UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the~~OF ~~Quarterly~~THE ~~Period~~SECURITIES ~~Ended~~EXCHANGE ~~November~~ACT 2,OF ~~2001~~1934

oFor ~~TRANSITION~~the ~~REPORT~~Quarterly ~~PURSUANT~~Period TOEnded ~~SECTION~~May 133, ~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~2002

~~For~~o TRANSITION ~~the~~REPORT ~~transition period~~PURSUANT ~~from___________to_________~~TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-23389

PAPER WAREHOUSE, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41-1612534

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

7630 Excelsior Boulevard

Minneapolis, Minnesota 55426

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (952) 936-1000

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, and (2) has been subject to such filing requirements for the past 90 days. YES ~~[x]~~ý NO ~~[ ]~~o

On ~~December~~June 1310, ~~2001,~~2002 there were 1,886,192 shares of Common Stock, $.03 par ~~par~~ value, of Paper Warehouse, Inc. outstanding.

PAPER WAREHOUSE, INC. ~~and SUBSIDIARIES~~

INDEX

Part I.	FINANCIAL INFORMATION
	Item 1:	Financial Statements
		Consolidated Balance Sheets as of November 2, 2001 and February 2, 2001
		Consolidated Balance Sheets
		Consolidated Statements of Operations for the Three and Nine Months ended November 2, 2001 and October 27, 2000
		As of May 3, 2002 and February 1, 2002
		Consolidated Statements of Cash Flows for the Nine Months ended November 2, 2001 and October 27, 2000
		Consolidated Statements of Operations
		Notes to Consolidated Financial Statements
		For the Three Months ended May 3, 2002
	Item 2:	Management’s Discussion and Analysis of Results of Operations and Financial Condition
		and May 4, 2001
	Item 3:	Quantitative and Qualitative Disclosures about Market Risk
		Consolidated Statements of Cash Flows
Part II.	OTHER INFORMATION
		For the Three Months ended May 3, 2002
	Item 6:	Exhibits and Reports on Form 8-K
		and May 4, 2001
		Signatures
		Notes to Consolidated Financial Statements
	Item 2:	Management’s Discussion and Analysis of
		Financial Condition and Results of Operations
	Item 3:	Quantitative and Qualitative Disclosures about
		Market Risk
Part II.	OTHER INFORMATION
	Item 6:	Exhibits and Reports on Form 8-K
		Signatures

PAPER WAREHOUSE, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	November 2, 2001			February 2, 2001
	May 3, 2002			February 1, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	~~432~~225,~~022~~965		$	~~427~~264,~~878~~067
Merchandise inventories	18,~~808~~157,~~441~~849			1814,~~150~~765,~~433~~866
Accounts receivable	~~870~~1,~~428~~502,791			1,~~168~~177,~~209~~364
Prepaid expenses and other current assets	1724,~~998,623~~036			~~862~~521,~~957~~686
Total current assets	2220,~~109~~610,~~514~~641			2016,~~609~~728,~~477~~983
Property and equipment, net	75,~~612~~941,~~624~~364			86,~~698~~207,~~745~~849
Deferred tax asset	3,483,468			3,483,468
Other assets, net	1,526,268			1,592,055
Other assets, net	1,715,102			1,608,056
Net assets of discontinued operations	—			2,545,786
Total assets	$	3428,~~920~~078,~~708~~273		$	3427,~~399~~074,~~746~~673
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable – line of credit	$	5,517,501		$	6,867,583
Notes payable — line of credit	$	7,438,031		$	7,731,966
Note payable to vendor	145,218			---
Note payable — other	500,000			1,000,000
Current maturities of long-term debt	700,143			601,943
Accounts payable	8,744,821			6,324,741
Accrued liabilities	2,866,099			1,468,129
Current portion – reserve for store closings	203,380			437,565
Total current liabilities	18,177,162			15,699,961
Convertible subordinated debt	4,000,000			4,000,000
Other long-term debt, less current maturities	1,592,172			1,945,909
Current maturities of long-term debt	535,564			553,481
Reserve for store closings, less current portion	507,845			877,601
Accounts payable	9,761,138			8,087,854
Deferred rent credits	1,707,704			1,464,477
Accrued liabilities	1,807,631			1,822,488
Total liabilities	25,984,883			23,987,948
Current portion — reserve for store closings	284,302			311,383
Commitments	---			---
Total current liabilities	24,326,666			23,507,172
Other long-term debt, less current maturities	1,224,412			1,328,979
Reserve for store closings, less current portion	348,381			383,908
Deferred rent credits	1,221,992			1,261,470
Total liabilities	27,121,451			26,481,529
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; 1,886,192 and 1,882,593 shares issued and outstanding	56,585			56,477
Common stock, $.03 par value; 13,333,333 shares authorized; 1,886,192 shares issued and outstanding	56,585			56,585
Additional paid-in capital	15,~~009~~010,~~390~~338			15,~~027~~010,~~827~~548
Accumulated deficit	(614,~~130~~110,~~150~~101		)	(414,~~672~~473,~~506~~989		)
Total stockholders’ equity	8956,~~935,825~~822			10593,~~411,798~~144
Total liabilities and stockholders’ equity	$	3428,~~920~~078,~~708~~273		$	3427,~~399~~074,~~746~~673

See accompanying notes to consolidated financial statements.

PAPER WAREHOUSE, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		~~Three Months Ended~~	Three Months Ended					~~Nine Months Ended~~
		November 2, 2001			October 27, 2000			November 2, 2001			October 27, 2000
			May 3, 2002			May 4, 2001
Revenues:
Retail sales		$	~~22,795,616~~$	17,384,220	$	~~22,367,181~~$	17,457,118	$	~~64,539,848~~		$	~~65,010,932~~
Franchise related fees		~~419,009~~	415,682		~~421,099~~	388,205		~~1,172,589~~			~~1,107,556~~
Total revenues		~~23,214,625~~	17,799,902		~~22,788,280~~	17,845,323		~~65,712,437~~			~~66,118,488~~
Costs and expenses:
Costs of products sold and occupancy costs		~~15,400,399~~	11,114,648		~~14,749,759~~	11,359,627		~~43,010,123~~			~~43,141,527~~
Store operating expenses		~~6,156,793~~	4,663,836		~~5,508,677~~	4,247,419		~~16,395,004~~			~~15,566,669~~
General and administrative expenses		~~2,520,366~~	2,389,184		~~2,251,598~~	2,711,717		~~7,943,975~~			~~7,273,932~~
Repositioning credits		~~---~~	—		~~(160,000~~	(230,000	)	~~(230,000~~)		)	~~(690,000~~		)
Total costs and expenses		~~24,077,558~~	18,167,668		~~22,350,034~~	18,088,763		~~67,119,102~~			~~65,292,128~~
Operating (loss) income		(862,933		)	438,246			(1,406,665		)	826,360
Operating loss from continuing operations			(367,766		)	(243,440		)
Interest expense		~~(444,541~~	(357,709	)	~~(461,783~~)	(352,369	)	~~(1,120,548~~)		)	~~(1,289,087~~		)
Other income, net		~~28,576~~	77,292		~~29,527~~	18,817		~~103,525~~			~~306,047~~
(Loss) income before income taxes		(1,278,898		)	5,990			(2,423,688		)	(156,680		)
Loss from continuing operations before income taxes			(648,183		)	(576,992		)
Income tax benefit (expense)		510,285			(3,721		)	966,044			52,797
Income tax benefit			—			229,720
Net (loss) income		$	(768,613	)	$	2,269		$	(1,457,644	)	$	(103,883	)
Net loss from continuing operations			(648,183		)	(347,272		)
Net (Loss) Income Per Common Share:
Discontinued operations: (Note 3)
Basic net (loss) income per common share		$	(.41	)	$	.00		$	(.77	)	$	(.07	)
Loss from discontinued operations of Seattle market (net of income tax benefit of $52,349 in 2001)			(246,145		)	(79,136		)
Diluted net (loss) income per common share		$	(.41	)	$	.00		$	(.77	)	$	(.07	)
Gain on sale of Seattle market			1,258,216			—
Net income (loss) from discontinued operations			1,012,071			(79,136		)
Net income (loss)			$	363,888		$	(426,408	)
Net income (loss) per common share:
Basic and diluted earnings per share:
Net loss from continuing operations			$	(0.34	)	$	(0.19	)
Net income (loss) from discontinued operations			$	0.53		$	(0.04	)
Net income (loss)			$	0.19		$	(0.23	)
Weighted Average Shares Outstanding	— Basic		1,886,192			1,882,593
	— Diluted		1,887,325			1,887,325

See accompanying notes to consolidated financial statements.

PAPER WAREHOUSE, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	Three Months Ended
	November 2, 2001			October 27, 2000
	May 3, 2002			May 4, 2001
OPERATING ACTIVITIES:
Net loss	$	(1,457,644	)	$	(103,883	)
Net income (loss)	$	363,888		$	(426,408	)
Adjustments to reconcile net loss to net cash provided by (used for) operations:
Net loss from discontinued operations	246,145			79,136
Depreciation and amortization	1,748,820			1,763,623
Adjustments to reconcile net income (loss) to net cash (used for) provided by continuing operations:
Repositioning credits	(230,000		)	(690,000		)
Gain on sale of discontinued operations, net	(1,258,216		)	—
Gains on sales of property and equipment	---			(10,700		)
Depreciation and amortization	529,216			526,906
Deferred taxes	(969,477		)	(62,672		)
Repositioning credits	—			(230,000		)
Deferred rent credits	371,252			157,457
Deferred taxes	—			(283,394		)
Other noncash items affecting earnings	228,630			176,327
Deferred rent credits	(36,083		)	359,803
Changes in operating assets and liabilities:
Other noncash items affecting earnings	65,787			54,475
Merchandise inventories	(658,008		)	(569,784		)
Changes in operating assets and liabilities (excluding effects of disposition):
Accounts receivable	297,781			(542,501		)
Merchandise inventories	(3,391,983		)	(245,302		)
Prepaid expenses and other current assets	(166,189		)	191,571
Accounts receivable	(38,951		)	33,419
Accounts payable	2,565,298			(1,019,191		)
Prepaid expenses and other current assets	(202,350		)	(25,073		)
Accrued liabilities	1,269,945			405,109
Accounts payable	1,673,284			2,302,667
Reserve for store closing	(373,941		)	(570,939		)
Accrued liabilities	(18,252		)	575,839
Net cash provided by (used for) operations	2,626,467			(875,583		)
Store closing reserves	(62,608		)	(219,513		)
Net cash (used for) provided by continuing operations	(2,130,123		)	2,502,555
INVESTING ACTIVITIES:
Purchases of property and equipment, net	(635,908		)	(789,900		)
Proceeds from sale of Seattle market net assets	3,925,222			—
Other	(635		)	(6,600		)
Purchases of property and equipment	(262,731		)	(63,628		)
Net cash used for investing activities	(636,543		)	(796,500		)
Net cash provided by (used for) investing activities of continuing operations	3,662,491			(63,628		)
FINANCING ACTIVITIES:
Net (payments on) proceeds from notes payable – line of credit	(1,350,082		)	2,531,611
Net payments on line of credit	(293,935		)	(2,251,134		)
Net payments on other long-term debt	(26,377		)	(20,107		)
Payments on long-term debt	(616,289		)	(92,017		)
Payment of debt issuance costs	(240,669		)	(33,580		)
Other	(210		)	(3,029		)
Payments on financing of property and equipment	(350,323		)	(477,258		)
Net cash used for financing activities of continuing operations	(910,434		)	(2,346,180		)
Other	(18,329		)	21,406
Net cash (used for) provided by discontinued operations	(660,036		)	87,065
Net cash (used for) provided by financing activities	(1,985,780		)	2,022,072
Net (decrease) increase in cash and cash equivalents	(38,102		)	179,812
Net increase in cash and cash equivalents	4,144			349,989
Cash and cash equivalents, beginning of period	264,067			427,878
Cash and cash equivalents, beginning of period	427,878			469,768
Cash and cash equivalents, end of period	$	225,965		$	607,690
Cash and cash equivalents, end of period	$	432,022		$	819,757
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period	$	~~837~~298,~~201~~028		$	1280,~~061,556~~368
Income taxes paid during the period	~~3,875~~$	1,350		~~9,433~~$	1,350
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Reclassification of accounts payable to note payable to vendor	$	~~145,218~~—		$	~~---~~1,000,010

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

We, (“Paper Warehouse, Inc.” or the “Company”), are a ~~growing~~ chain of retail stores, specializing ~~specializing~~ in party supplies and paper goods. WeAs of ~~operate~~May ~~100~~3, 2002, we operated 87 Company-owned stores in ~~ten~~nine states throughout ~~the~~ 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~~In addition, we sell Paper Warehouse franchises through our wholly owned subsidiary, Paper Warehouse Franchising, Inc.

We prepared these consolidated financial statements in accordance with Securities and Exchange Commission (“SEC”) Rules and Regulations. These unaudited financial statements represent the consolidated financial statements of Paper Warehouse, Inc., Paper Warehouse Franchising, Inc. and PartySmart.com, Inc. as of ~~November~~May 23, ~~2001~~2002 and February 21, ~~2001~~2002 and for ~~for~~ the three ~~and nine~~ month periods ended ~~November~~May 23, ~~2001~~2002 and ~~October~~May 274, ~~2000~~ 2001. The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments, which are, in our opinion, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our fiscal ~~2000~~2001 Form 10-K as filed with the ~~SEC.~~ SEC. The unaudited balance sheet as of February 21, ~~2001~~2002 has been derived from our audited financial statements as of that date.

Due to the seasonality of our business, revenues and operating results for the three ~~and nine~~ months ended ~~November~~May 23, ~~2001~~2002 are not necessarily indicative of the results to be expected for the full year.

(2) ~~Net Earnings~~ Debt ~~(Loss) Per Common Share~~Covenants

~~Basic~~The ~~net~~accompanying ~~earnings~~financial ~~(loss)~~statements ~~per~~have ~~common~~been ~~share~~prepared ~~(“EPS”)~~in isconformity ~~computed~~with accounting principles generally accepted in the United States of America, which contemplates our continuation as ~~net~~a ~~income~~going ~~(loss)~~concern. At ~~divided~~the end of the first quarter, we were in breach of a financial covenant under the indenture for our subordinated convertible debentures. If this breach continues until June 16, 2002, it will become an “Event of Default” as defined by the ~~weighted~~indenture. An ~~average~~“Event ~~number~~of Default” would permit either the indenture trustee or the holders owning at least 25% of the ~~common~~outstanding debentures to declare all of the $4.0 million of the ~~shares~~outstanding debentures to be due and payable, although we are seeking to obtain a waiver of this breach and amendments to the indenture from the debenture holders prior to it becoming an “Event of Default.” In addition, if the waiver is not obtained by June 16, 2002, a cross default would occur and cause us to be in default of our bank line of credit. We are in the process of trying to obtain the required waiver and amendments. If we are unable to obtain the waiver and the amendments and if the indenture trustee or the holders owning at least 25% of the outstanding debentures ~~during~~declare all of the ~~periods~~$4.0 million of the outstanding debentures to be due and payable, we currently have no available source of additional funds.

~~Diluted~~In ~~EPS~~view isof the matters described in the preceding paragraph, ~~computed~~recoverability asof ~~net~~a ~~income~~major ~~(loss)~~portion ~~divided~~of by the ~~weighted~~recorded ~~average~~asset ~~number~~amounts ofshown ~~common~~in the ~~shares~~accompanying ~~outstanding~~balance ~~during~~sheet ~~the~~is ~~period;~~dependent ~~increased~~upon toour ~~include~~continued ~~assumed~~operations, ~~conversions~~which in ofturn ~~potentially~~is ~~dilutive~~dependent ~~shares~~upon ~~outstanding~~our ~~into~~ability ~~common~~to ~~shares,~~obtain ~~when~~the waiver in a timely ~~dilutive~~fashion. ~~Our~~The ~~potentially~~financial ~~dilutive~~statements do ~~shares~~not ~~of common stock~~ include ~~stock~~any ~~options~~adjustments ~~which~~relating ~~have~~to ~~been~~the ~~granted~~recoverability toand classification ~~employees~~of ~~and~~recorded ~~outside~~asset ~~directors,~~amounts ~~our~~or ~~outstanding~~amounts ~~convertible~~and ~~subordinated~~classification of liabilities that ~~debentures~~might ~~and~~be anecessary ~~warrant~~should ~~granted~~we tobe ~~the~~unable ~~underwriter~~to continue as ~~part~~a ofgoing ~~our convertible debenture offering~~concern.

~~We had $~~4.0 million of convertible subordinated debentures outstanding as of November 2, 2001 and October 27, 2000 that were not included in the computation of diluted EPS for the three and nine month periods ended November 2, 2001 or the nine month period ended October 27, 2000, as their inclusion (approximately 444,000 shares) would have been antidilutive. In addition, options to purchase approximately 256,300 shares of common stock were outstanding as of November 2, 2001 but were excluded from the computation of common share equivalents for the three and nine month periods ended November 2, 2001 because they were antidilutive. Options to purchase approximately 261,400 shares of common stock were outstanding as of October 27, 2000 but were excluded from the computation of common share equivalents for the nine month period ended October 27, 2000 because they were antidilutive.

~~Had~~We wehave ~~not~~sought ~~incurred losses~~assistance into ~~these~~help ~~periods,~~us ~~for~~obtain the ~~three~~waiver and ~~nine~~amendments ~~month~~in accordance ~~periods~~with ~~ended~~the ~~November~~plan ~~2, 2001,~~approved weby ~~would~~our ~~have~~board ~~assumed~~of ~~conversions~~directors. If ofwe ~~convertible~~are ~~subordinated~~unable ~~debentures into~~to ~~approximately~~obtain ~~444,000~~the ~~common~~waiver ~~shares~~and amendments, and weacceleration ~~would~~occurs, ~~have~~we ~~assumed~~will ~~no conversions~~proceed ofto ~~stock~~develop ~~options. For the~~additional ~~first~~options ~~nine~~including ~~months~~vender ~~of fiscal 2000~~financing, wearrangements ~~would~~with ~~have~~our ~~assumed~~landlords, ~~conversions of~~reducing ~~convertible~~operating ~~subordinated~~expenses, ~~debentures~~and ~~into~~other ~~approximately~~additional ~~444,000~~steps. ~~common~~We ~~shares~~believe these actions will ~~and~~allow ~~conversions~~us ofto ~~stock~~fund ~~options~~our ~~into~~business ~~approximately~~in ~~20,000~~the ~~common~~near ~~shares~~term.

~~The~~(3) Net ~~components~~Earnings of(Loss) ~~basic and~~Per ~~diluted~~Common ~~EPS for the three and nine-month periods ended November 2, 2001 and October 27, 2000 are as follows:~~Share

	Three Months Ended					Nine Months Ended
Basic and diluted EPS:	November 2, 2001			October 27, 2000		November 2, 2001			October 27, 2000
Basic EPS:
Net (loss) income	$	(768,613	)	$	2,269	$	(1,457,644	)	$	(103,883	)
Weighted average shares outstanding	1,886,192			1,548,270		1,883,896			1,547,054
Basic EPS	$	(.41	)	$	.00	$	(.77	)	$	(.07	)
Diluted EPS:
Net (loss) income	$	(768,613	)	$	2,269	$	(1,457,644	)	$	(103,883	)
Weighted average shares outstanding	1,886,192			1,548,270		1,883,896			1,547,054
Assumed conversions of stock options	---			32,606		---			---
Adjusted weighted average shares outstanding	1,886,192			1,580,876		1,883,896			1,547,054
Diluted EPS	$	(.41	)	$	.00	$	(.77	)	$	(.07	)

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 (3loss) ~~Financing~~ divided by the weighted average number of common shares ~~Arrangements~~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, 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 that were outstanding as of May 3, 2002, that were not included in the computation of diluted EPS for the three month period ended May 3, 2002, as their inclusion would have been antidilutive. We also had 257,568 stock options outstanding as of May 3, 2002, that were not included in the computation of diluted EPS for continuing operations as their inclusion would have been antidilutive. Had we not incurred a loss from continuing operations in the first quarter of fiscal 2002, we would have assumed conversions of convertible subordinated debentures into approximately 444,000 shares of common stock and we would have assumed conversions of stock options into approximately 1,133 shares of common stock.

We ~~have outstanding~~had as$4.0 ofmillion ~~November 2, 2001,~~ of convertible subordinated debentures inoutstanding anand 256,318 stock options ~~aggregate~~outstanding ~~principal~~as ~~amount~~ of ~~$4.0~~May ~~million~~4, ~~convertible~~2001 ~~into~~that ~~444,000~~were ~~shares~~not ~~of our~~included ~~common~~in ~~stock. The~~the ~~debentures~~computation ~~bear~~of ~~interest~~diluted atEPS anfor ~~annual~~the ~~rate~~three ofmonth ~~10.5%,~~period ~~payable~~ended ~~quarterly~~May 4, ~~and~~2001, ~~mature~~as intheir inclusion, ~~2005. The~~would ~~indenture~~have ~~under~~been ~~which~~antidilutive. Had ~~these~~we ~~debentures~~not ~~were~~incurred ~~issued~~a ~~contains~~loss ~~covenants~~in ~~that~~the ~~require~~first usquarter toof ~~satisfy~~fiscal ~~certain financial~~2001, ~~tests~~we ~~and~~would ~~impose~~have ~~restrictions~~assumed conversions onof ~~our~~convertible ~~ability~~subordinated todebentures ~~pay~~into ~~dividends. We~~approximately ~~were in compliance with all of our~~444,000 ~~financial~~common ~~covenants~~shares asand ~~required~~we bywould ~~the~~have ~~indenture~~assumed atno ~~November~~conversions 2,of ~~2001~~stock options.

~~We have a $15.0~~(4) Discontinued million multi-year revolving line of credit facility with Wells Fargo Retail Finance for general working capital purposes that expires in September 2004. Borrowings outstanding under this line of credit bear interest at the prime 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 borrowing limitation, primarily resulting from the levels of inventory, we often maximize the availability under this line during intra-month peaks and at certain times during the year. On November 2, 2001, we had availability of approximately $13.2 million under this line, of which approximately $5.5 million was outstanding.Operations

~~The~~On ~~credit~~April 23, 2002, we ~~agreement~~completed ~~contains~~the ~~covenants~~sale of 13 stores in the Seattle market for approximately $4.5 million and exited that market. We sold substantially all of our assets used in connection with the operation of those stores, which ~~requires~~consisted usprimarily toof ~~maintain~~inventory ~~certain~~and ~~financial~~equipment. In accordance with Statement of Financial ~~covenants~~Accounting Standards No. 144, a“Accounting for ~~certain~~the ~~level~~Impairment or Disposal of ~~availability~~Long-Lived Assets, ~~and~~which ~~imposes~~we adopted ~~restrictions~~February on2, ~~our~~2002, we have reflected the operating results of the 13 ~~ability~~stores toin ~~pay~~the ~~dividends~~Seattle market for the three months ended May 3, 2002 and May 4, 2001 as discontinued operations in our consolidated statement of operations. WeIn ~~were~~addition, inwe have ~~compliance~~reflected ~~with~~the ~~all~~net assets of ~~our~~the ~~covenants~~13 stores in the Seattle market as ~~required~~net byassets of ~~the~~discontinued ~~credit~~operations ~~facility~~in our consolidated balance sheet at February 1, ~~November~~2002. We 2,recorded ~~2001~~a gain of approximately $1.3 million in connection with the sale.

~~(4) Note payable to vendor~~5

In(5) Financing order to enhance our liquidity through the second half of fiscal 2001, we 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. The note payable to vendor of approximately $145,000 as of November 2, 2001 represents the principal amount of the deferred trade payments for one of our vendors, on which we are also paying interest. All other deferred trade payments are non-interest bearing and are reflected in accounts payable as of November 2, 2001. The note payable, including interest, and all other deferred trade payments were paid in full by December 1, 2001.Arrangements

(We have outstanding as of May 3, 2002, convertible subordinated debentures in an aggregate principal amount of $4.0 million, convertible into 444,000 shares of our common stock. The debentures bear interest at an annual rate of 10.5~~) Common~~%, payable quarterly, and mature in ~~Stock~~2005. ~~Transactions~~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.

OnSince ~~April~~February 41, ~~2001 our~~ ~~Board~~2002, we have been in breach of ~~Directors~~a ~~approved~~covenant under the indenture that requires us to maintain a ~~one-for-three~~minimum ~~reverse~~consolidated ~~stock~~net ~~split~~worth of ~~our~~at least $7.010 ~~par~~million. We are current, however, on all required ~~value~~payments ~~common~~under ~~and~~the ~~preferred~~indenture. We ~~stock~~have asked ~~for~~our ~~stockholders~~debenture ofholders ~~record~~to onwaive ~~April~~this 16breach, and to approve amendments to ~~2001~~our indenture to eliminate the financial covenants that require us to maintain a minimum consolidated net worth and limit our ability to incur additional indebtedness, before June 16, 2002. ~~The~~If we ~~reverse~~do ~~stock~~not ~~split~~receive ~~reduced~~consents to waive the existing breach under the indenture from more than 50% of the ~~number~~aggregate principal amount of ~~shares~~the outstanding debentures by June 16, 2002, such breach will become an “Event of ~~common~~Default” ~~stock~~under ~~previously~~the ~~issued~~terms of ~~and~~the ~~outstanding~~indenture. An at“Event of Default” ~~February~~would 2,permit ~~2001~~either the indenture trustee or the holders owning at least 25% in principal amount of ~~5,647,779~~the outstanding debentures to ~~1,882,593,~~declare ~~subsequently~~all ~~increased~~of tothe ~~eliminate~~$4.0 ~~fractional~~million ~~interests~~of ~~resulting~~outstanding ~~from~~debentures ~~the~~to ~~reverse~~be ~~stock~~immediately ~~split~~due and payable. NoAn ~~fractional~~“Event ~~shares~~ of ~~common~~Default” ~~stock~~under ~~were~~our indenture would ~~issued~~also incross-default ~~connection~~our revolving credit agreement and would provide our secured lender with the ~~reverse~~right ~~stock~~to ~~split. The~~prevent ~~par~~us ~~value~~from paying future principal or interest payments to the holders of our ~~common~~subordinated ~~and~~debentures ~~preferred~~until ~~stock~~such ~~correspondingly~~“Event of ~~increased~~Default” is cured, waived or ceases to $exist.03 We ~~per~~cannot ~~share~~predict at this time whether our secured lender will prevent us from making future payments of interest on the debentures if an “Event of Default” occurs under the indenture. ~~The~~ ~~reverse~~If ~~stock~~an ~~split~~event ~~was~~of ~~effective~~default asoccurs under our revolving line of credit, a waiver of the ~~close~~“Event of ~~market~~Default” onunder ~~April~~the 16indenture cannot cure the line of credit default. To cure the line of credit default, ~~2001~~we would need to obtain a waiver from our secured lender. In addition, if the outstanding amount of ~~and~~the subordinated debentures is accelerated, the amount outstanding under our revolving ~~common~~line ~~stock~~of ~~began~~credit ~~trading~~could onalso abe ~~reverse~~made ~~split~~immediately ~~basis~~due onand ~~April~~payable ~~17,~~by our ~~2001~~senior lender. ~~All~~Due ~~share~~to ~~and~~our ~~per~~breach, ~~share~~the $4.0 ~~data~~million isconvertible subordinated debentures are reflected as current debt ~~presented~~in toour ~~give~~consolidated ~~effect~~balance sheets. In the future, we may also consider a program to ~~the~~repurchase ~~retroactive~~our ~~application~~outstanding debentures, ofprovided that we have the ~~reverse~~funds ~~stock~~available for, and our secured ~~split~~lender has approved, such a program.

~~(6) Repositioning~~We have a $15.0 ~~credits~~million –multi-year ~~Reserve~~revolving line of credit facility with a bank for ~~Store~~general working ~~Closings~~capital purposes that expires in September 2004. 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 borrowing limitation primarily resulting from the levels of inventory, we often maximize the availability under our line during intra-month peaks and at certain times during the year. On May 3, 2002, we had availability of approximately $9.4 million under this line, of which approximately $7.4 million was outstanding.

The ~~reserve for store~~revolving ~~closings~~credit ~~reflects~~agreement ~~reductions~~also ~~related~~contains tocovenants, ~~ongoing~~which ~~payments~~require ofus ~~rent,~~to ~~common~~maintain ~~area~~certain ~~maintenance~~financial covenants and ~~real~~a ~~estate~~certain ~~taxes~~level of availability, and imposes restrictions on ~~stores~~our ~~that~~ability to pay dividends. We were ~~closed~~in compliance with, inor ~~addition~~had toobtained waivers for, all of our ~~beneficial~~financial ~~adjustments~~covenants ~~resulting~~as ~~from~~required by the ~~subleasing~~credit orfacility ~~termination~~at May 3, 2002. If an “Event of ~~leases~~Default” occurs under our ontrust ~~certain~~indenture, ~~store~~however, ~~locations~~it will cross-default our revolving credit agreement. To cure the line of credit default, we would need to obtain a waiver from our secured lender.

During the first quarter of fiscal 2001, we terminated the lease on the Colorado Springs, Colorado store location, which had been previously closed. Accordingly, a reversal of $230,000 of the store closing reserves related to this location is reflected in our consolidated statement of operations for the nine months ended November 2, 2001.6

(76) ~~Recently Issued~~ Notes ~~Accounting Pronouncements~~payable

OnAs ~~July~~of ~~20,~~May ~~2001~~3, ~~the~~2002, ~~Financial~~we ~~Accounting~~had ~~Standards~~$500,000 ~~Board~~remaining ~~(FASB)~~on ~~issued~~an ~~Statement~~unsecured ofnote ~~Financial Accounting~~payable ~~Standards~~to ~~(SFAS)~~an ~~141,~~unrelated ~~Business Combinations, and SFAS 142, Goodwill and~~business ~~Intangible Assets~~partner. ~~SFAS~~This ~~141 is~~note ~~effective~~was ~~for~~paid ~~all~~in ~~business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years~~full ~~beginning~~subsequent ~~after~~to ~~December~~first ~~15,~~quarter ~~2001~~end. ~~Major provisions of these Statements and their effective dates for the Company are as follows:~~

•(7) Repositioning ~~all~~Credits ~~business~~— ~~combinations~~Reserve initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited. • intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability. • goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective February 2, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. • effective February 2, 2002, goodwill and intangible assets with indefinite lives will be tested for ~~impairment annually and whenever there is an impairment indicator. • all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.~~Store Closings

~~Although~~The wereserve ~~are~~for ~~still~~store ~~reviewing~~closings ~~the~~reflects ~~provisions~~reductions ofrelated ~~these~~to ~~Statements,~~ongoing ~~our~~payments ~~preliminary~~of ~~assessment~~rent, iscommon area maintenance and real estate taxes on the stores that ~~these~~were ~~Statements~~closed, ~~will~~in ~~not~~addition to ~~have~~beneficial aadjustments ~~material~~resulting ~~impact~~from onthe subleasing of, and the ~~Company’s~~termination ~~financial~~of, ~~position~~leases oron ~~results~~certain ofstore ~~operations~~locations.

InDuring ~~September~~the ~~2001,~~first quarter ~~the~~of ~~FASB~~fiscal ~~issued~~2001, ~~SFAS~~we ~~144,~~closed ~~Accounting~~on ~~for~~an ~~the~~agreement ~~Impairment~~to orterminate ~~Disposal~~the ~~of Long-lived~~lease ~~Assets. SFAS~~on ~~144~~the ~~combines~~Colorado ~~the~~Springs, ~~two~~Colorado ~~accounting~~store ~~models~~location, ~~for~~which ~~disposals~~had ofbeen ~~long-lived assets and~~previously ~~resolves previously identified implementation issues~~closed. ~~This~~Accordingly, ~~Statement~~the isreversal ~~effective for financial statements issued for~~of ~~fiscal years beginning after December 15~~$230,000 ~~2001. We~~of dothe ~~not~~store ~~anticipate~~closing ~~that~~reserves ~~this~~is ~~Statement~~reflected ~~will~~in ~~have~~our ~~a material~~consolidated ~~effect~~statement onof operations for the ~~company~~three ~~unless~~months anended ~~impairment~~May ~~event~~4, ~~occurs~~2001.

~~MANAGEMENT’S~~(8) Income ~~DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS~~Taxes

~~AND~~During ~~FINANCIAL~~the ~~CONDITION~~fourth quarter of fiscal 2001, we recorded a full valuation allowance against our deferred tax asset. Accordingly, income tax expense for the quarter was offset by net operating loss carryforwards. The Company’s estimated annual effective income tax rate was 40% for the first quarter of fiscal 2001.

(9) Adoption of New Accounting Standards

On February 2, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, SFAS No. 142, Goodwill and Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. As a result of the adoption of SFAS 142, we ceased amortization of our goodwill on February 2, 2002 and we will evaluate goodwill for impairment at least annually thereafter. We have goodwill of approximately $477,000. We completed the transitional goodwill impairment test required by SFAS 142 and no impairment was identified. The adoption of SFAS 141 and 142 did not have a material effect on our consolidated financial statements or reporting of financial information. The sale of the Seattle net assets were accounted for in accordance with SFAS No. 144 as discontinued operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

We are a ~~growing~~ chain of retail stores specializing in party supplies and paper goods. WeAs ~~operate~~of ~~100~~May 3, 2002, we operated 87 stores in ~~ten~~nine 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~~site, ~~the~~which ~~name~~can be accessed at www.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~~We ~~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; and

• achieve favorable economies of scale.

Fiscal Year

Our fiscal year ends on the Friday closest to January 31^st. 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.

Revenues

Total revenues consist of retail sales from our Company-owned stores and Ee-commerce web site, and franchise related fees. Franchise related fees include royalties we receive on sales, generally 4-5% of the store’s sales, and initial franchise fees, recognized at the time ~~the~~ the franchisee signs a lease for a store, and 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~~operation.

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 and expenses relating to franchising, such as payroll, legal, travel and advertising.

RESULTS OF OPERATIONS

Net Income (Loss) ~~Income~~ and Net Income (Loss) ~~Income~~ Per Common Share

We reported a net ~~loss~~income of approximately $~~769~~364,000, or $0.4119 per ~~share on a~~ diluted ~~basis~~ share, for the ~~third~~first quarter ended ~~November~~May 23, ~~2001~~2002, compared to a net ~~income~~loss of approximately $2426,~~300~~000, or ($0.0023) per ~~share~~ ~~on a~~ diluted ~~basis~~share, for the ~~third~~first quarter ended ofMay ~~fiscal~~4, ~~2000~~2001. WeOur ~~reported~~2002 first quarter results reflect a net loss of approximately $1648,~~458,~~000 from continuing operations, or ($0.7734) per ~~share~~diluted ~~year-to-date~~share, ~~compared~~offset toby a net ~~loss~~income offrom discontinued operations of approximately $~~104~~1.0 million,~~000,~~ or $0.0753 per diluted share. The results for the ~~prior-year comparable~~first ~~period. EBITDA~~quarter of 2001 reflect a net loss of approximately $347,000 ~~(earnings~~from ~~before~~continuing ~~interest~~operations, ~~taxes,~~or ~~depreciation~~($0.19) ~~and~~per ~~amortization)~~diluted share, ~~excluding~~and ~~any~~a ~~repositioning~~net loss from discontinued ~~activity,~~operations ~~was~~of ~~approximately~~ $~~216~~79,~~000~~136, or ($0.04) per diluted share. The principal reason for ~~the~~our first ~~nine~~quarter ~~months~~losses offrom ~~fiscal 2001~~continuing ~~compared~~operations tois ~~EBITDA~~the seasonality of ~~approximately~~our ~~$2.2~~business, ~~million~~in ~~for~~which, ~~the~~first ~~same~~quarter ~~period~~is intypically ~~the~~our weakest ~~prior year~~quarter. The ~~decline~~combination of first quarter’s relatively low sales volume with our expense structure usually results in a first-quarter loss. EBITDA ~~year-over-year~~(earnings ~~primarily~~before ~~reflects~~interest, ~~lower-than-expected~~taxes, ~~sales~~depreciation and ~~resulting~~amortization) from ~~margin. Although~~continuing ~~sales~~operations ~~for~~excluding ~~our~~any ~~seasonal~~repositioning activity, of approximately ~~events~~$239,000 ~~including~~for ~~graduation~~the ~~and~~first ~~Halloween,~~quarter ~~have~~of ~~been~~fiscal ~~strong~~2002, ~~sales~~compared ~~for~~favorably ~~our~~to an EBITDA ~~everyday~~of ~~product~~approximately ~~categories~~$72,000 ~~remain~~for ~~soft~~the comparable period in the prior year.

The following table sets forth for the periods indicated, certain costs and expenses of continuing operations as a percentage of total revenues and retail sales of continuing operations:

	Three Months Ended				~~Nine Months Ended~~
	November 2, 2001		October 27, 2000		November 2, 2001		October 27, 2000
	May 3, 2002		May 4, 2001
Costs of products sold and occupancy costs:
as % of total revenues	6662.34	%	6463.7	%	~~65.5~~	%	~~65.2~~	%
as % of retail sales	6763.69	%	65.91	%	~~66.6~~	%	~~66.4~~	%
Store operating expenses:
as % of total revenues	26.52	%	2423.28	%	~~24.9~~	%	~~23.5~~	%
as % of retail sales	2726.08	%	24.63	%	~~25.4~~	%	~~23.9~~	%
General and administrative expenses:
as % of total revenues	1013.94	%	915.92	%	~~12.1~~	%	~~11.0~~	%
as % of retail sales	1113.17	%	1015.15	%	~~12.3~~	%	~~11.2~~	%
Number of Company-owned stores	100		98		100		98
Number of Company-owned stores related to continuing operations	87		85
Total number of Company-owned stores	87		98

Revenues

Retail Sales. Retail sales offrom ~~approximately~~continuing ~~$22.8~~operations ~~million for the third quarter~~ of ~~fiscal 2001 decreased $428,000, or 2%, from retail~~ ~~sales of approximately~~ $2217.4 million for the ~~comparable~~first ~~period~~three inmonths ~~the prior year. On a year-to-date basis, retail sales~~ of ~~approximately~~fiscal ~~$64.5~~2002 ~~million~~ decreased ~~approximately~~ $~~471~~73,000, ~~or less~~from ~~than 1%, from~~ retail sales of ~~approximately~~ $6517.05 million for the first ~~nine~~ three months of fiscal ~~2000~~2001. Sales from our Internet web site, although improved, were not significant. ~~Similar to other retailers, sales remain~~As ~~soft. While~~previously ~~our fiscal 2001 seasonal categories have performed well~~mentioned, ~~our~~we ~~everyday~~sold ~~product~~13 ~~categories~~stores ~~have~~in ~~continued to~~the ~~perform~~Seattle atmarket ~~below~~during ~~prior~~the ~~year~~first ~~levels. We~~quarter ~~opened~~ended ~~one~~May ~~new~~3, ~~store~~2002, ~~during the~~and ~~quarter~~exited ~~ended~~that ~~November 2~~market. Accordingly, ~~2001, bringing~~ our Company-owned store count towas ~~100, compared~~87 toat aMay ~~store~~3, ~~count~~2002, ofas compared to 98 at ~~October~~May 274, ~~2000~~ 2001. ~~Third~~Sales ~~quarter~~have ~~2001~~remained ~~comparable~~soft, ~~store~~as ~~sales increased approximately~~the ~~1.0%,~~economy ~~while~~continues ~~nine-month~~to ~~comparable~~rebound ~~store sales were essentially flat~~slowly. ~~These~~ First ~~growth~~quarter ~~rates~~2002 ~~compare to~~ comparable store sales ~~increases~~declined of 2.80% ~~and~~from ~~9.5% for~~ the ~~third quarter and first nine months of~~prior ~~fiscal~~year ~~2000~~comparable period.

Franchise Related Fees. Franchise related fees for the third quarter of fiscal 2001 of approximately $419,000 were essentially flat to franchise related fees of approximately $421,000 for the comparable period in the prior year, and primarily reflect a slowdown in the economy. For the nine-month period ended November 2, 2001, franchise related fees of approximately $1.2 million increased 6% over franchise related fees of approximately $1.1 million for the prior year comparable period. The year-over-year increase for the nine-month period primarily reflects increased royalties resulting from higher franchise store sales. During the third fiscal quarter of 2001, one franchise store opened, bringing the total of franchise stores to 54 at November 2, 2001 compared with 48 franchise stores at the end of the third quarter of fiscal 2000.9

Franchise Related Fees. Franchise related fees for the first three months of fiscal 2002 of approximately $416,000 increased 7% over franchise related fees of approximately $388,000 for the comparable period in the prior year. The year-over-year increase primarily reflects initial franchise fees collected for new franchise openings, in addition to increased royalties resulting from higher franchise store sales. During the first fiscal quarter of 2002, we opened two franchise stores, for a total of 54 franchise stores at May 3, 2002 compared with 51 franchise stores at May 4, 2001.

Costs of Products Sold and Occupancy Costs

Cost of products sold and occupancy costs ~~totaled~~for ~~approximately~~continuing operations totaled $1511.41 million, or 6763.69% of retail sales, for the ~~third~~first quarter ended May ~~November 2~~3, ~~2001~~2002, as compared to approximately $1411.74 million, or 65.91% of retail ~~sales for the third quarter~~ ~~ended October 27~~sales, ~~2000. Cost of products sold and occupancy costs totaled approximately $43.0 million or 66.6% of retail sales~~ for the ~~nine~~first ~~month~~quarter ~~period~~ ended ~~November~~May 24, 2001~~, as compared to approximately $43~~.1 As ~~million~~a orresult ~~66.4%~~ of ~~retail~~ ~~sales~~our ~~for~~aggressive ~~the~~markdown ~~comparable~~program ~~period~~ in ~~the~~fiscal ~~prior year. For the quarter~~2001, ~~our gross margin dollars~~we were ~~unfavorable~~able to ~~the~~remove ~~prior~~a ~~year,~~significant ~~primarily~~amount ~~due~~of toslower ~~the~~moving ~~shortfall~~and indiscontinued ~~sales. In~~items ~~addition,~~from our ~~product~~assortment, ~~margin percentage~~and ~~for~~we ~~the~~entered ~~third quarter of~~ fiscal ~~2001~~2002 ~~decreased~~with ~~significantly~~a ~~from~~higher ~~the~~blended ~~product~~ margin ~~percentage~~on ~~for~~inventory ~~the~~available ~~third~~for ~~quarter~~sale ofthan ~~fiscal 2000. The decline~~ in the ~~margin~~prior ~~percentage reflects an aggressive markdown strategy that was implemented in order to reduce carryover merchandise and remove older items from our assortment~~year. ~~Although~~Accordingly, weour ~~realized~~product ~~diminished~~ margins for the ~~during~~first ~~the~~three ~~third~~months ~~quarter as a result~~ of ~~this~~fiscal ~~strategy,~~2002 ~~this~~increased ~~markdown program was successful in~~ substantially ~~reducing~~over ~~our~~the ~~carryover~~prior ~~of Halloween~~year ~~merchandise~~comparable period. ~~This~~The ~~strategy~~increase ~~has allowed~~in usmargin toalso ~~clean~~reflects upa ~~old~~shift ~~inventory~~in ~~and,~~sales ~~going~~from ~~into~~seasonal ~~fiscal~~product ~~2002,~~categories ~~will enable us~~ to ~~re-invest~~ ineveryday ~~newer and trendier merchandise. Our~~ product ~~margin~~categories, ~~percentage~~which ~~for~~typically ~~the~~carry ~~year-to-date~~higher ~~period~~margins. It ~~was~~also ~~essentially~~reflects ~~flat~~successful topattern changeovers ~~the~~that ~~percentage~~took ~~for~~place ~~the~~earlier ~~comparable period~~ in the ~~prior~~ year, asincreased ~~the reduction in margin from our aggressive~~ markdown ~~strategy~~dollars ~~was~~received ~~essentially offset by~~from ~~favorability stemming from~~ our ~~decision~~vendors, ~~to move to full-priced greeting cards~~ and other selected price increases. ~~In addition,~~Occupancy ~~due~~costs ~~to some successful operational initiatives, we realized substantially less product shrinkage year-over-year resulting~~ from ~~our Halloween~~continued ~~physical~~operations ~~inventories. Occupancy costs~~ were ~~slightly~~ higher than the prior year ~~for~~primarily ~~the~~due ~~quarter and~~to ~~essentially~~the ~~flat~~addition toof ~~the~~two ~~prior~~new ~~year~~stores ~~for~~and the ~~year-to-date~~expansion ~~period~~of an existing store.

Store Operating Expenses

Store operating expenses for continuing operations for the ~~third~~first ~~quarter~~three months of fiscal ~~2001~~2002 ~~were~~of approximately $64.27 million , or 27 26.08% of retail sales, were ashigher ~~compared~~than tostore operating expenses of approximately $54.52 million, or 24.63% of retail sales for the ~~comparable period in the~~ prior year comparable period. OnThe aincrease ~~year-to-date~~primarily ~~basis,~~relates ~~store~~to ~~operating~~higher ~~expenses~~advertising ~~were~~costs ~~approximately~~for ~~$16.4~~the ~~million~~current oryear ~~25.4%~~due ofto ~~retail~~an ~~sales~~added ~~during fiscal~~newspaper ~~2001~~flyer, ~~compared to approximately $15.6 million or 23.9% of retail sales~~additional ~~during~~radio ~~fiscal 2000. Store operating expense dollars were unfavorable year-over-year~~advertising, and ~~we lost significant sales leverage during~~ the ~~third~~move ~~quarter~~from ~~due~~mailbox insertion to ~~the~~Sunday ~~softness of sales. The year-over-year increase in store~~newspaper ~~operating~~insertion, ~~expense~~which ~~reflects higher store payroll~~ costs ~~and~~more. ~~other~~Although ~~store-related costs~~it ~~associated~~has ~~with~~somewhat ~~the~~dissipated, ~~implementation~~we ~~of our back-office computer~~continue ~~system. We continue~~ to realize higher wage rate pressure due to the tightness of labor markets ~~although the impact continues to dissipate~~.

General and Administrative Expenses

General and administrative expenses for ~~the~~continuing ~~third~~operations for the first quarter of fiscal ~~2001~~2002 were approximately $2.54 million, or 1013.94% of ~~total~~ revenues, compared to general and administrative expenses of approximately $2.37 million, or 915.92% of ~~total~~ revenues ~~for the third quarter of fiscal 2000. General and administrative expenses were approximately $7.9 million~~, ~~or 12.1% of total revenues~~ for the first ~~nine months~~quarter of fiscal 2001~~, compared to general and administrative expenses of approximately $7~~.~~3 million, or 11.0% of total revenues for the comparable period in the prior year.~~ The year-over- year ~~increase~~change ~~in general and administrative expense dollars~~ primarily reflects ~~reflects~~the ~~certain~~ one-time ~~professional fees incurred for operational~~ consulting, asand ~~well~~professional ascosts ~~expenses~~that ~~associated~~were ~~with~~incurred aduring ~~new operating lease for~~the ~~back-office~~first ~~computer~~quarter ~~systems~~of ~~related~~fiscal to2001, ~~our~~in ~~information~~addition ~~systems~~to ~~initiatives. The~~the ~~increase~~successful ~~also~~reduction ~~reflects~~of ~~higher payroll~~certain ~~and~~costs ~~payroll~~such ~~related~~as ~~costs~~travel and ~~benefits expense~~training. ~~Due~~Over the tonext ~~poor~~12 ~~sales results~~months, we ~~lost~~expect ~~significant~~general ~~sales leverage of these costs during both the quarter~~ and ~~the~~administrative ~~nine-month~~expenses ~~periods. We~~to ~~remain~~be ~~focused on the containment of~~less ~~these~~than ~~costs~~prior year levels as we ~~move~~strive ~~through~~to ~~the~~continue ~~remainder~~to ofcontain ~~the~~these ~~year~~costs.

Interest Expense

Interest expense, for the quarter ended ~~November~~May 23, ~~2001~~ 2002, of approximately $~~445~~358,000, or 12.90% of total revenues, ~~decreased~~ increased approximately $175,000, ~~from~~ over interest expense for the first quarter ended ~~October~~May 274, ~~2000. On~~ ~~a year-to-date basis, interest expense of approximately $1.1 million for fiscal~~ 2001~~, or 1~~.~~7% of total revenues, decreased approximately $169,000 from interest expense for the comparable period in the prior year.~~ The ~~decrease~~ ~~from~~increase over prior year primarily reflects ~~a lower level of borrowings on our~~ ~~revolving~~the ~~credit~~net ~~facility,~~additional ~~stemming~~interest ~~from~~on ~~our~~a ~~ability to defer approximately~~ $31.0 million innote ~~trade payments with some of our largest vendors~~payable, aspartially ~~well~~offset asby ~~substantial~~lower ~~reductions~~interest ~~throughout~~on ~~the~~our ~~year~~revolving inline ~~the~~of ~~prime rate~~credit. ~~The~~We ~~interest~~had ~~favorability~~a ~~was~~higher ~~partially offset~~average bylevel ~~the~~of ~~write-off,~~borrowings ~~during~~for the ~~third~~ quarter, compared ofto ~~approximately~~the ~~$75~~prior year,~~000~~ ~~in deferred~~however, ~~financing~~this ~~costs~~was ~~associated~~offset ~~with~~by ~~our~~a ~~previous~~lower ~~line~~variable rate of ~~credit~~interest. For the remainder of fiscal ~~2001~~2002, we expect to ~~realize lower~~ interest expense asto ~~compared~~remain torelatively the same as the prior year, ~~due~~reflecting ~~to continued~~a ~~favorability~~higher inaverage ~~the~~level of borrowing offset by a lower prime rate.

Income Tax Benefit

~~Our~~During ~~estimated~~the ~~annual~~fourth ~~effective~~quarter ~~income~~of ~~tax~~fiscal ~~rate~~2001, ~~for~~we ~~the~~recorded ~~third~~a ~~quarter~~full valuation ~~and~~allowance ~~first~~against ~~nine~~our ~~months~~deferred oftax ~~fiscal~~asset. Accordingly, ~~2001~~income istax ~~40%,~~expense ~~unchanged~~for ~~from~~ the ~~estimated~~quarter was offset by net operating loss carryforwards. The Company’s estimated annual effective income tax rate ~~used~~was in40% for the ~~prior~~first quarter ~~year~~of ~~comparable~~fiscal ~~periods~~2001.

ANALYSIS OF FINANCIAL CONDITION

Liquidity and Capital Resources

Our fundamental capital requirements are for ongoing operations, consisting principally of investments in our inventory, in addition to capital requirements necessary to support the continued growth of our information systems infrastructure and our store base. Our primary sources of liquidity have been:

• borrowings under our revolving line of credit

• proceeds from financings such as our initial public offering and our public sale of convertible subordinated debt

• payment terms from vendors, including extensions of those terms

• lease financings

• cash from operations

Our liquidity needs vary throughout the year as a result of the seasonal nature of our business. Our cash availability also fluctuates as a result of:

• the ~~level~~ level of our inventory, which primarily determines our line-of-credit borrowing capacity;

• quarterly fluctuations in revenues and operating income;

• timing of of seasonal purchases;

• timing of of new store openings, remodels and/or relocations;

• intra-month cash needs for payment of rent, payroll and other operational payables; and

~~Our liquidity, as measured by~~ • our ~~working capital, was $3.9 million at~~ ~~November~~revolving 2,line ~~2001~~of ~~and~~credit ~~was $4~~covenants.~~9 million at February 2, 2001. Our current ratio was 1.2 to 1.0 at November 2, 2001 and was 1.3 to 1.0 at February 2, 2001.~~

Merchandise inventories at November 2, 2001 increased approximately $658,000, or 4%, over merchandise inventories at the end of fiscal 2000, primarily reflecting the receipt of merchandise to support our fourth quarter seasonal events. As we move through the fourth quarter, we should see inventory levels decline to more normalized levels.11

~~Net~~Our ~~cash~~primary ~~provided by operations~~cash ~~totaled~~requirements ~~approximately~~are ~~$2.6 million~~ for ~~the~~ongoing ~~nine month period ended November 2~~operations, ~~2001,~~consisting ~~compared~~primarily ~~to net cash used for operations~~ of ~~approximately~~investments ~~$876,000 for the same period~~ in ~~fiscal 2000. The increase in cash flows from operations~~ ~~primarily reflects the extended dating that we have received from several of~~ our ~~vendors and landlords~~inventory, incosts ~~addition~~associated towith apayroll, ~~concerted~~and ~~effort~~payments toon ~~keep~~our ~~every-day inventory~~store ~~levels relatively flat. We~~leases ~~continue~~consisting toof ~~strive~~rent, ~~when~~common ~~possible,~~area tomaintenance ~~take~~and ~~advantage~~real ofestate ~~vendor cash discounts~~taxes.

~~Net~~Our ~~cash~~primary ~~used~~sources ~~for investing activities was approximately $637,000 for the first nine months~~ of ~~fiscal 2001, primarily reflecting capital expenditures related to opening, relocating and remodeling Company-owned stores and upgrading our information systems. The net~~ cash ~~used~~have ~~for investing activities for the first nine months of fiscal 2000 was approximately $797,000, consisting almost entirely of net capital expenditures.~~been:

We• borrowings ~~have~~under ~~invested and will continue to evaluate~~ our ~~needs for additional investment in information~~revolving ~~technology~~line ~~and infrastructure capabilities in order to gain operational efficiencies. For the remainder~~ of ~~fiscal~~ 2001, we anticipate that we will spend approximately $300,000 on capital expenditures. These capital expenditures will be primarily for the purchase of software that will provide better tracking, accuracy and analysis of store labor hours.credit;

~~Net~~• extended ~~cash~~payment ~~used~~terms ~~for financing activities was approximately~~negotiated ~~$2.0~~with ~~million~~several ~~for the first nine months~~ of 2001 compared to net cash provided by financing activities of approximately $2.0 million for the first nine months of fiscal 2000. The year-over-year use of cash primarily reflects an improved ability to pay down our ~~revolving~~largest ~~line~~vendors ~~of credit, resulting from the extended dating on trade payables~~ and ~~rent, as negotiated~~ with ~~several~~certain of our ~~vendors and~~ landlords.;

~~Financing~~• proceeds from financings such as our shareholder rights offering, our public sale of convertible subordinated debt, the

~~We have~~ refinancing ~~outstanding as~~ of ~~November 2, 2001, convertible subordinated debentures in an aggregate principal amount of $4.0 million, convertible into 444,000 shares of~~ our ~~common~~mortgage ~~stock. The debentures bear interest at an annual rate of 10.5%, payable quarterly,~~ and ~~mature in 2005. The indenture under which these debentures were issued contains covenants that require us to satisfy certain financial tests and impose restrictions on~~ our ~~ability~~initial topublic ~~pay dividends. We were in compliance with all of our financial covenants as required by the indenture at November 2, 2001.~~offering;

We• everyday ~~have~~payment aterms $15.0 million multi-year revolving line of credit facility with Wells Fargo Retail Finance for general working capital purposes that expires in September 2004. Borrowings outstanding under this line of credit bear interest at the prime 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 borrowing limitation, primarily resulting from ~~the levels of inventory, we often maximize~~ ~~the~~venders; ~~availability under this line during intra-month peaks~~ and ~~at certain times during the year. On November 2, 2001, we had availability of approximately $13.2 million under this line, of which approximately $5.5 million was outstanding.~~

~~The~~• lease ~~credit agreement contains covenants, which requires us to maintain certain financial covenants, a certain level of availability, and imposes restrictions on our ability to pay dividends~~financings. ~~We were in compliance with all of our covenants as required by the credit facility at November 2, 2001.~~

In ~~addition~~order to provide us with the liquidity we needed during the first ~~liquidity~~quarter ~~sources~~of ~~described~~fiscal ~~above~~2002, we ~~have~~entered ~~also~~into ~~generated~~a short-term loan of $1.0 million with an unrelated business partner that was paid in full after the end of our first quarter. In addition, we recently sold our 13 stores in the Seattle market for approximately $4.5 million. The proceeds from the sale of Seattle were used to reduce our revolving line of credit, which gave us additional availability ~~working~~which we believe will provide us with the liquidity necessary to assist us with our short-term working capital ~~through:~~needs.

~~• extended~~Our liquidity from continuing operations as measured ~~dating~~by onour ~~payables~~working capital, was ($3.7) million at May 3, 2002 and ~~rent~~was asapproximately ($6.8) ~~negotiated~~million ~~with~~at ~~certain~~February 1, 2002. The Company’s current ratio from continuing operations was 0.85 to 1.0 at May 3, 2002 and was 0.71 to 1.0 at February 1, 2002. Our working capital and current ratio results reflect the reclassification of $4.0 million of convertible subordinated debentures from long-term debt to short-term debt on our ~~vendors~~consolidated ~~and~~balance sheets due to our ~~landlords~~existing breach of a covenant in the indenture governing our subordinated debentures.

~~• our~~Net cash used for continuing operations ~~shareholder~~totaled ~~rights~~approximately ~~offering~~$2.1 ~~that~~million ~~took~~for ~~place~~the ~~during~~first quarter of 2002 compared to net cash provided by continuing operations of approximately $2.5 million for the same period in 2001. The decrease in cash flows from operations primarily reflects increases in inventory levels to support upcoming seasonal events. In contrast, in the prior year, we had ended fiscal 2000 with higher levels of inventory.

~~• scaling~~Net cash provided by investing activities of continuing operations was ~~back~~approximately ~~PartySmart~~$3.~~com~~7 million for the first quarter ended May 3, 2002, consisting of net proceeds received on the sale of our ~~Internet~~Seattle ~~website~~stores, ~~venture~~net of capital expenditures. In comparison, net cash used for investing activities of continuing operations was approximately $64,000 for the first quarter ended May 4, 2001, consisting entirely of capital expenditures.

~~• selective price increases and other various pricing strategy changes~~12

~~• seeking~~We have invested and will continue to evaluate our needs for additional ~~alternative~~investment ~~sources~~in information technology and infrastructure capabilities in order to gain operational efficiencies. We anticipate that we will spend an aggregate $800,000 on capital expenditures for the ~~financing~~remainder of ~~fixtures~~fiscal 2002 for store improvements 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 also 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.

WeNet cash ~~believe~~used ~~that~~for financing activities of continuing operations was approximately ~~our~~$910,000 ~~financial~~for ~~resources,~~the ~~including~~first ~~our~~fiscal ~~new~~quarter ~~credit~~of ~~agreement,~~2002 ~~which~~compared ~~better~~to ~~matches~~net cash used for ~~the~~financing ~~seasonal~~activities ~~needs~~of continuing operations of ~~our~~approximately ~~business,~~$2.3 ~~stringent~~million ~~cost~~for the ~~containment,~~first ~~our~~fiscal ~~anticipated~~quarter of 2001. The current year use of cash ~~flows~~for financing activities reflects payments made on our revolving line of credit related to proceeds from ~~operations~~the ~~and~~sale of Seattle, partially offset by increases in the ~~generation~~line of ~~additional~~credit ~~working~~due ~~capital~~to aspayments made to our ~~described~~vendors ~~above~~as well as a payment of $500,000 ~~will~~on bethe ~~adequate~~$1.0 tomillion ~~meet~~unsecured ~~our~~note payable. The use of cash ~~needs~~in ~~over~~the prior year reflects an improvement in our ability to make payments on the ~~next~~line ~~twelve~~of ~~months~~credit resulting from the extended dating that we had received from certain vendors and landlords.

~~NASDAQ~~Outstanding ~~SmallCap Listing~~Debt

~~On August~~We ~~29,~~have ~~2001,~~outstanding ~~the~~as ~~Nasdaq Stock Market notified us that we were not in compliance with one~~ of ~~its~~May ~~SmallCap~~3, ~~maintenance standards~~2002, ~~requiring~~convertible ~~that we~~subordinated ~~maintain~~debentures ain ~~minimum~~an ~~market~~aggregate ~~value~~principal amount of ~~public~~$4.0 ~~float~~million, ~~and~~convertible ~~gave us until November 27,~~into ~~2001~~444,000 toshares ~~comply~~of ~~with~~our ~~the~~common ~~standard~~stock. OnThe ~~October~~debentures 1,bear ~~2001,~~interest weat ~~announced~~an ~~that~~annual werate ~~received~~of ~~notice~~10.5%, ~~that~~payable ~~Nasdaq~~quarterly, ~~has suspended~~and ~~the~~mature ~~public~~in ~~float requirement for continued listing~~2005. ~~Therefore,~~The weindenture ~~are in compliance with Nasdaq SmallCap Market’s~~under ~~maintenance~~which ~~requirements~~these ~~and~~debentures ~~our~~were ~~common~~issued ~~stock~~contains ~~will~~covenants ~~continue~~that torequire beus ~~listed on the~~to ~~Nasdaq~~satisfy ~~SmallCap~~certain ~~Market~~financial ~~for~~tests ~~the~~and ~~foreseeable~~impose ~~future. There~~restrictions ~~can~~on beour noability ~~assurance that we will be able~~ to ~~satisfy the~~pay ~~Nasdaq SmallCap Market’s maintenance requirements on a continuing basis~~dividends.

Since February 1, 2002, we have been in breach of a covenant under the indenture that requires us to maintain a minimum consolidated net worth of at least $7.0 million. We are current, however, on all required payments under the indenture. We have asked our debenture holders to waive this breach, and to approve amendments to our indenture to eliminate the financial covenants that require us to maintain a minimum consolidated net worth and limit our ability to incur additional indebtedness, before June 16, 2002. If we do not receive consents to waive the existing breach under the indenture from more than 50% of the aggregate principal amount of the outstanding debentures by June 16, 2002, it will become an “Event of Default” under the terms of the indenture. An “Event of Default” would permit either the indenture trustee or the holders owning at least 25% in principal amount of the outstanding debentures to declare all of the $4.0 million of outstanding debentures to be immediately due and payable. An “Event of Default” under our indenture would also cross-default our revolving credit agreement and would provide our secured lender with the right to prevent us from paying future principal or interest payments to the holders of our subordinated debentures until such “Event of Default” is cured, waived or ceases to exist. We cannot predict at this time whether our secured lender will prevent us from making future

payments of interest on the debentures if an “Event of Default” occurs under the indenture. If an event of default occurs under our revolving line of credit, a waiver of the “Event of Default” under the indenture cannot cure the line of credit default. To cure the line of credit default, we would need to obtain a waiver from our secured lender. In addition, if the outstanding amount of the subordinated debentures is accelerated, the amount outstanding under our revolving line of credit could also be made immediately due and payable by our senior lender. Due to our breach, the $4.0 million convertible subordinated debentures are reflected as current debt in our consolidated balance sheets. In the future, we may also consider a program to repurchase our outstanding debentures, provided that we have the funds available for, and our secured lender has approved, such a program.

We have a $15.0 million multi-year revolving line of credit facility with a bank for general working capital purposes that expires in September 2004. 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 borrowing limitation primarily resulting from the levels of inventory, we often maximize the availability under our line during intra-month peaks and at certain times during the year. On May 3, 2002, we had availability of approximately $9.4 million under this line, of which approximately $7.4 million was outstanding.

The revolving credit agreement also contains covenants, which require us to maintain certain financial covenants and a certain level of availability, and imposes restrictions on our ability to pay dividends. We were in compliance with, or had obtained waivers for, all of our financial covenants as required by the credit facility at May 3, 2002. If an “Event of Default” occurs under our trust indenture, however, it will cross-default our revolving credit agreement. To cure the line of credit default, we would need to obtain a waiver from our secured lender.

As discussed above, with the passage of time, unless it is cured, we will be in default of a financial covenant in the indenture under which our subordinated debentures were issued, which will also cause a default under our revolving line of credit facility. Although we have asked our debenture holders to waive this default, we may not receive the requisite number of consents prior to June 16, 2002. In the event repayment of the amounts outstanding under either our outstanding debentures or the revolving credit line were to be accelerated, we may not have the funds readily available to satisfy such obligations or meet the other operating cash needs of our business. In addition, if such acceleration were to occur, we would evaluate our options to attempt to remedy such acceleration at that time. In general, our highly-leveraged financial condition, as well as the possible reactions of customers, employees, suppliers and franchisees to publicity regarding our continuing losses, make it extremely difficult for us to predict our actual liquidity needs as well as obtain additional financing. The assumptions underlying our projections as to such needs, therefore, may not be realized.

Provided our subordinated debt and revolving credit line are not accelerated as a result of an “Event of Default” under our trust indenture or our credit facility, we believe that our revolving line of credit and our terms from our vendors, along with funds expected to be generated from operations, will be adequate to meet our cash needs through the remainder of fiscal 2002.

NASDAQ Listing

During the first quarter of fiscal 2002, the Nasdaq Stock Market notified us that we had regained compliance with two of its SmallCap Market maintenance requirements, one requiring that we maintain a minimum market value of $1.0 million public float, and one requiring that we maintain a minimum bid price of $1.00 per share. On May 8, 2002, however, the Nasdaq Stock Market notified us that we were not in compliance with another maintenance requirement, requiring that the company maintain a minimum of $2.0 million in net tangible assets or a minimum of $2.5 million in stockholders’ equity. We have recently submitted a plan to Nasdaq indicating how we plan to achieve and sustain compliance with this requirement. If the plan is not deemed adequate by Nasdaq compliance staff, we may appeal the decision to the Nasdaq Listing Qualification Panel.

If we do not ultimately satisfy the maintenance requirement, we may decide to apply for quotation of our common stock 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.

Inflation

We believe that inflation has not had a material impact upon our historical operating results, and do not expect it to have such an impact in the future. There can be no assurance 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, increases in fuel costs could have a negative impact on utility costs and freight costs for our Company-owned stores.

Forward-Looking Information

Certain statements contained in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors may include, among others, those factors listed in our ~~2000~~2001 Form 10-K filed with the SEC on May 2, 2002 and our other filings with the ~~Securities and Exchange Commission~~SEC.

Additional Information on Paper Warehouse

We are currently subject to the informational requirements of the Exchange Act of 1934, as amended. As a result, we are required to file periodic reports and other information with the SEC, such as annual, quarterly and current reports and proxy and information statements. You are advised to read this Form 10-Q in conjunction with the other reports, proxy statements and other documents we file from time to time with the SEC. If you would like more information regarding Paper Warehouse, you may read and copy the reports, proxy and information statements and other documents we file with the SEC, at prescribed rates, at the SEC’s public reference room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding the operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public free of charge at the SEC’s website. The address of this website is http://www.sec.gov.

We are also in the process of making our most current SEC filings, such as our annual, quarterly and current reports, proxy statements and press releases available to the public free of charge on our Website. The address of our Website is www.paperwarehouse.com. Our Website is not intended to be, and is not, a part of this Quarterly Report on Form 10-Q. We will provide electronic or paper copies of our SEC filings (excluding exhibits) to any Paper Warehouse shareholder free of charge upon receipt of a written request for any such filing. All requests for our SEC filings should be sent to the attention of Investor Relations at Paper Warehouse, Inc., 7630 Excelsior Boulevard, Minneapolis, MN 55426.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In addition to other sources of liquidity, we have utilized 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 ~~decreases~~changes in the prime ~~prime~~ rate,. We ~~which we~~ do not consider this exposure to be material to our financial position, results of operations or cash flows. We do not utilize any derivative financial instruments or engage in any other hedging activities.

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K


Item 6.		Exhibits and Reports on Form 8-K

	a.	Exhibits:

		Exhibit 10.1 — Second Amendment to Loan and Security Agreement Between Wells Fargo Retail Finance LLC and the Company dated April 26, 2002.

		Exhibit 12 — Computation re: Ratio of Earnings to Fixed Charges

	b.	Reports on Form 8-K:

		Filed during the quarter for which this report is filed:

		None.

		Filed subsequent to the quarter for which this report is filed:

		Form 8-K dated May 8, 2002 reporting the sale of our 13 stores in the Seattle market and our exiting of that market, including pro forma financial statements and a copy of the asset purchase agreement.

~~a. Exhibits:~~17

Exhibit 12 – Computation re: Ratio of Earnings to Fixed Charges

b. Reports on Form 8-K:

Form 8-K dated October 2, 2001 filing the Loan and Security Agreement Between Wells Fargo Retail Finance LLC and Paper Warehouse, Inc. dated September 7, 2001 and the related press release dated September 17, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	~~PAPER WAREHOUSE, INC.~~	PAPER WAREHOUSE, INC.
Date: December 13, 2001
Date: June 10, 2002
	~~By: /s/ Yale T. Dolginow~~	By: /s/ Yale T. Dolginow
	~~Name: Yale T. Dolginow~~	Name: Yale T. Dolginow
	~~Title: President and Chief Executive Officer~~	Title: President and Chief Executive Officer
	~~By: /s/ Cheryl W. Newell~~	By: /s/ Cheryl W. Newell
	~~Name: Cheryl W. Newell~~	Name: Cheryl W. Newell
	Title: Vice President and Chief Financial Officer
		Title: Chief Financial Officer
	~~(Principal Financial Officer)~~	(Principal Financial Officer)
	~~By: /s/ Diana G. Purcel~~	By: /s/ Diana G. Purcel
	~~Name: Diana G. Purcel~~	Name: Diana G. Purcel
	~~Title: Vice President and Controller~~	Title: Vice President and Controller
	~~(Principal Accounting Officer)~~	(Principal Accounting Officer)

Exhibit Index

Exhibit No.	Description	Location
12	Computation re: Ratio of Earnings to Fixed Charges	Filed herewith electronically
10	Second Amendment to Loan and
	Security Agreement Between Wells Fargo
	Retail Finance LLC and the Company	Filed herewith
	dated April 26, 2002.	electronically
12	Ratio of Earnings to	Filed herewith
	Fixed Charges	electronically

Filing Compare · PAPER WAREHOUSE INC