Party
Supplies. We offer an extensive selection of complementary
and coordinating party supplies in unique and traditional patterns, colors and
designs. Our party supplies include:
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invitations
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plates
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napkins
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party favors
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streamers
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giftware
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banners
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candles
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balloons
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party snacks
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candy
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seasonal novelties
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We
typically offer, in our 8,500 square foot prototype, over 120 ensembles of
everyday and seasonal party goods for many occasions, which include party hats,
plates, napkins and cups. A significant
portion of our juvenile party goods ensembles involves the use of movie and
television figures, animated characters and celebrity likenesses licensed to
the manufacturer of these ensembles.
Gift
Wrapping Products. We offer a wide assortment of everyday and
seasonal gift wrapping products in various patterns and colors, including
gift-wrap, gift bags, gift boxes, tissue paper, ribbons, bows, shred, gift tags
and tape. In addition to holiday
selections, we offer distinctive gift packaging products for special occasions
such as birthdays, graduations, weddings, baby showers and other family and religious
celebrations.
Greeting
Cards. We feature a wide variety of special occasion,
seasonal and everyday greeting cards under the Ambassador brand of
Hallmark. In our 8,500 square foot
prototype store, we offer over 10,000 traditional, humorous and contemporary
style 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 these products 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 everyday and seasonal merchandise from approximately 230
suppliers. During fiscal 2000, our
largest supplier, Amscan Holdings, Inc., accounted for approximately 17% of our
purchases and our 5 largest suppliers represented approximately 53% of our
purchases. We recently announced a
multi-year partnership with Hallmark Cards, Inc., in which they will be the
exclusive supplier of greeting cards for our Company-owned and franchise
stores. As a result of this
partnership, we have a contractual obligation for chain-wide purchases of $37.0
million of greeting cards and gift-wrap.
We estimate that these purchase commitments will be fulfilled over a
five to seven year period. With the
exception of the agreement with Hallmark, we do not have any long-term purchase
commitments or exclusive contracts with any of our other 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 and carry product not available from domestic
suppliers. We utilize some of the
stores in our markets for the separation and redistribution of products to
other stores within that market. We
maintain a relatively small cross-dock facility 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
seasons. For fiscal 2000, we
distributed 15 newspaper and direct mail inserts, with two of them running in
limited markets only. 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 certain
institutional customers, we offer an organizational discount of 15% off of
purchases in excess of $50.00.
For
fiscal 2000, we spent approximately 65% of our marketing budget on full color
newspaper and direct mail inserts, approximately 25% for radio advertising and
the remainder on yellow pages advertising, in-store sales promotions and other
miscellaneous advertising expenses.
Information Systems
We
have invested significantly in building a strong information systems
infrastructure, as we believe that the strength of this infrastructure is
essential to our current operations, and is critical towards enhancing our
competitive position in the industry.
Our current 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.
During
fiscal year 2000, we began to roll out “POS Smart” to some of our stores as a
test pilot. “POS Smart” is a project
designed to improve communication between the stores and the corporate office
in order to enhance receiving processes, provide timely electronic
communication between the corporate office and the stores and improve other
back-office processes at the stores.
Some of the initiatives that we had planned to implement during fiscal
2000, such as electronic data interchange, which will allow us to
systematically manage inventory processes and improve order accuracy, and data
warehousing, which will improve our ability to analyze and report results, were
put on hold until fiscal 2001. During
fiscal year 2001, in addition to implementing data warehousing and electronic
data interchange, we plan to roll out “POS Smart” to the remainder of our store
base.
Internet and E-commerce
In
an effort to increase our sales and strengthen our name recognition, in 1999 we
developed and launched our Internet website, PartySmart.com,
to sell party supplies and paper goods over the Internet. We believe that this site is an additional
distribution channel for consumers who want to purchase party or theme products
on-line, and it is a critical information tool for consumers who want party
planning advice or who want to identify the nearest Paper Warehouse or Party
Universe location. 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 unique themes and
product offerings that match the current season, such as Halloween and
Christmas. Our website allows our
customers to, among other things:
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put
together an entire party
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obtain
party advice, ideas and tips
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pay
for everything at one time at a check-out screen
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check
on the status of orders that have already been placed
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contact
customer service about the products and services available on our website
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preview
our store to learn more about our history, products and services
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obtain
information about us, such as store locations, franchising opportunities,
investor relations and career opportunities
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The
financial results of PartySmart.com,
launched in September 1999, have been disappointing. After its launch, and as fiscal 1999 progressed, we realized that
the website sales were not meeting our expectations and losses were greater
than had been initially anticipated. In
addition, as we gained greater experience in the e-commerce field, the
competitive advertising environment changed, and we determined that the amount
of advertising necessary to provide adequate visibility to our website was far
in excess of our available financial resources. Furthermore, during the fourth quarter of fiscal 1999, we
identified several navigational problems and embedded coding errors in our
website that made it difficult for shoppers to find our website and inhibited
purchases from occurring on our website.
Due to these issues, we questioned whether the asset value of our
website, consisting primarily of capitalized internally developed software
costs, was fully recoverable, and during the fourth quarter of fiscal 1999 we
hired an outside firm to perform an appraisal.
As a result of this appraisal, we recorded a pre-tax impairment charge
of approximately $800,000 to reflect the related assets of PartySmart.com, Inc.
at their fair market value. This charge
is explained in greater detail in Note 4 to our financial statements. As
communicated to our shareholders in our 1999 Annual Report, we have decided to
keep this distribution and information channel active, but on a much smaller
scale.
Our
website was essentially under construction through the first half of fiscal
2000, and the navigational and coding errors that earlier were identified, were
corrected by an outside firm at little to no cost to us. In addition, during fiscal 2000 we took the
following steps to minimize our ongoing financial exposure with regard to our
website:
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we
appointed a full-time on-site web master
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we
brought the Internet server application “in-house”
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we
moved fulfillment (processing and shipping of orders) “in-house” to our
12,100 square foot Maple Grove, Minnesota location.
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Looking
forward, we believe that E-commerce can be an important information tool and a
successful distribution channel for us.
However, we will continue to evaluate the website’s contributions to
ensure that they are aligned with our overall goals and objectives.
Franchising
We
have offered franchises of our Paper Warehouse store concept since October
1987. As of February 2, 2001, we had 35
franchisees operating 49 franchise stores located in the following states:
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Number
of Stores
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Arizona
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1
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Colorado
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6
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Florida
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1
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Georgia
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1
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Illinois
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2
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Iowa
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2
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Kansas
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2
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Kentucky
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1
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Louisiana
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4
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Maryland
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1
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Massachusetts
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1
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Minnesota
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1
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Mississippi
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1
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Missouri
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1
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Montana
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3
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Nebraska
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3
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Nevada
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1
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North
Dakota
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4
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South
Dakota
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5
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Tennessee
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1
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Texas
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5
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Wyoming
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2
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Total
Franchise Stores
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49
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We
typically establish franchise stores in markets outside of metropolitan areas
with Company-owned stores. 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
• fixtures, equipment, supplies and inventory procurement
• opening advertising materials
• operations training
We
make available to our franchisees, services such as business planning,
operations and promotional activities.
In addition, we perform the merchandising process for our
franchisees. We make periodic
inspections of the franchise stores to ensure that the franchisee is complying
with our various requirements and quality standards. We may, in the future, enter into multiple store development
agreements with franchisees granting them certain exclusive rights to develop
stores in specified markets, so long as the franchisee meets a stated
development schedule and complies with other provisions of the development
agreement and the franchise agreement.
Our
franchise revenues are comprised of initial franchise fees and continuing
royalty payments. Our current initial
franchise fee ranges from $19,000 to $25,000 for new franchisees, depending on
the type of store. We may offer a
discounted 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, point of sale 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:
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specialty
party supply retailers
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other
party superstores such as Party City and Factory Card Outlet
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card
shops such as Hallmark
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designated
departments in mass merchandisers, discount retailers, toy stores, drug
stores, supermarkets and department stores
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other
Internet retailers
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Two
of our major competitors continue to have significant financial
difficulties. We believe the following
factors distinguish our business from these competitors:
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we
have grown our number of stores in a more controlled manner
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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
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we
have a strong dedicated senior management team and board of directors with
significant retail experience
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Trademarks and Service Marks
We
use the marks Paper Warehouse, Party Universe and Party Smart, all of which are 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.
Seasonality
Our
results of operations have historically fluctuated from quarter to quarter
because of variations in revenues and operating expenses. We generate a significant portion of our
operating income in our second and fourth fiscal quarters because of seasonal
events. Any factor that negatively
affects our revenues or increases our operating expenses during the second and
fourth fiscal quarters could negatively affect our annual results of
operations. As a result of the
seasonality of our revenues, we expect to incur a loss in the first quarter of
each year for the foreseeable future.
Although we typically realize strong sales during the third quarter, due
to increased promotional activities, we have historically experienced reduced
operating income for this quarter.
Our
results of operations also fluctuate from quarter to quarter as a result of the
following:
• the timing of new store openings, remodels
or relocations
• costs associated with new store openings,
remodels or relocations
• expenses incurred to support our expansion
strategy
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 February 2, 2001, we employed approximately 350 full-time and approximately
990 part-time employees. We consider
our relationships with our employees to be good. None of our employees are covered by a collective bargaining
agreement.
(d)
Financial Information About Geographic Areas
Since
inception, all of our revenues have been derived from, and all of our assets
have been located in, the United States.
Item 1A. CAUTIONARY STATEMENT REGARDING FUTURE
RESULTS, FORWARD-LOOKING INFORMATION AND CERTAIN IMPORTANT FACTORS.
Paper
Warehouse makes written and oral statements from time to time regarding its
business and prospects, such as projections of future performance, statements
of management’s plans and objectives, forecasts of market trends, and other
matters that are forward-looking statements within the meaning of Sections 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of
1934. Statements containing the words
or phrases “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should” or similar
expressions identify forward-looking statements, which may appear in documents,
reports, filings with the Securities and Exchange Commission, news releases,
written or oral presentations made by our officers or other representatives to
analysts, shareholders, investors, news organizations and others, and
discussions with our management and other Company representatives. For such statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
Our
future results, including results related to forward-looking statements,
involve a number of risks and uncertainties.
No assurance can be given that the results reflected in any
forward-looking statements will be achieved.
Any forward-looking statements made by us or on our behalf speak only as
of the date on which such statement is made.
Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to
revision. We do not undertake any
obligation to update or keep current either (i) any forward-looking statement
to reflect events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking statement
which may be made by us or on our behalf.
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time
in any forward-looking statement that may be made by us or on our behalf. Some of these important factors, but not
necessarily all of the important factors, include the following:
We Have Experienced Losses and May Not be Profitable
We
incurred a net loss of $434,000 for fiscal 2000, a net loss of $4.4 million for
fiscal 1999 and a net loss of $521,000 for fiscal 1998. Excluding the $4.0 million pre-tax
repositioning charge recorded in fiscal 1999, we attribute these losses
principally to:
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an
immature store base stemming from the opening of 27 Company-owned stores
during fiscal 1998, 10 of which were franchise stores that we purchased, and
8 Company-owned stores during fiscal 1999
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increases
in competition among party supplies and paper goods retailers in our
geographic markets
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increases
in store labor expenses primarily due to a rise in the average hourly wage
rates and to a lesser degree, additional staff
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increases
in general and administrative expenses to support our store base and to build
our infrastructure
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increases
in interest expense related to increased usage of our revolving
line-of-credit during fiscal 2000, our fiscal 1999 issuance of $4.0 million
convertible subordinated debt in addition to the amortization of deferred
financing costs related to our financing activities
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operational
and start-up costs of our e-commerce business of approximately $1.4 million,
during fiscal 1999, excluding the impairment charge
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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
associated with our net operating loss carryforwards of approximately $3.3
million at February 2, 2001. We may
decide not to benefit any future losses or we may be required to reserve for a
portion of, or write off, these assets.
We May Not Have Sufficient Cash
Available to Operate Our Business
As a result of the continuing
liquidity needs of our business, 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, including paying vendors amounts as they are due. As
a result of a disappointing fiscal 2000 fourth quarter, in which sales were
below expectations, we did not generate the cash cushion we expected, or that
is required, for us to fund our operations into second quarter. In order to provide the liquidity we needed
for operations, we recently negotiated extended terms with several of our
largest vendors. If we are unable to make these payments on such
extended terms, it will be difficult for us to acquire product to remain fully
in-stock, which would have a significant impact on our sales. A substantial portion of our expected cash
from operations will be used for the payment of principal and interest, thereby
reducing cash available for other purposes including operations. In the event that we cannot meet our cash
needs, we may have to recapitalize or sell assets to meet the operating cash
needs.
Our Indebtedness Could Negatively Affect Our Financial
Position
As
of February 2, 2001, we had approximately $13.4 million of borrowings outstanding,
which include amounts outstanding under our revolving line of credit, capital
leases, our mortgage and our subordinated debt. The Company is substantially more leveraged than certain of its
competitors, which might place the Company at a competitive disadvantage. The substantial level of our indebtedness
could:
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impair
our ability to obtain additional financing for operations, capital
expenditures or general corporate purposes
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cause
a substantial portion of our cash flow from operations to be spent on
principal and interest payments
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affect
our ability to fund our operations
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make
us more vulnerable to economic or industry downturns and competitive
pressures
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prevent
us from making interest and principal payments on our debt obligations
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hinder
our ability to adjust to changing market conditions
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prevent
us from meeting certain financial tests contained in our debt obligations,
which could lead to a default on those obligations
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We May Need to Raise Additional Capital to Fund Our
Operations
If the Company is unable to
generate sufficient cash from operations, the Company will be required to adopt
one or more alternatives such as refinancing or restructuring the indebtedness
of the Company, selling assets or seeking to raise additional debt or equity
capital. Financial difficulties of our
competitors and our recent losses may affect our ability to obtain
financing. In addition, other 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
operations, products and services, implement our long-term growth strategy,
take advantage of future opportunities or respond to competitive pressures.
We May be Unable 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 existing or 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.
Our Plans to Remodel and Relocate Stores May Reduce
Profitability
In
fiscal 2001, we plan to remodel five stores and have no current plans to
relocate any stores. Any remodeling or
relocating plan is 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.
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 or 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.
Our
Annual Results Are Significantly Dependent on the Results of Second and Fourth
Quarters
We
generate a significant portion of our operating income in our second and fourth
fiscal quarters because of the seasonality of our revenues and promotional
expenses. Any factor that negatively
affects our revenues or increases our operating expenses during the second and
fourth fiscal quarters could negatively affect our annual results of
operations. As a result of the
seasonality of our revenues, we expect to incur a loss in the first quarter of
fiscal 2001 and for the first quarter of each fiscal year in the foreseeable
future. Although we typically realize
strong sales during the third quarter, due to increased promotional activities,
we have historically experienced a lower level of 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.
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. 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. Any
supplier could discontinue selling to us at any time other than Hallmark Cards,
Inc. with which we have a long-term supply agreement.
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.
We May Move to the NASDAQ Bulletin Board
On
February 1, 2001, the NASDAQ Stock Market notified us that we were not in
compliance with a NASDAQ SmallCap maintenance standard. This standard requires that we maintain at
least a $1.00 minimum bid price. We
have until May 2, 2001 to comply with the maintenance requirement. In order to comply, our common stock must trade
above $1.00 for at least 10 consecutive trading days prior to May 2, 2001. If we do not satisfy this maintenance
requirement before May 2, 2001, we may decide to apply for quotation on the
NASDAQ Bulletin Board, or any other organized market on which our shares may be
eligible for trading, or we may decide to appeal the decision by NASDAQ to
delist our common stock. On April 4,
2001 our Board of Directors approved a one-for-three reverse split of our
common stock. The reverse stock split
was proposed in order to meet the Nasdaq SmallCap market’s maintenance standard
of at least a $1.00 per share minimum bid price. We anticipate that following the reverse stock split, our common
stock will trade at a price that is higher than the $1.00 per share minimum bid
price. However, there can be no
assurance that, after the consummation of the reverse stock split, our common
stock will trade at three times the market price prior to the reverse stock
split or above the $1.00 per share minimum bid price. As of April 25, 2001, the Company’s stock has traded in excess of
$1.00 for seven consecutive days. There
can also be no assurance that we will be able to satisfy the Nasdaq SmallCap
Market’s maintenance requirements on a continuing basis. If our stock does not maintain a price in
excess of $1.49 for 30 consecutive trading days, we will be in violation of the
minimum market value of public float maintenance requirement.
A Failure in Executing Our Franchise Program May Reduce Our
Profitability
Our
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 and Party Universe store
concept. 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 Franchising, Inc., 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
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.
Our Internet Strategy is Not Likely to be Profitable
Although
we have scaled-back the extent of, and minimized our financial exposure to, our
e-commerce venture, operation of the website still requires management’s
ongoing attention and the dedication of our merchandising, accounting and
information systems departments. In
addition, although we have made attempts to minimize the financial impact of
the web store, there are still incremental costs to operate the site. Our website is not likely to generate any
profits and we are not likely to recapture the money invested in our Internet
strategy.
Our
Former Status as an S-Corporation Could Expose Us to Liability
From
February 1993 to November 1997, we operated as an S-Corporation under the
Internal Revenue Code of 1986. In
connection with the completion of our initial public offering, we converted to
a C-Corporation. If the IRS or any state taxing authority were to challenge our
prior S-Corporation status, we could be liable to pay corporate taxes on our
income, at the effective corporate tax rate, for all or a part of the period we
were an S-Corporation, plus interest and possibly penalties.
We Need
to Anticipate and Respond to Merchandising Trends
Our
success depends in part on our ability to anticipate and respond in a timely
manner to changing merchandise trends and consumer demands. We make merchandising decisions well in
advance of the seasons during which we will sell the merchandise. As a result, if we fail to identify and respond
quickly to emerging trends, consumer acceptance of the merchandise in our
stores could diminish, and we may experience a reduction in revenues. We sell certain licensed products that are
in great demand for short time periods, making it difficult to project our
inventory needs for these products.
Significantly greater or less-than-projected product demand,
particularly for our juvenile licensed products, could lead to one or more of
the following:
• lost sales due to insufficient
inventory
• higher carrying costs associated
with slower turning inventory
• higher levels of carryover
merchandise
• reduced or eliminated margins due
to mark downs on excess inventory
ITEM 2. PROPERTIES.
We
own a 23,000 square foot building in a suburb of Minneapolis, Minnesota, in
which our headquarters are located. 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.
We
lease a 23,600 square foot building in a suburb of Minneapolis, Minnesota for
warehouse space. We lease all the
locations for our 98 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.
ITEM 3. LEGAL PROCEEDINGS.
We
are not a party to any material litigation nor are we aware of any threatened
litigation that would have a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No
matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended February 2, 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors, Executive Officers and Other Key Personnel
The
following table contains certain information about our directors and executive
officers as of March 1, 2001:
|
Name
|
Age
|
Position
|
Yale
T. Dolginow
|
58
|
President, Chief
Executive Officer and Chairman of the Board
|
Steven
R. Anderson
|
54
|
Vice President and
Chief Information Officer
|
Steven
P. Durst
|
32
|
Vice President of
Merchandising
|
Cheryl
W. Newell
|
47
|
Vice President and
Chief Financial Officer
|
Arthur
H. Cobb
|
50
|
Director
|
Diane
C. Dolginow
|
57
|
Secretary and Director
|
Marvin
W. Goldstein
|
57
|
Director
|
Jeffrey
S. Halpern
|
58
|
Director
|
Martin
A. Mayer
|
58
|
Director
|
Richard
W. Perkins
|
70
|
Director
|
The
following table contains certain information about our other key personnel as
of March 1, 2001:
|
Name
|
Age
|
Position
|
Michael
A. Anderson
|
40
|
Vice
President of Franchising
|
Kristen
Lenn
|
33
|
Vice President of
Human Resources
|
Willard
V. Lewis
|
64
|
Vice President of
Store Development
|
Carol
A. Nelson
|
50
|
Vice President of
Stores
|
|
Diana
G. Purcel
|
34
|
Vice
President, Controller and Chief Accounting Officer
|
Yale T.
Dolginow has been President,
Chief Executive Officer and a director of the Company since 1986. From 1982 to 1986, Mr. Dolginow served as
President and Chief Executive Officer of Carlson Catalog Showrooms, Inc., which
was a chain of 59 catalog showrooms located throughout the Midwest. From 1981 to 1982, Mr. Dolginow served as
Assistant to the President of Dayton Hudson Corporation, k/n/a Target
Corporation. From 1978 to 1980, Mr.
Dolginow served as President of Modern Merchandising, Inc., a 70-store retail
chain operating in several markets, and as Executive Vice President from 1977
to 1978. From 1968 until 1976, Mr.
Dolginow was the Chief Executive Officer and President of Dolgin’s, Inc., a
chain of catalog showroom stores that operated in the Kansas City and St. Louis
metropolitan markets. Mr. Dolginow is a
director of Richfield Bank & Trust Co. and Bet Shalom Congregation. Mr. Dolginow and Diane C. Dolginow are
husband and wife.
Steven R.
Anderson currently
serves as Vice President and Chief Information Officer of the Company and
joined us in December 1998. From May
1997 until June 1998, Mr. Anderson was Senior Vice President and Chief
Information Officer for County Seat, a publicly held specialty soft goods
retailer. From 1986 to 1997, Mr.
Anderson held a number of information systems positions, including Senior Vice
President and Chief Information Officer at Best Buy Co., a publicly-held
specialty retailer.
Steven P.
Durst
currently serves as Vice President of Merchandising and joined us in 1995. Mr. Durst joined us as Director of
Information Systems, became Vice President of Information Systems in 1997 and
assumed his current position in 1998.
From 1995 to 1997 Mr. Durst served as Director of Information Systems
for the Company. From 1990 to 1995 Mr.
Durst was employed by Exxon Corporation where he performed various engineering
and business planning functions. Mr.
Durst is the son-in-law of Mr. and Mrs. Dolginow.
Cheryl W.
Newell
currently serves as Vice President and Chief Financial Officer and joined us in
August 1997. From 1991 to August 1997,
Ms. Newell was a Vice President with the Corporate Banking Group at U.S.
Bancorp, a bank holding company, responsible for management of desktop
technology, disaster recovery and training and development. From 1986 to 1991,
Ms. Newell was a Vice President with Citicorp, k/n/a Citigroup, a bank holding
company. From 1976 to 1986, Ms. Newell
was a Vice President at Norwest Bank k/n/a Wells Fargo Corporation.
Arthur H.
Cobb has
served as a director since 1992. He is
a consultant and certified public accountant. Since 1975, he has been engaged
in providing financial consulting services and is President of Cobb &
Associates, Ltd. Mr. Cobb was a partner
with Peat Marwick Mitchell & Co., k/n/a KPMG LLP, an international firm of certified
public accountants.
Diane C.
Dolginow currently
serves as our Secretary and a director and joined us in 1986. Ms. Dolginow was a director of Dolgin’s Inc.
from 1968 to 1976, and since 1994 has been a director on the National Advisory
Board of the School of Education at the University of Kansas. Ms. Dolginow and Mr. Dolginow are husband
and wife.
Marvin W.
Goldstein has been a director of
the Company since December 1996. Mr.
Goldstein is currently a private investor.
From April 1997 through August 1997, Mr. Goldstein was Executive Vice
President and Chief Operating Officer of Regis Corp., a national chain of hair
salons. From August 1995 through April
1997, Mr. Goldstein was Chairman of the Board, Chief Executive Officer and
President of Pet Food Warehouse, Inc., a specialty retailer. From February 1988 to September 1994, Mr.
Goldstein served in various positions at the Department Store Division of
Dayton Hudson Corporation, k/n/a/ Target Corporation, including President and
Chief Operating Officer, and Chairman and Chief Executive Officer. Mr. Goldstein is a director, and serves on
the compensation committee, of each of the following companies: Ali-Mac,
A.R.C.A., Inc., Greenspring Company, KBGear, Kidboard, Inc., Red Tag.com, and
Wilson’s The Leather Experts. With the
exception of A.R.C.A., Inc. and Wilson’s The Leather Experts, all of the
foregoing companies are privately held companies.
Jeffrey S.
Halpern has
served as a director since 1997. He has
been Chairman of the Board and Chief Executive Officer of Southwest Casino and
Hotel Corp. since 1993. Mr. Halpern was
a partner in the law firm of Popham, Haik, Schnobrich & Kaufman, Ltd. from
1989 until 1993, and a founding partner of Halpern & Druck from 1980 to
1989.
Martin A.
Mayer has been a director of
the Company since 1992. He has been
President of SCS Management, Inc. since 2000.
From 1992 to 2000, Mr. Mayer was an independent financial consultant. Mr. Mayer was a partner with Peat Marwick
Mitchell & Co., k/n/a KPMG LLP, a public accounting firm, from 1973 until
1992. Mr. Mayer is a certified public
accountant. Mr. Mayer is a director of
Direct III Marketing and American Select, privately-held companies.
Richard W.
Perkins has been a director of
the Company since 2000. Mr. Perkins is
President of Perkins Capital Management, Inc., an investment management company
that he founded in 1984. From 1966 to 1984 he served as a vice president of
Piper Jaffray, k/n/a/ US Bancorp Piper Jaffrey. Mr. Perkins is a Chartered Financial Analyst and a fellow of the
Financial Analysts Federation. Mr.
Perkins is a director and on the compensation committee of Bio-Vascular, Inc.,
CNS, Inc., iNTELFILM Corporation, Lifecore Biomedical, Inc., Nortech Systems, Inc.,
PW Eagle, Inc., and Quantech, Ltd., all public companies. Mr. Perkins is a director of Vital Holdings,
Inc., a public company.
Michael A.
Anderson
currently serves as Vice President of Franchising and joined us in 1991. Mr. Anderson joined us as Controller and
assumed his current position in 1999.
From 1987 to 1991, Mr. Anderson was an accountant at Luri, Eiger,
Besikof & Company, a Minneapolis public accounting firm. From 1982 to 1986, Mr. Anderson was a staff
accountant with Marvin O. Anderson, LPA, a public accounting firm located in
Minnesota.
Kristen
Lenn currently
serves as Vice President of Human Resources and joined us in August 1997. From 1994 to 1997, Ms. Lenn was a Senior
Consultant with McGladrey & Pullen LLP a public accounting firm, and
provided a wide range of human resources services to clients.
Willard V.
Lewis currently
serves as Vice President of Store Development and joined us in 1992. Mr. Lewis joined us as Director of
Development and assumed his current position in 1997. From 1990 to 1992, Mr. Lewis served as Vice President of Network
Facilities Professionals, Inc., a Minnesota-based computer software firm. Mr. Lewis was employed by Dolgin’s, Inc.
from 1970 to 1985.
Carol A.
Nelson
currently serves as Vice President of Stores and joined us in 1994. Ms. Nelson joined us as Director of Stores
and held this position until she assumed her current position in 1997. From 1992 to 1994, Ms. Nelson was Director
of Stores of CBR, Inc., a privately owned retailer, specializing in airport
retail. From 1976 to 1992, Ms. Nelson
served as a District Manager, managing 17 stores in a five-state area, for Best
Products, Inc.
Diana G.
Purcel currently
serves as Vice President, Controller and Chief Accounting Officer and joined us
in April 1999. She is a certified
public accountant. Before joining the
Company and since March 1998, Ms. Purcel was Divisional Controller for
Corporate Planning and Reporting for Damark International, Inc. From 1994 to 1998, Ms. Purcel was a Senior
Analyst with Dayton Hudson Corporation, k/n/a Target Corporation. Prior to joining Dayton Hudson Corporation
and since 1988, Ms. Purcel was a senior auditor with Arthur Andersen LLP.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) Market Information
Since
August 4, 2001, our shares of Common Stock have traded on the NASDAQ SmallCap
Market under the symbol “PWHS”. Prior
to August 4, 2001 and since November 25, 1997, our shares of Common Stock
traded on the NASDAQ National Market under the same symbol. The following table summarizes the high and
low closing sale prices per share of our Common Stock for the periods
indicated, as reported on the NASDAQ SmallCap and National Markets. These prices reflect the retroactive application
of our one-for-three reverse stock split as approved by our Board of Directors
on April 4, 2001, as if the reverse stock split had occurred on January 30,
1999. These prices do not include
commissions, mark-ups or markdowns.
|
Fiscal
Year 2000
|
High
|
Low
|
|
First
Quarter
|
$5.25
|
$2.64
|
|
Second
Quarter
|
4.68
|
1.89
|
|
Third
Quarter
|
5.07
|
3.00
|
|
Fourth
Quarter
|
4.32
|
2.16
|
|
|
|
|
|
Fiscal
Year 1999
|
High
|
Low
|
|
First
Quarter
|
$6.75
|
$5.07
|
|
Second
Quarter
|
9.18
|
5.10
|
|
Third
Quarter
|
7.50
|
4.50
|
|
Fourth
Quarter
|
6.57
|
4.14
|
(b)
Holders
As of April 25, 2001 we had approximately
190 holders of record of our Common Stock.
(c)
Dividends
We
have never declared or paid any cash or stock dividends with respect to our
Common Stock, as it is our policy, and the policy of our Board of Directors, to
retain any earnings to provide for our growth and development.
(d) Recent
Sale of Unregistered Securities
We
did not engage in any unregistered sales of equity securities during our fiscal
year ended February 2, 2001.
ITEM 6. SELECTED FINANCIAL DATA.
The
Selected Financial Data presented below should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Form 10-K, and in conjunction with “Management's Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this Form
10-K. The Selected Financial Data as of
and for the fiscal years ended February 2, 2001 and January 28, 2000 (fiscal
years 2000 and 1999) have been derived from our Consolidated Financial
Statements as audited by Grant Thornton LLP, independent certified public
accountants. The Selected Financial
Data as of and for the three years ended January 29, 1999 (fiscal years 1998,
1997 and 1996) have been derived from our Consolidated Financial Statements as
audited by KPMG LLP, independent certified public accountants.
Summary of Financial and Operating Data
(Dollars in thousands, except per share data)
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
2000
|
1999
|
1998
|
1997
|
1996
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
Revenues
|
$90,246
|
$82,371
|
$63,491
|
$52,949
|
$43,002
|
|
Repositioning
(credits) charge
|
(970)
|
3,962
|
--
|
--
|
--
|
|
Operating
income (loss)
|
605
|
(6,496)
|
(667)
|
889
|
2,080
|
|
Net
(loss) income
|
(434)
|
(4,449)
|
(521)
|
(191)
|
1,303
|
|
Basic
and diluted net loss per share (5)
|
(.27)
|
(2.88)
|
(.34)
|
--
|
--
|
|
Pro
forma net (loss) income (1)
|
--
|
--
|
--
|
(207)
|
808
|
|
Pro
forma diluted net (loss) income per
share (1) (5)
|
--
|
--
|
--
|
(.24)
|
.96
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
Number
of stores open at year end:
|
|
|
|
|
|
|
Company-owned
stores
|
98
|
102
|
97
|
73
|
64
|
|
Franchise
stores
|
49
|
47
|
46
|
51
|
50
|
|
|
|
|
|
|
|
|
Comparable
store sales increase (2) (3)
|
5.8%
|
9.5%
|
2.9%
|
9.7%
|
9.0%
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
Working
capital
|
$4,910
|
$4,701
|
$5,369
|
$9,383
|
$1,701
|
|
Total
assets
|
34,400
|
37,389
|
30,453
|
21,017
|
16,270
|
|
Total
debt (4)
|
13,415
|
13,467
|
8,808
|
1,753
|
11,240
|
|
Total
stockholders’ equity
|
10,412
|
9,641
|
14,090
|
14,594
|
1,793
|
|
(1)
|
For
the period from February 1, 1993 through November 28, 1997, we were an
S-Corporation and not generally subject to corporate income taxes. The Statement of Operations Data during
this period reflects a pro forma provision for income taxes as if the Company
was subject to corporate income taxes for such periods. This pro forma provision for income taxes
is computed using a combined federal and state tax rate of 38%.
|
|
(2)
|
Company-owned
stores enter the comparable store sales base at the beginning of their 13th
month of operations.
|
|
(3)
|
For
purposes of computing the increase in comparable store sales, this
computation assumes fiscal 2000 was a 52-week year.
|
|
(4)
|
Total
debt consists of total current and long-term debt, including capital lease
obligations.
|
|
(5)
|
Reflects
the retroactive application of the Company’s one-for-three reverse stock
split as approved by its Board of Directors on April 4, 2001, as if the
reverse stock split had occurred on January 31, 1997.
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Certain statements contained in
this Annual Report include “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. All forward-looking statements in this Annual Report are based on
information currently available to us as of the date of this Annual Report, and
we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such factors may include, among others,
those factors listed in Item 1A of this Annual Report and elsewhere in this
Annual Report, and our other filings with the Securities and Exchange
Commission. The following discussion
should be read in conjunction with “Selected Financial Data” (Item 6 of this
Annual Report) and our financial statements and related notes appearing
elsewhere in this Annual Report.
Overview
We
are a growing chain of retail stores specializing in party supplies and paper
goods. We operate 98 stores in ten
states throughout the central and western regions of the United States under
the names Paper Warehouse and Party Universe, and operate a website
under the name PartySmart.com. We purchased the business, consisting of
three stores located in the Minneapolis/St. Paul metropolitan area, in 1986,
and incorporated it in Minnesota in 1987.
In growing the number of Company-owned stores, we employ a strategy of
clustering stores in our principal markets to:
• provide our customers with convenient store locations
• expand our total market share
• achieve favorable economies of scale
Before
November 1997, we elected to be treated for federal and state income tax
purposes as an S-Corporation under the Internal Revenue Code of 1986 and
comparable state tax laws. For the
purpose of our selected financial data in Item 6 above, we have presented a pro
forma tax provision to arrive at pro forma net income for the applicable years. These pro forma amounts represent what the
income tax provision and the net income would have been if we had been a
C-Corporation and thus subject to federal income taxation for the entire
period. This pro forma provision was
computed using a combined federal and state income tax rate of 38%.
Revenues
Total revenues consist of retail sales from our
Company-owned stores and E-commerce website, and franchise related fees. Franchise related fees include royalties we
receive on sales, generally 4% of the store’s sales, and initial franchise
fees, recognized at the time the franchisee signs a lease for a store, at which
time we have substantially performed all of our services. Company-owned stores enter the comparable
store sales base at the beginning of their 13th month of operations.
Costs and Expenses
Costs of products sold and occupancy costs include the
direct cost of merchandise, plus handling and distribution, and certain
occupancy costs.
Store
operating expenses include all costs incurred at the store level, including
store payroll and related benefits, advertising and credit card processing
fees.
General
and administrative expenses include corporate administrative expenses for
Company-owned stores, district store staff, expenses relating to franchising,
such as payroll, legal, travel and advertising, and non-capitalizable costs
associated with our Internet subsidiary.
Results of Operations
The
following table sets forth for the periods indicated, certain costs and
expenses as a percentage of total revenues and retail sales:
|
|
Fiscal Year Ended
|
|
|
February 2,
2001
|
January 28,
2000
|
January 29,
1999
|
|
Costs
of products sold and occupancy costs:
|
|
|
|
|
as
% of total revenues
|
65.2%
|
67.2%
|
65.0%
|
|
as
% of retail sales
|
66.3%
|
68.2%
|
66.3%
|
|
|
|
|
|
|
Store
operating expenses:
|
|
|
|
|
as
% of total revenues
|
24.4%
|
23.7%
|
23.9%
|
|
as
% of retail sales
|
24.8%
|
24.0%
|
24.4%
|
|
|
|
|
|
|
General
and administrative expenses:
|
|
|
|
|
as
% of total revenues
|
10.8%
|
12.2%
|
12.2%
|
|
as
% of retail sales
|
11.0%
|
12.4%
|
12.4%
|
|
|
|
|
|
|
Number
of Company-owned stores
|
98
|
102
|
97
|
Fiscal Year Ended February 2, 2001 (Fiscal
2000 – 53 weeks) Compared to Fiscal Year Ended January 28, 2000 (Fiscal 1999 –
52 weeks)
Revenues
Retail
Sales. Retail sales of $88.8 million for fiscal 2000
increased $7.7 million, or 9.4%, over retail sales of $81.1 million for fiscal
1999. Fiscal 2000 contained 53 weeks
compared to 52 weeks for fiscal 1999.
The increase reflects the continued maturation of our store base, as
approximately $4.5 million of the increase is attributable to an increase in
comparable store sales. The
year-over-year increase also reflects sales of approximately $1.2 million for
the additional week in fiscal 2000.
Sales from our Internet web site, which became operational in the third
quarter of fiscal 1999, were not significant during fiscal 2000, as our site
was under construction through the first half of the year and was relaunched in
the third quarter. During fiscal 2000,
we opened one and closed five Company-owned stores, bringing the total to 98 as of February 2, 2001. Comparable store sales for fiscal 2000
increased 5.8% over the prior year comparable period, and were calculated
assuming fiscal 2000 was a 52-week year.
This growth rate compares to a comparable store sales increase of 9.5%
for fiscal 1999. The reduction in
comparable sales was attributable to a disappointing fourth quarter in which we
realized a comparable sales decline of 3%.
In comparison, for the first nine months of fiscal 2000, we reported a
comparable sales increase of over 9%.
Franchise
Related Fees. Fiscal 2000 franchise related fees of $1.5
million increased 17.2% over fees of $1.2 million for fiscal 1999. The
year-over-year increase reflects increased royalties from increased franchise
store sales and higher initial franchise fees.
For both fiscal 2000 and 1999, royalty payments averaged 4% of
franchise store sales. During fiscal 2000, three franchise stores opened
and one franchise store closed, bringing the total franchise stores to 49 as of
February 2, 2001, compared to 47 at the end of fiscal 1999.
Costs and Expenses
Cost of
Products Sold and Occupancy Costs. Cost of
products sold and occupancy costs totaled $58.9 million, or 66.3% of retail
sales, for fiscal 2000, as compared to $55.3 million, or 68.2% of retail sales,
for fiscal 1999. We realized an
increase in our product margins as compared to the prior year. The higher margin reflects selected price
increases that were implemented early in fiscal 2000 in addition to a strong
graduation season, in which higher graduation sales were augmented by increased
sales for solid color merchandise, which typically carry higher margins. Increased purchasing allowances as
negotiated with our vendors additionally contributed to the gross margin
favorability for fiscal 2000 versus fiscal 1999. We continue to realize
increased sales across the majority of our product categories
year-over-year. However, we have also
continued to experience margin pressure in the juvenile birthday category due
to increased sales of licensed products, which typically has a lower
margin. The year-over-year favorability
also reflects payments applied against the store closing reserve in fiscal 2000
for rent, common area maintenance and real estate taxes on the stores that were
reserved for during fiscal 1999.
Store
Operating Expenses. Store operating expenses for fiscal 2000 were
$22.0 million, or 24.8% of retail sales, as compared to $19.5 million, or 24.0%
of retail sales, for the comparable period in the prior year. The increase in the percentage primarily
reflects a 17% increase in fixed labor costs for the fourth quarter against a
relatively flat sales base. Our fourth
quarter labor needs are projected based on an expected sales volume, which
didn’t materialize in fiscal 2000. In
addition, we continued to realize higher wage rate pressure due to the
tightness of certain labor markets.
Through the third quarter of fiscal 2000, store operating expenses as a
percentage of retail sales were favorable to prior year store operating
expenses as a percentage of retail sales.
General
and Administrative Expenses. General and administrative expenses were $9.7
million, or 10.8% of total revenues, for fiscal 2000 compared to $10.1 million,
or 12.2% of total revenues, for fiscal 1999.
The year-over year favorability reflects a concerted attempt during
fiscal 2000 to reduce overall general and administrative expenses. Over the next twelve months, we expect
general and administrative expenses as a percentage of total revenues to remain
relatively flat.
Repositioning
Credits. During fiscal 2000 we sublet three store
locations and terminated the lease on one store location. We reversed $970,000 of our repositioning
reserve that was recorded during fiscal 1999.
Interest
Expense. For fiscal 2000, interest expense of
approximately $1.7 million, or 1.9% of total revenues, increased $487,000 over
interest expense for fiscal 1999. The
increase over prior year reflects an increased level of borrowing from our
revolving credit facility necessary to fund working capital requirements, in
addition to a full year of interest payments related to our convertible
subordinated debentures, which were issued during the second quarter of fiscal
1999. Interest expense also increased
due to the amortization of the deferred financing costs related to our
financing activities and increases in the prime rate. We expect interest expense to increase somewhat throughout fiscal
2001, due to a higher level of borrowings on our revolving line of credit, in
addition to a full year’s affect of the increase in the effective annual rate
on our $4.0 million of convertible subordinated debentures, from 9% to 10.5%.
Other
Income, net. Other income, net of other expense, of
approximately $335,000 for fiscal 2000 primarily reflects the receipt of
$200,000 as consideration for terminating the lease on our warehouse
facility. Other income of approximately
$368,000 for fiscal 1999 includes the receipt of approximately $250,000 from a
landlord as consideration for terminating the lease on a store.
Net Loss. As a result
of the factors discussed above, we realized a net loss of approximately
$434,000, or $.27 per diluted share, in fiscal 2000 as compared to a net loss
of $4.4 million, or $2.88 per diluted share, for fiscal 1999. The per share data has been adjusted to
reflect the one-for three reverse stock split as approved by our Board of
Directors on April 4, 2001.
Fiscal Year
Ended January 28, 2000 (Fiscal 1999 – 52 weeks) Compared to Fiscal Year Ended
January 29, 1999 (Fiscal 1998 – 52 weeks)
Revenues
Retail
Sales. Retail sales of $81.1 million for fiscal 1999
increased $18.9 million, or 30.4%, over retail sales of $62.2 million for
fiscal 1998. The year-over-year
increase reflects the larger store base at the end of fiscal 1999 and the
continued maturation of 27 stores opened during fiscal 1998, 10 of which were
purchased franchise stores. Of this
increase, approximately $13.1 million was the result of existing store growth
and approximately $5.8 million was attributable to an increase in comparable
store sales. Sales from our Internet
web site, which became operational in September 1999, were not
significant. During fiscal 1999, we
opened eight and closed three Company-owned stores, bringing the total to 102 as of January 28, 2000. Comparable store sales for fiscal 1999
increased 9.5% over the prior year comparable period. This growth rate compared favorably to a comparable store sales
increase of 2.9% for fiscal 1998.
Franchise
Related Fees. Fiscal 1999 franchise related fees of $1.2 million
decreased 2.3% from fees of $1.3 million for fiscal 1998. The
year-over-year decrease reflects our purchases throughout fiscal 1998 of 10
franchise stores, reducing our royalties received on product sales from
franchise stores. For both fiscal 1999
and 1998, royalty payments averaged 4% of franchise store sales. During fiscal 1999, two franchise stores opened
and one franchise store closed, bringing the total franchise stores to 47 as of
January 28, 2000, compared to 46 at the end of fiscal 1998.
Costs and Expenses
Cost of
Products Sold and Occupancy Costs. Cost of products sold and occupancy costs totaled
$55.3 million, or 68.2% of retail sales, for fiscal 1999, as compared to $41.3
million, or 66.3% of retail sales, for fiscal 1998. The increase in this expense category primarily reflects higher
occupancy costs, resulting from the increased store base as well as the
annualization of occupancy costs for our Seattle market, which carries higher
occupancy costs as compared to our other markets. We have also experienced slight increases in the cost of our
products.
Store
Operating Expenses. Store operating expenses for fiscal 1999 were
$19.5 million, or 24.0% of retail sales, as compared to $15.2 million, or 24.4%
of retail sales, for the comparable period in the prior year. The decrease in the percentage was primarily
attributable to the continued maturation of our store base and the ability to
leverage year-over-year increases in store labor, advertising and store
operating expenses. We continued to
realize higher wage rate pressure due to the tightness of certain labor
markets.
General
and Administrative Expenses. General and
administrative expenses were $10.1 million and $7.7 million for fiscal 1999 and
fiscal 1998, respectively, with both years at 12.2% of total revenues. The dollar increase was primarily the result
of higher payroll and benefit costs resulting from the addition of several
corporate positions necessary to support our growth. In addition, the increase also reflects approximately $1.4
million of start-up and operational costs associated with our Internet
strategy.
Repositioning
Charge. During the fourth quarter of fiscal 1999, we
recorded a pre-tax repositioning charge of approximately $4.0 million, or $1.53
per share, net of tax and adjusted for the one-for-three reverse stock split as
approved by our Board of Directors on April 4, 2001, consisting of:
• reserves for stores to be closed,
previously closed and to be relocated
• impairment charges on long-lived assets
associated with closed stores
• an impairment charge associated with our
Internet website asset
Reserves
for Stores. In response to operating losses, and in an
attempt to strengthen our competitive position and improve long-term results,
during fiscal 1999, we organized a “challenge-store” committee comprised of
various members of management to review the profitability of our portfolio of
stores. During the fourth quarter of
fiscal 1999, this committee adopted a plan to close four under-performing stores,
and we recorded a pre-tax charge of approximately $1.7 million for the closing
of these stores. This amount consisted
primarily of reserves for an estimate of the remaining lease obligations for
these stores, net of expected sublease payments. These stores were subsequently closed during the first half of
fiscal 2000. Net sales and operating
losses for the four stores that were closed during fiscal 2000 were
approximately $1.7 million and ($273,000) for fiscal 1999, $1.2 million and
($244,000) for fiscal 1998 and $177,000 and ($65,000) for fiscal 1997. We also reserved approximately $600,000 for
an estimate of the remaining lease obligations, net of expected sublease
payments, for one store that was relocated during the first quarter of fiscal
2000 and approximately $700,000 for a change in
the estimate of the net remaining lease obligations for four stores that were
previously closed. We recorded a total
reserve liability of $3.0 million.
Impairment
charges on long-lived assets. The
repositioning charge additionally reflected write-downs of approximately
$200,000 related to furniture and fixtures and goodwill associated with stores
to be closed. In addition, in response
to current and projected operating losses for our Internet venture and a significant
change in the e-commerce competitive advertising environment, during the fourth
quarter of fiscal 1999, we performed a review of the long-lived assets
associated with PartySmart.com, for impairment. As a result of this review, we
concluded that the asset value of our Internet website, consisting primarily of
capitalized internally developed software costs, was not fully recoverable and
we hired an outside firm to perform an appraisal. As a result of this appraisal, and in accordance with SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of”, we recorded a pre-tax impairment charge of approximately
$800,000 to reflect the related assets of PartySmart.com at their fair market value.
Interest
Expense. For fiscal 1999, interest expense of approximately
$1.2 million, or 1.4% of total revenues, increased $928,000 over interest
expense for fiscal 1998. The increase
over the prior year reflected increased borrowings from our revolving credit
facility necessary to fund working capital requirements, in addition to our
public sale of convertible subordinated debentures. Interest expense also increased due to the amortization of the
deferred financing costs related to our financing activities during fiscal
1999. In comparison, we did not borrow
under our revolving credit facility during the first five months of fiscal
1998.
Other
Income, net. Other income, net of other expense, of
approximately $368,000 for fiscal 1999, reflects the receipt of approximately
$250,000 from a landlord as consideration for terminating the lease on a store.
Net
Loss. As a result of the factors discussed above, we
realized a net loss of approximately $4.4 million, or $2.88 per diluted share,
in fiscal 1999 as compared to a net loss of $521,000, or $.34 per diluted
share, for fiscal 1998. The per share
data has been adjusted to reflect the one-for three reverse stock split as
approved by our Board of Directors on April 4, 2001.
Seasonality
Our
results of operations have historically fluctuated from quarter to quarter
because of variations in revenues and operating expenses. We generate a significant portion of our
operating income in our second and fourth fiscal quarters because of seasonal
events. Any factor that negatively
affects our revenues or increases our operating expenses during the second and
fourth fiscal quarters could negatively affect our annual results of
operations. As a result of the
seasonality of our revenues, we expect to incur a loss in the first quarter of
each year for the foreseeable future.
Although we typically realize strong sales during the third quarter, due
to increased promotional activities, we have historically experienced reduced
operating income for this quarter.
Our
results of operations also fluctuate from quarter to quarter as a result of the
following:
• the timing of new store openings,
remodels or relocations
• costs associated with new store
openings, remodels or relocations
• expenses incurred to support our
expansion strategy
Liquidity and Capital Resources
Our
primary capital requirements are for ongoing operations, consisting of
investments in our inventory, in addition to capital requirements necessary to
support the continued growth of our information systems infrastructure and our
store base. Our primary sources of cash
for ongoing operations have been:
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•
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borrowings
under our revolving line of credit
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•
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proceeds
from financings such as our recent shareholder rights offering, our public
sale of convertible subordinated debt, the refinancing of our mortgage and
our initial public offering
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•
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payment
terms from venders
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•
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lease
financings
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•
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cash
from operations
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Our
liquidity needs vary throughout the year as a result of the seasonal nature of
our business. Our cash availability
also fluctuates as a result of:
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•
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the
level of our inventory, which primarily determines our line-of-credit
borrowing capacity
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•
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quarterly
fluctuations in revenues and operating income
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•
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timing
of seasonal purchases
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•
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timing
of new store openings, remodels and/or relocations
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•
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intra-month
cash needs for payment of rent, payroll and other operational payables
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As
a result of a disappointing fiscal 2000 fourth quarter, in which sales were
below expectations, we did not generate the cash cushion we expected, or that
is required, for us to fund our operations into second quarter. In order to provide the liquidity we needed
for operations, we recently negotiated extended terms with several of our
largest vendors. The arrangements with
our vendors resulted in the extended dating of approximately $3.0 million of
trade payments to be repaid during the second half of fiscal 2001. In addition, we were able to extend
approximately $500,000 of rent payments into the second half of fiscal 2001 or
beyond. We may not be able to defer any
additional payments.
Our
liquidity as measured by our working capital was $4.9 million at February 2,
2001 compared to $4.7 million at January 28, 2000. Our current ratio was 1.31 to 1.00 at February 2, 2001 compared
to 1.26 to 1.00 at January 28, 2000.
The year-over-year change in our working capital and current ratio
calculations reflects a reduction in inventory levels. The change also reflects a reduction of
accounts payable from unusually high levels at the end of fiscal 1999,
partially offset by an increase in our borrowings on our line-of-credit.
Cash
used for operations for each of the last three fiscal years was approximately
$175,000 in fiscal 2000, $999,000 in fiscal 1999 and $1.3 million in fiscal
1998. The cash use in fiscal 2000
primarily reflects a purposeful reduction in merchandise inventory levels and a
reduction in accounts payable. Our ability
to leverage our accounts payable has lessened during fiscal 2000, and we
continue to feel pressure from the vendor community, resulting from the
financial difficulties of other party goods stores in the industry. In addition, we continue to strive, when
possible, to take advantage of cash discounts and other favorable terms that
are offered by our vendors. The cash
use in fiscal years 1999 and 1998 primarily reflects increases in merchandise
levels, partially offset by increases in accounts payable.
Net
cash used for investing activities was approximately $987,000 for fiscal 2000,
$3.2 million for fiscal 1999 and $6.7 million for fiscal 1998. The cash use in fiscal 2000 consisted almost
entirely of capital expenditures related to upgrading our information systems
and remodeling of Company-owned stores.
We have invested and will continue to evaluate our needs for additional
investment in information technology and infrastructure capabilities in order
to gain operational efficiencies.
Capital expenditures during fiscal 1999 primarily represented
expenditures necessary to develop and launch our website and expenditures
related to the opening of new stores.
Capital expenditures during fiscal 1998 were approximately $4.3 million,
and included approximately $3.2 million related to new stores. Additionally, in
fiscal 1998 we used approximately $2.2 million of cash towards the purchase of
10 franchise stores.
We
anticipate that we will spend an aggregate $1.2 million on capital expenditures
during fiscal 2001. These capital
expenditures will be for two new store openings, fixturing, remodeling or
relocating existing stores, and continuing investments in information systems. We seek to lease sites, of approximately
8,500 square feet, for our Company-owned stores rather than own real
estate. If the number of stores we plan
to open, relocate or remodel increases or decreases, this estimate may change
accordingly. Our plans may vary based
upon the availability of suitable locations and the availability of acceptable
terms. It is our intention to finance
new store fixtures and equipment with long-term leases, assuming availability
and reasonable terms. We may
additionally seek to acquire existing stores from franchisees. At present, we have no agreement to acquire
any franchise store.
Net
cash provided by financing activities was $1.1 million for fiscal 2000, $3.6
million for fiscal 1999 and $6.9 million for fiscal 1998. The
year-over-year decrease reflects our prior year subordinated debt offering,
refinancing of our mortgage and financing of our capital leases, partially
offset by an increased usage of our revolving line-of-credit in the current
year. Cash provided by financing
activities in fiscal 1998 primarily reflects our borrowing under our revolving
line of credit with our bank.
During
fiscal 1999, we issued convertible subordinated debentures in an aggregate
principal amount of $4.0 million, which mature in 2005, and are convertible
into approximately 444,000 shares of our common stock. We received net proceeds of approximately
$3.2 million from the issuance of these debentures, which were used to develop
and implement our Internet website, to repay indebtedness and for other general
corporate purposes. Until September 15,
2000, the debentures bore interest at an annual rate of 9.0% that was payable
quarterly. The indenture under which
these debentures were issued contains covenants that require us to satisfy
certain financial tests and imposes restrictions on our ability to pay
dividends. As of our fiscal 1999 year
end, we were in breach of a covenant requiring a minimum consolidated tangible
net worth, however, we were current on all required payments under the
indenture. During fiscal 2000, we
requested a waiver of this breach from our debenture holders, and requested
amendments, to replace the definition of consolidated tangible net worth in the
indenture with a definition of consolidated net worth, and to increase the
interest rate on the debentures. In
order for us to obtain the waiver and approval for the amendments, an
affirmative vote from greater than 50% of the dollar value of the debentures
outstanding was required. We offered
debenture holders a 150 basis point increase in the interest rate to an annual
rate of 10.5%, effective as of September 15, 2000, contingent upon obtaining a
majority affirmative vote.
Additionally, we offered each debenture holder a consent fee of $10 per
bond, payable only upon obtaining his or her affirmative vote. Subsequently, we obtained a waiver for the
breach of the covenant as of January 28, 2000 and obtained required approval
for the amendments. Since we obtained
the majority vote, effective September 15, 2000, the interest rate on our
subordinated convertible debentures increased to an annual rate of 10.5%. We were in compliance with all of our
financial covenants as required by the indenture at February 2, 2001.
We
have a $15.0 million multi-year revolving line of credit facility with a bank
for general working capital purposes that expires in June 2002. Borrowings outstanding under this line of
credit bear interest at a variable rate and are secured by substantially all of
our assets. Advances under this credit
line are limited to a fixed percentage of certain assets, primarily
inventory. As a result of the
limitations on the fixed percentage and on inventory levels, we often maximize
the availability under our line during intra-month peaks and at certain times
during the year. At February 2, 2001
and January 28, 2000, we had borrowings outstanding of approximately $6.9
million and $6.3 million, respectively, under our revolving line of credit
facility. The credit agreement contains
covenants, which require us to satisfy certain financial tests and impose
restrictions on our ability to pay dividends.
We were in compliance with all of our financial covenants as required by
the credit facility at February 2, 2001.
In
March 2000, our Chairman and Chief Executive Officer, issued a $1.2 million
standby letter of credit in favor of the lender for our revolving line of
credit, as beneficiary. This caused the
lender to provide us with an additional $1.2 million advance over our existing
revolving line of credit. During fiscal 2000, we met the
requirements for early expiration and the standby letter of credit was
cancelled. In consideration for issuing
the standby letter of credit, we granted an option to our Chairman to purchase
16,667 shares of our common stock at an exercise price of $2.91 per share,
equal to 110% of the market price of our underlying stock as of the date of
grant, and adjusted to reflect the one-for-three reverse stock split as
approved by our Board of Directors on April 4, 2001. In addition, we agreed to indemnify him for any liability
incurred in connection with the standby letter of credit.
During
fiscal 1999, we refinanced our corporate office building. The $1.1 million term note is payable in
monthly installments of $8,612, including interest through May 2009, and is
secured by a first mortgage on our office headquarters.
In
addition to the liquidity sources described above, we have also generated
additional working capital through:
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extended
dating on payables and rent as negotiated with certain of our vendors and
landlords
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our
shareholder rights offering that took place during fiscal 2000
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•
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reducing
corporate and store-wide expenses
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•
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scaling
back PartySmart.com, our
Internet website venture
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selective
price increases and other various pricing strategy changes
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seeking
alternative sources for the financing of fixtures and equipment
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We
believe that our financial resources, including our credit agreement, our
anticipated cash flows from operations and the generation of additional working
capital as described above, will be adequate to meet our cash needs over the
next twelve months. We also believe
that these resources will be adequate to fund our operations until our credit
facility expires in June 2002, at which time we expect to extend or replace the
credit agreement.
Inflation
We
do not believe that inflation has had a material impact upon our historical
operating results, and we do not expect it to have a material impact in the
future. There can be no assurances,
however that our business will not be affected by inflation in the future. We could be negatively impacted by
substantial cost increases for raw materials such as paper, petroleum and
cardboard, as significant cost increases in these areas could have a material
impact on our costs of products in future periods. In addition, continued
increases in fuel costs could have a negative impact on utility costs for our
Company-owned stores.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In
addition to other sources of liquidity, we have used a combination of fixed
rate and floating rate debt to fund our operations, capital expenditures and
the growth in our Company-owned stores and our Internet business. As a result of our floating rate debt, we
are exposed to market risk from changes in interest rates. There have been recent changes in the prime
rate. We do not consider this exposure
to be material to our consolidated financial position, results of operations or
cash flows. We do not use any
derivative financial instruments or engage in any other hedging activities.
ITEM 8. FINANCIAL STATEMENTS.
The
Company’s Consolidated Financial Statements and the reports of its independent
certified public accountants are included in this Annual Report on Form
10-K. The index to these financial
statements is included in Item 14 (a) (1) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not
applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a)
Directors of the Registrant
The
information under the captions “Election of Directors—Information About
Nominees” and “Election of Directors—Other Information About Nominees” in the
Company’s 2001 Proxy Statement is incorporated herein by reference.
(b)
Executive Officers of the Registrant
Information
concerning Executive Officers of the Company is included in this Annual Report
under Item 4A, “Executive Officers of the Registrant.”
(c)
Compliance with Section 16 (a) of the Exchange Act
The
information under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s 2001 Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The
information under the captions “Election of Directors—Directors’ Fees and
Compensation Committee Interlocks” and “Executive Compensation and Other
Benefits” in the Company’s 2001 Proxy Statement is incorporated herein by
reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The
information under the caption “Principal Shareholders and Beneficial Ownership
of Management” in the Company’s 2001 Proxy Statement is incorporated herein by
reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
The
information under the caption “Certain Relationships and Related Transactions”
in the Company’s 2001 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report
(1) Financial Statements:
The
following Consolidated Financial Statements are included herein:
(2) Financial Statement Schedules:
Schedule
II - Valuation and Qualifying Accounts:
Reserve
for Store
Closings
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Balance
at beginning of year
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Provision
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Charges/
Write-offs
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Credits
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Balance
at
end
of year
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Fiscal
year ended
February 2, 2001
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$3,000,000
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$--
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$715,000
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$970,000
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$1,315,000
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Fiscal
year ended
January 28, 2000
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$--
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$3,000,000
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$--
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$--
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$3,000,000
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Fiscal
year ended
January 29, 1999
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$--
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$--
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$--
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$--
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$--
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The
reserve for store closings at the end of fiscal 2000 reflects reductions
related to ongoing payments of rent, common area maintenance, real estate taxes
and other miscellaneous expenses on the stores that were closed, in addition to
beneficial adjustments of $970,000 resulting from the subleasing of three store
locations and the termination of a lease on one store location.
All
other schedules have been omitted since they are not required, not applicable
or the information has been included in the financial statements or the notes
thereto.
(3) Exhibits:
The exhibits to this Annual Report
on Form 10-K are listed in the Exhibit Index attached hereto.
A
copy of any of the exhibits listed in the Exhibit Index or referred to below
will be furnished at a reasonable cost to any person who was a shareholder of
the Company on April 25, 2001, upon receipt from any such person of a written
request for any such exhibit. Such
request should be sent to Paper Warehouse, Inc., 7630 Excelsior Boulevard,
Minneapolis, Minnesota 55426; Attn: Shareholder Relations.
The
following is a list of each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on Form
10-K pursuant to Item 14(c):
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1.
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1997
Stock Option and Compensation Plan
(incorporated by reference to the Company’s Registration Statement on
Form S-1 File No. 333-36911).
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2.
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Directors’
Stock Option Plan (incorporated by reference to the Company’s Registration
Statement on Form S-1 File No. 333-36911).
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3.
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Employment
Agreement by and between the Company and Yale T. Dolginow dated February 7,
1997 (incorporated by reference to the Company’s Registration Statement on
Form S-1 File No. 333-36911).
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4.
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Employment
Agreement by and between the Company and Brent D. Schlosser dated February 7,
1997 (incorporated by reference to the Company’s Registration Statement on
Form S-1 File No. 333-36911).
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5.
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Amendment
Number 1 to the Employment Agreement by and between the Company and Brent D.
Schlosser dated September 26, 1997 (incorporated by reference to the
Company’s Form 10-K for fiscal year ended January 31, 1998 File No. 0-23389).
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6.
|
Employment
Agreement by and between the Company and Cheryl W. Newell dated July 14, 1997
(incorporated by reference to the Company’s Registration Statement on Form
S-1 File No. 333-36911).
|
|
7.
|
1998
Employee Stock Purchase Plan (incorporated by reference to the Company’s
Registration Statement on Form S-1 File No. 333-79161).
|
|
8.
|
Amendment
to 1997 Stock Option and Compensation Plan
(incorporated by reference to the Company's Form 10-K for fiscal year
ended January 28, 2000 File No. 0-23389).
|
|
9.
|
Separation
Agreement and General Release between the Company and Brent D. Schlosser
dated December 2, 1999 (incorporated by reference to the Company's Form 10-K
for fiscal year ended January 28, 2000 File No. 0-23389).
|
(b) Reports on Form 8-K.
We
did not file any Current Reports on Form 8-K during the fourth quarter of
fiscal 2000.
Report of Independent Certified
Public Accountants
The
Board of Directors and Stockholders
Paper Warehouse, Inc.:
We
have audited the accompanying consolidated balance sheets of Paper Warehouse,
Inc. and Subsidiaries as of February 2, 2001 and January 28, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We
believe our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Paper Warehouse, Inc.
and Subsidiaries as of February 2, 2001 and January 28, 2000 and the results of
their consolidated operations and their consolidated cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
We
have also audited Schedule II of Paper Warehouse, Inc. and Subsidiaries for the
years ended February 2, 2001 and January 28, 2000. In our opinion, this schedule when considered in relation to the
basic financial statements taken as a whole presents fairly, in all material
respects, the information required to be set forth therein.
/s/
Grant Thornton LLP
Minneapolis, Minnesota
March 16, 2001 (except for Note 15, as to which the date is April 4, 2001)
Independent Auditors' Report
The
Board of Directors and Stockholders
Paper Warehouse, Inc.:
We
have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Paper Warehouse, Inc. and Subsidiary
for the year ended January 29, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
the cash flows of Paper Warehouse, Inc. and Subsidiary for the fiscal year
ended January 29, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/
KPMG LLP
March 19, 1999
Minneapolis, Minnesota
PAPER
WAREHOUSE, INC. and SUBSIDIARIES
Consolidated Balance Sheets
February 2, 2001 and January 28, 2000
|
|
February 2,
2001
|
January 28,
2000
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$427,878
|
$469,768
|
|
Merchandise
inventories
|
18,150,433
|
20,206,851
|
|
Accounts
receivable
|
1,168,209
|
830,153
|
|
Prepaid
expenses and other current assets
|
862,957
|
1,003,398
|
|
Total
current assets
|
20,609,477
|
22,510,170
|
|
|
|
|
|
Property
and equipment, net
|
8,698,745
|
10,006,870
|
|
Deferred
tax asset
|
3,483,468
|
3,177,052
|
|
Other
assets, net
|
1,608,056
|
1,694,552
|
|
Total
assets
|
$34,399,746
|
$37,388,644
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Notes
payable – line of credit
|
$6,867,583
|
$6,303,648
|
|
Current
maturities of long-term debt
|
601,943
|
715,517
|
|
Accounts
payable
|
6,324,741
|
8,226,993
|
|
Accrued
liabilities
|
1,468,129
|
1,751,634
|
|
Current
portion – reserve for store closings
|
437,565
|
811,709
|
|
Total
current liabilities
|
15,699,961
|
17,809,501
|
|
|
|
|
|
Convertible
subordinated debt
|
4,000,000
|
4,000,000
|
|
Other
long-term debt, less current maturities
|
1,945,909
|
2,447,852
|
|
Reserve
for store closings, less current portion
|
877,601
|
2,188,291
|
|
Deferred
rent credits
|
1,464,477
|
1,301,563
|
|
Total
liabilities
|
23,987,948
|
27,747,207
|
|
|
|
|
|
Commitments
|
--
|
--
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
Serial
preferred stock, $.03 par value; 3,333,333 shares authorized;
none issued or outstanding
|
--
|
--
|
Common
stock, $.03 par value; 13,333,333 shares authorized;
1,882,593 and 1,542,645 shares issued and
outstanding
|
56,477
|
46,279
|
|
Additional
paid-in capital
|
15,027,827
|
13,833,442
|
|
Accumulated
deficit
|
(4,672,506)
|
(4,238,284)
|
|
Total
stockholders’ equity
|
10,411,798
|
9,641,437
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$34,399,746
|
$37,388,644
|
See accompanying notes to consolidated
financial statements.
PAPER
WAREHOUSE, INC. and SUBSIDIARIES
Consolidated Statements of
Operations
Years ended February 2, 2001, January 28, 2000 and January 29, 1999
|
|
February 2,
2001
|
January 28,
2000
|
January 29,
1999
|
|
Revenues:
|
|
|
|
|
Retail
sales
|
$88,789,995
|
$81,128,437
|
$62,218,553
|
|
Franchise
related fees
|
1,456,376
|
1,242,330
|
1,271,973
|
|
Total
revenues
|
90,246,371
|
82,370,767
|
63,490,526
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
Costs
of products sold and occupancy costs
|
58,871,216
|
55,332,014
|
41,252,342
|
|
Store
operating expenses
|
22,001,011
|
19,488,775
|
15,185,082
|
|
General
and administrative expenses
|
9,738,851
|
10,083,556
|
7,719,992
|
|
Repositioning
(credits) charge
|
(970,000)
|
3,962,454
|
--
|
|
Total
costs and expenses
|
89,641,078
|
88,866,799
|
64,157,416
|
|
|
|
|
|
|
Operating
income (loss)
|
605,293
|
(6,496,032)
|
(666,890)
|
|
|
|
|
|
|
Interest
expense
|
(1,669,744)
|
(1,182,349)
|
(254,405)
|
|
Other
income, net
|
335,229
|
368,008
|
76,981
|
Loss
before income taxes and cumulative effect of
accounting change
|
(729,222)
|
(7,310,373)
|
(844,314)
|
|
Income
tax benefit
|
295,000
|
2,970,332
|
323,654
|
|
Net
loss before cumulative effect of accounting change
|
(434,222)
|
(4,340,041)
|
(520,660)
|
|
Cumulative
effect of accounting change, net
|
--
|
(108,506)
|
--
|
|
Net
loss
|
$(434,222)
|
$(4,448,547)
|
$(520,660)
|
|
|
|
|
|
|
Net Loss Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share before
cumulative effect of accounting change
|
$(0.27)
|
$(2.81)
|
$(0.34)
|
|
Cumulative effect of
accounting change, net
|
--
|
(0.07)
|
--
|
|
Basic and diluted net
loss per common share
|
$(0.27)
|
$(2.88)
|
$(0.34)
|
|
Weighted average shares
outstanding
|
1,627,311
|
1,542,645
|
1,524,326
|
See accompanying notes to consolidated
financial statements.
PAPER WAREHOUSE, INC. and SUBSIDIARIES
Consolidated Statements of
Stockholders’ Equity
Years Ended February 2, 2001, January 28, 2000 and January 29, 1999
|
|
Serial
Preferred
Stock
|
Number of
Common
Shares
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Earnings /
(Deficit)
|
Total
Stockholders’
Equity
|
|
Balance,
January 30, 1998
|
--
|
1,519,062
|
$45,572
|
$13,683,807
|
$864,405
|
$14,593,784
|
|
Net
loss
|
--
|
--
|
--
|
--
|
(520,660)
|
(520,660)
|
|
Distribution
of earnings
|
--
|
--
|
--
|
--
|
(133,482)
|
(133,482)
|
|
Issuance
of common stock
|
--
|
23,583
|
707
|
149,635
|
--
|
150,342
|
|
Balance,
January 29, 1999
|
--
|
1,542,645
|
46,279
|
13,833,442
|
210,263
|
14,089,984
|
|
Net
loss
|
--
|
--
|
--
|
--
|
(4,448,547)
|
(4,448,547)
|
|
|
|
|
|
|
|
|
|
Balance,
January 28, 2000
|
--
|
1,542,645
|
46,279
|
13,833,442
|
(4,238,284)
|
9,641,437
|
|
Net
loss
|
--
|
--
|
--
|
--
|
(434,222)
|
(434,222)
|
Issuance
of common stock
pursuant to shareholder rights
offering (net of offering
expenses of $67,100)
|
--
|
331,571
|
9,947
|
1,166,322
|
--
|
1,176,269
|
|
Employee
purchases of stock
|
--
|
8,377
|
251
|
28,063
|
--
|
28,314
|
|
|
|
|
|
|
|
|
|
Balance,
February 2, 2001
|
--
|
1,882,593
|
$56,477
|
$15,027,827
|
$(4,672,506)
|
$10,411,798
|
See accompanying notes to consolidated
financial statements.
PAPER WAREHOUSE, INC. and SUBSIDIARIES
Consolidated Statements of Cash
Flows
Years ended February 2, 2001, January 28, 2000 and January 29, 1999
|
|
February 2,
2001
|
January 28,
2000
|
January 29,
1999
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
Net
loss
|
$(434,222)
|
$(4,448,547)
|
$(520,660)
|
|
Adjustments
to reconcile net loss to net cash used for operations:
|
|
|
|
|
Depreciation
and amortization
|
2,345,028
|
2,222,025
|
1,732,220
|
|
Repositioning
(credits) charge
|
(970,000)
|
3,962,454
|
--
|
|
Gain
on sale of property and equipment
|
(21,630)
|
(6,887)
|
(277)
|
|
Deferred
taxes
|
(295,000)
|
(3,042,669)
|
(323,654)
|
|
Deferred
rent credits
|
202,746
|
226,915
|
(578,145)
|
|
Other
noncash items affecting earnings
|
89,555
|
349,759
|
--
|
Changes
in operating assets and liabilities, net of the effect
of asset acquisition:
|
|
|
|
|
Merchandise
inventories
|
2,056,418
|
(3,904,781)
|
(3,966,362)
|
|
Accounts
receivable
|
(338,056)
|
275,109
|
(653,325)
|
|
Prepaid
expenses and other current assets
|
131,001
|
(130,574)
|
(459,616)
|
|
Accounts
payable
|
(1,902,252)
|
2,912,400
|
2,325,577
|
|
Accrued
liabilities
|
(323,337)
|
585,895
|
1,136,587
|
|
Store
closing reserves
|
(714,834)
|
--
|
--
|
|
Net
cash used for operations
|
(174,583)
|
(998,901)
|
(1,307,655)
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
Purchases
of assets of businesses
|
--
|
--
|
(2,239,165)
|
|
Purchases
of property and equipment
|
(1,088,078)
|
(3,166,926)
|
(4,334,787)
|
|
Proceeds
from sales of property and equipment
|
107,950
|
49,894
|
6,349
|
|
Other
assets, net
|
(6,600)
|
(43,196)
|
(117,420)
|
|
Net
cash used for investing activities
|
(986,728)
|
(3,160,228)
|
(6,685,023)
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
Proceeds
from convertible subordinated debentures
|
--
|
4,000,000
|
--
|
|
Net
proceeds from shareholder rights offering
|
1,176,269
|
--
|
--
|
|
Net
proceeds from (payments on) notes payable – line of credit
|
563,935
|
(546,352)
|
6,850,000
|
|
Proceeds
from refinancing of mortgage
|
--
|
1,100,000
|
--
|
|
Net
payments on other long-term debt
|
(27,052)
|
(930,816)
|
(203,174)
|
|
Payment
of debt issuance costs
|
(33,580)
|
(1,019,105)
|
--
|
|
Proceeds
from financing of property and equipment
|
--
|
1,550,780
|
622,454
|
|
Payments
on financing of property and equipment
|
(588,465)
|
(514,185)
|
(214,282)
|
|
Proceeds
received from employee purchases of stock
|
28,314
|
--
|
--
|
|
Distribution
of Subchapter S Corporation accumulated earnings
|
--
|
--
|
(133,482)
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
1,119,421
|
3,640,322
|
6,921,516
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
(41,890)
|
(518,807)
|
(1,071,162)
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
469,768
|
988,575
|
2,059,737
|
|
Cash
and cash equivalents, end of year
|
$427,878
|
$469,768
|
$988,575
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
Interest
paid during the year
|
$1,459,294
|
$930,065
|
$274,004
|
|
Income
taxes paid during the year
|
10,758
|
--
|
--
|
See accompanying notes to consolidated
financial statements.
PAPER WAREHOUSE, INC. and SUBSIDIARIES
Notes to Consolidated Financial
Statements
(1) Summary of Significant Accounting Policies
Description of
Business
We
(“Paper Warehouse, Inc.” or the “Company”) are a growing chain of retail
stores, specializing in party supplies and paper goods. We operate 98 Company-owned stores in ten
states throughout the central and western regions of the United States under
the names “Paper Warehouse” and “Party Universe” and operate a web site under
the name “PartySmart.com.”
Additionally, we sell Paper Warehouse franchises through our wholly
owned subsidiary, Paper Warehouse Franchising, Inc.
Basis of Presentation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. We have eliminated all
intercompany balances and transactions between the entities in consolidation. All share and per share data has been
restated to give effect to the retroactive application of the Company’s
one-for-three reverse stock split, as approved by its Board of Directors on
April 4, 2001. (See Note 15).
Fiscal Year
Our
fiscal year ends on the Friday closest to January 31st. Our fiscal year is generally 52 weeks,
however it periodically consists of 53 weeks.
The fiscal year ended February 2, 2001 (fiscal 2000) consisted of 53
weeks, while the fiscal years ended January 28, 2000 (fiscal 1999) and January
29, 1999 (fiscal 1998) consisted of 52 weeks.
Unless otherwise stated, references to years in this report relate to
fiscal years rather than to calendar years.
Accounting Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
We
consider all highly liquid instruments with original maturities of three months
or less to be cash equivalents.
Fair Values of Financial
Instruments
Due
to their short-term nature, the carrying value of our current financial assets
and liabilities approximates their fair value.
The fair value of our borrowings, if recalculated based on current
interest rates, would not significantly differ from the recorded amounts.
Merchandise
Inventories
Inventories
are stated at the lower of cost (as determined on a first-in, first-out basis)
or market. We review slow moving merchandise and take appropriate markdowns and
write-downs, as necessary.
Property and Equipment
Property
and equipment are recorded at cost.
Depreciation is computed on a straight-line basis over the estimated
useful lives of 3 years for computers and internally developed software costs,
5-7 years for fixtures and equipment and 40 years for building and land
improvements.
Other Assets
Other
assets consist primarily of debt issuance costs, goodwill, security deposits
and trademarks. Debt issuance costs are
amortized to interest expense over the term of the related financing on a
straight-line basis. Goodwill
represents the excess of purchase price over net assets acquired and is being
amortized over 15 years on a straight-line basis. The costs of acquiring trademarks have been capitalized and are
being amortized over 10 years on a straight-line basis.
Long-Lived
Assets
We
review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying
amount of the asset, we recognize a loss for the difference.
Deferred
Rent Credits
Certain
of our operating leases provide for scheduled increases in base rentals over
their terms. For these leases, we
recognize the total rental amounts due over the lease terms on a straight-line
basis. We have established
corresponding deferred rent credits for the differences between the amounts
recognized and the amounts paid.
Store Opening and
Closing Costs
Expenditures
incurred in connection with the opening of new stores or the remodeling of
existing stores are expensed as incurred.
In
the event that a store is planned to close before its lease has expired, any
remaining lease obligation, net of expected sublease recovery, is provided for
in the period the plan to close the store is adopted. In addition, the remaining investment in fixed assets, net of the
expected recovery value, is also expensed.
Leases
Leases
that meet the accounting criteria for capital lease treatment are recorded as
property and equipment and the related capital lease obligations are included
in debt. All other leases are accounted
for as operating leases.
Advertising Costs
Advertising
costs, included in store operating expenses, are expensed as incurred. Advertising costs, net of advertising income,
were approximately $3.2 million, $2.9 million and $3.1 million for fiscal years
2000, 1999 and 1998, respectively.
Net Earnings (Loss)
Per Common Share
Basic net earnings (loss) per
common share (“EPS”) is computed as net earnings (loss) divided by the weighted
average number of common shares outstanding during the periods.
Diluted EPS is computed as net
earnings (loss) divided by the weighted average number of common shares
outstanding during the period; increased to include assumed conversions of potentially
dilutive shares outstanding into common shares, when dilutive. Our potentially dilutive shares of common
stock include stock options that have been granted to employees and outside
directors, our outstanding convertible subordinated debentures and a warrant
granted to the underwriter as part of our convertible debenture offering. We had $4.0 million of convertible
subordinated debentures outstanding at the end of fiscal year 2000 and fiscal
year 1999 that were not included in either computation of diluted EPS, as their
inclusion would have been antidilutive.
In addition, options to purchase 259,400, 173,475 and 137,400 shares of
common stock were outstanding at the end of fiscal years 2000, 1999 and 1998, respectively,
but were excluded from the computation of common share equivalents because they
were antidilutive. Had the inclusion of
these items not been antidilutive, we would have assumed conversions of
convertible subordinated debentures into approximately 444,000 and 243,000
common shares for the years ended February 2, 2001 and January 28, 2000,
respectively. We would have assumed
conversions of stock options into approximately 19,000 and 100 common shares
for fiscal years 2000 and 1999, respectively.
We would not have assumed any conversions of stock options for fiscal
1998.
Stock-Based
Compensation
We
use the intrinsic value method to value our stock options issued to
employees. Had the fair value method
been applied, our compensation expense would have been different. (See Note 11.)
(2) Accounting
Change – Fiscal Year 1999
We adopted Statement of Position
(SOP) No. 98-5, “Reporting on the Costs of Start-Up Activities” during fiscal
1999. This Statement required that
costs of start-up activities and organization costs be expensed as
incurred. Prior to the adoption of this
Statement, our policy was to capitalize lease acquisition fees and amortize
them over the related lease term using the straight-line method. The impact of the change of approximately
$109,000, net of taxes of approximately $72,000, is shown as a cumulative
effect of accounting change in the Consolidated Statement of Operations for the
year ended January 28, 2000.
(3) Internet
Subsidiary
During fiscal 1999, we incorporated
PartySmart.com, Inc. as a wholly owned subsidiary. PartySmart.com, Inc. has a storefront on the Web that began
selling selected party supplies and paper goods over the Internet in the third
quarter of fiscal 1999. In fiscal 1999,
we incurred development costs of approximately $2.5 million related to the
Internet venture, $1.1 million of which was originally capitalized. In recording certain of these expenses, we
followed the guidance prescribed by SOP No. 98-1, “Accounting for the Costs of
Computer Software Developed for Internal Use,” and the guidance prescribed by
SOP 98-5. During the fourth quarter of
fiscal 1999, we evaluated the assets associated with PartySmart.com and
recognized an impairment loss related to these website assets (See note 4).
(4) Repositioning
Charge (Credits)
During
the fourth quarter of fiscal 1999, we recorded a pre-tax repositioning charge
of approximately $4.0 million, or $1.53 per share, net of tax, consisting of a
reserve for store-closings, and impairment charges on long-lived assets
associated with closed stores and with our Internet website asset.
Reserve
for Store Closings
In
response to operating losses, and in an attempt to strengthen our competitive
position and improve long-term results, during the fourth quarter of fiscal
1999 we adopted a plan to close four under-performing stores, and recorded a
pre-tax charge of approximately $1.7 million.
This amount consisted primarily of reserves for lease obligations for
these stores, net of expected sublease payments. Additionally, we recorded an impairment charge of approximately
$200,000 related to furniture and fixtures and goodwill associated with stores
to be closed. These four stores were
subsequently closed during the first half of fiscal 2000. We also reserved approximately $600,000 in
fiscal 1999 for the remaining lease obligations for one store that was
subsequently relocated during the first quarter of fiscal 2000. Additionally included in the fiscal 1999
repositioning charge was a reserve for a change in the estimate of the
remaining lease obligations, net of expected sublease payments, for four stores
that were previously closed of approximately $700,000.
The reserve for store closings at
the end of fiscal 2000 reflects reductions related to ongoing payments of rent,
common area maintenance, real estate taxes and other miscellaneous expenses on
the stores that were closed, in addition to beneficial adjustments resulting
from the subleasing of store locations. Prior to our original estimate of time
to sublease store locations, we closed on agreements to sublease three store
locations, and terminated a lease on one location, and accordingly, recovered
$970,000 of the store closing reserve during fiscal 2000.
Impairment Charge
During
the fourth quarter of fiscal 1999, in response to actual and projected
operating losses for our Internet venture and a significant change in the
e-commerce competitive advertising environment, we performed a review of the
long-lived assets associated with PartySmart.com, for impairment. As a result
of this review, we concluded that the asset value of our Internet website,
consisting primarily of capitalized internally developed software costs, was
not fully recoverable and we hired an outside firm to perform an
appraisal. As a result of this
appraisal, and in accordance with SFAS No. 121, “Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, we recorded
a pre-tax impairment charge of approximately $800,000 to reflect the related
assets of PartySmart.com at their fair market value.
(5) Property and
Equipment, net
Property and equipment, net, consisted of the following
at:
|
|
February 2,
2001
|
January 28,
2000
|
|
Fixtures
and equipment
|
$15,445,831
|
$14,892,320
|
|
Building
|
1,273,088
|
1,273,088
|
|
Internally
developed software costs
|
615,905
|
340,000
|
|
Land
and improvements
|
319,733
|
319,733
|
|
Accumulated
depreciation and amortization
|
(8,955,812)
|
(6,818,271)
|
|
|
|
|
|
Total
property and equipment, net
|
$8,698,745
|
$10,006,870
|
Depreciation
and amortization expense on property and equipment was approximately $2.3
million, $2.2 million, and $1.7 million for fiscal years 2000, 1999 and 1998,
respectively.
(6) Notes Payable – Line of Credit
We have a $15.0 million multi-year
revolving line of credit facility with a bank for general working capital purposes
that expires in June 2002. Borrowings
outstanding under this line of credit bear interest at a variable rate (8.5% at
February 2, 2001 and at January 28, 2000) and are secured by substantially all
of our assets. Advances under this
credit line are limited to a fixed percentage of certain assets, primarily
inventory. As a result of the
limitations on the fixed percentage and on inventory levels, we often maximize
the availability under our line during intra-month peaks and at certain times
during the year. At February 2, 2001 we
had availability of $8.1 million, of which approximately $6.9 million was
outstanding, and at January 28, 2000, we had availability of $8.9 million, of
which approximately $6.3 million was outstanding.
In March 2000, our Chairman and
Chief Executive Officer, issued a $1.2 million standby letter of credit in
favor of the lender for our revolving line of credit, as beneficiary. This caused the lender to provide us with an
additional $1.2 million advance over our existing revolving line of credit. During
fiscal 2000, we met the requirements for early expiration and the standby
letter of credit was cancelled. In
consideration for issuing the standby letter of credit, we granted an option to
our Chairman to purchase 16,667 shares of our common stock at an exercise price
of $2.91 per share, equal to 110% of the market price of our underlying stock
as of the date of grant, as adjusted to reflect the one-for-three reverse stock
split as approved by our Board of Directors on April 4, 2001. In addition, we agreed to indemnify him for
any liability incurred in connection with the standby letter of credit.
The credit agreement contains
covenants, which require us to satisfy certain financial tests and impose
restrictions on our ability to pay dividends.
We were in compliance with all of our financial covenants as required by
the credit facility at February 2, 2001.
The
credit agreement requires the use of all cash receipts to pay down indebtedness
and includes various covenants, which, if violated, could accelerate the
maturity of the debt. Accordingly, we
have classified borrowings outstanding under the revolving credit facility as a
current liability in our Consolidated Balance Sheets.
(7) Leases
Our
assets under capital leases consist of agreements for equipment and fixtures
and an agreement for software. At
February 2, 2001, assets under capital leases were approximately $1.5 million,
net of accumulated depreciation of approximately $1.2 million, and at January
28, 2000, assets under capital leases were approximately $2.1 million, net of
accumulated depreciation of approximately $612,000.
We
lease all of our retail stores under noncancelable operating leases that have
various expiration dates. In addition to base rents, certain leases require us
to pay our share of common area maintenance and real estate taxes, and include
provisions for contingent rentals based upon sales. Certain of the leases contain renewal options under which we may extend
the term three to five years. Total
rent expense was approximately $10.2 million, $9.7 million and $7.1 million for
fiscal years 2000, 1999 and 1998, respectively.
Future
minimum lease payments required under noncancelable lease agreements existing
at February 2, 2001 were:
|
Fiscal
Year:
|
Operating
Leases
|
Capital
Leases
|
|
2001
|
$11,127,410
|
$589,502
|
|
2002
|
10,596,238
|
560,635
|
|
2003
|
9,967,441
|
410,656
|
|
2004
|
9,033,606
|
41,138
|
|
2005
|
7,806,141
|
--
|
|
Thereafter
|
19,141,541
|
--
|
|
|
|
|
|
Total
future minimum lease commitments
|
$67,672,377
|
1,601,931
|
|
Less:
Interest at 9.4%-15.3%
|
|
210,034
|
|
Total
capital lease obligations
|
|
$1,391,897
|
(8) Long-Term Debt
Subordinated
Convertible Debt
During
fiscal 1999, we issued convertible subordinated debentures in an aggregate
principal amount of $4.0 million, which mature in 2005, and are convertible at
$9.00 into approximately 444,000 shares of our common stock. We received net proceeds of approximately
$3.2 million from the issuance of these debentures, which were used to develop
and implement our Internet website, to repay indebtedness and for other general
corporate purposes. Until September 15,
2000, the debentures bore interest at an annual rate of 9.0% that was payable
quarterly. The indenture under which
these debentures were issued contains covenants that require us to satisfy
certain financial tests and impose restrictions on our ability to pay
dividends. As of our fiscal 1999 year
end, we were in breach of a covenant requiring a minimum consolidated tangible
net worth, however, we were current on all required payments under the
indenture. During fiscal 2000, we
requested a waiver of this breach from our debenture holders, and amendments to
the indenture agreements, to replace the definition of consolidated tangible
net worth in the indenture with a definition of consolidated net worth, and to
increase the interest rate on the debentures.
In order for us to obtain the waiver and approval for the amendments, an
affirmative vote from greater than 50% of the dollar value of the debentures
outstanding was required. We offered
debenture holders a 150 basis point increase in the interest rate to an annual
rate of 10.5%, effective as of September 15, 2000, contingent upon obtaining a
majority affirmative vote.
Additionally, we offered each debenture holder a consent fee of $10 per
bond, payable only upon obtaining his or her affirmative vote. Subsequently, we obtained a waiver for the
breach of the covenant as of January 28, 2000 and obtained required approval
for the amendments. Effective as of
September 15, 2000, the interest rate on our subordinated convertible
debentures increased to an annual rate of 10.5%. We were in compliance with all of our financial covenants as
required by the indenture at February 2, 2001.
Long-term debt consisted
of the following at:
|
|
February 2,
2001
|
January 28,
2000
|
|
Convertible
subordinated debentures due 2005
|
$4,000,000
|
$4,000,000
|
|
Term
note payable in monthly installments of $8,612, including interest at 7.125%
through May 2009. The note is secured by a first mortgage on our office
headquarters
|
1,055,955
|
1,083,004
|
|
$2,300,000
subordinated notes payable to private placement holders called and payable
upon presentment
|
100,000
|
100,000
|
|
Sub-total
long-term debt
|
5,155,955
|
5,183,004
|
|
Capital
lease obligations
|
1,391,897
|
1,980,365
|
|
Less:
current maturities
|
601,943
|
715,517
|
|
Long-term
debt
|
$5,945,909
|
$6,447,852
|
Required
principal payments on long-term debt over the next five years, excluding
capital lease obligations and $100,000 of subordinated notes payable on demand,
are:
|
Fiscal
Year:
|
|
|
2001
|
$29,044
|
|
2002
|
31,182
|
|
2003
|
33,478
|
|
2004
|
35,942
|
|
2005
|
4,038,589
|
|
Thereafter
|
887,720
|
|
|
|
|
Total
required principal payments
|
$5,055,955
|
(9) Income Taxes
The actual income tax rate differed from the amounts computed
by the U.S. federal income tax rate of 34% to pretax net loss as a result of
the following for the fiscal years ending:
|
|
February 2,
2001
|
January 28,
2000
|
January 29,
1999
|
Computed “expected” tax benefit on losses,
including tax benefit associated with change in
accounting principle in fiscal 1999
|
$(247,935)
|
$(2,547,013)
|
$(287,067)
|
|
|
|
|
|
Reduction
in income taxes resulting from state
and local income taxes, net of federal income
tax benefit
|
(25,850)
|
(514,840)
|
(48,548)
|
|
Other
permanent differences
|
(21,215)
|
19,184
|
11,961
|
|
Total
income tax benefit
|
$(295,000)
|
$(3,042,669)
|
$(323,654)
|
|
|
|
|
|
|
Effective
tax rate
|
(40.5%)
|
(40.6%)
|
(38.3%)
|
The components of the income tax benefit were
as follows for the fiscal years ending:
|
|
February 2,
2001
|
January 28,
2000
|
January 29,
1999
|
|
Deferred:
|
|
|
|
|
Federal
|
$(269,150)
|
$(2,527,829)
|
$(275,106)
|
|
State
|
(25,850)
|
(514,840)
|
(48,548)
|
|
Total
income tax benefit
|
$(295,000)
|
$(3,042,669)
|
$(323,654)
|
The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities were as follows at:
|
|
February 2,
2001
|
January 28,
2000
|
|
Deferred
tax asset/(liability):
|
|
|
|
|
|
|
|
Short-term deferred income taxes:
|
|
|
Inventories,
principally due to additional costs inventoried
for tax purposes
|
$249,800
|
$241,240
|
|
Other
|
--
|
19,976
|
|
|
|
|
|
Short-term
deferred tax assets
|
$249,800
|
$261,216
|
|
|
|
|
|
Long-term
deferred income taxes:
|
|
|
|
Net
operating loss carryforwards
|
$3,274,350
|
$2,313,089
|
|
Reserve
for store closings
|
526,066
|
1,248,429
|
|
Difference
in timing of lease deductions
|
626,775
|
545,677
|
|
Cumulative
effect of accounting change
|
46,552
|
72,337
|
Plant
and equipment, principally due to differences in
depreciation and capitalized interest
|
(897,454)
|
(898,346)
|
|
Software
development expense
|
(92,821)
|
(104,134)
|
|
|
|
|
|
Net
long-term deferred tax assets
|
$3,483,468
|
$3,177,052
|
At February 2, 2001, we had a net
operating loss carryforward for federal and state income tax purposes of
approximately $14.5 million, available to offset future taxable income, if any,
through fiscal 2020.
Although realization of the net
deferred tax assets is not assured, we believe based on the level of historical
taxable income and projections for future taxable income, that it is more
likely than not that all of the net deferred tax assets will be realized over
the next 20 years as prescribed by IRS regulations. The amount of net deferred tax assets considered realizable
however, could be adjusted in the future based on changes in conditions or
assumptions.
(10) Equity Transactions
The following equity transactions
reflect the retroactive restatement of the Company’s one-for-three reverse
stock split. (See Note 15.)
During fiscal 2000, we distributed,
to shareholders of record on September 15, 2000, 0.108 rights for each share of
common stock held on September 15, 2000.
Each whole right entitled its holder to purchase one-third share of our $.03
par value common stock at a subscription price of $3.75. No fractional rights were issued and the
rights were not transferable. As a
result of this offering, we sold approximately 332,000 shares of $.03 par value
common stock and raised approximately $1.2 million of net proceeds, to be used
for general working capital and corporate purposes.
During fiscal 1998, we issued
23,583 shares of common stock in partial consideration for the purchase of four
stores from a franchisee.
(11) Stock Options
We have a stock option plan (“the
Plan”) pursuant to which we grant stock option awards in order to attract and
retain employees and directors and to preserve cash resources. Under this plan, 341,667 shares are
available for issuance and 256,066 were outstanding as of February 2,
2001. We also have a separate director
stock option plan (“the Director Plan”) which permits up to 38,214 shares to be
issued, of which 3,334 were outstanding as of February 2, 2001. Under both plans, stock options are granted
with an exercise price equal to the stock’s fair market value at the date of
grant. All stock options have ten-year
terms and vest ratably over three years from the date of grant.
During fiscal 2000, the
Compensation Committee of the Board of Directors approved the repricing to
$6.00 per common share of 141,433 options, all of which were originally granted
in excess of $6.00 per common share.
The repricing of these options creates in substance a modification. Accordingly, these options will be treated
as variable awards, and we will reflect changes in their value in the general
and administrative expense line until the options are exercised or expire. All exercise prices as disclosed in the
footnotes have been restated to reflect the repricing of these options.
During fiscal 1999, our shareholders
approved an amendment to the Plan to increase the number of shares available
for issuance from 175,000 to 341,667, to add non-employee directors,
consultants and independent contractors to the class of persons eligible to
receive awards under the Plan and to amend the provisions regarding the Board’s
ability to amend the Plan without shareholder approval in certain
circumstances.
Details of the status of stock
options as of February 2, 2001 are reflected in the tables below and reflect
the retroactive application of our one-for-three reverse stock split, as
approved by our Board of Directors on April 4, 2001, as if the reverse stock
split had occurred on January 30, 1998.
(See Note 15.)
|
|
Options
|
|
|
Total Outstanding
|
Exercisable
|
|
|
Number of
Shares
|
Weighted-
Average
Exercise
Price
|
Number of
Shares
|
Weighted-
Average
Exercise
Price
|
Options
outstanding
January 30, 1998
|
61,483
|
$6.00
|
61,483
|
$6.00
|
|
Options
granted
|
75,917
|
6.00
|
50,611
|
6.00
|
Options
outstanding
January 29, 1999
|
137,400
|
6.00
|
112,094
|
6.00
|
|
Options
granted
|
37,442
|
5.94
|
12,481
|
5.94
|
|
Options
forfeited/canceled
|
(1,367)
|
6.00
|
(456)
|
6.00
|
Options
outstanding
January 28, 2000
|
173,475
|
6.00
|
124,119
|
6.00
|
|
Options
granted
|
94,300
|
2.76
|
--
|
--
|
|
Options
forfeited/canceled
|
(8,375)
|
5.88
|
--
|
--
|
Options
outstanding
February 2, 2001
|
259,400
|
$4.80
|
124,119
|
$6.00
|
Options exercisable at January 28, 2000 and January 29, 1999 were
65,829 and 20,494, respectively.
|
|
Options
|
|
|
Total Outstanding
|
Exercisable
|
Range of
exercise
price
|
Number of
shares
|
Weighted-
average
remaining
contractual
life in years
|
Weighted-
average
exercise
price
|
Number of
shares
|
Weighted-
average
remaining
contractual
life in years
|
Weighted-
average
exercise
price
|
|
$2.64-$4.29
|
93,667
|
9.2
|
$2.73
|
--
|
--
|
$--
|
|
$4.32-$6.00
|
165,733
|
7.6
|
6.00
|
124,119
|
7.4
|
6.00
|
|
|
259,400
|
8.2
|
4.80
|
124,119
|
7.4
|
6.00
|
The per share weighted-average fair
value of options granted each year using the Black-Scholes option-pricing model
was $1.14 at February 2, 2001, $2.13 at January 28, 2000 and $3.70 at January
29, 1999, using the following weighted-average assumptions for fiscal years:
|
|
2000
|
1999
|
1998
|
|
Volatility
|
60%
|
60%
|
60%
|
|
Expected
Divided Yield
|
0.0%
|
0.0%
|
0.0%
|
|
Risk
Free Rate
|
5.0%
|
6.0%
|
5.5%
|
|
Expected
Life (in years)
|
5.0
|
5.0
|
5.0
|
If we had elected to recognize
compensation cost based on the fair value of the options at the date of grant
as prescribed by SFAS No. 123, our net loss would have increased to the pro
forma amounts indicated below for the fiscal years ending:
|
|
February 2,
2001
|
January 28,
2000
|
January 29,
1999
|
|
Net
loss – as reported
|
$(434,222)
|
$(4,448,547)
|
$(520,660)
|
|
Net
loss – pro forma
|
(673,222)
|
(4,621,547)
|
(649,660)
|
|
|
|
|
|
|
Basic
and diluted net loss per common share – as
reported
|
(0.27)
|
(2.88)
|
(0.34)
|
|
Basic
and diluted net loss per common share –
pro forma
|
(0.41)
|
(3.00)
|
(0.43)
|
(12) Employee Benefits
We have a retirement savings plan
that includes a 401(k) feature. The
plan covers substantially all employees who are 21 years of age and have
completed one year of service.
Employees become fully vested in the plan on a graduated scale over a
six-year period. The 401(k) feature
allows for employees to elect salary deferrals for up to 15% of their
compensation, but not in excess of certain limitations. We match 25% of the first 4% of employee
contributions to the plan. Our
contributions were approximately $54,000, $44,000 and $34,000 for fiscal years
2000, 1999 and 1998, respectively. We reserve the right to make a discretionary
contribution each plan year, however we did not make any discretionary
contributions in fiscal years 2000, 1999 or 1998.
During fiscal 1999, we introduced
an Employee Stock Purchase Plan, which allows eligible employees to purchase
our stock at below-market prices through elected payroll deductions equal to
between 2% and 15% of their compensation.
The plan allows participants to purchase shares of our stock on each
offering date at the lower of 85% of the fair market value of one share of
common stock on the offering date or on the termination date of the offering
period. Pursuant to this plan, during
fiscal 2000, employees purchased approximately 8,400 shares of our common
stock. No stock had been purchased by
employees under this plan prior to fiscal 2000.
(13) Commitments
During the second half of fiscal
2000, we entered into a multi-year partnership with a vendor to be the
exclusive supplier for greeting cards for our Company-owned and franchise
stores. Accordingly, we have a contractual
obligation for chain-wide purchases of $37.0 million of greeting cards and
gift-wrap for our company-owned and franchise stores. We estimate that these purchase commitments will be fulfilled
over a five- to seven- year period.
Total chain-wide purchases in fiscal 2000 under this agreement were
approximately $3.2 million.
(14) Supplementary Financial Information (Unaudited)
The following represents unaudited selected quarterly financial
information for fiscal years 2000 and 1999:
($’s in 000’s, except per
share data)
|
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|
|
2000
|
1999
|
2000
|
1999
|
2000
|
1999
|
2000
|
1999
|
|
Retail
Sales
|
$19,423
|
$16,420
|
$23,221
|
$19,618
|
$22,367
|
$21,447
|
$23,779
|
$23,643
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit (a)
|
5,986
|
5,013
|
8,266
|
6,503
|
7,617
|
6,784
|
8,049
|
7,496
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings (b)(c)(d)
|
(985)
|
(1,217)
|
879
|
101
|
2
|
(418)
|
(330)
|
(2,914)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS (e)
|
$(0.64)
|
$(0.79)
|
$0.57
|
$0.07
|
$0.00
|
$(0.27)
|
$(0.18)
|
$(1.89)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS (e)
|
(0.64)
|
(0.79)
|
0.47
|
0.07
|
0.00
|
(0.27)
|
(0.18)
|
(1.89)
|
|
(a)
|
Gross profit is retail
sales less cost of products sold and occupancy costs.
|
|
(b)
|
First quarter 1999 net
loss includes a $109,000 cumulative effect of accounting change ($.07 per
basic and diluted share, net of tax) related to the adoption of an accounting
pronouncement.
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|
(c)
|
Fourth quarter 1999
net loss includes a $4.0 million repositioning charge ($1.53 per basic and
diluted share, net of tax) consisting of reserves for store closings and
impairment charges on long-lived assets.
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(d)
|
Second, third and
fourth quarter 2000 net earnings (loss) include $530,000 ($.21 per basic and
$.16 per diluted share, net of tax), $160,000 ($.06 per basic and diluted
share, net of tax) and $280,000 ($.09 per basic and diluted share, net of
tax), respectively, related to the recovery of store closing reserves.
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|
(e)
|
Basic and Diluted EPS
reflect the retroactive restatement of our one-for-three reverse stock split
as approved by our Board of Directors on April 4, 2001.
|
(15) Subsequent Event
On April 4, 2001 our Board of
Directors approved a one-for-three reverse stock split of our $.01 par value
common and preferred stock for stockholders of record on April 16, 2001. The reverse stock split reduced the number
of shares of common stock previously issued and outstanding at February 2, 2001
of 5,647,779 to 1,882,593, subject to increase to eliminate fractional
interests resulting from the reverse stock split. No fractional shares of common stock were issued in connection
with the reverse stock split. The par
value of our common and preferred stock correspondingly increased to $.03 per
share. The reverse stock split was
effective as of the close of market on April 16, 2001, and our common stock
began trading on a reverse split basis on April 17, 2001. All share and per share data is presented to
give effect to the retroactive application of the reverse stock split as if it
occurred on January 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
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PAPER WAREHOUSE, INC.
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Dated: April 26, 2001
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By: /s/ Yale T. Dolginow
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Yale T. Dolginow
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Chairman,
President and Chief Executive Officer
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Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below on April 26,
2001 by the following persons on behalf of the registrant and in the capacities
indicated.
SIGNATURE
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/s/ Yale T. Dolginow
Yale T. Dolginow
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Chairman of the Board,
President and
Chief Executive Officer (principal
executive officer)
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|
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/s/ Arthur H. Cobb
Arthur H. Cobb
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Director
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/s/ Diane C. Dolginow
Diane C. Dolginow
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Secretary and Director
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/s/ Marvin W.
Goldstein
Marvin W. Goldstein
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Director
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/s/ Jeffery S. Halpern
Jeffery S. Halpern
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|
Director
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/s/ Martin A. Mayer
Martin A. Mayer
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Director
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/s/ Richard W. Perkins
Richard W. Perkins
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Director
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/s/ Cheryl W. Newell
Cheryl W. Newell
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Vice President and Chief
Financial
Officer (principal financial officer)
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/s/
Diana G. Purcel
Diana
G. Purcel
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Vice
President and Controller
(principal accounting officer)
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PAPER
WAREHOUSE, INC. and SUBSIDIARIES
EXHIBIT
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended February 2, 2001
|
Item No.
|
Description of Item
|
Method
of Filing
|
|
3.1
|
Amended
and Restated Articles of Incorporation
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
3.2
|
Amended
and Restated By-laws
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
4.1
|
Indenture,
dated July 20, 1999, between the Company and
Norwest Bank Minnesota, N.A. relating to 9%
Convertible Subordinated Debentures
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-79161)
|
|
4.2
|
Form
of 9% Subordinated Debentures due September 15, 2005
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-79161)
|
|
10.1
|
1997
Stock Option and Compensation Plan
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
10.2
|
Directors’
Stock Option Plan
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
10.3
|
Corporation
Tax Allocation and Indemnification
Agreement entered into on September 26, 1997 between
the Company and Yale T. Dolginow and Brent D. Schlosser
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
10.4
|
Employment
Agreement between the Company and
Yale T. Dolginow dated February 7, 1997
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
10.5
|
Employment Agreement between the
Company and
Brent D. Schlosser dated February 7, 1997
|
Incorporated by reference to the
Company’s Registration Statement on Form S-1 (File No. 333-36911)
|
|
10.6
|
Amendment
Number 1 to the Employment Agreement by
and between the Company and Brent D. Schlosser dated
September 26, 1997
|
Incorporated
by reference to the Company's Form 10-K for fiscal year ended January 31,
1998 (File No. 0-23389)
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|
10.7
|
Separation
Agreement and General Release between
Brent D. Schlosser and the Company dated December 2, 1999
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended January 28,
2000 File No. 000-23389)
|
|
10.8
|
Employment
Agreement by and between the Company and
Cheryl W. Newell dated July 14, 1997
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-36911)
|
|
10.9
|
1998
Employee Stock Purchase Plan
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended January 29,
1999 File No. 000-23389)
|
|
10.10
|
Amendment
to 1997 Stock Option and Compensation Plan
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended January 28,
2000 File No. 000-23389)
|
|
10.11
|
Mortgage
note dated April 8, 1999 between the Company
and Fortis Insurance Company
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-79161)
|
|
10.12
|
Mortgage
and Security Agreement between the Company
and Fortis Insurance Company dated April 8, 1999
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No. 333-79161)
|
|
10.13
|
Loan
and Security Agreement between BankBoston Retail
Finance, Inc. and the Company dated June 7, 1999
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No.
333-79161)
|
|
10.14
|
First
Amendment to Loan and Security Agreement
between BankBoston Retail Finance, Inc. and the Company
dated December 10, 1999
|
Incorporated
by reference to the Company’s Form 10-Q for quarter ended October 29, 1999
(File No. 000-23389)
|
|
10.15
|
Second
Amendment to Loan and Security Agreement
between BankBoston Retail Finance, Inc. and the Company
dated March 17, 2000
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended January 28,
2000 File No. 000-23389)
|
|
10.16
|
Third
Amendment to Loan and Security Agreement
between BankBoston Retail Finance, Inc. and the Company
dated December 6, 2000
|
Filed
herewith electronically
|
|
10.17
|
Fourth
Amendment to Loan and Security Agreement
between Fleet Retail Finance, Inc. and the Company
dated April 17, 2001
|
Filed
herewith electronically
|
|
10.18
|
Indemnification
Agreement between Yale T. Dolginow and
the Company dated March 21, 2000
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended January 28,
2000 File No. 000-23389)
|
|
10.19
|
First
Supplemental Indenture between the Company and
Norwest Bank, N. A. as trustee
|
Incorporated
by reference to the Company’s Form 10-Q for quarter ended April 28, 2000
(File No. 000-23389)
|
|
10.20
|
Amendment
to 1998 Employee Stock Purchase Plan
|
Incorporated
by reference to the Company’s Form 10-Q for quarter ended April 28, 2000
(File No. 000-23389)
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges
|
Filed
herewith electronically
|
|
21
|
Subsidiaries
of Company
|
Incorporated
by reference to the Company’s Form 10-K for fiscal year ended January 28,
2000 File No. 000-23389)
|
|
23.1
|
Consent
of Grant Thornton LLP
|
Filed
herewith electronically
|
|
23.2
|
Consent
of KPMG LLP
|
Filed
herewith electronically
|
