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:
|
•
|
invitations
|
•
|
plates
|
•
|
napkins
|
•
|
party favors
|
•
|
streamers
|
•
|
giftware
|
|
•
|
banners
|
•
|
candles
|
•
|
balloons
|
•
|
party snacks
|
•
|
candy
|
•
|
seasonal novelties
|
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:
|
|
•
|
put
together an entire party
|
|
|
•
|
obtain
party advice, ideas and tips
|
|
|
•
|
pay
for everything at one time at a check-out screen
|
|
|
•
|
check
on the status of orders that have already been placed
|
|
|
•
|
contact
customer service about the products and services available on our website
|
|
|
•
|
preview
our store to learn more about our history, products and services
|
|
|
•
|
obtain
information about us, such as store locations, franchising opportunities,
investor relations and career opportunities
|
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:
|
|
•
|
we
appointed a full-time on-site web master
|
|
|
•
|
we
brought the Internet server application “in-house”
|
|
|
•
|
we
moved fulfillment (processing and shipping of orders) “in-house” to our
12,100 square foot Maple Grove, Minnesota location.
|
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:
|
|
Number
of Stores
|
|
Arizona
|
1
|
|
|
Colorado
|
6
|
|
|
Florida
|
1
|
|
|
Georgia
|
1
|
|
|
Illinois
|
2
|
|
|
Iowa
|
2
|
|
|
Kansas
|
2
|
|
|
Kentucky
|
1
|
|
|
Louisiana
|
4
|
|
|
Maryland
|
1
|
|
|
Massachusetts
|
1
|
|
|
Minnesota
|
1
|
|
|
Mississippi
|
1
|
|
|
Missouri
|
1
|
|
|
Montana
|
3
|
|
|
Nebraska
|
3
|
|
|
Nevada
|
1
|
|
|
North
Dakota
|
4
|
|
|
South
Dakota
|
5
|
|
|
Tennessee
|
1
|
|
|
Texas
|
5
|
|
|
Wyoming
|
2
|
|
|
|
|
|
|
Total
Franchise Stores
|
49
|
|
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:
|
|
•
|
specialty
party supply retailers
|
|
|
•
|
other
party superstores such as Party City and Factory Card Outlet
|
|
|
•
|
card
shops such as Hallmark
|
|
|
•
|
designated
departments in mass merchandisers, discount retailers, toy stores, drug
stores, supermarkets and department stores
|
|
|
•
|
other
Internet retailers
|
Two
of our major competitors continue to have significant financial
difficulties. We believe the following
factors distinguish our business from these competitors:
|
|
•
|
we
have grown our number of stores in a more controlled manner
|
|
|
•
|
our
clustering growth strategy creates a critical mass of stores in our principal
markets, which allows us to promote customer convenience and create favorable
economies of scale for marketing, advertising and operations
|
|
|
•
|
we
have a strong dedicated senior management team and board of directors with
significant retail experience
|
Trademarks and Service Marks
We
use the marks Paper Warehouse, Party Universe and Party Smart, 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:
|
|
•
|
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
|
|
|
•
|
increases
in competition among party supplies and paper goods retailers in our
geographic markets
|
|
|
•
|
increases
in store labor expenses primarily due to a rise in the average hourly wage
rates and to a lesser degree, additional staff
|
|
|
•
|
increases
in general and administrative expenses to support our store base and to build
our infrastructure
|
|
|
•
|
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
|
|
|
•
|
operational
and start-up costs of our e-commerce business of approximately $1.4 million,
during fiscal 1999, excluding the impairment charge
|
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:
|
|
•
|
impair
our ability to obtain additional financing for operations, capital
expenditures or general corporate purposes
|
|
|
•
|
cause
a substantial portion of our cash flow from operations to be spent on
principal and interest payments
|
|
|
•
|
affect
our ability to fund our operations
|
|
|
•
|
make
us more vulnerable to economic or industry downturns and competitive
pressures
|
|
|
•
|
prevent
us from making interest and principal payments on our debt obligations
|
|
|
•
|
hinder
our ability to adjust to changing market conditions
|
|
|
•
|
prevent
us from meeting certain financial tests contained in our debt obligations,
which could lead to a default on those obligations
|
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) |
