<PAGE>
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
X [FEE REQUIRED]
---
For the fiscal year ended July 29, 1995
Commission file number 1-5967
------
THREE D DEPARTMENTS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-0733200
----------------------------- -----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 Bristol Street, Costa Mesa, California 92626-1808
-----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code
(714) 662-0818
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ----------------------------
Common Stock,
$.25 par value per share:
Class A Common Stock AMERICAN STOCK EXCHANGE
Class B Common Stock AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 X No
------ -----
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 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. [ X ]
<PAGE>
The aggregate market value of the outstanding voting stock of the
registrant held by non-affiliates as of October 12, 1995 was $1,151,565 for
Class A common stock and $1,531,858 for Class B common stock, based upon a
closing price of $2.625 per share for Class A common stock and $3.25 per share
for Class B common stock on that date.
As of September 30, 1995, 1,151,494 shares of Class A common stock and
1,276,717 shares of Class B common stock were outstanding.
Documents Incorporated by Reference
- - - - - -----------------------------------
The information required by Part III of this Report (Items 10, 11, 12
and 13) is incorporated by reference from the registrant's definitive Proxy
Statement for its 1995 Annual Meeting of Stockholders which is expected to be
filed with the Commission on or about November 27, 1995.
The total number of pages is 26. The exhibit index is located on
pages 11-12.
2
<PAGE>
PART I
------
Item 1. Description of Business
-----------------------
Three D Departments, Inc. (the "Company") owns and operates 28 retail
bed and bath specialty stores (9 in Connecticut, 10 in Los Angeles and Orange
Counties of Southern California, and 9 in metropolitan Phoenix, Arizona) as of
July 29, 1995. The New England and Southern California stores are operated
under the name of "Three D Bed and Bath"; the Arizona stores under the name of
"Linens Plus."
The Company's specialty stores are engaged in the retail sale of
linens and towels, rugs, bedspreads, sheets, blankets, housewares, kitchen
accessories and giftwares, also known as "domestics merchandise."
Industry Segments
- - - - - -----------------
The Company has only one industry segment, that being the retail sale
of domestics merchandise through Company-owned specialty stores, as described
above. Such retail sales are currently made in 28 specialty stores owned and
operated by the Company as compared with 27 and 31 specialty stores owned and
operated by the Company at the close of the fiscal years 1994 and 1993,
respectively.
In fiscal 1995, the Company implemented a new superstore format with
the opening of four new stores and four expanded stores. This new format
expanded such stores' housewares and kitchen accessories department.
The following is a breakdown of inventory and equipment for fiscal
years 1995, 1994 and 1993:
<TABLE>
<CAPTION>
July 29, July 30, July 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Specialty Stores
Inventory $16,260,487 $14,118,720 $12,989,306
Equipment 9,601,674 7,241,070 7,150,762
</TABLE>
The Company's cost of opening and operating specialty stores varies
between $100,000 to $250,000 per store for fixtures and leasehold improvements
depending on the location and size of the store plus additional working capital
for inventory.
3
<PAGE>
Locations
- - - - - ---------
The following table identifies the Company's sales, inventory and
equipment by geographic areas for fiscal years 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales
East Coast $13,820,780 $12,103,904
West Coast 36,160,924 29,648,663
----------- -----------
Total $49,981,704 $41,752,567
=========== ===========
Inventories
East Coast $ 4,727,772 $ 4,609,213
West Coast 11,215,241 9,509,507
Corporate 317,474
----------- -----------
Total $16,260,487 $14,118,720
=========== ===========
Property, Fixtures and Equipment
East Coast $ 2,849,984 $ 2,639,205
West Coast 6,751,690 4,601,865
Corporate 1,387,040 1,328,588
----------- -----------
Total $10,988,714 $ 8,569,658
=========== ===========
</TABLE>
. East Coast Region represents stores in Connecticut.
. West Coast Region represents stores in California and Arizona.
. Corporate represents the Company's corporate offices in California.
Operations and Products
- - - - - -----------------------
The following summarizes the Company's percentage of retail sales by
various categories of merchandise of products for the fiscal years ended 1995,
1994 and 1993:
COMPOSITION OF PRODUCT REVENUES
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Tabletop 27% 21% 19%
Bedding 47 50 50
Bath 26 29 31
---- ---- ----
100% 100% 100%
</TABLE>
Competition
- - - - - -----------
The Company's business continues to be highly competitive. While no
definitive statistics are available, the Company believes that the specialty
stores operated by the Company are significant factors in the "specialty store"
market for domestics merchandise. However, many types of local and national
retailers, including discount and conventional department stores, specialty
shops, variety stores, mail order houses and supermarkets, directly compete with
the Company, and many of the Company's competitors have greater financial
resources.
4
<PAGE>
Seasonal Variations
- - - - - -------------------
As in the case of many retailers, the Company's second quarter
(November through January), which includes the Christmas season, is its
strongest sales quarter, with the third quarter (February through April) being
the weakest.
Suppliers and Raw Materials
- - - - - ---------------------------
The Company is not dependent upon any one supplier for merchandise and
purchases most of its merchandise directly from manufacturers. During fiscal
1995, the Company purchased merchandise from approximately 460 suppliers located
throughout the United States, none of whom supplied more than 6.7% of the
Company's purchases. The Company is not engaged in the production, extraction,
manufacture or use of raw materials.
Patents and Licenses
- - - - - --------------------
The Company does not own any material patents or patent licenses, and
it is unlikely the Company will acquire any such rights in the near future.
Development of New Products
- - - - - ---------------------------
During fiscal 1995, no funds were specifically allocated for full-time
activities directed to the development of new products or services.
Environmental Regulations
- - - - - -------------------------
Federal, state and local regulations relating to the environment do
not materially affect the Company's capital expenditures, earnings or
competitive position.
Employees
- - - - - ---------
At July 29, 1995, the Company employed 496 persons on a full-time or
part-time basis, exclusive of persons engaged solely as directors or officers,
as compared with 441 persons at the close of fiscal 1994. The increase in the
number of employees was associated with the new superstore format which are
larger stores and require additional employees and inventory to operate. No
employee is represented by any union. The Company believes that relations
between the Company and its employees are satisfactory.
Customers
- - - - - ---------
No material part of the retail business of the Company is dependent
upon a single customer or upon very few customers.
Foreign Operations
- - - - - ------------------
The Company does not engage in material operations in foreign
countries nor is a material part of its sales or revenues derived from customers
in foreign countries.
5
<PAGE>
Item 2. Properties
----------
The Company's specialty stores are operated under leases expiring
between fiscal 1996 and fiscal 2012. Such leases typically require the payment
of a minimum annual rental or a percentage of net sales, whichever is higher,
payable in monthly installments. In some cases, the Company has options to
renew its specialty store leases.
The Company's executive offices currently occupy approximately 15,000
square feet of space and are located at 3200 Bristol Street, Costa Mesa,
California, under a lease expiring in December,1995. The Company believes there
are sufficient office facilities at attractive rates available in the vicinity
to its current office.
During fiscal 1995, the aggregate annual rental for all leased
properties was approximately $5,583,000.
In December 1994, the Company purchased a commercial building in
Phoenix, Arizona for approximately $1,200,000. The building contains
approximately 22,000 square feet with a ground lease of 45 years. The Company
uses the building as one of its retail stores.
The Company also owns a residence located on approximately one acre in
West Hartford, Connecticut. The Company utilizes the residence from time to
time for the housing of out-of-state executives while supervising the Company's
Connecticut operations.
Item 3. Legal Proceedings
-----------------
No material litigation, other than ordinary, routine litigation
incident to the business of the Company, is currently pending, or to the best
knowledge of the Company's management, is threatened against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the shareholders.
6
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
-------
Both classes of the Company's common stock are listed on the American
Stock Exchange. The high and low sales prices for each quarter within the past
two fiscal years as reported by the Exchange were:
<TABLE>
<CAPTION>
1995 High Low Dividend
---- ---- ----- --------
<S> <C> <C> <C>
First Quarter
Class A $1 5/16 $1 1/16 $.0125
Class B 1 1/2 1 1/4 .0075
Second Quarter
Class A 1 5/16 1 1/8 .0125
Class B 1 5/8 1 1/4 .0175
Third Quarter
Class A 2 11/16 1 3/16 .0125
Class B 2 5/8 1 7/16 .0075
Fourth Quarter
Class A 3 3/8 1 1/2 .0125
Class B 3 7/8 1 11/16 .0075
<CAPTION>
1994 High Low Dividend
---- ---- ----- --------
<S> <C> <C> <C>
First Quarter
Class A $1 1/2 $1 3/8 $.0125
Class B 1 5/8 1 7/16 .0075
Second Quarter
Class A 1 7/8 1 7/16 .0125
Class B 1 3/4 1 3/8 .0075
Third Quarter
Class A 1 7/8 1 1/2 .0125
Class B 1 7/8 1 11/16 .0075
Fourth Quarter
Class A 1 5/8 1 5/16 .0125
Class B 1 7/8 1 3/8 .0075
</TABLE>
The Company had approximately 381 holders of record of its Class A
common stock and approximately 358 holders of record of its Class B common stock
as of July 29, 1995.
7
<PAGE>
Item 6. Selected Financial Data
-----------------------
Fiscal Year Ended (a)
<TABLE>
<CAPTION>
- - - - - ---------------------------------------------------------------------------------------------
July 29, July 30, July 31, August 1, August 3,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales $49,981,704 $41,752,567 $42,044,998 $43,065,361 $45,813,949
Income (loss) before
income taxes $ (983,400) $(1,401,461) $ (211,061) $ (555,578) $ 979,725
Net income (loss) $ (527,628) $ (675,561) $ (146,961) $ (384,823) $ 535,725
Weighted average
shares outstanding $ 2,528,011 $ 2,850,804 $ 2,870,381 $ 2,871,194 $ 2,877,288
Per Share:
Net income (loss) $ (.21) $ (.24) $ (.05) $ (.13) $ .19
Book value $ 4.65 $ 4.53 $ 4.78 $ 4.88 $ 5.09
Dividends declared:
Class A $ .05 $ .05 $ .05 $ .10 $ .10
Class B $ .03 $ .03 $ .03 $ .06 $ .06
Working capital $11,877,942 $12,867,856 $ 7,741,610 $ 9,111,456 $10,546,138
Long-term debt $ 9,784,325 $ 6,015,911 $ 1,971,440 $ 3,351,726 $ 3,092,417
Stockholders' equity $11,745,345 12,922,169 $13,711,433 $14,006,161 $14,624,982
Total assets $28,077,285 $25,446,968 $24,254,008 $24,405,708 $23,993,414
</TABLE>
(a) The Company operates on a 52-53 week basis. Years end on the Saturday
nearest July 31. The fiscal years 1992, 1993, 1994 and 1995 each included 52
weeks; fiscal year 1991 included 53 weeks.
8
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Fiscal 1995 Compared to Fiscal 1994
- - - - - -----------------------------------
Sales in fiscal 1995 increased $8,229,137 to $49,981,704, a 19.7%
increase over fiscal 1994 sales of $41,752,567. The increase was due primarily
to the opening of four new stores and four expanded stores with the housewares
format. Offsetting the increase was the decrease in sales resulting from the
closing of seven stores in fiscal 1994. Sales from stores opened in both
periods increased by 12.1%. This increase was due to improved sales in our
California stores. Sales for stores open in both periods include sales for
stores in operation for a full year in both the current and prior year.
Costs of sales, including warehouse and buying expenses, was 57.8% of
sales in fiscal 1995, as compared to 57.6% in fiscal 1994. The increase
resulted from increased freight costs and lower margins associated with our
additional housewares inventory.
Store operating, administrative and general expenses were 42.1% of
sales in fiscal 1995, as compared to 44.5% in fiscal 1994. This decrease was
principally due to lower store closing costs and writeoffs associated with store
closings. In fiscal 1994, the Company closed seven stores as compared to only
three in fiscal 1995.
Interest expense increased $514,533 to $1,054,330 in fiscal 1995.
This increase was attributable to additional borrowings for capital expenditures
and inventory for four new and four expanded stores.
In fiscal 1995, the Company continued its housewares expansion program
which resulted in an increase in sales. To achieve this increase in sales,
the Company incurred additional expenses for pre-opening costs of $375,000 and
interest costs of approximately $500,000 to finance the expansion program. In
the fourth quarter, the Company sustained inventory adjustments for shrinkage,
freight and markdowns that affected gross margins for the period. The Company
incurred a net loss of $527,628 for the fiscal year ended 1995.
As of August 1995, the Company has carried out plans to cut its
corporate payroll siginificantly,and will be reducing pre-opening and
advertising costs during fiscal 1996. Presently, Management plans on expanding
three stores to include its housewares format in fiscal 1996. In addition,
Management has introduced a Customer Loyalty Program designed to increase sales
from its existing stores.
Fiscal 1994 Compared to Fiscal 1993
- - - - - -----------------------------------
Sales decreased to $41,752,567 from $42,044,998 or .7% during fiscal
1994. The slight decrease was due primarily to the net closing of five stores.
Sales from stores open in both periods increased by 4.5%. This increase was due
to improved sales in our California stores. Sales for stores open in both
periods include sales for stores in operation for a full year in both the
current and prior year.
Cost of sales, including warehouse and buying, was 57.6% of sales in
1994, as compared with 56.3% in the prior year. The increase resulted from
unanticipated markdowns on an early termination of a store lease and additional
inventory shrinkage.
Store operating, administrative and general expenses were 44.5% of
sales in fiscal 1994, as compared to 43.1% in fiscal 1993. This increase was
attributable to pre-opening and advertising costs associated with our new
housewares department and store closing costs including writeoffs incurred in
closing five marginal stores.
Interest expense increased $78,762 to $539,797 in fiscal 1994. This
increase was principally due to interest fees at a rate of 1% associated with
obtaining a new secured loan agreement and additional borrowings. (See
Liquidity and Capital Resources.)
9
<PAGE>
The provision for income taxes for the fiscal year resulted in a tax
benefit of $629,677 due to the utilization of a net operating loss carryback and
the recognition of deferred tax assets under the new Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Effective August 1,
1993, the Company adopted the provisions of Statement 109 which requires the use
of a liability method. Under this method the provision for income taxes is the
taxes payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
During fiscal 1994, the Company implemented its new superstore format
with one new store, two expanded stores and three remodeled stores. As a part
of implementing its new superstore format, net income was affected by markdowns
and expenses incurred in terminating and net closing of five smaller stores. In
the coming fiscal year, Management will continue to close or replace smaller
stores with superstores but does not expect the costs associated with closing
these stores to be significant.
Liquidity and Capital Resources
- - - - - -------------------------------
At July 29, 1995, working capital decreased to $11,877,942 from
$12,867,856 at July 30, 1994. The decrease was primarily due to the net loss
incurred in fiscal 1995 and capital expenditures for new and expanded stores.
However, the Company's current ratio was 3.0 to 1.0 at July 29, 1995.
Capital expenditures in fiscal 1995 totaled approximately $4,272,000
for fixtures, improvements, leases and a building. These expenditures were
funded by operating activities and additional borrowings. In 1996, the Company
plans on expanding three stores to include its housewares format. Capital
expenditures for these stores are expected to be approximately $750,000 and will
be funded from operations and additional borrowings.
The Company's present source of liquidity consists of cash from
operations and borrowings under its revolving credit facility. The Company is
party to a loan and security agreement which includes a revolving credit
facility and secured note. The revolving credit loan matures on July 28, 1999
and provides for borrowings of 60% of eligible inventory not to exceed a maximum
borrowing of $9,000,000, of which $8,550,000 was outstanding at September 30,
1995. Interest is payable monthly. Principal payments are required only if the
value of the inventory falls below certain specified levels. The secured
promissory note is for $1,000,000 and had an outstanding balance of $920,000 at
September 30, 1995. The note requires monthly principal payments of $20,000
plus interest with the balance due on July 28, 1999. See Note 4 to the
Financial Statements. In addition to its leases, the Company has certain other
financial commitments, see Notes 4 and 6 to the Financial Statements.
Management believes that during 1996 its cash from operations and borrowings
will be sufficient to meet its operational and capital expenditure needs.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109
which requires, among other things, that a valuation allowance against deferred
tax assets be recorded when it is "more likely than not that some portion of the
deferred tax asset will not be realized."
In fiscal 1993, 1994 and 1995 the Company incurred book operating
losses of $211,061, $1,401,461 and $983,400, respectively, and tax operating
losses of $320,979, $1,430,670 and $1,063,343, respectively. These losses
were due to store closing costs associated with closing 14 marginal stores
over three years, and pre-opening and interest costs in implementing our
housewares expansion program.
The Company's net deferred asset as of July 29, 1995 was $941,351 of
which $484,934 and $252,236 are for federal and state net operating loss
carryforwards, respectively. The expiration of the state net operating losses
are $15,147 in 1997, $45,793 in 1998, $111,210 in 1999 and $80,085 in 2000. The
Company will need taxable income of $2,525,000 by the year 2000 to realize the
state tax benefit. The expiration of the federal net operating losses are
$123,393 in 2009 and $361,537 in 2010. The Company will need $1,426,000 by the
year 2010 to realize the federal benefit. Management believes, based on plans
implemented for fiscal 1996, sufficient taxable income will be available to
realize the tax benefit of these net operating loss carryforward assets before
their expiration, consequently, no valuation allowance is necessary at July 29.
1995.
10
<PAGE>
Inflation and Seasonality
- - - - - -------------------------
Management does not believe its operating results have been materially
affected by inflation in fiscal 1993, 1994 and 1995. The Company's second
quarter (November through January ) which includes the Christmas season, is its
strongest sales quarter, with the third quarter (February through April) being
the weakest.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
There are hereby incorporated the Financial Statements of the Company
filed with and as part of this Report. (See Item 14 of this Form 10-K.)
Item 9. Disagreements on Accounting and Financial Disclosure
----------------------------------------------------
None.
PART III
--------
The information required by Items 10, 11, 12 and 13 of Form 10-K will be
set forth in the Company's Proxy Statement for its 1995 Annual Meeting of
Stockholders, which is expected to be filed with the Securities and Exchange
Commission on or about November 27, 1995, and such information is incorporated
herein by this reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following financial statements and financial schedules are filed
as a part of this Report:
(1) Financial Statements Page No.
-------------------- --------
Report of Independent Accountants 14
Balance Sheet as of July 29, 1995 and 15
July 30, 1994
Statement of Operations for the Fiscal
Years Ended July 29, 1995,
July 30, 1994 and July 31, 1993 16
Statement of Changes in Stockholders'
Equity for the Fiscal Years
Ended July 29, 1995, July 30, 1994 and 17
July 31, 1993
Statement of Cash Flows for the Fiscal
Years Ended July 29, 1995,
July 30, 1994 and July 31, 1993 18
Notes to Financial Statements 19
(2) Financial Statement Schedules
-----------------------------
All schedules are omitted because they are not required, are
inapplicable, or the information is included in the Financial Statements or
Notes thereto.
11
<PAGE>
(3) Exhibits
--------
Exhibit
No. Title
------- -----
3.1 Restated Certificate of Incorporation of the Company, as
filed with the Delaware Secretary of State on November
30, 1984, together with Certificate of Amendment of the
Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on March 3, 1987./1/
3.2 Bylaws of the Company as amended through July 29, 1987./1/
4.1 Class A Common Stock share certificate./2/
4.2 Class B Common Stock share certificate./2/
10.1 1993 Incentive Stock Option Plan and Option Certificate./3/
10.2 Promissory note with an officer.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
-------------------
fourth quarter of the fiscal year ended July 29, 1995.
- - - - - --------------------------------------------------------------------------------
/1/ Exhibits 3.1 and 3.2 were filed as Exhibits to the Registrant's
Annual Report on Form 10-K filed with the Commission on November 2, 1987, and
each is incorporated herein by this reference.
/2/ Exhibits 4.1 and 4.2 were filed as Exhibits to the Registrant's
Annual Report on Form 10-K filed with the Commission on October 29, 1984, and
each is incorporated herein by this reference.
/3/ Exhibit 10.1 was filed as an Exhibit to the Registrant's 1994
proxy statement.
12
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: October 24, 1995
THREE D DEPARTMENTS, INC.
(Registrant)
By: /s/ Frank Kane
---------------------------
Frank Kane
Vice President and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the date set forth above.
Signature Title
--------- -----
/s/ Bernard Abrams Chairman of the Board, Chief Executive Officer
- - - - - ------------------ and Director
Bernard Abrams
/s/ Donald L. Abrams President, Chief Operating Officer
- - - - - -------------------- and Director
Donald L. Abrams
/s/ Frank Kane Vice President, Assistant Secretary
- - - - - -------------- and Principal Financial Officer
Frank Kane
/s/ John B. Abrahms Senior Vice President, Assistant Treasurer
- - - - - ------------------- and Director
John B. Abrahms
/s/ Abe Markowicz Director
- - - - - -----------------
Abe Markowicz
/s/ David Kotkin Secretary and Director
- - - - - ----------------
David Kotkin
/s/ Gerson K. Bernstein Director
- - - - - -----------------------
Gerson K. Bernstein
/s/ Henry W. Nozko, Jr. Director
- - - - - -----------------------
Henry W. Nozko, Jr.
/s/ Bernard Joseph White Director
- - - - - -------------------------
Bernard Joseph White
/s/ Ronald C. Dow Controller and Treasurer
- - - - - -----------------
Ronald C. Dow
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders and Board of Directors of Three D Departments, Inc.
In our opinion, the financial statements listed in the index appearing
under Item 14(a)(1) on page 11 present fairly, in all material respects, the
financial position of Three D Departments, Inc. (the Company) at July 29, 1995
and July 30, 1994, and the results of its operations and its cash flows for each
of the three years in the period ended July 29, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 7 to the financial statements, the Company changed its
method of accounting for income taxes in fiscal year 1994.
PRICE WATERHOUSE LLP
Los Angeles, California
October 13, 1995
14
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
July 29, July 30,
1995 1994
---- ----
Assets
------
CURRENT ASSETS:
- - - - - ---------------
<S> <C> <C>
Cash $ 319,045 $ 3,311,144
Receivables:
Tax refund 364,395
Other 296,291 659,044
Inventories 16,260,487 14,118,720
Prepaid expenses 475,435 293,153
Prepaid income taxes 98,363 107,555
Deferred income taxes 325,936 322,733
----------- -----------
Total current assets 17,775,557 19,176,744
----------- -----------
PROPERTY, FIXTURES AND IMPROVEMENTS, at cost:
- - - - - -----------------------------------
Property, fixtures and equipment 10,988,714 8,569,658
Leasehold improvements 2,821,530 2,466,222
----------- -----------
13,810,244 11,035,880
Less - accumulated depreciation and amortization 6,550,443 6,325,295
----------- -----------
7,259,801 4,710,585
----------- -----------
OTHER ASSETS:
- - - - - ------------
Deferred costs of leases, net 1,263,509 492,599
Deferred income taxes 615,415 160,398
Other 1,163,003 906,642
----------- -----------
3,041,927 1,559,639
----------- -----------
$28,077,285 $25,446,968
=========== ===========
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
CURRENT LIABILITIES:
- - - - - -------------------
<S> <C> <C>
Long-term debt - current portion $ 312,929 $ 62,097
Accounts payable 3,406,867 4,377,271
Accrued liabilities 2,177,819 1,869,520
----------- -----------
Total current liabilities 5,897,615 6,308,888
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 9,784,325 6,015,911
- - - - - ------------------------------------ ----------- -----------
DEFERRED COMPENSATION 200,000 200,000
- - - - - --------------------- ----------- -----------
OTHER LIABILITIES 450,000
- - - - - ----------------- -----------
STOCKHOLDERS' EQUITY:
- - - - - --------------------
Preferred stock; $1.00 par value;
authorized 300,000 shares; none issued
Common stock; $.25 par value
Class A - authorized 6,000,000 shares;
issued 1,656,969 shares (1994 - 1,656,969
shares) 414,242 414,242
Class B - authorized 6,000,000 shares;
issued 1,576,113 shares (1994 - 1,576,113
shares) 394,028 394,028
Additional paid-in capital 1,246,557 1,246,557
Retained earnings 11,495,251 12,123,208
----------- -----------
13,550,078 14,178,035
Less - 804,871 shares of common stock in treasury,
at cost ( 1994 - 382,278 shares) 1,804,733 1,255,866
----------- -----------
11,745,345 12,922,169
----------- -----------
COMMITMENTS (Note 11)
- - - - - -----------
$28,077,285 $25,446,968
=========== ===========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
July 29, July 30, July 31,
1995 1994 1993
------------ ------------ --------------
<S> <C> <C> <C>
Revenues:
Sales $49,981,704 $41,752,567 $42,044,998
Costs and expenses:
Cost of sales, including
warehousing
and buying expenses 28,875,368 24,043,495 23,677,848
Store operating,
administrative and
and general expenses 21,035,406 18,570,736 18,117,176
Interest expense 1,054,330 539,797 461,035
----------- ----------- -----------
50,965,104 43,154,028 42,256,059
----------- ----------- -----------
Loss before income taxes and
cumulative
effect of accounting change (983,400) (1,401,461) (211,061)
----------- ----------- -----------
Provision (benefit) for income
taxes:
Federal (381,403) (520,173) (77,000)
State (74,368) (109,504) 12,900
----------- ----------- -----------
(455,771) (629,677) (64,100)
----------- ----------- -----------
Net loss before cumulative effect
of accounting change (527,628) (771,784) (146,961)
Cumulative effect of accounting
change
for income taxes 96,223
----------- ----------- -----------
Net loss $ (527,628) $ (675,561) $ (146,961)
=========== =========== ===========
Net loss per share before
cumulative
effect of accounting change $(.21) $(.27) $(.05)
===== ===== =====
Net loss per share $(.21) $(.24) $(.05)
===== ===== =====
Weighted average number of
common shares outstanding 2,528,011 2,850,804 2,870,381
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock
-------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1992 $413,585 $394,685 $1,246,557 $13,173,680 $(1,222,346)
Net loss (146,961)
Cash dividends
Class A common stock ($.05 per share) (70,660)
Class B common stock ($.03 per share) (43,587)
Purchase of common stock for treasury
(8,000 shares of Class A and 12,000
shares of Class B) (33,520)
Conversions from Class B to Class A common stock 158 (158)
-------- --------- ---------- ------------ -----------
Balance at July 31, 1993 413,743 394,527 1,246,557 12,912,472 (1,255,866)
Net loss (675,561)
Cash dividends
Class A common stock ($.05 per share) (70,426)
Class B common stock ($.03 per share) (43,277)
Conversions from Class B to Class A common stock 499 (499)
-------- --------- ---------- ------------ -----------
Balance at July 30, 1994 414,242 394,028 1,246,557 12,123,208 (1,255,866)
Net loss (527,628)
Cash dividends
Class A common stock ($.05 per share) (60,800)
Class B common stock ($.03 per share) (39,529)
Purchase of Common Stock for treasury
(257,586 shares of Class A and
165,007 of Class B) (548,867)
-------- --------- ---------- ------------ -----------
Balance at July 29, 1995 $414,242 $394,028 $1,246,557 $11,495,251 $(1,804,733)
======== ======== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF CASH FLOWS
-----------------------
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
July 29 July 30 July 31
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (527,628) $ (675,561) $ (146,961)
Adjustments to reconcile net loss
to net cash provided from (used in)
operating activities:
Depreciation and amortization 1,554,240 1,323,238 1,378,354
Increase in cash value of life insurance (354,732) (298,507) (275,959)
Loss on sales, abandonments & trade-in
of property, fixtures and improvements 64,970 46,018 51,266
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 727,148 (755,000) 56,629
(Increase) decrease in inventories (2,141,767) (1,129,414) 975,419
(Increase) decrease in prepaid expenses (182,282) 102,332 134,808
Decrease in prepaid income taxes 9,192 21,137 51,136
Increase in deferred income taxes (458,220) (327,423) (25,662)
Decrease (increase) in deposits 59,045 (48,116) 7,677
(Decrease) increase in accounts payable (970,404) 1,199,208 521,395
Increase in accrued liabilities 158,299 507,547 53,481
Other 4,458 (6) 28,786
----------- ----------- -----------
Net cash (used in) provided from
operating activities (2,057,681) (34,547) 2,810,369
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of fixtures 38,784 190,590 23,107
Purchase of fixtures, equipment &
improvements (2,798,083) (1,166,810) (712,680)
Purchase of software (66,877) (2,940) (112,539)
Purchase of buildings (1,193,834)
Purchase of leases (280,000)
----------- ----------- -----------
Net cash used in investing activities (4,300,010) (979,160) (802,112)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from loan against cash value of
life insurance 2,043,180
Proceeds from borrowings 7,150,000 5,928,568 1,000,000
Dividends paid (104,787) (113,697) (143,034)
Purchases of common stock (548,867) (33,520)
Repayment of debt (3,130,754) (5,597,881) (1,377,793)
----------- ----------- -----------
Net cash provided from (used in)
financing activities 3,365,592 2,260,170 (554,347)
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (2,992,099) 1,246,463 1,453,910
Cash and cash equivalents:
Beginning of year 3,311,144 2,064,681 610,771
----------- ----------- -----------
End of year $ 319,045 $ 3,311,144 $ 2,064,681
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES:
- - - - - ---------------------------------------
Three D Departments, Inc. (the Company) operates retail bed and bath specialty
stores. No single customer accounts for ten percent or more of revenue. There
were no material foreign sales.
Significant accounting policies followed by the Company in the preparation of
its financial statements follow:
Fiscal Year
-----------
The Company's fiscal year ends on the Saturday nearest to July 31. The
fiscal years ended July 29, 1995, July 30, 1994 and July 31, 1993 included
52 weeks.
Inventories
-----------
Inventories are valued at the lower of average cost or market.
Pre-Opening Costs
-----------------
Costs associated with the opening of new stores are expensed in the period
incurred.
Property, Fixtures and Improvements
-----------------------------------
Depreciation and amortization are computed on the straight-line method
based upon estimated useful lives as follows: building - 20 to 25 years;
fixtures, furniture and equipment - 3 to 8 years; and leasehold
improvements - 4 to 15 years.
Goodwill
--------
Goodwill is amortized on the straight-line method over a period of five
years. The net unamortized balances of $0 and $2,794 at July 29, 1995 and
July 30, 1994, respectively, are recorded in other assets.
Deferred Costs
--------------
Deferred costs of leases are amortized over the number of years remaining
under such lease agreements. Such costs are recorded net of amortization
in the balance sheet. Amortization charged to the statement of operations
amounted to $106,296, $78,006 and $78,006 for fiscal years 1995, 1994 and
1993, respectively.
Income Taxes
------------
Deferred taxes are provided for items whose financial and tax bases differ.
Statement of Cash Flows
-----------------------
The Company considers that cash and cash equivalents include all highly
liquid investments with maturities of three months or less.
Earnings Per Share
------------------
Net income (loss) per share is based on the weighted average number of
shares outstanding, plus common stock equivalent when dilutive.
19
<PAGE>
Advertising Expense
-------------------
Advertising cost is expensed in the period incurred.
NOTE 2 - OTHER ASSETS:
- - - - - ---------------------
The Company currently has life insurance policies on key executives in which the
Company is the principal beneficiary. Net cash surrender values at July 29,
1995 and July 30, 1994 were $820,928 and $465,786, respectively, and are
included in other assets. In March 1994, the Company borrowed approximately
$2,043,000 against the cash surrender value of its life insurance policies.
NOTE 3 - ACCRUED LIABILITIES:
- - - - - ----------------------------
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
July 29, July 30
1995 1994
---------- ----------
<S> <C> <C>
Accrued expenses $1,877,273 $1,581,368
Accrued salaries and wages 300,546 288,152
---------- ----------
$2,177,819 $1,869,520
========== ==========
</TABLE>
NOTE 4 - BORROWINGS:
- - - - - -------------------
On July 28, 1994, the Company refinanced its short-term borrowings and long-term
debt with a financial institution and entered into a loan and security
agreement which includes a revolving credit facility and an equipment
acquisition line.
On April 11, 1995, the Company amended its loan and security agreement to
increase the maximum borrowings of its revolving credit facility and replace
its equipment acquisition line with a secured promissory note.
The revolving credit loan matures on July 28, 1999, and provides for borrowings
of 60% of eligible inventory not to exceed a maximum borrowing of $9,000,000, of
which $8,550,000 was outstanding at July 29, 1995. Interest is payable monthly
at the prime rate plus 2%. Principal payments are required only if the value
of the inventory falls below certain specified levels. A commitment fee of
0.5% per annum on the average unused amount is required.
The secured promissory note is for $1,000,000 with an outstanding balance of
$960,000 at July 29, 1995. The note requires monthly principal payments of
$20,000 plus interest at prime plus 2% with the balance due on July 28, 1999.
The agreement requires the Company to maintain certain financial covenants,
limits capital expenditures and dividend payments and restricts disposal of
assets without prior approval. At July 29, 1995 the Company was in compliance
with these covenants or they were waived by the lender. The loans are secured
by the Company's inventory, accounts receivable, equipment and general
intangibles.
20
<PAGE>
NOTE 5 - LONG-TERM DEBT:
- - - - - -----------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 29, July 30
1995 1994
----------- ----------
<S> <C> <C>
Note payable - revolving credit loan, payable
monthly through July 28, 1999, interest at prime
rate plus 2%, (10.75% at July 29, 1995). $ 8,550,000 $5,928,568
Note payable - secured promissory note, payable
monthly through July 28, 1999, principal and
interest at prime rate plus 2% (10.75% at
July 29, 1995) 960,000
Notes payable officer - monthly interest payments
of $4,167 through July 1996, monthly payments
of $14,158 including principal and interest
through December 1999 at 10% interest 500,000
Capitalized lease obligations, due in monthly
installments of $6,239 including interest
at 10.5% through October, 1997. Secured
by computer equipment. 87,254 149,440
----------- ----------
10,097,254 6,078,008
Less current portion 312,929 62,097
----------- ----------
$ 9,784,325 $6,015,911
=========== ==========
</TABLE>
The weighted average interest rate associated with all borrowings outstanding at
July 29, 1995 and July 30, 1994 was 10.7% and 9.3%, respectively.
The capitalized lease obligations above reflect the present value of future
rental payments, discounted at the interest rate implicit in the lease.
Capital leases included in property, fixtures and improvements consist of
computer equipment with a net book value at July 29, 1995 and July 30, 1994 of
$116,495 and $175,647, respectively.
The future minimum lease payments required under capital leases for fiscal years
subsequent to July 29, 1995 are as follows:
<TABLE>
<CAPTION>
Capital
Leases
<S> <C>
1996 $74,868
1997 18,717
-------
Total minimum lease payments 93,585
Less amount representing interest 6,331
-------
$87,254
=======
</TABLE>
21
<PAGE>
NOTE 6 - OTHER LIABILITIES:
- - - - - --------------------------
In September 1994, the Company entered into an agreement to purchase a favorable
lease for approximately $750,000. Such agreement calls for annual payments of
$150,000 for five years. The outstanding balance at July 29, 1995 was
$600,000, of which $150,000 is current.
NOTE 7 - INCOME TAXES:
- - - - - ---------------------
Effective August 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to amounts which are
more likely than not to be realized. The provision for income taxes is the
payable or refundable amount for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The cumulative effect of adopting Statement 109, as of August 1, 1993, was to
increase net income by $96,223. As permitted under the Statement, prior years'
financial statements have not been restated.
The provision (benefit) for income taxes for each of the three fiscal years in
the period ended July 29, 1995 consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal $(364,395) $(62,000)
State $ 13,050 13,050 12,900
--------- --------- --------
13,050 (351,345) (49,100)
Deferred tax expense:
Federal (381,403) (155,778) (15,000)
State (87,418) (122,554)
--------- --------- --------
Provision for income taxes $(455,771) $(629,677) $(64,100)
========= ========= ========
</TABLE>
The differences between the Company's effective income tax rate and the
statutory U.S. federal income tax rate for each of the three fiscal years in
the period ended July 29, 1995 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0%) (34.0%) (34.0%)
State income taxes, net of
federal tax benefit (7.1) (5.2) 4.0
Tax refund (3.4)
Life insurance premiums (3.5) (1.0) (2.1)
Other (1.7) (1.3) 1.8
----- ----- -----
(46.3%) (44.9%) (30.3%)
===== ===== =====
</TABLE>
22
<PAGE>
Deferred tax assets and liabilities as of July 29, 1995, relate to the
following:
<TABLE>
<CAPTION>
July 29, July 30,
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets
Inventories $ 249,227 $ 250,771
Contribution carryforwards 10,205 10,139
Accrued vacation 66,504 61,823
Accrued compensation 88,000 88,000
Loss carryforwards 737,169 276,728
Leasehold improvements 236,155 205,397
AMT carryforward 10,601
---------- ----------
Total deferred tax assets 1,387,260 903,459
---------- ----------
Deferred tax liabilities
Depreciation 445,909 420,328
---------- ----------
Net deferred tax asset $ 941,351 $ 483,131
========== ==========
</TABLE>
The 1995 income tax provision does not include any valuation allowance against
deferred tax assets. Management believes that the assets will be realized by
offsetting net operating loss carryforwards against future taxable income.
At July 29, 1995, the Company had federal net operating loss carryforwards of
$1,426,000 expiring through 2010 and state net operating loss carryforwards of
approximately $1,510,000 expiring at various dates through 2000.
NOTE 8 - STOCKHOLDERS' EQUITY:
- - - - - -----------------------------
The Company is authorized to issue 300,000 shares of preferred stock of $1.00
par value per share, with dividend and liquidation preferences over the common
stock. No shares of preferred stock have been issued.
In addition, the Company is authorized to issue 6,000,000 shares of Class A
common stock, $.25 par value per share, and 6,000,000 shares of Class B common
stock, $.25 par value per share. Class A shares only differ in that quarterly
cash dividends, if declared, must be for a higher amount than Class B shares
and Class A stock has only one-tenth vote per share as compared to one vote per
share for Class B stock. The Class B shares are convertible into Class A shares
at any time at no cost to the stockholder.
On February 4, 1986, the Board of Directors authorized an expenditure, not to
exceed $600,000, for the purchase of Class A and/or Class B shares on the open
market. On October 20, 1987, the Board of Directors amended the aforementioned
February 4, 1986 authorization, increasing the amount of Class A and Class B
common shares which can be repurchased from $600,000 to $1,350,000. On January
19, 1988, the Board of Directors increased the authorized expenditure by an
additional $1,000,000 for the purchase of shares at a market price.
During fiscal 1993, the Company acquired 8,000 shares of its Class A shares and
10,000 shares of its Class B shares at the open market price of $1.60 for Class
A and $1.725 for Class B. In addition, 2,000 shares of the Company's Class B
shares were acquired at the open market price of $1.735. The shares, along
with shares acquired in the previous fiscal years, will be held as treasury
shares and will be used for various corporate purposes, including issuance under
the Company's stock option plan.
During fiscal 1995, the Company expended $547,877 in the purchase of 256,794
Class A shares and 165,007 Class B shares from a major shareholder at a
negotiated price. In addition, the Company expended $990 for the purchase of 792
Class A shares from an unrelated shareholder at the prevailing market price.
23
<PAGE>
NOTE 9 - STOCK OPTIONS:
- - - - - ----------------------
The Company has one non-qualified and two qualified stock option plans that
provide for the granting of options to purchase the Company's common stock to
selected key employees, officers and directors. Under the 1988 non-qualified
Stock Option Plan, a maximum of 100,000 shares of Class A common stock are
authorized for grants at not less than 100% of fair market value on date of
grant. Options are exercisable in cumulative amounts at 25% per year, but not
until one year from the date of grant, and expire ten years after the date of
grant. At July 29, 1995, 100,000 shares were available for future grants.
In February 1994, stockholders approved a new Incentive Stock Option Plan (the
"1993 Plan") which authorizes options for a maximum of 150,000 shares of Class
A common stock and 150,000 shares of Class B common stock to be granted at not
less than 100% of fair market value on the date of grant. Options are
exercisable in cumulative amounts at 25% per year, but not until one year from
date of grant, and expire ten years after the date of grant.
In February 1995, stockholders approved to amend the 1993 Plan by increasing the
number of shares authorized to be issued under the Plan to 300,000 shares of
Class A common stock and 300,000 of Class B common stock and limit the number
of options to be granted to any employee during a twelve-month period to
100,000.
At July 29, 1995, options for 139,000 shares of Class A common stock and 148,691
shares of Class B common stock had been granted under the 1993 Plan at option
prices ranging from $1.12 to $1.85. There are 161,000 shares of Class A common
stock and 151,309 shares of Class B common stock available for future grant.
Under the Plan, 21,000 shares of Class A common stock and 13,423 shares of
Class B common stock are exercisable at a total cost of $61,663. During fiscal
1995, 10,500 shares of Class A common stock were cancelled and no options have
been exercised.
Under the previous Incentive Stock Option Plan (the "1983 Plan"), shares were
authorized for grants at not less than 100% of fair market value on date of
grant. Options were exercisable in cumulative amounts at 25% per year
commencing in the first year and expired ten years after the date of grant. In
June 1992, the 1983 Plan expired and no additional shares will be granted under
the 1983 Plan.
Stock option transactions during fiscal 1995, 1994 and 1993 for the expired 1983
Plan are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares Option Price
Class A Class B Per Share Total
------- ------- -------------- ---------
<S> <C> <C> <C> <C>
Outstanding August 1, 1992 67,500 69,698 585,247
Cancelled (8,000) $ 5.25 (42,000)
------ ------- --------
Outstanding July 31, 1993 59,500 69,698 543,247
Cancelled (6,000) 2.88 - 5.25 (24,375)
------ ------- --------
Outstanding July 30, 1994 53,500 69,698 518,872
Cancelled 35,500 5.00 (177,500)
------ ------- --------
Outstanding July 29, 1995 18,000 69,698 341,372
====== ======= ========
Options Exercisable
July 29, 1995 18,000 69,698 $2.88 - $5.25 $341,372
====== ======= ========
</TABLE>
24
<PAGE>
NOTE 10 - RELATED PARTIES:
- - - - - -------------------------
In May 1991, an officer, director and stockholder of the Company entered into a
note agreement with the Company to borrow $37,107. The agreement provides for
interest to accrue at 8.5% annually for four years with principal and interest
due in May 1995. In May 1995, the Company agreed to extend the note maturity
until December 1996. Management believes the terms of the note agreement are
competitive with those charged in the open market.
In December 1994, the Company entered into a note agreement to borrow $500,000
from an officer, director and shareholder of the Company. The agreement
provides for interest payable monthly at 10% for the first 18 months and
interest and principal thereafter with the note due on December 1999.
A stockholder, officer and director of the Company is the principal stockholder
of an insurance agency used by the Company. During fiscal 1995, 1994 and 1993,
the Company paid insurance premiums to this agency of $451,100, $437,800 and
$492,400, respectively. Management believes that such premiums are competitive
with those charged by independent insurance brokers.
The Company has a deferred compensation agreement with an officer providing for
payments of $20,000 annually for ten years after retirement. In the event of
death, the unpaid balance is payable in two equal annual installments. The
liability under the agreement has been accrued.
In May 1990, the Company entered into a lease agreement for space in a shopping
center in which several family members of the officers and directors of the
Company have a 41% ownership. During fiscal 1995, 1994 and 1993, the Company
paid approximately $119,000, $127,000 and $123,000, respectively, in rent for
such space. Management believes that the terms of the lease are competitive
with those available for similar properties.
A stockholder, officer and director of the Company is a partner in a law firm
utilized by the Company. During fiscal 1994, the Company paid fees to this
firm of $9,728.
During fiscal 1995, 1994 and 1993, a director of the Company was paid for
consulting services of $6,500, $6,300 and $6,300, respectively.
NOTE 11 - COMMITMENTS:
- - - - - ---------------------
Lease agreements relating to the occupancy of retail stores, warehouses, office
facilities and to the rental of equipment are in effect and expire at varying
dates through 2012. The agreements provide for minimum annual rentals and/or
payments based on percentages of sales. A number of agreements are renewable
at the Company's option and/or cancelable by either party if a specified level
of annual sales is not attained.
Total rents charged against income, including payments for real estate taxes and
certain other expenses, amounted to $5,583,191 in fiscal 1995, $5,235,175 in
fiscal 1994 and $5,448,874 in fiscal 1993.
NOTE 12 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- - - - - -----------------------------------------------------------
For the three fiscal years in the period ended July 29, 1995, the Company made
cash payments for interest and taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Interest $1,045,875 $372,283 $467,401
Income taxes 3,858 17,356 2,785
Non-cash transaction for
purchase of lease 600,000
</TABLE>
25
<PAGE>
NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- - - - - -------------------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
-1995 $11,704,513 $14,794,036 $11,522,075 $11,961,080 $49,981,704
-1994 10,193,558 12,510,206 8,554,691 10,494,112 41,752,567
Income (loss) before
income taxes
-1995 (206,291) 608,252 (153,908) (1,231,453) (983,400)
-1994 (29,447) 149,251 (1,161,457) (359,808) (1,401,461)
Net income (loss)
-1995 (134,068) 345,765 (104,144) (635,181) (527,628)
-1994 71,952 121,645 (831,827) (37,331) (675,561)
Net income (loss)
per share
-1995 $ (.05) $ .14 $ (.04) $ (.26) $ (.21)
-1994 .03 .04 (.29) (.02) (.24)
</TABLE>
The 1994 first quarter net income of $71,952 includes $96,223 for the cumulative
effect of this accounting change for income taxes (Note 7).
26
<PAGE>
PROMISSORY NOTE
$500,000 December 1, 1994
FOR VALUE RECEIVED, the undersigned (hereinafter called "Maker") promises to pay
to the order of Bernard Abrams (hereinafter called "Lender") at his office at
3200 Bristol, Costa Mesa, California or at such other place as the holder
hereof, (including the Lender, hereinafter referred to as "Holder") may
designate in lawful money of the United States, the principal sum of Five
HUNDRED THOUSAND ($500,000) DOLLARS, together with interest on the unpaid
balance of this note, beginning as of the date hereof, at ten (10%) percent per
annum which interest on the unpaid balance shall be computed and payable monthly
in arrears on the basis of a Three Hundred Sixty (360) day year for the actual
number of days elapsed, together with all taxes levied or assessed on this note
or the debt evidenced hereby against the Holder, and together with all costs,
expenses and attorneys' fees incurred in any action to collect this note.
Interest only shall be payable in monthly installments of $4,166.67
each commencing on January, 1, 1995 and continuing on the first day of each and
every month thereafter through and including June, 1, 1996. Thereafter, equal
monthly payments of principal and interest in the amount of $14,158.41 each
shall be due and payable on the first day of each and every month during the
remainder of the term of the loan evidenced by this note commencing on July 1,
1996. Each such payment of principal and interest has been calculated to be an
amount sufficient to provide for the full amortization of the outstanding
principal balance on the date hereof at the interest rate of ten (10%) percent
per annum in level monthly payments of principal and interest as if this note
were payable over a three and one-half (3-1/2) year-amortization schedule.
Notwithstanding anything herein to the contrary, however, the entire
indebtedness evidenced by this note, including, but not limited to, all
outstanding principal and accrued and unpaid interest shall be due and payable
on December 1, 1999.
Maker agrees that (i) if any installment of principal or interest
payable hereunder, or any other sum due under this note, shall not be paid
within ten (10) days of when such installment or sum is due and payable, or if
Maker shall be in default in the performance of any other obligation under this
note of Maker to Holder; or (ii) if Maker hereunder shall suffer or permit the
filing by or against it of any petition for adjudication, arrangement,
reorganization or the like under any bankruptcy or insolvency law, make an
assignment for the benefit of creditors or suffer or permit the appointment of a
receiver for any part of its property (each of the events and circumstances in
(i) and (ii) being events of default), then, upon the happening of any of such
event, the entire indebtedness with accrued interest thereon due under this note
and all other expenses, including, but not limited
<PAGE>
to, reasonable attorneys' fees incurred by the Holder in collecting or enforcing
payment hereof, shall accelerate and become immediately due and payable at the
option of the Holder without notice and without regard to the scheduled maturity
date set forth herein and Holder may proceed to exercise any rights or remedies
that Holder may have by law or under this note. Failure to exercise such option
shall not constitute a waiver of the right to exercise the same in the event of
any subsequent default. Maker agrees that the interest rate shall increase by
five (5%) percent per annum above the rate of interest otherwise payable under
this note from and after the date an event of default occurs or after maturity,
by acceleration or otherwise, or judgment.
Maker may prepay any amounts on any regularly-scheduled payment date
on account of principal without the imposition of any penalty.
Unless applicable law provides otherwise, all payments and prepayments
received by the Holder under the note shall, at the option of the Holder, be
applied by the Holder in the following order:
(a) to the then outstanding late charges imposed against the Maker
under this note;
(b) to any unpaid and accrued interest; and then
(c) to the outstanding principal indebtedness of the Maker in favor
of the Holder.
Any and all prepayments of principal shall be credited to the unpaid
principal of this note in the inverse order of maturity, and shall not affect
the obligation to pay the regular installments required hereunder until the
entire indebtedness has been paid.
Notwithstanding any applicable grace period, if any amount due
hereunder is not paid within ten (10) days of the date it is due, a late charge
equal to five (5%) percent of such amount shall be assessed against Maker for
the purpose of defraying the expenses incident to handling each such delinquent
payment.
Notwithstanding any provisions of this note, the maximum rate of
interest to be paid hereunder shall not exceed the highest or the maximum rate
of interest permissible to be charged by the Holder under applicable laws. Any
amount paid in excess of such rate shall be considered to have been payments in
reduction of principal.
Failure by the Holder to insist upon the strict performance by Maker
of any terms and provisions herein shall not be deemed to be a waiver of any
terms and provisions herein, and the Holder shall retain the right thereafter to
insist upon strict performance by the Maker of any and all terms and provisions
of this note or any document securing the repayment of this note.
MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY
<PAGE>
SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY
WAY RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR
THE ENFORCEMENT OF ANY OF HOLDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT
LIMITATION, TORT CLAIMS. THE MAKER ACKNOWLEDGES THAT IT MAKES THIS WAIVER
KNOWINGLY, VOLUNTARILY AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE
RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS.
This note and the provisions hereof shall inure to the benefit of the
Holder, his legal representatives, successors and assigns and shall be binding
upon the undersigned and its legal representatives, successors and assigns. As
used herein, plural or singular include each other and pronouns of any gender
are to be construed as masculine, feminine or neuter, as the context requires.
Dated this first day of December 1994.
THREE D DEPARTMENTS, INC.
By
Its: President
Donald L. Abrams
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-30-1994
<PERIOD-START> JUL-31-1994
<PERIOD-END> JUL-29-1995
<CASH> 319,045
<SECURITIES> 0
<RECEIVABLES> 296,291
<ALLOWANCES> 0
<INVENTORY> 16,260,487
<CURRENT-ASSETS> 17,775,557
<PP&E> 13,810,244
<DEPRECIATION> 6,550,443
<TOTAL-ASSETS> 28,077,285
<CURRENT-LIABILITIES> 5,897,615
<BONDS> 0
<COMMON> 808,270
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,077,285
<SALES> 49,981,704
<TOTAL-REVENUES> 49,981,704
<CGS> 28,875,368
<TOTAL-COSTS> 21,035,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,054,330
<INCOME-PRETAX> (983,400)
<INCOME-TAX> (455,771)
<INCOME-CONTINUING> (527,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> $(.21)
<EPS-DILUTED> $(.21)
</TABLE>
