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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 28, 2000
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 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
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; 9% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2005
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
As of April 7, 2000, 4,639,475 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 7, 2000, was
$3,378,165. 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 referred to herein) from the
Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held on June 9, 2000 (the "2000 Proxy Statement").
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PAPER WAREHOUSE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 28, 2000
TABLE OF CONTENTS
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DESCRIPTION PAGE
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PART I
Item 1. Business.................................................................... 1
Item 1A. Cautionary Statement Regarding Future Results, Forward-Looking
Information and Certain Important Factors................................ 11
Item 2. Properties.................................................................. 17
Item 3. Legal Proceedings........................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......................... 18
Item 4A. Executive Officers of the Registrant........................................ 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................... 21
Item 6. Selected Financial Data..................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 32
Item 8. Financial Statements........................................................ 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 33
Item 11. Executive Compensation...................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 33
Item 13. Certain Relationships and Related Transactions.............................. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 34
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PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Paper Warehouse is a growing chain of retail stores specializing in
party supplies and paper goods. As of January 28, 2000, we had 149 stores,
including 102 Company-owned stores and 47 franchise stores. These stores are
conveniently located in major retail trade areas to provide customers with easy
access. We operate these stores under the names PAPER WAREHOUSE and PARTY
UNIVERSE and operate a web site under the name PARTYSMART.COM. Our eight
principal markets are:
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- Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- Oklahoma City/Tulsa, OK - Des Moines, IA - Seattle, WA
- Tucson, AZ - Omaha, NE
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We offer an extensive selection of party supplies and paper goods, at
everyday low prices, for a wide variety of celebratory occasions, everyday uses
and seasonal events, including:
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CELEBRATORY OCCASIONS AND EVERYDAY USES SEASONAL EVENTS
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- birthdays
- weddings - Valentine's Day - Halloween
- baby showers - Easter - Christmas
- graduations - Fourth of July - Hanukkah
- other family and religious celebrations - Thanksgiving - New Year's
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Through our 8,500 square foot superstore prototype, we offer a
comprehensive selection of over 19,000 different products, offering customers
the convenience of one-stop shopping for all of their party supplies and paper
goods needs. Our merchandise is organized by party themes. The prominent
signage, wide aisles, knowledgeable staff and depth of product offerings allow
customers to coordinate various merchandise offerings for all party occasions.
We believe that our extensive product selection and high in-stock positions
stimulate customers to purchase additional products.
The first Paper Warehouse store opened in Minneapolis, Minnesota in
1983. 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 this Report, "Paper Warehouse," "Company," "we," "our" and "us"
refer to Paper Warehouse, Inc. and our subsidiaries, Paper Warehouse
Franchising, Inc. and PartySmart.com, Inc. Our principal executive offices are
located at 7630 Excelsior Boulevard, Minneapolis, Minnesota, 55426. Our
telephone number is (952) 936-1000.
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(b) FINANCIAL INFORMATION ABOUT SEGMENTS
Since its inception, the Company's revenues, operating (loss) income
and assets have been attributable to the single industry segment of party
supplies and paper goods.
(c) NARRATIVE DESCRIPTION OF BUSINESS
PAPER WAREHOUSE STORES
FORMAT. We operate stores that range in size from 3,000 square feet to
8,500 square feet of retail space. We introduced our current 8,500-square foot
prototype store in 1994, which was developed based on management's extensive
retail and other industry experience, in addition to customer research. We
believe it is the optimal store format for our future growth. Of our 102
Company-owned stores, approximately 90% are 6,000 square feet or larger.
Our stores are designed to create a customer-friendly environment. We
use vibrant colors, theme-oriented merchandise displays and unique products to
create a fun and festive shopping experience. The focal point of our stores is
the seasonal display located at the front of each store, which creates a
"store-within-a-store" appearance. This display maximizes the season's selling
impact and is updated continuously to promote a fresh image within the store. To
assist customers in coordinating party supplies for any occasion, we locate
related departments, such as gift-wrap and greeting cards adjacent to one
another and display related merchandise such as party hats, plates, cups and
napkins together within a department. Customers are able to easily move about
the different departments to find specific product categories due to prominent,
easy-to-read signage, bright lighting and wide aisles. We believe that our store
layout assists customers in finding and coordinating their party supply needs,
and also encourages browsing, impulse purchases and repeat visits.
In 1998 we introduced the "concept store." A concept store has a
different look and feel than our other stores. These stores have more colorful
ceilings, lower shelves in the front of the store, carpeting and confetti-tiled
floors and new vibrant uncluttered signage. We endeavor to store all extra
merchandise out of sight. These features give the store a very open and
organized feel, allow customers to see merchandise throughout the store, and
provide a more fun and festive shopping atmosphere. Of our 102 Company-owned
stores, 29 are concept stores. We anticipate that new Company-owned stores will
be concept stores, and we will selectively remodel existing stores to concept
stores where the revenue potential justifies the investment. We believe that our
concept stores will assist us in creating brand awareness, will generate strong
sales per square foot and can be readily transferred to new markets. During
fiscal 2000, we plan to open one new concept store, and relocate three stores
and remodel two existing stores, all to incorporate the concept-store format.
PARTY SMART. We are seeking to distinguish our business from our
competitors by positioning Paper Warehouse as the party expert. We believe that
we have the opportunity to create a distinct identity for ourselves, one in
which customers equate us with the word "PARTY" in every possible way. To
achieve this recognition, during 1999 we implemented a program in our stores
called PARTY SMART. We define PARTY SMART as being able to provide a customer
with all the information and resources necessary to throw a party. Our goals for
this program are to:
- increase average purchases per customer visit
- increase the frequency of store visits
- develop customers' preference for us over our competitors
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The PARTY SMART program consists of:
- providing helpful and engaging in-store presentations to add value
to the shopping experience
- communicating our expertise by giving customers party ideas,
decorating tips, referrals and planning advice
- creating a "party planning resource center" in each store that
carries different types of brochures for different types of
parties and seasonal events such as entertainment and catering
ideas, games to play at children's birthday parties and shopping
checklists
- advertising our PARTY SMART concept through shopping bag inserts,
window and aisle signs, buttons for employees, in-store audio
messages, radio broadcasting and the Internet
CUSTOMER SERVICE. We seek to provide a high level of customer service
to enhance our customer-friendly store environment. Store managers and sales
associates are trained to assist customers with party planning and event
coordination. In connection with our PARTY SMART program, all employees are
trained on how to provide nontraditional customer service to our customers. We
want our employees to be able to offer our customers party ideas, decorating
tips, and referrals in addition to helping customers find and purchase products.
In addition, we provide party planning guides and checklists. Our "no hassles"
return policy makes it easy for customers to return or exchange products, which
we believe, encourages customers to purchase additional product quantities.
Certain products that require additional sales assistance, such as balloons and
custom printing, are located near checkout counters where sales associates can
readily assist customers. We continually monitor our level of customer service
by regular store visits and by employing anonymous "mystery shoppers." Mystery
shoppers visit all Company-owned stores at least once per quarter to evaluate
personnel on various aspects of customer service, including responsiveness,
quality of product displays and store cleanliness. A portion of store managers'
compensation is based on the results of these mystery shopper surveys.
OPERATIONS AND TRAINING. Each Company-owned store is typically operated
by a store manager, one assistant manager and a varying number of full-time and
part-time sales associates, depending on the store size, sales volume and
selling season. Store managers are responsible for all aspects of a store's
day-to-day operations, including employee hiring and training, work scheduling,
expense control and customer service. These managers report to a district or
operations manager, each of whom is responsible for approximately 10 to 18
stores. Within each geographic market, we use floating managers to assist in
smaller stores that cannot support both a store manager and an assistant
manager. In addition, floating managers support store managers during busy
holiday seasons, and substitute for store managers during vacations and other
absences, and work with newly hired store managers to ensure a smooth transition
for sales personnel and customers.
Before opening a new Company-owned store, we train store managers
intensely for two weeks, on average, depending on prior experience. During the
new store set-up, our district management team provides additional training to
our store managers. After the store opening, corporate headquarters personnel
spend considerable time overseeing the operations. We schedule periodic training
sessions for store managers in the central or district offices on various
topics, including human resources, merchandising, loss prevention and employee
supervision. We cover additional training topics at monthly managers' meetings
and through monthly mailings, such as our Company newsletter.
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Paper Warehouse stores are typically open:
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Monday through Friday.................................... 9:00 a.m. to 9:00 p.m.
Saturday................................................. 9:00 a.m. to 6:00 p.m.
Sunday................................................... 11:30 a.m. to 5:00 p.m.
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SITE SELECTION AND LOCATIONS
SITE SELECTION. In order to select the optimal location for our stores,
we use a site selection process that considers various criteria, including:
- population density
- demographics, including age and income
- parking availability
- storefront visibility and presence
- local competition
- traffic counts
- lease rates
We locate our stores in or near visible high traffic strip mall centers
in close proximity to prominent mass merchandisers, discount or grocery store
anchors. Our strategy of clustering stores in metropolitan markets promotes
customer convenience and creates favorable economies of scale for marketing,
advertising and operations.
LOCATIONS. As of January 28, 2000, we had 102 Company-owned stores
in the following states:
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Number of Stores
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Arizona.............................................................. 4
Colorado............................................................. 15
Iowa................................................................. 8
Kansas/Missouri...................................................... 18
Minnesota............................................................ 28
Nebraska............................................................. 2
Oklahoma............................................................. 12
Washington........................................................... 13
Wisconsin............................................................ 2
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Total Company-Owned Stores........................................... 102
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MERCHANDISING
OVERVIEW. Through our 8,500 square foot store prototype, we offer a
comprehensive selection of over 19,000 products, providing customers the breadth
of product offerings and the convenience of one-stop shopping for all party
supplies and paper goods. Our merchandise is organized by party themes. The
prominent signage and wide aisles in our stores allow customers easy access to
coordinate the merchandise required for all party occasions. We also believe
that our extensive and readily available merchandise selection often stimulates
customers to purchase additional products.
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PARTY SUPPLIES. We offer an extensive selection of complementary and
coordinating party supplies in unique and traditional patterns, colors and
designs. Our party supplies include:
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- invitations - plates - napkins - party favors - streamers - giftware
- banners - candles - balloons - party snacks - candy - seasonal novelties
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We typically offer, in our 8,500 square foot prototype, over 120
ensembles of everyday and seasonal party goods for many occasions, which include
party hats, plates, napkins and cups. A significant portion of our juvenile
party goods ensembles involves the use of movie and television figures, animated
characters and celebrity likenesses licensed to the manufacturer of these
ensembles.
GIFT WRAPPING PRODUCTS. We offer a wide assortment of everyday and
seasonal gift wrapping products in various patterns and colors, including
gift-wrap, gift bags, gift boxes, tissue paper, ribbons, bows, shred, gift tags
and tape. In addition to holiday selections, we offer distinctive gift packaging
products for special occasions such as birthdays, graduations, weddings, baby
showers and other family and religious celebrations.
GREETING CARDS. We feature a wide variety of special occasion, seasonal
and everyday greeting cards at significantly lower prices than national greeting
card chain stores. In our 8,500 square foot prototype store, we offer over
10,000 traditional, humorous and contemporary brand name greeting cards.
CATERING FOOD SERVICE SUPPLIES. We offer food service products such as
plates, cups, serving trays and bowls and table coverings. In addition to
offering such products to our regular party goods customers, many commercial
users of food service products buy this product from us, including catering
companies and non-profit organizations.
LOW PRICES. We provide customers with everyday low pricing. We
guarantee that we will meet or beat any advertised price on the products we
offer. We reinforce our everyday low price strategy with in-store signage and
through extensive promotional advertising.
PRODUCT SOURCING AND INVENTORY MANAGEMENT
We purchase our merchandise from approximately 150 suppliers. During
fiscal 1999, our largest supplier, Amscan Holdings, Inc., accounted for
approximately 17% of our purchases and our 5 largest suppliers represented
approximately 51% of our purchases. We do not have any long-term purchase
commitments or exclusive contracts with any of our suppliers. We believe that
alternative sources of product are available at comparable terms and conditions.
We consider numerous factors in supplier selection, including price, payment
terms, product offerings and product quality.
We negotiate pricing with suppliers on behalf of all Company-owned and
franchise stores. We believe that this buying power enables us to receive
favorable pricing terms and to more readily obtain high demand merchandise.
Although franchise stores are responsible for purchasing their own inventory,
franchisees are able to make purchases on our negotiated pricing terms. As we
add new stores, we believe we will increase the volume of our inventory
purchases and benefit further from increased discounts, trade allowances and
more favorable payment terms from our suppliers.
More than 95% of our everyday merchandise is shipped directly from the
supplier to our stores. Shipping merchandise directly to our stores provides us
with flexibility in pursuing new markets without the geographical constraints
and costs associated with a central distribution system. Deliveries are
processed and inventory items are inspected, sorted and priced in a segregated
receiving area in the back of the store (approximately 10% of total gross square
feet per store) before being placed on the selling
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floor. We believe that we realize substantial savings by not maintaining a large
central distribution system.
Some of our suppliers, such as overseas suppliers, will not ship
directly to our stores, but will instead ship products directly to one store in
each of our major metropolitan markets. This store then separates and ships the
products to our other stores within that market. This approach allows us to make
opportunistic volume purchases. We maintain space in the following principal
markets, including Minneapolis/St. Paul, Denver, Kansas City, Oklahoma City,
Tucson, Omaha and Seattle, for the separation and redistribution of products to
other stores within that market. We maintain a small warehouse in Minneapolis
from which we separate and distribute merchandise systemwide, including to our
franchise stores.
ADVERTISING AND MARKETING
We maintain aggressive advertising and marketing programs. Our strategy
of clustering stores in metropolitan markets enables us to cost effectively
employ a variety of media. We primarily advertise through newspaper and direct
mail inserts, and to a lesser degree, radio. We also promote products through
the use of direct mail mini-catalogs as well as through in-store coupon books
and party planning aids.
Our advertising efforts are designed to educate consumers about our
convenient store locations, promote the breadth and value of product offerings
and stress the customer service levels and knowledge of our sales associates.
Our advertising consists primarily of full color newspaper and direct mail
inserts designed around major holidays and the spring and summer seasons. For
fiscal 1999, we distributed 12 newspaper and direct mail inserts. We supplement
inserts by radio advertising for Easter, the spring season, graduation,
Halloween, and Christmas. In addition, we typically advertise the opening of new
stores in newspaper and direct mail inserts as well as on the radio.
We have a targeted direct mail program for special events. We mail
mini-catalogs of wedding and graduation party goods to brides-to-be and families
of high school graduates and have 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. Our
institutional customers include a variety of small businesses, caterers, food
service companies, schools, synagogues, churches, civic groups and other
organizations.
For fiscal 1999, we spent approximately 68% of our marketing budget on
full color newspaper and direct mail inserts, approximately 22% for radio
advertising and the remainder on direct mail mini-catalogs and in-store sales
promotions.
INFORMATION SYSTEMS
Our information systems infrastructure is integral to our continued
growth and essential towards enhancing our competitive position in the industry.
We completed the installation of Point of Sale ("POS") terminals in our
Company-owned stores during fiscal 1996. The POS terminals allow price lookup
and inventory tracking by product. By polling transaction data nightly from each
store's POS terminals, the system provides daily sales information and inventory
levels at store, department, class, and product level. This information allows
the corporate office to monitor daily sales, gross profit, repricing and
inventory by product across the entire store base. Also, our automatic
merchandise replenishment system uses this information to reorder goods for
individual stores based on specific product requirements.
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We completed the installation of JDA Retail Software Package ("JDA") in
the first quarter of fiscal 1998. JDA operates on an IBM AS/400 platform, which
required us to purchase new hardware. The JDA system supports the complete range
of retail cycle functions in the areas of finance, merchandising and
distribution, providing our management with more sophisticated tools to utilize
the information collected by our POS terminals. While our previous information
systems were already performing most of the functions of JDA, we believe that
JDA has improved the efficiency of these tasks. During fiscal year 2000, we plan
to develop enhancements such as data warehousing and electronic data interchange
to improve our ability to systematically manage inventory processes and
reporting. We are also exploring ways to improve communication between the
stores and the corporate office to enhance receiving processes, provide timely
electronic communication between the corporate office and the stores and improve
other back-office processes at the stores.
INTERNET AND E-COMMERCE
In an effort to increase our sales and name recognition, in 1999 we
developed and launched our Internet website, PARTYSMART.COM to sell party
supplies and paper goods. On this site, we offer everyday party goods for
parties and celebrations such as baby showers, birthdays, theme parties and
anniversaries. In addition, the site is regularly updated with themes and
product offerings that match the current season. Our website allows our
customers to, among other things:
- put together an entire party
- obtain party advice, ideas and tips
- create personalized invitations and e-mail party guests
- pay for everything at one time at a check-out screen
- check on the status of orders that have already been placed
- receive e-mails from us about new items that would fit the selected
party theme, or items asked about but were unavailable when the
order was placed
- contact customer service about the products and services available
on our website
- preview our store to learn more about our history, products and
services
- receive other information about us, such as franchising
opportunities, investor relations and career opportunities
The financial results of PARTYSMART.COM, launched in September 1999,
have been disappointing to date. During fiscal 1999, we incurred start-up and
operational costs of approximately $1.4 million, excluding the impairment
charge, related to this venture. Subsequent to its launch and as the year
progressed, our website sales did not meet our expectations and losses were
greater than we had initially anticipated. As we gained greater experience in
the e-commerce field, the competitive advertising environment changed and we
learned that the amount of advertising necessary to provide adequate visibility
to our website was far in excess of our available financial resources. In
addition, we identified several navigational and other underlying coding errors
in our website that made it difficult for shoppers to find our website and
inhibited purchases from occurring on our website. Due to these issues, we
questioned whether the asset value of our website, consisting primarily of
capitalized internally developed software costs, was fully recoverable, and
during the fourth quarter of fiscal 1999 we hired an outside firm to perform an
appraisal. As a result of this appraisal, we recorded a pre-tax impairment
charge of approximately $800,000 to reflect the related assets of
PartySmart.com, Inc. at their fair market
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value. See Note 4 to our financial statements on Page F-11 of this report. We
intend to keep this distribution channel active, but on a smaller scale. Our
website continues to be operational, but we have taken the following steps to
minimize our financial exposure:
- we have appointed an on-site web master
- our experienced merchandise team will continue to merchandise the
web store, and
- for the near future, fulfillment (processing and shipping of
orders) will be handled out of our newly relocated 12,100 square
foot Maple Grove, Minnesota location.
FRANCHISING
We have offered franchises of our Paper Warehouse store concept since
October 1987. As of January 28, 2000, we had 38 franchisees operating 47
franchise stores located in the following states:
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Number of Stores
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Arizona......................................................... 1
Colorado........................................................ 6
Florida......................................................... 1
Georgia......................................................... 2
Illinois........................................................ 2
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........................................................... 4
Wyoming......................................................... 2
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Total Franchise Stores.......................................... 47
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We typically establish franchise stores in markets outside of
metropolitan areas with Company-owned stores, as we believe these markets are
not usually served adequately by the party supplies and paper goods industry. In
addition to generating franchise revenues, franchise stores benefit us through
increased name recognition and increased buying power with our suppliers.
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We assist franchisees in opening and operating a Paper Warehouse store.
During the pre-opening phase, our support includes:
- site evaluation and assistance with lease negotiations
- store build-out assistance
- fixtures, equipment, supplies and inventory procurement
- opening advertising materials
- operations training
We make available to our franchisees services such as business
planning, operations and promotional activities. In addition, we perform the
merchandising process for our franchisees. We make periodic inspections of the
franchise stores to ensure that the franchisee is complying with our various
requirements and quality standards. We may, in the future, enter into multiple
store development agreements with franchisees granting them certain exclusive
rights to develop stores in specified markets, so long as the franchisee meets a
stated development schedule and complies with other provisions of the
development agreement and the franchise agreement.
Our franchise revenues are comprised of initial franchise fees and
continuing royalty payments. Our current initial franchise fee ranges from
$19,000 to $25,000 for new franchisees, depending on the type of store. We may
offer a discount franchise fee for developers opening multiple stores. If a
franchisee enters into a second or third franchise agreement they will receive a
discount on the initial fee associated with the second or third store.
Franchisees are also required to pay us a continuing royalty equal to a
percentage of their weekly gross sales. Historically, this percentage has varied
from 3% to 5%. Currently, new franchises pay us a continuing royalty of 4% of
gross sales.
The franchisee's initial investment depends primarily upon store size.
This investment includes the initial franchise fee, real estate and leasehold
improvements, fixtures and equipment, signs, POS systems, deposits and business
licenses, initial inventory, opening promotional expenses and working capital.
We reserve the right to require franchisees to pay a weekly advertising fee not
to exceed 1% of gross sales, although to date we have not charged this fee. Each
franchisee is granted a license from us for the right to use certain of our
intellectual property rights, including the mark PAPER WAREHOUSE or PARTY
UNIVERSE and related designs. Our franchise agreements are for a ten-year term
and contain conditional renewal options.
COMPETITION
The party supplies and paper goods retailing business is highly
competitive. In order to compete successfully against other party supplies and
paper goods retailers, we believe we must maintain convenient locations, broad
merchandise selections, competitive pricing and strong customer service. Our
stores compete with a variety of smaller and larger retailers, including:
- specialty party supply retailers
- other party superstores such as Party City and Factory Card Outlet
- card shops such as Hallmark
- designated departments in mass merchandisers, discount retailers,
toy stores, drug stores, supermarkets and department stores
- other Internet retailers
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Two of our major competitors are currently having significant financial
difficulties. We believe the following factors distinguish our business from
these competitors:
- we have grown our number of stores in a more controlled manner
- our clustering growth strategy creates a critical mass of stores
in our principal markets, which allows us to promote customer
convenience and create favorable economies of scale for marketing,
advertising and operations
- we have a strong dedicated senior management team and board of
directors with significant retail experience
TRADEMARKS AND SERVICE MARKS
We use the marks PAPER WAREHOUSE, PARTY UNIVERSE and PARTY SMART, which
are all federally registered. We are aware of the common law usage of the name
PAPER WAREHOUSE by several companies in various parts of the United States,
which may prevent us from using that name in certain regional markets. In
markets where we cannot use PAPER WAREHOUSE, we intend to use the name PARTY
UNIVERSE. Because of our regional approach to advertising and store clustering,
we believe that the use of a single trademark within each market is more
important to our growth and business strategy than the use of one mark
nationally.
GOVERNMENT REGULATION
As a franchisor, we comply with rules and regulations adopted by the
Federal Trade Commission and with state laws that regulate the offer and sale of
franchises. We also comply with a number of state laws that regulate certain
substantive aspects of the franchisor-franchisee relationship. These laws
regulate the franchise relationship, for example, by requiring the franchisor to
deal with franchisees in good faith, by prohibiting interference with the right
of free association among franchisees and by regulating illegal discrimination
among franchises with regard to charges, royalties or fees. To date, those laws
have not kept us from seeking franchisees in any given area and have not
affected our operations.
All of our stores comply with regulations adopted by federal agencies
and with licensing and other regulations enforced by state and local health,
sanitation, safety, fire and other departments. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors and difficulties or failures in obtaining the required
licenses or approvals can delay and sometimes prevent the opening of a new
store. In addition, we comply with the Fair Labor Standard Act and various state
laws governing matters such as minimum wage, overtime and other working
conditions. We also comply with the provisions of the Americans with
Disabilities Act of 1990, which generally requires that employers provide
reasonable accommodation for employees with disabilities and that stores be
accessible to customers with disabilities.
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EMPLOYEES
As of January 28, 2000, we employed approximately 340 full-time and
approximately 800 part-time employees. We consider our relationships with our
employees to be good. None of our employees are covered by a collective
bargaining agreement.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Since its inception, all of our revenues have been derived from, and
all of our assets have been located in, the United States.
ITEM 1A. CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING
INFORMATION AND CERTAIN IMPORTANT FACTORS
Paper Warehouse makes written and oral statements from time to time
regarding its business and prospects, such as projections of future performance,
statements of management's plans and objectives, forecasts of market trends, and
other matters that are forward-looking statements within the meaning of Sections
27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934.
Statements containing the words or phrases "will likely result," "are expected
to," "will continue," "is anticipated," "estimates," "projects," "believes,"
"expects," "anticipates," "intends," "target," "goal," "plans," "objective,"
"should" or similar expressions identify forward-looking statements, which may
appear in documents, reports, filings with the Securities and Exchange
Commission, news releases, written or oral presentations made by our officers or
other representatives to analysts, shareholders, investors, news organizations
and others, and discussions with our management and other Company
representatives. For such statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
Our future results, including results related to forward-looking
statements, involve a number of risks and uncertainties. No assurance can be
given that the results reflected in any forward-looking statements will be
achieved. Any forward-looking statements made by us or on our behalf speak only
as of the date on which such statement is made. Our forward-looking statements
are based upon assumptions that are sometimes based upon estimates, data,
communications and other information from suppliers, government agencies and
other sources that may be subject to revision. We do not undertake any
obligation to update or keep current either (i) any forward-looking statement to
reflect events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking statement
which may be made by us or on our behalf.
In addition to other matters identified or described by us from time to
time in filings with the SEC, there are several important factors that could
cause our future results to differ materially from historical results or trends,
results anticipated or planned by us, or results that are reflected from time to
time in any forward-looking statement that may be made by us or on our behalf.
Some of these important factors, but not necessarily all of the important
factors, include the following:
11
<PAGE>
WE HAVE EXPERIENCED LOSSES AND MAY NOT BE PROFITABLE
We incurred a net loss of $4.4 million for fiscal 1999, a net loss of
$521,000 for fiscal 1998 and a pro forma net loss of $207,000 for fiscal 1997.
Excluding the $4.0 million pre-tax repositioning charge recorded in fiscal 1999,
we attribute these losses principally to:
- an immature store basis stemming from the opening of 27
Company-owned stores during fiscal 1998, 10 of which were
franchise stores that were purchased, and 8 stores during fiscal
1999
- increases in competition among party supplies and paper goods
retailers in our geographic markets
- increases in store labor expenses due to the rise in the average
hourly wage rates and the additional staff needed to support our
growth
- increases in general and administrative expenses necessary to
support our store base and to continue to build our infrastructure
- increases in interest expense related to our fiscal 1999 issuance
of $4.0 million convertible subordinated debt in addition to the
amortization of deferred financing costs related to fiscal 1999
financing activities
- operational and start-up costs of our e-commerce business of
approximately $1.4 million, excluding the impairment charge
- increases in the amortization expense related to goodwill from
our purchases of franchise stores
- expenses associated with a canceled acquisition and repayment of
debt in fiscal 1997
We cannot assure you that we will generate sufficient revenues, or
control operating expenses, to achieve or sustain profitability in future years.
If we are unable to achieve profitability in the near future, we may not be able
to realize our deferred tax assets of approximately $3.4 million at January 28,
2000, and we may be required to reserve for a portion of, or write off, these
assets.
WE MAY NOT HAVE SUFFICIENT OPERATING CAPITAL AVAILABLE TO OPERATE OUR BUSINESS
As a result of the continuing liquidity needs of our business,
borrowing limits and a default in our revolving credit facility, a breach and
possible "Event of Default" in connection with our outstanding subordinated
debentures and the possibility of continuing operating losses in our business,
it is possible that we may not have available to us adequate liquidity to meet
all of the operating cash needs of our business. In the event that we can not
meet our cash needs, we may be forced to seek protection from our creditors
under the bankruptcy laws.
WE MAY NOT BE ABLE TO PROFITABLY GROW OUR BUSINESS
In order to profitably grow our business we need to increase sales in
our existing markets and open stores in new markets. Opening additional
Company-owned stores in existing markets could reduce sales from our stores
located in or near those markets and stores opened in new markets may not be
profitable. In addition, the opening of additional stores could put additional
strain on our existing store base to leverage the new stores' fixed cost
structure.
12
<PAGE>
WE MAY NOT BE ABLE TO EFFECTIVELY EXECUTE OUR LONG-TERM GROWTH STRATEGY
Our long-term growth strategy requires effective planning and
management. Once a new geographic market is identified, we must obtain suitable
store sites on acceptable terms. Also, the competitive and merchandising
challenges we face in new geographic markets may be different from the
challenges we face in our existing geographic markets. We may have to adapt to
regional tastes and customs and compete against established and familiar local
businesses with innovative or unique techniques for marketing party supplies and
paper goods. Entering new markets may also place significant demands on our
management, financial controls, operations and information systems. This may
cause us to incur higher costs relating to marketing and operations. Expansion
will require an increase in our personnel, particularly store managers and sales
associates, to operate our new stores.
OUR PLANS TO REMODEL AND RELOCATE STORES MAY REDUCE PROFITABILITY
In fiscal 2000 we plan to remodel approximately 2 stores and relocate 3
existing stores. This plan is subject to several risks, including:
- the loss of sales during the remodeling or relocation period
- cost overruns of the remodeling or relocation
- failure to achieve increased sales after the remodeling or
relocation
We remodel our stores periodically to maintain a fresh look for the
customer, standardize store layout and fixtures, and improve merchandise
presentation. Remodeling may be as simple as repainting or creating new signage
to as extensive as conducting a total makeover. We relocate a store when it is
too small and there is no room to expand at the existing location or when a
store is not performing in its present location and a better location is
available.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND SUPPORT OUR
LONG-TERM GROWTH STRATEGY
We believe that the combination of cash flow from operations and
available borrowing capacity under our $15.0 million, 3-year revolving credit
facility, will be adequate to handle our cash requirements through fiscal 2000.
We may, however, need to raise additional capital in the future to fund our
operations and support our long-term growth. Financial difficulties of our
competitors and our recent losses may affect our ability to obtain financing. In
addition, additional financing may not be available, or may not be available on
favorable terms. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our products and
services, implement our long-term growth strategy, take advantage of future
opportunities or respond in a timely manner to competitive pressures.
13
<PAGE>
OUR ANNUAL RESULTS ARE DEPENDENT ON SECOND AND FOURTH QUARTERS
We generate a significant portion of our operating income in our second
and fourth fiscal quarters because of the seasonality of our revenues and
promotional expenses. Any factor that negatively affects our revenues or
increases our operating expenses during the second and fourth fiscal quarters
could negatively affect our annual results of operations. As a result of the
seasonality of our revenues, we expect to incur a loss in the first quarter of
fiscal 2000 and for the first quarter of each fiscal year in the foreseeable
future. Although we typically realize strong sales during the third quarter, due
to increased promotional activities, we have historically experienced reduced
operating income for this quarter.
COMPETITION MAY REDUCE OUR REVENUES AND OPERATING INCOME
Increased competition by existing or future competitors may reduce our
sales and cause us to incur a loss. As a result of competition from other
specialty party supplies and paper goods retailers, we have experienced reduced
sales growth in our existing stores and incurred additional marketing and
promotional expenses. Our stores compete with a variety of smaller and larger
retailers, including:
- specialty party supplies and paper goods retailers, including
other party superstores
- card shops and designated departments in mass merchandisers
- discount retailers
- toy stores
- drug stores
- supermarkets
- department stores
- other Internet retailers
Many of our competitors have substantially greater financial and
personnel resources than we do. Some of our competitors have been, or may be,
funded by certain members of the vendor community. We may also encounter
additional competition from new entrants in the future in our existing markets.
OUR BUSINESS DEPENDS ON CONTINUED GOOD RELATIONS WITH OUR SUPPLIERS
Our failure to maintain good relationships with our principal suppliers
or the loss of our principal suppliers would hurt our business. In fiscal 1999,
our largest supplier accounted for approximately 17% of our purchases and our 5
largest suppliers represented approximately 51% of our purchases. Many of our
principal suppliers currently provide us with incentives like volume purchasing
allowances and trade discounts. If our suppliers were to reduce or discontinue
these incentives, prices from our suppliers would increase and our profitability
would be reduced. We do not have long-term contracts with any of our suppliers,
and any supplier could discontinue selling to us at any time.
WE NEED TO ATTRACT AND RETAIN QUALITY EMPLOYEES
Our success depends on attracting and retaining a large and growing
number of quality employees, including key employees. Many of our employees are
in entry level or part-time positions with historically high rates of turnover.
Our ability to meet our labor needs while controlling costs is subject to
external factors such as unemployment levels, minimum wage legislation and
changing demographics.
14
<PAGE>
WE MAY MOVE TO THE NASDAQ SMALLCAP MARKET
On January 31, 2000, the NASDAQ Stock Market notified us that we were
not in compliance with one of its maintenance standards requiring that we
maintain at least $5.0 million of "public float" -- the total market value of
our common stock held by shareholders who are not insiders. The NASDAQ Stock
Market also informed us that we had 90 calendar days to regain compliance with
this standard. Based on the number of our shares owned by non-insiders, for us
to meet this standard, the closing bid price of our common stock must average at
least $1.85 for at least 10 consecutive trading days within the 90-day period.
NASDAQ informed us that if we did not meet the standard before May 1, 2000, it
could delist our stock as early as the opening of business on May 3, 2000. Based
on recent trading prices, it will not be possible for our common stock price to
meet the required average of $1.85 during the allowed time frame and,
accordingly, we are in the process of applying for quotation on the NASDAQ
SmallCap Market. If our common stock were to trade at less than $1.00 per share
for 30 consecutive business days, it would not be eligible for quotation on the
NASDAQ SmallCap Martket either. In that event, quotations of our common stock
would likely be reported on the NASDAQ bulletin board. Any move of our common
stock from the NASDAQ National Market could cause the market price of our common
stock to decline and could make it more difficult to buy and sell our common
stock.
A FAILURE IN EXECUTING OUR FRANCHISE PROGRAM MAY REDUCE OUR PROFITABILITY
Our continued growth and success depends in part upon our ability to
attract, contract with and retain qualified franchisees. It also depends upon
the ability of those franchisees to operate their stores successfully and
promote and develop the Paper Warehouse store concept. During fiscal 2000 we
plan to establish approximately 10 new franchise stores. Although we have
established criteria to evaluate prospective franchisees, and our franchise
agreements include certain operating standards, each franchisee operates his/her
store independently. Various laws limit our ability to influence the day-to-day
operations of our franchise stores. We cannot assure you that franchisees will
be able to operate Paper Warehouse stores successfully and in a manner
consistent with our concepts and standards. As a result, our franchisees may
operate their stores in a manner that reduces the gross revenues of these
stores, and therefore reduces our franchise revenues.
Paper Warehouse, as a franchisor, is subject to both regulation by the
Federal Trade Commission and state laws regulating the offer and sale of
franchises. These regulations limit our ability to terminate or refuse to renew
franchises. Our franchisees are also subject to labor laws, including minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements. Our failure to obtain or maintain approvals to sell franchises, or
a franchisee's violation of any labor law, could cause us to lose or reduce our
franchise revenues.
A CHANGE IN CONSUMER PREFERENCES COULD NEGATIVELY AFFECT OUR BUSINESS
If consumer demand for single-use, disposable party goods were to
diminish, the party supplies and paper goods industry and our revenues would be
negatively affected. For example, if cost increases in raw materials such as
paper, plastic, cardboard or petroleum were to cause our prices to increase
significantly, consumers might decide to forgo the convenience associated with
single-use, disposable products and use standard dinnerware and flatware.
Similarly, changes in consumer preferences away from disposable products and in
favor of reusable products for environmental or other reasons could reduce the
demand for our products.
15
<PAGE>
REGIONAL RISKS MAY AFFECT OUR BUSINESS
Because our operations are located principally in eight metropolitan
areas, we are subject to certain regional risks, such as the economy, weather
conditions, natural disasters and government regulations. If any region in which
we operate stores were to suffer an economic downturn or other adverse regional
risks were to occur, our sales and profitability could decline and our ability
to implement our growth strategy would be hindered.
OUR INTERNET STRATEGY IS NOT LIKELY TO BE PROFITABLE
Although we have scaled-back the extent of, and minimized our financial
exposure to, our e-commerce venture, operation of the website still requires
management's ongoing attention and the dedication of our merchandising,
accounting and information systems departments. In addition, although we have
made attempts to minimize the financial impact of the web store, there are still
incremental costs to operate the site. Our website is not likely to generate any
profits and we are not likely to recapture the money invested in our Internet
strategy.
OUR FORMER STATUS AS AN S-CORPORATION COULD EXPOSE US TO LIABILITY
From February 1993 to November 1997, we were treated as an
S-Corporation under the Internal Revenue Code of 1986. In connection with the
completion of our initial public offering, we converted to a C-Corporation. If
the IRS or any state taxing authority were to challenge our prior S-Corporation
status, we could be liable to pay corporate taxes on our income, at the
effective corporate tax rate, for all or a part of the period we were an
S-Corporation, plus interest and possibly penalties.
WE NEED TO ANTICIPATE AND RESPOND TO MERCHANDISING TRENDS
Our success depends in part on our ability to anticipate and respond in
a timely manner to changing merchandise trends and consumer demands. We make
merchandising decisions well in advance of the seasons during which we will sell
the merchandise. As a result, if we fail to identify and respond quickly to
emerging trends, consumer acceptance of the merchandise in our stores could
diminish and we may experience a reduction in revenues. We sell certain licensed
products that are in great demand for short time periods, making it difficult to
project our inventory needs for these products. Significantly greater or
less-than-projected product demand, particularly for our juvenile licensed
products, could lead to one or more of the following:
- lost sales due to insufficient inventory
- higher carrying costs associated with slower turning inventory
- reduced or eliminated margins due to mark downs on excess
inventory
16
<PAGE>
OUR INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL POSITION
As of January 28, 2000, we had approximately $13.5 million of
borrowings outstanding, which includes amounts outstanding under our revolving
line of credit, capital leases, our mortgage and our subordinated debt. We may
incur additional indebtedness, and realize increased interest expense, in the
future. Our level of indebtedness could:
- impair our ability to obtain additional financing
- cause a substantial portion of our cash flow from operations to be
spent on principal and interest payments
- affect our ability to fund our operations
- make us more vulnerable to industry downturns and competitive
pressures
- prevent us from making interest and principal payments on our debt
obligations
- prevent us from meeting certain financial tests contained in our
debt obligations, which could lead to a default on those
obligations
We are currently in breach of two financial covenants in the indenture
under which our subordinated debentures were issued and are in default under our
revolving line of credit as a result of a cross-default provision. Although we
intend to seek a waiver and amendments from the debenture holders, we may not be
successful. In the event repayment of the credit line or the debentures were to
be accelerated, we would not have the funds available to satisfy such
obligations.
CONTROL BY MANAGEMENT
As of March 1, 2000, Yale T. Dolginow, President and Chief Executive
Officer owned or had the right to vote and control the disposition of 41.3% of
our outstanding Common Stock. Accordingly, Yale T. Dolginow may have the ability
to elect the Company's directors and determine the outcome of other corporate
actions requiring shareholder approval. Such control could have the effect of
delaying, deferring or preventing a change in control of the Company.
ITEM 2. PROPERTIES.
We own a 23,000 square foot building in a suburb of Minneapolis,
Minnesota, in which our headquarters are located. During 1999, we refinanced
this 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, and is
secured by a first mortgage on our office headquarters.
On February 23, 2000, Yale Dolginow, our Chairman and Chief Executive
Officer signed a letter of intent to purchase our corporate office building at
fair market value, to be determined by an outside appraisal. 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. For further discussion on the impact to the Company, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We lease a 17,000 square foot building in a suburb of Minneapolis,
Minnesota for warehouse space. We lease all the locations for our 102
Company-owned stores. We anticipate that our new Company-owned stores will
typically have ten-year leases with at least one five-year renewal option.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material litigation nor are we aware of any
threatened litigation that would have a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended January 28, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The following table contains certain information about our directors
and executive officers as of March 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Yale T. Dolginow ................... 57 President, Chief Executive Officer and Chairman of the
Board
Cheryl W. Newell.................... 46 Vice President and Chief Financial Officer
Steven R. Anderson.................. 53 Vice President and Chief Information Officer
Steven P. Durst..................... 31 Vice President of Merchandising
Arthur H. Cobb...................... 49 Director
Diane C. Dolginow................... 56 Secretary and Director
Marvin W. Goldstein................. 56 Director
Jeffrey S. Halpern.................. 57 Director
Martin A. Mayer..................... 57 Director
</TABLE>
The following table contains certain information about other key
personnel as of March 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael A. Anderson................. 39 Vice President of Franchising
Kristen Lenn........................ 32 Vice President of Human Resources
Willard V. Lewis.................... 63 Vice President of Store Development
Carol A. Nelson..................... 49 Vice President of Stores
Diana G. Purcel..................... 33 Controller
</TABLE>
18
<PAGE>
YALE T. DOLGINOW currently serves as President, Chief Executive Officer
and a director and was part of the original management team that purchased the
Paper Warehouse business in 1986. Mr. Dolginow has been in the retail business
since 1968 and has served in various capacities with numerous retail and
mail-order companies, such as President and Chief Executive Officer of Carlson
Catalog Showrooms, Inc., Assistant to the President of Dayton Hudson
Corporation, k/n/a Target Corporation, President of Modern Merchandising, Inc.
and Chief Executive Officer and President of Dolgin's, Inc. Mr. Dolginow and
Diane C. Dolginow are husband and wife.
CHERYL W. NEWELL currently serves as Vice President and Chief Financial
Officer and joined us in August 1997. From 1991 to August 1997, Ms. Newell was a
Vice President with the Corporate Banking Group at U.S. Bancorp, a bank holding
company, responsible for management of desktop technology, disaster recovery and
training and development. From 1986 to 1991, Ms. Newell was a Vice President
with Citicorp, a bank holding company. From 1976 to 1986, Ms. Newell was a Vice
President at Norwest Bank k/n/a Wells Fargo Corporation.
STEVEN R. ANDERSON currently serves as Vice President and Chief
Information Officer of the Company and joined us in December 1998. From May 1997
until June 1998, Mr. Anderson was Senior Vice President and Chief Information
Officer for County Seat, a publicly held specialty soft goods retailer. From
1986 to 1997, Mr. Anderson held a number of information systems positions,
including Senior Vice President and Chief Information Officer at Best Buy Co., a
publicly-held specialty retailer.
STEVEN P. DURST currently serves as Vice President of Merchandising and
joined us in 1995. Mr. Durst joined us as Director of Information Systems,
became Vice President of Information Systems in 1997 and assumed his current
position in 1998. From 1995 to 1997 Mr. Durst served as Director of Information
Systems for the Company. From 1990 to 1995 Mr. Durst was employed by Exxon
Corporation where he performed various engineering and business planning
functions. Mr. Durst is the son-in-law of Mr. and Mrs. Dolginow.
ARTHUR H. COBB has served as a director since 1992. He is a consultant
and certified public accountant. Since 1978, he has been engaged in providing
financial consulting services and is President of Cobb & Associates, Ltd. Mr.
Cobb was a partner with Peat Marwick Mitchell & Co., k/n/a KPMG LLP, a public
accounting firm.
DIANE C. DOLGINOW currently serves as our Secretary and a director and
joined us in 1986. Ms. Dolginow was a director of Dolgin's Inc. from 1968 to
1976, and since 1994 has been a director on the National Advisory Board of the
School of Education at University of Kansas. Ms. Dolginow and Mr. Dolginow are
husband and wife.
MARVIN W. GOLDSTEIN has served as a director since 1996. Mr. Goldstein
is currently a private investor. From April 1997 through August 1997, Mr.
Goldstein was Executive Vice President and Chief Operating Officer of Regis
Corp., a national chain of hair salons. From August 1995 through April 1997, Mr.
Goldstein was Chairman of the Board, Chief Executive Officer and President of
Pet Food Warehouse, Inc., a specialty retailer. From February 1988 to September
1994, Mr. Goldstein served in various positions at the Department Store Division
of Dayton Hudson Corporation, k/n/a Target Corporation, including President and
Chief Operating Officer, Chairman and Chief Executive Officer. Mr. Goldstein is
a director, and serves on the compensation committee, of each of the following
companies: Ali-Mac, A.R.C.A., Inc., Buffet's, Inc, Fieldworks, Inc., Greenspring
Company, KBGear, Kidboard, Inc., Red Tag.com, and Wilson's, The Leather Experts.
With the exception of A.R.C.A., Inc., Buffets, Fieldworks, Inc. and Wilson's The
Leather Experts, all of the foregoing companies are privately held.
19
<PAGE>
JEFFREY S. HALPERN has served as a director since 1997. He has been
Chairman of the Board and Chief Executive Officer of Southwest Casino and Hotel
Corp. since 1993. Mr. Halpern was a partner in the law firm of Popham, Haik,
Schnobrich & Kaufman, Ltd. from 1989 until 1993, and a founding partner of
Halpern & Druck from 1980 to 1989.
MARTIN A. MAYER has served as a director since 1992. He has been an
independent financial consultant since 1992. Mr. Mayer was a partner with Peat
Marwick Mitchell & Co., k/n/a KPMG LLP, a public accounting firm, from 1973
until 1992. Mr. Mayer is a certified public accountant.
MICHAEL A. ANDERSON currently serves as Vice President of Franchising
and joined us in 1991. Mr. Anderson joined us as Controller and assumed his
current position in 1999. From 1987 to 1991, Mr. Anderson was an accountant at
Luri, Eiger, Besikof & Company, a Minneapolis public accounting firm. From 1982
to 1986, Mr. Anderson was a staff accountant with Marvin O. Anderson, LPA, a
public accounting firm located in Minnesota.
KRISTEN LENN currently serves as Vice President of Human Resources and
joined us in August 1997. From 1994 to 1997, Ms. Lenn was a Senior Consultant
with McGladrey & Pullen LLP a public accounting firm, and provided a wide range
of human resources services to clients.
WILLARD V. LEWIS currently serves as Vice President of Store
Development and joined us in 1992. Mr. Lewis joined us as Director of
Development and assumed his current position in 1997. From 1990 to 1992, Mr.
Lewis served as Vice President of Network Facilities Professionals, Inc., a
Minnesota-based computer software firm. Mr. Lewis was employed by Dolgin's, Inc.
from 1970 to 1985.
CAROL A. NELSON currently serves as Vice President of Stores and joined
us in 1994. Ms. Nelson joined us as Director of Stores and held this position
until she assumed her current position in 1997. From 1992 to 1994, Ms. Nelson
was Director of Stores of CBR, Inc., a privately owned retailer, specializing in
airport retail. From 1976 to 1992, Ms. Nelson served as a District Manager,
managing 17 stores in a five-state area, for Best Products, Inc.
DIANA G. PURCEL currently serves as Controller and joined us in
April 1999. She is a certified public accountant. Before joining the Company
and since March 1998, Ms. Purcel was Divisional Controller for Corporate
Planning and Reporting for Damark International, Inc. From 1994 to 1998, Ms.
Purcel was a Senior Analyst with Dayton Hudson Corporation, k/n/a Target
Corporation. Prior to joining Dayton Hudson Corporation and since 1988, Ms.
Purcel was a senior auditor with Arthur Andersen LLP.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION
Our shares of Common Stock have traded on the NASDAQ National Market
under the symbol "PWHS" since November 25, 1997. The following table summarizes
the high and low closing sale prices per share of our Common Stock for the
periods indicated, as reported on the NASDAQ National Market. These prices do
not include commissions, mark-ups or markdowns.
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter........................................ $2.25 $1.69
Second Quarter....................................... 3.06 1.70
Third Quarter........................................ 2.50 1.50
Fourth Quarter....................................... 2.19 1.38
<CAPTION>
Fiscal Year 1998 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter........................................ $7.00 $4.63
Second Quarter....................................... 5.25 3.88
Third Quarter........................................ 4.13 1.69
Fourth Quarter....................................... 3.00 2.02
</TABLE>
(b) HOLDERS
As of April 7, 2000 we had approximately 160 holders of record of our
Common Stock.
(c) DIVIDENDS
We have never declared or paid any cash or stock dividends with respect
to our Common Stock, as it is our policy, and the policy of our Board of
Directors, to retain any earnings to provide for our continued growth and
development.
(d) RECENT SALE OF UNREGISTERED SECURITIES
We did not engage in any unregistered sales of equity securities during
our fiscal year ended January 28, 2000.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data presented below should be read in
conjunction with the Consolidated 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 fiscal year ended January 28, 2000 have been derived from our Consolidated
Financial Statements as audited by Grant Thornton LLP, independent certified
public accountants. The Selected Financial Data as of and for the four years
ended January 29, 1999 have been derived from our Consolidated Financial
Statements as audited by KPMG LLP, independent certified public accountants.
SUMMARY OF FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues...................................... $82,371 $63,491 $52,949 $43,002 $33,478
Repositioning charge.......................... 3,962 --- --- --- ---
Operating (loss) income....................... (6,496) (667) 889 2,080 1,781
Net (loss) income............................. (4,449) (521) (191) 1,303 1,286
Basic and diluted net loss per share.......... (.96) (.11) --- --- ---
Pro forma net (loss) income (1)............... --- --- (207) 808 797
Pro forma diluted net (loss) income per
share (1)................................... --- --- (.08) .32 .32
OTHER DATA:
Number of stores open at yearend:
Company-owned stores........................ 102 97 73 64 55
Franchise stores............................ 47 46 51 50 53
Comparable store sales increase (2)......... 9.5% 2.9% 9.7% 9.0% 13.6% (3)
BALANCE SHEET DATA:
Working capital............................... $ 4,701 $ 5,369 $9,383 $1,701 $ 925
Total assets.................................. 37,389 30,453 21,017 16,270 14,934
Total debt (4)................................ 13,467 8,808 1,753 11,240 8,021
Total stockholders' equity.................... 9,641 14,090 14,594 1,793 3,124
</TABLE>
- -----------------------
(1) For the period February 1, 1993 through November 28, 1997, we were an
S-Corporation and not generally subject to corporate income taxes. The
Statement of Operations data during this period reflects a pro forma
provision for income taxes as if 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.
(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, including
capital lease obligations.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 Item
1A. and elsewhere in this report and our other filings with the Securities and
Exchange Commission. The following discussion should be read in conjunction with
"Selected Financial Data" (Item 6) and our financial statements and related
notes appearing elsewhere in this report.
OVERVIEW
We are a growing chain of retail stores specializing in party supplies
and paper goods. We operate 102 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
We completed an initial public offering in late 1997, selling 1,985,800
shares of our common stock and raising net proceeds of $13.1 million. The
proceeds from that offering were used to retire our existing 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
operations.
Before November 1997, we elected to be treated for federal and state
income tax purposes as an S-Corporation under the Internal Revenue Code of 1986
and comparable state tax laws. For the purpose of discussion and analysis, we
have presented a pro forma tax provision to arrive at pro forma net income for
the applicable years. These pro forma amounts represent what the income tax
provision and the net income would have been if we had been a C-Corporation and
thus subject to federal income taxation for the entire period. This pro forma
provision was computed using a combined federal and state income tax rate of
38%.
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.
23
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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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain costs
and expenses as a percentage of total revenues and retail sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------
JANUARY 28, JANUARY 29, JANUARY 30,
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Costs of products sold and occupancy costs:
as % of total revenues............................ 67.2% 65.0% 66.0%
as % of retail sales.............................. 68.2% 66.3% 67.5%
Store operating expenses:
as % of total revenues............................ 23.7% 23.9% 21.7%
as % of retail sales.............................. 24.0% 24.4% 22.2%
General and administrative expenses:
as % of total revenues............................ 12.2% 12.2% 10.6%
as % of retail sales.............................. 12.4% 12.4% 10.8%
Number of Company-owned stores......................... 102 97 73
</TABLE>
FISCAL YEAR ENDED JANUARY 28, 2000 (FISCAL 1999) COMPARED TO FISCAL YEAR ENDED
JANUARY 29, 1999 (FISCAL 1998)
REVENUES
--------
RETAIL SALES. Retail sales of $81.1 million for fiscal 1999 increased
$18.9 million, or 30.4%, over retail sales of $62.2 million for fiscal 1998. The
year-over-year increase reflects the larger store base at the end of fiscal 1999
and the continued maturation of 27 stores opened during fiscal 1998, 10 of which
were purchased franchise stores. Of this increase, approximately $13.1 million
is the result of existing store growth and approximately $5.8 million is
attributable to an increase in comparable store sales. Sales from our Internet
web site, which became operational in September 1999, were not significant.
During fiscal 1999, we opened 8 and closed 3 Company-owned stores, bringing the
total to 102 as of January 28, 2000. Comparable store sales for fiscal 1999
increased 9.5% over the prior year comparable period. This growth rate compares
favorably to a comparable store sales increase of 2.9% for fiscal 1998.
24
<PAGE>
FRANCHISE RELATED FEES. Fiscal 1999 franchise related fees of $1.2
million decreased 2.3% from fees of $1.3 million for fiscal 1998. The
year-over-year decrease reflects our purchases throughout fiscal 1998 of 10
franchise stores, reducing our royalties received on product sales from
franchise stores. For both fiscal 1999 and 1998, royalty payments averaged 4% of
franchise store sales. During fiscal 1999, two franchise stores opened and one
franchise store closed, bringing the total franchise stores to 47 as of January
28, 2000, compared to 46 at the end of fiscal 1998.
COSTS AND EXPENSES
------------------
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs totaled $55.3 million or 68.2% of retail sales for fiscal 1999,
as compared to $41.3 million or 66.3% of retail sales for fiscal 1998. The
increase in this expense category primarily reflects higher occupancy costs,
resulting from the increased store base as well as the annualization of
occupancy costs for our Seattle market, which carries higher occupancy costs as
compared to our other markets. We have also experienced slight increases in the
cost of our products. 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 fiscal 1999 were
$19.5 million or 24.0% of retail sales, as compared to $15.2 million or 24.4% of
retail sales for the comparable period in the prior year. The decrease in the
percentage was primarily attributable to the continued maturation of our store
base and the ability to leverage year-over-year increases in store labor,
advertising and store operating expenses. We continue to realize higher wage
rate pressure due to the tightness of certain labor markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $10.1 million and $7.7 million for fiscal 1999 and fiscal 1998,
respectively, with both years at 12.2% of total revenues. The dollar increase is
primarily the result of higher payroll and benefit costs resulting from the
addition of several corporate positions necessary to support our growth. In
addition, the increase also reflects approximately $1.4 million of start-up and
operational costs associated with our Internet strategy. Over the next
twelve-months, we expect general and administrative expenses to remain
relatively flat as our store base continues to mature and we better leverage our
expense structure.
REPOSITIONING CHARGE. During the fourth quarter of fiscal 1999, we
recorded a pre-tax repositioning charge of approximately $4.0 million, or $.51
per share, net of tax, consisting of:
- reserves for stores to be-closed, previously closed and to-be
relocated
- impairment charges on long-lived assets associated with closed
stores
- an impairment charge associated with our Internet website asset
RESERVES FOR STORES. In response to operating losses, and in an attempt
--------------------
to strengthen our competitive position and improve long-term results, during
fiscal 1999, we organized a "challenge-store" committee comprised of various
members of management to review the profitability of our portfolio of stores.
During the fourth quarter of fiscal 1999, this committee adopted a plan to close
four under-performing stores, and we recorded a pre-tax charge of approximately
$1.7 million for the closing of these stores. This amount consists primarily of
reserves for the remaining lease obligations for these
25
<PAGE>
stores, net of expected sublease payments. We anticipate the closing of these
stores to be completed within the first half of fiscal 2000. Net sales and
operating losses for the four stores to be closed during fiscal 2000 were
approximately $1.7 million and ($273,000) for fiscal 1999, $1.2 million and
($244,000) for fiscal 1998 and $177,000 and ($65,000) for fiscal 1997. We have
also reserved approximately $600,000 for the remaining lease obligations, net of
expected sublease payments, for one store to be relocated during the first
quarter of fiscal 2000 and approximately $700,000 for a change in the estimate
of the net remaining lease obligations for four stores that were previously
closed. We have recorded a total reserve liability of $3.0 million. The
provision represents the only activity in this liability account for fiscal 1999
and can be seen in Schedule II - Valuation and Qualifying Accounts included in
Item 14. The store reserves represent our best estimate of the required future
cash outlays. We will endeavor to mitigate these future cash flows, however, by
subletting the vacant properties as soon as is practically possible.
IMPAIRMENT CHARGES ON LONG-LIVED ASSETS. The repositioning charge
----------------------------------------
additionally reflects write-downs of approximately $200,000 related to furniture
and fixtures and goodwill associated with stores to be closed. In addition, in
response to current and projected operating losses for our Internet venture
and a significant change in the e-commerce competitive advertising
environment, during the fourth quarter of fiscal 1999, we performed a review
of the long-lived assets associated with PartySmart.com, for impairment. As a
result of this review, we concluded that the asset value of our Internet
website, consisting primarily of capitalized internally developed software
costs, was not fully recoverable and we hired an outside firm to perform an
appraisal. As a result of this appraisal, and in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", we recorded a pre-tax impairment charge of
approximately $800,000 to reflect the related assets of PartySmart.com at
their fair market value. Our website is still operational, although it is our
intention to scale-back the time and financial investment in this Internet
venture. We are in the process of correcting certain navigational as well as
other functional problems with the website.
INTEREST EXPENSE. For fiscal 1999, interest expense of approximately
$1.2 million, or 1.4% of total revenues, increased $928,000 over interest
expense for fiscal 1998. The increase over prior year reflects borrowings from
our revolving credit facility, necessary to fund working capital requirements,
in addition to our public sale of convertible subordinated debentures. Interest
expense also increased due to the amortization of the deferred financing costs
related to our financing activities during fiscal 1999. In comparison, we did
not borrow under our revolving credit facility during the first five months of
fiscal 1998. We expect interest expense to increase throughout fiscal 2000,
primarily due to a higher level of borrowing necessary to support a larger store
base, recent increases in the prime rate, and the impact from a full year
annualization of our $4.0 million of convertible subordinated debentures,
bearing interest at 9%. Interest expense should also increase as a result of the
full year annualization of the amortization of deferred financing costs related
to our fiscal 1999 financing activity.
OTHER INCOME, NET. Other income, net of other expense, of approximately
$368,000 for fiscal 1999 reflects the receipt of approximately $250,000 from a
landlord as consideration for terminating the lease on a store.
NET LOSS. As a result of the factors discussed above, we realized a net
loss of approximately $4.4 million in fiscal 1999 as compared to a net loss of
$521,000 for fiscal 1998.
26
<PAGE>
FISCAL YEAR ENDED JANUARY 29, 1999 (FISCAL 1998) COMPARED TO FISCAL YEAR ENDED
JANUARY 30, 1998 (FISCAL 1997)
REVENUES
--------
RETAIL SALES. Retail sales of $62.2 million for fiscal 1998 increased
20.1% over retail sales of $51.8 million for fiscal 1997, primarily due to an
increase in the number of Company-owned stores from 73 at the end of fiscal 1997
to 97 at the end of fiscal 1998. Approximately $9.3 million was attributable to
new, existing and remodeled Company-owned stores and approximately $1.1 million
of the increase was attributable to comparable store sales increases. During
fiscal 1998, we opened 17 company-owned stores, purchased 10 franchise stores,
and closed 3 stores. Fiscal 1998 comparable store sales increased 2.9% over the
prior period.
FRANCHISE RELATED FEES. 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
fees of $1.3 million for fiscal 1998 increased 9.5% over $1.2 million of
franchise related fees for fiscal 1997, reflecting higher initial franchise fees
due to an increase in the number of franchise store openings in fiscal 1998. The
increase in these initial fees was augmented by increased royalty payments
resulting from increased sales in the franchise stores. For both fiscal 1998 and
1997, royalty payments averaged 4% of sales in the franchise stores.
COSTS AND EXPENSES
------------------
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs were $41.3 million or 66.3% of retail sales for fiscal 1998, as
compared to $35.0 million or 67.5% of retail sales for fiscal 1997. The decrease
in the percentage relates primarily 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 retail sales, as compared to $11.5 million or 22.2% of
retail sales for fiscal 1997. The increased percentage was primarily
attributable to increases in store labor, and secondarily to increased store
operating expenses, with the largest increase coming from the payroll and
related benefits expense categories. The average hourly wage rate increased due
to tightness in labor markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $7.7 million or 12.2% of total revenues in fiscal 1998 compared to
$5.6 million or 10.6% of total revenues for 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. In addition, goodwill amortization increased due to our purchases during
fiscal 1998 of franchise stores.
INTEREST EXPENSE. Interest expense 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. We used the net proceeds from our initial public offering to repay
certain bank debt, subordinated debt, and shareholder notes, and to fund new
store growth. We did not borrow under our bank revolving line of credit until
late in the second quarter of fiscal 1998.
NET LOSS. As a result of the factors discussed above, we reported a net
loss of $521,000 in fiscal 1998, which compares to a pro forma net loss of
$207,000 in fiscal 1997. The pro forma net loss includes a benefit for federal
and state income taxes.
27
<PAGE>
SUBSEQUENT EVENTS. On January 31, 2000, the NASDAQ Stock Market
------------------
notified us that we were not in compliance with one of its maintenance standards
requiring that we maintain at least $5.0 million of public float, and that we
have until May 1, 2000 to comply with this maintenance requirement. In order to
comply, our common stock must trade above $1.85 for 10 consecutive trading days
prior to May 1, 2000. NASDAQ informed us that if our common stock did not trade
at this level for the required time period, they could delist our common stock
as early as the opening of business on May 3, 2000. Based on recent trading
prices, it would not be possible for our common stock price to meet the required
average of $1.85 during the allowed time frame and accordingly, we are in the
process of applying for quotation on the NASDAQ SmallCap market.
On February 23, 2000, Yale Dolginow, our Chairman and Chief Executive
Officer signed a letter of intent to purchase our corporate office building at
fair market value, to be determined by an outside appraisal. 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.
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 outstanding
as of January 28, 2000, 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.
SEASONALITY
Our results of operations have historically fluctuated from quarter to
quarter because of variations in revenues and operating expenses. We generate a
significant portion of our operating income in our second and fourth fiscal
quarters because of seasonal events. Any factor that negatively affects our
revenues or increases our operating expenses during the second and fourth fiscal
quarters could negatively affect our annual results of operations. As a result
of the seasonality of our revenues, we expect to incur a loss in the first
quarter of each year for the foreseeable future. Although we typically realize
strong sales during the third quarter, due to increased promotional activities,
we have historically experienced reduced operating income for this quarter.
Our results of operations also fluctuate from quarter to quarter as a
result of the following:
- the timing of new store openings, remodels or relocations
- costs associated with new store openings, remodels or relocations
- expenses incurred to support our expansion strategy
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 venders
- cash from operations
28
<PAGE>
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
Our liquidity as measured by our working capital was $4.7 million at
January 28, 2000 compared to $5.4 million at January 29, 1999. Our current ratio
was 1.3 to 1.0 at January 28, 2000 compared to 1.4 to 1.0 at January 29, 1999.
The year-over-year change in our working capital and current ratio calculations
primarily reflects higher inventory levels and enhanced accounts payable
leveraging.
Cash (used for) provided by operations for each of the last three
fiscal years was approximately ($999,000) in fiscal 1999, ($1.3 million) in
fiscal 1998 and $746,000 in fiscal 1997. The decrease in cash flows from
operations for fiscal 1999 and fiscal 1998 compared to fiscal 1997 primarily
reflects an increase in merchandise inventories and, to a lesser extent,
increased operating losses in fiscal 1999 and fiscal 1998. Merchandise
inventories increased approximately $3.9 million from the end of fiscal 1998,
reflecting necessary purchases in order to support a larger store base. This
inventory growth was partially funded by enhanced payable leveraging as
reflected by a $2.9 million increase in accounts payable.
Net cash used for investing activities was approximately $3.2 million
for fiscal 1999, $6.7 million for fiscal 1998 and $2.5 million for fiscal 1997.
Capital expenditures in fiscal 1999 of approximately $3.2 million included
approximately $902,000 related to the opening of new stores. The remainder
primarily represents expenditures necessary to develop and launch our Internet
website. Our capital expenditures also reflect continual upgrades to our
information systems infrastructure. 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. During
fiscal 1998, we had capital expenditures of approximately $4.3 million,
including approximately $3.2 million related to new stores. Additionally, in
fiscal 1998 we used approximately $2.2 million towards the purchase of 10
franchise stores. Capital expenditures in fiscal 1997 were approximately $2.4
million.
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. We plan to open one new store,
relocate three stores and remodel two stores in fiscal 2000. If the number of
stores we plan to open, relocate or remodel increases or decreases, this
estimate may change accordingly. Our plans may vary based upon the availability
of suitable locations and the availability of 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. We expect that the average new store cost for a
Company-owned store to be approximately $186,000, including approximately
$131,000 for fixtures and equipment, including point-of-sale equipment, and
$55,000 for store inventory, net of accounts payable. Pre-opening expenses are
expensed as incurred. We seek to lease sites, of approximately 8,500 square
feet, for our Company-owned stores rather than own real estate.
29
<PAGE>
Net cash provided by financing activities was $3.6 million for fiscal
1999, $6.9 million for fiscal 1998 and $3.5 million for fiscal 1997. Cash
provided by financing activities in fiscal 1999 reflects the net proceeds
received from the public offering of $4.0 million of convertible subordinated
debentures, the refinancing of our mortgage and the financing of property and
equipment. Cash provided by financing activities in fiscal 1998 primarily
reflects our borrowing under our revolving line of credit with our bank and cash
provided by financing activities in fiscal 1997 primarily reflects the proceeds
from our initial public offering.
During fiscal 1999, we issued convertible subordinated debentures in an
aggregate principal amount of $4.0 million, convertible into 1,333,333 shares of
our common stock. The debentures bear interest at an annual rate of 9.0%,
payable quarterly, and will mature in 2005. We received net proceeds of
approximately $3.2 million from the issuance of these debentures, which were
used to develop and implement our Internet website, to repay indebtedness and
for other general corporate purposes. 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 January
28, 2000, as a result of the repositioning charge, we were in breach of a
covenant requiring a minimum consolidated tangible net worth and a covenant
requiring a certain ratio of total liabilities to consolidated tangible net
worth. However, we were current on all required payments under the indenture.
Had we not recorded the repositioning charge, yet continued to realize losses
throughout fiscal 2000, we would have been out of compliance on these covenants
during fiscal 2000. Under the indenture, if these breaches were to continue
until June 11, 2000, they would become an "Event of Default", which would permit
the indenture trustee or holders owning at least 25% in principal amount of the
outstanding debentures to declare all of $4.0 million of outstanding debentures
to be immediately due and payable. We intend to request from our debenture
holders a waiver of these breaches, and amendments to replace the definition of
consolidated tangible net worth in the indenture with a definition of
consolidated net worth, before these breaches become an "Event of Default," and
to increase the interest rate on the debentures. While we do not anticipate any
difficulties in obtaining the waiver and amendments, we cannot be certain that
we will be successful in receiving the waiver and amendments. Since our breach
does not yet constitute an "Event of Default" as defined by the indenture as of
January 28, 2000, and since it is our intention to obtain a waiver of the breach
and an amendment to replace the definition of consolidated tangible net worth to
be consistent with the definition of consolidated net worth in our revolving
credit agreement prior to it becoming an "Event of Default," the $4.0 million
convertible subordinated debentures are reflected as long-term in our
consolidated balance sheet at January 28, 2000.
During fiscal 1999, we obtained a $15.0 million three-year revolving
line of credit facility with a bank for general working capital purposes that
replaced our previous $7.5 million facility. 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. As of January 28, 2000 we had availability of
$8.9 million under this line of which $6.3 million was outstanding. The bank
agreed to waive its rights and remedies effective January 28, 2000 in connection
with our failure to comply with one of the financial covenants in our credit
agreement. Accordingly, we were in compliance with all of our financial
covenants as required by the credit facility at January 28, 2000. We remain in
default under this credit facility, however, as a result of our breach of
covenants in the indenture covering our debentures, as discussed above. We have
not received a waiver for this "cross-default." As a result of this
cross-default, the lender could discontinue future advances under the credit
facility and demand repayment of all outstanding borrowings, which totaled $6.3
million as of January 28, 2000. 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
30
<PAGE>
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. As a result of this increase, as of March 31, 2000
we had $10.7 million of availability under our line of credit, of which $9.6
million was outstanding. We have agreed to indemnify Mr. Dolginow for any
liability he may incur in connection with the Standby Letter of Credit.
During fiscal 1999, we refinanced our corporate office building. The
$1.1 million term note is payable in monthly installments of $8,612, including
interest through May 2009, and is secured by a first mortgage on our office
headquarters.
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
As discussed above, we are in breach of two financial covenants in the
indenture under which our debentures were issued and in default under our
revolving line of credit facility as a result of a cross-default provision.
Although we intend to seek a waiver and amendments from the bondholders, we may
not be successful. In the event repayment of the credit line or the debentures
were to be accelerated, we would not have the funds available to satisfy such
obligations. In general, our highly-leveraged financial condition, as well as
the possible reactions of customers, employees, suppliers and franchisees to
publicity regarding our continuing losses, a recent press release announcing our
potential delisting from the NASDAQ National Market and potential liquidity
needs, make it extremely difficult to predict our actual liquidity needs, and
the assumptions underlying our projections as to such needs therefore may not be
realized.
As a result of the continuing liquidity needs of our business,
borrowing limits and a default in the revolving credit facility, the breach and
possible default in connection with the debentures and the possibility of
continuing operating losses in our business, it is possible that we may not have
available to us adequate liquidity to meet all of the operating cash needs of
our business. In the event that we can not generate sufficient cash flow to meet
our commitments, we may be forced to seek protection from our creditors under
the bankruptcy laws.
INFLATION
We do not believe that inflation has had a material impact upon our
historical operating results, and we do not expect it to have a material impact
in the future. There can be no assurances, however 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.
31
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In addition to other sources of liquidity, we have used 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 consolidated
financial position, results of operations or cash flows. We do not use any
derivative financial instruments or engage in any other hedging activities.
ITEM 8. FINANCIAL STATEMENTS.
The Company's Consolidated Financial Statements and the report of its
independent certified public accountants are included beginning on page F-1 of
this Annual Report on Form 10-K. The index to these financial statements is
included in Item 14 (a) (1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
We dismissed our independent auditors, KPMG LLP (KPMG), effective
October 11, 1999. Our Board of Directors approved this action upon
recommendation of its Audit Committee. The reports of KPMG on our consolidated
financial statements for the fiscal years ended January 29, 1999 (fiscal 1998)
and January 30, 1998 (fiscal 1997) did not contain any adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. During fiscal 1997, fiscal 1998 and the
period since the end of fiscal 1998, the Company believes there were no
disagreements between the Company and KPMG on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of KPMG,
would have caused it to make a reference to the subject matter of the
disagreements in connection with its report. In addition, during fiscal 1997,
fiscal 1998 and the period since the end of fiscal 1998, the Company believes
there were no "reportable events" within the meaning of Item 304 of Regulation
S-K under the Securities Act of 1933.
On October 15, 1999, we retained the accounting firm of Grant Thornton
LLP to audit our consolidated financial statements for the year ended January
28, 2000 (the 1999 fiscal year.) Our Board of Directors approved this action
upon recommendation of its Audit Committee.
On October 18, 1999, KPMG filed a letter with the SEC stating the
Company was notified in a letter dated April 14, 1999 from NASDAQ that the
Company's securities could be delisted from the NASDAQ National Market. The
Company prepared a registration statement on Form S-1 during the May/June
timeframe. KPMG recommended that disclosure of the NASDAQ notification be
included in the Form S-1 and the Company included such disclosure. We disagree
with KPMG's characterization of its involvement with the decision to include
disclosure in our Form S-1, dated effective July 15, 1999, regarding NASDAQ's
notification that our securities could be delisted from the NASDAQ National
Market.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) DIRECTORS 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 2000 Proxy Statement is incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Executive Officers of the Company is included in
this Report under Item 4A, "Executive Officers of the Registrant."
(c) COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 2000 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors--Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
2000 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 2000 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 2000 Proxy Statement is incorporated herein by
reference.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements:
The following Consolidated Financial Statements are included herein (page
numbers refer to pages in this Report):
<TABLE>
<CAPTION>
Page(s)
---------------------
<S> <C>
Report of Independent Certified Public Accountants................................. F-1
Independent Auditors' Report....................................................... F-2
Financial Statements:
Consolidated Balance Sheets................................................... F-3
Consolidated Statements of Operations......................................... F-4
Consolidated Statements of Stockholders' Equity............................... F-5
Consolidated Statements of Cash Flows......................................... F-6
Notes to Consolidated Financial Statements.................................... F-7 to F-20
</TABLE>
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the year ended
January 28, 2000:
Description
<TABLE>
<CAPTION>
Balance at Balance at
beginning Charges/ end
Reserve for Store Closings of year Provision Write-offs of year
-------------- --------------- ------------------ ------------
<S> <C> <C> <C> <C>
Fiscal year ended
January 28, 2000............... $--- $3,000,000 $--- $3,000,000
</TABLE>
All other schedules have been omitted since they are not required, not
applicable or the information has been included in the financial statements or
the notes thereto.
34
<PAGE>
(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, 2000, 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(c):
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
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 (incorporated by reference
to the Company's Registration Statement on Form S-1 File No.
333-79161).
8. Amendment to 1997 Stock Option and Compensation Plan (filed
herewith electronically).
9. Separation Agreement and General Release between and Brent D.
Schlosser and the Company dated December 2, 1999 (filed
herewith electronically).
(b) REPORTS ON FORM 8-K.
We did not file any Current Reports on Form 8-K during the fourth
quarter of fiscal 1999.
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Paper Warehouse, Inc.:
We have audited the accompanying consolidated balance sheets of Paper
Warehouse, Inc. and subsidiaries as of January 28, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Paper
Warehouse, Inc. and subsidiaries as of January 28, 2000 and the results of their
consolidated operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
We have also audited Schedule II of Paper Warehouse, Inc. and
subsidiaries for the year ended January 28, 2000. In our opinion, this schedule
when considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information required to be set
forth therein.
/s/ Grant Thornton LLP
March 10, 2000 (except for Note 6, as to which the date is March 21, and
March 31, 2000)
Minneapolis, Minnesota
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Paper Warehouse, Inc.:
We have audited the accompanying consolidated balance sheets of Paper
Warehouse, Inc. and Subsidiary (the Company) as of January 29, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-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 the results of their
operations and their cash flows for each of the fiscal years in the two-year
period ended January 29, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
March 19,1999
Minneapolis, Minnesota
F-2
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 28, 2000 AND JANUARY 29, 1999
<TABLE>
<CAPTION>
--------------- -- ---------------
January 28, January 29,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 469,768 $ 988,575
Merchandise inventories.................................................. 20,206,851 16,302,070
Accounts receivable...................................................... 830,153 1,105,262
Prepaid expenses and other current assets................................ 1,003,398 770,084
--------------- ---------------
Total current assets................................................. 22,510,170 19,165,991
Property and equipment, net................................................. 10,006,870 9,976,450
Deferred tax asset.......................................................... 3,177,052 239,099
Other assets, net........................................................... 1,694,552 1,071,014
--------------- ---------------
Total assets....................................................... $ 37,388,644 $ 30,452,554
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit........................................... $ 6,303,648 $ 6,850,000
Current maturities of long-term debt..................................... 715,517 460,559
Accounts payable......................................................... 8,226,993 5,314,593
Accrued liabilities...................................................... 1,751,634 1,172,056
Current portion - reserve for store closings............................. 811,709 ---
--------------- ---------------
Total current liabilities............................................ 17,809,501 13,797,208
Convertible subordinated debt............................................... 4,000,000 ---
Other long-term debt, less current maturities............................... 2,447,852 1,497,031
Reserve for store closings, less current portion............................ 2,188,291 ---
Deferred rent credits....................................................... 1,301,563 1,068,331
--------------- ---------------
Total liabilities.................................................. 27,747,207 16,362,570
--------------- ---------------
Stockholders' equity:
Serial preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding............................................ --- ---
Common stock, $.01 par value; 40,000,000 shares authorized;
4,627,936 shares issued and outstanding............................... 46,279 46,279
Additional paid-in capital............................................... 13,833,442 13,833,442
Accumulated (deficit) earnings........................................... (4,238,284) 210,263
--------------- ---------------
Total stockholders' equity........................................... 9,641,437 14,089,984
--------------- ---------------
Total liabilities and stockholders' equity......................... $ 37,388,644 $ 30,452,554
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 28, 2000, JANUARY 29, 1999 AND JANUARY 30, 1998
<TABLE>
<CAPTION>
-----------------------------------------------------
January 28, January 29, January 30,
2000 1999 1998
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Retail sales................................................ $ 81,128,437 $ 62,218,553 $ 51,787,842
Franchise related fees...................................... 1,242,330 1,271,973 1,161,097
-------------- --------------- ---------------
Total revenues....................................... 82,370,767 63,490,526 52,948,939
Costs and expenses:
Costs of products sold and occupancy costs.................. 55,332,014 41,252,342 34,966,018
Store operating expenses.................................... 19,488,775 15,185,082 11,484,271
General and administrative expenses......................... 10,083,556 7,719,992 5,609,869
Repositioning charge........................................ 3,962,454 --- ---
-------------- --------------- ---------------
Total costs and expenses............................. 88,866,799 64,157,416 52,060,158
-------------- --------------- ---------------
Operating (loss) income.............................. (6,496,032) (666,890) 888,781
Interest expense.............................................. (1,182,349) (254,405) (797,567)
Other income, net............................................. 368,008 76,981 94,378
Expenses of canceled acquisition.............................. --- --- (260,852)
-------------- --------------- ---------------
Loss before income taxes, cumulative effect of
accounting change and extraordinary charge................... (7,310,373) (844,314) (75,260)
Income tax benefit (expense).................................. 2,970,332 323,654 (5,941)
-------------- --------------- ---------------
Net loss before cumulative effect of accounting
change....................................................... (4,340,041) (520,660) (81,201)
Cumulative effect of accounting change, net................... (108,506) --- ---
-------------- --------------- ---------------
Net loss before extraordinary charge.......................... (4,448,547) (520,660) (81,201)
Extraordinary charge, net..................................... --- --- (109,765)
-------------- --------------- ---------------
Net loss............................................. $ (4,448,547) $ (520,660) $ (190,966)
============== =============== ===============
Net Loss Per Common Share:
Basic and diluted net loss per common share before
cumulative effect of accounting change................ $ (0.94) $ (0.11)
Cumulative effect of accounting change, net.............. (0.02) ---
-------------- ---------------
Basic and diluted net loss per common share.............. $ (0.96) $ (0.11)
============== ===============
Weighted average shares outstanding...................... 4,627,936 4,572,979 2,630,811
============== =============== ===============
Pro forma Net Loss Per Common Share:
Pro forma net loss....................................... $ (206,610)
===============
Basic and diluted pro forma net loss per common share
before extraordinary charge........................... $ (0.04)
Extraordinary charge, net................................ (0.04)
---------------
Basic and diluted pro forma net loss per common
share................................................. $ (0.08)
===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 28, 2000, JANUARY 29, 1999 AND JANUARY 30, 1998
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Serial Number of Additional Accumulated Total
Preferred Common Common Paid-In (Deficit) Stockholders'
Stock Shares Stock Capital Earnings Equity
----------- ------------- ------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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 .... --- 70,749 707 149,635 --- 150,342
----------- ------------- ------------- -------------- --------------- ----------------
Balance, January 29, 1999...... --- 4,627,936 46,279 13,833,442 210,263 14,089,984
Net loss..................... --- --- --- --- (4,448,547) (4,448,547)
----------- ------------- ------------- -------------- --------------- ----------------
Balance, January 28, 2000...... --- 4,627,936 $46,279 $13,833,442 $(4,238,284) $ 9,641,437
=========== ============= ============= ============== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 28, 2000, JANUARY 29, 1999 AND JANUARY 30, 1998
<TABLE>
<CAPTION>
---------------------------------------------------------
January 28, January 29, January 30,
2000 1999 1998
---------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................................... $(4,448,547) $ (520,660) $ (190,966)
Adjustments to reconcile net loss to net cash
(used for) provided by operations:
Depreciation and amortization............................... 2,222,025 1,732,220 1,140,966
Repositioning charge........................................ 3,962,454 --- ---
Gain on sale of property and equipment...................... (6,887) (277) (1,892)
Deferred taxes.............................................. (3,042,669) (323,654) 902
Deferred rent credits....................................... 226,915 (578,145) 189,228
Other noncash items affecting earnings...................... 349,759 --- 182,611
Changes in operating assets and liabilities, net of effect
of asset acquisition:
Accounts receivable....................................... 275,109 (653,325) (190,513)
Prepaid expenses and other current assets................. (130,574) (459,616) (34,915)
Merchandise inventories................................... (3,904,781) (3,966,362) (1,592,869)
Accounts payable.......................................... 2,912,400 2,325,577 866,731
Accrued liabilities....................................... 585,895 1,136,587 377,137
---------------- ----------------- -----------------
Net cash (used for) provided by operations.............. (998,901) (1,307,655) 746,420
INVESTING ACTIVITIES:
Purchases of assets of businesses................................ --- (2,239,165) ---
Proceeds from sale of property and equipment..................... 49,894 6,349 7,807
Purchases of property and equipment.............................. (3,166,926) (4,334,787) (2,438,110)
Other assets..................................................... (43,196) (117,420) (118,390)
---------------- ----------------- -----------------
Net cash used for investing activities.................. (3,160,228) (6,685,023) (2,548,693)
FINANCING ACTIVITIES:
Proceeds from convertible subordinated debentures................ 4,000,000 --- ---
Net proceeds from initial public offering........................ --- --- 13,134,879
Net payments on related party loans.............................. --- --- (2,136,193)
Net (payments on) proceeds from notes payable.................... (546,352) 6,850,000 (5,870,000)
Proceeds from refinancing of mortgage............................ 1,100,000 --- ---
Net payments on other long-term debt............................. (930,816) (203,174) (2,016,778)
Payment of debt issuance costs................................... (1,019,105) --- ---
Proceeds from financing of property and equipment................ 1,550,780 622,454 578,055
Payments on financing of property and equipment.................. (514,185) (214,282) (42,457)
Distribution of Subchapter S Corporation accumulated earnings.... --- (133,482) (142,663)
---------------- ----------------- -----------------
Net cash provided by financing activities............... 3,640,322 6,921,516 3,504,843
---------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents.... (518,807) (1,071,162) 1,702,570
Cash and cash equivalents, beginning of year..................... 988,575 2,059,737 357,167
---------------- ----------------- -----------------
Cash and cash equivalents, end of year........................... $ 469,768 $ 988,575 $ 2,059,737
================ ================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the year........................... $ 930,065 $ 274,004 $ 846,538
================ ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We, ("Paper Warehouse, Inc." or the "Company"), are a growing chain of
retail stores, specializing in party supplies and paper goods. We operate 102
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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. We have eliminated all
intercompany balances and transactions between the entities in consolidation.
FISCAL YEAR
Our fiscal year ends on the Friday closest to January 31st. Our fiscal
year is generally 52 weeks and periodically consists of 53 weeks. The fiscal
years ended January 28, 2000, January 29, 1999 and January 30, 1998 all
consisted of 52 weeks. Unless otherwise stated, references to years in this
report relate to fiscal years rather than to calendar years.
ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires us 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.
CASH EQUIVALENTS
We consider all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Due to their short-term nature, the carrying value of our current
financial assets and liabilities approximates their fair value. The fair value
of our borrowings, if recalculated based on current interest rates, would not
significantly differ from the recorded amounts.
F-7
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Inventories are stated at the lower of cost (as determined on a
first-in, first-out basis) or market. We review slow moving merchandise and take
appropriate markdowns to move the inventory. Periodically, we review inventory
valuations and take appropriate write-downs, as necessary.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of 3 years for
computers and internally developed software costs, 5-7 years for fixtures and
equipment and 40 years for building and land improvements.
OTHER ASSETS
Other assets consist primarily of debt issuance costs, goodwill,
security deposits and trademarks. Debt issuance costs are amortized to interest
expense over the terms of the related financings on a straight-line basis.
Goodwill represents the excess of purchase price over net assets acquired and is
being amortized over 15 years on a straight-line basis. The costs of acquiring
trademarks have been capitalized and are being amortized over 10 years on a
straight-line basis.
LONG-LIVED ASSETS
We review long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the fair value is less than the carrying amount of the asset, we recognize a
loss for the difference.
DEFERRED RENT CREDITS
Certain of our operating leases provide for scheduled increases in base
rentals over their terms. For these leases, we recognize the total rental
amounts due over the lease terms on a straight-line basis. We have established
corresponding deferred rent credits for the differences between the amounts
recognized and the amounts paid.
STORE OPENING AND CLOSING COSTS
Expenditures incurred in connection with the opening of new stores or
the remodeling of existing stores are expensed as incurred.
In the event that a store is planned to close before its lease has
expired, any remaining lease obligation, net of expected sublease recovery, is
provided for in the period the plan to close the store is adopted. In addition,
the remaining investment in fixed assets, net of the expected recovery value, is
also expensed.
F-8
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASES
Leases that meet the accounting criteria for capital lease treatment
are recorded as property and equipment and the related capital lease obligations
are included in debt. All other leases are accounted for as operating leases.
ADVERTISING COSTS
Advertising costs, included in store operating expenses, are expensed
as incurred. Advertising costs, net of advertising income, were approximately
$2.9 million, $3.1 million and $2.4 million for fiscal years 1999, 1998 and
1997.
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 at fiscal year end 1999 that
were not included in the computation of diluted EPS, as their inclusion would
have been antidilutive. In addition, options to purchase 520,425, 412,200 and
184,450 shares of common stock were outstanding at the end of fiscal years 1999,
1998 and 1997, 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
730,000 common shares and conversions of stock options into approximately 400
common shares for the year ended January 28, 2000. We would not have assumed
conversions of any potentially dilutive shares for fiscal years 1998 or 1997.
STOCK-BASED COMPENSATION
We apply Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees" to account for our stock options issued to employees
and members of the board of directors. Had Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-based Compensation" been
applied, our compensation expense would have been different; see Note 11.
RECLASSIFICATIONS
We have reclassified certain prior year amounts to conform to the
current year presentation.
F-9
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACCOUNTING CHANGE
We adopted Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities" during fiscal 1999. This Statement requires that
costs of start-up activities and organization costs be expensed as incurred.
Prior to the adoption of this Statement, our policy was to capitalize lease
acquisition fees and amortize them over the related lease term using the
straight-line method. The impact of the change of approximately $109,000, net of
taxes of approximately $72,000, is shown as a cumulative effect of accounting
change in the Consolidated Statement of Operations for the year ended January
28, 2000.
(3) INTERNET SUBSIDIARY
During fiscal 1999, we incorporated PartySmart.com, Inc. as a wholly
owned subsidiary. PartySmart.com, Inc. has a storefront on the Web that began
selling selected party supplies and paper goods over the Internet in the third
quarter of 1999. During fiscal 1999, we incurred start-up and operational costs
of approximately $2.5 million related to our Internet venture, $1.1 million of
which was capitalized. In recording certain of these expenses, we followed the
guidance prescribed by SOP 98-1, "Accounting for the Costs of Computer Software
Developed for Internal Use," and the guidance prescribed by SOP 98-5. During the
fourth quarter of 1999, we evaluated the assets associated with PartySmart.com
and recognized an impairment loss related to these website assets (See note 4).
(4) REPOSITIONING CHARGE
During the fourth quarter of fiscal 1999, we recorded a pre-tax
repositioning charge of approximately $4.0 million, or $.51 per share, net of
tax, consisting of a reserve for store-closings, and impairment charges on
long-lived assets associated with closed stores in addition to our Internet
website asset.
In response to operating losses, and in an attempt to strengthen our
competitive position and improve long-term results, during the fourth quarter of
fiscal 1999, we adopted a plan to close four under-performing stores, and
recorded a pre-tax charge of approximately $1.7 million. This amount consists
primarily of reserves for the remaining lease obligations for these stores, net
of expected sublease payments. We have classified lease payments that extend
beyond one year as long-term. Additionally, we recorded an impairment charge of
approximately $200,000 related to furniture and fixtures and goodwill associated
with stores to be closed. We anticipate the closing of these stores to be
completed within the first half of fiscal 2000. Net sales and operating losses
for the four stores to be closed during fiscal 2000 were approximately $1.7
million and ($273,000) for fiscal 1999, $1.2 million and ($244,000) for fiscal
1998 and $177,000 and ($65,000) for fiscal 1997. We have also reserved
approximately $600,000 for the remaining lease obligations for one store to be
relocated during the first quarter of fiscal 2000.
Additionally included in the repositioning charge is a reserve for a
change in the estimate of the remaining lease obligations, net of expected
sublease payments, for four stores that were previously closed of approximately
$700,000.
F-10
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) REPOSITIONING CHARGE (CONTINUED)
In response to current and projected operating losses for our Internet
venture and a significant change in the e-commerce competitive advertising
environment, during the fourth quarter of fiscal 1999, we performed a review of
the long-lived assets associated with PartySmart.com, for impairment. As a
result of this review, we concluded that the asset value of our Internet
website, consisting primarily of capitalized internally developed software
costs, was not fully recoverable and we hired an outside firm to perform an
appraisal. As a result of this appraisal, and in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", we recorded a pre-tax impairment charge of approximately
$800,000 to reflect the related assets of PartySmart.com at their fair market
value.
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at:
<TABLE>
<CAPTION>
--------------------- ----------------------
January 28, January 29,
2000 1999
--------------------- ----------------------
<S> <C> <C>
Fixtures and equipment................................. $14,892,320 $13,486,409
Internally developed software costs................ ... 340,000 ---
Building............................................... 1,273,088 1,273,088
Land and improvements.................................. 319,733 319,733
Accumulated depreciation and amortization.............. (6,818,271) (5,102,780)
--------------------- ----------------------
Total property and equipment, net................... $ 10,006,870 $ 9,976,450
===================== ======================
</TABLE>
Depreciation and amortization expense on property and equipment was
approximately $2.2 million, $1.7 million, and $1.1 million for fiscal years
1999, 1998 and 1997, respectively.
(6) NOTES PAYABLE - LINE OF CREDIT
During fiscal 1999, we obtained a $15.0 million three-year revolving
line of credit facility with a bank for general working capital purposes that
replaced our previous $7.5 million facility. Borrowings outstanding under this
line of credit bear interest at a variable rate (8.5% at January 28, 2000) and
are secured by substantially all of our assets. The agreement with respect to
the credit facility contains covenants, which require us to satisfy certain
financial tests and 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. As of January 28, 2000 we had availability of
$8.9 million of which $6.3 million was outstanding. The bank agreed to waive its
rights and remedies effective January 28, 2000 in connection with our failure to
comply with one of the financial covenants in our credit agreement. Accordingly,
we were in compliance with all of our financial covenants as required by the
credit facility at January 28, 2000. We remain in default under this credit
facility, however, as a result of our breach of covenants in the indenture
covering our debentures. We have not received a waiver for this "cross-default."
As a result of this cross-default, the lender could discontinue future advances
under the credit facility and demand repayment of all outstanding borrowings. In
March 2000, Yale T. Dolginow, our Chairman and Chief Executive Officer, through
Wells Fargo, N.A. issued a $1.2 million Standby
F-11
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE - LINE OF CREDIT (CONTINUED)
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. As a result of this increase, as of March 31, 2000 we had $10.7
million of availability under our line of credit, of which $9.6 million was
outstanding. We have agreed to indemnify Mr. Dolginow for any liability he may
incur in connection with the Standby Letter of Credit.
The credit agreement requires the use of all cash receipts to pay down
indebtedness and includes various covenants, which, if violated, could
accelerate the maturity of the debt. Accordingly, we have classified borrowings
outstanding under the revolving credit facility as a current liability in our
Consolidated Balance Sheet. At January 28, 2000, we had borrowings outstanding
of approximately $6.3 million under our revolving line of credit facility, and
at January 29, 1999, we had borrowings outstanding of approximately $6.9 million
under our previous credit facility.
(7) LEASES
Assets held under capital leases are included in property and equipment
and are charged to depreciation and interest over the life of the lease. Our
assets under capital leases consist of agreements for equipment and fixtures and
an agreement for software. At January 28, 2000, assets under capital leases were
approximately $2.1 million, net of accumulated depreciation of approximately
$612,000, and at January 29, 1999, assets under capital leases were $1.0
million, net of accumulated depreciation of approximately $135,000.
We lease all of our retail stores under noncancelable operating leases
that have various expiration dates. In addition to base rents, certain leases
require us to pay our 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 we may extend the term three to five years.
Total rent expense was approximately $9.7 million, $7.1 million and $5.3 million
for fiscal years 1999, 1998 and 1997, respectively.
F-12
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) LEASES (CONTINUED)
Future minimum lease payments required under noncancelable lease
agreements existing at January 28, 2000 were:
<TABLE>
<CAPTION>
----------------- -----------------
Operating Capital
Fiscal Year: Leases Leases
------------ ----------------- -----------------
<S> <C> <C>
2000.............................................................. $10,221,359 $754,940
2001.............................................................. 10,040,829 589,502
2002.............................................................. 9,346,653 560,635
2003.............................................................. 8,851,562 410,656
2004.............................................................. 8,187,118 41,138
Thereafter........................................................ 23,720,798 ---
----------------- -----------------
Total future minimum lease commitments............................ $70,368,319 2,356,871
=================
Less: Interest at 9.0%-15.3% 376,506
-----------------
Total capital lease obligations $1,980,365
=================
</TABLE>
(8) LONG-TERM DEBT
SUBORDINATED CONVERTIBLE DEBT
During fiscal 1999, we issued convertible subordinated debentures in an
aggregate principal amount of $4.0 million, convertible into 1,333,333 shares of
our common stock. The debentures bear interest at an annual rate of 9.0%,
payable quarterly, and mature in 2005. We received net proceeds of approximately
$3.2 million from the issuance of these debentures, which were used to develop
and implement our Internet website, to repay indebtedness and for other general
corporate purposes. 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 January 28, 2000, as
a result of the repositioning charge, we were in breach of a covenant requiring
a minimum consolidated tangible net worth and a covenant requiring a certain
ratio of total liabilities to consolidated tangible net worth. However, we were
current on all required payments under the indenture. Under the indenture, if
these breaches were to continue until June 11, 2000, they would become an "Event
of Default", which would permit the indenture trustee or holders owning at least
25% in principal amount of the outstanding debentures to declare all of $4.0
million of outstanding debentures to be immediately due and payable. We intend
to request from our debenture holders a waiver of these breaches, and amendments
to replace the definition of consolidated tangible net worth in the indenture
with a definition of consolidated net worth, before these breaches become an
"Event of Default," and increase the interest rate on the debentures, which
should not have a material impact on future financial statements. While we do
not anticipate any difficulties in obtaining the waiver and amendments, we
cannot be certain that we will be successful in receiving the waiver and
amendments. Since our breach does not yet constitute an "Event of Default" as
defined by the indenture as of January 28, 2000, and since it is our intention
to obtain a waiver of the breach and an amendment to replace the definition of
consolidated tangible net worth to be consistent with the definition of
consolidated net worth in our revolving credit agreement prior to it becoming an
"Event of Default," the $4.0 million convertible subordinated debentures are
reflected as long-term in our consolidated balance sheet at January 28, 2000.
F-13
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) LONG-TERM DEBT (CONTINUED)
REFINANCING
During fiscal 1999, we refinanced our corporate office building. The
$1.1 million term note is payable in monthly installments of $8,612, including
interest through May 2009. The note is secured by a first mortgage on our office
headquarters.
Long-term debt, excluding $4.0 million of subordinated debentures,
consisted of the following at:
<TABLE>
<CAPTION>
----------------- - ----------------
January 28, January 29,
2000 1999
----------------- ----------------
<S> <C> <C>
Term note payable in monthly installments of $8,612, including interest
at 7.125% through May 2009. The note is secured by a first mortgage on
our office headquarters.................................................... $1,083,004 $ ---
Notes payable in monthly installments, including interest at 6.914% to
9.08%, paid in fiscal 1999................................................. --- 913,820
$2,300,000 subordinated note payable to private placement holders called
and payable upon presentment............................................... 100,000 100,000
----------------- ----------------
Sub-total long-term debt................................................... 1,183,004 1,013,820
Capital lease obligations.................................................. 1,980,365 943,770
Less: current maturities................................................... 715,517 460,559
----------------- ----------------
Long-term debt......................................................... $2,447,852 $1,497,031
================= ================
</TABLE>
Required principal payments on long-term debt over the next five
years, excluding our subordinated debentures and capital lease obligations,
are approximately $27,100 in fiscal 2000, $29,000 in fiscal 2001, $31,200
in fiscal 2002, $33,500 in fiscal 2003, $35,900 in fiscal 2004 and $926,300
thereafter.
F-14
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
Prior to our initial public offering in November 1997, we elected to be
taxed as an S-Corporation under the Internal Revenue Code. Our earnings for the
S-Corporation period were allocated to our 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. However, a provision was made for state
taxes during the S-Corporation period as some states impose a tax upon
S-Corporations. We have provided federal and state income taxes for all periods
after November 28, 1997. We have a cross indemnification agreement with the
previous shareholders for the settlement of any potential tax adjustments.
The actual income tax rate differed from the amounts computed by the
U.S. federal income tax rate of 34% to pretax net loss as a result of the
following for the fiscal years ending:
<TABLE>
<CAPTION>
---------------------------------------------------------
January 28, January 29, January 30,
2000 1999 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Computed "expected" tax benefit on losses,
including tax benefit associated with change in
accounting principle in fiscal 1999................. $(2,547,013) $(287,067) $(25,756)
Increase (reduction) in income taxes resulting from:
Adjustment to reflect S-Corporation election....... --- --- (15,644)
Adjustment to reflect adoption of SFAS 109......... --- --- 43,251
State and local income taxes, net of federal
income tax benefit.............................. (514,840) (48,548) (1,313)
Other permanent differences............................ 19,184 11,961 5,403
----------------- ----------------- ----------------
Total income tax (benefit) expense..................... $(3,042,669) $(323,654) $ 5,941
================= ================ ================
Effective tax rate................................. (40.6%) (38.3%) ---
================= ================ ================
</TABLE>
The components of the income tax (benefit) expense were as follows for
the fiscal years ending:
<TABLE>
<CAPTION>
--------------------------------------------------------
January 28, January 29, January 30,
2000 1999 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal....................................... $ --- $ --- $ ---
State......................................... --- --- 5,039
----------------- ---------------- ----------------
--- --- 5,039
Deferred:
Federal....................................... (2,527,829) (275,106) 767
State......................................... (514,840) (48,548) 135
----------------- ---------------- ----------------
(3,042,669) (323,654) 902
----------------- ---------------- ----------------
Total income tax (benefit) expense............ $(3,042,669) $(323,654) $5,941
================= ================ ================
</TABLE>
F-15
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as follows
at:
<TABLE>
<CAPTION>
-------------------------------------
January 28, January 29,
2000 1999
---------------- ----------------
<S> <C> <C>
Deferred tax asset/(liability):
Short-term deferred income taxes:
Inventories, principally due to additional costs inventoried
for tax purposes.............................................. $ 241,240 $ 156,500
Other........................................................... 19,976 ---
---------------- ----------------
Short-term deferred tax assets.............................. $ 261,216 $ 156,500
================ ================
Long-term deferred income taxes:
Net operating loss carryforwards................................ $2,313,089 $ 529,843
Reserve for store closings...................................... 1,248,429 ---
Difference in timing of lease deductions........................ 545,677 454,911
Cumulative effect of accounting change.......................... 72,337 ---
Plant and equipment, principally due to differences in
depreciation and capitalized interest......................... (898,346) (623,922)
Software development expense.................................... (104,134) (121,733)
---------------- ----------------
Net long-term deferred tax assets......................... $3,177,052 $ 239,099
================ ================
</TABLE>
At January 28, 2000, we had a net operating loss carryforward for
federal and state income tax purposes of approximately $10.3 million, available
to offset future taxable income, if any, through fiscal 2019.
Although realization of the net deferred tax assets is not assured, we
believe based on the level of historical taxable income and projections for
future taxable income, that it is more likely than not that all of the net
deferred tax assets will be realized over the next 20 years as prescribed by IRS
regulations. The amount of net deferred tax assets considered realizable
however, could be adjusted in the future based on changes in conditions or
assumptions.
(10) EQUITY TRANSACTIONS
During fiscal 1998, we issued 70,749 shares of common stock in partial
consideration for the purchase of four stores from a franchisee. During fiscal
1997, we issued 171,350 shares of common stock when long-term debt with
detachable common stock warrants was called.
During fiscal 1997, we 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 were approximately $13.9 million. This
amount, net of related costs of the offering of approximately $716,000, has been
reflected in common stock and additional paid in capital in these consolidated
financial statements.
F-16
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) STOCK OPTIONS
In order to attract and retain employees and directors, and to preserve
cash resources, we utilize stock option awards. During fiscal year 1997, we
adopted a stock option plan (the Plan) pursuant to which we grant stock options
to employees and members of the Board of Directors. 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.
During fiscal 1999, our shareholders approved an amendment to the Plan
to increase the number of shares available for issuance from 639,641 to
1,025,000, to add non-employee directors, consultants and independent
contractors to the class of persons eligible to receive awards under the Plan
and to amend the provisions regarding the Board's ability to amend the Plan
without shareholder approval.
Details of the status of stock options as of January 28, 2000 are
reflected in the tables below:
<TABLE>
<CAPTION>
Options
-------------------------------------------------------------------------
Total Outstanding Exercisable
------------------------------------ -----------------------------------
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Options outstanding
January 31, 1997................. --- --- --- ---
Options granted................ 184,450 $ 7.50 122,967 $ 7.50
Options exercised.............. --- --- --- ---
Options forfeited/canceled..... --- --- --- ---
----------------- ---------------- ----------------- ----------------
Options outstanding
January 30, 1998................. 184,450 7.50 122,967 7.50
Options granted................ 227,750 2.89 74,550 2.28
Options exercised.............. --- --- --- ---
Options forfeited/canceled..... --- --- --- ---
----------------- ---------------- ----------------- ----------------
Options outstanding
January 29, 1999................. 412,200 4.95 197,517 5.76
Options granted................ 112,325 2.09 --- ---
Options exercised.............. --- --- --- ---
Options forfeited/canceled..... (4,100) 3.13 --- ---
----------------- ---------------- ----------------- ----------------
Options outstanding
January 28, 2000................. 520,425 $ 4.35 197,517 $ 5.76
================= ================ ================= ================
</TABLE>
Options exercisable at January 29, 1999 were 61,483. There were no
options exercisable at January 30, 1998.
F-17
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
Options
--------------------------------------------------------------------------------------------------
Total Outstanding Exercisable
------------------------------------------------ ------------------------------------------------
Weighted-average Weighted-average
Range of remaining remaining
exercise Number of contractual Weighted-average Number of contractual Weighted-average
price shares life in years exercise price shares life in years exercise price
------------------ -------------- --------------- ---------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$1.44-$2.75 117,125 9.4 $2.01 6,583 8.9 $2.12
$2.75-$4.25 192,600 8.9 2.75 59,217 8.8 2.75
$4.25-$7.50 210,700 7.9 7.12 131,717 7.9 7.29
-------------- --------------
$1.44-$7.50 520,425 8.6 $4.35 197,517 8.2 $5.76
============== ==============
</TABLE>
The per share weighted-average fair value of options granted each year
using the Black-Scholes option-pricing model was $.69 at January 28, 2000, $1.04
at January 29, 1999 and $3.19 at January 30, 1998, using the following
weighted-average assumptions for the fiscal years ended:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Volatility........................... 60% 60% 60%
Expected Divided Yield............... .0% .0% .0%
Risk Free Rate....................... 6.0% 5.5% 6.0%
Expected Life in years............... 5.0 5.0 5.0
</TABLE>
We apply ABP Opinion No. 25 to account for our stock option plans.
Because the exercise price of our stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized. If
we had elected to recognize compensation cost based on the fair value of the
options at the date of grant as prescribed by SFAS No. 123, our net loss would
have increased to the pro forma amounts indicated below for the fiscal years
ending:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
2000 1999 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Net loss - as reported and as reported pro forma
assuming C-Corporation status in fiscal 1997.......... $(4,448,547) $(520,660) $(206,610)
Net loss - pro forma..................................... (4,621,547) (649,660) (226,610)
Net loss per common share - as reported and as
reported pro forma assuming C-Corporation
status in fiscal 1997................................. (0.96) (0.11) (0.08)
Net loss per common share - pro forma.................... (1.00) (0.14) (0.09)
================ =============== ===============
</TABLE>
F-18
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) EMPLOYEE BENEFITS
We have a retirement savings plan that includes a 401(k) feature. The
plan covers substantially all employees who are 21 years of age and have
completed one year of service. Employees become fully vested in the plan on a
graduated scale over a six-year period. The 401(k) feature allows for employees
to elect salary deferrals for up to 15% of their compensation, but not in excess
of certain limitations. We match 25% of the first 4% of employee contributions
to the plan. Our contributions were approximately $44,000, $34,000 and $25,000
for fiscal years 1999, 1998 and 1997, respectively. We reserve the right to make
a discretionary contribution each plan year. We did not make any discretionary
contributions in fiscal years 1999, 1998 or 1997.
During fiscal 1999, we introduced an Employee Stock Purchase Plan,
which allows eligible employees to purchase our stock at below-market prices
through elected payroll deductions equal to between 2% and 15% of their
compensation. The plan allows participants to purchase shares of our stock on
each offering date at the lower of 85% of the fair market value of one share of
common stock on the offering date or on the termination date of the offering
period.
(13) EXPENSES OF CANCELED ACQUISITION AND EXTRAORDINARY CHARGE
During the fourth quarter of fiscal year 1997, we took a charge of
approximately $261,000 related to the expenses associated with the proposed
acquisition of The Paper Factory of Wisconsin, Inc., which was terminated
January 26, 1998. Subsequent to our initial public offering in November 1997, we
exercised our option to repay subordinated debt, and took a one-time charge to
earnings of approximately $110,000, net of taxes of approximately $73,000,
during the fourth quarter of fiscal 1997, which represented the unamortized
portion of the fees associated with the debt.
(14) SUBSEQUENT EVENTS
On January 31, 2000, the NASDAQ Stock Market notified us that we were
not in compliance with one of its maintenance standards requiring that we
maintain at least $5.0 million of public float, and that we have until May 1,
2000 to comply with this maintenance requirement. In order to comply, our common
stock must trade above $1.85 for 10 consecutive trading days prior to May 1,
2000. NASDAQ informed us that if our common stock did not trade at this level
for the required time period, they could delist our common stock as early as the
opening of business on May 3, 2000. Based on recent trading prices, it would not
be possible for our common stock price to meet the required average of $1.85
during the allowed time frame and accordingly, we are in the process of applying
for quotation on the NASDAQ SmallCap market.
On February 23, 2000, Yale Dolginow, our Chairman and Chief Executive
Officer signed a letter of intent to purchase our corporate office building at
fair market value, to be determined by an outside appraisal. 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.
F-19
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) SUBSEQUENT EVENTS (CONTINUED)
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 outstanding
as of January 28, 2000, 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.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
Dated: April 25, 2000
By: /s/ Yale T. Dolginow
-----------------------------------
Yale T. Dolginow, its
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on April 25, 2000 by the following persons on
behalf of the registrant and in the capacities indicated.
SIGNATURE
/s/ Yale T. Dolginow Chairman of the Board, President and
- ---------------------------------- Chief Executive Officer (principal
Yale T. Dolginow executive officer)
/s/ Arthur H. Cobb
- ----------------------------------
Arthur H. Cobb Director
/s/ Diane C. Dolginow
- ----------------------------------
Diane C. Dolginow Secretary and Director
/s/ Marvin W. Goldstein
- ----------------------------------
Marvin W. Goldstein Director
/s/ Jeffery S. Halpern
- ----------------------------------
Jeffery S. Halpern Director
/s/ Martin A. Mayer
- ----------------------------------
Martin A. Mayer Director
/s/ Cheryl W. Newell
- ---------------------------------- Vice President and Chief Financial
Cheryl W. Newell Officer (principal financial officer)
/s/ Diana G. Purcel
- ---------------------------------- Controller (principal accounting officer)
Diana G. Purcel
36
<PAGE>
PAPER WAREHOUSE, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended January 28, 2000
<TABLE>
<CAPTION>
Item No. Description of Item Method of Filing
- -------- ------------------- -----------------
<S> <C> <C>
Incorporated by reference to the
Company's Registration Statement on
3.1 Amended and Restated Articles of Incorporation .................. Form S-1 (File No. 333-36911)
Incorporated by reference to the
Company's Registration Statement on
3.2 Amended and Restated By-laws .................................... Form S-1 (File No. 333-36911)
4.1 Indenture, dated July 20, 1999, between the Company and Incorporated by reference to the
Norwest Bank Minnesota, N.A. relating to 9% Company's Registration Statement on
Convertible Subordinated Debentures.............................. Form S-1 (File No. 333-79161)
Incorporated by reference to the
Company's Registration Statement on
4.2 Form of 9% Subordinated Debentures due September 15, 2005 ....... Form S-1 (File No. 333-79161)
Incorporated by reference to the
Company's Registration Statement on
10.1 1997 Stock Option and Compensation Plan.......................... Form S-1 (File No. 333-36911)
Incorporated by reference to the
Company's Registration Statement on
10.2 Directors' Stock Option Plan..................................... Form S-1 (File No. 333-36911)
10.3 Corporation Tax Allocation and Indemnification Incorporated by reference to the
Agreement entered into on September 26, 1997 between Company's Registration Statement on
the Company and Yale T. Dolginow and Brent D. Schlosser.......... Form S-1 (File No. 333-36911)
Incorporated by reference to the
10.4 Employment Agreement between the Company and Company's Registration Statement on
Yale T. Dolginow dated February 7, 1997.......................... Form S-1 (File No. 333-36911)
Incorporated by reference to the
10.5 Employment Agreement between the Company and Company's Registration Statement on
Brent D. Schlosser dated February 7, 1997........................ Form S-1 (File No. 333-36911)
Incorporated by reference to
10.6 Amendment Number 1 to the Employment Agreement by the Company's Form 10-K for
and between the Company and Brent D. Schlosser dated fiscal year ended January 31,
September 26, 1997............................................... 1998 (File No. 0-23389)
10.7 Separation Agreement and General Release between
Brent D. Schlosser and the Company dated December 2, 1999........ Filed herewith electronically
Incorporated by reference to the
10.8 Employment Agreement by and between the Company and Company's Registration Statement on
Cheryl W. Newell dated July 14, 1997............................. Form S-1 (File No. 333-36911)
Incorporated by reference to
the Company's Form 10-K for
fiscal year ended January 29,
10.9 1998 Employee Stock Purchase Plan................................ 1999 File No. 0-23389)
37
<PAGE>
10.10 Amendment to 1997 Stock Option and Compensation Plan............. Filed herewith electronically
Incorporated by reference to
the Company's Registration
10.11 Mortgage note dated April 8, 1999 between the Company Statement on Form S-1 (File No.
and Fortis Insurance Company..................................... 333-79161)
Incorporated by reference to
the Company's Registration
10.12 Mortgage and Security Agreement between the Company Statement on Form S-1 (File
and Fortis Insurance Company dated April 8, 1999................. No. 333-79161)
Incorporated by reference to the
10.13 Loan and Security Agreement between BankBoston Retail Company's Registration Statement on
Finance, Inc. and the Company dated June 7, 1999................. Form S-1 (File No. 333-79161)
Incorporated by reference to the
10.14 First Amendment to Loan and Security Agreement Company's Form 10-Q for quarter
between BankBoston Retail Finance, Inc. and the Company ended October 29, 1999 File
dated December 10, 1999.......................................... No. 000-23389)
10.15 Second Amendment to Loan and Security Agreement
between BankBoston Retail Finance, Inc. and the Company
dated March 17, 2000............................................. Filed herewith electronically
10.16 Indemnification Agreement between Yale T. Dolginow and
the Company dated March 21, 2000................................. Filed herewith electronically
12 Computation of Ratio of Earnings to Fixed Charges................ Filed herewith electronically
21 Subsidiaries of Company.......................................... Filed herewith electronically
27 Financial Data Schedule.......................................... Filed herewith electronically
</TABLE>
38
<PAGE>
EXHIBIT 10.7
SEPARATION AGREEMENT AND GENERAL RELEASE
This agreement is made by and between Paper Warehouse, Inc.
("Company"), and Brent D. Schlosser ("Schlosser").
RECITALS
1. Schlosser is an officer, director, and employee of Company.
2. Schlosser desires to resign as an officer, director, and
employee of Company effective December 6, 1999, subject to the
terms and conditions of this agreement.
3. Company desires to accept Schlosser's resignation as an
officer, director, and employee of Company effective December
6, 1999, subject to the terms and conditions of this
agreement.
NOW THEREFORE, based on the foregoing premises, and the terms and
conditions set forth below, Schlosser and Company hereby agree as follows:
1. RESIGNATION AND TERMINATION OF CERTAIN BENEFITS. Schlosser hereby
resigns as an officer, director, and employee of Company, effective December 6,
1999 ("Effective Date"). On or about that date, Company will pay Schlosser his
final salary payment for services rendered through the Effective Date. As of the
Effective Date, and except as provided in this agreement, Schlosser will no
longer participate in any fringe benefit plans or programs that Company offers
to its employees. Company has no obligation to Schlosser for payment of any
earned but unused vacation time.
2. COMPENSATION. Upon expiration of the periods of time set forth in
paragraph 10 below for revoking and rescinding his waivers of certain rights and
claims, and provided he has not done so, as a benefit of this agreement, Company
will pay Schlosser compensation equal to four (4) months of Schlosser's final
annualized salary (the "Salary Continuation"). Payments will be made in equal
installments on Company's regular paydays. Payments will begin on December 24,
1999 for the period December 4-17, 1999, and in year 2000 on January 7, 21,
February 4, 18, March 3, 17, 31, and April 14 (for the period March 25-April 5,
2000). Payments will be subject to applicable income tax and other legally
required withholdings.
3. HEALTH, LIFE, AND DENTAL INSURANCE. Upon the Effective Date, when
Schlosser ceases to be an employee of Company, he is entitled to continue his
health, life, and dental insurance coverages at his expense as required by law.
If he then elects to continue such coverages, as an additional benefit of this
agreement, Company will pay its share of the cost of these coverages through the
period of the Salary Continuation, or until Schlosser obtains comparable
replacement coverages, whichever is sooner. Schlosser will make his
contributions to the cost of these coverages by payroll deductions from the
periodic payments he will receive under paragraph 2 of this agreement and hereby
voluntarily authorizes those deductions.
<PAGE>
4. CAR ALLOWANCE. As an additional benefit of this agreement, Company will
continue to pay Schlosser his car allowance of $150.00 per month for four months
in one lump sum of $600.00 on December 31, 1999.
5. INDEMNIFICATION. As an additional benefit of this agreement, Company
hereby indemnifies and defends Schlosser against any claims made against him in
his capacity as an officer, director, or employee of Company, to the extent
permitted by Company's by-laws and as required by Minnesota law. In addition,
and if allowed by the insurer, the Company will include Schlosser as an insured
under a directors' and officers' liability policy through December 31, 2002 with
terms and conditions of coverage comparable to the coverage afforded to the
Company's directors and officers.
6. NONCOMPETITION COVENANT. In consideration of the compensation and other
benefits that Schlosser will receive in this agreement, Schlosser will execute
the attached noncompetition agreement, which is incorporated herein.
7. TRANSITION. Through January 15, 2000, or earlier at the election of
Company, Schlosser will assist Company in the transition of company business in
which he was involved to others in the organization. During such transition
period, Schlosser will have his office and support staff. Schlosser will be
unavailable to assist in the transition for up to five (5) business days on or
around the Christmas/New Year holidays.
8. MUTUAL GENERAL RELEASE.
RELEASE BY SCHLOSSER. EXCEPT AS PROVIDED BELOW, in exchange for
receiving the pay and other benefits in this agreement, Schlosser hereby gives
up all of his claims against Company, except for claims arising under this
agreement or after the Effective Date. Schlosser fully and finally releases,
gives up, and otherwise relinquishes all of his rights and claims against
Company, including, for example, (1) rights and claims of age discrimination
under the federal Age Discrimination in Employment Act ("ADEA"); (2) rights and
claims of discrimination under the Minnesota Human Rights Act ("MHRA"); (3) all
claims Schlosser has now, whether or not he now knows about the claims; (4) all
claims for attorneys fees; and (5) all claims arising out of his employment or
separation from employment with Company, including, but not limited to, claims
for alleged breach of contract, wrongful termination, defamation, invasion of
privacy, and infliction of emotional distress.
Schlosser will not bring any lawsuits or make any other demands against
Company, consistent with the foregoing release. The money and benefits Schlosser
will receive as set forth in this agreement are full and fair payment for the
release of all of Schlosser's rights and claims. Company does not owe Schlosser
anything in addition to what he will receive in this agreement. The
consideration extended by Company in this agreement in return for Schlosser's
release of rights and claims is more than anything of value to which Schlosser
is already entitled.
2
<PAGE>
RELEASE BY COMPANY. EXCEPT AS PROVIDED BELOW, in exchange for receiving
the benefits in this agreement, Company hereby gives up all of its claims
against Schlosser, except for claims arising under this agreement or after the
Effective Date. Company fully and finally releases, gives up, and otherwise
relinquishes all of its rights and claims against Schlosser. Company will not
bring any lawsuits or make any other demands against Schlosser consistent with
the foregoing release. The benefits Company will receive as set forth in this
agreement are full and fair payment for the release of all of Company's rights
and claims. Schlosser does not owe Company anything in addition to what it will
receive in this agreement. The consideration extended by Schlosser in this
agreement in return for Company's release of rights and claims is more than
anything of value to which Company is already entitled.
EXCEPTIONS TO RELEASES. The foregoing releases do not apply to the tax
sharing agreement between Schlosser and Company, the terms and conditions of
which survive this agreement and Schlosser's resignation as an officer,
director, and employee of Company.
As used in this paragraph, "Schlosser" means Brent D. Schlosser, and
all and each of his heirs, representatives, administrators, executors, and
anybody else who has or obtains legal rights or claims against Company through
Schlosser.
Also as used in this paragraph, "Company" means Paper Warehouse, Inc.,
and all and each of its past and present parent, subsidiary, and affiliated
entities; and all and each of the past and present officers, directors, agents,
employees, insurers, indemnitors, successors and assigns of all and each of the
foregoing entities.
9. NON-ADMISSION. Company does not admit that it is responsible or legally
obligated to Schlosser, and in fact, Company denies that is responsible or
legally obligated to him even though it has paid him to release his claims.
10. IMPORTANT RIGHTS OF SCHLOSSER; PLEASE READ CAREFULLY
a) Company hereby advises Schlosser to consult an attorney prior to
signing this agreement.
b) Schlosser further understands that he has twenty-one (21) days to
consider his waiver of age discrimination rights and claims of age
discrimination under the ADEA, beginning the date on which he received this
agreement.
c) Schlosser further understands that, if he signs this agreement,
he will then be entitled to revoke his release of any rights and claims of age
discrimination under the ADEA within seven (7) days of executing it, and the
release of Schlosser's ADEA rights and claims will not become effective or
enforceable until the seven-day period expires.
3
<PAGE>
d) Schlosser further understands that he has the right to rescind
his release of discrimination rights and claims under the MHRA within fifteen
(15) days of the date upon which he signs this agreement. To be effective, he
must rescind his release in writing and deliver it to Company, by hand or mail,
within fifteen (15) days of the date upon which he signs this agreement. If he
delivers the rescission by mail, it must be:
1) Postmarked within fifteen (15) calendar days of the date
upon which he signs this agreement;
2) Addressed to Paper Warehouse, Inc., c/o Yale T. Dolginow,
7630 Excelsior Blvd., St. Louis Park, MN 55426; and
3) Sent by certified mail, return receipt requested.
If Schlosser exercises his rights to rescind and/or revoke his waivers
as provided above, this agreement will be null and void and of no further force
or effect.
11. COMPLETE AGREEMENT. Schlosser and Company each has read this agreement.
Each understands all of its terms. Each has had the opportunity to discuss this
agreement with his/its own attorney prior to signing it. In agreeing to sign
this agreement, Schlosser and Company have not relied on any statements or
explanations made by the other or their respective agents, or attorneys, except
as provided in this agreement.
12. GOVERNING LAW. This agreement will be interpreted and enforced
according to the laws of the State of Minnesota, notwithstanding any conflict of
law principles.
13. NON-ADMISSION. In entering into and performing their obligations under
this agreement, neither party admits responsibility for any alleged actionable
conduct, and in fact, denies engaging in any alleged actionable conduct.
<TABLE>
<S> <C>
Dated: 12/2/99 /s/ Brent D. Schlosser
--------------- ----------------------
Brent D. Schlosser
Dated: 12/2/99 Paper Warehouse, Inc.
---------------
By: /s/ Yale T. Dolginow
--------------------
Its: President and Chief Executive Officer
-------------------------------------
</TABLE>
4
<PAGE>
NONCOMPETITION AGREEMENT
This agreement is made this 2nd day of December, 1999, by and between
Brent D. Schlosser ("Employee") and Paper Warehouse, Inc. ("Employer").
RECITALS
1. Employer is engaged in the retail sale of party goods, including,
without limitation, sale by Internet ("Business"), and the success of its
business depends to a significant extent upon maintaining the secrecy of its
proprietary information and trade secrets (all and each of which is set forth in
the third recital below and referred to herein as "Confidential Information").
2. Employee is resigning from employment with Employer in return for
substantial compensation and benefits to which he is otherwise not entitled as
more fully set forth in that certain Separation Agreement and General Release
("Separation Agreement") between them.
3. Employee, as a long-term officer, director, and employee of
Employer, had access to certain of the Employer's Confidential Information that
Employer has developed at great expense, time, and effort, disclosure of which
to a competitor would cause irreparable harm to Employer. Such Confidential
Information include specifically Employer's strategic plans, business methods,
purchasing, non-public financial information, marketing information and
strategies, merchandising information and strategies, franchise information and
strategies, proprietary information pertaining to Company's vendors and
franchisees, and any other information that Company has treated or designated as
secret or confidential.
4. A reasonable time necessary to protect Employer's Confidential
Information from disclosure to a competitor in the Business is the period of
time before which such Confidential Information generally becomes available to
the public through no fault of Employee, or such Confidential Information no
longer provides unique benefit to Employer, or three years, whichever is
shortest.
5. Employer will not pay to Employee the compensation and other
benefits it has offered in the Separation Agreement between them unless Employee
signs this agreement.
6. Employee desires to receive the substantial compensation and other
benefits in the Separation Agreement, and has agreed as a condition of receiving
the referenced compensation and benefits to sign this agreement in order that
Employer may have reasonable protections against the disclosure of its
Confidential Information.
7. In consideration of the reasonable, post-employment, competitive
restrictions set forth in this agreement, Employer will pay to Employee the
substantial compensation and other benefits in the Separation Agreement.
<PAGE>
8. A material condition of the Separation Agreement is Employee's
acceptance of the reasonable restrictions herein in order to protect Employer's
legitimate interests in safeguarding its Confidential Information.
NOW, THEREFORE, based on the above premises and the terms and
conditions below, Employer and Employee hereby agree as follows:
1. TRADE SECRETS. Employee shall not directly or indirectly disclose or
use at any time any Confidential Information of Employer, unless Employee has
first obtained the written consent of Employer. Upon termination of employment,
Employee shall immediately surrender all such secrets and information in
Employee's possession, including all copies of same. The duration of these
restrictions is the shorter of the following:
(a) The period of time before which the Confidential
Information generally becomes available to the public
through no fault of Employee;
(b) When the Confidential Information no longer provides
unique benefit to Employer; or
(c) Three (3) years after Employee's employment
terminates.
2. NONCOMPETITION. In consideration of the payment and other
benefits of the Separation Agreement, Employee will not, directly or
indirectly, anywhere within the geographic area in which Employer is
conducting its businesses:
(a) have any ownership interest in, financial
participation in, or affiliation with any person or
entity engaged in the Business and who is a
competitor of Employer, including any affiliation as
an employee, independent contractor, consultant, or
other capacity; or
(b) solicit any employee of Employer for employment with
any other entity or person, or encourage or induce
such employee to terminate employment with Employer.
The foregoing restrictions shall be effective and enforceable for a
period of twelve (12) months after the Effective Date of Employee's termination
from employment with Employer.
The foregoing restrictions do not apply to any services that Employee
desires to render to his brother's franchised store in Lawrence, Kansas.
-2-
<PAGE>
3. REMEDIES. Irreparable harm will result to Employer, its business
and property, in the event Employee breaches this agreement, and such a
breach exhibits a probability of continuing future breaches and harm; and any
remedy at law would be inadequate. Therefore, in the event this agreement is
breached by Employee, Employer shall be entitled to injunctive relief and
orders to restrain the violation hereof by Employee and all persons or
entities acting for or with Employee. This provision shall not be construed
to preclude an action for damages at law for reimbursement of any money paid
to Employee, voiding the Separation Agreement, or such other relief as a
court deems just and equitable.
In the event Employer resorts to litigation to enforce this agreement,
Employee shall also pay the reasonable attorneys' fees and costs incurred by
Employer in successfully pursuing any of its rights and remedies with respect to
such breach.
In the event of a breach by Employee, the twelve (12) month period
stated herein shall be automatically extended and remain in full force during
the period of time such breach continues.
4. SEVERABILITY. Each of the provisions contained herein is severable
and, if any provision hereof shall to any extent be invalid or unenforceable,
the remainder of this agreement, including such provision in circumstances other
than those in which it is held invalid or unenforceable, shall not be affected
thereby and shall be valid or enforceable to the fullest extent permitted by
law; provided, however, that if any provision hereof is held to be invalid or
unenforceable because of its duration or the geographic scope covered, Employee
and Employer agree to be bound by any reasonable period of time or reasonable
geographic scope, or both, as the case may be, as determined by a court of
competent jurisdiction.
5. WAIVER. Any waiver by Employer of one or more breaches of this
agreement by Employee shall not prevent subsequent enforcement of the agreement
by Employer or be deemed a waiver of any subsequent breach of this agreement.
6. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties as to the matters covered herein and may not be modified orally, but
only by an agreement in writing signed by both parties. This agreement
supercedes and replaces all other agreements (written and oral) between Employer
and Employee concerning the subject matter hereof, and all such other agreements
are hereby terminated and shall be of no further force or effect.
7. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon
Employer and Employee and shall inure to the benefit of Employee, the legal
representatives of Employee and the successors and assigns of Employer, but
shall not be assignable by Employee.
8. GOVERNING LAW. This agreement will be governed and interpreted under
the laws of the State of Minnesota.
-3-
<PAGE>
9. VOLUNTARY AGREEMENT. Employee enters into this agreement voluntarily
only after having had the opportunity to consult with a chosen advisor.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
agreement as of the day and year first above written.
Dated: 12/2/99 /s/ Brent D. Schlosser
-------------------------- ----------------------
Brent D. Schlosser
Dated: 12/2/99 PAPER WAREHOUSE, INC.
--------------------------
By /s/ Yale T. Dolginow
---------------------------
Its President and CEO
-----------------------
-4-
<PAGE>
EXHIBIT 10.10
PAPER WAREHOUSE, INC.
1997 STOCK OPTION AND COMPENSATION PLAN
(AS AMENDED AND RESTATED AS OF JUNE 11, 1999)
1. PURPOSE. The purpose of the 1997 Stock Option and Compensation Plan, as
amended and restated as of June 11, 1999 (the "Plan") of Paper Warehouse,
Inc. (the "Company") is to increase shareholder value and to advance the
interests of the Company by furnishing a variety of economic incentives
("Incentives") designed to attract, retain and motivate employees.
Incentives may consist of opportunities to purchase or receive shares of
Common Stock, $.01 par value, of the Company ("Common Stock"), monetary
payments or both on terms determined under this Plan. The Plan shall
constitute an amendment and restatement of the Company's existing 1997
Stock Option and Compensation Plan (the "Former Plan") and as such shall
supersede and replace the Former Plan. The Former Plan shall be deemed
outstanding, however, only to the extent necessary to determine the terms
and conditions of any such offers to purchase the Company's Common Stock or
other rights previously granted under the Former Plan.
2. ADMINISTRATION. The Plan shall be administered by the compensation
committee (the "Committee") of the Board of Directors of the Company. The
Committee shall consist of not less than two directors of the Company and
shall be appointed from time to time by the Board of Directors of the
Company. Each member of the Committee shall be a non-employee director
within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934
("Non-Employee Directors"), and the regulations promulgated thereunder (the
"1934 Act"). The Board of Directors of the Company may from time to time
appoint members of the Committee in substitution for, or in addition to,
members previously appointed, and may fill vacancies, however caused, in
the Committee. The Committee shall select one of its members as its
chairman and shall hold its meetings at such times and places as it shall
deem advisable. A majority of the Committee's members shall constitute a
quorum. All action of the Committee shall be taken by the majority of its
members. Any action may be taken by a written instrument signed by majority
of the members and actions so taken shall be fully effective as if it had
been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary, shall keep minutes of its meetings and
shall make such rules and regulations for the conduct of its business as it
shall deem advisable. The Committee shall have complete authority to award
Incentives under the Plan, to interpret the Plan, and to make any other
determination which it believes necessary and advisable for the proper
administration of the Plan. The Committee's decisions and matters relating
to the Plan shall be final and conclusive on the Company and its
participants.
3. ELIGIBLE EMPLOYEES. Participants (including, officers, non-employee
directors, consultants and independent contractors) shall become eligible
to receive Incentives under the Plan when designated by the Committee.
Employees may be designated individually or by groups or categories (for
example, by pay grade) as the Committee deems appropriate. Participation by
officers of the Company and any performance
1
<PAGE>
objectives relating to such officers must be approved by the Committee.
Participation by others and any performance objectives relating to
others may be approved by groups or categories (for example, by pay
grade) and authority to designate participants who are not officers and
to set or modify such targets may be delegated.
4. TYPES OF INCENTIVES. Incentives under the Plan may be granted in any one or
a combination of the following forms: (a) incentive stock options and
non-statutory stock options (section 6); (b) stock appreciation rights
("SARs") (section 7); (c) stock awards (section 8); (d) restricted stock
(section 8); (e) performance shares (section 9); and (f) cash awards
(section 10).
5. SHARES SUBJECT TO THE PLAN.
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 11.6,
the number of shares of Common Stock which may be issued under the
Plan shall not exceed 1,025,000 shares of Common Stock.
5.2. CANCELLATION. To the extent that cash in lieu of shares of Common
Stock is delivered upon the exercise of a SAR pursuant to Section 7.4,
the Company shall be deemed, for purposes of applying the limitation
on the number of shares, to have issued the greater of the number of
shares of Common Stock which it was entitled to issue upon such
exercise or on the exercise of any related option. In the event that a
stock option or SAR granted hereunder expires or is terminated or
canceled unexercised as to any shares of Common Stock, such shares may
again be issued under the Plan either pursuant to stock options, SARs
or otherwise. In the event that shares of Common Stock are issued as
restricted stock or pursuant to a stock award and thereafter are
forfeited or reacquired by the Company pursuant to rights reserved
upon issuance thereof, such forfeited and reacquired shares may again
be issued under the Plan, either as restricted stock, pursuant to
stock awards or otherwise. The Committee may also determine to cancel,
and agree to the cancellation of, stock options in order to make a
participant eligible for the grant of a stock option at a lower price
than the option to be canceled.
5.3. TYPE OF COMMON STOCK. Common Stock issued under the Plan in connection
with stock options, SARs, performance shares, restricted stock or
stock awards, may be authorized and unissued shares.
6. STOCK OPTIONS. A stock option is a right to purchase shares of Common Stock
from the Company. Each stock option granted by the Committee under this
Plan shall be subject to the following terms and conditions:
6.1. PRICE. The option price per share shall be determined by the
Committee, subject to adjustment under Section 11.6.
6.2. NUMBER. The number of shares of Common Stock subject to the option
shall be determined by the Committee, subject to adjustment as
provided in Section 11.6. The number of shares of Common Stock subject
to a stock option shall be reduced
2
<PAGE>
in the same proportion that the holder thereof exercises a SAR if any
SAR is granted in conjunction with or related to the stock option.
6.3. DURATION AND TIME FOR EXERCISE. Subject to earlier termination as
provided in Section 11.4, the term of each stock option shall be
determined by the Committee but shall not exceed ten years and one day
from the date of grant. Each stock option shall become exercisable at
such time or times during its term as shall be determined by the
Committee at the time of grant. No stock option may be exercised
during the first twelve months of its term. Except as provided by the
preceding sentence, the Committee may accelerate the exercisability of
any stock option. Subject to the foregoing and with the approval of
the Committee, all or any part of the shares of Common Stock with
respect to which the right to purchase has accrued may be purchased by
the Company at the time of such accrual or at any time or times
thereafter during the term of the option.
6.4. MANNER OF EXERCISE. A stock option may be exercised, in whole or in
part, by giving written notice to the Company, specifying the number
of shares of Common Stock to be purchased and accompanied by the full
purchase price for such shares. The option price shall be payable in
United States dollars upon exercise of the option and may be paid by
cash; uncertified or certified check; bank draft; by delivery of
shares of Common Stock in payment of all or any part of the option
price, which shares shall be valued for this purpose at the Fair
Market Value on the date such option is exercised; by instructing the
Company to withhold from the shares of Common Stock issuable upon
exercise of the stock option shares of Common Stock in payment of all
or any part of the option price, which shares shall be valued for this
purpose at the Fair Market Value or in such other manner as may be
authorized from time to time by the Committee. Prior to the issuance
of shares of Common Stock upon the exercise of a stock option, a
participant shall have no rights as a shareholder.
6.5. INCENTIVE STOCK OPTIONS. Notwithstanding anything in the Plan to the
contrary, the following additional provisions shall apply to the grant
of stock options which are intended to qualify as Incentive Stock
Options (as such term is defined in Section 422A of the Internal
Revenue Code of 1986, as amended):
(a) The aggregate Fair Market Value (determined as of the time the
option is granted) of the shares of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time
by any participant during any calendar year (under all of the
Company's plans) shall not exceed $100,000.
(b) Any Incentive Stock Option certificate authorized under the Plan
shall contain such other provisions as the Committee shall deem
advisable, but shall in all events be consistent with and contain
all provisions required in order to qualify the options as
Incentive Stock Options.
3
<PAGE>
(c) All Incentive Stock Options must be granted within ten years from
the earlier of the date on which this Plan was adopted by the
Board of Directors or the date this Plan was approved by the
shareholders.
(d) Unless sooner exercised, all Incentive Stock Options shall expire
no later than 10 years after the date of grant.
(e) The option price for Incentive Stock Options shall be not less
than the Fair Market Value of the Common Stock subject to the
option on the date of grant.
(f) No Incentive Stock Options shall be granted to any participant
who, at the time such option is granted, would own (within the
meaning of Section 422A of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of
the employer corporation or of its parent or subsidiary
corporation.
7. STOCK APPRECIATION RIGHTS. A SAR is a right to receive, without payment to
the Company, a number of shares of Common Stock, cash or any combination
thereof, the amount of which is determined pursuant to the formula set
forth in Section 7.4. A SAR may be granted (a) with respect to any stock
option granted under this Plan, either concurrently with the grant of such
stock option or at such later time as determined by the Committee (as to
all or any portion of the shares of Common Stock subject to the stock
option), or (b) alone, without reference to any related stock option. Each
SAR granted by the Committee under this Plan shall be subject to the
following terms and conditions:
7.1. NUMBER. Each SAR granted to any participant shall relate to such
number of shares of Common Stock as shall be determined by the
Committee, subject to adjustment as provided in Section 11.6. In the
case of a SAR granted with respect to a stock option, the number of
shares of Common Stock to which the SAR pertains shall be reduced in
the same proportion that the holder of the option exercises the
related stock option.
7.2. DURATION. Subject to earlier termination as provided in Section 11.4,
the term of each SAR shall be determined by the Committee but shall
not exceed ten years and one day from the date of grant. Unless
otherwise provided by the Committee, each SAR shall become exercisable
at such time or times, to such extent and upon such conditions as the
stock option, if any, to which it relates is exercisable. No SAR may
be exercised during the first twelve months of its term. Except as
provided in the preceding sentence, the Committee may in its
discretion accelerate the exercisability of any SAR.
7.3. EXERCISE. A SAR may be exercised, in whole or in part, by giving
written notice to the Company, specifying the number of SARs which the
holder wishes to exercise. Upon receipt of such written notice, the
Company shall, within 90 days thereafter, deliver to the exercising
holder certificates for the shares of Common
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Stock or cash or both, as determined by the Committee, to which the
holder is entitled pursuant to Section 7.4.
7.4. PAYMENT. Subject to the right of the Committee to deliver cash in lieu
of shares of Common Stock (which, as it pertains to officers and
directors of the Company, shall comply with all requirements of the
1934 Act), the number of shares of Common Stock which shall be
issuable upon the exercise of a SAR shall be determined by dividing:
(a) the number of shares of Common Stock as to which the SAR is
exercised multiplied by the amount of the appreciation in such
shares (for this purpose, the "appreciation" shall be the amount
by which the Fair Market Value of the shares of Common Stock
subject to the SAR on the exercise date exceeds (1) in the case
of a SAR related to a stock option, the purchase price of the
shares of Common Stock under the stock option or (2) in the case
of a SAR granted alone, without reference to a related stock
option, an amount which shall be determined by the Committee at
the time of grant, subject to adjustment under Section 11.6); by
(b) the Fair Market Value of a share of Common Stock on the exercise
date.
In lieu of issuing shares of Common Stock upon the exercise of a SAR, the
Committee may elect to pay the holder of the SAR cash equal to the Fair
Market Value on the exercise date of any or all of the shares which would
otherwise be issuable. No fractional shares of Common Stock shall be issued
upon the exercise of a SAR; instead, the holder of the SAR shall be
entitled to receive a cash adjustment equal to the same fraction of the
Fair Market Value of a share of Common Stock on the exercise date or to
purchase the portion necessary to make a whole share at its Fair Market
Value on the date of exercise.
8. STOCK AWARDS AND RESTRICTED STOCK. A stock award consists of the transfer
by the Company to a participant of shares of Common Stock, without other
payment therefor, as additional compensation for services to the Company. A
share of restricted stock consists of shares of Common Stock which are sold
or transferred by the Company to a participant at a price determined by the
Committee (which price shall be at least equal to the minimum price
required by applicable law for the issuance of a share of Common Stock) and
subject to restrictions on their sale or other transfer by the participant.
The transfer of Common Stock pursuant to stock awards and the transfer and
sale of restricted stock shall be subject to the following terms and
conditions:
8.1. NUMBER OF SHARES. The number of shares to be transferred or sold by
the Company to a participant pursuant to a stock award or as
restricted stock shall be determined by the Committee.
8.2. SALE PRICE. The Committee shall determine the price, if any, at which
shares of restricted stock shall be sold to a participant, which may
vary from time to time and among participants and which may be below
the Fair Market Value of such shares of Common Stock at the date of
sale.
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8.3. RESTRICTIONS. All shares of restricted stock transferred or sold
hereunder shall be subject to such restrictions as the Committee may
determine, including, without limitation, any or all of the following:
(a) a prohibition against the sale, transfer, pledge or other
encumbrance of the shares of restricted stock, such prohibition
to lapse at such time or times as the Committee shall determine
(whether in annual or more frequent installments, at the time of
the death, disability or retirement of the holder of such shares,
or otherwise);
(b) a requirement that the holder of shares of restricted stock
forfeit, or (in the case of shares sold to a participant) resell
back to the Company at his cost, all or a part of such shares in
the event of termination of his employment during any period in
which such shares are subject to restrictions;
(c) such other conditions or restrictions as the Committee may deem
advisable.
8.4. ESCROW. In order to enforce the restrictions imposed by the Committee
pursuant to Section 8.3, the participant receiving restricted stock
shall enter into an agreement with the Company setting forth the
conditions of the grant. Shares of restricted stock shall be
registered in the name of the participant and deposited, together with
a stock power endorsed in blank, with the Company. Each such
certificate shall bear a legend in substantially the following form:
The transferability of this certificate and the shares of Common
Stock represented by it are subject to the terms and
conditions (including conditions of forfeiture) contained in
the 1997 Stock Option and Compensation Plan of Paper
Warehouse, Inc., as amended and restated as of June 11, 1999
(the "Company"), and an agreement entered into between the
registered owner and the Company. A copy of the Plan and the
agreement is on file in the office of the secretary of the
Company.
8.5. END OF RESTRICTIONS. Subject to Section 11.5, at the end of any time
period during which the shares of restricted stock are subject to
forfeiture and restrictions on transfer, such shares will be delivered
free of all restrictions to the participant or to the participant's
legal representative, beneficiary or heir.
8.6. SHAREHOLDER. Subject to the terms and conditions of the Plan, each
participant receiving restricted stock shall have all the rights of a
shareholder with respect to shares of stock during any period in which
such shares are subject to forfeiture and restrictions on transfer,
including without limitation, the right to vote such shares. Dividends
paid in cash or property other than Common Stock with respect to
shares of restricted stock shall be paid to the participant currently.
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9. PERFORMANCE SHARES. A performance share consists of an award which shall be
paid in shares of Common Stock, as described below. The grant of
performance share shall be subject to such terms and conditions as the
Committee deems appropriate, including the following:
9.1. PERFORMANCE OBJECTIVES. Each performance share will be subject to
performance objectives for the Company or one of its operating units
to be achieved by the end of a specified period. The number of
performance shares granted shall be determined by the Committee and
may be subject to such terms and conditions as the Committee shall
determine. If the performance objectives are achieved, each
participant will be paid in shares of Common Stock or cash. If such
objectives are not met, each grant of performance shares may provide
for lesser payments in accordance with formulas established in the
award.
9.2. NOT SHAREHOLDER. The grant of performance shares to a participant
shall not create any rights in such participant as a shareholder of
the Company, until the payment of shares of Common Stock with respect
to an award.
9.3. NO ADJUSTMENTS. No adjustment shall be made in performance shares
granted on account of cash dividends which may be paid or other rights
which may be issued to the holders of Common Stock prior to the end of
any period for which performance objectives were established.
9.4. EXPIRATION OF PERFORMANCE SHARE. If any participant's employment with
the Company is terminated for any reason other than normal retirement,
death or disability prior to the achievement of the participant's
stated performance objectives, all the participant's rights on the
performance shares shall expire and terminate unless otherwise
determined by the Committee. In the event of termination of employment
by reason of death, disability, or normal retirement, the Committee,
in its own discretion, may determine what portions, if any, of the
performance shares should be paid to the participant.
10. CASH AWARDS. A cash award consists of a monetary payment made by the
Company to a participant as additional compensation for his services to the
Company. Payment of a cash award will normally depend on achievement of
performance objectives by the Company or by individuals. The amount of any
monetary payment constituting a cash award shall be determined by the
Committee in its sole discretion. Cash awards may be subject to other terms
and conditions, which may vary from time to time and among participants, as
the Committee determines to be appropriate.
11. GENERAL.
11.1. EFFECTIVE DATE. The Former Plan became effective upon its approval by
the affirmative vote of the holders of a majority of the voting power
of the shares of the Company's Common Stock present and entitled to
vote at a meeting of its shareholders. Unless approved within one year
after the date of the Former Plan's
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adoption by the board of directors, the Plan shall not be effective
for any purpose. The effective date of the Former Plan shall also be
the effective date of this Plan.
11.2. DURATION. The Plan shall remain in effect until all Incentives
granted under the Plan have either been satisfied by the issuance of
shares of Common Stock or the payment of cash or been terminated under
the terms of the Plan and all restrictions imposed on shares of Common
Stock in connection with their issuance under the Plan have lapsed. No
Incentives may be granted under the Plan after the tenth anniversary
of the date the Plan is approved by the shareholders of the Company.
11.3. NON-TRANSFERABILITY OF INCENTIVES. No stock option, unless otherwise
permitted by the Committee in the stock option agreement of the
holder, SAR, restricted stock or performance award may be transferred,
pledged or assigned by the holder thereof (except, in the event of the
holder's death, by will or the laws of descent and distribution to the
limited extent provided in the Plan or in the Incentive) and the
Company shall not be required to recognize any attempted assignment of
such rights by any participant. During a participant's lifetime, an
Incentive may be exercised only by him or by his guardian or legal
representative.
11.4. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH. In the event that a
participant ceases to be an employee of the Company for any reason,
including death, any Incentives may be exercised or shall expire at
such times as may be determined by the Committee.
11.5. ADDITIONAL CONDITION. Notwithstanding anything in this Plan to the
contrary: (a) the Company may, if it shall determine it necessary or
desirable for any reason, at the time of award of any Incentive or the
issuance of any shares of Common Stock pursuant to any Incentive,
require the recipient of the Incentive, as a condition to the receipt
thereof or to the receipt of shares of Common Stock issued pursuant
thereto, to deliver to the Company a written representation of present
intention to acquire the Incentive or the shares of Common Stock
issued pursuant thereto for his own account for investment and not for
distribution; and (b) if at any time the Company further determines,
in its sole discretion, that the listing, registration or
qualification (or any updating of any such document) of any Incentive
or the shares of Common Stock issuable pursuant thereto is necessary
on any securities exchange or under any federal or state securities or
blue sky law, or that the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in
connection with the award of any Incentive, the issuance of shares of
Common Stock pursuant thereto, or the removal of any restrictions
imposed on such shares, such Incentive shall not be awarded or such
shares of Common Stock shall not be issued or such restrictions shall
not be removed, as the case may be, in whole or in part, unless such
listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the
Company.
11.6. ADJUSTMENT. In the event of any merger, consolidation or
reorganization of the Company with any other corporation or
corporations, there shall be substituted for
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each of the shares of Common Stock then subject to the Plan,
including shares subject to restrictions, options, or achievement of
performance share objectives, the number and kind of shares of stock
or other securities to which the holders of the shares of Common
Stock will be entitled pursuant to the transaction. In the event of
any recapitalization, stock dividend, stock split, combination of
shares or other change in the Common Stock, the number of shares of
Common Stock then subject to the Plan, including shares subject to
restrictions, options or achievements of performance shares, shall
be adjusted in proportion to the change in outstanding shares of
Common Stock. In the event of any such adjustments, the purchase
price of any option, the performance objectives of any Incentive,
and the shares of Common Stock issuable pursuant to any Incentive
shall be adjusted as and to the extent appropriate, in the
discretion of the Committee, to provide participants with the same
relative rights before and after such adjustment.
11.7. INCENTIVE PLANS AND AGREEMENTS. Except in the case of stock awards or
cash awards, the terms of each Incentive shall be stated in a plan or
agreement approved by the Committee. The Committee may also determine
to enter into agreements with holders of options to reclassify or
convert certain outstanding options, within the terms of the Plan, as
Incentive Stock Options or as non-statutory stock options and in order
to eliminate SARs with respect to all or part of such options and any
other previously issued options.
11.8. WITHHOLDING.
(a) The Company shall have the right to withhold from any payments
made under the Plan or to collect as a condition of payment, any
taxes required by law to be withheld. At any time when a
participant is required to pay to the Company an amount required
to be withheld under applicable income tax laws in connection
with a distribution of Common Stock or upon exercise of an option
or SAR, the participant may satisfy this obligation in whole or
in part by electing (the "Election") to have the Company withhold
from the distribution shares of Common Stock having a value up to
the amount required to be withheld. The value of the shares to be
withheld shall be based on the Fair Market Value of the Common
Stock on the date that the amount of tax to be withheld shall be
determined ("Tax Date").
(b) Each Election must be made prior to the Tax Date. The Committee
may disapprove of any Election, may suspend or terminate the
right to make Elections, or may provide with respect to any
Incentive that the right to make Elections shall not apply to
such Incentive. An Election is irrevocable.
(c) If a participant is an officer or director of the Company within
the meaning of Section 16 of the 1934 Act, then an Election is
subject to the following additional restrictions:
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(1) No Election shall be effective for a Tax Date which occurs
within six months of the grant of the award, except that
this limitation shall not apply in the event death or
disability of the participant occurs prior to the expiration
of the six-month period.
(2) The Election must be made either six months prior to the Tax
Date or must be made during a period beginning on the third
business day following the date of release for publication
of the Company's quarterly or annual summary statements of
sales and earnings and ending on the twelfth business day
following such date.
11.9. NO CONTINUED EMPLOYMENT OR RIGHT TO CORPORATE ASSETS. No participant
under the Plan shall have any right, because of his or her
participation, to continue in the employ of the Company for any period
of time or to any right to continue his or her present or any other
rate of compensation. Nothing contained in the Plan shall be construed
as giving an employee, the employee's beneficiaries or any other
person any equity or interests of any kind in the assets of the
Company or creating a trust of any kind or a fiduciary relationship of
any kind between the Company and any such person.
11.10. DEFERRAL PERMITTED. Payment of cash or distribution of any shares of
Common Stock to which a participant is entitled under any Incentive
shall be made as provided in the Incentive. Payment may be deferred at
the option of the participant if provided in the Incentive.
11.11. AMENDMENT OF THE PLAN. 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
Incentives 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 422 of the Code or the rules of
any stock exchange or Nasdaq or similar regulatory body. No
termination, suspension or amendment of the Plan may adversely affect
any outstanding Incentive without the consent of the affected
participant; provided, however, that this sentence will not impair the
right of the Committee to take whatever action it deems appropriate
under Sections 2, 11.6 and 11.12 of the Plan.
11.12. IMMEDIATE ACCELERATION OF INCENTIVES. Notwithstanding any provision
in this Plan or in any Incentive to the contrary, (a) the restrictions
on all shares of restricted stock award shall lapse immediately, (b)
all outstanding options and SARs will become exercisable immediately,
and (c) all performance shares shall be deemed to be met and payment
made immediately, if subsequent to the date that the Plan is approved
by the Board of Directors of the Company, any of the following events
occur unless otherwise determined by the Board of Directors and a
majority of the Continuing Directors (as defined below):
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(1) any person or group of persons becomes the beneficial owner of
30% or more of any equity security of the Company entitled to
vote for the election of directors;
(2) a majority of the members of the Board of Directors of the
Company is replaced within the period of less than two years by
directors not nominated and approved by the Board of Directors;
or
(3) the shareholders of the Company approve an agreement to merge or
consolidate with or into another corporation or an agreement to
sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation).
For purposes of this Section 11.12, beneficial ownership by a person
or group of persons shall be determined in accordance with Regulation
13D (or any similar successor regulation) promulgated by the
Securities and Exchange Commission pursuant to the 1934 Act.
Beneficial ownership of more than 30% of an equity security may be
established by any reasonable method, but shall be presumed
conclusively as to any person who files a Schedule 13D report with the
Securities and Exchange Commission reporting such ownership. If the
restrictions and forfeitability periods are eliminated by reason of
provision (1), the limitations of this Plan shall not become
applicable again should the person cease to own 30% or more of any
equity security of the Company.
For purposes of this Section 11.12, "Continuing Directors" are
directors (a) who were in office prior to the time any of provisions
(1), (2) or (3) occurred or any person publicly announced an intention
to acquire 20% or more of any equity security of the Company, (b)
directors in office for a period of more than two years, and (c)
directors nominated and approved by the Continuing Directors.
11.13. DEFINITION OF FAIR MARKET VALUE. For purposes of this Plan, the
"Fair Market Value" of a share of Common Stock at a specified date
shall, unless otherwise expressly provided in this Plan, be the amount
which the Committee determines in good faith to be 100% of the fair
market value of such a share as of the date in question; provided,
however, that notwithstanding the foregoing, if such shares are listed
on a U.S. securities exchange or are quoted on the NASDAQ National
market System ("NASDAQ"), then Fair Market Value shall be determined
by reference to the last sale price of a share of Common Stock on such
U.S. securities exchange or NASDAQ on the applicable date. If such
U.S. securities exchange or NASDAQ is closed for trading on such date,
or if the Common Stock does not trade on such date, then the last sale
price used shall be the one on the date the Common Stock last traded
on such U.S. securities exchange or NASDAQ.
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EXHIBIT 10.15
SECOND AMENDMENT AGREEMENT
This SECOND AMENDMENT AGREEMENT entered into at Boston, Massachusetts, as of
March 21, 2000, between PAPER WAREHOUSE, INC. and PAPER WAREHOUSE FRANCHISING,
INC. (hereinafter, collectively, the "Borrower"), each a Minnesota corporation
with its principal executive offices at 7630 Excelsior Boulevard, Minneapolis,
Minnesota 55426, and FLEET RETAIL FINANCE INC. f/k/a BankBoston Retail Finance
Inc., with an address of 40 Broad Street, Boston, MA 02109 (the "Lender").
WHEREAS, Lender established a revolving line of credit (the "Revolving Credit")
pursuant to a Loan and Security Agreement dated as of June 7, 1999 (as amended
and modified from time to time, the "Loan Agreement") for the Borrower under
which the Lender agreed to make advances to, and other financial accommodations
for the benefit of, the Borrower until the Maturity Date subject to the terms
and conditions of the Loan Agreement. All initially capitalized terms shall have
the definitions ascribed to them in the Loan Agreement, unless otherwise defined
herein.
WHEREAS, the Borrower has requested that the Lender permit the Borrower to
borrow up to $1,200,000 in excess of the existing Borrowing Base, to waive the
Borrower's failure to achieve certain financial covenants, and to amend the
advance rates under the Borrowing Base.
WHEREAS, subject to the terms and conditions in this Agreement, the Lender is
willing to modify the terms of the Loan Agreement in order to accommodate the
Borrower's request.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Lender and the Borrower mutually agree as
follows:
1. EFFECTIVE DATE: The "Effective Date" of this Agreement shall be the
date upon which the Lender receives each of the following items: (i)
this Second Amendment Agreement, duly executed by the Borrower;
(ii)the irrevocable letter of credit of Norwest Bank Minnesota,
National Association in the face amount of $1,200,000 issued to the
Lender; and (iii) the letter agreement between Yale T. Dolginow and
the Lender, respecting such letter of credit, each in form and
substance satisfactory to the Lender and executed and delivered by all
parties required by the Lender.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended as
follows:
a) Article I shall be amended to add the following definitions, in
appropriate alphabetical order:
"ACCEPTABLE CREDIT CARD RECEIVABLES": Those Accounts that from
time to time are due and owing to each Borrower on a non-recourse
basis from major credit card processors that are acceptable to
the Lender, which processors include, without limitation, Visa,
MasterCard, Discover, and American Express."
"CREDIT CARD ADVANCE RATE": Seventy-Five Percent (75%).
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"EBITDA": The Borrower's earnings before interest, taxes,
depreciation and amortization, each as determined in accordance
with GAAP.
"EXCELSIOR PROCEEDS": The net cash proceeds, after reduction for
the payment of all closing fees and taxes paid or arising in
connection therewith and payments made to discharge any liens,
which are received by the Borrower and delivered to the Lender
for application to the principal balance of the Loan Account in
connection with the sale of the real estate and improvements
thereon at the premises known as 7630 Excelsior Boulevard,
Minneapolis, Minnesota 55426.
"LETTER OF CREDIT RELEASE DATE": as defined in that letter
agreement re: Irrevocable Letter of Credit No. S407544, by and
between Yale T. Dolginow and Lender.
"LETTER OF CREDIT VALUE": The lesser of:
(a) the undrawn face amount of that certain standby letter
of credit of Norwest Bank Minnesota, National Association, dated
March 21, 2000, in the original amount of $1,200,000 and numbered
S407544 held by the Lender, as amended, extended, replaced,
substituted, or modified, but only so long as such letter of
credit remains a valid and binding obligation of Wells Fargo,
N.A. and has not expired or terminated, or been rescinded,
cancelled, or withdrawn, or amended, replaced, substituted, or
modified without the prior written consent of the Lender; or
(b) the lesser of (1) $1,200,000, prior to the date on which
the Lender receives the Excelsior Proceeds, or (2) the sum of (A)
$1,200,000, minus (B) the Excelsior Proceeds, from and after the
date on which the Beneficiary receives the Excelsior Proceeds.
"OVERADVANCE": Any loan or advance, or other credit extended by
the Lender for the benefit of the Borrower such that the balance
of the Loan Account is greater than the sum of (a) the Borrowing
Base minus (b) the Temporary Overadvance.
"TEMPORARY OVERADVANCE": As defined in Section 2.2 hereof.
"TOTAL STOCKHOLDERS' EQUITY": The stockholders' equity of the
Borrower (determined in accordance with GAAP, consistently
applied, except the balance of the Loan Account shall in all
events be treated as current).
b) The definition of "Inventory Advance Rate" in Article I shall be
amended to replace the date "September 30th" with the date "August
31st" and to replace the date "October 1st" with the date "September
1st."
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c) Section 2.1(b)(ii)(B)(I) shall be amended to replace the period at
the end thereof with the following: "PLUS the Credit Card Advance Rate
of the Acceptable Credit Card Receivables."
d) Section 2.1(b)(ii)(B) shall be amended to add, after the end of
clause 2.1(b)(ii)(B)(II) thereof, the following:
"PLUS
(III) The Temporary Overadvance."
e) The following sentence shall be added to Section 2.2: "Through the
Letter of Credit Release Date, the Lender agrees to establish a
Temporary Overadvance, so referred to herein, of up to the amount of
the Letter of Credit Value."
d) Section 5.12.1 shall be amended by replacing it with the following:
"5.12.1 TOTAL STOCKHOLDERS' EQUITY. The Borrower shall not permit or
suffer to exist Total Stockholders' Equity to be less than the
following amounts at the end of any of the following fiscal months:
(a) February 2000: $7,503,798; (b) March 2000: $7,623,477; (c) April
2000: $7,492,017; (d) May 2000: $7,800,535; (e) June 2000: $8,249,225;
(f) July 2000: $8,028,271; (g) August 2000: $7,935,907; (h) September
2000: 8,164,244; (i) October 2000: $8,668,752; (j) November 2000:
$8,515,338; (k) December 2000: $9,377,942; and (l) January 2001:
$8,740,589. These amounts are based on the Business Plan set forth on
EXHIBIT 5-12(a)-1 to the Second Amendment Agreement."
e) Section 5.12.2 shall be amended by replacing it with the following:
"5.12.2 (a) FIXED CHARGE COVERAGE RATIO. The Borrower shall not permit
or suffer to exist the ratio of its Cash Flow to its Contractual
Obligations, calculated on a cumulative basis for the period January
30, 2000 through February 2, 2001, to be less than 1.10:1.00; and (b)
EBITDA. The Borrower shall not permit or suffer to exist EBITDA of
less than the following amounts for the fiscal quarters ending in any
of the following fiscal months (where parenthesis indicate a
negative): (a) April 2000: ($700,000); (b) July 2000: $1,500,000; (c)
October 2000: $1,700,000. These amounts are based on the Business Plan
set forth on EXHIBIT 5-12(b)-1 to the Second Amendment Agreement."
3. LIMITED WAIVER. The Borrower has requested that the Lender waive its
rights and remedies in connection with the Borrower's failure to
comply with Section 5.12.1 of the Loan Agreement as of January 28,
2000, and the Borrower's failure to comply with Section 5.12.2 of the
Loan Agreement as of the fiscal year ending as of January 28, 2000.
The Lender has agreed to waive its rights and remedies arising solely
from the Borrower's failure to comply with Section 5.12.1 of the Loan
Agreement as of January 28, 2000, and the Borrower's failure to comply
with Section 5.12.2 of the Loan Agreement as of the fiscal year ending
as of January 28, 2000. This waiver is limited to this specific
request and shall not be deemed or construed to be a consent to any
other or future action or as a waiver of any Event of Default that may
exist under the Loan Agreement.
4. EXCELSIOR PROPERTY. Immediately upon receipt thereof, the Borrower
covenants and agrees to deliver to the Lender, for application to the
principal balance of the Loan Account, the net cash proceeds, after
reduction for the payment of all closing fees and
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taxes paid or arising in connection therewith and payments made to
discharge any liens, received by the Borrower in connection with the
sale of the real estate and improvements thereon at the premises known
as 7630 Excelsior Boulevard, Minneapolis, Minnesota 55426. Further,
the Borrower covenants and agrees that, upon or before the transfer of
such real estate, the Borrower shall deliver, or shall cause to be
delivered, to Lender a waiver or subordination (in form satisfactory
to Lender) executed by the Borrower's landlord with respect to such
premises.
5. AMENDMENT FEE. Upon the Borrower's execution of this Second Amendment
Agreement, Borrower agrees to pay to Lender an amendment fee of
$5,000.00, which fee shall be fully earned and nonrefundable upon
Lender's signing of this Second Amendment Agreement.
6. ENFORCEABILITY, ETC. Except as otherwise expressly provided herein,
the Loan Agreement and the other Loan Documents are, and shall
continue to be, in full force and effect and are hereby ratified and
confirmed in all respects, except that on and after the Effective Date
hereof (i) all references in the Loan Agreement to "this Agreement",
"hereto", "hereof", "hereunder", or words of like import referring to
the Loan Agreement shall mean the Loan Agreement as amended by this
Agreement and (ii) all references in the other Loan Documents to the
"Loan Agreement", "thereto", "thereof", "thereunder" or words of like
import referring to the Loan Agreement shall mean the Loan Agreement
as amended by this Agreement. Except as expressly provided herein, the
execution, delivery and effectiveness of this Agreement shall not
operate as an amendment of any right, power or remedy of the Lender
under the Loan Agreement or any other Loan Document, nor constitute an
amendment of any provision of the Loan Agreement or any other Loan
Documents.
7. GENERAL PROVISIONS
a) INTEGRATION; AMENDMENT; WAIVERS. This Agreement and Loan
Documents set forth in full are terms of agreement between the
parties and are intended as the full, complete and exclusive
contract governing the relationship between the parties,
superseding all other discussions, promises, representations,
warranties, agreements and the understandings between the parties
with respect thereto. No term of the Loan Documents may be
modified or amended, nor may any rights thereunder be waived,
except in a writing signed by the party against whom enforcement
of the modification, amendment or waiver is sought. Any waiver of
any condition in, or breach of, any of the foregoing in a
particular instance shall not operate as a waiver of other or
subsequent conditions or breaches of the same or a different
kind. The Lender's exercise or failure to exercise any rights
under any of the foregoing in a particular instance shall not
operate as a waiver of its right to exercise the same or
different rights in subsequent instances. Except as expressly
provided to the contrary in this Agreement, or in another written
agreement, all the terms, conditions, and provisions of the Loan
Documents shall continue in full force and effect. If in this
Agreement's description of an agreement between the parties,
rights and remedies of Lender or obligations of the Borrower are
described which also exist under the terms of the other Loan
Documents, the fact that this Agreement may omit or contain a
briefer description of any rights, remedies and obligations shall
not be deemed to limit
4
<PAGE>
any of such rights, remedies and obligations contained in the
other Loan Documents.
b) PAYMENT OF EXPENSES. Without limiting the terms of the Loan
Documents, the Borrower shall pay all costs and expenses
(including reasonable attorneys' fees) arising under or in
connection with the Loan Documents, including without limitation,
in connection with the negotiation, preparation, execution,
delivery, and enforcement of this Agreement and any and all
consents, waivers or other documents or instruments relating
thereto.
c) NO THIRD PARTY BENEFICIARIES. Except as may be otherwise
expressly provided for herein, this Agreement does not create,
and shall not be construed as creating, any rights enforceable by
any person not a party to this Agreement.
d) SEPARABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or
unenforceable, the remaining provisions of this Agreement shall
nevertheless remain in full force and effect.
e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, which together shall constitute one and the same
agreement.
f) TIME OF ESSENCE. Time is of the essence in each of the
Liabilities of the Borrower and with respect to all conditions
to be satisfied by the Borrower.
g) CONSTRUCTION; VOLUNTARY AGREEMENT; REPRESENTATION BY COUNSEL.
This Agreement has been prepared through the joint efforts of all
the parties. Neither its provisions nor any alleged ambiguity
shall be interpreted or resolved against any party on the ground
that such party's counsel was the draftsman of this Agreement.
Each of the parties declares that such party has carefully read
this Agreement and the agreements, documents and instruments
being entered into in connection herewith and that such party
knows the contents thereof and sign the same freely and
voluntarily. The parties hereto acknowledge that they have been
represented in negotiations for and preparation of this Agreement
and the agreements, documents and instrument being entered into
in connection herewith by legal counsel of their own choosing,
and that each of them has read the same and had their contents
fully explained by such counsel and is fully aware of their
contents and legal effect.
h) GOVERNING LAW; FORUM SELECTION. This Agreement has been entered
into and shall be governed by the laws of the Commonwealth of
Massachusetts.
i) FURTHER ASSURANCES. The Borrower agrees to take all further
actions and execute all further documents as the Lender may from
time to time reasonably request to carry out the transactions
contemplated by this Agreement.
j) NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be given in accordance with the
Loan Agreement.
k) MUTUAL WAIVER OF RIGHT TO JURY TRIAL. THE LENDER AND BORROWER
EACH HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY
5
<PAGE>
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY
RELATING TO: (I) THIS AGREEMENT, OR ANY OF THE AGREEMENTS,
INSTRUMENTS OR DOCUMENTS REFERRED TO HEREIN; OR (II) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN THEM; OR
(III) ANY CONDUCT, ACTS OR OMISSIONS OF THE LENDER OR OF THE
BORROWER OR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH THEM; IN EACH OF
THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
l) COPIES AND FACSIMILES. This Agreement and all documents which
have been or may be hereinafter furnished by the Borrower to the
Lender may be reproduced by the Lender by any photographic,
photostatic, microfilm, xerographic or similar process, and any
such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding (whether or
not the original is in existence and whether or not such
reproduction was made in the regular course of business).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
This Second Amendment Agreement is executed under seal as of the date
written above.
Witness Borrower:
---------
Paper Warehouse, Inc.
/s/ Cheryl W. Newell, CFO By: /s/ Yale T. Dolginow
- ---------------------------------- --------------------------------
Yale T. Dolginow, Chairman and Chief
Executive Officer
Witness Borrower:
---------
Paper Warehouse Franchising, Inc.
/s/ Cheryl W. Newell, CFO By: /s/ Yale T. Dolginow
- ---------------------------------- --------------------------------
Yale T. Dolginow, Chairman and Chief
Executive Officer
Witness Accepted:
---------
Fleet Retail Finance Inc.
By: /s/ James J. Ward
- ---------------------------------- --------------------------------
Name: James J. Ward
Title: Director
7
<PAGE>
EXHIBIT 5.12(a)-1
[Attach Stockholders Equity Spreadsheet]
8
<PAGE>
EXHIBIT 5.12(b)-1
[Attach EBITDA and Fixed Charge Coverage Ratio Spreadsheet]
9
<PAGE>
Exhibit 10.16
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into effective as of March 21, 2000 between Paper Warehouse, Inc., a Minnesota
corporation ("PAPER WAREHOUSE"), and Yale T. Dolginow ("Dolginow").
------------------- ------------
A. Fleet Retail Finance, Inc ("FLEET") has agreed to provide Paper
---------
Warehouse with additional borrowing capacity under a revolving line of credit if
Dolginow causes a $1.2 million standby letter of credit to be issued in favor of
Fleet.
B. As an inducement for Dolginow to issue such $1.2 million standby
letter of credit in favor of Fleet (the "LETTER OF CREDIT"), Paper Warehouse has
agreed to indemnify Dolginow as set forth in this Agreement for any liability he
may have as a result of such arrangement.
Accordingly, Paper Warehouse and Dolginow hereby agree as follows:
1. INDEMNIFICATION. Paper Warehouse agrees to indemnify and hold
----------------
harmless Dolginow, his heirs, personal representatives, executors and agents,
from and against any and all losses, claims, damages, expenses and liabilities
(or actions in respect thereof) (collectively, "INDEMNIFIABLE LOSSES"), as they
-----------------------
may be incurred (including all legal fees and other reasonable expenses)
suffered or incurred by Dolginow (including in settlement of any action, suit or
proceeding, if such action is settled with Paper Warehouse's consent) caused by,
relating to, based upon or arising out of the Letter of Credit, including
without limitation the foreclosure of any collateral pledged by Dolginow in
connection with the Letter of Credit. Paper Warehouse further agrees to pay
interest on any such Indemnifiable Losses at a fixed rate of ten percent (10%)
per annum (computed on the basis of the actual number of days elapsed in a year
consisting of 365 days) (which interest will be considered to be part of the
Indemnifiable Losses).
2. NOTICE OF RIGHT TO INDEMNIFICATION. Dolginow agrees to notify
-----------------------------------
Paper Warehouse promptly in writing upon Dolginow being required to pay any
amount in connection with the Letter of Credit; provided, however, that the
failure of Dolginow to give such notice promptly will not relieve Paper
Warehouse from any liability that it may have to Dolginow under this Agreement.
3. TERM OF AGREEMENT. This Agreement will continue until and
------------------
terminate upon the later of (i) the full and complete release of any and all
obligations that Dolginow might have in connection with the Letter of Credit, or
(ii) the final termination (as to which all rights of appeal have been exhausted
or lapsed) of all pending proceedings in respect of which Dolginow is
indemnified hereunder.
4. MISCELLANEOUS.
--------------
(a) REMEDIES CUMULATIVE. The remedies provided in this
--------------------
Agreement are cumulative and will not preclude assertion by Dolginow of
any rights or the seeking of any other remedies against Paper Warehouse.
<PAGE>
(b) AMENDMENTS AND WAIVER. No supplement, modification or
----------------------
amendment of this Agreement will be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement will be deemed or will constitute a waiver of any other
provisions hereof (whether or not similar) nor will such waiver
constitute a continuing waiver.
(c) NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement
-----------------------------
will entitle any person or entity (other than a party hereto and his, her
or its respective successors and assigns permitted hereby) to any claim,
cause of action, remedy or right of any kind.
(d) SUCCESSORS AND ASSIGNS. This Agreement will be binding upon
-----------------------
and inure to the benefit of and be enforceable by the parties hereto and
their respective successors and assigns (including any direct or indirect
successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of Paper Warehouse),
spouses, heirs and personal and legal representatives.
(e) NOTICE. All notices, requests, demands and other
-------
communications under this Agreement must be in writing and will be deemed
to have been duly given (i) if delivered by hand and receipted for by the
party to whom such notice or other communication was directed, on the
date of delivery, or (ii) if mailed by certified or registered mail or by
express mail, postage prepaid and properly addressed, on the third
business day after the date on which it is so mailed. Unless subsequently
modified as provided herein, notice to Paper Warehouse will be directed
to Paper Warehouse, Inc., 7630 Excelsior Boulevard, Minneapolis,
Minnesota 55426 (Attn: Chief Financial Officer), and notice to Dolginow
will be directed to 6404 Harold Woods Lane, Edina, Minnesota 55436.
(f) GOVERNING LAW. This Agreement will be governed by and
-------------
construed and enforced in accordance with the law of the State of
Minnesota applicable to contracts made to be performed in such state
without giving effect to the principles of conflicts of laws.
The parties have executed this Agreement on the day and year first above
written.
PAPER WAREHOUSE, INC. YALE T. DOLGINOW
By: /s/ Arthur H. Cobb /s/ Yale T. Dolginow
--------------------------------- ---------------------------------
Arthur H. Cobb , a director (signature)
---------------------
2
<PAGE>
EXHIBIT 12
PAPER WAREHOUSE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE FIVE YEARS ENDED JANUARY 28, 2000
<TABLE>
<CAPTION>
($'S IN THOUSANDS) FISCAL YEAR ENDED
-----------------------------------------------------------------
JANUARY 28, JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 2,
RATIO OF EARNINGS TO FIXED CHARGES: 2000 1999 1998 1997 1996
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Consolidated net (loss) earnings $ (4,448) $ (521) $ (207) $ 808 $ 797
Extraordinary charge, net - - 110 - -
Cumulative effect of accounting change, net 108 - - - -
Income taxes (1) (2,970) (323) 22 500 494
------------ --------- -------- --------- --------
Total (loss) earnings before extraordinary charge
and cumulative effect of accounting change (7,310) (844) (75) 1,308 1,291
Fixed Charges:
Interest expense 1,182 279 860 834 547
Interest portion of rental expense 3,281 2,378 1,779 1,436 1,046
------------ --------- -------- --------- --------
Total fixed charges 4,463 2,657 2,639 2,270 1,593
Earnings available for fixed charges $ (2,847) $ 1,813 $ 2,564 $ 3,578 $ 2,884
============ ========= ======== ========= ========
Ratio of earnings before extraordinary charge and cumulative
effect of accounting change to fixed charges (2) --- --- --- 1.58 1.81
============ ========= ======== ========= ========
</TABLE>
(1)Prior to November 1997, the Company was taxed as an S-Corporation. This
amount reflects the pro forma provision for taxes as if the Company were
taxed as a C-Corporation
(2)For the fiscal years ended January 28, 2000, January 29, 1999, and
January 30, 1998 earnings were not adequate to cover fixed charges by
approximately $7.3 million, $844,000 and $75,000, respectively.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF COMPANY
Paper Warehouse Franchising, Inc.
PartySmart.com, Inc
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-28-2000
<PERIOD-START> JAN-30-1999
<PERIOD-END> JAN-28-2000
<CASH> 470
<SECURITIES> 0
<RECEIVABLES> 830
<ALLOWANCES> 0
<INVENTORY> 20,207
<CURRENT-ASSETS> 22,510
<PP&E> 16,825
<DEPRECIATION> 6,818
<TOTAL-ASSETS> 37,389
<CURRENT-LIABILITIES> 17,810
<BONDS> 6,448
0
0
<COMMON> 46
<OTHER-SE> 9,595
<TOTAL-LIABILITY-AND-EQUITY> 37,389
<SALES> 82,371
<TOTAL-REVENUES> 82,371
<CGS> 74,821
<TOTAL-COSTS> 74,821
<OTHER-EXPENSES> 14,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,182
<INCOME-PRETAX> (7,310)
<INCOME-TAX> 2,970
<INCOME-CONTINUING> (4,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (108)
<NET-INCOME> (4,448)
<EPS-BASIC> (.96)
<EPS-DILUTED> (.96)
</TABLE>
