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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 29, 1999
COMMISSION FILE NO. 0-23389
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PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1612534
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 936-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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As of April 21, 1999, 4,627,936 shares of the Registrant's Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on such date, based upon the last sale price
of the Common Stock as reported on the Nasdaq National Market on April 21,
1999, was $4,558,761. For purposes of this computation, affiliates of the
Registrant are deemed only to be the Registrant's executive officers and
directors.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referenced to herein) from
the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be held on June 11, 1999 (the "1999 Proxy Statement").
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PART I
This Form 10-K contains trend information and other forward-looking
statements. For this purpose, any statements contained in this Form 10-K that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limitation the foregoing words such as "may," "will,"
"expect," "believe," "anticipate," "estimate," or "continue," or comparable
terminology, are intended to identify forword-looking statements. These
statements by their nature involve substantial risks and uncertainties and
actual results could differ materially from historical results of operations
and those discussed in the forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to,
those identified below in the section entitled "Certain Risks".
ITEM 1. BUSINESS.
Paper Warehouse, Inc., a Minnesota corporation ("Paper Warehouse" or
the "Company") is a growing chain of stores specializing in party supplies
and paper goods operating under the names PAPER WAREHOUSE and PARTY UNIVERSE.
The Company's seven principal markets are Tucson, AZ, Denver, CO, Kansas
City, MO and KS, Minneapolis/St. Paul, MN, Oklahoma City/Tulsa, OK, Omaha, NE
and Des Moines, IA, and Seattle, WA. Paper Warehouse stores offer an
extensive assortment of special occasion, seasonal and everyday paper
products, including party supplies, gift-wrap, greeting cards and catering
supplies, at everyday low prices. The Company's 143 stores (97 Company-owned
and 46 franchised stores) are conveniently located in major retail trade
areas to provide customers with easy access to its stores.
The Company offers a broad selection of party supplies and paper
goods for a wide variety of celebratory occasions and everyday uses,
including birthdays, weddings, baby showers, graduations and other family and
religious celebrations, as well as seasonal events such as Valentine's Day,
Easter, Fourth of July, Halloween, Thanksgiving, Christmas, Hanukkah and New
Year's. Through its 8,500 square foot superstore prototype, the Company
offers a comprehensive selection of over 19,000 SKUs, providing customers the
convenience of one-stop shopping for all party supplies and paper goods. The
Company's merchandise is organized by party themes, and the prominent signage
and wide aisles allow customers easy access to coordinate the merchandise
required for all party occasions. The Company believes that its extensive
selection, combined with high in-stock positions, often stimulates customers
to purchase additional products.
The first Paper Warehouse store opened in Minneapolis, Minnesota in
1983. The current management team purchased the Paper Warehouse business in
1986 and incorporated the Company in Minnesota in 1987. The Company's
principal executive offices are located at 7630 Excelsior Boulevard,
Minneapolis, Minnesota, 55426 and its telephone number is (612) 936-1000.
PAPER WAREHOUSE STORES
FORMAT. The Company developed its current store prototype based on
management's industry and other extensive retail experience and customer
research. Paper Warehouse operates stores that range in size from 3,000
square feet to 8,500 square feet of retail space. Management introduced its
current 8,500 square foot prototype store in 1994 and believes it is the
optimal store format for its future growth. Of the 97 Company-owned stores,
approximately 87% are 6,000 square feet or larger.
Paper Warehouse stores are designed to create a customer-friendly
environment. The Company uses vibrant colors, theme-oriented merchandise
displays and unique products to create a fun and festive shopping experience.
The focal point of the Company's stores is the seasonal display located at the
front of each store, which creates a "store-within-a-store" appearance. These
displays maximize the season's
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selling impact and are updated continuously to promote a fresh image within
the store. To assist customers in coordinating party supplies for any
occasion, the Company locates related departments, such as gift-wrap and
greeting cards, adjacent to one another and displays related merchandise such
as party hats, plates, cups and napkins together within a department.
Customers are able to easily move about the different departments and find
specific product categories due to prominent, easy-to-read signage, bright
lighting and wide aisles. Management believes that the Paper Warehouse store
layout assists customers in finding and coordinating their party supply
needs, as well as encourages browsing, impulse purchases and repeat visits.
CUSTOMER SERVICE. Paper Warehouse seeks to provide a high level of
customer service to enhance its customer-friendly store environment. Store
managers and sales associates are trained to assist customers with party
planning and event coordination. In addition, the Company provides party
planning guides and checklists for graduation, Halloween, Hanukkah, Christmas
and New Year's. The Company's "no hassle" return policy makes it easy for
customers to return or exchange products, which the Company believes
encourages customers to purchase additional quantities. Certain products that
require additional sales assistance, such as balloons and custom printing,
are located near checkout counters where sales associates can readily assist
customers. Management continually monitors its level of customer service by
regular store visits and by employing anonymous "mystery shoppers." Mystery
shoppers visit all Company-owned stores at least once per quarter to 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, the Company
uses 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.
Prior to the opening of a new Company-owned store, store managers
are usually trained intensely for two weeks, depending on prior experience,
and receive additional on-going training. During the new store set-up, a
manager receives additional training from the Company's district management
team. After the store opening, corporate headquarters personnel spend
considerable time overseeing the operations. Each district has a dedicated
trainer who visits the stores to work with the store managers, reinforcing
prior training and providing on-going training. Periodic training sessions
are scheduled for store managers in the central or district offices on
various topics, including human resources, merchandising, loss prevention and
employee supervision. Additional training topics are covered at monthly
managers' meetings and through monthly mailings and the Company's monthly
newsletter.
Paper Warehouse stores are typically open from 9:00 a.m. to 9:00
p.m. Monday through Friday, from 9:00 a.m. to 6:00 p.m. on Saturday and from
11:30 a.m. to 5:00 p.m. on Sunday.
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SITE SELECTION AND LOCATIONS
SITE SELECTION. In order to efficiently cluster stores in
metropolitan markets, the Company has developed a site selection process that
examines various criteria, including population density, demographics,
traffic counts, storefront visibility and presence, local competition, lease
rates and parking availability. The Company locates its stores in or near
visible high traffic strip mall centers in close proximity to prominent mass
merchandise, discount or grocery store anchors. The Company's strategy of
clustering stores in metropolitan markets promotes customer convenience and
creates favorable economies of scale for marketing, advertising and
operations.
LOCATIONS. As of January 29, 1999, Paper Warehouse had 97
Company-owned stores in the following locations:
<TABLE>
<CAPTION>
LOCATIONS NUMBER OF STORES
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<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
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TOTAL COMPANY - OWNED STORES......................................... 97
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</TABLE>
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MERCHANDISING
The Company offers a broad selection of party supplies and paper
goods for a wide variety of celebratory occasions and everyday uses,
including birthdays, weddings, baby showers, graduations and other family and
religious celebrations, as well as seasonal events such as Valentine's Day,
Easter, Fourth of July, Halloween, Thanksgiving, Christmas, Hanukkah and New
Year's. Through its 8,500 square foot store prototype, the Company offers a
comprehensive selection of over 19,000 SKUs, providing customers the
convenience of one-stop shopping for all party supplies and paper goods. The
Company's merchandise is organized by party themes, and the prominent signage
and wide aisles allow customers easy access to coordinate the merchandise
required for all party occasions. The Company also believes that its
extensive selection, combined with high in-stock positions, often stimulates
customers to purchase additional products.
The Company's merchandise offering consists of the following:
PARTY SUPPLIES. The Company offers an extensive selection of
complementary and coordinating party supplies in unique and traditional
patterns, colors and designs. The Company's party supplies include
invitations, plates, napkins, party favors, streamers, banners, candles,
balloons, party snacks and seasonal novelties such as Halloween costumes and
Christmas decor. The Company's 8,500 square foot store prototype offers over
140 ensembles of party goods for many occasions, which include party hats,
plates, napkins and cups. A significant portion of the Company's party goods
ensembles involves the use of movie and television figures, animated
characters and celebrity likenesses licensed to the manufacturer of such
ensembles.
GIFT WRAPPING PRODUCTS. The Company offers a wide assortment of gift
wrapping products in various patterns and colors, including gift wrap, gift
bags, gift boxes, tissue paper, ribbons, bows, shred and gift tags. In
addition to holiday selections, the Company offers distinctive gift packaging
products for special occasions such as birthdays, graduations, weddings, baby
showers and other family and religious celebrations.
GREETING CARDS. The Company features a wide variety of special
occasion, seasonal and everyday greeting cards. The Company's 8,500 square
foot prototype store offers over 10,000 titles. The Company carries
traditional, humorous and contemporary brand name greeting cards at
significantly lower prices than national greeting card chain stores.
HOUSEHOLD AND CATERING FOOD SERVICE SUPPLIES. The Company offers
paper supplies such as toilet paper, paper towels, dispenser towels, plates,
cups, serving trays and bowls and table coverings. In addition to offering
such products to the Company's regular party goods customers, the Company is
a paper product supplier for many commercial users of paper products,
including catering companies and non-profit organizations.
The Company provides customers with everyday low pricing on all
products, at discounts ranging from 10% to 50% off the manufacturer's
suggested retail price. In addition, the Company guarantees that it will meet
or beat any advertised price on the products it offers. The Company
reinforces its everyday low price strategy with signs prominently displayed
throughout its stores and extensive promotional advertising.
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PRODUCT SOURCING AND INVENTORY MANAGEMENT
The Company purchases its merchandise from approximately 150
suppliers. In fiscal 1998, the Company's largest supplier, Amscan Holdings,
Inc., accounted for approximately 14% of the Company's purchases and the 8
largest suppliers represented approximately 51% of the Company's purchases.
The Company does not have long-term purchase commitments or exclusive
contracts with any of its suppliers. Management believes that alternative
sources of product are available at comparable terms and conditions. The
Company considers numerous factors in supplier selection, including price,
payment terms, product offerings and product quality.
The Company negotiates pricing with suppliers on behalf of all
Company-owned and franchise stores and believes that its buying power enables
it to receive favorable pricing terms and to more readily obtain high demand
merchandise. Although franchise stores are responsible for purchasing their
own inventory, franchisees are able to make purchases on the Company's
negotiated pricing terms. As the Company adds new stores, the Company
believes it will increase the volume of its inventory purchases and benefit
further from increased discounts and trade allowances and more favorable
payment terms from its suppliers.
More than 95% of the Company's merchandise is shipped directly from
the supplier to the Company's stores. Drop shipment of merchandise provides
the Company with flexibility in pursuing new markets without the geographical
constraints and costs associated with a central distribution system.
Deliveries are processed and inventory items are inspected, sorted and priced
in a segregated receiving area in the back of the store (approximately 10% of
total gross square feet per store) before being placed on the selling floor.
The Company believes that it realizes substantial savings by not maintaining
a central distribution system.
In addition, the Company uses cross-dock distribution for suppliers
that will not ship directly to each store, such as overseas suppliers, and to
facilitate opportunistic volume purchases. The Company maintains space for
cross-dock distribution in each of the Company's principal metropolitan
markets, including Minneapolis/St. Paul, Denver, Kansas City, Oklahoma City,
Tucson, Omaha and Seattle, for separation and redistribution to the other
Paper Warehouse stores within that market. The Company's primary cross-dock
facility in Minneapolis is designed for the separation and distribution of
merchandise system wide.
ADVERTISING AND MARKETING
The Company maintains aggressive advertising and marketing programs.
The Company's strategy of clustering stores in metropolitan markets enables
it to cost effectively employ a variety of media. The Company advertises
primarily through newspaper, direct mail inserts and radio. Paper Warehouse
also promotes products through the use of direct mail mini-catalogs as well
as through in-store coupon books and party planning aids.
The Company's advertising efforts are designed to educate consumers
about its convenient store locations, promote the breadth and value of its
product offering and stress the customer service levels of its sales
associates. The Company's advertising consists primarily of full color
newspaper and direct mail inserts designed around major holidays and the
spring and summer seasons. For fiscal 1998, the Company distributed 17
newspaper and direct mail inserts. Inserts are supplemented by radio
advertising for New Year's, Easter, the spring season, Graduation, Halloween,
and Christmas. In addition, Paper Warehouse typically advertises the opening
of new stores in newspaper and direct mail inserts as well as on radio.
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Management has initiated a targeted direct mail program to increase
sales for special events. The Company currently mails mini-catalogs of
wedding and graduation party goods to brides-to-be and families of high
school graduates. Management has recently expanded this direct mail program
to other special occasions such as a child's first birthday, and to
organizations purchasing basic party and paper goods for commercial or
institutional use. The Company's institutional customers include a variety of
small businesses, caterers, food service companies, schools, synagogues,
churches, civic groups and other organizations.
For fiscal 1998, the Company spent approximately 75% of its
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.
INFORMATION SYSTEMS
The Company's information systems are integral to the Company's
continued expansion and enhancing its competitive position in the industry.
The Company completed the installation of Point of Sale ("POS") terminals in
all its Company-owned stores in the third quarter of fiscal 1996. The POS
terminals allow price lookup and inventory tracking by SKU. By polling
transaction data nightly from each store's POS terminals, the system provides
daily sales information and inventory levels at the store, department, class
and SKU level, allowing the corporate office to monitor daily sales, gross
profit, pricing and inventory by SKU across its entire store base. Also, the
Company's automatic merchandise replenishment system uses this information to
allocate goods to individual stores based on specific SKU requirements.
The Company 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 the Company to purchase
new hardware. Switching hardware platforms provided the Company the benefit
of parallel operations during the conversion process. In addition, the
Company has 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 management
with more sophisticated tools to utilize the information collected by its POS
terminals. The Company's previous information systems were already performing
most of the functions of the JDA Retail Software Package; however, management
believes JDA has improved the efficiency of these tasks. In addition, the
Company plans to develop enhancements such as data warehousing and electronic
data interchange to improve the Company's ability to systematically manage
its inventory.
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FRANCHISING
The Company has offered franchises of its Paper Warehouse store
concept since October 1987. As of January 29, 1999, the Company had 46
franchise stores located in the following states:
<TABLE>
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LOCATIONS NUMBER OF STORES
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<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
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TOTAL FRANCHISE STORES.......................................... 46
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</TABLE>
The Company establishes franchise stores in markets that are not
contiguous to metropolitan areas with Company-owned stores. In addition, the
Company grants development rights in metropolitan markets where the Company
does not plan to open Company-owned stores. The Company believes that these
markets typically are not served adequately by the party goods industry. In
addition to generating franchise revenues, franchise stores benefit the
Company through increased name recognition and increased buying power from
its suppliers.
The Company assists franchisees in all aspects of opening and
operating a Paper Warehouse store. During the pre-opening phase, the Company
support includes site evaluation and assistance with lease negotiations,
store build-out assistance, fixture, equipment, supplies and inventory
procurement, opening advertising materials and operations training. The
Company provides its franchisees with ongoing services such as business
planning, operations and promotional activities. In addition, the Company
performs the merchandising process for its franchisees. The Company makes
periodic inspections of its franchise stores to ensure that the franchisee is
complying with the Company's various requirements and quality standards. The
Company 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.
Paper Warehouse franchise revenues are comprised of initial franchise
fees and continuing royalty payments. The Company's current initial franchise
fee ranges from $19,000 to $25,000 for new
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franchisees, depending on the type of store. The Company offers a special
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 the Company a continuing royalty equal
to a percentage of their weekly gross sales. Historically, this percentage
has varied from 3% to 5%. Currently, new franchises pay the Company a
continuing royalty of 4% of gross sales.
The franchisee's initial investment depends primarily upon store
size. This investment includes the initial franchise fee, real estate and
leasehold improvements, fixtures and equipment, signs, point-of-sale systems,
deposits and business licenses, initial inventory, opening promotional
expenses and working capital. The Company may also require franchisees to pay
a weekly advertising fee not to exceed 1% of gross sales, although to date it
has not required such fee. Each franchisee is granted a license from the
Company for the right to use certain intellectual property rights, including
the mark PAPER WAREHOUSE or PARTY UNIVERSE and related designs. The Company's
franchise agreements provide for a ten-year term and contain conditional
renewal options.
COMPETITION
The party and paper supply retailing business is highly competitive.
In order to compete successfully against other party good retailers, the
Company believes it must maintain convenient locations, broad merchandise
selections, and competitive pricing and strong customer service. Paper
Warehouse stores compete with a variety of smaller and larger retailers,
including specialty party supply retailers, other superstores such as Party
City and Factory Card Outlet, card shops such as Hallmark and designated
departments in mass merchandisers, discount retailers, toy stores, drug
stores, supermarkets and department stores such as Target and Wal-Mart. Many
of these competitors have substantially greater financial and personnel
resources than the Company. The Company may also encounter additional
competition from new entrants in the future in the Company's existing or
planned new markets. Increased competition by existing or future competitors
may have a material adverse effect on the Company.
TRADEMARKS AND SERVICE MARKS
The marks PAPER WAREHOUSE and PARTY UNIVERSE are federally
registered trademarks owned by the Company. The Company is aware of the
common law usage of the name PAPER WAREHOUSE by several companies in various
parts of the United States, which may prevent the Company from using that
name in certain regional markets. In markets where PAPER WAREHOUSE cannot be
used by the Company, it intends to use the name PARTY UNIVERSE, for
Company-owned and franchise stores. Because of the Company's regional
approach to advertising and store clustering, the Company believes that the
use of a single trademark within each market is more important to its growth
and business strategy than the use of one mark nationally.
GOVERNMENT REGULATION
As a franchiser, the Company must comply with rules and regulations
adopted by the Federal Trade Commission and with state laws that regulate the
offer and sale of franchises. The Company also must comply with a number of
state laws that regulate certain substantive aspects of the
franchiser-franchisee relationship. These laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibiting interference with the right of free
association among franchisees and by regulating illegal discrimination among
franchises with regard to charges, royalties or fees. To date, those laws
have not precluded the Company from seeking franchisees in any given area and
have not had a material adverse effect on the Company's operations.
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All Paper Warehouse stores must comply with regulations adopted by
federal agencies and with licensing and other regulations enforced by state
and local health, sanitation, safety, fire and other departments. More
stringent and varied requirements of local governmental bodies with respect
to zoning, land use and environmental factors and difficulties or failures in
obtaining the required licenses or approvals can delay and sometimes prevent
the opening of a new store. In addition, the Company must comply with the
Fair Labor Standard Act and various state laws governing matters such as
minimum wage, overtime and other working conditions. The Company also must
comply with the provisions of the Americans with Disabilities Act of 1990,
which generally requires that employers provide reasonable accommodation for
employees with disabilities and that stores be accessible to customers with
disabilities.
EMPLOYEES
As of January 29, 1999, the Company employed approximately 320
full-time and approximately 680 part-time employees. The Company considers
its relationships with its employees to be good. None of the Company's
employees are covered by a collective bargaining agreement.
CERTAIN RISKS
In addition to factors discussed elsewhere in this Form 10-K, the
following are important factors that could cause actual results or events to
differ materially from those contained in any forward-looking statement made
by or on behalf of the Company.
RISKS ASSOCIATED WITH GROWTH
The Company's ability to increase its sales and net earnings will
depend in part on its ability to open stores in new and existing markets and
to operate such stores on a profitable basis. Paper Warehouse, which
currently operates 97 Company-owned stores, opened 27 Company-owned stores
during fiscal 1998 and 9 Company-owned stores during fiscal 1997. In fiscal
1999, Paper Warehouse expects to open fewer than 10 Company-owned stores.
These new stores are expected to be opened in existing markets where the
Company currently has Company-owned stores. If satisfactory sites are not
available in such markets or there is a change in the competitive
environment, alternative markets may be selected. Two of the Company's
primary competitors currently have several stores in these markets.
RISK OF OPENING NEW STORES
The Company's planned expansion in existing markets is subject to
many risks, including, but not limited to, failure to identify or the
unavailability of suitable sites on acceptable lease terms and the failure to
obtain qualified management and other store personnel. Operating stores in
different geographic markets may present competitive and merchandising
challenges that are different from those currently faced by the Company in
its existing geographic markets. Such challenges include adapting to local
tastes and customs as well as competing against local established and
familiar businesses that may have innovative or other unique techniques for
marketing party supplies and paper goods. The Company's expansion plans may
also place significant demands on the Company's management, financial
controls, operations and information systems and may cause the Company to
incur higher costs relating to marketing and operations. The Company's
expansion plans will also require an increase in Company personnel,
particularly store managers and sales associates to operate the Company's new
stores. There can be no assurance that the Company will be able to continue
to attract, develop, train and retain the personnel necessary to pursue and
maintain its growth and business strategies.
The Company's continued growth will depend on its ability to
increase sales in its existing stores. The opening of additional
Company-owned stores in existing markets could reduce sales from existing
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stores located in or near those markets. Although the Company believes it has
planned carefully for the implementation of its expansion program, there can
be no assurance that such plans can be executed as presently envisioned or
that the implementation of those plans will not have an adverse effect on the
Company's business, financial condition and results of operations.
RISK OF REMODELING/RELOCATING EXISTING STORES
The Company plans, in fiscal 1999, to remodel approximately 20
stores and relocate 4 existing stores is subject to many risks including, but
not limited to, loss of sales during the remodeling or relocation period,
cost overruns of the remodeling or relocation and failure to achieve
increased sales after the remodeling or relocation. Stores are remodeled
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 new signage to as extensive as a total makeover.
Stores are relocated when the store is small and there is no room to expand
at the existing location, the lease expires, or when a store is not
performing in its present location and a better location is available.
Although the Company believes it has planned carefully for the implementation
of its remodeling and relocation program, there can be no assurance that such
plans can be executed as presently envisioned or that the implementation of
those plans will not have an adverse effect on the Company's business,
financial condition and results of operations.
POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company believes that the combination of cash flow from
operations and available borrowing capacity under a revolving credit
facility, will be adequate to handle its cash requirements through fiscal
1999, including the cash needed to open new stores. The Company's current
revolving line of credit expires May 31, 1999. The Company has typically
renegotiated its revolving line of credit in the spring as it is doing this
year. The Company also anticipates that additional cash will be needed in the
ordinary course of business to support its growth, and is currently
negotiating with a prospective lender to replace its existing revolving
credit facility. The Company expects consummation of the replacement
revolving line of credit by the time the current revolving line of credit
expires. No assurance can be given that additional financing will be
available or will be available on terms favorable to the Company. Failure of
the Company to extend its current revolving credit facility and to secure
replacement financing could have a material adverse effect on the Company.
HIGHLY COMPETITIVE MARKET
The party supplies and paper goods retailing business is highly
competitive. Paper Warehouse stores compete with a variety of smaller and
larger retailers, including specialty party supply retailers (including other
superstores), card shops and designated departments in mass merchandisers,
discount retailers, toy stores, drug stores, supermarkets and department
stores. Many of the Company's competitors have substantially greater
financial and personnel resources than the Company. The Company may also
encounter additional competition from new entrants in the future in the
Company's existing markets. Increased competition by existing or future
competitors may have a material adverse effect on the Company.
RISK OF POTENTIAL ACQUISITIONS
As part of its growth strategies, the Company periodically considers
strategic acquisitions of other retail stores or chains in the party supply
industry. As of the date of this Annual Report on Form 10-K, the Company has
no existing agreements or commitments to affect any material acquisitions.
There can be no assurance that suitable acquisition candidates will be
identified, that acquisitions can be consummated or that new stores acquired
through such acquisitions can be operated profitably or integrated
successfully into the Company's operations. Further, growth through
acquisition entails certain risks to the Company, including unanticipated
business uncertainties, diversion of management attention, legal liabilities
and significant costs and expenses to the Company to complete the
acquisition,
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<PAGE>
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF SEASONAL AND QUARTERLY REVENUE AND OPERATING FLUCTUATIONS
The Company's results of operations have historically fluctuated
from quarter to quarter for such reasons as seasonal variations in revenues
and operating expenses, the amount and timing of revenues contributed by new
Company-owned and franchise stores, the costs associated with the opening of
new stores and expenses incurred to support the Company's expansion strategy.
As a result of these seasonal variations, a significant portion of the
Company's operating income is generated in the second and fourth fiscal
quarters. Historically, the Company has engaged in more promotional activity
during the third quarter than the second quarter, which results in reduced
operating income for the third quarter as compared to the second quarter. Any
factors negatively affecting the Company during the second and fourth fiscal
quarters could have a material adverse effect on the Company's financial
condition and results of operations for the entire fiscal year. Further, as a
result of the seasonality of the Company's revenue, the Company expects to
incur a loss in the first quarter of each year for the foreseeable future.
RISKS ASSOCIATED WITH FRANCHISEES
During fiscal 1999 the Company plans to establish approximately 15
new franchise stores. The continued growth and success of the Company is
dependent in part upon its ability to attract, contract with and retain
qualified franchisees and the ability of those franchisees to operate their
stores successfully and promote and develop the Paper Warehouse store
concept. Although the Company has established criteria to evaluate
prospective franchisees and the Company's franchise agreements include
certain operating standards, each franchisee operates its store independently
and the Company is limited in its ability to influence day-to-day store
operations. There can be no assurance that franchisees will be able to
operate Paper Warehouse stores successfully in their franchise areas in a
manner consistent with the Company's concepts and standards. Accordingly, the
Company's franchisees could operate their stores in a manner that reduces the
gross revenues of such stores, and therefore reduces the franchise revenue
received by the Company.
FAILURE TO ANTICIPATE AND/OR RESPOND TO MERCHANDISING TRENDS
The Company's success depends, in part, on its ability to anticipate
and respond, in a timely manner, to changing merchandise trends and consumer
demands. The Company makes merchandising decisions well in advance of the
seasons when such merchandise will be sold. Accordingly, any delay or failure
by the Company in identifying and responding to emerging trends could
adversely effect consumer acceptance of the merchandise in the Company's
stores, which would have a material adverse effect on the Company's business,
financial condition and results of operations. Certain licensed products sold
by the Company are in great demand for short time periods making it difficult
to project inventory needs for such products. Significant deviations from
projected demand for its products, in particular licensed products, could
have a material adverse effect on the Company's business, financial condition
and results of operations, either from lost sales due to insufficient
inventory, higher carrying costs associated with slower turning inventory or
reduced or eliminated margins due to the need to mark down excess inventory.
DEPENDENCE ON SUPPLIERS
The Company purchases its merchandise from approximately 150
suppliers. For the fiscal year ended January 29, 1999, the Company's largest
supplier accounted for approximately 14% of the Company's purchases and the 8
largest suppliers represented approximately 51% of the Company's purchases.
The Company's future success is partially dependent upon its ability to
maintain good
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<PAGE>
relationships with its principal suppliers. Many of the Company's principal
suppliers currently provide the Company with certain incentives, such as
volume purchasing allowances and trade discounts. A reduction or
discontinuance of these incentives could have a material adverse effect on
the Company. The Company does not have long-term contracts with any of its
suppliers, and any supplier could discontinue selling to the Company at any
time. While the Company believes its supplier relationships are good, the
failure by the Company to maintain good relationships with its principal
suppliers could have a material adverse effect on the Company's business,
financial condition or results of operations.
EFFECT OF CHANGES IN CONSUMER PREFERENCES AND ECONOMIC CONDITIONS
The party goods business would be adversely affected if consumer
demand for single-use, disposable party goods were to diminish. For example,
if cost increases in raw materials such as paper or plastic were to cause the
Company's prices to increase significantly, consumers might decide to forgo
the convenience associated with single-use, disposable products and use
standard dinnerware and flatware. Similarly, changes in consumer preferences
away from disposable products and in favor of reusable products for
environmental or other reasons could reduce the demand for the Company's
products. In addition, future adverse changes in economic conditions
affecting disposable consumer income, such as employment levels, the rate of
inflation, interest rates and taxation, could have an adverse effect on the
party goods business. Because its operations are located principally in seven
metropolitan areas, the Company is also subject to certain regional risks,
such as the economy, weather conditions, natural disasters and governmental
regulations. If any region in which the Company operates stores were to
suffer an economic downturn or other adverse regional events were to occur,
there could be an adverse impact on the Company's sales and profitability and
its ability to implement its planned expansion programs.
GOVERNMENT REGULATION
The Company, as a franchiser, is subject to regulation by the
Federal Trade Commission and also must comply with state laws regulating the
offer and sale of franchises and limiting the Company's ability to terminate
or refuse to renew franchises. The failure to obtain or maintain approvals to
sell franchises could adversely affect the Company. The Company and its
franchisees are subject to laws governing their relationships with employees,
including minimum wage requirements, overtime, working and safety conditions
and citizenship requirements. Because a significant number of the Company's
employees are paid at rates related to the federal minimum wage, increases in
the minimum wage would increase the Company's labor costs.
CONTROL BY MANAGEMENT
Yale T. Dolginow, President and Chief Executive Officer, and Brent
D. Schlosser, Executive Vice President, own or have the right to vote and
control the disposition of 41.1% of the Company's outstanding Common Stock.
Accordingly, these persons, acting together, may have the ability to elect
the Company's directors and determine the outcome of other corporate actions
requiring shareholder approval. Such control by Mr. Dolginow and Mr.
Schlosser could have the effect of delaying, deferring or preventing a change
in control of the Company.
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<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE
The market price for the Company's Common Stock may be volatile and
fluctuate depending on various factors, including the general economy, stock
market conditions, analyst recommendations, news announcements concerning the
Company or the party supplies and paper goods industry, variations in the
Company's quarterly and annual operating results and other factors. The stock
market in general, and the market for shares of small capitalization stocks
in particular, have experienced significant price and volume fluctuations
that often have been unrelated to the operating performance of particular
companies. These market fluctuations may adversely effect the market price of
the Company's Common Stock.
POSSIBLE ISSUANCE OF PREFERRED STOCK
Pursuant to the Company's Amended and Restated Articles of
Incorporation, the Board of Directors has authority to fix the rights,
preferences, privileges and restrictions, including voting rights, of any
shares of the Company's preferred stock and to issue such stock without any
further vote or action by the shareholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
and preferences of the holders of any shares of preferred stock that the
Board of Directors may create and issue in the future. The issuance of any
such preferred stock could have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, certain
provisions of Minnesota law applicable to the Company could have the effect
of discouraging certain attempts to acquire the Company, which could deprive
the Company's shareholders of opportunities to sell their shares of Common
Stock at prices higher than prevailing market prices and may also have a
depressive effect on the market price of the Company's Common Stock.
LABOR CONDITIONS
The Company's performance is dependent on attracting and retaining a
large and growing number of quality employees. Many of these employees are in
entry level or part time positions with historically high rates of turnover.
The Company's ability to meet its labor needs while controlling costs is
subject to external factors such as unemployment levels, minimum wage
legislation, and changing demographics.
S-CORPORATION STATUS; DISTRIBUTIONS
Since 1993 and until the Company's initial public offering, the
Company was treated as an S-Corporation under the Internal Revenue Code of
1986 as amended (the "Code"). In connection with the public offering, the
Company converted to a C-Corporation in November 1997. The Company believes
that it has met the S-Corporation requirements and, as of the date hereof,
the Internal Revenue Service (the "IRS") and other applicable state taxing
authorities have not challenged the Company's S-Corporation status. If, for
any reason, the Company were subsequently determined by the IRS or other
applicable state taxing authorities not to have met S-Corporation
requirements, the Company could be liable to pay corporate taxes on its
income at the effective corporate tax rate for all or a part of the period
from February 1, 1993 through the consummation of the initial public
offering, plus interest and possibly penalties.
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<PAGE>
ITEM 2. PROPERTIES.
The Company purchased an approximate 23,000 square foot building for
its headquarters and cross-dock facility in Minneapolis, Minnesota in 1995.
As of January 29, 1999, the secured debt on such property was $887,664, of
which $492,383 was owed to Richfield Bank & Trust Co. and $395,281 was owed
to the U.S. Small Business Administration. Richfield Bank & Trust Co. holds a
first mortgage on such property and the U.S. Small Business Administration
holds a second mortgage. The U.S. Small Business Administration's second
mortgage is also guarantied by Yale T. Dolginow. Paper Warehouse currently
leases the locations for its 97 Company-owned stores. The Company anticipates
that its new Company-owned stores will typically have ten-year leases with at
least one five-year renewal option.
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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation and is not
aware of any threatened litigation that would have a material adverse effect
on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended January 29, 1999.
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<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, their ages and the offices
held, as of March 1, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Yale T. Dolginow 56 President, Chief Executive Officer and Director
Brent D. Schlosser 45 Executive Vice President and Director
Cheryl W. Newell 45 Vice President and Chief Financial Officer
Diane C. Dolginow 55 Secretary and Director
Steven P. Durst 30 Vice President of Merchandising
Michael A. Anderson 38 Controller/Treasurer
Steven R. Anderson 52 Vice President and Chief Information Officer
Carol A. Carroll 48 Vice President of Stores
Willard V. Lewis 63 Vice President of Store Development
Francis E. O'Neil 64 Vice President of Franchising
Kristen Lenn 31 Director of Human Resources
</TABLE>
YALE T. DOLGINOW has been President, Chief Executive
Officer and a Director of the Company since 1986. From 1982 to 1986, Mr.
Dolginow served as President and Chief Executive Officer of Carlson Catalog
Showrooms, Inc., which was a chain of 59 catalog showrooms located throughout
the Midwest. From 1981 to 1982, Mr. Dolginow served as Assistant to the
President of Dayton Hudson Corporation. From 1978 to 1980, Mr. Dolginow
served as President of Modern Merchandising, Inc., a 70-store retail chain
operating in several markets, and as Executive Vice President from 1977 to
1978. From 1968 until 1976, Mr. Dolginow was the Chief Executive Officer and
President of Dolgin's, Inc., a chain of catalog showroom stores that operated
in the Kansas City and St. Louis metropolitan markets. Mr. Dolginow and Diane
C. Dolginow are husband and wife.
BRENT D. SCHLOSSER has been Executive Vice President and a
Director of the Company since 1986. From 1982 to 1986, Mr. Schlosser served
in various capacities, including Vice President Marketing/Buying and
Executive Vice President Marketing/Merchandising, at Carlson Catalog
Showrooms, Inc. 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 has been Vice President and Chief
Financial Officer of the Company since August 1997. From 1991 to August 1997,
Ms. Newell was a Vice President with the Corporate Banking Group at U.S.
Bancorp, a bank holding company, 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 k.n.a.
Wells Fargo Corporation.
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<PAGE>
DIANE C. DOLGINOW has been a Director of the Company since
1986 and Secretary since August 1997. Ms. Dolginow was a Director of Dolgin's
Inc. from 1968 to 1976, and since 1994 has been a Director on the National
Advisory Board of School of Education at University of Kansas. Ms. Dolginow
and Mr. Dolginow are husband and wife.
STEVEN P. DURST has been Vice President of Merchandising
since June 1998. Prior to that time and since 1997 Mr. Durst was Vice
President of Information Systems for the Company. 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.
MICHAEL A. ANDERSON has served as Controller/Treasurer of
the Company since 1997. Prior to that time and since 1991, Mr. Anderson was
Controller of the Company. 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 has served as Vice President and Chief
Information Officer of the Company since 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 has been Vice President of Stores of the
Company since 1997. Prior to that time and since 1994, Ms. Carroll was
Director of Stores of the Company. 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 has been Vice President of Store
Development of the Company since 1997. Prior to that time and since 1992, Mr.
Lewis was Director of Development. From 1990 to 1992, Mr. Lewis served as
Vice President of Network Facilities Professionals, Inc., a Minnesota-based
computer software firm. Mr. Lewis was employed by Dolgin's, Inc. from 1970 to
1985, served as Vice President and Treasurer from 1973 to 1977 and President
and General Manager from 1977 to 1985.
FRANCIS E. O'NEIL has served as Director of Franchising
since 1997. From 1995 to 1997, Mr. O'Neil was Director of Marketing at
Graphics Xpress, a subsidiary of Meyers Printing Co. From 1993 to 1995, Mr.
O'Neil was a New Business Consultant at Deluxe Corporation. From 1990 to
1993, he was Vice President of Marketing for Insty-Prints, Inc. From 1985 to
1996, Mr. O'Neil provided consulting services to various firms, including
Paper Warehouse as President of Franchise Forum, Inc. Mr. O'Neil has provided
consulting services to the Company on a regular basis since 1987.
KRISTEN LENN has served as Director of Human Resources
since August 1997. Prior to that time and since 1994, 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. From
1989 to 1994, Ms. Lenn was employed by various organizations as a human
resources generalist.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
RANGE OF COMMON STOCK
The Company completed its initial public offering on November 28,
1997. Since that date the Common Stock has been quoted on the Nasdaq National
Market under the symbol "PWHS."
The following table summarizes the high and low sale prices per
share of the Company's Common Stock for the periods indicated, as reported on
the Nasdaq National Market:
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
<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 1997
----------------
<S> <C> <C>
Fourth Quarter (since November 25, 1997) $8 5/8 $5 5/8
</TABLE>
On April 21, 1999, the last reported sale price for the Company's
Common Stock was $1.69 per share. As of April 21, 1999, the Company had
approximately 61 holders of record of the Company's Common Stock.
The Company has never declared or paid any cash or stock dividends
with respect to its Common Stock. The current policy of the Company and its
Board of Directors is to retain any earnings to provide for the growth of the
Company.
The Company did not have any unregistered sales of equity securities
during the fourth quarter of fiscal 1998.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data presented below should be read in
conjunction with the Financial Statements and notes thereto included
elsewhere in this Form 10-K, and in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Form 10-K. The Selected Financial Data as of and for the
five years ended January 29, 1999 have been derived from the Consolidated
Financial Statements of the Company audited by KPMG Peat Marwick LLP,
independent auditors.
SUMMARY OF FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
OPERATING DATA:
Number of stores open at end of period:
Company-owned stores.................... 97 73 64 55 42
Franchise stores........................ 46 51 50 53 29
Remodeled stores........................ 3 3 1 8 8
Comparable store sales increase (2)..... 2.4% 8.3% 7.8% 13.6%(3) 16.6%
BALANCE SHEET DATA:
Working capital........................... $ 5,212 $9,383 $1,701 $ 925 $2,301
Total assets.............................. 29,528 21,017 16,270 14,934 8,211
Total debt (4)............................ 7,864 1,217 11,240 8,021 3,619
Total stockholders' equity................ 14,090 14,594 1,793 3,124 2,646
</TABLE>
- ------------------------
(1) Since February 1, 1993 through November 28, 1997, the Company had been
an S-Corporation and during this period was not generally subject to
corporate income taxes. The Statement of Operations data during this
period reflects a pro forma provision for income taxes as if the
Company was subject to corporate income taxes for such periods. This
pro forma provision for income taxes is computed using a combined
federal and state tax rate of 38%.
(2) Company-owned stores enter the comparable store sales base at the
beginning of their 13th month of operations. Stores in which retail
square footage is increased more than 50%, or stores that are
relocated, are no longer included in the comparable store sales base
until 12 months have passed.
(3) For purposes of computing the increase in comparable store sales, this
computation assumes fiscal 1995 was a 52-week year.
(4) Total debt consists of total current and long-term debt and does not
include capital lease obligations.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the Company's results of operations and
its liquidity and capital resources should be read in conjunction with
"Selected Financial Data" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Form 10-K.
OVERVIEW
Paper Warehouse is a growing chain of stores specializing in party
supplies and paper goods operating under the names Paper Warehouse and Party
Universe. The current management team purchased the business in 1986 and
incorporated the Company in Minnesota in 1987. At the time of the
acquisition, the Company consisted of three stores located in the
Minneapolis/St. Paul metropolitan area. In 1987, the Company began granting
franchises. Over the past 10 years, the Company has grown to an aggregate of
143 stores, including 97 Company-owned stores and 46 franchise stores
throughout 24 states. In growing the number of Company-owned stores,
management has employed a strategy of clustering stores in the Company's
principal markets to provide its customers with convenient store locations,
expand its total market share and achieve favorable economies of scale.
The Company completed its initial public offering on November 28,
1997. All 1,778,000 shares of Common Stock were offered and sold by the
Company. Proceeds to the Company, net of offering expenses, were
approximately $11.7 million. On December 24, 1997, the underwriters partially
exercised their over allotment option and the Company sold an additional
207,800 shares of Common Stock. Proceeds to the Company, net of offering
expenses, were approximately $1.4 million. The proceeds from the sale of
Common Stock were used to retire the Company's revolving line of credit,
prepay subordinated debt, and retire other existing indebtedness. The balance
of the proceeds was used to finance new store openings and fund further
expansion.
Prior to November 28, 1997, the Company elected to be treated for
federal and state income tax purposes as an S-Corporation under the
Internal Revenue Code of 1986, as amended, and comparable state tax laws. For
the purpose of discussion and analysis, the Company has presented a pro forma
tax provision and pro forma net income. These pro forma amounts represent
what the income tax provision and the net income would have been if the
Company had been a C-Corporation and thus was subject to Federal income
taxation for the entire period. This pro forma provision is computed using a
combined Federal and state income tax rate of 38%.
Total revenue consists of Company-owned store sales and franchise
revenues. Franchise revenues are generated from royalties received on sales,
generally 4% of the store's sales, and initial franchise fees, which are
recognized at the time the franchisee signs a lease for the store.
Company-owned stores enter the comparable store sales base at the beginning
of their 13th month of operations. Stores in which retail square footage is
increased more than 50%, or stores that are relocated, are no longer included
in the comparable store sales base until 12 months have passed. Cost of
products sold and occupancy costs includes the direct cost of merchandise,
plus handling and distribution, and certain occupancy costs. Store operating
expenses include all costs incurred at the store level, such as advertising,
credit card processing fees, and store payroll. General and administrative
expenses include corporate administrative expense for Company-owned stores
and expenses relating to franchising, primarily payroll, legal, travel, and
advertising.
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<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 29, 1999 (52 WEEKS) COMPARED TO FISCAL YEAR ENDED
JANUARY 30, 1998 (52 WEEKS)
REVENUE. Company-owned store revenue 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, the Company
opened 17 company-owned stores, purchased 10 franchise stores, and closed 3
stores. Stores were closed when leases expired, or the store was relocated
to a larger space.
The number of franchise stores decreased to 46 stores at the end of
fiscal 1998 from 51 franchise stores at the end of fiscal 1997. Nine new
franchise stores were opened, ten franchise stores were sold, two franchise
stores were closed and two franchise stores were terminated. Franchise
revenue increased 9.5% to $1.3 million for fiscal 1998 from $1.2 million for
fiscal 1997. 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 revenue, as compared to $35.0 million or 67.5% of Company-owned store
revenue 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 revenue is primarily related to one-time
events that decreased the cost of product.
STORE OPERATING EXPENSES. Store operating expenses for fiscal 1998
were $15.2 million or 24.4% of Company-owned store revenue, as compared to
$11.5 million or 22.2% of Company-owned store revenue in fiscal 1997. The
increased percentage was primarily attributable to increases in store labor,
and secondarily to increased store operating expenses. The largest increase
was in payroll and related benefits. The average hourly wage rates continue
to increase due to tight labor markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $7.6 million or 12.0% of total revenue in fiscal 1998 compared
to $5.5 million or 10.4% of total revenue in fiscal 1997. The increase in
general and administrative expenses is 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
the Company's purchases of franchise stores.
INTEREST EXPENSE. Interest expense, net of interest income,
decreased $543,000 to $254,000, or .4% of total revenues in fiscal 1998 from
$798,000 or 1.5% of total revenues, in fiscal 1997. The Company used the net
proceeds of its initial public offering to repay certain bank debt,
subordinated debt, and shareholder notes, and to fund new store growth. The
Company did not borrow under its bank revolving line of credit until late in
the second quarter of fiscal 1998.
NET LOSS. As a result of the factors discussed above, the Company
had a net loss of $521,000 in fiscal 1998. This compares to a pro forma net
loss of $207,000 in fiscal 1997.
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<PAGE>
FISCAL YEAR ENDED JANUARY 30, 1998 (52 WEEKS) COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997 (52 WEEKS)
REVENUE. Company-owned store revenue increased 23.6% to $51.8
million for fiscal 1997 from $41.9 million for fiscal 1996. 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 1997 over the prior period.
The number of franchise stores increased to 51 at the end of fiscal
1997 from 50 franchise stores at the end of fiscal 1996. Franchise revenue
increased 4.6% to $1.2 million for fiscal 1997 from $1.1 million for fiscal
1996. Initial franchise fees decreased 57.0% or $94,000 due to a reduction in
the number 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 was $35.0 million or 67.5% of Company-owned
store revenue, as compared to $27.9 million or 66.7% of Company-owned store
revenue 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 Company-owned store revenue is 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 revenue, as compared to
$8.7 million or 20.8% of Company-owned store revenue in fiscal 1996. The
increase as a percentage of Company-owned store revenue 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 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 Company
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 revenue in fiscal 1997 compared
to $4.2 million or 9.9% in fiscal 1996. The increase in general and
administrative expenses is primarily attributable to necessary infrastructure
and additional staff to support the growing Company-owned store base.
Additionally, in fiscal 1997, the Company increased its senior management
team with key additions.
INTEREST EXPENSE. Interest expense, net of interest income,
increased $26,000 to $798,000, or l.5% of total revenues in fiscal 1997 from
$772,000 or 1.8% of total revenues, in fiscal 1996. The Company used the net
proceeds of its initial public offering to repay certain bank debt,
subordinated debt, and shareholder notes, resulting in the Company changing
to a "net investor" rather than a "net borrower" at fiscal year end.
EXTRAORDINARY CHARGE AND EXPENSES OF CANCELED ACQUISITION. As a
result of the early retirement of the Subordinated Notes in connection with
the Company's initial public offering, the Company incurred a one-time charge
to earnings, in the fourth quarter, of approximately $183,000 for the
unamortized portion of the Company's expenses related to issuance of the
Subordinated Notes.
-22-
<PAGE>
Additionally, the Company took a fourth quarter charge of $261,000 related to
the expenses associated with the proposed acquisition of The Paper Factory of
Wisconsin, Inc. by Paper Warehouse, which was terminated January 26, 1998.
PRO FORMA NET (LOSS) INCOME. As a result of the factors discussed
above, the Company 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.
SEASONALITY
The Company's results of operations have historically fluctuated
from quarter to quarter for such reasons as seasonal variations in revenues
and operating expenses, the amount and timing of revenues contributed by new
Company-owned and franchise stores, the costs associated with the opening of
new stores, and expenses incurred to support the Company's expansion
strategy. As a result of these seasonal variations, a significant portion of
the Company's operating income is generated in the second and fourth fiscal
quarters. Historically, the Company has engaged in more promotional activity
during the third quarter than the second quarter, which results in reduced
operating income for the third quarter as compared to the second quarter. Any
factors negatively affecting the Company during the second and fourth fiscal
quarters could have a material adverse effect on the Company's financial
condition and results of operations for the entire fiscal year. Further, as a
result of the seasonality of the Company's revenue, the Company expects to
incur a loss in the first quarter of each year for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for ongoing
operations, principally inventory, and capital improvements to support the
opening of new Company-owned stores and the remodeling of existing
Company-owned stores. The Company's primary sources of liquidity have been
met by cash from operations, payment terms from vendors, borrowings under its
revolving line of credit, the Subordinated Notes and proceeds from the
Company's initial public offering.
For fiscal 1998 and fiscal 1997, the Company's working capital was
$5.2 million and $9.4 million, respectively. Cash (used for) provided by
operations for each of the last three fiscal years was approximately ($2.2
million), $746,000, and $85,000, respectively. 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.
For fiscal 1998 and fiscal 1997, the Company's accounts payable were
$4.4 million and $3.0 million, respectively. The increase in accounts payable
was primarily attributable to increased merchandise inventory.
Net cash used for investing activities for fiscal 1998, 1997 and
1996, was approximately $6.7 million, $2.5 million, and $1.2 million,
respectively. These expenditures were primarily related to opening and
remodeling existing Company-owned stores and upgrading the Company's
information systems.
For fiscal 1998, the Company had capital expenditures of
approximately $4.3 million, including approximately $3.2 million related to
new stores. The Company currently plans to open fewer than ten Company-owned
stores in fiscal 1999. Total capital expenditures in fiscal 1999 are
estimated to be $2.7 million. These capital expenditures will be for new
store openings, fixturing and remodeling existing stores, and information
systems. The Company intends to continue to finance all of its new store
fixtures and equipment with long-term capital leases, assuming availability and
reasonable terms.
-23-
<PAGE>
Net cash provided by financing activities for fiscal 1998, 1997 and
1996, was $6.9 million $3.5 million, and $585,000, respectively. Cash
provided by financing activities in fiscal 1998 reflects the Company's
borrowing under its revolving line of credit with its banks. Cash provided by
financing activities in fiscal 1997 was primarily from the Company's initial
public offering.
In January 1997, the Company entered into a $7.5 million revolving
credit facility. The credit facility accrues interest at the bank's base rate
plus 0.5% and expires on May 31, 1999. The Company is currently in
negotiation to extend the maturity of this revolving credit facility. The
credit facility is secured by substantially all the assets of the Company.
The Company is required to maintain certain customary covenants. Advances
under the revolving line of credit bear interest at the bank's prime rate
(7.75% at January 29, 1999) plus .50% and are collateralized by all assets of
the Company, except those assets which are leased, and not including the
Company's corporate office. 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,
the Company was in compliance with all the covenants under its credit
facility and there was $6.8 million borrowings outstanding. The credit facility
also prohibits the Company from paying dividends except for distributions in
connection with the termination of its S Corporation status. The initial
borrowings of this facility were used to retire in full the outstanding
balance under the Company's previous credit facility.
The Company anticipates opening fewer than ten Company-owned stores
during fiscal 1999. In addition, the Company may seek to acquire existing
stores from franchisees. At present, the Company has no agreement to acquire
any franchise store. The Company expects 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. The Company typically
leases approximately 8,500 square feet for its Company-owned stores and seeks
to lease sites rather than own real estate.
Out of its planned Company-owned stores to be opened in fiscal 1999,
as of March 31, 1999, the Company has signed leases for five locations. Most
of the leases are for 10-year terms, with 5-year renewal options.
The Company believes that the combination of cash flow from
operations and available borrowing capacity under a revolving credit
facility, will be adequate to handle its cash requirements through fiscal
1999, including the cash needed to open new stores. The Company's current
revolving line of credit expires May 31, 1999. The Company has typically
renegotiated its revolving line of credit in the spring as it is doing this
year. The Company also anticipates that additional cash will be needed in the
ordinary course of business to support its growth, and is currently
negotiating with a prospective lender to replace its existing revolving
credit facility. The Company expects consummation of the replacement
revolving line of credit by the time the current revolving line of credit
expires. Failure of the Company to extend its current revolving credit
facility and to secure replacement financing could have a material adverse
effect on the Company.
INFLATION
The Company believes that inflation has not had a material impact
upon its historical operating results, and does not expect it to have such an
impact in the future. There can be no assurance that the Company's business
will not be affected by inflation in the future.
-24-
<PAGE>
IMPACT OF YEAR 2000
The Year 2000 problem arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20", instead of
the current "19." If not corrected, many computer applications could fail or
create erroneous results. The extent of the potential impact of the Year 2000
problem is not yet known, and if not timely corrected, could affect the
global economy. It is possible that the Company's currently installed
computer systems, software, or other business systems, or those of the
Company's suppliers, will not accept input of, store, or manipulate output
dates for the years 2000 and beyond without error or manipulation.
STATE OF READINESS: Management of the Company is actively engaged in
the process of evaluating the status of the Company's internal Information
Technology ("IT") and non-IT systems for compliance with Year 2000 issues. In
addition, the Company is in the process of verifying that third parties with
whom the Company has a material relationship, such as its largest vendors and
suppliers, are Year 2000 compliant. The majority of the Company's exposure is
in the readiness of third parties, where the situation is much less within
the Company's ability to predict or control. The first phase, evaluating the
Company's internal systems, is substantially complete. The second phase,
evaluating third party systems, was commenced in the second quarter of fiscal
1998, and is expected to be substantially complete by mid-fiscal 1999. In
addition, while the Company values its established relationships with its key
vendors, it is identifying secondary vendors in the event that certain of its
business partners are delayed in achieving Year 2000 compliance. The
Company's progress with regard to achieving Year 2000 compliance is monitored
and reported on a regular basis to its management and Board of Directors.
Non-IT systems. Management believes that the failure of any internal
non-IT systems, e.g. alarms, telephone system, voicemail, access cards,
locks, heating and cooling systems, etc., to be compliant for the Year 2000
would have little effect on the business, operations, or financial condition
of the Company as a whole. Management continues to review its non-IT systems,
and will continue to take steps to modify, upgrade or replace non-IT systems
as necessary to be Year 2000 compliant. The anticipated expenses for such
replacement/conversions are not expected to be material. Management believes
that any additional modifications/replacements will not have a material
impact on its business, operations, or financial condition.
Major IT Systems. During 1998 and 1997, the Company upgraded or
replaced its mission critical data processing system which controls the
Company's financial records, inventory management, and purchasing, and
believes that these systems will function properly with respect to dates in
the Year 2000 and beyond. The Company has received certification from many of
its hardware and software suppliers of the upgraded or replaced systems that
the systems should function correctly in Year 2000 and beyond. The Company is
in the process of upgrading its 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 the Year 2000. Management
believes that any additional modifications/replacements will not have a
material impact on its business, operations, or financial condition.
Third Party Systems. The Company has been in contact with its major
suppliers and service providers to understand their state of Year 2000
readiness, asked its major suppliers and service providers to complete a
survey on their state of Year 2000 readiness, and is assessing the possible
effects an adverse impact could have on the Company. The failure by a vendor
or supplier to be Year 2000 compliant may interrupt the flow of products to
the Company's stores for sale. Depending on how long product supply to the
stores is interrupted, the impact could have a material adverse effect.
Multiple sources of product supply mitigate this concern. The Company may
experience some inconvenience if one or more of its infrastructure (utility)
providers are not Year 2000 compliant. If the utility providers are not able
to provide electricity, water, heat, etc., to a store or stores following
January 1, 2000, the
-25-
<PAGE>
Company will, nonetheless, attempt to open all stores. If an infrastructure
failure would continue for more than several days, the result could have a
material adverse effect on the Company's revenues, earnings, and cash flow.
COSTS TO ADDRESS YEAR 2000 Issues. To date, the cost associated with
Year 2000 readiness has been immaterial. Management expects that any
additional costs of being Year 2000 compliant will be immaterial.
RISKS TO THE COMPANY FOR YEAR 2000 ISSUES. Some risks associated
with the Year 2000 problem are beyond the ability of the Company to control,
including the extent to which the Company's suppliers and service providers
can address the Year 2000 problem. Therefore, the Company cannot estimate the
impact to the Company if third parties are not Year 2000 compliant. The
failure by a third party vendor or supplier to adequately address the Year
2000 issue could have a material adverse affect on the third party, and
therefore could have an adverse affect on the Company. The most likely worst
case Year 2000 scenario is that one or more of the Company's stores will not
have power, heat, or water. The stores affected could still open for business
using a cash box to make sales and flashlights to provide light.
CONTINGENCY PLANS. The Company has not developed a formal
contingency plan for the Year 2000 problem for its operations. If the need
arises, the Company will create a contingency plan.
The costs of the Company's Year 2000 compliance programs and the
timetable on which the Company plans to complete such programs are based on
management's best estimates, and reflect 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, no assurance can be given
that these estimates will be achieved, and actual results could differ
materially from those anticipated.
RECENT DEVELOPMENTS
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.
USE OF INITIAL PUBLIC OFFERING PROCEEDS
The Company completed an initial public offering of shares of its
Common Stock on November 28, 1997. The total offering was for 1,778,000
shares of Common Stock, all of which were offered and sold by the Company. On
December 24, 1997, the underwriters partially exercised their over-allotment
option, purchasing 207,800 shares of Common Stock from the Company. The
offering price of the 1,985,800 shares of Common Stock (including the
over-allotment) was $7.50 per share. The proceeds to the Company, after
deduction of the underwriting discount and expenses associated with the
Offering, were $13.1 million.
Through January 29, 1999, the aggregate amount of expenses incurred
by the Company in connection with the issuance and distribution of the shares
of Common Stock offered and sold in the initial public offering, including
the underwriter's over-allotment, was approximately $1.7 million. This
includes underwriting discounts and commissions (of approximately $1.0
million) and expenses paid for accounting, legal, printing, and other
expenses.
During the period from November 28, 1997, through January 29, 1999,
the net proceeds of the offering have been applied as follows: (i) to repay
borrowings outstanding under the Company's
-26-
<PAGE>
revolving credit facility in the amount of $5.8 million, (ii) to prepay the
10% Subordinated Notes due November 30, 2004 in the amount of $2.1 million,
and (iii) to repay shareholder notes in the aggregate amount of $2.1 million
to Yale T. Dolginow and Brent D. Schlosser. The remaining $3.1 million has
been used for other general corporate purposes.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included
herein and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain statements that are forward-looking, such as plans for future
expansion and other business development activities as well as other capital
spending, financing sources, and competition.
Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, those relating to
development and construction activities, dependence on existing management,
general economic conditions, and changes in federal or state laws or the
administration of such laws.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS.
The following Consolidated Financial Statements of the Company and
the Independent Auditors' Report included on pages F-1 to F-16 of this Form
10-K are incorporated herein by reference.
<TABLE>
<CAPTION>
Page(s)
<S> <C>
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 - 16
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
-27-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of
Directors--Information About Nominees" and "Election of Directors--Other
Information About Nominees" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
The information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of
Directors--Compensation of Directors" and "Executive Compensation and Other
Benefits" in the Company's 1999 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Relationships and Related
Transactions" in the Company's 1999 Proxy Statement is incorporated herein by
reference.
-28-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF FORM 10-K REPORT
(1) 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
<TABLE>
<CAPTION>
Page(s)
<S> <C>
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-6-16
</TABLE>
-29-
<PAGE>
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 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
---- ----
<S> <C> <C>
ASSETS
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>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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>
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) 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.
F-6
<PAGE>
(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 CREDITS
Certain of the Company's operating leases provide for scheduled
increases in base rentals over their terms. For these leases, the Company
recognizes the total rental amounts due over the lease terms on a
straight-line basis and, accordingly, has established corresponding deferred
rent credits for the differences between the amounts recognized and the
amounts paid.
(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
Company's 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.
F-8
<PAGE>
(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
Buildings................................................... 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>
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.
F-9
<PAGE>
(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
Note payable in monthly installments of $2,771 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 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:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY:
-----------------------
<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>
F-10
<PAGE>
(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:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY:
- -----------------------
<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:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY
- ----------------------
<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>
F-11
<PAGE>
(6) INCOME TAXES
As indicated in Note 1, prior to November 28, 1997, the Company
elected to be taxed as an S-Corporation under the Internal Revenue Code. The
Company's earnings or losses for the S-Corporation period 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>
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>
F-12
<PAGE>
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.
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.
F-13
<PAGE>
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>
(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 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.
F-14
<PAGE>
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
Option Range Exercise 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>
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-Corp 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-Corp status in fiscal 1997................ ($0.11) ($0.08)
Net loss per share - pro forma.............. ($0.15) ($0.19)
</TABLE>
F-15
<PAGE>
(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 Shareholders at the 1999 Annual Meeting. If
approved by the Shareholders, 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-16
<PAGE>
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index attached hereto.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company on April 30, 1999, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Paper Warehouse,
Inc., 7630 Excelsior Boulevard, Minneapolis, Minnesota 55426; Attn:
Shareholder Relations.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report
on Form 10-K pursuant to Item 14(a)(3):
1. 1997 Stock Option and Compensation Plan (incorporated by
reference to the Company's Registration Statement on Form S-1
File No. 333-36911).
2. Directors' Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-1 File No.
333-36911).
3. Employment Agreement by and between the Company and Yale T.
Dolginow dated February 7, 1997 (incorporated by reference to
the Company's Registration Statement on Form S-1 File No.
333-36911).
4. Employment Agreement by and between the Company and Brent D.
Schlosser dated February 7, 1997 (incorporated by reference to
the Company's Registration Statement on Form S-1 File No.
333-36911).
5. Amendment Number 1 to the Employment Agreement by and between
the Company and Brent D. Schlosser dated September 26, 1997
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended January 31, 1998 File No. 0-23389).
6. Employment Agreement by and between the Company and Cheryl W.
Newell dated July 14, 1997 (incorporated by reference to the
Company's Registration Statement on Form S-1 File No.
333-36911).
7. 1998 Employee Stock Purchase Plan (filed herewith
electronically).
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of fiscal 1998.
-30-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PAPER WAREHOUSE, INC.
Date: April 28, 1999
By: /s/ Yale T. Dolginow
---------------------------------------------
Name: Yale T. Dolginow
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 28, 1999.
<TABLE>
<CAPTION>
NAME TITLE
<S> <C>
/s/ Yale T. Dolginow Chairman of the Board, President and
--------------------------------- Chief Executive Officer, (principal
Yale T. Dolginow executive officer)
/s/ Brent D. Schlosser Executive Vice President and Director
---------------------------------
Brent D. Schlosser
/s/ Diane C. Dolginow Secretary and Director
---------------------------------
Diane C. Dolginow
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/ Jeffery S. Halpern Director
---------------------------------
Jeffery S. Halpern
/s/ Cheryl W. Newell Vice President and Chief Financial
--------------------------------- Officer (principal financial officer)
Cheryl W. Newell
/s/ Michael A. Anderson Controller/Treasurer (principal
--------------------------------- accounting officer)
Michael A. Anderson
</TABLE>
-31-
<PAGE>
PAPER WAREHOUSE, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 29, 1999
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION OF ITEM METHOD OF FILING
- -------- ------------------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
3.2 Amended and Restated By-laws Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
4.1 Form of 10% Subordinated Note due November 30, 2004, dated Incorporated by reference to the
December 7, 1994 Company's Registration Statement on
Form S-1 (File No. 333-36911).
4.2 Form of Warrant Agreement Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
4.3 Form of Warrant Conversion Agreement, as extended Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.1 1997 Stock Option and Compensation Plan Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.2 Directors' Stock Option Plan Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.3 Corporation Tax Allocation and Indemnification Agreement entered Incorporated by reference to the
into on September 26, 1997 between the Company and Yale T. Company's Registration Statement on
Dolginow and Brent D. Schlosser Form S-1 (File No. 333-36911).
10.4 Employment Agreement by and between the Company and Yale T. Incorporated by reference to the
Dolginow dated February 7, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.5 Employment Agreement by and between the Company and Brent D. Incorporated by reference to the
Schlosser dated February 7, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.6 Amendment Number 1 to the Employment Agreement by and between the Incorporated by reference to the
Company and Brent D. Schlosser dated September 26, 1997 Company's Form 10-K for fiscal
year ended January 31, 1998
(File No. 0-23389).
10.7 Combination Mortgage and Security Agreement and Fixture Financing Incorporated by reference to the
Statement dated June 9, 1995 by and between the Company and Company's Registration Statement on
Richfield Bank & Trust Co. Form S-1 (File No. 333-36911).
-32-
<PAGE>
10.8 Secured Promissory Note of the Company in favor of Richfield Bank Incorporated by reference to the
& Trust Co. in the amount of $945,000 dated June 9, 1995 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.9 Authorization and Debenture Guaranty of the Company dated May 25, Incorporated by reference to the
1995 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.10 Employment Agreement by and between the Company and Cheryl W. Incorporated by reference to the
Newell dated July 14, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.11 Loan Agreement between Paper Warehouse, Inc., Yale T. Dolginow and Incorporated by reference to the
Richfield Bank & Trust Co., dated January 29, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.12 Revolving Promissory Note to Richfield Bank & Trust Co. dated Incorporated by reference to the
January 29, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.13 Security Agreement between the Company and Richfield Bank & Trust Incorporated by reference to the
Co. dated January 29, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.14 Amendment to Loan Agreement entered into as of October 1, 1997 by Incorporated by reference to the
and between the Company, Yale T. Dolginow and Richfield Bank & Company's Registration Statement on
Trust Co. Form S-1 (File No. 333-36911).
10.15 Master Lease by and between Target Financial, Inc. and the Company Incorporated by reference to the
dated October 22, 1997 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.16 Loan Agreement SBA Debenture No. COCL837046 3001 MN, dated August Incorporated by reference to the
15, 1995 Company's Registration Statement on
Form S-1 (File No. 333-36911).
10.17 Consulting Agreement entered into December 1, 1992 by and between Incorporated by reference to the
Paper Warehouse, Inc. and Stanford Weiner, Lawrence Weiner and Company's Registration Statement on
Gary Stone Form S-1 (File No. 333-36911).
10.18 1998 Employee Stock Purchase Plan Filed herewith electronically.
10.19 Asset Purchase Agreement dated December 17, 1998 among the Filed herewith electronically.
Company, Susan Hazan and Prickly Pear Paper, Inc.
10.20 Second Amendment to Loan Agreement dated March 15, 1999 between Filed herewith electronically.
the Company and Richfield Bank & Trust Co.
10.21 Third Amendment to Loan Agreement dated March 31, 1998 between Filed herewith electronically.
the Company and Richfield Bank & Trust Co.
21 Subsidiaries of Company Incorporated by reference to the
Company's Registration Statement on
Form S-1 (File No. 333-36911).
23 Consent of KPMG Peat Marwick LLP Filed herewith electronically.
27 Financial Data Schedule Filed herewith electronically.
</TABLE>
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<PAGE>
PAPER WAREHOUSE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
The purpose of this 1998 Employee Stock Purchase Plan (the "Plan") is to
advance the interests of Paper Warehouse, Inc. (the "Company") and its
shareholders by providing Eligible Employees of the Company and its
Participating Subsidiaries with an opportunity to acquire an ownership interest
in the Company through the purchase of Common Stock of the Company on favorable
terms through payroll deductions. The Company intends that the Plan qualify as
an "employee stock purchase plan" under Section 423 of the Code. Accordingly,
provisions of the Plan will be construed so as to extend and limit participation
in a manner consistent with the requirements of Section 423 of the Code.
2. DEFINITIONS.
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "CHANGE IN CONTROL" means an event described in Section 9.1 of the
Plan.
2.3 "CODE" means the Internal Revenue Code of 1986, as amended.
2.4 "COMMITTEE" means the group of individuals administering the Plan,
as provided in Section 3 of the Plan.
2.5 "COMMON STOCK" means the common stock, par value $0.01 per share,
of the Company, or the number and kind of shares of stock or other securities
into which such common stock may be changed in accordance with Section 4.3 of
the Plan.
2.6 "COMPENSATION" means all gross cash compensation (including wage,
salary, incentive, bonus, commission and overtime earnings) paid by the Company
or any Participating Subsidiary to a Participant, including amounts that would
have constituted compensation but for a Participant's election to defer or
reduce compensation pursuant to any deferred compensation, cafeteria, capital
accumulation or any other similar plan of the Company; provided, however, that
the Committee, in its sole discretion, may expand or limit the amounts that will
be deemed compensation for purposes of the Plan in such manner as it deems
appropriate.
2.7 "ELIGIBLE EMPLOYEE" means any employee of the Company or a
Participating Subsidiary who, with respect to any Offering Period, has been
continuously employed by the Company or a Participating Subsidiary for at least
one year prior to the Offering Commencement Date for such Offering Period. With
respect to a Subsidiary that has been acquired by the Company and designated as
a Participating Subsidiary or a Subsidiary that is otherwise subsequently
designated by the Committee as a Participating Subsidiary, the period of
employment of employees of such Participating Subsidiary occurring prior to the
time of such acquisition or designation will be included for purposes of
determining whether an employee has been employed for the requisite period of
time under the Plan.
2.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.9 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of
any date (or, if no shares were traded or quoted on such date, as of the next
preceding date on which there was such a trade or quote) (a) the mean between
the reported high and low sale prices of the Common Stock if the
<PAGE>
Common Stock is listed, admitted to unlisted trading privileges or reported on
any foreign or national securities exchange or on the Nasdaq National Market or
an equivalent foreign market on which sale prices are reported; (b) if the
Common Stock is not so listed, admitted to unlisted trading privileges or
reported, the closing bid price as reported by the Nasdaq SmallCap Market, OTC
Bulletin Board, National Quotation Bureau, Inc. or other comparable service; or
(c) if the Common Stock is not so listed or reported, such price as the
Committee determines in good faith in the exercise of its reasonable discretion.
2.10 "OFFERING COMMENCEMENT DATE" means the first day of an Offering
Period.
2.11 "OFFERING PERIOD" means any of the offerings to Participants of
Options under the Plan, each continuing for six months, as described in Section
6 of the Plan.
2.12 "OFFERING TERMINATION DATE" means the last day of an Offering
Period.
2.13 "OPTION" means a right to purchase shares of Common Stock granted
to a Participant in connection with an Offering Period pursuant to Section 7 of
the Plan.
2.14 "OPTION PRICE" means, with respect to any Offering Period, the
lower of (a) 85% of the Fair Market Value of one share of Common Stock on the
Offering Commencement Date, or (b) 85% of the Fair Market Value of one share of
Common Stock on the Offering Termination Date.
2.15 "PARTICIPANT" means an Eligible Employee who elects to participate
in the Plan pursuant to Section 5 of the Plan.
2.16 "PARTICIPATING SUBSIDIARY" means a Subsidiary that has been
designated by the Committee from time to time, in its sole discretion, as a
corporation whose Eligible Employees may participate in the Plan.
2.17 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.18 "SUBSIDIARY" means any subsidiary corporation of the Company
within the meaning of Section 424(f) of the Code.
2.19 "TERMINATION OF EMPLOYMENT" means a Participant's complete
termination of employment with the Company and all Participating Subsidiaries
for any reason, including death, disability or retirement. In the event that a
Participant is in the employ of a Participating Subsidiary and the Participating
Subsidiary ceases to be a Participating Subsidiary of the Company for any
reason, such event will be deemed a termination of employment unless the
Participant continues in the employ of the Company or another Participating
Subsidiary.
3. ADMINISTRATION.
The Plan will be administered by the Board or by a Committee of the
Board. So long as the Company has a class of its equity securities registered
under Section 12 of the Exchange Act, the Plan will be administered by a
Committee of the Board consisting of at least two members of the Board who are
"non-employee directors" within the meaning of Rule 16b-3 under the Exchange
Act. Such a Committee will act by majority approval of the members (but may
also take action with the written consent of a majority of the members of such
Committee), and a majority of the members of such a Committee will constitute a
quorum. As used in the Plan, "Committee" will refer to the Board or to such a
Committee, if established. To the extent consistent with corporate law, the
Committee may delegate to
2
<PAGE>
any officer of the Company the duties, power and authority of the Committee
under the Plan pursuant to such conditions or limitations as the Committee may
establish; provided, however, that only the Committee may exercise such duties,
power and authority with respect to Participants who are subject to Section 16
of the Exchange Act. The Committee may exercise its duties, power and authority
under the Plan in its sole discretion without the consent of any Participant or
other party, unless the Plan specifically provides otherwise. Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of the Plan will be final, conclusive and binding for
all purposes and on all persons, including, without limitation, the Company, the
shareholders of the Company, the Participants and their respective
successors-in-interest. No member of the Committee will be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under the Plan.
4. SHARES AVAILABLE FOR ISSUANCE; ADJUSTMENTS FOR CERTAIN EVENTS.
4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be one hundred
fifty thousand (150,000) shares of Common Stock. If the total number of shares
of Common Stock that would otherwise be issuable upon the exercise of Options
granted pursuant to Section 7 of the Plan on any Offering Termination Date
exceeds the number of shares then available for issuance under the Plan, the
Committee will make a pro rata allocation of the shares of Common Stock
remaining available for issuance under the Plan in as uniform and equitable a
manner as it deems appropriate.
4.2 ACCOUNTING FOR OPTIONS. Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Options will be applied to
reduce the maximum number of shares of Common Stock remaining available for
issuance under the Plan. Any shares of Common Stock that are subject to an
Option that is terminated unexercised will automatically again become available
for issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES AND OPTIONS. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) available for issuance or payment
under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants, the number and kind of securities or other property (including
cash) subject to, and the exercise price of, outstanding Options.
5. PARTICIPATION; PAYROLL DEDUCTIONS.
5.1 PARTICIPATION. Participation in the Plan is voluntary and is not
a condition of employment. Eligible Employees may elect to participate in the
Plan, beginning with the first Offering Period to commence after such person
becomes an Eligible Employee, by properly completing a subscription agreement
authorizing payroll deductions on the form provided by the Company and filing
the participation form with the Company's Human Resources Department not later
than the 1st day of the month immediately preceding the Offering Commencement
Date of the first Offering Period in which the Participant wishes to
participate. An Eligible Employee who elects to participate with respect to an
Offering Period will be deemed to have elected to participate in each subsequent
Offering Period, unless
3
<PAGE>
such Participant properly completes and files a notice of withdrawal form in the
manner described in Section 8.1 of the Plan.
5.2 LIMITATION ON PARTICIPATION. Notwithstanding any provisions of
the Plan to the contrary, an Eligible Employee may not participate in the Plan
and will not be granted an Option under the Plan if, immediately after the grant
of such Option, such Eligible Employee (or any other person whose stock
ownership would be attributed to such Eligible Employee pursuant to Section
424(d) of the Code) would own stock or options possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company or
of its "Parent" or "Subsidiary" corporations (within the meaning of Section 424
of the Code).
5.3 PAYROLL DEDUCTIONS.
(a) By completing and filing a participation form, a
Participant will elect to have payroll deductions made from such
Participant's total Compensation (in whole dollar amounts, provided,
however, that such dollar amounts may not exceed 15%, or such other
maximum percentage as the Committee may from time to time establish, of
the Participant's total Compensation) on each payday during the time he
or she is a Participant in the Plan in such amount as such Participant
designates on the participation form.
(b) All payroll deductions authorized by a Participant will be
credited as of each payday to an account established under the Plan for
the Participant. Such account will be solely for bookkeeping purposes,
no separate fund, trust or other segregation of such amounts will be
established or made and the amounts represented by such account will be
held as part of the Company's general assets, usable for any corporate
purpose. A Participant may not make any separate cash payment or
contribution to such Participant's account. No interest will accrue on
amounts held in such accounts under the Plan.
(c) A Participant may increase or decrease the amount of his or
her payroll deductions under the Plan (subject to such limitations on the
frequency of such changes as may be imposed by rules adopted by the
Committee from time to time) by properly completing an amended
participation form and filing it with the Company's Human Resources
Department not less than 30 days prior to the commencement of the pay
period for which such change in payroll deductions is to be effective or,
with respect to commissions, bonuses or other Compensation that is
indeterminate and subject to performance goals or criteria, not less than
10 days prior to the date that such performance related Compensation is
paid.
(d) A Participant may withdraw from participation in the Plan
at any time as provided in Section 8.1 of the Plan.
6. OFFERING PERIODS.
Options to purchase shares of Common Stock will be offered to
Participants under the Plan through a continuous series of Offering Periods,
each continuing for six months, and each of which will commence on February 1
and August 1 of each year, as the case may be, and will terminate on July 31 and
January 31 of such year, as the case may be. The first Offering Period will
commence on August 1, 1999 and terminate on January 31, 2000. Offering
Periods under the Plan will continue until either (a) the Committee decides, in
its sole discretion, that no further Offering Periods will be made because the
Common Stock remaining available under the Plan is insufficient to make an
Offering to all Eligible Employees, or (b) the Plan is terminated in accordance
with Section 13 below.
4
<PAGE>
7. OPTIONS.
7.1 GRANT OF OPTIONS. With respect to any Offering Period, each
Participant participating in such Offering Period will be granted, by operation
of the Plan on the Offering Commencement Date for such Offering Period, an
Option to purchase (at the Option Price) as many full shares of Common Stock as
such Participant will be able to purchase with the accumulated payroll
deductions credited to such Participant's account during such Offering Period
plus the balance (if any) carried forward from the Participant's payroll
deduction account from the preceding Offering Period.
7.2 LIMITATIONS ON PURCHASE. Notwithstanding Section 7.1 or any other
provision of the Plan to the contrary, the number of shares of Common Stock that
may be purchased under the Plan will be limited as follows:
(a) No Participant may purchase more than 5,000 shares of
Common Stock under the Plan in any given Offering Period; and
(b) No Participant may be granted an Option that permits such
Participant to purchase Common Stock under the Plan and any other
"employee stock purchase plans" (within the meaning of Section 423 of the
Code) of the Company and its Subsidiaries to accrue (I.E., become
exercisable) at a rate that exceeds $25,000 of the Fair Market Value of
such shares of Common Stock (determined at the time such Option is
granted) for each calendar year in which such Option is outstanding at
any time.
7.3 EXERCISE OF OPTIONS.
(a) Unless a Participant withdraws from the Plan as provided in
Section 8.1 of the Plan, the Participant's Option for the purchase of
shares of Common Stock granted with respect to an Offering Period will be
exercised automatically at the Offering Termination Date of such Offering
Period for the purchase of the number of full shares of Common Stock that
the accumulated payroll deductions in such Participant's account as of
such Offering Termination Date will purchase at the applicable Option
Price.
(b) A Participant may only purchase one or more full shares in
connection with the automatic exercise of an Option granted for any
Offering Period. The portion of any balance remaining in a Participant's
payroll deduction account at the close of business on the Offering
Termination Date of any Offering Period that is less than the purchase
price of one full share of Common Stock will be carried forward into the
Participant's payroll deduction account for the following Offering
Period. In no event, however, will the balance carried forward be equal
to or greater than the purchase price of one full share of Common Stock
on the Offering Termination Date of an Offering Period.
(c) No Participant (or any person claiming through such
Participant) will have any interest in any Common Stock subject to an
Option under the Plan until such Option has been exercised, at which
point such interest will be limited to the interest of a purchaser of the
Common Stock purchased upon such exercise pending the delivery of such
Common Stock.
(d) As promptly as practicable after the Offering Termination
Date of each Offering Period, the Company will issue the shares of Common
Stock purchased upon exercise of such Participant's Option granted for
such Offering Period, registered in the name of the Participant or, if
the Participant so directs on his or her Participation Form, in the names
of the Participant and his or her spouse. The Committee may determine,
in its sole discretion, the manner of
5
<PAGE>
delivery of shares of Common Stock purchased under the Plan, which may be
by electronic account entry into new or existing brokerage or other
accounts, delivery of physical stock certificates or such other means as
the Committee deems appropriate.
8. WITHDRAWAL FROM PLAN.
8.1 VOLUNTARY WITHDRAWAL. A Participant may, at any time on or before
5:00 p.m., Minnesota time, on the first day of the last month of an Offering
Period, terminate his or her participation in the Plan and withdraw all, but not
less than all, of the payroll deductions credited to such Participant's account
under the Plan by giving written notice to the Company's Human Resources
Department. Such notice must state that the Participant wishes to terminate his
or her participation in the Plan and request the withdrawal of all of the
Participant's payroll deductions held under the Plan. All of the Participant's
payroll deductions credited to his or her account will be paid to such
Participant as soon as practicable after receipt of the notice of withdrawal,
such Participant's Option for such Offering Period will automatically be
canceled and will no longer be exercisable, and no further payroll deductions
for the purchase of shares of Common Stock under the Plan will be made.
8.2 TERMINATION OF EMPLOYMENT.
(a) Upon the Termination of Employment of a Participant at any
time, the payroll deductions credited to such Participant's account will
be paid to such Participant as soon as practicable after the effective
date of such Termination of Employment (or, in the case of death, to the
person or persons entitled thereto under Sections 10 and 11.3 of the
Plan), such Participant's Option for the current Offering Period will
automatically be canceled and will no longer be exercisable, and no
further payroll deductions for the purchase of shares of Common Stock
under the Plan will be made.
(b) Unless the Committee otherwise determines in its sole
discretion, a Participant's employment will, for purposes of the Plan, be
deemed to have terminated on the date recorded on the personnel or other
records of the Company or the Participating Subsidiary for which the
Participant provides employment, as determined by the Committee in its
sole discretion based upon such records.
8.3 EFFECT OF WITHDRAWAL. A Participant's withdrawal pursuant to
Section 8.1 of the Plan will not have any effect upon such Participant's
eligibility to participate in a subsequent Offering Period (so long as such
Participant completes and files a new Participation Form pursuant to Section 5
of the Plan) or in any similar plan that may hereafter be adopted by the
Company.
9. CHANGE IN CONTROL.
9.1 CHANGE IN CONTROL. For purposes of this Section 9, a "CHANGE IN
CONTROL" of the Company will mean the following:
(a) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or entity
that is not controlled by the Company;
(b) the approval by the shareholders of the Company of any plan
or proposal for the liquidation or dissolution of the Company;
6
<PAGE>
(c) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (i) 20% or more, but less than 50%, of the
combined voting power of the Company's outstanding securities ordinarily
having the right to vote at elections of directors, unless the
transaction resulting in such ownership has been approved in advance by
the Continuity Directors (as defined in Section 9.2 below), or (ii) 50%
or more of the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections of directors
(regardless of any approval by the Continuity Directors);
(d) a merger or consolidation to which the Company is a party
if the shareholders of the Company immediately prior to effective date of
such merger or consolidation have "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act), immediately following the effective
date of such merger or consolidation, of securities of the surviving
corporation representing (i) less than 80%, but more than 50%, of the
combined voting power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at elections of directors,
unless such merger or consolidation has been approved in advance by the
Continuity Directors, or (ii) 50% or less of the combined voting power of
the surviving corporation's then outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any approval
by the Continuity Directors); or
(e) the Continuity Directors cease for any reason to constitute
at least a majority of the Board.
Notwithstanding anything in this Section 9.1 to the contrary, the
transfer by a Significant Shareholder (as defined below) of shares of
Common Stock or rights to acquire shares of Common Stock to the following
persons or entities, without consideration in money or money's worth
(such as by gift, bequest or devise), and the exercise or conversion of
any such transferred rights to acquire shares, will not, in and of
itself, be deemed to constitute a Change in Control for purposes of this
Section 9: (i) transfers to any spouse, child, heir, legatee or
successor of such Significant Shareholder; (ii) transfers to any trust
created for the benefit of such Significant Shareholder or any such
spouse, child, heir, legatee or successor, and amendments of or
distributions from any such trust; or (iii) transfers to any other
Significant Shareholder. For purpose of this Section 9.1(e),
"SIGNIFICANT SHAREHOLDER" will mean Yale T. Dolginow and Brent D.
Schlosser.
9.2 CONTINUITY DIRECTORS. For purposes of this Section 9, "CONTINUITY
DIRECTORS" of the Company will mean individuals who are members of the Board on
the effective date of the Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the Continuity
Directors (either by specific vote or by approval of the Company's proxy
statement in which such individual is named as a nominee for director without
objection to such nomination).
9.3 ADJUSTMENT OF OFFERING PERIOD. Without limiting the authority of
the Committee under Sections 3, 4.3 and 13 of the Plan, if a Change in Control
of the Company occurs, the Committee, in its sole discretion, may (a) accelerate
the Offering Termination Date of the then current Offering Period and provide
for the exercise of Options thereunder by Participants in accordance with
Section 7.3 of the Plan, or (b) accelerate the Offering Termination Date of the
then current Offering Period and provide that all payroll deductions credited to
the accounts of Participants will be paid to Participants as soon as practicable
after such Offering Termination Date and that all Options for such Offering
Period will automatically be canceled and will no longer be exercisable.
7
<PAGE>
10. DESIGNATION OF BENEFICIARY.
A Participant may file with the Company's Human Resources Department a
written designation of a beneficiary who is to receive shares of Common Stock
and cash, if any, under the Plan in the event of such Participant's death prior
to delivery of such shares or cash to such Participant. Such designation of
beneficiary may be changed by the Participant at any time by written notice to
the Company's Human Resources Department. In the event of the death of a
Participant in the absence of a valid designation of a beneficiary who is living
at the time of such Participant's death, (a) the Company will deliver such
shares of Common Stock and cash to the executor or administrator of the estate
of the Participant, or (b) if to the Company's knowledge no such executor or
administrator has been appointed, the Company, in its sole discretion, may
deliver such shares of Common Stock and cash to the spouse or to any one or more
dependents or relatives of the Participant or, if no spouse, dependent or
relative is known to the Company, to such other person as the Company may
designate.
11. RIGHTS OF ELIGIBLE EMPLOYEES AND PARTICIPANTS; TRANSFERABILITY.
11.1 NO RIGHT TO EMPLOYMENT. Nothing in the Plan will interfere with
or limit in any way the right of the Company or any Participating Subsidiary to
terminate the employment of any Eligible Employee or Participant at any time,
nor confer upon any Eligible Employee or Participant any right to continue in
the employ of the Company or any Participating Subsidiary.
11.2 RIGHTS AS A SHAREHOLDER. As a holder of an Option under the Plan,
a Participant will have no rights as a shareholder unless and until such Option
is exercised and the Participant becomes the holder of record of shares of
Common Stock. Except as otherwise provided in the Plan, no adjustment will be
made for dividends or distributions with respect to Options as to which there is
a record date preceding the date the Participant becomes the holder of record of
such shares, except as the Committee may determine in its sole discretion.
11.3 RESTRICTIONS ON TRANSFER. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an Option or
to receive shares of Common Stock under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way (other than by will, the laws of
descent and distribution, or as provided in Section 10 of the Plan) by the
Participant. Any such attempt at assignment, transfer, pledge or other
disposition will be without effect, except that the Company may treat such act
as an election to withdraw from the Plan in accordance with Section 8.1 of the
Plan. During his or her lifetime, a Participant's Option to purchase shares of
Common Stock under the Plan is exercisable only by such Participant.
12. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under the Plan, and a Participant may not sell, assign, transfer
or otherwise dispose of shares of Common Stock issued pursuant to Options
granted under the Plan, unless (a) there is in effect with respect to such
shares a registration statement under the Securities Act and any applicable
state or foreign securities laws or an exemption from such registration under
the Securities Act and applicable state or foreign securities laws, and
(b) there has been obtained any other consent, approval or permit from any other
regulatory body that the Committee, in its sole discretion, deems necessary or
advisable. The Company may condition such issuance, sale or transfer upon the
receipt of any representations or agreements from the parties involved, and the
placement of any legends on certificates representing shares of Common Stock, as
may be deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
8
<PAGE>
13. AMENDMENT OR TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options under the Plan will conform to any change
in applicable laws or regulations or in any other respect the Board may deem to
be in the best interests of the Company; provided, however, that no amendments
to the Plan will be effective without approval of the shareholders of the
Company if shareholder approval of the amendment is then required pursuant to
Section 423 of the Code or the rules of any stock exchange or Nasdaq or similar
regulatory body. Upon termination of the Plan, the Committee, in its sole
discretion, may take any of the actions described in Section 9.3 of the Plan.
14. EFFECTIVE DATE OF PLAN.
The Plan will be effective as of December 7, 1998, the date it was
adopted by the Board. The Plan has been adopted by the Board subject to
shareholder approval, and prior to shareholder approval shares of Common Stock
may be issued under the Plan subject to such approval. The Plan will terminate
at midnight on December 7, 2008 and may be terminated prior to such time by
Board action, and no Option will be granted after such termination.
15. MISCELLANEOUS.
15.1 GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota, notwithstanding the conflicts of laws
principles of any jurisdictions.
15.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure
to the benefit of the successors and permitted assigns of the Company and the
Participants.
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PAPER WAREHOUSE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
PARTICIPATION FORM
______ Original Application
______ Change in Payroll Deduction Amount
1. ___________________________________ hereby elects to participate in the
1998 Paper Warehouse, Inc. Employee Stock Purchase Plan (the "Plan") and
subscribes to purchase shares of the Company's Common Stock (the
"Shares") in accordance with this Agreement and the Plan.
2.. I hereby authorize payroll deductions, beginning ____________, ____, from
each paycheck in the amount of $_______________ (which amount may not
exceed 15% of total compensation on each payday) in accordance with the
Plan.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares in accordance with the Plan, and that shares will be
purchased for me automatically at the end of each six-month offering
period under the Plan unless I withdraw my accumulated payroll
deductions, withdraw from the Plan, or both, by giving written notice to
the Company prior to the end of the offering period, as provided in the
Plan.
4. Shares purchased for me under the Plan should be issued or held in an
account in the name(s) of:
_______________________________________________
(name(s))
_______________________________________________
(address)
_______________________________________________
_______________________________________________
(social security number)
5. I understand that if I dispose of any Shares received by me pursuant to
the Plan within two years after the first day of the offering period
during which I purchased such Shares, I may be treated for federal income
tax purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value of
the Shares at the time such Shares were delivered to me over the option
price paid for the Shares. I HEREBY AGREE TO NOTIFY THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY SUCH DISPOSITION. However,
if I dispose of such shares at any time after the expiration of the
two-year holding period, I understand that I will be treated for federal
income tax purposes as having received income only at the time of such
disposition, and that such income will be taxed as ordinary income only
to the extent of an amount equal to the lesser of (a) the excess of the
fair market value of the Shares at the time of such disposition over the
amount paid for the Shares under the
10
<PAGE>
option, or (b) the excess of the fair market value of the Shares over the
option price, measured as if the option had been exercised on the first
day of the offering period during which I purchased such shares. The
remainder of the gain, if any, recognized on such disposition will be
taxed at capital gains rates.
6. I have read the current prospectus for the Plan.
Date:
----------------------------------- -------------------------------
Signature of Employee
11
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into
as of the 17th day of December, 1998, by and among PRICKLY PEAR PAPER, INC., an
Arizona corporation ("PPPI"), SUSAN HAZAN, an Arizona resident ("Hazan"), and
PAPER WAREHOUSE, INC., a Minnesota corporation ("Paper Warehouse").
RECITALS
WHEREAS, PPPI is currently engaged in business as a discount seller of
various paper products and related items;
WHEREAS, PPPI is currently a franchisee of Paper Warehouse Franchising,
Inc., a Minnesota corporation and a subsidiary of Paper Warehouse, in the
operation of four Paper Warehouse-Registered Trademark- stores (store #'s 401,
402, 403, and 404) located in Tucson, Arizona (each a "Store" and collectively,
the "Stores") pursuant to the terms of those certain Paper Warehouse-Registered
Trademark- Franchise Agreements dated July 21, 1988 (for Store # 401), July 21,
1988 (for Store # 402), October 1, 1995 (for Store # 403), and September 1, 1997
(for Store # 404), (the "Franchise Agreements");
WHEREAS, Hazan is the majority (95%) shareholder of PPPI; and
WHEREAS, Paper Warehouse desires to acquire substantially all of the
assets of PPPI used in connection with the Stores pursuant to the terms
described below.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth below, the parties to this Agreement hereby agree as follows:
ARTICLE I
PURCHASE OF ASSETS
Subject to the terms and conditions stated herein, PPPI agrees to
transfer, assign, convey and deliver to Paper Warehouse at the Closing (as
defined below in Section 9.1) and as of the Effective Date (as defined below in
Section 9.1) all of PPPI's property and assets that are used in connection with
the business of any of the Stores (the "Purchased Assets"). The Purchased
Assets shall include:
1.1 INVENTORY. All inventory of each of the Stores (the "Inventory")
which will be based on a physical count of the inventory of the Stores conducted
on November 5, 1998 and November 9, 1998 by RGIS Inventory Service.
1.2 FURNITURE, FIXTURES AND EQUIPMENT. All furniture, fixtures and
equipment of each of the Stores as identified on SCHEDULE 1.2 attached hereto
(the "Fixtures").
<PAGE>
1.3 LEASES. The portion of PPPI's right, title and interest
(including the rent deposit thereunder) in and to those certain real estate
leases to which PPPI is a party or by which PPPI is bound which Paper Warehouse
specifically assumes pursuant to Section 2.3(a) of this Agreement.
1.4 CONTRACTS. The portion of PPPI's right, title and interest in and
to those certain contracts and other obligations to which PPPI is a party or by
which PPPI is bound which Paper Warehouse specifically assumes pursuant to
Section 2.3(b) of this Agreement.
1.5 INTANGIBLES. All of PPPI's right, title and interest in and to
all trademarks, service marks, trade names, assumed names and other intangibles,
including goodwill, relating to each of the Stores.
The Purchased Assets shall not include (i) PPPI's cash, (ii) PPPI's
minute books, stock records, financial records and similar records or (ii)
PPPI's right, title and interest in and to any of its accounts receivable that
are accrued as of the Effective Date but not yet paid as of the Closing Date.
Paper Warehouse shall have reasonable access to such records of PPPI to the
extent reasonably necessary for the operation of its business after the Closing
and the preparation of its tax returns and financial statements.
ARTICLE II
CONSIDERATION FOR THE ASSETS
Subject to the terms and conditions stated herein, Paper Warehouse agrees
to acquire the Purchased Assets and in exchange therefore shall deliver to PPPI
the following consideration:
2.1 PURCHASE PRICE. The purchase price for the Purchased Assets will
be $1,206,000 cash (the "Cash Purchase Price") plus 70,749 shares of common
stock of Paper Warehouse (the "Paper Warehouse Common Stock") valued at a price
per share equal to the closing sale price of such common stock as reported by
the Nasdaq National Market on the Closing Date. The sum of the Cash Purchase
Price and the value of the Paper Warehouse Common Stock (as determined above) is
referred to in this Agreement as the "Purchase Price". The Purchase Price will
be paid as follows:
(a) On the Closing Date, Paper Warehouse will pay by
check or wire transfer $1,085,400 in cash. At the sole discretion
of Paper Warehouse, portions of such amount may be paid directly
to third parties to pay, on behalf of PPPI, the obligations of
PPPI not assumed by Paper Warehouse pursuant to the terms of this
Agreement. Any portion of such amount not paid directly to third
parties shall be paid by Paper Warehouse to PPPI, and Paper
Warehouse will provide an accounting of any payments made to third
parties;
(b) On the Closing Date, Paper Warehouse will deliver to
PPPI certificates representing the Paper Warehouse Common Stock;
(c) On or before December 31, 1998, Paper Warehouse will
pay by check or wire transfer $120,600 in cash. Such amount shall
be non-interest bearing and, at the
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sole discretion of Paper Warehouse, portions of such amount may be paid
directly to third parties to pay, on behalf of PPPI, the obligations of
PPPI not assumed by Paper Warehouse pursuant to the terms of this
Agreement. Any portion of such amount not paid directly to third parties
shall be paid by Paper Warehouse to PPPI, and Paper Warehouse will
provide an accounting of any payments made to third parties.
2.2 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated among the Purchased Assets as follows:
<TABLE>
<S> <C>
Inventory: $751,000
Fixtures: $317,000
Rent Deposits $14,000
Intangibles; Goodwill $124,000 plus the value of the Paper
Warehouse Common Stock (as determined
above)
</TABLE>
Each of the parties agrees to report the transactions contemplated by
this Agreement, including reporting for income tax and other tax purposes,
consistent with such allocation.
2.3 ASSUMPTION OF LEASE AND OTHER CONTRACTS. On the Closing Date,
Paper Warehouse will assume:
(a) All of PPPI's obligations under the real estate
leases of PPPI listed on SCHEDULE 3.9 attached hereto which Paper
Warehouse designates as acquired or assumed on such Schedule which
arise after or relate to the period following the Effective Date
(and specifically excluding any obligations relating to periods on
or prior to the Effective Date), as further set forth in the
Assignment and Assumption of Leases, a copy of which is attached
hereto as EXHIBIT 2.3(a); and
(b) All of PPPI's obligations under the contracts and
other obligations of PPPI listed on SCHEDULE 3.10 attached hereto
which Paper Warehouse designates as acquired or assumed on such
Schedule which arise after or relate to the period following the
Effective Date (and specifically excluding any obligations
relating to periods on or prior to the Effective Date), as further
set forth in the Assignment and Assumption of Contracts, a copy of
which is attached as EXHIBIT 2.3(b).
2.4 NO GENERAL ASSUMPTION OF LIABILITIES. Except as expressly stated
in Sections 2.3(a) and 2.3(b), Paper Warehouse shall not and does not assume any
debts, liabilities, or obligations of any nature (whether known or unknown, due
or to become due, absolute or contingent, liquidated, accrued or otherwise) of
PPPI and all such debts, liabilities, and obligations shall remain the debts,
liabilities, and obligations of PPPI. Specifically, but without limiting the
generality of the foregoing, all debts and obligations which have arisen in
connection with the business of the Stores or the Purchased Assets on or prior
to the Effective Date and which are not specifically assumed by Paper Warehouse
shall be the sole and exclusive responsibility of PPPI.
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<PAGE>
2.5 OFFSET. Paper Warehouse may offset any amount owing to PPPI under
this Agreement by an amount equal to any amounts which PPPI or Hazan owes to
Paper Warehouse or Paper Warehouse Franchising, Inc.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PPPI AND HAZAN
PPPI and Hazan jointly and severally represent and warrant to Paper
Warehouse that the following statements were true and correct as of the
Effective Date as if made on that date and will be true and correct as of the
Closing Date as if made on said date:
3.1 AUTHORITY.
(a) PPPI is a corporation duly organized and existing and in
good standing under the laws of the State of Arizona, and is entitled to
own or lease its properties and to conduct its business as presently
conducted. PPPI has full power and authority to transfer, assign, convey
and deliver to Paper Warehouse the Purchased Assets as provided herein.
(b) The execution and delivery of this Agreement do not and the
consummation by each of PPPI and Hazan of the transactions contemplated
this Agreement will not (i) conflict with or result in a breach of the
Articles of Incorporation or Bylaws of PPPI, (ii) conflict with, or
result in a breach of, or constitute a default under any material
agreement or instrument to which PPPI or Hazan is a party or by which
either of them is bound, and (iii) violate any provision of any judicial
or governmental decree, order or judgment to which PPPI or Hazan is a
party or by which either of them is bound.
(c) All corporate and other proceedings necessary to be taken
by PPPI in connection with the transactions provided for by this
Agreement and necessary to make the same effective have been duly and
validly taken, and this Agreement has been duly and validly executed and
delivered by PPPI and Hazan and constitutes a valid and binding
obligation of PPPI and Hazan and is enforceable in accordance with its
terms.
3.2 SOLE SHAREHOLDER. Hazan (95%) and Linda Taylor (5%) are the only
shareholders of PPPI and no other person holds stock or any other equity
interest in PPPI.
3.3 FINANCIAL STATEMENTS. PPPI has furnished to Paper Warehouse the
unaudited balance sheet of PPPI dated October 31, 1998, attached hereto as
SCHEDULE 3.3 (the "Latest Balance Sheet"). The Latest Balance Sheet has been
prepared in accordance with past practices of PPPI, consistently applied, and
fairly presents the financial position, asset and liabilities (whether accrued,
absolute, contingent or otherwise) of PPPI on the date indicated and the results
of its operations for the period then ended.
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<PAGE>
3.4 UNDISCLOSED LIABILITIES. PPPI does not have any material
liability or obligation, whether due or to become due, absolute or contingent,
liquidated, accrued or otherwise, including any liability for federal, state,
local or foreign taxes which (a) is not reflected or reserved against on the
Latest Balance Sheet, or (b) has arisen since the date of the Latest Balance
Sheet and which is materially adverse to the business, assets or operations of
PPPI or any of the Stores, or (c) is not referred to in this Agreement or in any
exhibit or schedule attached hereto.
3.5 TITLE TO PROPERTIES. Except as specifically noted in SCHEDULE 3.5
attached hereto, PPPI has good and marketable title to all of the Purchased
Assets, real and personal (including those reflected in the Latest Balance
Sheet, except as since sold or otherwise disposed of in the ordinary course of
business), free and clear of all liens and encumbrances of any nature
whatsoever, other than (a) liens for taxes not yet due and payable and (b) liens
which may be created under applicable bulk sales laws. Except for personal
property that is leased by PPPI for use in the business of any of the Stores,
all of the Purchased Assets are owned by PPPI. All of such personal property
leases are listed on SCHEDULE 3.10 attached hereto.
3.6 CONDITION OF PERSONAL PROPERTY. The Fixtures are in good and
serviceable condition and repair, reasonable wear and tear excepted.
3.7 CONDUCT OF BUSINESS. Since the date of the Latest Balance Sheet,
there has not been and, between the date of this Agreement and the Closing,
neither PPPI nor Hazan shall cause or take any action, or fail to take any
action which results in:
(a) any material adverse change in the operation of the
business of any of the Stores;
(b) any change in the accounting methods or practices
followed by PPPI which would cause the Latest Balance Sheet and
any other financial information supplied to Paper Warehouse by
PPPI to be inconsistent or not comparable for purposes of
interpretation thereof;
(c) any sale, lease, abandonment or other disposition by
PPPI of any of the assets or property of PPPI other than sales of
inventory and the utilization of supplies in the ordinary course
of business;
(d) any material increase in the compensation of any
employee of PPPI or any of the Stores, or any material increase in
any benefits of any employee of PPPI or any of the Stores under
any employee benefit program, or, except as good business practice
may dictate, any termination of any of its key employees'
employment;
(e) any business interruption, damage, loss or other
occurrence having a material adverse effect on the Purchased
Assets or the business of any of the Stores, whether or not
covered by insurance;
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<PAGE>
(f) any terminations, changes or violations of any of
the leases, contracts, commitments, licenses or other arrangements
of PPPI having a material adverse effect on the Purchased Assets
or the business of any of the Stores;
(g) any violations of any permits, licenses, laws or
regulations having a material adverse effect on the Purchased
Assets or the business of any of the Stores; or
(h) any other occurrence, event or condition of which
PPPI or Hazan has knowledge which does or may have a material
adverse effect on the Purchased Assets or the business of any of
the Stores.
3.8 LITIGATION; ORDERS. There are no claims, actions, suits
proceedings or investigations pending or, to the best knowledge of PPPI or
Hazan, threatened at law or in equity by a federal, state, municipal or other
governmental department, bureau, agency or instrumentality wherever located,
which if adversely determined would have a material adverse effect on the
business, assets or financial condition of PPPI or any of the Stores or would
prevent or hinder the consummation of the purchase contemplated by this
Agreement. PPPI is not operating under or subject to, or in default with
respect to, any order, writ, injunction or decree of any court or federal,
state, local or other governmental department, bureau, agency or instrumentality
wherever located.
3.9 REAL ESTATE; LEASES. Neither PPPI nor Hazan owns or has title to
any real estate relating to any of the Stores. Attached hereto as SCHEDULE 3.9
is a true and complete list of all real estate leases (including all amendments
and supplements thereto) relating to any of the Stores (the "Leases"). True and
complete copies of all Leases have been delivered by PPPI to Paper Warehouse.
PPPI is the sole owner of all the lessee or sublessee rights under the Leases
and has not sold, assigned or otherwise transferred to any individual or entity
any of its rights under any of the Leases. PPPI has performed all material
obligations required to be performed by it to date under the Leases. To the
best knowledge of PPPI and Hazan, PPPI is not in default under, and there are no
facts which, with notice and/or the passage of time, would constitute a default
under, any of the Leases which would have a material adverse effect on the
business, assets, or financial condition of PPPI or any of the Stores. To the
knowledge of PPPI and Hazan, no other party to any of the Leases is in material
default thereunder. The leasehold improvements located in the Stores are in
good condition, normal wear and tear excepted, and the heating, air
conditioning, plumbing and electrical systems of such spaces are in good
operating order and sufficient for operation of a Paper Warehouse-Registered
Trademark- store. To the best knowledge of PPPI and Hazan, no condition exists
and no activity has ever been conducted on the real estate on which the Stores
are located which has given rise to, or may give rise to, any liability under
any federal, state or local environmental protection, health, safety or similar
law.
3.10 CONTRACTS. Attached hereto as SCHEDULE 3.10 is a true and
complete list describing briefly each contract, agreement or arrangement
relating to each of the Stores, other than the Leases or the Franchise
Agreements, to which PPPI or Hazan is a party, or by which PPPI or any of its
assets are bound (the "Contracts"). True and complete copies of all Contracts,
including all amendments and supplements thereto, have been delivered by PPPI to
Paper Warehouse. PPPI has performed all material obligations required to be
performed by it to date and, to the best knowledge of PPPI and Hazan, is not in
default under any of the Contracts, which would have a material
-6-
<PAGE>
adverse effect on the business, assets, or financial condition of PPPI or any of
the Stores. To the knowledge of PPPI and Hazan, no other party to any of the
Contracts is in material default thereunder.
3.11 TAX MATTERS. PPPI has filed all federal, state, local and foreign
tax returns required to be filed by it and all taxes shown to be due thereon
have been paid by it in a timely manner.
3.12 LABOR MATTERS; BENEFITS. PPPI has no written employment
agreements or other agreements providing for payment of a salary, commission or
fee by PPPI in connection with the business of any of the Stores. Except for
compensation to its employees consisting of wages, salaries, vacations and
holidays consistent with normal business practices and except as provided in
SCHEDULE 3.12 attached hereto, PPPI does not maintain (i) any pension,
retirement, disability, medical, dental, or other death benefit plant, profit
sharing, deferred compensation, stock option, or severance plan, including,
without limitation, any "pension plan" as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("Pension
Plan"), (ii) any "welfare plan" as defined in Section 3(1) of ERISA ("Welfare
Plan"), or (iii) any other plan, fund, contract, program, policy, agreement and
arrangement (whether written or not) which is sponsored, maintained or
contributed or required to be contributed to by PPPI, whether or not any of the
foregoing are funded.
With respect to any Pension/Welfare Plan referred to in SCHEDULE 3.12:
(a) Such Pension/Welfare Plans reflect the applicable
requirements of ERISA to the extent required by law and such
Pension/Welfare Plans and their related trusts have received or
requested favorable determinations from the Internal Revenue
Service holding that such Pension/Welfare Plans and trusts qualify
under Section 401 et seq. and other applicable provisions of the
Internal Revenue Code of 1986, as amended. Each of the
Pension/Welfare Plans is in material compliance, and has been
administered in accordance, with the applicable provisions of the
Internal Revenue Code and ERISA;
(b) There is no current matter which would adversely
affect the qualified tax exempt status of any such Pension/Welfare
Plan and trust under the Internal Revenue Code;
(c) All required reports and descriptions (including
Form 5500 Annual Reports, summary annual reports, PBGC-1's and
summary plan descriptions) have been timely filed and distributed
appropriately with respect to each such Pension/Welfare Plan. The
requirements of Part 6 of Subtitle B of Title I of ERISA and IRC
Section 4980B (collectively, "COBRA") have been met with respect
to each Welfare Plan;
(d) All contributions (including all employer
contributions and employee salary reduction contributions) which
are due have been paid to each Pension Plan and all contributions
for any period ending on or before the Closing which are not yet
due have been paid to each Pension Plan or accrued in accordance
with the past custom
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<PAGE>
and practice of PPPI. All premiums or other payments due for all periods
ending on or before the Closing have been paid (or, with respect to those
not yet due, will have been paid on or before Closing) with respect to
each Welfare Plan;
(e) PPPI has delivered or will deliver to Paper
Warehouse correct and complete copies of the plan documents and
summary plan descriptions, the most recent determination letter
received from the Internal Revenue Service, the most recent
Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which implement
each such Pension/Welfare Plan; and
(f) Neither the Pension/Welfare Plans nor trusts created
thereunder, nor any trustee, investment manager or administrator
thereof, has engaged in a non-exempt "prohibited transaction" as
such term is defined in ERISA Section 406 and IRC Section 4975.
All the accrued obligations of PPPI, whether arising by operation
of law, by contract or by past custom, for payments by it to trust or other
funds or any governmental agency with respect to unemployment compensation
benefits and social security benefits have been paid prior to Closing or, if due
after Closing, shall be paid when due under applicable laws and regulations.
All accrued vacation benefits payable to employees of PPPI shall have been paid
prior to or contemporaneously with Closing. All other accrued benefits of
employees of PPPI, and all other reasonably anticipated obligations of PPPI,
whether arising by operation of law, by contract or by past custom, for holiday
pay, bonuses or other forms of compensation or benefits which are and may become
payable to employees of PPPI shall be paid in accordance with the provisions of
applicable laws, regulations, benefit plans or policies, as the case may be. In
no event shall Paper Warehouse assume or be responsible for past or future
obligations of PPPI to any employee, including any obligations to pay salary,
benefits, severance pay, vacation pay or other benefits to any employee,
regardless of whether such employees are hired by Paper Warehouse.
3.13 COMPLIANCE WITH LAWS. PPPI is in compliance in all material
respects with all applicable laws, regulations and orders of federal, state,
local and foreign governments and all agencies and courts thereof, which affect
the business of any of the Stores or any owned or leased properties of PPPI used
in connection with the business of any of the Stores and to which PPPI may be
subject and, to the best knowledge of PPPI and Hazan, no claims have been filed
and are outstanding against PPPI alleging a violation of any such laws,
regulations or orders.
3.14 PERMITS; LICENSES. PPPI holds all of the material permits,
licenses, certificates or other authorizations of federal, state, local or
foreign governments and all agencies and courts thereof required for the conduct
of the business of each of the Stores. Attached hereto as SCHEDULE 3.14 is a
true and complete list of all such permits, licenses, certificates or other
authorizations. PPPI has performed all material obligations required to be
performed by it to date under, and, to the best knowledge of PPPI and Hazan, is
not in default under any such permits, licenses, certificates or other
authorizations.
3.15 COMPLETENESS OF DISCLOSURE. Neither this Agreement nor any
exhibit, certificate, instrument or other information furnished or to be
furnished to Paper Warehouse pursuant to this
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Agreement or in connection with the transactions contemplated by this Agreement,
contains or will contain any untrue statement of a material fact or, to the best
knowledge of PPPI and Hazan, omits or will omit to state a material fact
necessary in order to make the statements contained therein not misleading.
Neither PPPI nor Hazan knows of any fact which materially adversely affects the
present or proposed business or condition (financial or otherwise) of any of the
Stores, PPPI or any of the Purchased Assets which has not been set forth herein
or in any exhibit, schedule, certificate or other instrument furnished to Paper
Warehouse pursuant to this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PAPER WAREHOUSE
Paper Warehouse represents and warrants to PPPI and Hazan that the
following statements were true and correct as of the Effective Date as if made
on that date and will be true and correct as of the Closing Date as if made on
said date:
4.1 AUTHORITY.
(a) Paper Warehouse is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota,
and has the corporate power to own or lease its current properties and
conduct its business as presently conducted. Paper Warehouse has full
power and authority to complete the transactions contemplated by this
Agreement.
(b) The execution and delivery of this Agreement do not and the
consummation by Paper Warehouse of the transactions contemplated this
Agreement will not (i) conflict with or result in a breach of the
Articles of Incorporation or Bylaws of Paper Warehouse, (ii) to the best
knowledge of Paper Warehouse, conflict with, or result in a breach of, or
constitute a default under any agreement or instrument to which Paper
Warehouse is a party or by which it is bound, and (iii) to the best
knowledge of Paper Warehouse, violate any provision of any judicial or
governmental decree, order or judgment to which Paper Warehouse is a
party or by which it is bound.
(c) All corporate and other proceedings necessary to be taken
by Paper Warehouse in connection with the transactions provided for by
this Agreement and necessary to make the same effective have been duly
and validly taken, and this Agreement has been duly and validly executed
and delivered by Paper Warehouse and constitutes a valid and binding
obligation of Paper Warehouse and is enforceable in accordance with its
terms.
4.2 COMPLETENESS OF DISCLOSURE. To the knowledge of Paper Warehouse,
neither this Agreement nor any exhibit, certificate or other instrument
furnished or to be furnished to PPPI by Paper Warehouse pursuant to this
Agreement or in connection with the transactions contemplated by this Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
contained therein not misleading. Paper Warehouse knows of no fact which
materially adversely affects the present
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business or condition (financial or otherwise) of Paper Warehouse or its assets
which may materially affect the ability of Paper Warehouse to pay the Purchase
Price which has not been set forth herein or in any exhibit, schedule,
certificate or other instrument furnished to PPPI or Hazan pursuant to this
Agreement.
ARTICLE V
COVENANTS OF PPPI AND HAZAN
Between the date of this Agreement and the Closing:
5.1 ACCESS TO PPPI. PPPI and Hazan shall afford to the officers and
authorized representatives of Paper Warehouse access to the premises,
properties, books and records of PPPI relating to each of the Stores, and PPPI
shall furnish Paper Warehouse with such additional financial and operating data
and other information as to the business and properties of each of the Stores as
Paper Warehouse may from time to time reasonably request.
5.2 CONSENTS OF THIRD PARTIES. PPPI and Hazan shall use its/her best
efforts to obtain in writing all consents of third persons required to permit
PPPI to perform all the commitments made by PPPI in this Agreement and to
satisfy all the conditions to be satisfied by PPPI.
5.3 PRESERVATION OF BUSINESS ORGANIZATION AND OPERATION OF STORE
PENDING THE CLOSING. Pending the Closing of the purchase contemplated by this
Agreement, PPPI and Hazan shall use its/her best efforts to preserve PPPI's
relationships with its principal suppliers and principal customers and dealers
and PPPI will not take any action or do any act that would adversely affect the
continuous operation of any of the Stores.
5.4 EXCLUSIVE RELATIONSHIP WITH PAPER WAREHOUSE. Until the
termination of this Agreement or the Closing, whichever occurs first, PPPI shall
not offer any assets of any of the Stores to any prospective purchasers other
than Paper Warehouse (except for sale of inventory in the ordinary course of
business prior to the Closing Date), nor conduct any negotiations or discussions
with prospective purchasers (other than Paper Warehouse) of such assets (except
for sale of inventory in the ordinary course of business prior to the Closing
Date) or for the sale of equity interests toward that end.
ARTICLE VI
COVENANTS OF PAPER WAREHOUSE
Between the date of this Agreement and the Closing:
6.1 CONSENTS OF THIRD PARTIES. Paper Warehouse shall use its best
efforts to obtain in writing all consents of third persons required to permit
Paper Warehouse to perform all commitments made by Paper Warehouse in this
Agreement and to satisfy all the conditions to be satisfied by Paper Warehouse.
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ARTICLE VII
MUTUAL COVENANTS AND POST-CLOSING COVENANTS
7.1 BROKERS. Paper Warehouse shall hold PPPI and Hazan, and PPPI and
Hazan shall hold Paper Warehouse and its affiliates, harmless against any and
all claims or liabilities asserted by or due to any brokers, finders or
consultants upon the basis of an engagement by PPPI or by Paper Warehouse, as
the case may be, in connection with this Agreement and the transactions
contemplated hereby.
7.2 POST-CLOSING COVENANT TO TRANSMIT RECEIVABLES. If, after Closing,
PPPI and/or Hazan receives any payments due to Paper Warehouse under the terms
of this Agreement as a result of receivables arising from the sale of inventory
or relating to the Purchased Assets or any of the Stores after the Effective
Date, PPPI and/or Hazan shall immediately transmit such funds to Paper
Warehouse. If, after Closing, Paper Warehouse receives any payments due to PPPI
and/or Hazan under the terms of this Agreement as a result of receivables
arising from the sale of inventory or relating to the Purchased Assets or any of
the Stores prior to the Effective Date, Paper Warehouse shall immediately
transmit such funds to PPPI and/or Hazan.
7.3 WAIVER OF COMPLIANCE WITH APPLICABLE BULK SALES LAWS. PPPI, Hazan
and Paper Warehouse hereby waive compliance with any applicable bulk sales laws
with respect to transfer and conveyance of the Purchased Assets, provided that
(a) PPPI and Hazan shall discharge all debts, liabilities and obligations not
specifically assumed by Paper Warehouse under this Agreement in a timely and
commercially reasonable manner but no later than 45 days following the Closing
Date, and (b) PPPI and Hazan shall fully indemnify and hold Paper Warehouse
harmless against any claim based on failure to comply with any applicable bulk
sales laws, as more fully set forth in Article XI hereof.
7.4 POST-CLOSING COVENANT TO DISCHARGE OBLIGATIONS TO EMPLOYEES OF
PPPI. PPPI and/or Hazan shall discharge all payment obligations to employees of
any of the Stores which are accrued as of the Effective Date (including accrued
salary, expense reimbursements and benefits which may be accrued under any plan
or agreement for the benefit of employees) in a timely and commercially
reasonable manner but no later than 45 days following the Closing Date.
7.5 POST-CLOSING COVENANT TO DISCHARGE OBLIGATIONS TO THIRD PARTIES.
PPPI and/or Hazan shall discharge all debts, liabilities and obligations not
specifically assumed by Paper Warehouse under this Agreement in a timely and
commercially reasonable manner but no later than 45 days following the Closing
Date.
7.6 INSURANCE POLICIES. The parties hereto agree that Paper Warehouse
shall not purchase any insurance policies of PPPI relating to the Purchased
Assets or any of the Stores, and after the date of Closing, PPPI may, at its
option, cancel all such policies of insurance.
7.7 COST OF INVENTORY. PPPI and Paper Warehouse agree to split evenly
the cost of the inventory count conducted on November 5 and November 9, 1998 by
RGIS Inventory Service. The amount owing to Paper Warehouse by PPPI for the
cost of such inventory count shall be paid by
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PPPI to Paper Warehouse by offsetting such amount against the Cash Purchase
Price to be paid by Paper Warehouse to PPPI.
ARTICLE VIII
CLOSING CONDITIONS
8.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF PAPER WAREHOUSE. All
obligations of Paper Warehouse under this Agreement are, at the option of the
Paper Warehouse, subject to fulfillment of each of the following conditions on
or prior to the Closing Date:
(a) Paper Warehouse shall have obtained an assignment of
the Leases with the consent of the landlords identified on such
Leases in form and content satisfactory to Paper Warehouse or, at
Paper Warehouse's option, shall have terminated one or more of the
Leases and entered into one or more new leases for the Stores.
(b) The representations and warranties of PPPI and Hazan
contained in this Agreement or in any exhibit, schedule,
certificate or document delivered hereunder or otherwise in
connection with the transactions contemplated hereby, shall be
true and correct in all respects on and as of the date of the
Closing as though such representations and warranties were made on
and as of such dates. All terms and conditions of this Agreement
to be complied with and performed by PPPI and Hazan on or before
the date of the Closing will have been duly complied with and
performed.
(c) As of the date of the Closing, no claim, action,
suit or proceedings shall be pending or threatened against PPPI,
Hazan, or Paper Warehouse, which, if adversely determined, would
prevent or hinder the consummation of the transaction and other
actions contemplated hereby or result in the payment of
substantial damages as a result of such transaction and action.
(d) All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental thereto and all
other related legal matters shall have been approved as to legal
sufficiency by Gray, Plant, Mooty, Mooty & Bennett, P.A., legal
counsel to Paper Warehouse.
(e) There shall have been no material misrepresentation
or omission to state any material fact by PPPI or Hazan in
connection with the information provided to Paper Warehouse
relative to the transactions contemplated by this Agreement.
(f) PPPI shall have delivered to Paper Warehouse the
instruments of transfer, assignment and conveyance, warranty of
title and other documents as described in Article IX hereof.
(g) No material adverse events affecting any of the
Stores shall have occurred prior to the date of the Closing.
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(h) PPPI and Hazan shall have provided, on a timely
basis, such financial statements and supporting documentation as
may be required by this Agreement.
(i) As of the date of the Closing, there shall be no
outstanding judgments or actions pending against PPPI or Hazan or
any personnel of PPPI commenced by a governmental or regulatory
agency or by any private party (except those as to which Paper
Warehouse waives such condition in writing) or any unsatisfied
liabilities, liens or encumbrances, which materially adversely
affects the Purchased Assets, including the business of any of the
Stores.
8.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF PPPI AND HAZAN. The
obligations of PPPI and Hazan under this Agreement are, at the option of PPPI
and Hazan, subject to fulfillment of each of the following conditions on or
prior to the Closing Date:
(a) The representations and warranties of Paper
Warehouse contained in this Agreement or in any exhibit, schedule,
certificate or document delivered hereunder or otherwise in
connection with the transactions contemplated hereby, shall be
true and correct in all respects on and as of the date of the
Closing as though such representations and warranties were made on
and as of such dates. All terms, covenants and conditions of this
Agreement to be complied with and performed by Paper Warehouse on
or before the Closing will have been duly complied with and
performed.
(b) The Franchise Agreements shall have been terminated,
and PPPI and Hazan shall have received from Paper Warehouse
Franchising, Inc., written acknowledgment of such termination,
pursuant to the terms of the Termination Agreements referenced in
Section 9.2 of this Agreement.
(c) There shall have been no material misrepresentation
or omission to state any material fact by Paper Warehouse in
connection with the information provided to PPPI and Hazan
relative to the transactions contemplated by this Agreement.
(d) Paper Warehouse shall have employed Hazan and Linda
Taylor in accordance with the terms outlined in Paper Warehouse's
letter to Jean Moskow dated September 28, 1998.
ARTICLE IX
CLOSING
9.1 CLOSING DATE. The consummation and closing (the "Closing") of the
purchase contemplated by this Agreement shall take place on December 17, 1998,
or such other date to which the parties may agree, by mail, facsimile and/or
phone (the "Closing Date") but shall be effective as of close of business on
November 9, 1998 (the "Effective Date").
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9.2 CONVEYANCE OF ASSETS. PPPI shall, at the Closing, deliver to
Paper Warehouse, in addition to the instruments and agreements listed in Article
VIII hereof as prerequisites to Closing:
(a) such bills of sale with covenants of general
warranty, endorsements, assignments and other good and sufficient
instruments of transfer, assignment, conveyance and release and
satisfaction of liens and encumbrances in form reasonably
satisfactory to Paper Warehouse and its counsel as shall be
effective to vest in Paper Warehouse good and marketable title to
all of the Purchased Assets, all as provided in this Agreement;
(b) that portion of the Purchased Assets comprised of
PPPI's contracts (including agreements with its personnel,
customers, and business associates), contract amendments,
commitments, leases, books, business records (including original
invoices, receiving reports, bills of lading and purchase orders)
and other data relating to the Purchased Assets;
(c) Termination Agreements respecting the Franchise
Agreements the form of which is attached hereto as EXHIBIT 9.2(c),
executed by PPPI and Hazan (the "Termination Agreements"); and
(d) A Subscription Agreement for the Paper Warehouse
Common Stock, the form of which is attached hereto as EXHIBIT
9.2(d).
9.3 PAPER WAREHOUSE'S OBLIGATIONS AT CLOSING. Paper Warehouse shall
deliver the following documents to PPPI at the Closing:
(a) Termination Agreements respecting the Franchise
Agreements, executed by Paper Warehouse; and
(b) Documents whereby Paper Warehouse formally assumes
those obligations set forth in Sections 2.3(a) and 2.3(b) above.
ARTICLE X
TERMINATION OF AGREEMENT AND REMEDIES
10.1 TERMINATION. This Agreement and the transactions contemplated
hereby may be terminated at any time prior to the Closing:
(a) by written consent of Paper Warehouse and PPPI;
(b) by Paper Warehouse if there has been a material
misrepresentation or breach of the representations and warranties
of PPPI or Hazan set forth herein or in any exhibit delivered
pursuant hereto by such party;
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(c) by Paper Warehouse if the transactions contemplated
by this Agreement have become impracticable by reason of the
institution or threat by state, local, or federal government
authorities, or by any other person, of material litigation or
proceedings against PPPI, which may materially affect the
Purchased Assets, or the prospects for profitable operation of the
Store;
(d) by Paper Warehouse if PPPI or Hazan fails to fulfill
those obligations set forth in Section 8.1 above; or
(e) by PPPI if Paper Warehouse fails to fulfill those
obligations set forth in Section 8.2 above.
10.2 RESCISSION. If this Agreement is terminated pursuant to Section
10.1 without a material default, material misrepresentation or breach of
warranty by either party, or because of the failure to satisfy any of the
conditions specified in Article VIII for reasons other than a material breach of
any party, then all further obligations of the parties to this Agreement under
this Agreement shall terminate without liability.
10.3 REMEDIES. In the event of the breach of this Agreement or any
party's failure to perform the covenants set forth in this Agreement or
delivered hereunder, the measure of damages at law to the affected party will be
difficult to ascertain and the remedy at law may be inadequate. Accordingly,
PPPI and Paper Warehouse agree that they shall be entitled to the remedy of
specific performance to enforce the terms and conditions of this Agreement. If
any dispute between the parties concerning this Agreement leads to legal action,
the prevailing party shall be entitled to reimbursement by the other party for
all of its costs and expenses incurred in such action, including its reasonable
attorneys' fees.
ARTICLE XI
POST-CLOSING OBLIGATIONS
11.1 INDEMNIFICATION OF PAPER WAREHOUSE. Each of PPPI and Hazan agrees
to defend, indemnify and hold Paper Warehouse harmless from, against and in
respect of:
(a) any and all losses, damages or deficiencies
resulting from any and all misrepresentations or breaches of
warranty or covenants by PPPI or Hazan made or contained in (i)
this Agreement or (ii) in any agreement, list, document, exhibit
or schedule delivered to Paper Warehouse under or in connection
with this Agreement or the transaction contemplated herein;
(b) any and all claims relating to failure to comply
with any applicable bulk sales law in connection with the
transactions contemplated by this Agreement;
(c) any and all obligations, liabilities, or commitments
arising with respect to the Store and the Purchased Assets before
the Effective Date which are not specifically assumed by Paper
Warehouse under the terms of this Agreement; and
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(d) all costs and expenses incident to any and all
claims, suits, proceedings, claims, demands, assessments or
judgments in respect to subsection (a), (b), or (c) above,
including legal and accounting fees and expenses;
PROVIDED, HOWEVER, that if any such action, suit or proceeding is commenced
against Paper Warehouse or if any such claim, demand or assessment is asserted
against Paper Warehouse for which Paper Warehouse proposes to demand
indemnification, PPPI and Hazan shall be notified to that effect with reasonable
promptness and shall have the right, but not the obligation, to assume the
entire control of the defense, compromise or settlement thereof, including, at
their own expense, employment of counsel reasonably satisfactory to Paper
Warehouse and, in connection therewith, Paper Warehouse shall cooperate fully to
make available to PPPI all pertinent information under its control.
11.2 INDEMNIFICATION OF PPPI AND HAZAN. Paper Warehouse agrees to
defend, indemnify and hold PPPI and Hazan harmless from, against and in respect
of:
(a) any and all losses, damages or deficiencies
resulting from any and all misrepresentations or breaches of
warranty or covenants by Paper Warehouse made or contained in (i)
this Agreement or (ii) in any agreement, list, document, exhibit
or schedule delivered to PPPI under or in connection with this
Agreement or the transactions contemplated herein;
(b) any and all obligations, liabilities, or commitments
arising with respect to the Store and the Purchased Assets after
the Effective Date; and
(c) all costs and expenses incident to any and all
actions, suits, proceedings, claims, demands, assessments or
judgments in respect to subsection (a) or (b) above, including
legal and accounting fees and expenses;
PROVIDED, HOWEVER, that if any such action, suit or proceeding is commenced
against PPPI or Hazan or any such claim, demand or assessment is asserted
against PPPI or Hazan for which PPPI or Hazan proposes to demand
indemnification, Paper Warehouse shall be notified to that effect with
reasonable promptness and shall have the right, but not the obligation, to
assume the entire control of the defense, compromise or settlement thereof,
including, at its own expense, employment of counsel reasonably satisfactory to
PPPI and Hazan and, in connection therewith, PPPI and Hazan shall cooperate
fully to make available to Paper Warehouse all pertinent information under their
control.
11.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; LIMITATION ON
INDEMNIFICATION. Each of the representations and warranties of made by PPPI,
Hazan and Paper Warehouse in this Agreement shall survive for a period of two
years after the Closing Date, provided, however, that the representations and
warranties made in Section 3.5 of this Agreement (relating to title to
properties) shall survive without limitation, the representations and warranties
made in Section 3.11 of this Agreement (relating to tax matters) shall survive
until the applicable statutes of limitations relating to tax matters shall have
expired, and the representations and warranties made in Section
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3.13 of this Agreement (relating to compliance with laws) shall survive for a
period of five years after the Closing Date. After the expiration date of any
representations and warranties no claim for indemnification based on such
representations and warranties may be asserted by PPPI, Hazan or Paper
Warehouse, except that claims first asserted in writing with reasonable detail
before the expiration date may be pursued until they are finally resolved.
11.4 NONCOMPETITION. PPPI and Hazan shall be subject to the
noncompetition provisions set forth in the Termination Agreement.
ARTICLE XII
GENERAL MATTERS
12.1 NOTICES. All notices provided for in this Agreement shall be in
writing and hand delivered or sent by certified or registered mail, return
receipt requested, directed as follows:
To Paper Warehouse: Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, Minnesota 55426
Attn: Cheryl W. Newell
with a copy to: Brian B. Schnell, Esq.
Gray, Plant, Mooty,
Mooty & Bennett, P.A.
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
To PPPI and Susan Hazan
Hazan: 1001 East Via Soledad
Tucson, Arizona 85718
with a copy to: Jean Moskow, Esq.
Butler & Stein, P.C.
110 South Church Avenue
Suite 9300
Tucson, Arizona 85701
Notice, if mailed, shall be deemed effective as of the date such notice is
deposited in the United States mail, certified, return receipt requested,
postage prepaid and properly addressed to the address listed above or to such
other address as the parties may so notify each other of pursuant to the terms
of this Section 12.1.
12.2 PARTIES IN INTEREST. This Agreement shall benefit and bind the
parties hereto, and their respective heirs, successors and assigns.
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12.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
12.4 COMPLETE AGREEMENT. This Agreement, together with the agreements,
instruments and documents contemplated by this Agreement, is intended by the
parties as the final and binding expression of their agreement and as the
complete and exclusive statement of the terms hereof and thereof. This
Agreement supersedes and revokes all prior negotiations, representations and
agreements, whether oral or written, including Paper Warehouse's letter of
intent dated September 28, 1998 and PPPI's attorney's response thereto dated
October 6, 1998, relating to the subject matter hereof or thereof. This
Agreement may be supplemented, altered, amended or revoked only by a writing
signed by each of the parties hereto.
12.5 APPLICABLE LAW. This Agreement was made and entered into in the
State of Minnesota and the laws of the State of Minnesota (without regard to its
conflicts of laws rules) shall govern and be applicable to this Agreement and
any construction and interpretation thereof.
12.6 INDEPENDENT INVESTIGATION. Each of the parties hereto
acknowledges that it/he has conducted an independent investigation of the
transaction contemplated hereby and, in entering into this Agreement, has not
relied upon any representation or inducement of any other party to this
Agreement that it/he has not independently confirmed or examined.
12.7 TAX IMPLICATIONS. NONE OF THE PARTIES TO THIS AGREEMENT WARRANT
ANY TAX ASPECTS OF THE TRANSACTION CONTEMPLATED HEREBY. NOTHING HEREIN, OR ANY
EXHIBIT OR OTHER INFORMATION FURNISHED IN CONNECTION HERETO, SHALL BE CONSTRUED
AS LEGAL, BUSINESS OR TAX ADVICE. EACH PARTY TO THIS AGREEMENT IS URGED TO
CONSULT WITH HIS/HER/ITS OWN TAX ADVISOR AS TO THE TAX IMPLICATIONS OF THIS
TRANSACTION ON HIS/HER/ITS OWN AFFAIRS. THERE SHALL BE NO RECOURSE BY ANY PARTY
HERETO AGAINST ANY OTHER PARTY HERETO BY REASON OF THE FACT THAT THE EXECUTION
OF CONSUMMATION OF THIS AGREEMENT OR OF ANY TRANSACTION CONTEMPLATED HEREBY DOES
NOT HAVE THE SAME TAX CONSEQUENCES AFFECTING SUCH PARTY AS MAY BE ANTICIPATED BY
SUCH PARTY.
12.8 FURTHER ASSURANCES. On the Closing Date, and from time to time
thereafter, at the request of any party, any of the other parties will (a)
execute and deliver to the requesting party all assignments, endorsements and
other documents, and take such other actions, as the requesting party may
reasonably request in order to (i) accomplish the purposes and transactions
contemplated in this Agreement, (ii) more effectively transfer and assign to the
requesting party the rights granted to the requesting party pursuant to this
Agreement, (iii) confirm the title of the requesting party thereto, and (iv)
assist the requesting party in exercising its rights with respect thereto and
under this Agreement, and (b) obtain assignments, endorsements and other
documents from, and compel action by any affiliate of any party who or which may
have or claim any rights to or interest in the Purchased Assets or the Store.
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12.9 FEES AND EXPENSES. Each party to this Agreement shall pay all
fees and disbursements of its respective legal counsel, accountants, and other
agents, representatives and advisors arising in connection with this Agreement
and the transactions contemplated hereby.
[Rest of page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PAPER WAREHOUSE, INC. PRICKLY PEAR PAPER, INC.
By /s/ Cheryl W. Newell By /s/ Susan B. Hazan
---------------------------------- ------------------------------------
Cheryl W. Newell, Chief Susan Hazan, President
Financial Officer
SUSAN HAZAN
/s/ Susan Hazan
--------------------------------------
Susan Hazan, individually
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SCHEDULE 1.2
FIXTURES
1. See attached list.
<PAGE>
SCHEDULE 3.3
FINANCIAL STATEMENTS
1. See attached copy of Latest Balance Sheet.
<PAGE>
SCHEDULE 3.5
TITLE TO PROPERTY
1. National Bank of Arizona claims a security interest in all inventory,
furniture and equipment of PPPI, including (i) all accessions, additions,
replacements and substitutions relating thereto, (ii) all records of any
kind relating thereto, and (iii) all proceeds relating thereto. In
connection with the Closing, Paper Warehouse will pay a portion of the
Purchase Price to National Bank of Arizona on behalf of PPPI so that
National Bank of Arizona will release its security interest in all of the
Purchased Assets.
<PAGE>
SCHEDULE 3.9
LEASES
1. Lease of real property at 7070 East 22nd Street, Tucson, Arizona. Paper
Warehouse will assume from and after the Effective Date.
2. Lease of real property at 7401 N. La Cholla Boulevard (Foothills Mall),
Tucson, Arizona. Paper Warehouse will assume from and after the
Effective Date.
3. Lease of real property at 405 East Wetmore, Tucson, Arizona. Paper
Warehouse will assume from and after the Effective Date.
4. Lease of real property at 4861 East Grant, Tucson, Arizona. Paper
Warehouse will assume from and after the Effective Date.
<PAGE>
SCHEDULE 3.10
CONTRACTS
1. GENERAL
(a) See contracts listed on Schedule 3.12. Paper Warehouse will not
assume.
2. FOOTHILLS MALL
(a) Business Music, Inc.
Effective 09/30/97 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(b) Honeywell, Inc., Home and Building Control
Security System
Effective 10/07/97 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(c) Truly Nolen Exterminating, Inc.
Commercial Pest Management Agreement
Effective 12/97 for a period of one year, with automatic renewal
clause. Paper Warehouse will assume from and after the Effective
Date.
3. 405 E. WETMORE
(a) Business Music, Inc.
Effective 03/05/97 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(b) Honeywell, Inc., Protection Services Division
Burglar Alarm System
Effective __/08/90 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(c) Truly Nolen Exterminating, Inc.
Commercial Pest Management Agreement
Effective 05/16/97 for a period of one year, with automatic
renewal clause. Paper Warehouse will assume from and after the
Effective Date.
(c) ACS Air Conditioning Services
Preventive Maintenance Agreement
3-times a year Maintenance and Inspection
Effective 11/01/98 for a period of one year. Paper Warehouse will
assume from and after the Effective Date.
<PAGE>
(e) Yellow Pages Co.
(National Internet Yellow Pages Directory)
12-month term
10/98. Paper Warehouse will not assume.
4. 4861 E. GRANT
(a) Business Music, Inc.
Effective 03/07/97 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(b) Honeywell, Inc., Home and Building Control
Security System
Effective 09/11/95 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(c) Tucson Newspapers
Retail/National Advertising Contract
12-month term
Effective 08/31/98 for a period of one year. Paper Warehouse will
assume from and after the Effective Date.
(d) ACS Air Conditioning Services
Preventive Maintenance Agreement
3-times a year Maintenance and Inspection
Effective 11/01/98 for a period of one year. Paper Warehouse will
assume from and after the Effective Date.
5. 7070 E. 22ND STREET
(a) Business Music, Inc.
Effective 03/05/97 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(b) Honeywell, Inc., Protection Services
Burglar Alarm System
Effective 11/08/95 for a period of 60 months, with automatic
renewal clause. Paper Warehouse will not assume.
(c) ACS Air Conditioning Services
Preventive Maintenance Agreement
3-times a year Maintenance and Inspection
Effective 11/01/98 for a period of one year. Paper Warehouse will
assume from and after the Effective Date.
<PAGE>
(d) Truly Nolen Exterminating, Inc.
Commercial Pest Management Agreement
Pigeons on Sign
Service Schedule: April
Effective 04/09/98 for a period of one year, with automatic
renewal clause. Paper Warehouse will assume from and after the
Effective Date.
(e) Truly Nolen Exterminating, Inc.
Commercial Pest Management Agreement
Effective 07/23/97 for a period of one year, with automatic
renewal clause. Paper Warehouse will assume from and after the
Effective Date.
<PAGE>
SCHEDULE 3.12
LABOR MATTERS; BENEFITS
1. PPPI maintains a 401(k) Plan for its employees.
2. PPPI maintains a health insurance plan for its employees.
<PAGE>
SCHEDULE 3.14
PERMITS; LICENSES
1. 7070 East 22nd Street
Certificate of Occupancy (11-3-95)
Business Privilege License (11-8-95) (#107536)
Transaction Privilege License (10-8-88) (#10-125261-U)
2. 7401 N. La Cholla Boulevard (Foothills Mall)
Certificate of Occupancy (10-17-97) (#P97CP10815)
Transaction Privilege License (10-8-88) (#10-125261-U)
3. 405 E. Wetmore
Certificate of Occupancy (2-6-90)
Business Privilege License (3-1-90) (#108223)
Transaction Privilege License (10-8-88) (#10-125261-U)
4. 4861 E. Grant
Certificate of Occupancy (9-15-95)
Business Privilege License (9-25-95) (#139136)
Transaction Privilege License (10-8-88) (#10-125261-U)
Copies of each of these licenses are attached hereto.
<PAGE>
SECOND AMENDMENT TO LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT ("Amendment") is entered into
as of March 31, 1997, by and between Paper Warehouse, Inc., a Minnesota
corporation ("Borrower"), and Richfield Bank & Trust Co., a Minnesota banking
corporation ("Bank").
RECITALS:
WHEREAS, the Borrower is bound by the terms and conditions of that
certain Loan Agreement dated January 29, 1997 as amended by and amendment dated
as of October 31, 1997 (the "Loan Agreement") by and between the Borrower, and
the Bank, pursuant to which the Bank granted to the Borrower a Line of Credit of
$7,500,000 (the "Loan");
WHEREAS, the Borrower has requested an amendment of the terms of the
Loan Agreement and a waiver of compliance with one of the provisions of the Loan
Agreement, and
WHEREAS, the Bank is willing to grant such a request;
NOW, THEREFORE, the Loan Agreement is hereby amended and the Bank and
the Borrower agree as follows:
1. Effective as of the date of the First Amendment to the Loan Agreement as of
October 1, 1997, Section 5.18 of the Loan Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
Section 5.18 MINIMUM NET INCOME. During the fiscal year ending
in January 1999, the Borrower shall achieve a net income before
distributions to shareholders of not less than $1,500,000.
The Bank hereby waives any default based on the failure of the Borrower to
comply with the provisions of Section 5.18 of the Loan Agreement prior to the
date of this Amendment to the Loan Agreement. The waiver of compliance specified
herein shall be effective only in the specific instance set forth above. Nothing
contained herein shall be construed to constitute the Bank's agreement to waive
any other default under the terms of the Loan Agreement, whether now existing or
hereafter arising.
2. Except as specifically provided herein, all terms and conditions of the Loan
Agreement remain in full force and effect, without waiver or modification. All
terms defined in the Loan Agreement shall have the same meaning when used in
this Amendment, except as otherwise specifically provided herein. This Amendment
and the Loan Agreement shall be read together, as one document.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
Borrower:
PAPER WAREHOUSE, INC.
/S/ Yale Dolginow
--------------------------------
Yale Dolginow
President & CEO
Bank:
RICHFIELD BANK & TRUST CO.
/S/ Daniel J. Roberts
--------------------------------
Daniel J. Roberts
Assistant Vice President
Acknowledged and agreed to
as of the 31st day of March, 1998.
Firstar Bank Milwaukee, N.A.,
a participant in the Loan.
By: /s/ illegible
--------------------------------
Title: Vice President
------------------------------
<PAGE>
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT ("Amendment") is entered into as of
March 15, 1999, by and between Paper Warehouse, Inc., a Minnesota corporation
("Borrower"), and Richfield Bank & Trust Co., a Minnesota banking
corporation("Bank").
RECITALS:
WHEREAS, the Borrower is bound by the terms and conditions of that certain
Loan Agreement dated January 29, 1997 as amended by and amendments dated as of
October 31, 1997 and March 31, 1998 (the "Loan Agreement") by and between the
Borrower and the Bank, pursuant to which the Bank granted to the borrower a Line
of Credit of $7,500,000 (the "Loan");
WHEREAS, the Borrower has requested an amendment of the terms of the Loan
Agreement and a waiver of compliance with one of the provisions of the Loan
Agreement, and
WHEREAS, the Bank is willing to grant such a request;
NOW, THEREFORE, the Loan Agreement is hereby amended and the Bank and the
Borrower agree as follows:
1. Effective as of the date of the Second Amendment to the Loan Agreement as
of March 31, 1998, Section 5.18 of the Loan Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
Section 5.18 MAXIMUM NET LOSS. During the fiscal year ending in
January 1999, the Borrower shall not incur a net loss before taxes of
more than $900,000.
The Bank hereby waives any default based on the failure of the Borrower to
comply with the provisions of Section 5.18 of the Loan Agreement prior to the
date of this Amendment to the Loan Agreement. The waiver of compliance
specified herein shall be effective only in the specific instance set forth
above. Nothing contained herein shall be construed to constitute the Bank's
agreement to waive any other default under the terms of the Loan Agreement,
whether now existing or hereafter arising.
2. Section 5.07 of the Loan Agreement shall be amended by the deletion of the
existing Section 5.07 and the insertion in lieu thereof of the following:
Section 5.07 LIENS. The Borrower shall not create, incur or
permit to exist in favor of any person other than the Agent or the
Bank any mortgage, deed of trust, security interest or other lien on
any of its property now owned or hereafter acquired, except mortgages,
deeds of trust, security interests and other liens securing any
indebtedness for borrowed money in existence on the date hereof and
listed in the certificate of indebtedness and liens described in
Exhibit
<PAGE>
E, purchase money security interests securing indebtedness permitted by
Section 5.08(d) and the mortgage lien permitted by Section 5.08(e).
3. Section 5.08 of the Loan Agreement shall be amended by the insertion of the
following clause:
(e) Indebtedness to Fortis Real Estate, a division of Fortis
Advisors, Inc. in an amount not to exceed $1,100,000, incurred in
connection with the refinancing of Borrower's corporate headquarters,
secured by a mortgage against such property provided that the proceeds
of such loan are used in part to repay amounts due the Bank secured by
such property.
4. Except as specifically provided herein, all terms and conditions of the
Loan Agreement remain in full force and effect, without waiver or modification.
All terms defined in the Loan Agreement shall have the same meaning when used in
this Amendment, except as otherwise specifically provided herein. This
Amendment and the Loan Agreement shall be read together, as one document.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
BORROWER:
PAPER WAREHOUSE, INC.
By: /s/ Yale Dolginow
----------------------------------
Title: President & CEO
--------------------------------
BANK:
RICHFIELD BANK & TRUST CO.
By: /s/ Jay W. Stevens
----------------------------------
Title: Vice President
--------------------------------
Acknowledged and agreed to as of the 15th day of March, 1999
Firstar Bank Milwaukee, N.A., a participant in the Loan.
By: /s/ Hunt W. Gildner
---------------------------
Title: Vice President
------------------------
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
-----------------------------
The Board of Directors
Paper Warehouse, Inc. and Subsidiary:
We consent to the inclusion of our report dated March 19, 1999, with respect
to the consolidated balance sheets of Paper Warehouse, Inc. and Subsidiary 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, which report appears
in the Form 10-K of Paper Warehouse, Inc. and Subsidiary dated April 29, 1999.
/s/ KPMG Peat Marwick LLP
April 29, 1999
Minneapolis, Minnesota
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-START> JAN-31-1998
<PERIOD-END> JAN-29-1999
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 1,105
<ALLOWANCES> 0
<INVENTORY> 16,302
<CURRENT-ASSETS> 18,085
<PP&E> 15,079
<DEPRECIATION> 5,103
<TOTAL-ASSETS> 29,528
<CURRENT-LIABILITIES> 12,873
<BONDS> 1,497
0
0
<COMMON> 46
<OTHER-SE> 14,044
<TOTAL-LIABILITY-AND-EQUITY> 29,528
<SALES> 63,491
<TOTAL-REVENUES> 63,491
<CGS> 56,437
<TOTAL-COSTS> 56,437
<OTHER-EXPENSES> 7,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> (844)
<INCOME-TAX> 324
<INCOME-CONTINUING> (521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (521)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
