid by Lender), and upon written request
of Lender shall evidence payment of all other Taxes prior to the date upon which
any fine, penalty, interest or cost may be added thereto or imposed by law for
the nonpayment thereof.
(b) After prior notice to Lender, in the case of any material
item, Borrower, at its own expense, may contest by appropriate legal proceeding,
promptly initiated and conducted in good faith and with due diligence, the
amount or validity or application in whole or in part of any of the Taxes,
provided that (i) no Event of Default then exists under the Note or this
Instrument, (ii) Borrower is permitted to do so under the provisions of any
mortgage or deed of trust superior in lien to the Mortgage and under the
provisions of the any ground lease encumbered hereby, if any, (iii) such
proceeding shall suspend the collection of the Taxes from Borrower and from the
Mortgaged Property, (iv) such proceeding shall be permitted under and be
conducted in accordance with the provisions of any other instrument to which
Borrower or the Mortgaged Property is subject and shall not constitute a default
thereunder, (v) neither the Mortgaged Property nor any part thereof or interest
therein will in the opinion of Lender be in danger of being sold, forfeited,
terminated, canceled or lost, (vi) Borrower shall have set aside adequate
reserves for the payment of the Taxes, together with all interest and penalties
thereon, and (vii) Borrower shall have furnished such security as may be
required in the proceeding, or as may be requested by Lender to insure the
timely payment of any such Taxes, together with all interest and penalties
thereon.
1.5 ESCROW FUND.
(a) Borrower will pay to Lender on the first day of each
calendar month one-twelfth of an amount (the "Escrow Fund") which would be
sufficient to pay, on the first day of the month preceding the month in which
they become due, the Taxes and the premiums on all Policies (the "Premiums")
payable, or estimated by Lender to be payable, during the ensuing twelve (12)
months. Lender will apply the Escrow Fund to the payment of Taxes and the
Premiums which are required to be paid by Borrower pursuant to the provisions
of this Instrument. If the amount of the Escrow Fund shall exceed the amount
of the Taxes and the Premiums payable by Borrower pursuant to the provisions
of this Instrument, Lender shall, in its discretion, (i) return any excess to
Borrower, or (ii) credit such excess against future payments to be made to
the Escrow Fund. In allocating such excess, Lender may deal with the person
shown on the records of Lender to be the owner of the Premises and
Improvements. If the Escrow Fund is not sufficient to pay the Taxes and/or
the Premiums, as the same become payable, Borrower shall pay to Lender, upon
request, an amount which Lender shall estimate as sufficient to make up the
deficiency. Until expended or applied as above provided, any amounts in the
Escrow Fund may be commingled with the general funds of Lender, shall
constitute additional security for the Debt and shall not bear interest. The
collection of such deposits by Lender shall not relieve Borrower of any of
the obligations of Borrower under any provision of this Instrument. Provided
(i) there are sufficient amounts in the Escrow
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not less than thirty (30) days in advance of the due date of such payment,
(ii) no Event of Default exists under this Instrument and (iii) Lender is not
otherwise constrained or prohibited from making such payment, Lender shall
pay the Taxes and Premiums as they become due by their respective due dates;
further, if such conditions apply and should Lender fail to make such payment
on or before the delinquency date of such payment, then Lender shall be
responsible for the payment of any interest and penalties arising on account
of such failure from and after such date, provided that in the event Borrower
receives written notice of such failure to pay, then the liability of Lender
for such interest and penalties shall terminate ten (10) days after Borrower
receives such notice unless Borrower notifies Lender in writing within such
ten (10) day period of such failure to pay.
(b) To the extent permitted by applicable law, if a Default
occurs under any of the provisions of this Instrument, Lender shall have the
right to apply the balance of any funds deposited with it, or its designee,
accumulated to pay Taxes and Premiums, either as a credit against the Debt or to
the payment of any other charges payable hereunder.
1.6. CONDEMNATION. Borrower shall promptly provide notice to Lender of
the actual or threatened commencement of any condemnation or eminent domain
proceedings and shall deliver to Lender copies of any and all pleadings and
papers served in connection with such proceedings. Lender may at its option
participate in such proceedings. Notwithstanding any taking by any public or
quasi-public authority through eminent domain or otherwise, Borrower shall
continue to pay the Debt at the time and in the manner provided for its payment
in the Note and this Instrument and the Debt shall not be reduced until any
award or payment therefor shall have been actually received and applied by
Lender to the discharge of the Debt. Lender may apply the entire amount of any
such award or payment to the discharge of the Debt whether or not then due and
payable in such order, priority and proportions as Lender in its discretion
shall deem proper. If Lender receives and retains such award or payment and
applies it to the Debt, the lien of this Instrument shall be affected only by a
reduction of the amount of said lien by the amount of such award or payment so
received and retained by Lender. Borrower shall at its expense file and
prosecute its claim or claims for any such award or payment in good faith and
with due diligence and cause the same to be collected and paid over to Lender.
Borrower hereby irrevocably authorizes and empowers Lender, in the name of
Borrower or otherwise, to collect and receipt for any such award or payment and
to file and prosecute such claim or claims. Although it is hereby expressly
agreed that the same shall not be necessary in any event, Borrower shall, upon
demand of Lender, make, execute and deliver any and all assignments and other
instruments sufficient for the purpose of assigning any such award or payment to
Lender, free and clear of any encumbrances of any kind or nature whatsoever. If
the Mortgaged Property is sold, through foreclosure or otherwise, prior to the
receipt by Lender of such award or payment, Lender shall have the right, whether
or not a deficiency judgment on the Note shall have been sought, recovered or
denied, to receive such award or payment, or a portion thereof sufficient to pay
the Debt, whichever is less, and Borrower shall pay over to Lender said award or
payment as, if and when Borrower receives same, to the extent of
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any deficiency found to be due upon such sale, with interest thereon, whether
or not a deficiency judgment on this Instrument shall have been sought or
recovered or denied, and of the attorneys' fees, costs and disbursements
incurred by Lender in connection with the collection of such award or
payment. Lender shall not be limited to the interest paid on the award by the
condemning authority and shall be entitled to reserve interest on the amount
at the Interest Rate (as defined in the Note).
1.7. LEASES AND RENTS.
(a) Borrower absolutely and irrevocably assigns to Lender the
Rents, and Borrower grants to Lender the right to enter upon and to take
possession of the Premises and Improvements for the purpose of collecting the
same and to let the Premises and Improvements, or any part thereof, and to apply
the Rents after payment of all necessary charges and expenses on account to the
Debt, reserving only to Borrower the conditional right, as a licensee, to
collect, use and enjoy the Rents until an Event of Default shall occur hereunder
and be continuing. In exercising such conditional right, Borrower shall be
entitled to collect and receive such Rent and agrees to use such Rents in
payment of principal and interest becoming due under the Note and in payment of
Taxes and Premiums becoming due hereunder, but such right of Borrower may be
revoked by Lender upon the occurrence and during the continuance of an Event of
Default under the terms of the Note or this Instrument and thereafter Lender may
let the Premises and Improvements or any part thereof and may retain and apply
the Rents toward payment of the Debt in such order, priority and proportions as
Lender, in its discretion, shall deem proper, or toward the operation,
maintenance and repair of the Premises and Improvements, and irrespective of
whether Lender shall have commenced a foreclosure of this Instrument or shall
have applied or arranged for the appointment of a receiver. Lender shall not be
obligated to give to Borrower prior notice of such revocation of the right to
let and collect the Rents.
(b) In addition to the rights which Lender may have herein,
if an Event of any Default occurs under this Instrument and is continuing,
Lender, at its option, may require Borrower to pay monthly in advance to
Lender, or any receiver appointed to collect the Rents for application to the
amounts outstanding under the Note, the fair and reasonable rental value for
the use and occupation of such part of the Premises and Improvements as may
be in actual possession of Borrower for application to the amounts
outstanding under the Note. Upon default in any such payment, Borrower will
vacate and surrender possession of the Premises and Improvements to Lender,
or to such receiver, and, in default thereof, Borrower may be evicted by
summary proceedings or otherwise. Nothing contained in this paragraph shall
be construed as imposing on Lender any of the obligations of the lessor under
the Leases, any duty to produce rents from the Premises and Improvements and
shall not cause Lender to be a "mortgage-in-possession" for any purpose.
Lender further agrees that it shall, upon request, execute, acknowledge and
deliver to Lender such further and additional assignments and other
instruments as shall be reasonably required for the purpose of assigning the
Rents.
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(c) Borrower shall not, without the prior written consent of Lender,
(i) accept prepayments or installments of the Rents for a period of more than 1
month in advance; (ii) further assign the whole or any part of the Rents; or
(iii) enter into new Leases, modify, cancel, terminate or accept any surrender
under any existing Leases. Borrower shall (aa) fulfill or perform each and
every provision of the Leases on the part of the Borrower to be observed or
performed, (bb) promptly send to Lender copies of all notices of default which
Borrower shall give or receive under the Leases and (cc) enforce the performance
or observance of the provisions thereof by the tenant thereunder.
Notwithstanding the foregoing, provided no Event of Default then exists under
this Instrument or any of the other Loan Documents, the prior written consent of
Lender shall not be required in connection with making of non-residential Leases
which (i) provide for a term of five (5) years or less (including options) at a
market rental rate for comparable properties in the Mortgaged Property area (as
determined by the Lender or the Lender's loan correspondent); (ii) have been
negotiated at arms length; (iii) demise not more than ten percent (10%) in the
aggregate of the Improvements; and (iv) do not contain material modifications
from a standard form of Lease previously approved by the Lender, if any. If the
Mortgaged Property includes residential apartments, the prior consent of the
Lender shall not be required in connection with the making, modification or
termination of Leases in the ordinary course of business and in the exercise of
the Borrower's prudent business judgment.
1.8. BOOKS AND RECORDS.
(a) Borrower will keep and maintain or will cause to be kept and
maintained in accordance with Generally Accepted Accounting Principles,
consistently applied, proper and accurate books, records and accounts reflecting
all of the financial affairs of Borrower and all items of income and expense in
connection with the operation of the Mortgaged Property. Lender shall have the
right from time to time at all times during normal business hours to examine
such books, records and accounts in connection with the operation of the
Mortgaged Property at the office of Borrower or such other person maintaining
such books, records and accounts and to make copies or extracts thereof as
Lender shall desire.
(b) Borrower will furnish Lender within ninety (90) days after
each fiscal year end of Borrower with:
(i) a complete executed copy of an annual financial statement
prepared in accordance with Generally Accepted Accounting Principles
certified by Borrower, containing a balance sheet, income statements, cash
flow statements, operating statements in the same form and scope as the
financial statements of the Borrower provided to Lender in connection with
the Loan and shall otherwise be in form and substance satisfactory to
Lender, which statement shall include the operation of the Mortgaged
Property;
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(ii) a complete and detailed leasing status and rent roll report
with respect to the Improvements, which leasing report shall also include,
by way of illustration only, a list of current tenants, space occupied,
base rent, additional rent, lease concessions, commencement and expiration
dates and leasing commission obligations and shall otherwise be in form and
substance satisfactory in all respects to Lender
(said items in clauses (i) and (ii) being referred to as the "Reports"). If
Borrower fails to provide any Report within thirty (30) days of a written
request by Lender, Borrower shall pay Lender $5,000 for such Report not timely
delivered.
(c) Borrower shall furnish to Lender, within ten (10) days after
request, such further detailed financial and other information (including, but
not limited to, financial statements) as may be reasonably requested by Lender
with respect to the Mortgaged Property and Borrower, any Guarantor (if any) or
Responsible Party (if any) or any affiliate of, or entity controlled by,
Borrower, any Guarantor (if any) or Responsible Party (if any) as of a date not
earlier than that specified by Lender in such request.
1.9. TRANSFER OR ENCUMBRANCE OF THE MORTGAGED PROPERTY.
(a) No part of the Mortgaged Property nor any interest in
Borrower shall be further encumbered, sold, transferred, assigned or conveyed,
or permitted to be further encumbered, sold, transferred, assigned or conveyed
(a "Transfer") if such Transfer results in any person or group acting in concert
acquiring beneficial ownership of securities of the Borrower representing more
than 20% of the combined voting power of all securities of the Borrower entitled
to vote and such percentage is greater than the aggregate percentage of such
voting power then held by Yale Dolginow, Brent Schlosser and their immediate
families, designated beneficiaries and any trust established for the benefit
thereof by either of them, nor shall the Mortgaged Property or any portion
thereof be converted to or operated as a condominium or cooperative form of
ownership without the prior written consent of Lender in each instance, and
which consent in any and all circumstances may be withheld in the sole and
absolute discretion of Lender. The provisions of the foregoing sentence of this
paragraph shall apply to each and every such further encumbrance, sale,
transfer, assignment or conveyance, regardless of whether or not Lender has
consented to, or waived by its action or inaction its rights hereunder with
respect to, any such previous further encumbrance, sale, transfer, assignment or
conveyance, and irrespective of whether such further encumbrance, sale,
transfer, assignment or conveyance is voluntary, by reason of operation of law
or is otherwise made. For illustration purposes only, a Transfer shall be
deemed to include: an installment sales contract or agreement whereby Borrower
agrees to sell the Mortgaged Property or any part thereof in installments and/or
an agreement by Borrower for leasing of all or a substantial part of the
Mortgaged Property for other than actual occupancy by a space tenant.
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(b) Notwithstanding the foregoing provisions of Section 1.9(a),
and in addition to any Transfers not prohibited by this Section and except if
Borrower is comprised of any individual persons, beneficial interests in
Borrower can be transferred for estate planning purposes to family members of
the holder of such beneficial interests without the prior written consent of
Lender, provided (i) no Event of Default then exists under this Instrument or
the Loan Documents and (ii) Lender receives true, accurate and complete copies
of the documents accomplishing such transfer within seven (7) days of such
transfer. In no event shall any such Transfer affect in any respect whatsoever
the liability of any of the Responsible Parties (if any) with respect to the
Loan.
1.10. MAINTENANCE OF THE MORTGAGED PROPERTY; COMPLIANCE WITH LAWS,
REGULATIONS, COVENANTS AND EASEMENTS.
(a) Borrower shall cause the Mortgaged Property to be maintained
in good condition and repair and, to the extent of any renovations that are made
by Borrower, the same shall be made in compliance with the requirements of all
governmental authorities having jurisdiction over the Mortgaged Property.
Borrower will not commit or suffer to be committed any waste of the Mortgaged
Property. The Improvements and the Building Equipment shall not be removed,
demolished or materially altered (except for normal replacement of the Building
Equipment), without the prior written consent of Lender, including, but not
limited to, any alteration changing the configuration or number of parking
spaces comprising a part of the Mortgaged Property. Without limiting the rights
of Borrower to obtain insurance proceeds as and to the extent set forth in
Paragraph 1.3(c) of this Instrument and subject Lender's compliance therewith,
Borrower shall promptly repair, replace or rebuild any part of the Mortgaged
Property which may be damaged or destroyed by fire or other property hazard or
casualty (including any fire or other property hazard or casualty for which
insurance was not obtained or obtainable) or which may be affected by any taking
by any public or quasi-public authority through eminent domain or otherwise, and
shall complete and pay for, within a reasonable time, any structure at any time
in the process of construction or repair on the Premises.
(b) Borrower represents and warrants to Lender that the
Mortgaged Property is currently in compliance with, and Borrower shall in the
future promptly comply with, all existing and future governmental laws, orders,
ordinances, rules and regulations affecting the Mortgaged Property, or any
portion thereof or the use thereof, including specifically, but not limited to,
provisions of the Americans with Disabilities Act. Borrower shall comply with
the requirements of all, and shall not modify, amend or terminate any, easements
and restrictive covenants which from time to time affect the whole or any
portion of the Mortgaged Property or the use thereof. Borrower shall also
comply with the requirements of, and to the extent reasonably within Borrower's
control, maintain, preserve, enforce and renew, all rights of way, easements,
grants, privileges, licenses, franchises and restrictive covenants which from
time to time benefit or pertain to the whole or any portion of the Mortgaged
Property, and Borrower shall not modify, amend or terminate, or surrender any of
its rights under, any of such rights of way,
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easements, grants, privileges, licenses, franchises or restrictive covenants.
Borrower will not, without obtaining the prior written consent of Lender,
initiate, join in or consent to any new private restrictive covenant, zoning
ordinance, or other public or private restrictions, limiting or affecting the
uses which may be made of the Mortgaged Property or any part thereof.
(c) In the event Borrower retains a professional manager for the
Mortgaged Property, the management agreement is hereby assigned to Lender and
the rights of the manager thereunder shall be subordinated to the lien of this
Instrument and such manager shall consent to such subordination and assignment
upon request from Lender. If any change of management or termination or
modification of any management contract occurs without Lender's prior written
approval, it shall constitute a Default hereunder. So long as no Event of
Default exists under this Instrument, Lender approves Borrower as manager of the
Mortgaged Property and no written management contract shall be required during
the term of such party's management.
1.11. ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this paragraph the following terms shall
have the following meanings: (i) the term "Hazardous Material" shall mean any
material or substance that, whether by its nature or use, is now or hereafter
defined as a hazardous waste, hazardous substance, pollutant or contaminant
under any Environmental Requirement, or which is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous and which is now or hereafter regulated under any Environmental
Requirement, or which is or contains petroleum, gasoline, diesel fuel or another
petroleum hydrocarbon product, (ii) the term "Environmental Requirements" shall
collectively mean all present and future laws, statutes, ordinances, rules,
regulations, orders, codes, licenses, permits, decrees, judgments, directives or
the equivalent of or by any Governmental Authority and relating to or addressing
the protection of the environment or human health, and (iii) the term
"Governmental Authority" shall mean the Federal government, or any state or
other political subdivision thereof, or any agency, court or body of the Federal
government, any state or other political subdivision thereof, exercising
executive, legislative, judicial, regulatory or administrative functions and
having appropriate jurisdiction over Hazardous Materials or Hazardous Materials
activities; and (iv) the term "Environmental Assessments" shall mean the PEER
Environmental, Inc. Phase I Environmental Assessment provided by Borrower to
Lender in connection with this Loan.
(b) Except as set forth in the Environmental Assessments,
Borrower hereby represents and warrants to Lender that to the best of Borrower's
knowledge after diligent inquiry (i) no Hazardous Material is currently located
at, on, in, under or about the Mortgaged Property in a manner which violates any
Environmental Requirement, or which requires cleanup or corrective action of any
kind under any Environmental Requirement, (ii) no releasing, emitting,
discharging, leaching, dumping or disposing of any Hazardous Material from the
Mortgaged Property onto or into any other property or
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from any other property onto or into the Mortgaged Property has occurred or
is occurring in violation of any Environmental Requirement, (iii) no written
or oral notice of violation, lien, complaint, suit, order or other notice
with respect to the Mortgaged Property is presently outstanding under any
Environmental Requirement, and (iv) the Mortgaged Property and the operation
thereof are in material compliance with all Environmental Requirements.
(c) Borrower shall comply, and shall cause all tenants or other
occupants of the Mortgaged Property to comply, in all material respects with all
Environmental Requirements, and will not generate, store, handle, process,
dispose of or otherwise use, and will not permit any tenant or other occupant of
the Mortgaged Property to generate, store, handle, process, dispose of or
otherwise use, Hazardous Materials at, in, on, under or about the Mortgaged
Property in a manner that could lead or potentially lead to the imposition on
Borrower, Lender or the Mortgaged Property of any liability or lien of any
nature whatsoever under any Environmental Requirement. Borrower shall notify
Lender promptly in the event of any spill or other release of any Hazardous
Material at, in, on, under or about the Mortgaged Property which is required to
be reported to a Governmental Authority under any Environmental Requirement,
will promptly forward to Lender copies of any notices received by Borrower
relating to alleged violations of any Environmental Requirement and will
promptly pay when due any fine or assessment against Lender, Borrower or the
Mortgaged Property relating to any Environmental Requirement. If at any time it
is determined that the operation or use of the Mortgaged Property violates any
applicable Environmental Requirement or that there are Hazardous Materials
located at, in, on, under or about the Mortgaged Property which, under any
Environmental Requirement, require special handling in collection, storage,
treatment or disposal, or any other form of cleanup or corrective action,
Borrower shall, within thirty (30) days after receipt of notice thereof from any
Governmental Authority or from Lender, take, at Borrower's sole cost and
expense, such actions as may be necessary to fully comply in all respects with
all Environmental Requirements, provided, however, that if such compliance
cannot reasonably be completed within such thirty (30) day period, Borrower
shall commence such necessary action within such thirty (30) day perod and shall
thereafter diligently and expeditiously proceed to fully comply in all respects
and in a timely fashion with all Environmental Requirements.
(d) If Borrower fails to timely take, or to diligently and
expeditiously proceed to complete in a timely fashion, any such action described
in Section 1.11(c) above, Lender may, in its sole and absolute discretion, make
advances or payments toward the performance or satisfaction of the same, but
shall in no event be under any obligation to do so. All sums so advanced or
paid by Lender (including, without limitation, counsel and consultant fees and
expenses, investigation and laboratory fees and expenses, and fines or other
penalty payments) and all sums advanced or paid in connection with any judicial
or administrative investigation or proceeding relating thereto, will within 30
days of the demand, become due and payable from Borrower and shall bear interest
at the Default Rate (as hereinafter defined) from the date any such sums are so
advanced or paid by Lender until the date any such sums are repaid by
Borrower to
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Lender. Borrower will execute and deliver, promptly upon request, such
instruments as Lender may deem useful or necessary to permit Lender to take any
such action, and such additional notes and mortgages, as Lender may require to
secure all sums so advanced or paid by Lender. If a lien is filed against the
Mortgaged Property by any Governmental Authority resulting from the need to
expend or the actual expending of monies arising from an action or omission,
whether intentional or unintentional, of Borrower or for which Borrower is
responsible, resulting in the releasing, spilling, leaking, leaching, pumping,
emitting, pouring, emptying or dumping of any Hazardous Material into the waters
or onto land located within or without the State where the Mortgaged Property is
located, then Borrower will, within thirty (30) days from the date that Borrower
is first given notice that such lien has been placed against the Mortgaged
Property (or within such shorter period of time as may be specified by Lender if
such Governmental Authority has commenced steps to cause the Mortgaged Property
to be sold pursuant to such lien), either (a) pay the claim and remove the lien,
or (b) furnish a cash deposit, bond, or such other security with respect thereto
as is reasonably satisfactory in all respects to Lender and is sufficient to
effect a complete discharge of such lien on the Mortgaged Property.
(e) Lender may, at its option, at intervals of not less than one
year, or more frequently if Lender reasonably believes that a Hazardous Material
or other environmental condition violates or threatens to violate any
Environmental Requirement, cause an environmental audit of the Mortgaged
Property or portions thereof to be conducted to confirm Borrower's compliance
with the provisions of this paragraph, and Borrower shall cooperate in all
reasonable ways with Lender in connection with any such audit. If such audit
discloses that a violation of an Environmental Requirement exists, Borrower
shall pay all costs and expenses incurred in connection with such audit;
otherwise, the costs and expenses of such audit shall, notwithstanding anything
to the contrary set forth in this paragraph, be paid by Lender.
(f) If this Instrument is foreclosed, or if the Mortgaged
Property is sold pursuant to the provisions of this Instrument, or if Borrower
tenders a deed or assignment in lieu of foreclosure or sale, Borrower shall
deliver the Mortgaged Property to the purchaser at foreclosure or sale or to
Lender, its nominee, or wholly-owned subsidiary, as the case may be, in a
condition that complies in all respects with all Environmental Requirements.
Borrower will defend, indemnify, and hold harmless Lender, its employees,
agents, officers, and directors (collectively, "Indemnitee"), from and against
any and all claims, demands, penalties, causes of action, fines, liabilities,
settlements, damages, costs, or expenses of whatever kind or nature, known or
unknown, foreseen or unforeseen, contingent or otherwise (including, without
limitation, counsel and consultant fees and expenses, investigation and
laboratory fees and expenses, court costs, and litigation expenses) which we
asserted against or incurred by Indemnitee and which are arising out of, or in
any way related to, (i) any breach by Borrower of any of the provisions of this
Section 1.11, (ii) the presence, disposal, spillage, discharge, emission,
leakage, release, or threatened release of any Hazardous Material which is at,
in, on, under, about, from or affecting the Mortgaged Property, including,
without limitation, any
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damage or injury resulting from any such Hazardous Material to or affecting
the Mortgaged Property or the soil, water, air, vegetation, buildings,
personal property, persons or animals located on the Mortgaged Property or on
any other property or otherwise, (iii) any personal injury (including
wrongful death) or property damage (real or personal) arising out of or
related to any such Hazardous Material which is at, in, on, under, about,
from or affecting the Mortgaged Property, (iv) any lawsuit brought or
threatened, settlement reached, or order or directive of or by any
Governmental Authority relating to such Hazardous Material which is at, in,
on, under, about, from or affecting the Mortgaged Property, or (v) any
violation of any Environmental Requirement or any policy or requirement of
Lender hereunder. The aforesaid indemnification shall, notwithstanding any
exculpatory or other provision of any nature whatsoever to the contrary set
forth in the Note, this Instrument or any other document or instrument now or
hereafter executed and delivered in connection with the loan evidenced by the
Note and secured by this Instrument, constitute the personal recourse
undertakings, obligations and liabilities of Borrower.
(g) The aforesaid indemnification shall not be applicable to any
claim, demand, penalty, cause of action, fine, liability, settlement, damage,
cost or other expense of any type whatsoever occasioned, arising and caused
solely and directly as the result of the gross negligence or willful misconduct
of Lender, its nominee or wholly-owned subsidiary or their respective employees
or agents.
(h) Provided no claims concerning the indemnification set forth
herein are then pending, all obligations and liabilities of Borrower under this
Section 1.11 shall cease and terminate on the fifth (5th) anniversary of the
date of payment to Lender in cash of the entire Debt, PROVIDED that
contemporaneously with or subsequent to the payment to Lender in cash of the
entire Debt Borrower, at its sole cost and expense, delivers to Lender an
environmental audit of the Mortgaged Property in form and substance, and
prepared by a qualified environmental consultant, satisfactory in all respects
to Lender and indicating that the Mortgaged Property is in material compliance
with all applicable Environmental Requirements, AND PROVIDED FURTHER, HOWEVER,
that Borrower shall continue to be obligated to indemnify Lender and to hold
Lender harmless from and against any penalty, fine, liability, damage, cost or
other expense incurred by Lender and to which the aforesaid indemnification
pertains to the extent the same arises out of any claim, penalty, fine liability
or damage which is asserted or cause of action suit which is commenced prior to,
or which otherwise relates back to the period before fifth (5th) anniversary of
the date of payment to Lender in cash of the entire Debt. Except as hereinabove
specifically provided to the contrary in this Section 1.11, the obligations and
liabilities of Borrower under this Section 1.11 shall survive and continue in
full force and effect and shall not be terminated, discharged or released, in
whole or in part, irrespective of whether the Debt has been paid in full and
irrespective of any foreclosure of this Instrument, sale of the Mortgaged
Property pursuant to the provisions of this Instrument or acceptance by Lender,
its nominee or wholly-owned subsidiary of a deed or assignment in lieu of
foreclosure or sale and irrespective of any other fact or circumstance of any
nature whatsoever.
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1.12. PERFORMANCE OF OTHER AGREEMENTS. Borrower shall observe and
perform each and every term to be observed or performed by Borrower pursuant to
the terms of any agreement or recorded instrument affecting or pertaining to the
Mortgaged Property.
1.13. OTHER SECURITY FOR THE DEBT. Borrower shall observe and perform
all of the terms, covenants and provisions contained in the Note and in all
other mortgages and other instruments or documents evidencing, securing or
guaranteeing payment of the Debt, in whole or in part, or otherwise executed and
delivered in connection with the Note, this Instrument or the loan evidenced and
secured thereby or hereby, including, but not limited to, that certain
Assignment of Leases and Rents dated of even date herewith from Borrower to
Lender (the "Loan Documents").
1.14. RIGHT OF ENTRY. Lender and its agents shall have the right to
enter and inspect the Mortgaged Property at all reasonable times, subject to the
rights of tenants of the Mortgaged Property (all of which leases shall permit
inspection of the demised premises thereunder), provided, however, that if
Lender has not delivered written notice of such intent to inspect at least 24
hours in advance of such inspection, then Borrower may require that any such
inspection be limited to any areas of the Mortgaged Property which are open to
access to the public.
1.15. SECURITY AGREEMENT.
(a) This Instrument constitutes both a real property mortgage
and a "security agreement," within the meaning of the Uniform Commercial Code,
and the Mortgaged Property includes both real and personal property and all
other rights and interests, whether tangible or intangible in nature, of
Borrower in the Mortgaged Property. Borrower by executing and delivering this
Instrument has granted to Lender, as security for the Debt, a security interest
in the Building Equipment and hereby pledges to Lender any and all monies now or
hereafter held by Lender as additional security for the Debt until expended or
applied as provided in this Instrument. If a Default occurs under the Note,
this Instrument or the Loan Documents, Lender, in addition to any other rights
and remedies which it may have, shall have and may exercise immediately and
without demand, any and all rights and remedies granted to a secured party upon
default under the Uniform Commercial Code, including, without limiting the
generality of the foregoing, the right to take possession of the Building
Equipment or any part thereof, and to take such other measures as Lender may
deem necessary for the care, protection and preservation of the Building
Equipment. Upon request or demand of Lender, Borrower shall at its expense
assemble the Building Equipment and make it available to Lender at a convenient
place acceptable to Lender. Borrower shall pay to Lender on demand any and all
expenses, including legal expenses and attorneys' fees, incurred or paid by
Lender in protecting its interest in the Building Equipment and in enforcing its
rights hereunder with respect to the Building Equipment. Any notice of sale,
disposition or other intended action by Lender with respect to the Building
Equipment sent to Borrower in accordance with the provisions of this Instrument
at least seven (7) days prior to the date of any such sale, disposition or other
action, shall constitute reasonable notice to Borrower, and the
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method of sale or disposition or other intended action set forth or specified
in such notice shall conclusively be deemed to be commercially reasonable
within the meaning of the Uniform Commercial Code unless objected to in
writing by Borrower within five (5) days after receipt by Borrower of such
notice. The proceeds of any sale or disposition of the Building Equipment,
or any part thereof, may be applied by Lender to the payment of the Debt in
such order, priority and proportions as Lender in its discretion shall deem
proper.
(b) Borrower warrants that (i) Borrower's (that is, "Debtor's")
name, identity or corporate structure and residence or principal place of
business are as set forth in Section 1.15(c) hereof; (ii) Borrower (that is,
"Debtor") has been using or operating under said name, identity or corporate
structure without change for the time period set forth in Section 1.15(c)
hereof; and (iii) the location of the collateral is upon the Real Property.
Borrower covenants and agrees that Borrower will furnish Lender with notice of
any change in the matters addressed by clauses (i) or (iii) of this
Section 1.15(b) within thirty (30) days of the effective date of any such change
and Borrower will promptly execute any financing statements or other instruments
deemed necessary by Lender to prevent any filed financing statement from
becoming misleading or losing its perfected status.
(c) The information contained in this Section 1.15(c) is
provided in order that this Instrument shall, to the extent permitted by
applicable law, comply with the requirements of the Uniform Commercial Code, as
enacted in the State of Minnesota, for instruments to be filed as financing
statements. The name of the "Debtor" and, as provided to Borrower by Lender,
the name of the "Secured Party," the identity or corporate structure and
residence or principal place of business of "Debtor," and the time period for
which "Debtor" has been using or operating under said name and identity or
corporate structure without change, are as set forth in Schedule 1 of EXHIBIT C
attached hereto and by this reference made a part hereof; as provided to
Borrower by Lender, the name of the mailing address of the "Secured Party" from
which information concerning the security interest may be obtained, and the
mailing address of "Debtor," are as set forth in Schedule 2 of said EXHIBIT C
attached hereto; and a statement indicating the types, or describing the items,
of collateral is set forth hereinabove.
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ARTICLE II - DEFAULTS AND REMEDIES
2.1. DEFAULT. The term "Event of Default", wherever used in this
Instrument, shall mean any one or more of the following events, without regard
to any grace period or notice and cure period provided or referenced below with
respect to any such events, and the term "Default", wherever used in this
Instrument, shall mean any one or more of the following events, after expiration
of any applicable grace period or notice and cure period provided or referenced
below with respect to any such events. The Debt shall become immediately due
and payable at the option of Lender upon the occurrence of any one or more of
the following events, whether such occurrence shall be voluntary, involuntary,
by operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any rule or regulation of any administrative or
governmental body:
(a) if any portion of the Debt is not paid within ten (10) days
of the due date or if the Debt is not paid in full on maturity;
(b) if Borrower shall fail to pay when due any installment of
any assessment against the Premises and Improvements for local improvements
heretofore or hereafter laid, which assessment is or may become payable in
annual or periodic installments and is or may become a lien on the
Mortgaged Property, as such payment due date may be extended by Borrower's
contest thereof in accordance with Paragraph 1.4(b);
(c) if any Federal tax lien is filed against Borrower, any
Guarantor (if any) or Responsible Party (if any) or the Mortgaged Property
and the same is not discharged of record within thirty (30) days after the
same is filed;
(d) except as expressly permitted under the Loan Documents, if
without the consent of Lender (which consent in any and all circumstances
may be withheld in the sole and absolute discretion of Lender), any part of
the Mortgaged Property or any interest of any nature whatsoever therein or
any interest of any nature whatsoever in Borrower (whether partnership,
stock, equity, beneficial, profit, loss or otherwise) is in any manner, by
operation of law or otherwise, whether directly or indirectly, further
encumbered, sold, transferred, assigned or conveyed, and irrespective of
whether any such further encumbrance, sale, transfer, assignment or
conveyance is voluntary, by reason or operation of law or is otherwise
made, or if any portion of the Mortgaged Property is operated as or
converted to a condominium or cooperative ownership regime without the
prior written consent of Lender;
(e) if Borrower shall fail to comply with any requirement or
order or notice of violation of law or ordinance issued by any Governmental
Authority within three (3) months from the issuance thereof, or the time
period set forth therein, whichever is less;
(f) if the Policies are not assigned to Lender in the manner set
forth in Paragraph 1.3 or kept in full force and effect, or if the Policies
or certified copies thereof are not delivered to Lender upon request in
accordance with Paragraph 1.3;
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(g) if any representation or warranty of Borrower, any Guarantor
(if any) or any Responsible Party (if any) made herein or in any such
guaranty executed and delivered by a Guarantor (if any) (a "Guaranty"), or
in any certificate, report, financial statement or other instrument
furnished in connection with the making of the Note, this Instrument, any
such Guaranty if Borrower or any Guarantor (if any) or Responsible Party
(if any), shall prove false or misleading in any material respect or shall
have omitted any substantial contingent or unliquidated liability or claim;
(h) if Borrower, any Guarantor (if any), any Responsible Party
(if any) or any general partner of Borrower (each of whom is hereinafter in
this subparagraph referred to as an "Obligor") shall commence any case,
proceeding or other action relating to it in bankruptcy or seeking
reorganization, liquidation, dissolution, winding-up, arrangement,
composition or readjustment of its debts, or for any other relief, under
bankruptcy, insolvency, reorganization, liquidation, dissolution,
winding-up, arrangement, composition, readjustment of debt or other similar
act or law of any jurisdiction, domestic or foreign, now or hereafter
existing; or if an Obligor shall apply for a receiver, custodian or trustee
of it or for all or a substantial part of its property; or if an Obligor
shall make an assignment for the benefit of creditors; or if an Obligor
shall be unable to, or shall admit in writing the inability to pay its
debts generally as they become due; or if an Obligor shall take any action
indicating its consent to, approval of, acquiescence in, or in furtherance
of, any of the foregoing; or if any case, proceeding or other action
against an Obligor shall be commenced in bankruptcy or seeking
reorganization, liquidation, dissolution, winding-up, arrangement,
composition or readjustment of its debts, or any other relief, under any
bankruptcy, insolvency, reorganization, liquidation, dissolution,
arrangement, composition, readjustment of debt or other similar act or law
of any jurisdiction, domestic or foreign, now or hereafter existing, and
such condition shall continue for a period of sixty (60) days undismissed,
undischarged or unbonded; or if a receiver, custodian or trustee of an
Obligor or for all or a substantial part of its property shall be appointed
and such condition shall continue for a period of sixty (60) days
undismissed, undischarged or unbonded; or if a warrant of attachment,
execution or distraint, or similar process, shall be issued against any
substantial part of the property of an Obligor and such condition shall
continue for a period of sixty (60) days undismissed, undischarged or
unbonded;
(i) if Borrower or any other person shall be in Default under
the Note, or under any other mortgage, instrument or document evidencing,
securing or guaranteeing payment of the Debt, in whole or in part, or
otherwise executed and delivered in connection with the Note, this
Instrument or the loan evidenced and secured thereby or hereby;
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(j) if Borrower or any other person shall be in Default under
any mortgage or deed of trust covering any part of the Premises and
Improvements whether superior or inferior in lien to this Instrument, and
including, without limitation, any such mortgage or deed of trust now or
hereafter held by Lender;
(k) if the Mortgaged Property shall become subject (i) to any
tax lien, other than a lien for local real estate taxes and assessments not
due and payable, or (ii) to any lis pendens, notice of pendency, stop
order, notice of intention to file mechanic's or materialman's lien,
mechanic's or materialman's lien or other lien of any nature whatsoever and
the same shall not either be discharged of record or in the alternative
insured over to the satisfaction of Lender by the title company insuring
the lien of this Instrument within a period of thirty (30) days after the
same is filed or recorded, and irrespective of whether the same is superior
or subordinate in lien or other priority to the lien of this Instrument and
irrespective of whether the same constitutes a perfected or inchoate lien
or encumbrance on the Premises and Improvements or is only a matter of
record or notice, except only for those filings permitted in
Paragraph 1.3(c)(ii)(bb) in connection with the permitted repair and
renovation of the Mortgaged Property;
(l) if Borrower shall fail to maintain its business in the State
of Minnessota in good standing under the applicable regulations of the
agencies or governmental authorities having jurisdiction thereof, or its
failure to receive and maintain whatever licenses are required, or shall be
required, for the ownership, maintenance and operation of the Premises and
Improvements; or
(m) except for specific defaults set forth in this Section 2.1,
if Borrower shall continue to be in default under any of the other terms,
covenants or conditions of this Instrument for ten (10) days after notice
from Lender in the case of any default which can be cured by the payment of
a sum of money or for thirty (30) days after notice from Lender in the case
of any other default, provided that if such default cannot reasonably be
cured within such thirty (30) day period and Borrower shall have commenced
to cure such default within such thirty (30) day period and thereafter
diligently and expeditiously proceeds to cure the same, such thirty (30)
day period shall be extended for so long as it shall require Borrower in
the exercise of due diligence to cure such default, it being agreed that no
such extension shall be for a period in excess of ninety (90) days.
2.2. RIGHTS AND REMEDIES OF LENDER. At any time after the occurrence of
a Default hereunder, Lender shall have all of the rights and remedies available
under applicable law, including, by way of illustration and not of limitation,
the right:
(i) to declare the Debt immediately due and payable;
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(ii) to commence and maintain an action or actions in any court
of competent jurisdiction to foreclose this Instrument and the security
interest granted herein, or to obtain specific enforcement of the covenants
of Borrower hereunder, and Borrower agrees that such covenants shall be
specifically enforceable by injunction or any other appropriate equitable
remedy, and that for the purposes of any action brought hereunder, Borrower
waives the defenses of laches and any statute of limitations;
(iii) to enter upon, possess, manage and operate the Mortgaged
Property or any part thereof, to make, terminate, enforce or modify the
Leases upon such terms and conditions as Lender deems proper, and to make
repairs, alterations and improvements to the Mortgaged Property necessary
in Lender's judgment to protect or enhance the security hereof;
(iv) to enforce and realize upon, or waive, the security
hereunder and any other security now or hereafter held by Lender in such
order and manner as Lender may in its sole discretion determine, whether
concurrently or successively and in one or several consolidated independent
judicial actions or lawfully taken non-judicial proceedings, or both;
(v) foreclose this Instrument, and in any such action qualify
for the appointment of a receiver of the Mortgaged Property either before
or after a foreclosure sale, without notice and without regard to the
solvency or insolvency of Borrower at the time of the application for such
receiver, and without regard to the then value of the Mortgaged Property,
and Lender or any holder of the Note may be appointed as such receiver or
as Lender in possession. The receiver or Lender in possession shall have
the power to collect the Rents during the pendency of such foreclosure
action, and in case of a sale and a deficiency, during the full statutory
period of redemption, if any, whether there be a redemption or not, as well
as during all other times, when Borrower, except for the intervention of
the receiver or Lender in possession, would be entitled to collect such
Rents, together with all other powers which may be necessary or are usual
in such cases for the protection, possession, control, management and
operation of the Mortgaged Property during the whole of said period; and
(vi) to exercise all rights, powers and remedies, if any,
described under Article IV of this Instrument.
(vii) to enforce this Instrument in any other manner permitted
under applicable law or to exercise any other remedy now or hereafter
existing in equity, at law, by virtue of statute or otherwise, as provided
in Minnesota.
2.3. APPOINTMENT OF RECEIVER. The holder of this Instrument, in any
action to foreclose it, shall be entitled to the appointment of a receiver. In
addition, upon the actual or threatened waste to any part of the Mortgaged
Property or upon the occurrence of any
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default hereunder, the holder of this Instrument shall be at liberty, without
notice, to apply for the appointment of a receiver of the Rents, and shall be
entitled to the appointment of such receiver as a matter of right, without
regard to the value of the Mortgaged Property as security for the Debt, or
the solvency or insolvency of any person then liable for the payment of the
Debt.
2.4. SALE OF MORTGAGED PROPERTY. In connection with any foreclosure,
the Mortgaged Property, or any interest therein, may, at the discretion of
Lender, at the direction of Lender, be sold in one or more parcels or in several
interests or portions and in any order or manner.
2.5. RECOVERY OF SUMS REQUIRED TO BE PAID. Lender shall have the right
from time to time to take action to recover any sum or sums which constitute a
part of the Debt as the same become due, without regard to whether or not the
balance of the Debt shall be due, and without prejudice to the right of Lender
thereafter to bring an action of foreclosure, or any other action, for a default
or defaults by Borrower existing at the time such earlier action was commenced.
2.6. ACTIONS AND PROCEEDINGS. Lender shall have the right to appear in
and defend any action or proceeding brought with respect to the Mortgaged
Property and to bring any action or proceeding, in the name and on behalf of
Borrower, which Lender, in its discretion, feels should be brought to protect
Lender's interest in the Mortgaged Property.
2.7. RIGHT TO CURE DEFAULTS. Upon the occurrence of any Default
hereunder, Lender may, at its discretion, remedy the same and for such purpose
shall have the right to enter upon the Mortgaged Property or any portion thereof
without thereby becoming liable to Borrower or any person in possession thereof
holding under or claiming under or through Borrower, it being understood and
agreed that nothing contained in this Instrument shall in any manner obligate
Lender to remedy any default hereunder. If Lender shall remedy such Default or
appear in, defend, or bring any action or proceeding to protect Lender's
interest in the Mortgaged Property or to foreclose this Instrument or collect
the Debt, the costs and expenses thereof (including reasonable attorneys' fees
to the extent permitted by law), with interest as provided in this paragraph,
shall be paid by Borrower to Lender upon demand. All such costs and expenses
incurred by Lender in remedying such default or in appearing in, defending, or
bringing any such action or proceeding shall be paid by Borrower to Lender upon
demand, with interest (calculated for the actual number of days elapsed on the
basis of a 360-day year consisting of twelve (12) thirty (30) day months) at a
rate per annum equal to 18% (the "Default Rate"), provided, however, that the
Default Rate shall in no event exceed the maximum interest rate which Borrower
may by law pay, for the period after notice from Lender that such costs or
expenses were incurred to the date of payment to Lender. To the extent any of
the aforementioned costs or expenses paid by Lender after default by Borrower
shall constitute payment of (i) Taxes, charges or assessments which may be
imposed by law upon the Mortgaged Property, (ii) Premiums on insurance policies
covering the
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Mortgaged Property, (iii) expenses incurred in preserving and protecting the
lien of this Instrument, including, but not limited to, the costs and
expenses of any litigation to collect the indebtedness secured by this
Instrument or to prosecute, defend, protect or preserve the rights and the
lien created by this Instrument, or (iv) any amount, cost or charge to which
Lender becomes subrogated, upon payment, whether under recognized principles
of law or equity, or under express statutory authority; then, and in each
such event, such costs, expenses and amounts, together with interest thereon
at the Default Rate, shall be added to the indebtedness secured by this
Instrument and shall be secured by this Instrument.
2.8. LATE PAYMENT CHARGE. If any installment of principal, interest or
other sum payable under this Instrument is not paid within ten (10) days after
the date on which it is due, Borrower shall pay to Lender upon demand an amount
equal to four percent (4%) of such unpaid installment as a late payment charge
in order to defray part of the increased cost of collection occasioned by any
late payments, as liquidated damages and not as a penalty, since actual damages
are impossible to determine at this time. This charge shall be in addition to,
and not in lieu of, any other remedy Lender may have and is in addition to any
reasonable fees and charges of any agents or attorneys which Lender is entitled
to employ on any defaults hereunder, whether authorized herein or by law.
2.9. NON-WAIVER. The failure of Lender to insist upon strict
performance of any term of this Instrument shall not be deemed to be a waiver of
any term of this Instrument. No delay or omission by Lender to exercise any
right, power or remedy accruing under this Instrument shall be construed to be a
waiver of any default or acquiescence therein. A waiver in one or more
instances to exercise any right, power or remedy accruing hereunder shall apply
only to the particular instance or instances, and at the particular time or
times only, and no such waiver shall be deemed a continuing waiver, but every
term, covenant, provision or condition establishing such right, power or remedy
shall survive and continue to remain in full force and effect. Borrower shall
not be relieved of Borrower's obligation to pay the Debt at the time and in the
manner provided for its payment in the Note and this Instrument by reason of:
(i) failure of Lender to comply with any request of Borrower to take any action
to foreclose this Instrument or otherwise enforce any of the provisions hereof
or of the Note or any other mortgage, instrument or document evidencing,
securing or guaranteeing payment of the Debt or any portion thereof, (ii) the
release, regardless of consideration, of the whole or any part of the Mortgaged
Property or any other security for the Debt, or (iii) any agreement or
stipulation between Lender and any subsequent owner or owners of the Mortgaged
Property or other person extending the time of payment or otherwise modifying or
supplementing the terms of the Note, this Instrument or any other mortgage,
instrument or document evidencing, securing or guaranteeing payment of the Debt
or any portion thereof, without first having obtained the consent of Borrower,
and in the latter event, Borrower shall continue to be obligated to pay the Debt
at the time and in the manner provided in the Note and this Instrument, as so
extended, modified and supplemented, unless expressly released and discharged
from such obligation by Lender in writing. Regardless of consideration, and
without the necessity for any notice to or
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consent by the holder of any subordinate lien, encumbrance, right, title or
interest in or to the Mortgaged Property, Lender may release any person at
any time liable for the payment of the Debt or any portion thereof or any
part of the security held for the Debt and may extend the time of payment or
otherwise modify the terms of the Note or this Instrument, including, without
limitation, a modification of the interest rate payable on the principal
balance of the Note, without in any manner impairing or affecting this
Instrument or the lien hereof or the priority of this Instrument, as so
extended and modified, as security for the Debt over any such subordinate
lien, encumbrance, right, title or interest. Lender may resort for the
payment of the Debt to any other security held by Lender in such order and
manner as Lender, in its discretion, may elect. Lender may take action to
recover the Debt, or any portion thereof, or to enforce any covenant hereof
without prejudice to the right of Lender thereafter to foreclose this
Instrument. Lender shall not be limited exclusively to the rights and
remedies herein stated but shall be entitled to every additional right and
remedy now or hereafter afforded by law or equity. The rights of Lender
under this Instrument shall be separate, distinct and cumulative and none
shall be given effect to the exclusion of the others. No act of Lender shall
be construed as an election to proceed under any one provision herein to the
exclusion of any other provision.
2.10. ABSOLUTE AND UNCONDITIONAL OBLIGATION. Borrower acknowledges that
Borrower's obligation to pay the Debt in accordance with the provisions of the
Note and this Instrument is and shall at all times continue to be absolute and
unconditional in all respects, and shall at all times be valid and enforceable
irrespective of any other agreements or circumstances of any nature whatsoever
which might otherwise constitute a defense to the Note or this Instrument or the
obligation of Borrower thereunder to pay the Debt or the obligations of any
other person relating to the Note or this Instrument or the obligations of
Borrower under the Note or this Instrument or otherwise with respect to the loan
secured hereby. Except as set forth below, Borrower absolutely, unconditionally
and irrevocably waives any and all right to assert any setoff, counterclaim or
crossclaim (a "Borrower Claim") of any nature whatsoever with respect to the
obligation of Borrower to pay the Debt in accordance with the provisions of the
Note and this Instrument or the obligations of any other person relating to the
Note or this Instrument or obligations of Borrower under the Note or this
Instrument or otherwise with respect to the loan secured hereby in any action or
proceeding (a "Lender Proceeding") brought by Lender to collect the Debt, or any
portion thereof, or to enforce, foreclose and realize upon the lien and security
interest created by this Instrument or any other document or instrument securing
repayment of the Debt. The forgoing sentence shall not alter or diminish the
right of Borrower (i) to raise in a Lender Proceeding any compulsory defenses
which, if not raised in the Lender Proceeding, would be forever barred, or
(ii) to bring any motion or file any suit against Lender with respect to a
Borrower Claim in an action separate from a Lender Proceeding.
2.11. WAIVER OF STATUTORY RIGHTS. Borrower shall not and will not apply
for or avail itself of any appraisement, valuation, stay, extension or exemption
laws, or any so-called "Moratorium Laws", now existing or hereafter enacted, in
order to prevent or
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hinder the enforcement or foreclosure of this Instrument, but hereby waives
the benefit of such laws to the full extent that Borrower may do so under
applicable law. Borrower for itself and all who may claim through or under
it waives any and all right to have the property and estates comprising the
Mortgaged Property marshaled upon any foreclosure of the lien of this
Instrument and agrees that any court having jurisdiction to foreclose such
lien may order the Mortgaged Property sold as an entirety. Borrower hereby
waives for itself and all who may claim through or under it, and to the full
extent Borrower may do so under applicable law, any and all rights of
redemption from sale under any order or decree of foreclosure of this
Instrument or granted under any statute now existing or hereafter enacted.
2.12. TRIAL BY JURY WAIVER. THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM, WHETHER CONTRACT, TORT OR
OTHERWISE ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THE LOAN,
THE NOTE, THIS INSTRUMENT, THE LOAN DOCUMENTS OR ANY ACTS OR OMISSIONS OF
LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION THEREWITH.
ARTICLE III - MISCELLANEOUS
3.1. NOTICE. Any notice, request, demand, statement, authorization,
approval or consent made hereunder shall be in writing and shall be sent by
Federal Express, UPS, Airborne or other reputable nationally recognized
overnight courier service, or by postage pre-paid registered or certified mail,
return receipt requested, and shall be deemed given when received or refused (as
indicated on the receipt) and addressed as follows:
If to Borrower:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, Minnesota 55426-4504
Attn: Chief Financial Officer
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With a copy to:
Oppenheimer Wolff & Donnelly, LLP
45 South Seventh Street, Suite 3400
Minneapolis, Minnesota 55402-1609
Attention: Christopher Scotti
If to Lender:
Fortis Insurance Company
501 West Michigan
Milwaukee, Wisconsin 53201-3050
Attn: General Counsel; Loan No. 30381
With a copy to:
Fortis Advisers, Inc.
One Chase Manhattan Plaza
New York, New York 10005
Attn: Senior Vice President - Mortgages;
Loan No. 30381
With a copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: Albert E. Bender, Jr.; Loan from
Fortis Insurance Company to Paper
Warehouse, Inc.
Each party may designate a change of address by notice given, as herein
provided, to the other party, at least fifteen (15) days prior to the date such
change of address is to become effective.
3.2. WAIVER OF NOTICE. Borrower shall not be entitled to any notices of
any nature whatsoever from Lender except with respect to matters for which this
Instrument specifically and expressly provides for the giving of notice by
Lender to Borrower, and Borrower hereby expressly waives the right to receive
any notice from Lender with respect to any matter for which this Instrument does
not specifically and expressly provide for the giving of notice by Lender to
Borrower.
3.3. ESTOPPEL CERTIFICATES. Borrower shall within ten (10) days after
request by Lender furnish Lender or any proposed assignee with a statement, duly
acknowledged and certified, setting forth (i) the amount of the original
principal amount of the Note, (ii) the unpaid principal amount of the Note,
(iii) the rate of interest of the Note, (iv) the terms of payment and maturity
date of the Note, (v) the date installments of interest and/or principal were
last paid, (vi) that, except as provided in such statement, there are no
defaults or events which with the passage of time or the giving of notice or
both, would constitute an event of default under the Note or this Instrument,
(vii) that the Note
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and this Instrument are valid, legal and binding obligations and have not
been modified or if modified, giving particulars of such modification, (viii)
whether any offsets or defenses exist against the obligations and have not
been modified or if modified, giving particulars of such modification, (viii)
whether any offsets or defenses exists against the obligations secured hereby
and, if any are alleged to exist, a detailed description thereof, (ix) that
all Leases are in full force and effect and (provided the Mortgaged Property
is not a residential multifamily property) have not been modified (or if
modified, setting forth all modifications), (x) the date to which the rents
thereunder have been paid pursuant to the Leases, (xi) whether or not, to the
best knowledge of Borrower, any of the lessees under the Leases are in
default under the Leases, and if any of the lessees are in default, setting
forth the specific nature of all such defaults, (xii) the amount of security
deposits held by Borrower under each Lease and that such amounts are
consistent with the amounts required under each Lease, and (xiii) as to any
other matters reasonably requested by Lender and reasonably related to the
Leases, the obligations secured hereby, the Mortgaged Property or this
Instrument.
3.4. CHANGES IN LAWS REGARDING TAXATION. In the event of the passage
after the date of this Instrument of any law of the State in which the
Mortgaged Property is located deducting from the value of real property for
the purpose of taxation any lien or encumbrance thereon or changing in any
way the laws for the taxation of mortgages or debts secured by mortgages for
state or local purposes or the manner of the collection of any such taxes,
and imposing a tax, either directly or indirectly, on this Instrument, the
Note or the Debt, Borrower shall, if permitted by law, pay any tax imposed as
a result of any such law within the statutory period or within fifteen (15)
days after demand by Lender, whichever is less, provided, however, that if,
in the opinion of the attorneys for Lender, Borrower is not permitted by law
to pay such taxes, Lender shall have the right, at its option, to declare the
Debt due and payable on a date specified in a prior notice to Borrower of not
less than thirty (30) days.
3.5. NO CREDITS ON ACCOUNT OF THE DEBT. Borrower will not claim or
demand or be entitled to any credit or credits on account of the Debt for any
part of the Taxes assessed against the Mortgaged Property or any part thereof
and no deduction shall otherwise be made or claimed from the taxable value of
the Mortgaged Property, or any part thereof, by reason of this Instrument or
the Debt.
3.6. DOCUMENTARY STAMPS. If at any time the United States of America,
any state thereof, or any governmental subdivision of any such state, shall
require revenue or other stamps to be affixed to the Note or this Instrument,
Borrower will, upon demand, pay for the same, with interest and penalties
thereon, if any.
3.7. FILING OF MORTGAGE, ETC. Borrower forthwith upon the execution
and delivery of this Instrument and thereafter, from time to time, will cause
this Instrument and any extension, modification, renewal or replacement
hereof, and any security instrument creating a lien or evidencing the lien
hereof upon the Mortgaged Property and each instrument of further assurance
to be filed, registered or recorded in such manner
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and in such places as may be required by any present or future law in order
to publish notice of and fully to protect, preserve and perfect the lien
hereof upon, and the interest of Lender in, the Mortgaged Property. Borrower
will pay all title insurance fees and charges, all filing, registration and
recording fees, and all expenses incident to the preparation, execution and
acknowledgment of this Instrument, any mortgage supplemental hereto, any
security instrument with respect to the Mortgaged Property, and any
instrument of further assurance, and all Federal, state, county and municipal
taxes, duties, imposts, assessments and charges arising out of or in
connection with the execution and delivery of this Instrument, any mortgage
supplemental hereto, any security instrument with respect to the Mortgaged
Property or any instrument of further assurance. Borrower shall hold
harmless and indemnify Lender, its successors and assigns, against any
liability incurred by reason of the imposition of any tax on the making and
recording of this Instrument.
3.8. FURTHER ACTS, ETC. Borrower will at its cost, and without
expense to Lender, do, execute, acknowledge and deliver all and every such
further acts, deeds, conveyances, mortgages, assignments, notices of
assignments, transfers and assurances as Lender shall, from time to time,
require for the better assuring, conveying, assigning, transferring and
confirming unto Lender the property and rights hereby conveyed or assigned
intended now or hereafter so to be, or which Borrower may be or may hereafter
become bound to convey or assign to Lender, or for carrying out the intention
or facilitating the performance of the terms of this Instrument or for
filing, registering or recording this Instrument and, on demand, will execute
and deliver and hereby authorizes Lender to execute in the name of Borrower
to the extent Lender may lawfully do so, one or more financing statements,
chattel mortgages or comparable security instruments, to evidence more
effectively the lien hereof upon the Mortgaged Property.
3.9. USURY LAWS. It is the express intent hereof that Borrower not
pay and Lender not receive, directly or indirectly in any manner whatsoever,
interest in excess of that which may be legally paid by Borrower under
applicable law, and the note is subject to the express condition that at no
time shall Borrower be obligated or required to pay, nor shall Lender be
permitted to collect, interest on the principal balance of the Note at a rate
which could subject Lender to either civil or criminal liability as a result
of being in excess of the maximum rate which Borrower is permitted by law to
agree to pay. If any such excess amount of interest is contracted for,
charged, paid, received or applied under the Loan Documents or the Note, or
in the event the maturity of the indebtedness secured hereby is accelerated
in whole or in part or all or part of the principal of or interest on the
Note shall be prepaid, so that under any of such circumstances the amount of
interest contracted for, charged, paid, received or applied under the Loan
Documents or the Note on the amount of principal actually outstanding from
time to time under the Note shall exceed the maximum amount of interest
permitted by applicable law, then in any such event (a) neither Borrower nor
any other person liable for payment of the indebtedness secured hereby shall
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum amount of interest permitted by applicable law, (b) any
such excess which may have been collected shall, at Lender's option, either
be applied as a
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credit against the then unpaid principal amount of the Note or refunded to
Borrower and (c) the effective rate of interest shall be automatically
reduced to the maximum lawful rate of interest allowed under applicable law,
as now or hereafter construed by the courts having jurisdiction thereof.
Without limiting the generality of the foregoing, all calculations of the
rate of interest contracted for, charged or received under the Loan Documents
or the Note which are made for the purposes of determining whether such rate
exceeds the maximum amount of interest permitted by applicable law shall be
made, to the extent permitted by applicable law, by amortizing, prorating,
allocating and spreading in equal parts during the period of the full stated
term of the Note, all interest at any time contracted for, charged or
received in connection with the indebtedness evidenced by the Note.
3.10. INDEMNITY. Anything in this Instrument or the other Loan
Documents to the contrary notwithstanding, Borrower shall indemnify and hold
Lender harmless and defend Lender at Borrower's sole cost and expense against
any loss or liability, cost or expense (including, without limitation,
reasonable attorneys' fees and disbursements of Lender's counsel, whether
in-house staff, retained firms or otherwise), and all claims, actions,
procedures and suits arising out of or in connection with (i) any ongoing
matters arising out of the transaction contemplated hereby, the Debt, this
Instrument, the Note or any Loan Documents, (ii) any amendment to, or
restructuring of, the Debt and this Instrument, the Note or any of the other
Loan Documents, and (iii) any and all lawful action that may be taken by
Lender in connection with the enforcement of the provisions of this
Instrument or the Note or any of the other Loan Documents, whether or not
suit is filed in connection with the same, or in connection with Borrower,
any Guarantor (if any), any Responsible Party (if any) and/or any partner,
joint venturer or shareholder thereof becoming a party to a voluntary or
involuntary federal or state bankruptcy, insolvency or similar proceeding.
All sums expended by Lender shall be payable on demand and, until reimbursed
by Borrower pursuant hereto, shall be deemed additional principal of the Debt
and secured hereby and shall bear interest at the Default Rate.
3.11. NO ORAL CHANGE. This Instrument may only be modified, amended or
changed by an agreement in writing signed by Borrower and Lender, and may
only be released, discharged or satisfied of record by an agreement in
writing signed by Lender. No waiver of any term, covenant or provision of
this Instrument shall be effective unless given in writing by Lender and if
so given by Lender shall only be effective in the specific instance in which
given. Borrower acknowledges that the Note, this Instrument and the other
documents and instruments executed and delivered in connection therewith or
otherwise in connection with the loan secured hereby set forth the entire
agreement and understanding of Borrower and Lender with respect to the loan
secured hereby and that no oral or other agreement, understanding,
representation or warranty exists with respect to the loan secured hereby
other than those set forth in the Note, this Instrument and the other Loan
Documents.
3.12. ENFORCEABILITY. This instrument and the obligations arising
hereunder shall be governed by, and construed in accordance with, the laws of
the state in which the
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Mortgaged Property are located and any applicable laws of the United States
of America. Whenever possible, each provision of this Instrument shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Instrument shall be unenforceable or prohibited
by or invalid under applicable law, such provision shall be ineffective to
the extent of such unenforceability, prohibition or invalidity, without
invalidating the remaining provisions of this Instrument.
3.13. RELATIONSHIP. The relationship of Lender to Borrower hereunder
is strictly and solely that of lender and borrower and mortgagor and
mortgagee and nothing contained in the Note, this Instrument or any other
document or instrument now or hereafter executed and delivered in connection
therewith or otherwise in connection with the loan secured hereby is intended
to create, or shall in any event or under any circumstance be construed as
creating, a partnership, joint venture, tenancy-in-common, joint tenancy or
other relationship of any nature whatsoever between Lender and Borrower other
than as lender and borrower and mortgagee and mortgagor.
3.14. LIABILITY. If Borrower consists of more than one person, the
obligations and liabilities of each such person hereunder shall be joint and
several.
3.15. CERTAIN DEFINITIONS. Unless the context clearly indicates a
contrary intent or unless otherwise specifically provided herein, words used
in this Instrument shall be used interchangeably in singular or plural form
and the word "Mortgagor" shall mean each Borrower and any subsequent owner or
owners of the Mortgaged Property or any part thereof or interest therein; the
word "Lender" shall mean Lender or any subsequent holder of the Note; the
word "Note" shall mean the Note, any amendment, extension, modification,
restatement or replacement thereof or any other evidence of indebtedness
secured by this Instrument; the word "Guarantor" shall mean, if any exist,
each person guaranteeing payment of the Debt or any portion thereof or
performance by Borrower of any of the terms of this Instrument and their
respective heirs, executors, administrators, legal representatives,
successors and assigns; the word "person" shall include an individual,
corporation, partnership, trust, unincorporated association, government,
governmental authority, or other entity; the words "Mortgaged Property" shall
include any portion of the Mortgaged Property or interest therein; and the
word "Debt" shall mean all sums secured by this Instrument. Whenever the
context may require, any pronouns used herein shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns and
pronouns shall include the plural and vice versa.
3.16. HEADINGS, ETC. The headings and captions of various paragraphs
of this Instrument are for convenience of reference only and are not to be
construed as defining or limiting, in any way, the scope or intent of the
provisions hereof.
3.17. DUPLICATE ORIGINALS. This Instrument may be executed in any
number of duplicate originals, and each such duplicate original shall be
deemed to constitute but one and the same instrument.
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<PAGE>
3.18. SOLE DISCRETION OF LENDER. Except as may otherwise be expressly
provided herein the contrary or as required by applicable law, wherever
pursuant to the Note, this Instrument or any other document or instrument now
or hereafter executed and delivered in connection therewith or otherwise with
respect to the loan secured hereby, Lender exercises any right given to it to
consent or not consent, or to approve or disapprove, or any arrangement or
term is to be satisfactory to Lender, the decision of Lender to consent or
not consent, or to approve or disapprove, or to decide that arrangements or
terms are satisfactory or not satisfactory, shall be in the sole and absolute
discretion of Lender and shall be final and conclusive.
3.19. REASONABLENESS. If at any time Borrower believes that Lender has
not acted reasonably in granting or withholding any approval or consent under
the Note, this Instrument or any other document or instrument now or
hereafter executed and delivered in connection therewith or otherwise with
respect to the loan secured hereby, as to which approval or consent either
Lender has expressly agreed to act reasonably, or absent such agreement, a
court of law having jurisdiction over the subject matter would require Lender
to act reasonably, then Borrower's sole remedy shall be to seek injunctive
relief or specific performance and no action for monetary damages or punitive
damages shall in any event or under any circumstance be maintained by
Borrower against Lender.
3.20 BROKERAGE. Borrower shall pay in full all brokerage commissions
due any party upon the execution and delivery hereof. Borrower covenants and
agrees that no brokerage commission or other fee, commission or compensation
is to be paid by Lender and Borrower agrees to indemnify Lender against any
claims for any of the same.
3.21. SALE/ASSIGNMENT. Borrower acknowledges that Lender shall have
the right in its sole and absolute discretion during the term of the Loan (i)
to sell and assign the Loan or participation interests in the Loan and/or
(ii) to effect a so-called securitization of the Loan, in each instance in
such manner and on such terms and conditions as Lender shall deem to be
appropriate. Borrower shall cooperate, and shall cause each Responsible Party
(if any), indemnitor and other person or party associated or connected with
the Loan or the collateral therefor to cooperate, in all respects with Lender
in connection with such sale, assignment, participation and/or
securitization, and shall, in connection therewith, execute and deliver such
estoppels, certificates, instruments and documents as may be requested by
Lender. Borrower grants to Lender, and shall cause each Responsible Party
(if any), indemnitor and other person or party associated or connected with
the Loan or the collateral therefor to grant to Lender, the right to
distribute on a confidential basis financial and other information concerning
Borrower, each such Responsible Party (if any), indemnitor and other person
or party and the property encumbered by this Instrument and other pertinent
information with respect to the Loan to any party who has indicated to Lender
an interest in entering into such sale, assignment and/or securitization of
the Loan. If Borrower shall default in the performance of its obligations as
set forth in this paragraph, and if such default shall not be remedied by
Borrower within ten (10) days after notice by Lender, Lender shall have the
right in its discretion to declare the Debt immediately due and payable.
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<PAGE>
3.22. WAIVER OF AUTOMATIC STAY. BORROWER HEREBY AGREES THAT, IN
CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT
THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN,
IF BORROWER SHALL (i) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT
JURISDICTION OR BE THE SUBJECT OF ANY PETITION UNDER ANY SECTION OR CHAPTER
OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE; (ii) BE THE SUBJECT OF ANY
ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUE;
(iii) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION,
ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR
RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO
BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (iv) HAVE SOUGHT OR
CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER,
CONSERVATOR, OR LIQUIDATOR; OR (v) BE THE SUBJECT OF AN ORDER, JUDGMENT OR
DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION
FILED AGAINST ANY BORROWER FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION,
READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT
OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR
RELIEF FOR DEBTORS, THEN, SUBJECT TO COURT APPROVAL, LENDER SHALL THEREUPON
BY ENTITLED AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT
CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER
INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR
STATUTE (INCLUDING, WITHOUT LIMITATION, RELIEF FROM ANY EXCLUSIVE PERIOD SET
FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE AVAILABLE TO
LENDER AS PROVIDED IN THIS NOTE AND THE LOAN DOCUMENTS, AND AS OTHERWISE
PROVIDED BY LAW, AND BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHT TO OBJET TO
SUCH RELIEF.
ARTICLE IV - LOCAL LAW PROVISIONS
4.1. INCONSISTENCIES. In the event of any inconsistencies between the
terms and conditions of this Article IV and any other terms of this
Instrument the terms and conditions of this Article IV shall control and be
binding.
4.2 POWER OF SALE. Without limiting any rights of Lender under
Section 2.2, upon any Default:
(a) Lender may cause any or all of the Property to be sold under the
power of sale granted in this Instrument in any manner permitted by
38
<PAGE>
applicable law. Lender is hereby authorized and empowered to
expose to sale and to sell the Mortgaged Property at public auction
for cash, after having first complied with all applicable
requirements of the law of the State of Minnesota with respect to
the exercise of powers of sale contained in mortgages or such other
sales appropriate under the circumstances, and upon any such sale,
Lender shall convey title to the purchaser of the Mortgaged
Property.
(b) Lender may qualify for the appointment of a receiver of the
Mortgaged Property either before or after a foreclosure sale
pursuant to Minnesota Statutes Section 559.17 or otherwise, without
notice and without regard to the solvency or insolvency of Borrower
at the time of the application for such receiver, and without
regard to the then value of the Mortgaged Property, and Lender or
any holder of the Note may be appointed as such receiver or as
Lender in possession, and to file in the Office of the Hennepin
County Recorder, or in the case of a registered property, in the
Office of the Hennepin County Registrar of Titles, a notice of the
occurrence of a Default in the terms and conditions of this
Instrument and by serving the notice of the occurrence of a Default
upon the occupiers of the Mortgaged Property. The receiver or
Lender in possession shall have the power to collect the Rents
during the pendency of such foreclosure action, and in case of a
sale and a deficiency, during the full statutory period of
redemption, if any, whether there be a redemption or not, as well
as during all other times, when Borrower, except for the
intervention of the receiver or Lender in possession, would be
entitled to collect such Rents, together with all other powers
which may be necessary or are usual in such cases for the
protection, possession, control, management and operation of the
Mortgaged Property during the whole of said period; if application
of the Rents is made after the occurrence of a Sheriff's sale
foreclosing this Instrument and Lender is not entitled to obtain a
deficiency judgment under Minnesota Statutes, Section 582.30, such
Rents shall be applied to the holder of the Sheriff's Certification
of Sale as a credit against the amount required to be paid to
effect a redemption of the Mortgaged Property from foreclosure of
this Instrument, and if Lender is entitled to obtain a deficiency
judgment pursuant to Minnesota Statutes, Section 582.30, such Rents
shall be applied first, to Lender for the payment of any deficiency
for which Lender is entitled to seek a judgment (whether or not
Lender has obtained a judgment) and second, to the holder of the
Sheriff's Certificate of Sale; as a credit to the amount required
to be paid to effect a redemption of the Mortgaged Property from
the foreclosure of this Instrument;
(c) If a Default shall have occurred, Lender may cause the Mortgaged
Property to be sold by advertisement for cash, after having first
complied with all applicable requirements of the law of the State
of Minnesota with
39
<PAGE>
respect to the exercise of powers of sale or foreclosure by
advertisement (pursuant to Minn. Stat. chs. 580 and 582, or
otherwise) contained in mortgages or such other sales
appropriate under the circumstances. Lender or any person
conducting the sale for Lender is authorized to execute to the
purchaser at said sale a deed to the Mortgaged Property so
purchased. Lender may bid at said sale and purchase said
Mortgaged Property, or any part hereof, if the highest bidder
therefor. At the foreclosure sale the Mortgaged Property may be
offered for sale and sold as a whole without first offering it
in any other manner or may be offered for sale and sold in any
other manner Lender may elect. Any and all statements of fact
or other recitals made in any deed or deeds given by the Lender
as to nonpayment of the Debt, or as to the occurrence of any
Default, or as to Lender having declared all of such Debt to be
due and payable, or as to the request to sell, or as to notice
of time, place and terms of sale and of the properties to be
sold having been duly given, or as to any other act or thing
having been duly done by Lender, shall be taken as prima facie
evidence of the truth of the facts so stated and recited.
Lender may appoint or delegate any one or more persons as agent
(or as attorney-in-fact) to perform any act or acts necessary or
incident to any sale held by Lender, including the posting of
notices and the conduct of sale, but in the name and on behalf
of Lender.
(d) Any and all statements of fact or other recitals made in any deed
or deeds given by Lender as to nonpayment of the Debt, or as to the
occurrence of any Default, or as to Lender having declared all of
such Debt to be due and payable, or as to the request to sell, or
as to notice of time, place and terms of sale and of the properties
to be sold having been duly given, or as to any other act or thing
having been duly done by Lender, shall be taken as prima facie
evidence of the truth of the facts so stated and recited.
IN WITNESS WHEREOF, Borrower has duly executed this Instrument under
seal the day and year first above written.
BORROWER:
PAPER WAREHOUSE, INC., a Minnesota
corporation
By: /s/ Yale T. Dolginow
----------------------------------
Name: Yale T. Dolginow
----------------------------
Title: Chief Executive Officer
---------------------------
ACKNOWLEDGMENT
40
<PAGE>
STATE OF ____________
COUNTY OF __________
On this _____ day of _________________, 1999, before me,
_____________________________, a Notary Public of ____________ County,
________________, personally appeared ____________________, known or
identified to me to be the ___________________ of PAPER WAREHOUSE, INC., a
Minnesota corporation, and the officer who subscribed the corporate name to
the foregoing instrument, and acknowledged to me that he executed the same in
the name of such corporation.
IN WITNESS WHEREOF, I have set my hand and affixed my official notarial
stamp or seal, the day and year in this certificate first above written.
My Commission Expires:
_________________________________
_______________________________ Notary Public
[NOTARIAL SEAL]
41
<PAGE>
EXHIBIT A
(Legal Description of Premises)
Tax Map Reference Number: ___________________
42
<PAGE>
EXHIBIT B
(Permitted Title Exceptions)
Those items set forth in Schedule B, Section 2, of that certain Commitment
for Title Insurance issued by Lawyers Title Insurance Corporation, Commitment
No. 13659, as endorsed and marked in connection with the making of the Loan
evidenced by the Note and the recording of this Instrument.
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<PAGE>
EXHIBIT C
(UCC Financing Statement Information)
SCHEDULE 1
(DESCRIPTION OF "DEBTOR" AND "SECURED PARTY")
A. DEBTOR:
1. Name and Identity of Corporate Structure: Paper Warehouse, Inc.,
a Minnesota corporation.
2. The principal place of business and chief executive office of
Debtor is located in Hennepin County.
3. Debtor has been using or operating under said name and identity
without change for more than five (5) years or has not operated
under any other name or identity.
B. SECURED PARTY: Fortis Insurance Company
SCHEDULE 2
(NOTICE MAILING ADDRESSES OF "DEBTOR" AND "SECURED PARTY")
A. The mailing address of Debtor is:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, Minnesota 55426-4504
Attn: Chief Financial Officer
B. The mailing address of Secured Party is:
Fortis Insurance Company
c/o Fortis Advisers, Inc.
One Chase Manhattan Plaza
New York, New York 10005
Attn: Mortgage Servicing Department; Loan No.
30381
44
<PAGE>
EXHIBIT 12
PAPER WAREHOUSE, INC., AND SUBSIDIARY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE YEARS ENDED JANUARY 29, 1999
<TABLE>
<CAPTION>
($'S IN THOUSANDS) FISCAL YEARS ENDED
--------------------------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 2, JANUARY 27,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES:
Earnings:
Consolidated net earnings .............................. $ (521) $ (207) $ 808 $ 797 $ 794
Extraordinary charge, net .............................. --- (110) --- --- ---
Income taxes (1) ....................................... 323 (22) (500) (494) (492)
------- ------- ------- ------- -------
Total earnings before extraordinary charge .......... (844) (75) 1,308 1,291 1,286
Fixed Charges:
Interest expense ....................................... 279 860 834 547 227
Interest portion of rental expense ..................... 2,378 1,779 1,436 1,046 673
------- ------- ------- ------- -------
Total fixed charges ................................. 2,657 2,639 2,270 1,593 900
Earnings available for fixed charges ..................... $ 1,813 $ 2,564 $ 3,578 $ 2,884 $ 2,186
Ratio of earnings before extraordinary charge
to fixed charges........................................ --- (2) --- (2) 1.58 1.81 2.43
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(1) Prior to November 1997, the Company was taxed as an S-Corporation.
This amount reflects the pro forma provision for taxes as if the Company
were taxed as a C-Corporation.
(2) For the fiscal years ended January 29, 1999 and January 30, 1998,
earnings were not adequate to cover fixed charges by approximately
$844,000 and $75,000 respectively. Assuming this issuance had occured at
the beginning of the last fiscal year, earnings would not have been
adequate to cover fixed charges by approximately $1.3 million.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Paper Warehouse, Inc. and Subsidiary:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial and Operating Data"
in the prospectus.
/s/ KPMG Peat Marwick LLP
May 24, 1999
Minneapolis, Minnesota
2
