<PAGE>
As filed with the Securities and Exchange Commission on August 31, 2000
Registration No. 333-_____
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------
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
(952) 936-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
YALE T. DOLGINOW
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PAPER WAREHOUSE, INC.
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(952) 936-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
BRUCE A. MACHMEIER
OPPENHEIMER WOLFF & DONNELLY LLP
45 SOUTH SEVENTH STREET, SUITE 3300
MINNEAPOLIS, MINNESOTA 55402
(612) 607-7000
-------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / / _____________
-----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rights to purchase shares of common stock,
par value $.01 per share (2)....................... N/A None
------------------------------------------------------------------------------------------------------------------------------------
Common stock, par value $.01 per share................ $1,875,000 $495.00
====================================================================================================================================
</TABLE>
(1) Calculated in accordance with Rule 457(o) based on the estimated maximum
offering price of the common stock.
(2) Evidencing the rights to subscribe for common stock of the registrant.
Pursuant to Rule 457(g) under the Securities Act, no separate registration fee
is required for the rights since they are being registered in the same
registration statement as the common stock underlying the rights.
WE HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY
BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL WE FILE A FURTHER AMENDMENT
WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933
OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE>
[INSERT THE FOLLOWING RED HERRING LANGUAGE VERTICALLY ON THE LEFT SIDE OF THE
FRONT COVER PAGE OF THE PROSPECTUS]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
Subject to Completion Dated August 31, 2000
PRELIMINARY PROSPECTUS
[LOGO]
RIGHTS OFFERING OF 1,500,000 SHARES OF
COMMON STOCK AT $1.25 PER SHARE
--------------------------------------------------------------------------------
THE RIGHTS OFFERING WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , , 2000, UNLESS WE EXTEND IT.
--------------------------------------------------------------------------------
TERMS OF THE RIGHTS OFFERING
------------------
- We are distributing rights to purchase additional shares of our common
stock for a price of $1.25 per share to all of our shareholders of record
on September 15, 2000.
- You have been granted 0.323 rights for each share of common stock you held
on the record date. Each whole right entitles you to purchase one share of
our common stock for $1.25 per share.
- We will not issue fractional rights or fractional shares. If the number of
shares of common stock you held on the record date would result in your
receipt of fractional rights, the number of rights issued to you is being
rounded down to the nearest whole right. As a result, our shareholders of
record that held fewer than four shares as of September 15, 2000 are not
receiving rights.
- To participate in this rights offering, you must exercise your rights
before they expire at 5:00 p.m. New York City time, on , 2000, unless we
extend the offering.
- You may not sell or transfer the rights. We do not intend to list the
rights on any securities exchange or include them in any automated
quotation system.
- Since August 4, 2000, our common stock has traded on the Nasdaq SmallCap
Market System under the symbol "PWHS." On August 28, 2000, the last
reported sale price for our common stock was $1.50 per share.
- We will use all of the net proceeds from the rights offering for working
capital and general corporate purposes.
- OUR BOARD OF DIRECTORS DOES NOT MAKE ANY RECOMMENDATION TO YOU ABOUT
WHETHER YOU SHOULD EXERCISE ANY OF YOUR RIGHTS.
------------------
THE EXERCISE OF YOUR RIGHTS INVOLVES SUBSTANTIAL RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
<TABLE>
<CAPTION>
---------------------------------------------------- -------------------------- ------------------------------------
SUBSCRIPTION PRICE NET PROCEEDS TO PAPER WAREHOUSE
---------------------------------------------------- -------------------------- ------------------------------------
<S> <C> <C>
Per Share...................................... $1.25 $1.21
---------------------------------------------------- -------------------------- ------------------------------------
Total.......................................... $1,875,000 $1,811,000
---------------------------------------------------- -------------------------- ------------------------------------
</TABLE>
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August 31, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents Incorporated by Reference........................................................................ i
Where You Can Find More Information........................................................................ ii
Questions and Answers About the Rights Offering............................................................ 1
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 9
Forward-Looking Statements................................................................................. 17
Use of Proceeds............................................................................................ 18
Price Range of Our Common Stock............................................................................ 18
Capitalization............................................................................................. 19
Anti-dilution.............................................................................................. 20
The Rights Offering........................................................................................ 21
Business................................................................................................... 28
Plan of Distribution....................................................................................... 38
Material U.S. Federal Income Tax Consequences.............................................................. 38
Legal Matters.............................................................................................. 40
Experts.................................................................................................... 40
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" certain documents, which means that we can disclose important
information to you by referring you to those documents. The information in the
documents incorporated by reference is considered to be part of this prospectus,
except to the extent that this prospectus updates or supersedes the information.
We incorporate by reference the documents listed below which we have previously
filed with the SEC (SEC file no. 0-23389):
- our Annual Report on Form 10-K for the fiscal year ended January 28,
2000, including the portions incorporated by reference from our proxy
statement in connection with our 2000 annual meeting of shareholders;
- our Quarterly Reports on Form 10-Q for the quarters ended April 28,
2000 and July 28, 2000; and
- the description of our common stock contained in our Registration
Statement on Form 8-A, including any amendments or reports filed for
the purpose of updating this description.
We also incorporate by reference the information contained in all other
documents we file with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the
Securities Exchange Act of 1934 after the date of this prospectus. The
information will be considered part of this prospectus from the date the
document is filed and will supplement or amend the information contained in this
prospectus.
We will provide you, at no charge, a copy of the documents we
incorporate by reference in this prospectus. TO OBTAIN TIMELY DELIVERY,
REQUESTS FOR COPIES SHOULD BE MADE NO LATER THAN , 2000 (FIVE
BUSINESS DAYS BEFORE THE EXPIRATION OF THE OFFER).
i
<PAGE>
To request a copy of any or all of these documents, you should write or
telephone us at the following address and telephone number:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, Minnesota 55426
Attn: Shareholder Information
(952) 936-1000
------------------
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and
other documents with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. The Exchange Act file number for our SEC filings is
0-23389. Our SEC filings made electronically through the SEC's EDGAR system are
available to the public at the SEC's web site at http://www.sec.gov. You may
also read and copy any document we file with the SEC at the following SEC public
reference rooms:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center 7 World Trade Center
450 Fifth Street, N.W. 500 West Madison Street Suite 1300
Washington, D.C. 20549 Chicago, Illinois 60621 New York, New York 10048
</TABLE>
You may obtain information regarding the operation of the SEC's public
reference rooms by calling the SEC at 1-800-SEC-0330.
We have filed with the SEC a Registration Statement on Form S-3 under
the Securities Act of 1933, and the rules and regulations promulgated
thereunder, with respect to this rights offering. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement and the attached exhibits
and schedules. The statements contained in this prospectus as to the contents of
any contract, agreement or other document that is filed as an exhibit to the
registration statement are not necessarily complete. Accordingly, each such
statement is qualified in all respects by reference to the full text of such
contract, agreement or document filed as an exhibit to the registration
statement or otherwise filed with the SEC.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any securities in any
state or other jurisdiction in which the offer or solicitation is not permitted.
You should not assume that the information in this prospectus is accurate as of
any date other than the date of this prospectus.
------------------
IN THIS PROSPECTUS, "PAPER WAREHOUSE," "THE COMPANY," "WE," "US" AND "OUR"
REFER TO PAPER WAREHOUSE, INC. AND OUR SUBSIDIARIES, UNLESS THE CONTEXT
SPECIFICALLY INDICATES OTHERWISE.
PAPER WAREHOUSE, -Registered Trademark- PARTY UNIVERSE-Registered
Trademark- AND PARTYSMART-Registered Trademark- ARE REGISTERED TRADEMARKS OF
OURS.
OUR FISCAL YEAR ENDS ON THE FRIDAY CLOSEST TO JANUARY 31ST.
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
WHAT IS A RIGHTS OFFERING?
A rights offering is a distribution of rights on a pro rata basis to all of our
shareholders. We are distributing 0.323 rights for each share of our common
stock you held on September 15, 2000.
We will not issue fractional rights or fractional shares. If the number of
shares of common stock you held on the record date would result in your receipt
of fractional rights, the number of rights issued to you is being rounded down
to the nearest whole right. As a result, our shareholders of record that held
fewer than four shares as of September 15, 2000 are not receiving rights.
WHAT IS A RIGHT?
Each whole right entitles you to purchase one share of our common stock at a
subscription price of $1.25 per share. When you "exercise" a whole right, that
means that you choose to purchase the common stock that the right entitles you
to purchase. You may exercise any number of your rights, or you may choose not
to exercise any of your rights. You cannot, however, give or sell your rights to
anyone else -- only you can exercise them.
CAN I PURCHASE ADDITIONAL SHARES BEYOND THOSE THAT I HAVE THE RIGHT TO PURCHASE?
No. You can only exercise the rights that you are granted in the rights
offering. If other shareholders do not exercise their rights, neither you nor
anyone else will have the right to exercise them.
WHY IS PAPER WAREHOUSE OFFERING THE RIGHTS?
We are offering the rights in order to raise money for working capital and
general corporate purposes. After review by our management and Board of
Directors, we have determined that this rights offering is the best approach to
raising such money.
HOW DID PAPER WAREHOUSE ARRIVE AT THE $1.25 PER SHARE PRICE?
In determining the subscription price per share for the rights offering, our
Board of Directors considered several factors including:
- the historic and current market price of our common stock,
- general conditions in the securities market, and
- pricing of similar transactions.
Because of his interest in this transaction, Yale T. Dolginow, our Chairman of
the Board, President and Chief Executive Officer and Diane Dolginow, did not
participate in the deliberations or decision regarding the subscription price.
HOW DO I EXERCISE MY RIGHTS?
You must properly complete the attached rights certificate and deliver
it, along with proper payment for each share that you wish to purchase, to the
subscription agent before 5:00 p.m., New York City time on , 2000.
The instructions also describe an alternate procedure called a "guaranteed
delivery" procedure, which allows an extra three days to deliver the rights
certificate if full payment is received before the expiration date of the rights
offering and a securities broker or qualified financial institution signs a form
to guaranty that the rights certificate will be timely delivered.
MUST I PAY THE SUBSCRIPTION PRICE IN CASH?
All shareholders granted rights who wish to participate in the rights offering,
must timely pay the subscription price by wire transfer, certified or cashier's
check drawn on a U.S.
1
<PAGE>
bank, U.S. postal money order or personal check that clears before the
expiration time of the rights offering.
WHAT IF A BROKER, BANK, TRUST COMPANY OR OTHER NOMINEE IS THE RECORD HOLDER OF
MY SHARES?
If you wish to exercise your rights, please promptly contact the broker, bank,
trust company or other nominee holding your shares. Your broker or other nominee
holder is the record holder of the shares you own and must exercise the rights
on your behalf for shares you wish to purchase or arrange for a rights
certificate issued in your name. The broker, bank or other nominee has been
requested to contact you for instructions on exercising your rights.
HOW SOON MUST I ACT?
The rights expire at 5:00 p.m., New York City time, on , 2000. The
subscription agent must actually receive all required documents and payments
before that time and date. Rights not exercised by the expiration date will
be null and void.
AFTER I EXERCISE MY RIGHTS, CAN I CHANGE MY MIND?
No. Once you send in your rights certificate and payment, you cannot revoke the
exercise of your rights, even if you later learn information about us that you
consider to be unfavorable. You should not exercise your rights unless you are
certain that you wish to purchase additional shares of our common stock at a
price of $1.25 per share.
CAN I SELL OR GIVE AWAY MY RIGHTS?
No. The rights are non-transferable.
IS EXERCISING MY RIGHTS RISKY?
The exercise of your rights involves risks. Exercising your rights means buying
additional shares of our common stock, and should be considered as carefully as
you would consider other equity investments. Among other things, you should
carefully consider the risks described under the heading "Risk Factors,"
beginning on page 9.
HAS PAPER WAREHOUSE'S BOARD OF DIRECTORS MADE A RECOMMENDATION REGARDING THIS
RIGHTS OFFERING?
Our Board of Directors does not make any recommendation to you about whether you
should exercise any or all of your rights.
WHAT FEES OR CHARGES APPLY IF I EXERCISE MY RIGHTS?
We are not charging any fee or sales commission to issue rights to you or to
issue shares to you if you exercise your rights. If you exercise your rights
through a broker or other holder of your shares, you are responsible for paying
any fees that person may charge.
WHEN WILL I RECEIVE MY NEW SHARES?
If you purchase shares of common stock through the rights offering, you will
receive certificates representing those shares as soon as practicable after
, 2000, unless we decide not to issue certificates, in which case the
subscription agent will make a book-entry for your shares. Subject to state
securities laws and regulations, we have the discretion to delay distribution
of any shares you may have elected to purchase by exercise of your rights in
order to comply with state securities laws.
WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY RIGHTS?
The receipt and exercise of your rights are intended to be nontaxable. You
should, however, seek specific tax advice from your personal tax advisor.
2
<PAGE>
WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY RIGHTS?
You are not required to exercise any rights or otherwise take any action in
response to this rights offering. If you do not exercise any rights and the
rights offering is completed, the number of shares which you own will not
change, but your percentage ownership of our total outstanding common stock
will decline.
HOW MANY SHARES OF PAPER WAREHOUSE COMMON STOCK WILL BE OUTSTANDING AFTER THE
RIGHTS OFFERING?
The number of shares of common stock outstanding after the rights offering
depends on the number of rights exercised by our shareholders. If all of the
shareholders exercise all of their rights, then there will be 6,144,940 shares
of our common stock outstanding after the rights offering, assuming we do not
issue any other shares of our common stock after the date of this prospectus.
The percentage ownership of Yale T. Dolginow, our Chairman of the Board,
President and Chief Executive Officer, in our company will increase to the
extent other shareholders do not exercise their rights. Mr. Dolginow has
indicated to us that he intends to exercise all of the rights he will be
granted in the rights offering, subject to market conditions, in which case
he will beneficially own approximately 2,535,454 shares, or 48.2%, of our
common stock outstanding after the rights offering, if no one elses exercises
their rights in the rights offering.
HOW MUCH MONEY WILL PAPER WAREHOUSE RECEIVE FROM THE RIGHTS OFFERING?
The amount of money we will raise from the rights offering depends on the
number of rights exercised by our shareholders. If every shareholder exercises
all of their rights, our gross proceeds from the rights offering will be
approximately $1,875,000. It is unlikely that every shareholder will exercise
their rights. Yale T. Dolginow, our Chairman of the Board, President and Chief
Executive Officer, has indicated to us that he intends to exercise all of his
rights, subject to market conditions, which means that we can expect to receive
at least $774,000 in proceeds in connection with the rights offering.
CAN PAPER WAREHOUSE CANCEL THE RIGHTS OFFERING?
Yes. Our Board of Directors may cancel the rights offering at any time on or
before , 2000, for any reason. If we cancel the rights offering, we will
promptly refund any money received from shareholders, without interest.
WHAT IF I HAVE MORE QUESTIONS?
If you have more questions about the rights offering or need additional copies
of the rights offering documents, please contact Wells Fargo Bank Minnesota,
N.A. at 1-800-380-1372.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN OR
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY,
IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE
DECIDING WHETHER TO EXERCISE YOUR RIGHTS. FOR A MORE COMPLETE UNDERSTANDING OF
THIS RIGHTS OFFERING, OUR COMMON STOCK AND OUR COMPANY, WE ENCOURAGE YOU TO READ
THIS ENTIRE PROSPECTUS AND THE DOCUMENTS TO WHICH WE REFER YOU UNDER THE HEADING
"DOCUMENTS INCORPORATED BY REFERENCE."
PAPER WAREHOUSE
Paper Warehouse is a growing chain of retail stores specializing in
party supplies and paper goods. As of July 28, 2000, we had 146 stores,
including 99 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:
<TABLE>
<S> <C> <C>
- Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- Oklahoma City/Tulsa, OK - Des Moines, IA - Seattle, WA
- Tucson, AZ - Omaha, NE
</TABLE>
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:
<TABLE>
<CAPTION>
CELEBRATORY OCCASIONS AND EVERYDAY USES SEASONAL EVENTS
<S> <C> <C>
- birthdays - Valentine's Day - Halloween
- weddings - Easter - Christmas
- baby showers - Fourth of July - Hanukkah
- graduations - Thanksgiving - New Year's
- other family and religious celebrations
</TABLE>
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.
Our executive offices are located at 7630 Excelsior Boulevard,
Minneapolis, Minnesota 55426, and our telephone number is (952) 936-1000. Our
web site address is http://www.paperwarehouse.com. Our web site and the
information contained on that site, or connected to that site, are not
incorporated into and do not constitute a part of this prospectus.
4
<PAGE>
THE RIGHTS OFFERING
<TABLE>
<S> <C>
Rights granted............................... We have granted each person who was a
record holder of our common stock on the
record date, 0.323 rights for each share
of common stock then held. You may
purchase one whole share of common stock
for every whole right granted. To exercise
your rights, you must deliver a rights
certificate for each share of common stock
for which you subscribe.
We will not issue fractional rights or
fractional shares. If the number of shares
of common stock you held on the record
date would result in your receipt of
fractional rights, the number of rights
issued to you is being rounded down to the
nearest whole right. As a result, our
shareholders of record that held fewer
than four shares as of September 15, 2000
are not receiving rights.
Securities offered........................... We are offering 1,500,000 shares of our
common stock to be issued upon exercise of
the rights.
Shares of common stock outstanding prior to
this rights offering...................... 4,644,940 shares outstanding on August 31,
2000.
Shares of common stock outstanding after
this rights offering...................... 6,144,940 shares, assuming this offering
is completed and all of the rights are
exercised.
Record date.................................. September 15, 2000.
Expiration date and time..................... The rights expire at 5:00 p.m., New York
City time, on , 2000, unless we
extend it or all of the rights are properly
exercised before that time and date.
Reasons for the rights offering.............. We have determined that it would be
advisable to raise money for working
capital and general corporate purposes.
After review by our management and the
Board of Directors, this rights offering
was determined to be the best approach to
raise money for these purposes.
No Board recommendation...................... Our Board of Directors makes no
recommendation to shareholders regarding
the exercise of rights under this
offering. Shareholders who exercise any
rights risk investment loss on new money
invested. We cannot assure you that the
$1.25 subscription
5
<PAGE>
price will remain at or below the market
price for our common stock during the
rights offering, or that anyone purchasing
shares at the $1.25 subscription price
will be able to sell those shares in the
future at a higher price. We refer you to
the section entitled "Risk Factors."
Subscription price........................... $1.25 per share, payable in cash.
Basis for subscription price................. Our Board of Directors approved the $1.25
subscription price. Because of his
interest in this transaction, Yale T.
Dolginow, our Chairman of the Board,
President and Chief Executive Officer, did
not participate in the deliberations or
decision regarding the subscription price.
Transferability of rights.................... The rights are not transferable which
means that only you may exercise them. You
may not sell, give away or otherwise
transfer your rights to anyone.
No revocation................................ If you exercise any rights, you are not
allowed to revoke or change the exercise
or request a refund of monies paid.
Subscription agent........................... Wells Fargo Bank Minnesota, N.A.
Procedure for exercising rights.............. To exercise rights, you must complete the
enclosed rights certificate and deliver
it, along with full payment for the shares
purchased, to the subscription agent prior
to the expiration date.
You may deliver the documents and payments
by mail or commercial courier. If regular
mail is used for this purpose, we
recommend using insured, registered mail.
You may use an alternative "guaranteed
delivery" procedure if you are unable to
deliver the rights certificate before the
expiration date, subject to the
requirements of this procedure described
under the heading "The Rights
Offering--Guaranteed Delivery Procedure."
Payment adjustments.......................... If you send a payment that is insufficient
to purchase the number of shares
requested, or if the number of shares
requested is not specified in the forms
you return to the subscription agent, the
payment received will be applied to
exercise your
6
<PAGE>
rights to the extent of the payment. If
the payment exceeds the amount required to
exercise all of your rights, we will
refund that excess as soon as practicable.
We will not pay interest on any payments
received under the rights offering.
Nominee accounts............................. If you wish to exercise your rights and
purchase shares in this rights offering
and your shares are held by a broker,
bank, trust company or other nominee, you
should promptly contact those record
holders and request them to exercise the
rights on your behalf. You may also
contact the nominee and request the
nominee to send a separate rights
certificate to you.
You are responsible for the payment of any
fees that brokers or other persons holding
your shares may charge in connection with
the exercise of your rights and the
purpose of your shares.
U.S. federal income tax consequences......... For U.S. federal income tax purposes, we
believe that a shareholder will not
recognize taxable income upon the receipt
or exercise of rights. We refer you to the
section entitled "Material U.S. Federal
Income Tax Consequences."
We urge you to consult your own tax
adviser concerning the tax consequences of
this rights offering under your own tax
situation.
This prospectus does not summarize tax
consequences arising under state, local or
foreign tax laws, or any tax laws relating
to special tax circumstances or particular
types of taxpayers.
Stock certificates........................... Unless we decide to issue uncertificated
shares, we will deliver stock certificates
representing shares of our common stock
purchased upon exercise of your rights as
soon as practicable after the expiration
date.
Withdrawal, amendment and extension.......... We may withdraw, amend or extend the
rights offering at any time prior to the
expiration date and for any reason. If we
withdraw the rights offering, we will
return all funds received in the rights
offering without interest to those persons
who exercised their rights and subscribed
for shares in the rights offering.
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL DATA
We derived the following summary consolidated statements of operations
data and consolidated balance sheet data from both our audited and unaudited
financial statements and related notes. Our unaudited consolidated statements of
operations data for the six months ended July 28, 2000 and July 30, 1999 and
consolidated balance sheet data as of July 28, 2000 and July 30, 1999 include
all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of results for these
unaudited periods. The consolidated results of operations for the six months
ended July 28, 2000 are not necessarily indicative of the results of operations
that may be expected for the full fiscal year 2000.
You should read the summary consolidated financial data presented below
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements with
related notes and other financial information contained in or incorporated by
reference in our Annual Report on Form 10-K for the year ended January 28, 2000
and our Quarterly Reports on Form 10-Q for the quarters ended April 28, 2000 and
July 28, 2000, which we incorporate by reference in this prospectus. See
"Documents Incorporated By Reference."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
----------------------------------------------------------- -------------------------
FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, JANUARY 28, JULY 30, JULY 28,
1996 1997 1998 1999 2000 1999 2000
----------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $33,478 $43,002 $52,949 $63,491 $82,371 $36,614 $43,330
Repositioning credit (charge).... -- -- -- -- (3,962) -- 530
Operating income (loss).......... 1,781 2,080 889 (667) (6,496) (1,539) 388
Net (loss) income................ 1,286 1,303 (191) (521) (4,449) (1,116) (106)
Basic and diluted net loss
per share...................... -- -- -- (.11) (.96) (.24) (.02)
Pro forma net (loss) income...... 797 808 (207) -- -- -- --
Pro forma diluted net (loss)
income per share............... .32 .32 (.08) -- -- -- --
OTHER DATA:
Number of stores open at year-end:
Company-owned stores........... 55 64 73 97 102 97 99
Franchise stores............... 53 50 51 46 47 46 47
Comparable store sales
Increase....................... 13.6% 9.0% 9.7% 2.9% 9.5% 6.3% 13.5%
BALANCE SHEET DATA:
Working capital.................. $ 925 $ 1,701 $ 9,383 $ 5,369 $ 4,701 $ 8,053 $ 4,551
Total assets..................... 14,934 16,270 21,017 30,453 37,389 36,082 37,170
Total current and long-term debt,
including capital lease
obligations.................... 8,021 11,240 1,753 8,808 13,467 12,974 15,663
Total stockholders' equity....... 3,124 1,793 14,594 14,090 9,641 12,974 9,550
</TABLE>
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS
BEFORE DECIDING WHETHER TO EXERCISE YOUR RIGHTS AND PURCHASE SHARES OF OUR
COMMON STOCK IN THE RIGHTS OFFERING. YOU SHOULD ALSO CONSIDER THE RISKS
DESCRIBED BELOW WHEN YOU EVALUATE OUR PERFORMANCE AND THE FORWARD-LOOKING
STATEMENTS WE MAKE IN THIS PROSPECTUS, THE DOCUMENTS INCORPORATED BY REFERENCE
INTO THIS PROSPECTUS AND OTHERWISE FROM TIME TO TIME. MANY FACTORS, INCLUDING
THE RISKS DESCRIBED BELOW AND OTHER RISKS WE HAVE NOT RECOGNIZED, COULD CAUSE
OUR OPERATING RESULTS TO BE DIFFERENT FROM OUR EXPECTATIONS AND PLANS.
RISKS RELATING TO OUR BUSINESS
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.
We incurred a net loss of approximately $106,000 for the six months ended July
28, 2000, which included pre-tax beneficial adjustments of $530,000 related to
the repositioning charge taken in fiscal 1999. 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; and
- 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 $3.5 million at July 28,
2000, and we may be required to reserve for a portion of, or write off, these
assets.
9
<PAGE>
WE MAY NOT HAVE SUFFICIENT OPERATING CAPITAL AVAILABLE TO OPERATE OUR
BUSINESS
As a result of the continuing liquidity needs of our business and
borrowing limits 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.
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.
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
Our plans to remodel and relocate stores are subject to several risks,
including:
- the loss of sales during the remodeling or relocation period;
- cost overruns of the remodeling or relocation; and
- failure to achieve increased sales after the remodeling or relocation.
To date, we have remodeled 2 stores and relocated 3 stores. 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 the net proceeds from this rights
offering, cash flow from operations and available borrowing capacity under our
$15.0 million, multi-year revolving credit facility, will be adequate to handle
our cash requirements through the next 12 months. We may, however, need to raise
additional capital in the future to fund our operations and support our
long-term growth.
10
<PAGE>
Financial difficulties of our competitors and our recent losses may affect our
ability to obtain financing. Furthermore, 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.
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 incurred a loss in the first quarter of fiscal
2000 and expect to incur a net loss 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; and
- 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
five 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.
11
<PAGE>
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.
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.
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.
12
<PAGE>
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 web site 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 web site is not likely to generate
any profits in the foreseeable future 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. 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; and
- reduced or eliminated margins due to mark downs on excess inventory.
OUR INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL POSITION
As of July 28, 2000, we had approximately $15.7 million of borrowings
outstanding, which includes amounts outstanding under our revolving line of
credit, our subordinated debt, our mortgage and capital leases. 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; and
13
<PAGE>
- prevent us from meeting certain financial tests contained in our debt
obligations, which could lead to a default on those obligations.
OUR COMPANY IS CONTROLLED BY OUR MANAGEMENT
As of July 28, 2000, Yale T. Dolginow, our Chairman of the Board,
President and Chief Executive Officer, owned or had the right to vote and
control the disposition of 41.3% of our outstanding common stock. Mr. Dolginow's
percentage ownership in our company will increase to the extent other
shareholders do not exercise their rights. Mr. Dolginow has indicated to us that
he intends to exercise all of the rights he will be granted in the rights
offering, subject to market conditions, in which case he will beneficially own
approximately 2,535,454 shares, or 48.2%, of our common stock outstanding after
the rights offering, if no one else exercises their rights in the rights
offering. Accordingly, Yale T. Dolginow may have the ability to elect our
directors and determine the outcome of other corporate actions requiring
shareholder approval. This control could have the effect of delaying, deferring
or preventing a change in control of our company.
RISKS RELATING TO EXERCISING YOUR RIGHTS AND INVESTING IN OUR COMMON STOCK
THE TRADING PRICE OF OUR COMMON STOCK MAY DECLINE
We cannot assure you that the public trading market price of our common
stock will not decline before the rights expire. If you exercise your rights and
then the public trading market price of the common stock decreases below $1.25,
then you will have committed to buy shares of our common stock at a price above
the prevailing market price. Moreover, we cannot assure you that following the
exercise of your rights you will be able to sell your shares of common stock at
a price equal to or greater than the $1.25 subscription price. Until
certificates are delivered upon expiration of the rights offering, you may not
be able to sell the shares of our common stock you purchase in the rights
offering. Unless we decide to issue uncertificated shares, we will deliver
certificates representing shares of our common stock purchased as soon as
practicable after expiration of the rights offering. We will not pay you
interest on funds delivered to the subscription agent pursuant to the exercise
of your rights.
YOU MAY NOT REVOKE OR CHANGE YOUR EXERCISE OF RIGHTS
You are not allowed to revoke or change your exercise of rights after
you send in your subscription forms and payment, even if the market price of our
common stock falls prior to the closing of this rights offering. If we elect to
withdraw or terminate the rights offering, neither we nor the subscription agent
will have any obligation with respect to the rights, except to return, without
interest, any subscription payments.
IF YOU DESIRE TO PURCHASE SHARES IN THE RIGHTS OFFERING, YOU MUST ACT
PROMPTLY AND FOLLOW ALL SUBSCRIPTION INSTRUCTIONS
If you desire to purchase shares in the rights offering, you must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to the expiration date. If you fail to complete and
sign the required subscription forms, send an incorrect payment amount, or
otherwise fail to follow the subscription procedures that apply to your desired
transaction, the subscription agent may, depending on the circumstances, reject
your subscription or accept it to the full extent of the payment received.
Neither we nor the subscription agent undertakes to contact you
14
<PAGE>
concerning, or attempt to correct, an incomplete or incorrect subscription form.
We have the sole discretion to determine whether the exercise of your rights
properly follows the correct procedures.
THERE IS A RISK IN USING A PERSONAL CHECK TO PAY FOR SHARES PURCHASED IN
THE RIGHTS OFFERING
Any personal check used to pay for shares of our common stock in the
rights offering must clear prior to the expiration date, and the clearing
process may require five or more business days.
YOU MAY EXPERIENCE A DELAY IN YOUR ABILITY TO RESELL THE SHARES OF COMMON
STOCK PURCHASED IN THE RIGHTS OFFERING
If you exercise rights, you may not be able to resell the new shares
purchased until you (or your broker or other nominee) have received a stock
certificate for the shares purchased, or an indication that the shares have been
registered in your name by the subscription agent. Although we will endeavor to
issue the appropriate certificates as soon as practicable after completion of
the rights offering, unless we issue uncertificated shares, there may be some
delay between the expiration date and the time we are able to issue the new
stock certificates.
THE SUBSCRIPTION PRICE IS NOT AN INDICATION OF THE VALUE OF PAPER WAREHOUSE
OR OUR COMMON STOCK
The $1.25 subscription price was set by our Board of Directors (with
Yale T. Dolginow and Diane C. Dolginow abstaining) and does not necessarily bear
any relationship to the book value of our assets, past operations, cash flows,
losses, financial condition or any other established criteria for value. You
should not consider the $1.25 subscription price as an indication of the value
of Paper Warehouse or our common stock.
RISKS RELATING TO NOT EXERCISING YOUR RIGHTS AND PURCHASING ADDITIONAL COMMON
SHARES OF OUR COMMON STOCK
IF YOU DO NOT EXERCISE YOUR RIGHTS, YOU MAY SUFFER SIGNIFICANT DILUTION
If you do not exercise all of your rights, you may suffer significant
dilution of your percentage ownership of our common stock relative to
shareholders who exercise their rights. For example, if you own 100,000 shares
of common stock before the rights offering, or approximately 2.2% of our common
stock, and you exercise none of your rights while all other rights are
exercised, then your percentage ownership will be reduced to 1.6%.
THE RIGHTS ARE NON-TRANSFERABLE AND THUS THERE WILL BE NO MARKET FOR THEM
You cannot give or sell your rights to anyone else -- only you can
exercise them. We do not intend to list the rights on any securities exchange or
include them in any automated quotation system. Therefore, there will no market
for the rights.
BY NOT EXERCISING YOUR RIGHTS AND PURCHASING ADDITIONAL SHARES OF OUR
COMMON STOCK FOR $1.25 PER SHARE, YOU MAY LOSE OUT ON ANY FUTURE INCREASES IN
THE VALUE OF OUR COMMON STOCK
The principal risk you run in not exercising your rights and purchasing
additional shares of common stock is that you will lose out on any future
increases in the value of our common stock. It is possible that the $1.25
subscription price may be less than the price that might be received by our
15
<PAGE>
shareholders if they were to sell their shares in the public market or if our
company were to be sold. We have no immediate plans to sell our company, but a
sale transaction could occur at any time.
DESPITE THE RATHER NEGATIVE RISK FACTORS SET FORTH ABOVE, MANAGEMENT AND
YOUR BOARD OF DIRECTORS BELIEVE STRONGLY IN OUR COMPANY AND ITS PROSPECTS
The "risks relating to our business" set forth above are risks that a
shareholder should consider in purchasing additional shares of our common stock,
and are necessarily a conservative view of our prospects. Management and your
board of directors, on the other hand, believe strongly in our company and its
prospects. Yale T. Dolginow, our Chairman of the Board, President and Chief
Executive Officer, has indicated to us that he intends to exercise all of the
rights he will be granted in the rights offering, subject to market conditions.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus and the documents to which we refer you and incorporate
herein by reference contain forward-looking statements regarding our 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. In
addition, from time to time, we or our representatives may make forward-looking
statements orally or in writing. We base these forward-looking statements on our
expectations and projections about future events, which we derive from the
information currently available to us.
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 this prospectus and 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 these 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 this 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 any forward-looking statement to
reflect events or circumstances arising after the date of such statement, or 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 we listed under the heading "Risk Factors."
17
<PAGE>
USE OF PROCEEDS
We will receive up to $1,875,000 in gross proceeds from the rights
offering. The exact amount of proceeds will depend on the number of rights
exercised by our shareholders. Yale T. Dolginow, our Chairman of the Board,
President and Chief Executive Officer, has indicated to us that he intends to
exercise all of his rights, subject to market conditions, which means that we
can expect to receive at least $774,000 in proceeds in connection with the
rights offering. We will pay from the net proceeds of this rights offering the
estimated offering expenses of approximately $64,000. We will use the net
proceeds from the rights offering of approximately $1,811,000 for working
capital and general corporate purposes.
PRICE RANGE OF OUR COMMON STOCK
From our initial public offering on November 24, 1997 until August 3,
2000, our common stock was traded on the Nasdaq National Market, under the
symbol PWHS. Since August 4, 2000 our common stock has traded on the Nasdaq
SmallCap Market, under the symbol PWHS. The following table sets forth the high
and low closing prices for our common stock, as reported by the Nasdaq National
Market, for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR ENDING FEBRUARY 2, 2001
First quarter..................................... $1.75 $0.88
Second quarter.................................... 1.56 0.63
FISCAL YEAR ENDED JANUARY 28, 2000
First quarter..................................... $2.25 $1.69
Second quarter.................................... 3.06 1.70
Third quarter..................................... 2.50 1.50
Fourth quarter.................................... 2.19 1.38
FISCAL YEAR ENDED JANUARY 29, 1999
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>
The foregoing prices reflect inter-dealer prices, without dealer
markup, mark-down or commissions, and may not represent actual transactions.
As of April 28, 2000, we had approximately 161 shareholders of record
of our common stock and an estimated 960 beneficial holders whose shares were
registered in the names of nominees.
We have never declared or paid any cash dividends on our common stock,
and we do not anticipate paying any cash dividends on our common stock in the
foreseeable future. It is the policy of our Board of Directors to retain any
earnings to provide for our continued growth and development.
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CAPITALIZATION
The following table sets forth our short-term debt and capitalization
(1) on an actual basis as of July 28, 2000, and (2) on an as adjusted basis to
reflect this rights offering, assuming all of the rights are exercised by our
shareholders. This table should be read together with the consolidated financial
statements and notes thereto incorporated by reference into this prospectus.
<TABLE>
<CAPTION>
JULY 28, 2000
----------------------------
ACTUAL AS ADJUSTED
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including capital lease obligations)................... $9,460 $9,460
============ ==============
Long-term debt (including capital lease obligations).................... 6,203 6,203
------------ --------------
Shareholders' equity:
Serial Preferred Stock, par value $.01 per share;
10,000,000 authorized shares; no shares issued and
outstanding on an actual and as adjusted basis..................... -- --
Common stock, par value $.01 per share; 40,000,000 authorized
shares; 4,639,475 shares issued and outstanding on an
actual basis and 6,144,940(1) shares issued and outstanding
on an as adjusted basis............................................ 46 61
Additional paid-in capital............................................ 13,848 15,644
Accumulated deficit................................................... (4,344) (4,344)
------------ --------------
Total shareholders' equity......................................... 9,550 11,361
------------ --------------
Total capitalization.................................... $15,753 $17,564
============ ==============
</TABLE>
(1) Reflects issuance of 5,465 additional shares on 7/31/00 pursuant to
Employee Stock Purchase Plan.
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ANTI-DILUTION
Our net tangible book value available for common shareholders as of
July 28, 2000 was approximately $8,654,000 or $1.87 per share of common stock.
"Net tangible book value" is defined as our total shareholders' equity less
intangible assets. "Net tangible book value per common share" is determined by
dividing our net tangible book value available for common shareholders by the
number of outstanding shares of common stock.
After giving effect to the sale of the maximum approximately
1,500,000 shares of common stock in the rights offering at a purchase price
of $1.25 per share, the pro forma net tangible book value available for
common shareholders as of July 28, 2000 would have been approximately
$10,465,000 or $1.70 per share of common stock. This represents an immediate
decrease in net tangible book value of $0.17 per share to the existing
shareholders, and an immediate anti-dilution of $0.45 per share to investors
who purchase shares of common stock in the offering. This "anti-dilution"
represents the difference between the offering price per share and the pro
forma net tangible book value per share as adjusted for the offering.
The following table illustrates this per share anti-dilution as of July
28, 2000, which is determined by subtracting the price paid by an investor that
purchases shares in the offering from the net tangible book value per share
after the offering.
<TABLE>
<S> <C>
Offering price per share (1) ............................................................... $1.25
Net tangible book value per share as of July 28, 2000....................................... $1.87
Decrease in net tangible book value per share attributable to payments by investors
participating in the offering (2) ....................................................... $0.17
-----
Pro forma net tangible book value per share after offering.................................. $1.70
-----
Anti-dilution of net tangible book value per share to investors participating
in the offering.......................................................................... $0.45
=====
-------------------
(1) Before deducting the estimated offering expenses.
(2) After deducting the estimated offering expenses.
</TABLE>
20
<PAGE>
THE RIGHTS OFFERING
The following describes the rights offering in general and assumes
(unless specifically provided otherwise) that you are a holder of our common
stock on the record date. If you hold your shares in a brokerage account or
through a dealer or other nominee, please see "--Instructions to Nominee
Holders" below.
BEFORE DECIDING WHETHER TO EXERCISE YOUR RIGHTS, YOU SHOULD READ
CAREFULLY THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH UNDER "RISK
FACTORS," BEGINNING ON PAGE 9.
THE RIGHTS
We are distributing non-transferable rights to shareholders who owned
shares of our common stock on September 15, 2000, at no cost to the
shareholders. We will give you 0.323 rights for each share of common stock that
you owned on September 15, 2000. Each whole right will entitle you to purchase
one share of our common stock for $1.25.
We will not issue fractional rights or fractional shares. If the number
of shares of common stock you held on the record date would result in your
receipt of fractional rights, the number of rights issued to you is being
rounded down to the nearest whole right. As a result, our shareholders of record
that held fewer than four shares as of September 15, 2000 are not receiving
rights.
If you wish to exercise your rights, you must do so before 5:00 p.m.,
New York City time, on , 2000. After that date, the rights will
expire and will no longer be exercisable.
Unless we decide to issue uncertificated shares in the rights offering,
you will receive certificates representing the shares of our common stock that
you purchase pursuant to the exercise of your rights as soon as practicable
after , 2000, whether you exercise your rights immediately prior
to that date or earlier.
REASONS FOR THE RIGHTS OFFERING
We have decided it would be in the best interests of our shareholders
to raise money for working capital and general corporate purposes. After review
by our management and Board of Directors, this rights offering was determined to
be the best approach to obtaining such additional money.
Yale T. Dolginow, our Chairman of the Board, President and Chief
Executive Officer, has indicated to us that he intends to exercise all of the
rights granted to him in connection with this rights offering, subject to market
conditions. Other shareholders will have the opportunity to maintain their
percentage ownership in our company by exercising their rights.
21
<PAGE>
NO BOARD RECOMMENDATION TO SHAREHOLDERS
Our Board of Directors does not make any recommendation to you about
whether you should exercise any of your rights. If you do not exercise all of
your rights, you will own a smaller percentage of our total outstanding common
stock after completion of the rights offering. If you exercise your rights, you
risk investment loss on new money invested. We cannot assure you that the $1.25
subscription price will remain at or below the market price for the common stock
during the rights offering, or that anyone purchasing shares of our common stock
will be able to sell those shares in the future at a higher price.
EXPIRATION DATE
The rights expire at 5:00 p.m., New York City time, on ,
2000, unless we extend it, in our sole discretion. After that time, your
rights will no longer be exercisable.
In order to exercise your rights in a timely manner, you must assure
that the subscription agent actually receives, prior to expiration date, the
properly executed and completed rights certificate (or form of "notice of
guaranteed delivery"), together with full payment for all shares you wish to
purchase.
DETERMINATION OF SUBSCRIPTION PRICE
The subscription price is $1.25 per share subscribed for, payable in
cash. Our Board of Directors, excluding Yale Dolginow and Diane Dolginow,
decided to set the subscription price for this rights offering at $1.25 per
share after considering a variety of factors including:
- the historic and current market price of our common stock,
- general conditions in the securities market, and
- pricing of similar transactions
Because of their interest in this transaction, Yale T. Dolginow, our
Chairman of the Board, President and Chief Executive Officer, and Diane C.
Dolginow, Director, did not participate in the deliberations or decision
regarding the subscription price.
The $1.25 per share subscription price should not be considered an
indication of the actual value of Paper Warehouse or our common stock. We cannot
assure you that the market price of our common stock will not decline during the
rights offering. We also cannot assure you that you will be able to sell shares
of our common stock purchased during the rights offering at a price equal to or
greater than $1.25 per share.
NON-TRANSFERABILITY OF RIGHTS
The rights are non-transferable which means that only you may exercise
them. You may not sell, give away or otherwise transfer your rights to anyone.
22
<PAGE>
TRANSFERABILITY OF SHARES
Shares of our common stock issued in connection with this rights
offering will be registered under the federal securities laws. Therefore, these
shares of our common stock may be sold freely after the rights offering, subject
to restrictions on our affiliates.
SUBSCRIPTION AGENT
Wells Fargo Bank Minnesota, N.A. is acting as the subscription agent
for the rights offering under an agreement with us. All rights certificates,
payments of the subscription price, nominee holder certifications and notices of
guaranteed delivery, to the extent applicable to your exercise of rights, must
be delivered to Wells Fargo Bank Minnesota, N.A. as follows:
<TABLE>
<CAPTION>
IF BY MAIL: IF BY OVERNIGHT COURIER OR HAND DELIVERY:
<S> <C>
Wells Fargo Shareowner Services Wells Fargo Shareowner Services
Reorganization Department Reorganization Department
Wells Fargo Bank Minnesota, N.A. Wells Fargo Bank Minnesota, N.A.
P.O. Box 64858 161 North Concord Exchange
St. Paul, MN 55164-0858 South St. Paul, MN 55075
</TABLE>
We will pay the fees and expenses of Wells Fargo Bank Minnesota, N.A.
We have also agreed to indemnify Wells Fargo Bank Minnesota, N.A. against
certain liabilities in connection with the rights offering.
EXERCISE OF RIGHTS
You may exercise your rights by delivering to the subscription agent,
at the address specified above, at or prior to expiration date:
- the properly completed and executed rights certificate(s) which
evidence your rights, and
- payment in full of the subscription price for each share you wish to
purchase upon exercise of your rights.
PLEASE DO NOT SEND RIGHTS CERTIFICATES OR RELATED FORMS TO US. PLEASE
SEND THE PROPERLY COMPLETED AND EXECUTED FORM OF RIGHTS CERTIFICATE WITH FULL
PAYMENT TO THE SUBSCRIPTION AGENT AT THE ADDRESS SPECIFIED ABOVE.
You should read carefully the forms of rights certificate and related
instructions and forms which accompany this prospectus. You should call the
subscription agent (1-800-380-1372) promptly with any questions you may have.
METHOD OF PAYMENT
Payment for the shares must be made by:
- certified or cashier's check drawn upon a U.S. bank, personal check, a
U.S. postal money order payable to "Wells Fargo Bank Minnesota, N.A.,
as subscription agent" or
23
<PAGE>
- wire transfer of immediately available funds.
Payment will be deemed to have been received by the subscription agent
only upon clearance of any uncertified check or receipt by the subscription
agent of any certified or cashier's check drawn upon U.S. bank, any U.S. postal
money order or any funds transferred by wire transfers. PLEASE NOTE THAT FUNDS
PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR. ACCORDINGLY, IF YOU WISH TO PAY BY MEANS OF AN UNCERTIFIED PERSONAL
CHECK, WE URGE YOU TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF
, 2000, TO ENSURE THAT THE PAYMENT IS RECEIVED AND CLEARS
BEFORE THAT DATE. WE ALSO URGE YOU TO CONSIDER PAYMENT BY MEANS OF A CERTIFIED
OR CASHIER'S CHECK OR MONEY ORDER.
GUARANTEED DELIVERY PROCEDURES
If you want to exercise your rights, but time will not permit
your rights certificate to reach the subscription agent on or prior to
, 2000, you may exercise your rights if you satisfy the following
guaranteed delivery procedures:
- You send, and the subscription agent receives, payment in full for each
share of common stock being subscribed for through the exercise of your
rights, on or prior to , 2000;
- You send, and the subscription agent receives, on or prior to
, 2000, a notice of guaranteed delivery, substantially in
the form provided with the attached instructions, from a member firm of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States. The notice
of guaranteed delivery must state your name, the number of rights that you
hold and the number of shares of common stock that you wish to purchase
upon exercise of your rights. The notice of guaranteed delivery must
guarantee the delivery of your rights certificate to the subscription
agent within three Nasdaq SmallCap Market trading days following the
date of the notice of guaranteed delivery; and
- You send, and the subscription agent receives, your properly completed
and duly executed rights certificate, including any required signature
guarantees, within three Nasdaq SmallCap Market trading days following the
date of your notice of guaranteed delivery. The notice of guaranteed
delivery may be delivered to the subscription agent in the same manner as
your rights certificate at the addresses set forth under the heading
"Subscription Agent," or may be transmitted to the subscription agent by
facsimile transmission, to facsimile number (651) 450-4163. You can obtain
additional copies of the form of notice of guaranteed delivery by
requesting them from the subscription agent at the address set forth under
the heading "Subscription Agent."
SIGNATURE GUARANTEES
Signatures on the rights certificate do not need to be guaranteed if
either:
- the rights certificate provides that the shares of common stock to be
purchased are to be delivered directly to the record owner of such
rights, or
- the rights certificate is submitted for the account of a member firm
of a registered national securities exchange or a member of the
National Association of Securities
24
<PAGE>
Dealers, Inc., or a commercial bank or trust company having an office
or correspondent in the United States.
If your signature on your rights certificate must be guaranteed, then
it must be guaranteed by an "eligible guarantor institution," as defined in Rule
17Ad-15 of the Securities Exchange Act of 1934, as amended, subject to the
standards and procedures adopted by the subscription agent. Eligible guarantor
institutions include banks, trust companies, brokers, dealers, credit unions,
national securities exchanges and savings associations.
INSTRUCTIONS TO NOMINEE HOLDERS
If you hold shares of our common stock for the account of others, such
as a broker, bank, trustee or depository for securities or other nominee, you
should contact the beneficial owners as soon as possible to obtain instructions
and related certifications concerning their rights. Our request to you is
further explained in the suggested form of letter of instructions from nominee
holders to beneficial owners accompanying this prospectus. To the extent so
instructed, nominee holders should complete appropriate rights certificates on
behalf of beneficial owners and submit them on a timely basis to the
subscription agent with the proper payment.
INCOMPLETE FORMS; INSUFFICIENT OR EXCESS PAYMENT
If you do not indicate the number of rights being exercised, or do not
forward sufficient payment for the number of rights that you indicate are being
exercised, then we are entitled to accept the subscription forms and payment for
the maximum number of rights that may be exercised based on the actual payment
delivered. We will return any payment not applied to the purchase of shares
under the rights offering procedures to those who made these payments as soon as
practicable by mail. Interest will not be payable on amounts refunded.
PROHIBITION ON FRACTIONAL SHARES
Each whole right entitles you to purchase one share of our common stock
at the subscription price of $1.25 per share. We will not issue fractional
rights or fractional shares. We will accept any inadvertent subscription
indicating a purchase of fractional shares by rounding down to the nearest whole
share and, as soon as practicable, refunding without interest any payment
received for a fractional share.
HOW PROCEDURAL AND OTHER QUESTIONS ARE RESOLVED
We are entitled to determine all questions concerning the timeliness,
validity, form and eligibility of any exercise of rights. This determination
will be final and binding. We, in our sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as we may determine, or reject the purported exercise or any right because
of any defect or irregularity.
Rights certificates will not be considered received or accepted until
all irregularities have been waived or cured within such time as we determine,
in our sole discretion. Neither we nor the subscription agent has any duty to
give notification of any defect or irregularity in connection with the
submission of rights certificates or any other required document. Neither we nor
the subscription agent will incur any liability for failure to give such
notification.
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<PAGE>
We reserve the right to reject any exercise of rights if the exercise
does not comply with the terms of the rights offering or is not in proper form
or if exercise of rights would be unlawful or materially burdensome.
NO REVOCATION
Once you have exercised your rights, you may not revoke or change your
exercise.
FOREIGN AND UNKNOWN ADDRESSES
We are not mailing rights certificates to shareholders whose addresses
are outside the United States or who have an APO or FPO address. In those cases,
the rights certificates will be held by Wells Fargo Bank Minnesota, N.A. for
those shareholders. To exercise their rights, these shareholders must notify
Wells Fargo Bank Minnesota, N.A. prior to 11:00 a.m., New York City time, on the
third business day prior to the expiration date.
RIGHT TO BLOCK EXERCISE DUE TO REGULATORY ISSUES
We reserve the right to refuse the exercise of rights by any holder of
rights who would, in our opinion, be required to obtain prior clearance or
approval from any state, federal or foreign regulatory authorities for the
exercise of rights or ownership of additional shares, if, at the expiration
date, this clearance or approval has not been obtained. We are not undertaking
to pay for any expenses incurred in seeking that clearance or approval.
We are not offering or selling, or soliciting any purchase of, rights
or underlying shares in any state or other jurisdiction in which this is not
permitted. We reserve the right to delay the commencement of the rights offering
in certain states or other jurisdictions if necessary to comply with local laws.
However, we may elect not to offer rights to residents of any state or other
jurisdiction whose law would require a change in the rights offering in order to
carry out the rights offering in that state or jurisdiction.
WITHDRAWAL, AMENDMENT AND EXTENSION
We reserve the right to withdraw, amend or extend the rights offering
at any time prior to the expiration date and for any reason, including a change
in the market price of our common stock. If we withdraw the rights offering, we
will return all funds received in the rights offering to those persons who
subscribed for shares in the rights offering. We will not, however, pay any
interest on these funds.
ISSUANCE OF STOCK CERTIFICATES
Unless we decide to issue uncertificated shares for the common stock
purchased in the rights offering, we will issue stock certificates for shares
purchased in the rights offering as soon as practicable after the expiration
date. The subscription agent will deliver subscription payments to us only after
consummation of the rights offering and the issuance of stock certificates to,
or a book-entry for, those exercising rights.
If you exercise rights, you will have no rights as a shareholder until
certificates representing shares you purchased are issued or a book-entry has
been made on the records of the subscription agent. Unless you instruct
otherwise in your rights certificate, shares purchased by the exercise of rights
will be registered in the name of the person exercising the rights.
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<PAGE>
EXPENSES OF THE RIGHTS OFFERING
We will pay from the net proceeds of the rights offering or our
available cash balances all of our incurred expenses of this offering which we
estimate will be approximately $64,000.
QUESTIONS AND ASSISTANCE CONCERNING THE RIGHTS
You should direct any questions or requests for assistance concerning
the method of exercising rights or requests for additional copies of this
prospectus or any of the enclosed forms:
Wells Fargo Bank Minnesota, N.A.
Wells Fargo Shareowner Services
Reorganization Department
Wells Fargo Bank Minnesota, N.A.
P.O. Box 64858
St. Paul, MN 55164-0858
1-800-380-1372
27
<PAGE>
BUSINESS
Paper Warehouse is a growing chain of retail stores specializing in
party supplies and paper goods. As of July 28, 2000, we had 146 stores,
including 99 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:
<TABLE>
<S> <C> <C>
- Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- Oklahoma City/Tulsa, OK - Des Moines, IA - Seattle, WA
- Tucson, AZ - Omaha, NE
</TABLE>
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:
<TABLE>
<CAPTION>
CELEBRATORY OCCASIONS AND EVERYDAY USES SEASONAL EVENTS
<S> <C> <C>
- birthdays - Valentine's Day - Halloween
- weddings - Easter - Christmas
- baby showers - Fourth of July - Hanukkah
- graduations - Thanksgiving - New Year's
- other family and religious celebrations
</TABLE>
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.
Our executive offices are located at 7630 Excelsior Boulevard,
Minneapolis, Minnesota 55426, and our telephone number is (952) 936-1000. Our
web site address is HTTP://WWW.PAPERWAREHOUSE.COM. Our web site and the
information contained on that site, or connected to that site, are not
incorporated into and do not constitute a part of this prospectus.
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 99
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
28
<PAGE>
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 99 company-owned
stores, 30 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; and
- develop customers' preference for us over our competitors.
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; and
- 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.
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<PAGE>
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.
Paper Warehouse stores are typically open:
<TABLE>
<S> <C>
Monday through Friday.................................... 9:00 a.m. to 9:00 p.m.
Saturday................................................. 9:00 a.m. to 6:00 p.m.
Sunday................................................... 11:30 a.m. to 5:00 p.m.
</TABLE>
SITE SELECTION AND LOCATIONS
SITE SELECTION. In order to select the optimal location for our
stores, we use a site selection process that considers various criteria,
including:
- population density;
- demographics, including age and income;
- parking availability;
30
<PAGE>
- storefront visibility and presence;
- local competition;
- traffic counts; and
- 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 July 28, 2000, we had 99 company-owned stores in the
following states:
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Arizona.............................................................. 4
Colorado............................................................. 14
Iowa................................................................. 6
Kansas/Missouri...................................................... 18
Minnesota............................................................ 28
Nebraska............................................................. 2
Oklahoma............................................................. 13
Washington........................................................... 13
Wisconsin............................................................ 1
----
Total Company-Owned Stores........................................... 99
====
</TABLE>
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.
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:
<TABLE>
<S> <C> <C> <C> <C> <C>
- invitations - plates - napkins - party favors - streamers - giftware
- banners - candles - balloons - party snacks - candy - seasonal novelties
</TABLE>
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,
31
<PAGE>
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 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, Des Moines, Kansas City,
Oklahoma City, Omaha, Tucson, and Seattle, for the separation and redistribution
of products to other stores within that market. We maintain a small
32
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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.
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
33
<PAGE>
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 web site, 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 web site 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 web site;
- preview our store to learn more about our history, products and
services; and
- 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 web site 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 web site was far in excess of our available financial resources. In
addition, we identified several navigational and other underlying coding errors
in our web site that made it difficult for shoppers to find our web site and
inhibited purchases from occurring on our web site. Due to these issues, we
questioned whether the asset value of our web site, 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 value. We intend to keep this
distribution channel active, but on a smaller scale. Our web site continues to
be operational, but we have taken the following steps to minimize our financial
exposure:
- we have appointed an on-site web master;
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<PAGE>
- our strategic partner has fixed the navigational problems at no cost
to the company;
- our experienced merchandise team will continue to merchandise the web
store; and
- we have moved fulfillment (processing and shipping of orders) and it
is now 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 July 28, 2000, we had 37 franchisees operating 47 franchise
stores located in the following states:
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Arizona......................................................... 1
Colorado........................................................ 6
Florida......................................................... 1
Georgia......................................................... 1
Illinois........................................................ 2
Iowa............................................................ 2
Kansas.......................................................... 2
Kentucky........................................................ 1
Louisiana....................................................... 4
Maryland........................................................ 1
Minnesota....................................................... 1
Mississippi..................................................... 1
Missouri........................................................ 1
Montana......................................................... 3
Nebraska........................................................ 3
Nevada.......................................................... 1
North Dakota.................................................... 4
South Dakota.................................................... 5
Tennessee....................................................... 1
Texas........................................................... 4
Wyoming......................................................... 2
----
Total Franchise Stores.......................................... 47
====
</TABLE>
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.
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;
35
<PAGE>
- fixtures, equipment, supplies and inventory procurement;
- opening advertising materials; and
- 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; and
- other Internet retailers.
Four other party goods retailers 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;
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<PAGE>
- 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; and
- 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.
EMPLOYEES
As of July 28, 2000, we employed approximately 360 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.
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.
37
<PAGE>
We lease a 22,000 square foot building in a suburb of Minneapolis,
Minnesota for warehouse space. We lease all the locations for our 99
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.
PLAN OF DISTRIBUTION
On or about, 2000, we will distribute the rights and
copies of this prospectus to individuals who owned shares of common stock on
September 15, 2000. If you wish to exercise your rights and purchase shares
of our common stock at the subscription price of $1.25 per share, you should
complete the rights certificate and return it, along with payment for the
shares, to the subscription agent, Wells Fargo Bank Minnesota, N.A., at the
address on page 23. See "The Rights Offering--Exercise of Subscription
Rights."
Yale T. Dolginow, our Chairman of the Board, President and Chief
Executive Officer, has indicated to us that he intends to exercise all of the
rights he will be granted in connection with this offering, subject to market
conditions, which means that we will issue to Mr. Dolginow 619,011 shares in
connection with this rights offering.
We have agreed to pay the subscription agent a fee of $4,000 plus
certain expenses. We have not employed any brokers, dealers or underwriters in
connection with the solicitation of exercise of rights. Except as described in
this section, we are not paying any other commissions, fees or discounts in
connection with the rights offering. Some of our employees may solicit responses
from you as a holder of rights, but we will not pay our employees any
commissions or compensation for these services other than their normal
employment compensation. We estimate that our total expenses in connection with
the rights offering will be $64,000.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section discusses the material U.S. federal income tax
consequences of the rights offering to:
- beneficial owners of the common stock upon distribution of the
rights, and
- holders of rights upon exercise of the rights.
The discussion is based on the Internal Revenue Code of 1986, as amended, the
Treasury regulations promulgated thereunder, judicial authority, and current
administrative rulings and practice, all of which are subject to change
prospectively or retroactively. We have not sought, nor do we intend to seek,
any ruling from the Internal Revenue Service or an opinion of counsel related
to the tax matters described below.
The discussion is limited to U.S. taxpayers who hold common stock,
and who will hold the rights and any shares acquired upon the exercise of the
rights as capital assets, which are generally property held for investment.
The discussion does not include any tax consequences under state, local or
foreign law. Because the rights are non-transferable, no discussion is made
of the tax consequences associated with the purchase, sale or transfer of
rights. Financial institutions, broker-dealers, nominee holders of
38
<PAGE>
common stock or rights, life insurance companies, tax-exempt organizations,
foreign persons and possibly other types of taxpayers may be subject to special
provisions of the tax law or subject to other tax considerations not discussed
below.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THEIR OWN
RESPECTIVE TAX SITUATIONS OR SPECIAL TAX CONSIDERATIONS THAT MAY APPLY TO THEM,
INCLUDING WITHOUT LIMITATION FOREIGN, STATE AND LOCAL LAWS THAT MAY APPLY.
DISTRIBUTION OF THE RIGHTS
Owners of our common stock will not recognize taxable income solely as
a result of the distribution of the rights.
BASIS AND HOLDING PERIOD OF THE RIGHTS
The tax basis of the rights to a recipient shareholder will be zero,
assuming the following exceptions do not apply. If, however, either:
- the fair market value of the rights on the date of distribution
is 15% or more of the fair market value (on the date of
distribution) of the common stock held by the shareholder, or
- the shareholder elects (pursuant to Internal Revenue Code Section
307(b)(2) and the related Treasury regulations) to allocate the
shareholder's basis in common stock to the rights, which election
must be made in the shareholder's federal income tax return for
the taxable year in which the rights are received,
then, upon exercise of the rights, the shareholder's basis in such common stock
will be allocated between the common stock and the rights in proportion to the
relative fair market values of the common stock and the rights on the date of
distribution.
The holding period of a shareholder with respect to the rights received
as a distribution on such shareholder's common stock will include the
shareholder's holding period for the common stock with respect to which the
rights were distributed.
EXERCISE OF THE RIGHTS AND BASIS AND HOLDING PERIOD OF THE ACQUIRED SHARES
Holders of rights will not recognize any gain or loss upon exercise of
the rights. The basis of the shares acquired through exercise of the rights will
be equal to the sum of the subscription price for the rights exercised and the
holder's basis in such rights (if any). The holding period for the shares
acquired through exercise of the rights will begin on the date the rights are
exercised.
SALE OF THE ACQUIRED SHARES
An owner of shares acquired by exercise of the rights will recognize
gain or loss upon the sale of their shares in an amount equal to the
difference between the amount realized by the shareholder on such sale and
the shareholder's basis in the shares. The gain or loss so recognized will be
long-term or short-term capital gain or loss, depending on whether the shares
have been held for more than one year after exercise of the rights, assuming
the shareholder held the shares as a capital asset.
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<PAGE>
LAPSE OF THE RIGHTS
If the rights expire unexercised, the holder of such rights will not
recognize any loss, and no adjustment will be made to the basis of the common
stock, if any, owned by such holders.
INFORMATION REPORTING AND BACKUP WITHHOLDING
If a holder receives any reportable payment pursuant to the rights
offering, the holder may be subject to backup withholding at the rate of 31% on
such payments unless the holder:
- is a corporation or is otherwise exempt and demonstrates the
basis for the exemption if so required, or
- provides a correct taxpayer identification number and certifies
under penalties of perjury that the taxpayer identification
number is correct and that the holder is not subject to backup
withholding
Any amount withheld under these rules will be credited against such holder's
federal income tax liability, if any. We may require holders to establish their
exemptions from backup withholding or to arrange for payment of backup
withholding.
LEGAL MATTERS
Certain legal matters in connection with this rights offering will be
passed upon for us by Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Paper Warehouse, Inc. as of
January 28, 2000 and for the year then ended January 28, 2000 have been
incorporated by reference in this prospectus and included elsewhere in this
registration statement in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, incorporated by reference in this
prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Paper Warehouse, Inc. as of
January 29, 1999, and for each of the years in the two-year period ended January
29, 1999 have been incorporated by reference in this prospectus and included
elsewhere in this registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference in this
prospectus, and upon the authority of said firm as experts in accounting and
auditing.
40
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses in connection with the issuance
and distribution of the securities being registered. All amounts shown are
estimated, except the SEC registration fee.
SEC registration fee.................................... $495
Nasdaq listing fees..................................... 15,000
Subscription agent fees and expenses.................... 4,000
Legal fees and expenses................................. 15,000
Accounting fees......................................... 14,000
Printing and mailing expenses........................... 4,000
Miscellaneous........................................... 11,505
-------
Total............................................... $64,000
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Amended and Restated Articles of Incorporation limit the liability
of our directors to the fullest extent permitted by law. Specifically, our
directors will not be personally liable for monetary damages for breach of the
fiduciary duty as directors, except for liability for:
- any breach of the director's duty of loyalty to us or our
shareholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- corporate distributions which are in contravention of
restrictions in the Minnesota Business Corporation Act, our
Articles or Bylaws, or any agreement to which we are a party;
- violations of Minnesota securities laws;
- any transaction from which the director derives an improper
personal benefit; or
- any act or omission occurring before the effective date of the
provision in our Articles eliminating or limiting liability.
This provision will generally not limit liability under state or federal
securities law.
Section 302A.521 of the Minnesota Business Corporation Act provides
that a Minnesota business corporation must indemnify any director, officer,
employee or agent of the corporation made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity (as defined) of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of the corporation. Section
302A.521 of the Minnesota Business Corporation Act contains detailed terms
regarding this right of indemnification and reference is made thereto for a
complete statement of these indemnification rights.
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<PAGE>
Article 6 of our Bylaws provides that each of our directors, officers
and employees will be indemnified by us in accordance with, and to the fullest
extent permissible by, applicable law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC this indemnification is against public policy as expressed in the
Securities Act, and is therefore unenforceable.
ITEM 16. EXHIBITS.
A list of the exhibits included as part of this registration statement
is set forth in the Exhibit Index that immediately precedes such exhibits and is
incorporated herein by this reference.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are inapplicable or the required information has otherwise been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (1) (i) and (ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(5) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on August 31, 2000.
PAPER WAREHOUSE, INC.
By: /s/ Yale T. Dolginow
----------------------------------------
Yale T. Dolginow
President and Chief Executive Officer
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<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Yale
T. Dolginow and Cheryl W. Newell, and each of them, his or her true and lawful
attorney-in-fact and agent with full powers of substitution and resubstitution,
for and in his or her name, place and stead, in any and all capacities, to sign
any or all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on August 31, 2000 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Yale T. Dolginow Chairman of the Board, President and Chief Executive
----------------------------------------
Yale T. Dolginow Officer (principal executive officer)
/s/ Diane C. Dolginow Director and Secretary
----------------------------------------
Diane C. Dolginow
/s/ Arthur H. Cobb Director
----------------------------------------
Arthur H. Cobb
/s/ Marvin W. Goldstein Director
----------------------------------------
Marvin W. Goldstein
/s/ Jeffery S. Halpern Director
----------------------------------------
Jeffery S. Halpern
/s/ Martin A. Mayer Director
----------------------------------------
Martin A. Mayer
/s/ Richard W. Perkins Director
----------------------------------------
Richard W. Perkins
/s/ Cheryl W. Newell Vice President and Chief Financial Officer
---------------------------------------- (principal financial officer)
Cheryl W. Newell
/s/ Diana G. Purcel Controller (principal accounting officer)
----------------------------------------
Diana G. Purcel
</TABLE>
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<S> <C> <C>
4.1 Form of Rights Certificate ................................... Filed herewith
5.1 Opinion and Consent of Oppenheimer Wolff &
Donnelly LLP.................................................. Filed herewith
23.1 Consent of Oppenheimer Wolff & Donnelly LLP................... Included in Exhibit 5.1.
23.2 Consent of Grant Thornton LLP................................. Filed herewith
23.3 Consent of KPMG LLP........................................... Filed herewith
24.1 Powers of Attorney............................................ Included on signature page of this
registration statement.
99.1 Form of Instructions as to Use of Rights Certificate.......... Filed herewith
99.2 Form of Notice of Guaranteed Delivery......................... Filed herewith
99.3 Form of Letter to Shareholders of Record...................... Filed herewith
99.4 Form of Letter to Securities Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees..................... Filed herewith
99.5 Form of Letter to Clients and Instructions by Beneficial Owners
to Brokers or Other Nominees.................................. Filed herewith
</TABLE>
II-6
