SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 1, 2002
Commission File No. 0-23389
PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
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Minnesota |
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41-1612534 |
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(State or other
jurisdiction of |
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(I.R.S. Employer |
7630 Excelsior Boulevard
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (952) 936-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.03 par value
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
As of April 23, 2002, 1,886,192 shares of the Registrant’s Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant on such date, based upon the last sale price of the Common Stock as reported on the Nasdaq SmallCap Market on April 23, 2002, was $1,034,717. For purposes of this computation, affiliates of the Registrant are deemed only to be the Registrant’s executive officers, directors and greater than 10% shareholders.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on June 13, 2002 (the “2002 Proxy Statement”).
PAPER WAREHOUSE, INC.
Form 10-K
For the fiscal year ended February 1, 2002
TABLE OF CONTENTS
ITEM 1. BUSINESS.
(a) General Development of Business
Paper Warehouse is a chain of retail stores specializing in party supplies and paper goods. 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. Our fiscal year ended February 1, 2002 (fiscal 2001) consisted of 52 weeks, our fiscal year ended February 2, 2001 (fiscal 2000) consisted of 53 weeks, and our fiscal year ended January 28, 2000 (fiscal 1999) consisted of 52 weeks.
As of February 1, 2002, we had 152 stores, including 100 Company-owned stores and 52 franchise stores. These stores are conveniently located in major retail trade areas to provide customers with easy access. We operate these stores under the names Paper Warehouse and Party Universe. We also operate a website, which can be accessed at www.PartySmart.com. Our website is not intended to be, and is not, a part of this Annual Report on Form 10-K. As of February 1, 2002, our stores were located in the following principal markets:
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• Denver, CO |
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• Des Moines, IA |
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• Kansas City, MO and KS |
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• Minneapolis/St. Paul, MN |
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• Oklahoma City/Tulsa, OK |
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• Omaha, NE |
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• Seattle, WA |
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• Tucson, AZ |
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On April 12, 2002, however, we signed a purchase agreement to sell 13 stores located in Seattle, Washington, and on April 23, 2002, we closed on this transaction and exited the Seattle market.
We offer an extensive selection of party supplies and paper goods, at everyday low prices, for a wide variety of celebratory occasions, everyday uses and seasonal events, including:
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Celebratory occasions and everyday uses |
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Seasonal events |
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• birthdays |
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• Valentine’s Day |
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• Halloween |
Through our 8,500 square foot store prototype, we offer a comprehensive selection of over 19,000 different products, offering customers the convenience of one-stop shopping for all of their party supplies and paper goods needs. We organize our merchandise by party themes. The prominent signage, wide aisles, knowledgeable staff and depth of product offerings allow customers to coordinate various merchandise offerings for all party occasions. We believe that our extensive product selection and high in-stock positions stimulate customers to purchase additional products.
The first Paper Warehouse store opened in Minneapolis, Minnesota in 1983. We purchased the business, consisting of three stores located in the Minneapolis/St. Paul metropolitan area, in 1986, and incorporated it in Minnesota in 1987. In this Annual Report on Form 10-K, “Paper Warehouse,” “Company,” “we,” “our” and “us” refer to Paper Warehouse, Inc. and our subsidiaries, Paper Warehouse Franchising, Inc. and PartySmart.com, Inc. Our principal executive offices are located at 7630 Excelsior Boulevard, Minneapolis, Minnesota 55426. Our telephone number is (952) 936-1000.
(b) Financial Information about Segments
Since our inception, our revenues, operating income (loss) and assets have been attributable to the single industry segment of party supplies and paper goods.
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(c) Narrative Description of Business
Paper Warehouse Stores
Format. We operate stores that range in size from 3,000 square feet to 9,300 square feet of retail space. We introduced our current 8,500-square foot prototype store in 1994, which was developed based on management’s extensive retail and other industry experience, in addition to customer research. Of our 100 Company-owned stores at year end approximately 90% were 6,000 square feet or larger.
Our stores are designed to create a customer-friendly environment. We use vibrant colors, theme-oriented merchandise displays and unique products to create a fun and festive shopping experience. The focal point of our stores is the seasonal display located at the front of each store, which creates a “store-within-a-store” appearance. This display maximizes the season’s selling opportunity and is continuously updated to promote a fresh image within the store. To assist customers in coordinating party supplies for occasions, we locate related departments, such as gift-wrap and greeting cards adjacent to one another and display related merchandise such as party hats, plates, cups and napkins together within a department. Customers are able to easily move about the different departments to find specific product categories due to prominent, easy-to-read signage, bright lighting and wide aisles. We believe that our store layout assists customers in finding and coordinating their party supply needs, and also encourages browsing, impulse purchases and repeat visits.
In 1998 we introduced our “concept store.” A concept store has a different look and feel than our other stores. These stores have more colorful ceilings, lower shelves in the front of the store, carpeting and confetti-tiled floors and new vibrant uncluttered signage. In addition, in our concept store, we endeavor to stow all extra merchandise out of sight. These features give the store a very open and organized feel, allow customers to more easily see merchandise throughout the store, and provide a more fun and festive shopping atmosphere. Of our 100 Company-owned stores at year end, 36 were concept stores. New Company-owned stores are configured as concept stores and we selectively remodel existing stores to concept stores where the revenue potential justifies the investment involved. We believe that our concept stores help facilitate the creation of brand awareness, generate strong sales per square foot and are readily transferable to new markets. During fiscal 2002, we currently plan to remodel four existing stores, to incorporate the concept-store format.
Party Smart Concept. We continue to distinguish our business from our competitors by positioning Paper Warehouse as the party expert. We believe that we have the opportunity to create a distinct identity for ourselves, one in which customers equate us with the word “party” in every possible way. During fiscal 1999, we implemented a program in our stores called Party Smart. We believe strongly in this concept, and continue to invest resources, both financial and personnel, towards the success of this program. We define Party Smart as being able to provide a customer with all the information and resources necessary to have a successful party, celebration or gathering. We reinforce this concept through shopping bag inserts, window and aisle signs, buttons for employees, in-store audio messages, radio broadcasting and the Internet. Through this program, we continue to strive towards:
• increasing the average purchase per customer visit;
• increasing the frequency of store visits; and
• developing customers’ preference for us over our competitors.
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The first phase of the Party Smart program consisted of the following:
• providing helpful and engaging in-store presentations to add value to the shopping experience;
• communicating our expertise by giving customers party ideas, decorating tips, referrals and planning advice and integrating this with our in-depth product knowledge; and
• creating a “party planning resource center” in each store that carries different types of brochures for different types of parties and seasonal events such as entertainment and catering ideas, games to play at children’s birthday parties and shopping checklists.
In an effort to stress our commitment to building and enhancing management skills, during fiscal 2001, we rolled out Phase II of Party Smart. This phase included, among other things, in-depth discussions and workshops covering a variety of managerial topics, the implementation of a new performance evaluation tool and the introduction of certain methods, including background checks, to enhance the evaluation of potential employee candidates.
During fiscal 2002, we intend to continue promoting and supporting the Party Smart philosophy by reinforcing the use of training materials, updating the sales associates workbooks and enhancing the performance evaluation tools to reflect the standards of Party Smart.
Customer Service. We strive towards providing a high level of customer service to enhance our customer-friendly store environment. Store managers and sales associates are trained to assist customers with party planning and event coordination. In connection with our Party Smart program, all employees are trained on how to provide nontraditional customer service to our customers. We want our employees to be able to offer our customers party ideas, decorating tips and referrals, as well as help customers find and purchase products. In addition, we provide party planning guides and checklists. Our “no hassles” return policy makes it easy for customers to return or exchange products, which we believe, encourages customers to purchase additional product quantities. Certain products that require additional sales assistance, such as balloons, are located near checkout counters where sales associates can readily assist customers. We continually monitor our level of customer service by regular store visits and by employing anonymous “mystery shoppers.” Mystery shoppers visit all Company-owned stores at least once per quarter, and evaluate personnel based on our Party Smart philosophy, including various aspects of customer service, such as responsiveness, quality of product displays and store cleanliness. These mystery shopper results are utilized during the evaluation process of our store managers.
Operations and Training. Each Company-owned store is typically operated by a store manager, one assistant manager and a varying number of full-time and part-time sales associates, depending on the store size, sales volume and selling season. Store managers are responsible for all aspects of a store’s day-to-day operations, including employee hiring and training, work scheduling, expense control and customer service. These managers report to a district or operations manager, each of whom is responsible for several stores. Within each geographic market, we use floating managers to assist in smaller stores that cannot support both a store manager and an assistant manager. In addition, floating managers support store managers during busy holiday seasons, and substitute for store managers during vacations and other absences, and work with newly hired store managers to ensure a smooth transition for sales personnel and customers.
Before opening a new Company-owned store, we train store managers intensely for two weeks, on average, depending on their prior experience. During the new store set-up, our district management team provides additional training to our store managers. After the store opening, corporate headquarters personnel spend considerable time overseeing the operations. We schedule periodic training sessions for store managers in the central or district offices on various topics, including human resources,
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merchandising, loss prevention and employee supervision. We cover additional training topics at monthly managers’ meetings and through mailings, such as our weekly merchandising updates and our monthly Company newsletter.
Paper Warehouse stores are typically open:
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Monday through Friday |
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9:00 a.m. to 9:00 p.m. |
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Saturday |
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9:00 a.m. to 6:00 p.m. |
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Sunday |
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10:00 a.m. to 5:00 p.m. |
Site Selection and Locations
Site Selection. In order to select the optimal location for our stores, we use a site selection process that considers various criteria, including:
• population density;
• demographics, including age and income;
• parking availability;
• storefront visibility and presence;
• local competition;
• traffic counts; and
• lease rates.
We locate our stores in or near visible high traffic strip mall centers in close proximity to prominent mass merchandisers, discount or grocery store anchors. Our strategy of clustering stores in metropolitan markets promotes customer convenience and creates favorable economies of scale for marketing and advertising, operations and merchandising.
Locations. As of February 1, 2002, we had 100 Company-owned stores in the following states:
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Number of Stores |
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Arizona |
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4 |
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Colorado |
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14 |
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Iowa |
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5 |
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Kansas |
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8 |
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Minnesota |
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29 |
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Missouri |
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10 |
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Nebraska |
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2 |
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Oklahoma |
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14 |
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Washington |
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13 (1) |
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Wisconsin |
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1 |
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Total Company-owned Stores |
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100 |
(1) As noted above, on April 23, 2002, we sold these stores and exited the Seattle market.
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Merchandising
Overview. Through our 8,500 square foot store prototype, we offer a comprehensive selection of over 19,000 products, providing customers the breadth of product offerings and the convenience of one-stop shopping for all party supplies and paper goods. Our merchandise is organized by party themes. The prominent signage and wide aisles in our stores allow customers easy access to coordinate the merchandise required for all party occasions. We also believe that our extensive and readily available merchandise selection stimulates customers to purchase additional products.
Party Supplies. We offer an extensive selection of complementary and coordinating party supplies in unique and traditional patterns, colors and designs. Examples of party supplies include:
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• invitations |
• plates |
• napkins |
• party favors |
• streamers |
• giftware |
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• 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 with traditional, humorous and contemporary styles under the Ambassador brand of Hallmark.
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. Our low price position is reinforced with extensive promotional and seasonal advertised specials.
Product Sourcing and Inventory Management
We purchase our everyday and seasonal merchandise from approximately 280 suppliers. During fiscal 2001, our largest supplier accounted for approximately 21% of our purchases and our 4 largest suppliers represented approximately 58% of our purchases. We have a multi-year supply agreement with Hallmark Cards, Inc., for Hallmark to be the exclusive supplier of greeting cards for our Company-owned and franchise stores. As a result of this partnership, we have a remaining contractual obligation for chain-wide purchases of $27.5 million of greeting cards and gift-wrap. We estimate that these purchase commitments will be fulfilled over a four-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
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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.
Approximately 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 allows us to carry products 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, Minnesota from which we separate and distribute merchandise system-wide, 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 promote the breadth and value of product offerings, educate consumers about our convenient store locations 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 seasonal events. For fiscal 2001, we distributed 12 newspaper and direct mail inserts in all of our markets, and four in limited markets. We supplement inserts with 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. Historically we have mailed mini-catalogs of wedding and graduation party goods to brides-to-be and families of high school graduates but we 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 2001, 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.
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Information Systems
We believe that a strong information systems infrastructure is essential to our current operations and is critical towards enhancing our competitive position in our industry. We have invested significantly in building this infrastructure. 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 2001, we completed the roll out of “POS Smart”, which is our back-office computer system, to the remainder of our store base. “POS Smart” has improved communication among the stores and the corporate office by enhancing receiving processes, providing timely electronic communication among the corporate office and the stores and improving other back-office processes at the stores. During fiscal 2001, we also implemented electronic data interchange with several of our key vendors, which has allowed us to systematically manage inventory processes and improve order accuracy. In addition, during fiscal 2001 we activated our data warehouse, which has improved our ability to analyze data and report results. During fiscal 2002, we intend to implement time and attendance software that will provide better tracking, accuracy and analysis of store labor hours.
Internet and e-commerce
In order to increase our sales and strengthen our name recognition, we developed a website, PartySmart.com, to sell party supplies and paper goods over the Internet. We believe this site is an additional distribution channel for consumers who want to purchase party or theme products on-line, and it is an 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; and
• obtain information about us, such as store locations, franchising opportunities, investor relations and career opportunities.
Looking forward, we believe that the Internet can be an important information tool and a successful distribution channel for us, and we remain committed to keep this distribution and information channel active. However, we will continue to evaluate the website’s contributions to ensure that they are aligned with our overall goals and objectives.
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Franchising
We have offered franchises of our Paper Warehouse store concept since October 1987. As of February 1, 2002, we had 39 franchisees operating 52 franchise stores in the following locations:
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Number of Stores |
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Arizona |
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1 |
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Canada |
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1 |
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Colorado |
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5 |
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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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1 |
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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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Michigan |
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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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2 |
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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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2 |
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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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Texas |
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7 |
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Wyoming |
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2 |
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Total Franchise Stores |
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52 |
We typically establish franchise stores in markets outside of metropolitan areas with Company-owned stores. We believe that 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; and
• operations training.
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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 is typically $35,000 for new franchisees. 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 5% of their 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 c