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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 28, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to__________
Commission File No. 0-23389
---------------------------
PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1612534
(State or 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: (952) 936-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES /X/ NO / /
On June 6, 2000, there were 4,639,475 shares of Common Stock, $.01 par value, of
Paper Warehouse, Inc. outstanding.
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PAPER WAREHOUSE, INC.
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets
As of April 28, 2000 and January 28, 2000 1
Consolidated Statements of Operations
For the Three Months ended April 28, 2000
and April 30, 1999 2
Consolidated Statements of Cash Flows
For the Three Months ended April 28, 2000
and April 30, 1999 3
Notes to Consolidated Financial Statements 4-6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-13
Item 3: Quantitative and Qualitative Disclosures about
Market Risk 14
PART II. OTHER INFORMATION
Item 2: Changes in Securities 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------
April 28, January 28,
2000 2000
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 645,281 $ 469,768
Merchandise inventories ............................................ 21,572,129 20,206,851
Accounts receivable ................................................ 1,002,051 830,153
Prepaid expenses and other current assets .......................... 1,878,095 1,003,398
------------ ------------
Total current assets ......................................... 25,097,556 22,510,170
Property and equipment, net ........................................ 9,730,682 10,006,870
Deferred tax asset ................................................. 3,177,052 3,177,052
Other assets, net .................................................. 1,633,899 1,694,552
------------ ------------
Total assets ............................................... $ 39,639,189 $ 37,388,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit ..................................... $ 8,988,094 $ 6,303,648
Current maturities of long-term debt ............................... 674,610 715,517
Accounts payable ................................................... 9,019,205 8,226,993
Accrued liabilities ................................................ 1,748,813 1,751,634
Current portion - reserve for store closings ....................... 855,542 811,709
------------ ------------
Total current liabilities .................................... 21,286,264 17,809,501
Convertible subordinated debt ......................................... 4,000,000 4,000,000
Other long-term debt, less current maturities ......................... 2,326,839 2,447,852
Reserve for store closings, less current portion ...................... 2,014,217 2,188,291
Deferred rent credits ................................................. 1,340,464 1,301,563
------------ ------------
Total liabilities .......................................... 30,967,784 27,747,207
------------ ------------
Stockholders' equity:
Serial preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding ...................................... --- ---
Common stock, $.01 par value; 40,000,000 shares authorized;
4,639,475 and 4,627,936 shares issued and outstanding ........... 46,395 46,279
Additional paid-in capital .......................................... 13,848,345 13,833,442
Accumulated deficit ................................................. (5,223,335) (4,238,284)
------------ ------------
Total stockholders' equity ................................... 8,671,405 9,641,437
------------ ------------
Total liabilities and stockholders' equity ................. $ 39,639,189 $ 37,388,644
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
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PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
April 28, April 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Retail sales ........................................... $ 19,423,086 $ 16,419,572
Franchise related fees ................................. 314,676 272,857
------------ ------------
Total revenues .................................... 19,737,762 16,692,429
Costs and expenses:
Costs of products sold and occupancy costs ............. 13,437,240 11,406,845
Store operating expenses ............................... 4,999,285 4,673,890
General and administrative expenses .................... 2,578,412 2,244,945
------------ ------------
Total costs and expenses .......................... 21,014,937 18,325,680
------------ ------------
Operating loss .................................... (1,277,175) (1,633,251)
Interest expense ....................................... (401,097) (216,040)
Other income (expense), net ............................ 48,560 (2,068)
------------ ------------
Loss before income taxes and cumulative effect of
accounting change ................................... (1,629,712) (1,851,359)
Income tax benefit ..................................... 644,661 742,526
------------ ------------
Net loss before cumulative effect of accounting change.. (985,051) (1,108,833)
Cumulative effect of accounting change, net ............ --- (108,506)
------------ ------------
Net loss .......................................... $ (985,051) $(1,217,339)
============ ============
Net Loss Per Common Share:
Basic and diluted net loss per common share before
cumulative effect of accounting change .... $ (.21) $ (.24)
Cumulative effect of accounting change, net ....... --- (.02)
------------ ------------
Basic and diluted net loss per common share ....... $ (.21) $ (.26)
============ ============
Weighted average shares outstanding ............... 4,639,475 4,627,936
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
April 28, April 30,
2000 1999
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ......................................................... $(985,051) $(1,217,339)
Adjustments to reconcile net loss to net cash used for operations:
Depreciation and amortization ............................... 593,158 535,235
Gain on sale of property and equipment ...................... (10,200) (1,414)
Deferred taxes .............................................. (651,886) (812,883)
Deferred rent credits ....................................... 62,940 61,456
Other noncash items affecting earnings ...................... 49,524 189,123
Changes in operating assets and liabilities:
Accounts receivable ....................................... (171,898) 166,966
Prepaid expenses and other current assets ................. (222,811) 89,930
Merchandise inventories ................................... (1,365,278) (2,695,759)
Accounts payable .......................................... 792,212 3,085,174
Accrued liabilities ....................................... (26,860) 82,494
Store closing reserve ..................................... (130,241) ---
----------- -----------
Net cash used for operations .............................. (2,066,391) (517,017)
INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (388,091) (574,102)
Proceeds from sale of property and equipment ..................... 92,450 16,010
----------- -----------
Net cash used for investing activities .................... (295,641) (558,092)
FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable - line of credit ... 2,684,446 (291,092)
Proceeds from refinancing of mortgage ............................ --- 1,100,000
Net payments on other long-term debt ............................. (6,584) (895,331)
Payment of debt issuance costs ................................... --- (37,241)
Proceeds from financing of property and equipment ................ --- 1,105,039
Payments on financing of property and equipment .................. (155,336) (103,708)
Proceeds received from employee purchases of stock ............... 15,019 ---
----------- -----------
Net cash provided by financing activities ................. 2,537,545 877,667
----------- -----------
Net increase (decrease) in cash and cash equivalents ...... 175,513 (197,442)
Cash and cash equivalents, beginning of period ................... 469,768 988,575
----------- -----------
Cash and cash equivalents, end of period ......................... $ 645,281 $ 791,133
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period ........................... $ 308,198 $ 210,949
Income taxes paid during the period ....................... 6,783 ---
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
We, ("Paper Warehouse, Inc." or the "Company"), are a growing
chain of retail stores, specializing in party supplies and paper goods.
We operate 101 stores in ten states throughout the central and western
regions of the United States under the names "Paper Warehouse" and
"Party Universe" and operate a web site under the name
"PartySmart.com." Additionally, we sell Paper Warehouse franchises
through our wholly owned subsidiary, Paper Warehouse Franchising, Inc.
We prepared these consolidated financial statements in
accordance with Securities and Exchange Commission ("SEC") Rules and
Regulations. These unaudited financial statements represent the
consolidated financial statements of Paper Warehouse, Inc., Paper
Warehouse Franchising, Inc. and PartySmart.com, Inc. as of April 28,
2000 and January 28, 2000 and for the three month periods ended April
28, 2000 and April 30, 1999. The information furnished in these
financial statements includes normal recurring adjustments and reflects
all adjustments, which are, in our opinion, necessary for a fair
presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in our Annual Report to Shareholders and our Form 10-K filed
with the SEC.
Due to the seasonality of our business, revenues and operating results
for the three months ended April 28, 2000 are not necessarily
indicative of the results to be expected for the full year.
(2) NET LOSS PER COMMON SHARE
Basic earnings per common share ("EPS") is computed as net
loss divided by the weighted average number of common shares
outstanding during the periods.
Diluted EPS is computed as net loss divided by the weighted
average number of common shares outstanding during the period;
increased to include assumed conversions of potentially dilutive shares
outstanding into common shares, when dilutive. Our potentially dilutive
shares of common stock include stock options which have been granted to
employees and outside directors, our outstanding convertible
subordinated debentures and a warrant granted to the underwriter as
part of our convertible debenture offering. We had $4.0 million of
convertible subordinated debentures outstanding as of April 28, 2000
that were not included in the computation of diluted EPS, as their
inclusion would have been antidilutive. In addition, options to
purchase 787,325 and 426,300 shares of common stock were outstanding as
of April 28, 2000 and April 30, 1999, respectively, but were excluded
from the computation of common share equivalents because they were
antidilutive. Had we not incurred losses, the inclusion of these items
would not have been antidilutive, and we would have assumed conversions
of convertible subordinated debentures into approximately 1.3 million
common shares and conversions of stock options into approximately
17,600 common shares for the first quarter of fiscal 2000. We would
have assumed conversions of stock options into approximately 100 common
shares for the first quarter of fiscal 1999.
4
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(3) FINANCING ARRANGEMENTS
We have outstanding as of April 28, 2000, convertible
subordinated debentures in an aggregate principal amount of $4.0
million, convertible into 1.3 million shares of our common stock. The
debentures bear interest at an annual rate of 9.0%, payable quarterly,
and mature in 2005. The indenture under which these debentures were
issued contains covenants that require us to satisfy certain financial
tests and imposes restrictions on our ability to pay dividends. As of
our fiscal 1999 year end, we were in breach of a covenant requiring a
minimum consolidated tangible net worth, however, we were current on
all required payments under the indenture. Subsequent to January 28,
2000, we mailed a proxy to our debenture holders requesting a waiver of
this breach, and amendments, one of which would replace the definition
of consolidated tangible net worth in the indenture with a definition
of consolidated net worth, and one to increase the interest rate on the
debentures. In order for us to obtain the waiver and amendments, an
affirmative vote from greater than 50% of the dollar value of the bonds
outstanding is required. Included as part of the proxy, we offered
debenture holders a 150 basis point increase in the interest rate to an
annual rate of 10.5%, effective as of September 15, 2000, contingent
upon obtaining a majority affirmative vote. Additionally, we offered
each debenture holder a consent fee of $10 per bond, payable only upon
obtaining his or her affirmative vote. Subsequent to the first quarter
ended April 28, 2000, we obtained a waiver for the breach of the
covenant as of January 28, 2000 and obtained the requested amendments.
We were in compliance with all of our financial covenants as required
by the indenture at April 28, 2000. Since we obtained the majority
vote, the interest rate on our subordinated convertible debentures will
increase to an annual rate of 10.5% and will be reflected in the
December 15, 2000 interest payment to debenture holders.
We have a $15.0 million three-year revolving line of credit
facility with a bank for general working capital purposes. Borrowings
outstanding under this line of credit bear interest at a variable rate
and are secured by substantially all of our assets. The credit
agreement contains covenants, which require us to satisfy certain
financial tests and impose restrictions on our ability to pay
dividends. Advances under this credit line are limited to a fixed
percentage of certain assets, primarily inventory. As a result of the
limitations on the fixed percentage and on inventory levels, we often
maximize the availability under our line during intra-month peaks. In
March 2000, Yale T. Dolginow, Chairman and Chief Executive Officer,
through Wells Fargo, N.A. issued a $1.2 million Standby Letter of
Credit in favor of Fleet Retail Finance, Inc. as beneficiary. The
Standby Letter of Credit expires on December 6, 2000, although it may
expire as early as September 2000 assuming certain conditions are met.
This Standby Letter of Credit caused Fleet Retail Finance, Inc., the
lender for our revolving line of credit, to provide us with up to a
$1.2 million overadvance on our revolving line of credit. On April 28,
2000 we had availability of approximately $10.9 million under this
line, of which approximately $9.0 million was outstanding. In
consideration for issuing the Standby Letter of Credit, we granted an
option to Yale T. Dolginow to purchase 50,000 shares of our common
stock at an exercise price of $.97 per share, equal to 110% of the
market price of our underlying stock as of the date of grant. We have
agreed to indemnify Mr. Dolginow for any liability he may incur in
connection with the Standby Letter of Credit.
We were in compliance with all of our financial covenants as
required by the credit facility at April 28, 2000. At January 28, 2000,
as a result of the breach in covenant in the indenture covering our
debentures, we were in a "cross-default" under this credit facility. As
a result of obtaining the requested waiver and amendments from our
debenture holders, as discussed above, we are no longer in a
"cross-default" under this credit facility.
5
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(4) COMMON STOCK AND STOCK OPTION TRANSACTIONS
Pursuant to our Employee Stock Purchase Plan, on January 31,
2000, 11,539 shares of our common stock were purchased by employees.
On March 6, 2000, the Compensation Committee of the Board of
Directors approved the repricing to $2.00 per common share of 424,300
options, all of which were originally granted in excess of $2.00 per
common share. The repricing of these options creates in substance a
modification. Accordingly, these options will be treated as variable
awards, and we will reflect changes in their value in the general and
administrative expense line until the options are exercised or expire.
During the first quarter of fiscal 2000, we granted options to
selected management and to the board of directors to purchase 266,900
shares of our common stock at an exercise price range of $0.88 to $1.50
per share. The options vest over three years and expire 10 years from
the date of grant.
(5) SUBSEQUENT EVENT
Subsequent to the first quarter ended April 28, 2000, we
closed on an agreement with a subtenant for the sublease of the
previous Maple Grove, Minnesota store location, which was relocated in
March 2000. Per the sublease agreement, beginning July 1, 2000, the
sublessee agrees to pay, over the term of the underlying lease, the
fixed minimum monthly rental per the underlying lease, plus charges
including, but not limited to, common area maintenance, real estate
taxes, insurance costs and utility charges. Accordingly, effective as
of the date of closing, during the second quarter ending July 28, 2000,
we will reflect the reversal of the remainder of the store closing
reserve that was established for this location at January 28, 2000, for
approximately $500,000.
(6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
to the current year presentation.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a growing chain of retail stores specializing in party supplies
and paper goods. We operate 101 stores in ten states throughout the central and
western regions of the United States under the names PAPER WAREHOUSE and PARTY
UNIVERSE, and operate a web site under the name PARTYSMART.COM. We purchased the
business, consisting of three stores located in the Minneapolis/St. Paul
metropolitan area, in 1986, and incorporated it in Minnesota in 1987. In growing
the number of Company-owned stores, we employ a strategy of clustering stores in
our principal markets to:
- provide our customers with convenient store locations
- expand our total market share
- achieve favorable economies of scale
REVENUES
Total revenues consist of retail sales from our Company-owned stores
and E-commerce web site, and franchise related fees. Franchise related fees
include royalties we receive on sales, generally 4% of the store's sales, and
initial franchise fees, recognized at the time the franchisee signs a lease for
a store, at which time we have substantially performed all of our services.
Company-owned stores enter the comparable store sales base at the beginning of
their 13th month of operations.
COSTS AND EXPENSES
Costs of products sold and occupancy costs include the direct cost of
merchandise, plus handling and distribution, and certain occupancy costs.
Store operating expenses include all costs incurred at the store level,
including store payroll and related benefits, advertising and credit card
processing fees.
General and administrative expenses include corporate administrative
expenses for Company-owned stores, expenses relating to franchising, such as
payroll, legal, travel and advertising, and non-capitalizable costs associated
with PartySmart.com, our Internet web site.
7
<PAGE>
RESULTS OF OPERATIONS
NET LOSS AND NET LOSS PER COMMON SHARE
We reported a net loss of approximately $985,000, or $.21 per share,
for the first quarter ended April 28, 2000, compared to a net loss of
approximately $1.2 million, or $.26 per share for the first quarter ended April
30, 1999. The net loss for the first quarter of 1999 included the net impact of
a cumulative effect of accounting change of approximately $109,000 ($.02 per
share) from the adoption of an accounting pronouncement. The principal reason
for our first quarter loss in fiscal 2000 is the seasonality of our business, in
which, first quarter is typically our weakest quarter. The combination of the
relatively low sales volume with our fixed expense structure usually results in
the realization of a first-quarter loss. Earnings before interest, taxes,
depreciation and amortization (EBITDA) for the first three months of fiscal 2000
was approximately ($635,000), which favorably compares to an EBITDA of
approximately ($1.2 million) for the comparable period in the prior year.
The following table sets forth for the periods indicated, certain costs
and expenses as a percentage of total revenues and retail sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 28, APRIL 30,
2000 1999
---------------- ---------------
<S> <C> <C>
Costs of products sold and occupancy costs:
as % of total revenues............................ 68.1% 68.3%
as % of retail sales.............................. 69.2% 69.5%
Store operating expenses:
as % of total revenues............................ 25.3% 28.0%
as % of retail sales.............................. 25.7% 28.5%
General and administrative expenses:
as % of total revenues............................ 13.1% 13.4%
as % of retail sales.............................. 13.3% 13.7%
Number of Company-owned stores......................... 101 97
</TABLE>
REVENUES
RETAIL SALES. Retail sales of $19.4 million for the first three months
of fiscal 2000 increased $3.0 million, or 18%, over retail sales of $16.4
million for the first three months of fiscal 1999. The year-over-year increase
reflects the larger store base. In addition, the increase in sales reflects the
continued maturation of stores opened during fiscal 1998 and fiscal 1999, as
approximately $2.0 million of this year-over-year favorability was attributable
to an increase in comparable store sales. Sales from our Internet web site,
which became operational in the third quarter of fiscal 1999, were not
significant. During the first quarter ended April 28, 2000, we opened one new
Company-owned store, relocated one Company-owned store and closed two
Company-owned stores, bringing the total to 101 at April 28, 2000, compared to
97 at April 30, 1999. First quarter 2000 comparable store sales increased 12.3%
over the prior year comparable period. This growth rate favorably compares to a
comparable store sales increase of 4.6% for the first fiscal quarter of 1999.
8
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REVENUES (CONTINUED)
FRANCHISE RELATED FEES. Franchise related fees for the first three
months of fiscal 2000 of approximately $315,000 increased 15% over franchise
related fees of approximately $273,000 for the comparable period in the prior
year. The year-over-year increase primarily reflects increased royalties from
increased franchise store sales. During the first fiscal quarter of 2000, we
opened one franchise store, for a total of 48 franchise stores at April 28, 2000
compared with 45 franchise stores at the end of the first fiscal quarter of
1999.
COSTS OF PRODUCTS SOLD AND OCCUPANCY COSTS
Cost of products sold and occupancy costs totaled $13.4 million or
69.2% of retail sales for the first quarter ended April 28, 2000, as compared to
$11.4 million or 69.5% of retail sales for the first quarter ended April 30,
1999. The dollar increase in this expense category primarily reflects higher
occupancy costs, resulting from the increased store base as well as the
occupancy costs for our Seattle market, which carries higher occupancy costs as
compared to our other markets. Our product margins for the first three months of
fiscal 2000 remained relatively flat to the prior year comparable period. We
experienced a reduction in gross margin due to a higher percentage of product
sales derived from our licensed juvenile category, which typically results in
lower margins. This reduction was essentially offset by an increased amount of
purchasing allowances, as negotiated with our vendors.
On February 23, 2000 we entered into a letter of intent with our
Chairman and CEO pursuant to which he is to purchase our corporate office
building at fair market value, to be determined by an outside appraisal. If this
transaction is completed, we would then lease the facility from him at fair
market rates, and as a result, would realize increased occupancy costs over the
term of the agreement. The transaction is contingent upon a satisfactory
purchase and lease agreement, is subject to financing and is expected to be
completed by the end of the second quarter of fiscal 2000.
STORE OPERATING EXPENSES
Store operating expenses for the first three months of fiscal 2000 were
$5.0 million or 25.7% of retail sales, as compared to $4.7 million or 28.5% of
retail sales for the comparable period in the prior year. The decrease in the
percentage primarily reflects the continued maturation of our store base and our
ability to leverage year-over-year increases in store labor, advertising and
store operating expenses. The year-over-year improvement also reflects the shift
in the timing of an advertising flyer to second quarter and increased
advertising rebates due to the favorable sales volume of certain products. We
continue to realize higher wage rate pressure due to the tightness of labor
markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the first quarter of fiscal
2000 were approximately $2.6 million, or 13.1% of revenues, compared to general
and administrative expenses of approximately $2.2 million, or 13.4% of revenues
for the first quarter of fiscal 1999. The year-over year dollar increase
reflects approximately $272,000 of operational costs associated with our
Internet strategy, which became operational in the third quarter of fiscal 1999.
Over the next twelve-months, we expect general and administrative expenses to
remain relatively flat to prior year as our store base continues to mature and
we better leverage our expense structure.
9
<PAGE>
INTEREST EXPENSE
Interest expense, for the quarter ended April 28, 2000, of
approximately $401,000, or 2.0% of total revenues, increased $185,000, over
interest expense for the first quarter ended April 30, 1999. The increase over
prior year reflects borrowings from our revolving credit facility, necessary to
fund working capital requirements, in addition to interest payments related to
our convertible subordinated debentures, which were sold during the second
quarter of fiscal 1999. Interest expense also increased due to the amortization
of the deferred financing costs related to our financing activities during
fiscal 1999. We expect interest expense to continue to increase throughout
fiscal 2000, primarily due to recent increases in the prime rate and an increase
in the effective annual rate on our $4.0 million of convertible subordinated
debentures from 9.0% to 10.5%, to be reflected in the December 15, 2000 interest
payment to debenture holders.
INCOME TAX BENEFIT
The Company's estimated annual effective income tax rate is 40% for the
first quarter of fiscal 2000, unchanged from the first quarter of fiscal 1999
estimated annual rate.
ANALYSIS OF FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for ongoing operations, consisting
primarily of investments in our inventory, in addition to capital requirements
necessary to support the continued growth of our information systems
infrastructure and our store base. Our primary sources of liquidity have been:
- borrowings under our revolving line of credit
- proceeds from financings such as our initial public offering
and our public sale of convertible subordinated debt
- payment terms from vendors
- cash from operations
Our liquidity needs vary throughout the year as a result of the
seasonal nature of our business. Our cash availability also fluctuates as a
result of:
- the level of our inventory, which primarily determines our
line-of-credit borrowing capacity
- quarterly fluctuations in revenues and operating income
- timing of seasonal purchases
- timing of new store openings, remodels and/or relocations
- intra-month cash needs for payment of rent, payroll and other
operational payables
10
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our liquidity as measured by our working capital, was $3.8 million at
April 28, 2000 and was $4.7 million at January 28, 2000. The Company's current
ratio was 1.2 to 1.0 at April 28, 2000 compared to 1.3 to 1.0 at January 28,
2000. The decrease in our working capital and in our current ratio reflects
higher usage of our revolving credit facility to fund seasonal purchases of
inventory and to finance our prior year loss.
Merchandise inventories have increased approximately $1.4 million from
the end of fiscal 1999, reflecting necessary purchases in order to support our
store base and for upcoming seasonal events. This inventory growth was only
partially funded, however, by a $792,000 increase in accounts payable.
Net cash used for operations totaled approximately $2.1 million for the
first quarter ended April 28, 2000 compared to net cash used for operations of
approximately $517,000 for the same period in 1999. The decline in cash flows
from operations primarily reflects the increase in merchandise inventories, with
only a partial increase in accounts payable. Our accounts payable leveraging has
somewhat lessened year-over-year as we have strived, when possible, to take
advantage of vendor cash discounts that are offered.
Net cash used for investing activities was approximately $296,000
for the first quarter ended April 28, 2000 and approximately $558,000 for the
first quarter ended April 30, 1999. The use of cash for the first three
months of 2000 reflects $388,000 of capital expenditures primarily related to
opening, relocating and remodeling Company-owned stores and upgrading our
information systems. In comparison, we had capital expenditures of
approximately $574,000 in the prior year comparable period.
We have invested and will continue to evaluate our needs for additional
investment in information technology and infrastructure capabilities in order to
gain operational efficiencies. We anticipate that we will spend an aggregate
$1.7 million on capital expenditures during fiscal 2000. These capital
expenditures will be for one new store opening, fixturing, remodeling or
relocating existing stores, and continuing investments in information systems.
If the number of Company-owned stores we plan to open or relocate increases or
decreases, this estimate may change accordingly. The number of Company-owned
stores may vary from plan primarily based upon the availability of suitable
locations on acceptable terms. It is our intention to finance new store fixtures
and equipment with long-term leases, assuming availability and reasonable terms.
We may additionally seek to acquire existing stores from franchisees. At
present, we have no agreement to acquire any franchise store.
Net cash provided by financing activities was approximately $2.5
million for the first fiscal quarter of 2000 compared to net cash provided by
financing activities of approximately $878,000 for the first fiscal quarter of
1999. The year-over-year increase primarily reflects our increased borrowing
capacity, partially offset by the prior year refinancing of our mortgage and
capital leases.
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Based on our current expectations about our business, we expect the
liquidity sources described above, together with funds generated by operations,
to be adequate to meet our cash needs through the remainder of fiscal 2000. In
addition to recently increasing our borrowing availability under our revolving
credit facility, we have attempted to seek additional working capital through:
- evaluation of transactions such as a sale of our corporate
office building to Yale Dolginow, our Chairman and CEO, with
subsequent lease back to the Company, for which we have a
signed letter of intent
- reducing corporate and store-wide expenses
- scaling back PARTYSMART.COM, our Internet website venture
- increasing prices
- seeking alternative sources for the financing of fixtures and
equipment
FINANCING
We have outstanding as of April 28, 2000, convertible subordinated
debentures in an aggregate principal amount of $4.0 million, convertible into
1.3 million shares of our common stock. The debentures bear interest at an
annual rate of 9.0%, payable quarterly, and mature in 2005. The indenture under
which these debentures were issued contains covenants that require us to satisfy
certain financial tests and imposes restrictions on our ability to pay
dividends. As of our fiscal 1999 year end, we were in breach of a covenant
requiring a minimum consolidated tangible net worth, however we were current on
all required payments under the indenture. Subsequent to January 28, 2000, we
mailed a proxy to our debenture holders requesting a waiver of this breach, and
amendments, one of which would replace the definition of consolidated tangible
net worth in the indenture with a definition of consolidated net worth, and one
to increase the interest rate on the debentures. In order for us to obtain the
waiver and amendments, an affirmative vote from greater than 50% of the dollar
value of the bonds outstanding is required. Included as part of the proxy, we
offered debenture holders a 150 basis point increase in the interest rate to an
annual rate of 10.5%, effective as of September 15, 2000, contingent upon
obtaining a majority affirmative vote. Additionally, we offered each debenture
holder a consent fee of $10 per bond, payable only upon obtaining his or her
affirmative vote. Subsequent to the first quarter ended April 28, 2000, we
obtained a waiver for the breach of the covenant as of January 28, 2000 and
obtained the requested amendments. We were in compliance with all of our
financial covenants as required by the indenture at April 28, 2000. Since we
obtained the majority vote, the interest rate on our subordinated convertible
debentures will increase to an annual rate of 10.5% and will be reflected in the
December 15, 2000 interest payment to debenture holders.
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
FINANCING (CONTINUED)
We have a $15.0 million three-year revolving line of credit facility
with a bank for general working capital purposes. Borrowings outstanding under
this line of credit bear interest at a variable rate and are secured by
substantially all of our assets. The credit agreement contains covenants, which
require us to satisfy certain financial tests and impose restrictions on our
ability to pay dividends. Advances under this credit line are limited to a fixed
percentage of certain assets, primarily inventory. As a result of the
limitations on the fixed percentage and on inventory levels, we often maximize
the availability under our line during intra-month peaks. In March 2000, Yale T.
Dolginow, Chairman and Chief Executive Officer, through Wells Fargo, N.A. issued
a $1.2 million Standby Letter of Credit in favor of Fleet Retail Finance, Inc.
as beneficiary. The Standby Letter of Credit expires on December 6, 2000,
although it may expire as early as September 2000 assuming certain conditions
are met. This Standby Letter of Credit caused Fleet Retail Finance, Inc., the
lender for our revolving line of credit, to provide us with up to a $1.2 million
overadvance on our revolving line of credit. On April 28, 2000 we had
availability of approximately $10.9 million under this line, of which
approximately $9.0 million was outstanding. In consideration for issuing the
Standby Letter of Credit, we granted an option to Yale T. Dolginow to purchase
50,000 shares of our common stock at an exercise price of $.97 per share, equal
to 110% of the market price of our underlying stock as of the date of grant. We
have agreed to indemnify Mr. Dolginow for any liability he may incur in
connection with the Standby Letter of Credit.
We were in compliance with all of our financial covenants as required
by the credit facility at April 28, 2000. At January 28, 2000, as a result of
the breach in covenant in the indenture covering our debentures, we were in a
"cross-default" under this credit facility. As a result of obtaining the
requested waiver and amendments from our debenture holders, as discussed above,
we are no longer in a "cross-default" under this credit facility.
INFLATION
We believe that inflation has not had a material impact upon our
historical operating results, and do not expect it to have such an impact in the
future. There can be no assurance that our business will not be affected by
inflation in the future. We could be negatively impacted by substantial cost
increases for raw materials such as paper, petroleum and cardboard, as
significant cost increases in these areas could have a material impact on our
costs of products in future periods.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forward-looking statements in this document are based on
information currently available to us as of the date of this report, and we
assume no obligation to update any forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors may include, among others, those factors listed in our
1999 Form 10-K and our other filings with the Securities and Exchange
Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to other sources of liquidity, we have utilized a
combination of fixed rate and floating rate debt to fund our operations, capital
expenditures and the growth in our Company-owned stores and our Internet
business. As a result of our floating rate debt, we are exposed to market risk
from changes in interest rates. There have been recent increases in the prime
rate. We do not consider this exposure to be material to our financial position,
results of operations or cash flows. We do not utilize any derivative financial
instruments or engage in any other hedging activities.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 20, 1999, we completed a public offering of $4 million
convertible subordinated debentures due September 15, 2005, bearing interest
at an annual rate of 9.0%, payable quarterly. The indenture under which these
debentures were issued contains covenants that require us to satisfy certain
financial tests. As of our fiscal 1999 year end, we were in breach of a
covenant requiring a minimum consolidated tangible net worth. However, we
were current on all required payments under the indenture. Subsequent to the
first quarter ended April 28, 2000, we obtained from a majority of the
debenture holders a waiver for the breach of the covenant as of January 28,
2000. We were in compliance with all of our financial covenants as required
by the indenture at April 28, 2000. A majority of the debenture holders also
approved amendments to the indenture to replace the definition of
consolidated tangible net worth and to increase the interest rate on the
debentures. In order to obtain the consent of a majority of the debenture
holders, we offered the debenture holders a 150 basis point increase in the
interest rate to an annual rate of 10.5%, beginning with the December 15,
2000 payment, contingent upon obtaining a majority affirmative vote. Since we
obtained the majority vote, the interest rate on our subordinated convertible
debentures will increase to an annual rate of 10.5% and will be reflected in
the December 15, 2000 interest payment to debenture holders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
Exhibit 10.1 - First Supplemental Indenture between the
Company and Norwest Bank, N.A., as trustee
Exhibit 10.2 - Amendment to 1998 Employee Stock Purchase Plan
Exhibit 12 - Computation re: Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule
b. REPORTS ON FORM 8-K:
Registrant did not file any reports on Form 8-K during the
quarter ended April 28, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAPER WAREHOUSE, INC.
Date: June 6, 2000
By: /s/ Yale T. Dolginow
-------------------------------------------------
Name: Yale T. Dolginow
Title: President and Chief Executive Officer
By: /s/ Cheryl W. Newell
-------------------------------------------------
Name: Cheryl W. Newell
Title: Chief Financial Officer
(Principal Financial Officer)
By: /s/ Diana G. Purcel
-------------------------------------------------
Name: Diana G. Purcel
Title: Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.1 First Supplemental Indenture Filed herewith
between the Company and electronically
Norwest Bank, N.A. as trustee
10.2 Amendment to 1998 Employee Filed herewith
Stock Purchase Plan electronically
12 Ratio of Earnings to Filed herewith
Fixed Charges electronically
27 Financial Data Schedule Filed herewith
electronically
