<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
---------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended August 3, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
3535 HYLAND AVENUE, SUITE 200, COSTA MESA, CALIFORNIA 92626-1439
----------------------------------------------------------------
(Address of principal executive offices)
TELEPHONE NUMBER (714) 662-0818
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered
------------------- ------------------------------------
Common Stock,
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 ant amendment to this
Form 10-K. [ X ]
The aggregate market value of the outstanding voting stock of the registrant
held by non-affiliates as of September 30, 1996 was $533,901 for Class A common
stock and $469,615 for Class B common stock, based upon a closing price of
$1.1875 per share for Class A common stock and $1.0625 per share for Class B
common stock on that date.
As of September 30, 1996 1,163,094 shares of Class A common stock and 1,272,867
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 1996 Annual Meeting of Stockholders which is expected to be filed with the
Commission on or about December 3, 1996.
The total number of pages is 26. The exhibit index is located on page 11.
<PAGE>
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
Three D Departments, Inc. is a specialty retailer of home textiles, housewares
and decorative accessories. The Company offers coordinated high quality bedding,
bath, housewares, and decorative accessories with an emphasis on brand names,
and everyday value pricing in an attractive store environment with premium
customer service. The Company operates 23 stores including nine stores in
southern California, seven stores in Arizona, six stores in Connecticut, and an
outlet store in Chino, California. The Company operates both regular stores
(under 20,000 square feet) and superstores (over 20,000 square feet). There are
currently fifteen superstores, seven regular stores and one outlet store.
The Company provides a unique shopping environment which sets it apart from its
competitors through its emphasis on coordinated housewares and accessories along
with its extensive assortment of high quality fashion linens. The Company's
superstore prototype is a 25,000 square foot rectangular store designed in a
racetrack format which showcases the broad and complete assortment in its
various product categories. The linen area makes extensive use of fully dressed
beds, coordinated four foot fashion vignettes and coordinating bath products in
high quality glass displays. The decorative housewares are presented on
promotional stepped displays which help the customer pull together a stylized
look.
The Company's roots are in the home textiles business and its merchandise
selection demonstrates its ability to procure high quality fashion bedding and
bath product and offer these products to the consumer at prices that are
competitive. As the specialty home textiles business has become crowded with big
box retailers, Three D has broadened its merchandise to include housewares and
decorative accessories. The Company has developed its accent on high quality
coordinating decorative product that appeals to its upper income, discriminating
customer.
BUSINESS STRATEGY
The Company's goal is to become a unique and preferred specialty retailer of
high quality bed, bath, decorative housewares and home decorative accessories.
The primary components of the strategy to achieve its goal are as follows:
Coordinated High Quality Merchandise The commitment to high quality is
apparent from the many recognizable brand names carried by the Company such as
Croscill, Martex, Wamsutta, Fieldcrest, Krups, Calphalon and many more. The
Company works closely with its supplier base to select and in many cases create
product that presents a decorator image to the consumer. This process and store
display technique fosters both a pleasant shopping experience for browsing, and
also facilitates a rapid decision making process for the customer who has little
time.
A Complete Decorative Home Store Currently, the various classifications
contribute to total sales in the following manner; bedding - 44%, bath - 25%,
decorative housewares - 14%, and decorative accessories - 17%. The Company is
reputed as a high quality and high fashion linen retailer. The expansion into
both decorative housewares and decorative accessories has been accomplished in
fifteen out of twenty-three stores. The new classifications (which already
account for one third of total sales) provide an opportunity for more frequent
visits from the Company's current customer base. The long product life of
bedding product, coupled
1
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with its high ticket price does not create enough demand for frequent visits by
the customer. With a wider array of product offering, the Company seeks to
attract increased visits and sales from its customer base. The typical
superstore carries 50,000 stock keeping units (SKU's) featuring a broad
assortment of brands, styles, colors, and prices.
Shopping Environment Home fashion merchandise requires enough space to
adequately separate different looks and help the customer feel the mood created
by the product. The Company has developed a racetrack formula store with
alcoves along the outer perimeter in order to create many display opportunities
in a compact space. As a result, the store has a "home" ambience and the sales
associates are close to the customer when they are ready for assistance.
Customer Service The Company places a special emphasis on customer recognition
and service. Acknowledging customers and being aware of their needs are the
first steps in the customer service program. This is followed on with extensive
product knowledge brochures made available to all staff . Sales associates are
encouraged to suggest coordinating product, search the entire Company for hard
to obtain merchandise, and assist the customer on merchandise returns. Sales
associates are compensated on an hourly basis with medical, vacation and 401K
profit sharing benefits.
ITEM 2. PROPERTIES
----------
Home Fashion Superstores Beginning in 1990, the Company changed its strategy
from that of a linens only specialty store and decided to offer housewares and
accessories to its customer. The superstore prototype is a 25,000 square foot
rectangular store designed in a racetrack format which showcases the broad and
complete assortment in its various product categories. Decorative accessories
are prominently featured as the customer enters the store. The Company
specializes in high quality silk flowers, hard to find decorative vases,
candle holders, and picture frames. The linen area makes extensive use of fully
dressed beds, coordinated four foot fashion vignettes and coordinating bath
products in high quality glass displays. The decorative housewares are presented
on promotional stepped displays which help the customer pull together a stylized
look.
Since 1994, the Company has built 7 racetrack superstores. The average
investment for a racetrack superstore is approximately $325,000 for fixtures and
equipment and $850,000 for inventory. In the fiscal year ended August 3, 1996,
these stores generated store level operating cash flow of approximately 15.8%
annual return on sales.
In addition to its racetrack superstores the Company has added contiguous space
to expand or has renovated existing bed and bath stores in order to add
decorative housewares and decorative accessory product. Although the converted
stores are not as productive as a newly built racetrack prototype, the store
conversions allow the Company to continue its expansion of decorative
accessories and housewares with efficient use of capital in existing markets.
In the fiscal year ended August 3, 1996, these stores generated store level
operating cash flow of approximately 10.8% annual return on sales.
Bed and Bath Stores The Company continues to operate seven stores in its
previously existing markets where the store was originally opened as a bed and
bath store. The Company intends to either convert these
2
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stores to superstores or replace them with new space on an opportunistic basis.
In the fiscal year ended August 3, 1996, these stores generated store level
operating cash flow of approximately 8.9% annual return on sales.
Outlet Store The Company has converted a former bed and bath location in a
moderate market area to function as an outlet for slow moving and discontinued
goods. The policy of the Company is to offer discontinued goods in its full
line locations until such time as the remaining pieces may be more efficiently
sold through a single presentation. The outlet store serves a more cost
conscious consumer and assists the Company in its need to liquidate slow moving
merchandise in a more orderly fashion.
Real Estate Strategy The Company leases all of its existing space except for a
22,000 square foot commercial building it purchased in December 1994 in Phoenix,
Arizona, which is used as a retail store, and a residence in West Hartford,
Connecticut which is used to defray the costs of lodging in connection with the
supervision of its Connecticut operations. The Company's corporate offices are
located at 3535 Hyland Avenue, Costa Mesa, California. During fiscal 1996 the
Company paid approximately $5,917,000 in aggregate annual rent payments in
connection with leases that expire between fiscal 1997 and fiscal 2012. The
leases typically require the payment of minimum annual rentals or a percentage
of net sales, whichever is greater, payable in monthly instalments. In some
cases, the Company has options to renew its leases.
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.
3
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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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>
1996 HIGH LOW DIVIDEND
---- ---- --- --------
<S> <C> <C> <C>
First Quarter
Class A $ 3 1/16 $ 1 7/8 $0.0125
Class B 3 1/4 2 7/16 0.0075
Second Quarter
Class A 2 1/8 1 1/2 0.0125
Class B 2 5/16 1 1/4 0.0075
Third Quarter
Class A 1 7/8 1 1/2 0.0125
Class B 1 7/8 1 3/8 0.0075
Fourth Quarter
Class A 2 13/16 0.0125
Class B 2 7/8 0.0075
1995 HIGH LOW DIVIDEND
---- ---- --- --------
<S> <C> <C> <C>
First Quarter
Class A $ 1 5/16 $ 1 1/16 $0.0125
Class B 1 1/2 1 1/4 0.0075
Second Quarter
Class A 1 5/16 1 1/8 0.0125
Class B 1 5/8 1 1/4 0.0075
Third Quarter
Class A 2 11/16 1 3/16 0.0125
Class B 2 5/8 1 7/16 0.0075
Fourth Quarter
Class A 3 3/8 1 1/2 0.0125
Class B 3 7/8 1 11/16 0.0075
</TABLE>
The Company had approximately 362 holders of record of its Class A common stock
and approximately 337 holders of record of its Class B common stock as of August
3, 1996.
4
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
FISCAL YEAR ENDED (A)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
AUGUST 3, JULY 29, JULY 30, JULY 31, AUGUST 1,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $47,851,248 $49,981,704 $41,752,567 $42,044,998
Operating expenses 47,819,764 49,910,773 42,614,231 41,795,024 43,214,913
Interest expense 1,317,052 1,054,330 539,797 461,035 417,289
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(Loss) before income taxes
and cumulative effect of
accounting change (1,285,568) (983,399) (1,401,461) (211,061) (555,578)
Benefit for federal and state
income taxes (455,771) (629,677) (64,100) (170,755)
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Net loss before cumulative
effect of accounting change (1,285,568) (527,628) (771,784) (146,961) (384,823)
Cumulative effect of
accounting change 310,427 96,223
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Net (loss) ($975,141) ($527,628) ($675,561) ($146,961) ($384,823)
========================================================= ------------
Weighted average shares
outstanding 2,433,417 2,528,011 2,850,804 2,870,381 2,871,194
===========
Net (loss) per share before
cumulative effect of
accounting change ($0.53) ($0.21) ($0.27) ($0.05) ($0.13)
=========================================================
Net (loss) per share ($0.40) ($0.21) ($0.24) ($0.05) ($0.13)
=======================================================================
Book value per share $ 4.39 $ 4.65 $ 4.53 $ 4.78 $ 4.88
===========
Dividends declared per share:
Class A $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.10
Class B $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.06
Working capital $11,225,777 $12,191,536 $12,867,856 $ 7,741,610 $ 9,111,456
Long-term debt $ 9,143,410 $ 9,784,325 $ 6,015,911 $ 1,971,440 $ 3,351,726
Stockholders' equity $10,684,928 $11,745,345 $12,922,169 $13,711,433 $14,006,161
Total assets $27,507,134 $28,077,285 $25,446,968 $24,254,008 $24,405,708
</TABLE>
(a) The Company operates on a 52-53 week basis. Years end on the Saturday
nearest to July 31. The fiscal years 1992, 1993, 1994, and 1995 each included 52
weeks, fiscal year 1996 included 53 weeks.
5
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Results of Operations
- - ---------------------
The following table sets forth selected data from the Statement of Operations
expressed in percentage form and other statistical information which the Company
believes is pertinent to its operating results:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED,
-------------------------
AUGUST 3, JULY 29, JULY 30,
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales, including warehousing and buying 56.2% 57.8% 57.6%
----- ----- -----
Gross profit 43.8% 42.2% 42.4%
Store operating, administrative, and general
expenses 43.7% 42.1% 44.4%
Interest expense 2.8% 2.1% 1.3%
----- ----- -----
Loss before income tax and cumulative effect of
change in accounting principle (2.7)% (2.0)% (3.3)%
Income tax benefit (0.0)% (0.9)% (1.5)%
Cumulative effect of change in accounting
principle 0.6% 0.0% 0.2%
----- ----- -----
Net (loss) (2.1)% (1.1)% (1.6)%
===== ===== =====
- - ----------------------------------------------------------------------------------------
Number of stores, beginning of year 28 27 31
New store openings 0 4 1
Store closures (5) (3) (5)
----- ----- -----
Number of stores, end of year 23 28 27
===== ===== =====
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
- - -----------------------------------
Sales in fiscal 1996 were $47,851,248, a 4.3% decrease from fiscal 1995 sales of
$49,981,704. Sales from stores not open in the comparable month of the prior
year accounted for $4,024,603 of new volume, which offset the loss of sales from
closed stores of $2,463,763. Additionally, sales of stores open in both fiscal
1996 and 1995 decreased by 7.8%. In the first three quarters of fiscal 1996
comparable store sales decreased 8.5% as the Company experienced several
competitive openings against stores in all of its markets. In the fourth
quarter, comparable store sales increased .7%, due mostly to an additional week
in the Company's 52-53 week fiscal calendar.
Cost of sales, including warehouse, transportation, and buying expenses, was
56.2% of sales in fiscal 1996,
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compared to 57.8% in fiscal 1995. In fiscal 1995, the Company sustained
inventory adjustments related to shrinkage, freight and markdowns. These items
did not recur to the same degree in fiscal 1996 thus resulting in lower cost of
sales.
Store operating, administrative and general expenses were 43.7% of sales in
fiscal 1996 compared to 42.1% in fiscal 1995. The Company closed five stores in
fiscal 1996 compared to three store closings in fiscal 1995. Store closings
during fiscal 1996 were executed via lease expirations and no lease exit fees
were incurred. However, the winding down of operations caused downward pressure
on sales and margins resulting in operating expenses as high as 51.8% of sales
for closed stores. Additionally, the decrease in comparable store sales of 7.8%
negatively impacted the Company's ability to leverage its fixed expenses such as
rent and depreciation.
Interest expense increased $262,722 to $1,317,052 in fiscal 1996 due principally
to an increase in average outstanding borrowings. The average outstanding
borrowings for fiscal 1996 were $8,840,537 compared to $7,726,494 in fiscal
1995. The Company retired $578,924 in debt during the year as its working
capital needs decreased in conjunction with the decrease in the number of
stores.
The Company's combined statutory rate of federal and state taxes is 40.5%,
however; as of the end of the fiscal year ended August 3, 1996 the Company
recorded a valuation allowance against deferred tax assets of $478,929. The
valuation allowance relates primarily to operating loss carry forwards generated
in fiscal years 1994 through 1996. Taxable income is required to offset these
loss carry forwards before their expiration dates, which occur between fiscal
1997 and 2011. Although the Company's estimates for future income suggest there
will be sufficient taxable income in the future to utilizes all of the loss
carry forwards the Company has decided to provide a valuation reserve due to the
prospective nature of future income. The amount of deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced. There was no valuation allowance against
deferred tax assets as of July 29, 1995, and for the year then ended the Company
recorded a tax benefit of $455,771 against loss before taxes of $983,399 which
represented an effective tax rate of 46.3%.
For the year ended August 3, 1996 net loss was $975,141 compared to a net loss
of $527,628 in the prior year. The valuation allowance recorded in fiscal 1996
is the primary reason for an increase in net loss compared to the prior year.
In fiscal 1996 the Company recorded income representing the cumulative effect of
a change in accounting principle of $310,427 relating to the capitalization into
inventory of certain buying, warehousing and transportation costs. The Company
believes this refinement provides a better measurement of operations by more
closely matching revenues with expenses.
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
five stores in fiscal 1994. Sales from stores opened in both periods increased
by 12.1%.
Cost of sales, including warehouse, transportation, and buying expenses, was
57.8% of sales in fiscal 1995, compared to 57.6% in fiscal 1994. In the fourth
quarter, the Company sustained inventory adjustments for shrinkage, freight and
markdowns that affected gross margins for fiscal 1995.
7
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Store operating, administrative and general expenses were 42.1% of sales in
fiscal 1995, compared to 44.4% 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 five stores 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. The Company
incurred a net loss of $527,628 for the fiscal year ended July 29,1995.
Liquidity and Capital Resources
- - -------------------------------
The Company's primary need for cash is to support the merchandise inventory
required to run its operations, and additionally to support its program to
enlarge its revenue base by either adding new stores or expanding existing
sites. The Company has traditionally supported this need through funds generated
by operations and also through use of its credit facilities. At August 3, 1996
the Company maintained a working capital position of $11,225,777 compared to
$12,191,536 as of July 29, 1995. During fiscal 1996 borrowings under credit
facilities decreased by $578,924 from $10,097,254 at July 29, 1995 to $9,518,330
at August 3, 1996.
Cash provided by operations during the year ended August 3, 1996 was $1,651,000
compared to cash used in operations of $2,057,681 in the year ended July 29,
1995. During fiscal 1995 the Company opened four new stores which required
additional investment in inventories. During the year ended August 3, 1996 the
Company used cash created by operations to reduce its borrowings under lines of
credit by $578,924 , invest in store fixtures and equipment of $808,846, and pay
dividends of $96,182. Net cash increased by $187,988 from $319,045 at July
29,1995 to $507,033 at August 3, 1996.
On July 27, 1994 the Company entered into a revolving credit facility with
Foothill Capital Corporation. The revolving credit loan matures on July 28,
1999, and provides for borrowings of 60% of eligible inventory not to exceed a
maximum of $9,000,000 of which $8,300,000 was outstanding at August 3, 1996.
Payments of principal are required if inventory falls below 167 percent of the
amount then outstanding. The revolving credit facility bears interest, payable
monthly, at two percent above the prime rate and additionally requires the
Company to pay a commitment fee of .5 percent on the unused portion. Foothill
Capital Corporation is also the holder of a $1,000,000 secured promissory note
that requires principal payments of $20,000 per month in addition to interest at
two percent above the prime rate. The balance of the secured promissory note at
August 3, 1996 was $720,000. Both the revolving credit facility and the secured
promissory note are secured by inventory, fixtures and accounts receivable of
the Company. The agreements require the Company to maintain certain financial
covenants, some of which, limit capital expenditures , dividend payments and
restrict the disposal of assets without prior approval. At August 3, 1996, the
Company was in compliance with all covenants.
8
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During fiscal 1997 the Company plans to expand two bed and bath stores to the
superstore concept and also plans to open one new racetrack superstore. The
Company also plans to upgrade its store level computer systems. Total capital
expenditures for fiscal 1997 are planned to be approximately $1,000,000.
Management believes that funds generated from operations, its $9,000,000
revolving credit facility ($8,300,000 which was utilized as of August 3, 1996 ),
and use of trade credit will be sufficient to satisfy the Company's working
capital requirements and commitments for capital expenditures through fiscal
1997.
At August 3, 1996 the Company had total deferred tax assets of $1,574,151 and
deferred tax liabilities of $485,155. The deferred tax assets consist primarily
of state and federal tax loss carry forwards which relate to operating losses of
$1,285,568, $983,399, and $1,401,461 generated in fiscal years 1996, 1995 and
1994 respectively. In general, state tax loss carry forwards expire beginning
five years from the date of loss and federal tax loss carry forwards expire 15
years from the date of loss. Taxable income is required to offset these loss
carry forwards before their expiration date. The table below sets forth the
expiration date of deferred tax assets and the approximate amount of taxable
income required to be generated by the Company in order to utilize its deferred
tax assets.
<TABLE>
<CAPTION>
Taxable Income Cumulative Taxable
-------------- ------------------
Required to Utilize Income Required to
Expiration Date of Amount of ------------------- ------------------
Deferred Tax Assets Deferred Tax Assets Deferred Tax Assets Utilize Deferred Tax Assets
- - ------------------- ------------------- ------------------- ---------------------------
<S> <C> <C> <C>
End of fiscal 1997 $ 30,599 $ 166,154 $ 166,154
End of fiscal 1998 $ 30,342 $ 167,299 $ 333,453
End of fiscal 1999 $ 111,210 $ 410,928 $ 744,381
End of fiscal 2000 $ 68,502 $ 231,470 $ 975,851
End of fiscal 2001 $ 110,556 $ 346,883 $1,322,734
2002 and after $1,222,942 $3,837,130 $5,159,864
</TABLE>
The recent history of operating losses is associated with a change in store
prototype and the development of additional product categories developed by the
Company. The expansion of the new store prototype has been executed by
expansion of old bed and bath format stores where both market conditions and
store lease conditions were favorable. However, management decided that many
store sites could not support a new store prototype, which resulted in store
closings. Nonetheless the cost of closing thirteen stores in the last three
fiscal years and the associated decline in sales and salability of merchandise
inventory resulted in additional operating costs which are not expected to
recur. As of August 3, 1996 the Company had 23 stores of which seven stores were
the old bed and bath format. All seven remaining bed and bath stores currently
have positive operating margins, however, management has decided to convert two
stores in fiscal 1997 to the new store prototype in order to increase sales and
operating profits. The remaining five stores are expected to operate under their
existing format during fiscal 1997.
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<PAGE>
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS 109). The Statement
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 assets will not be realized". The Company's plans for fiscal 1997
and beyond suggest that the Company will earn sufficient income in future years
to utilize all of its operating loss carry forwards and other associated
deferred tax assets. However, because the plans of the Company are prospective
and in deference to the history of operating losses the Company has decided to
establish a reserve against its deferred tax assets in the amount of $478,929.
Inflation and Seasonality
- - -------------------------
Management believes its operating results have not been materially affected by
inflation in fiscal 1994, 1995 and 1996. The Company's second quarter (November
through January ) which includes the Christmas season, is the strongest sales
quarter. Additionally, the third quarter (February through April) has
traditionally been the weakest.
Forward Looking Statements
- - --------------------------
The preceding "Business" and Management's Discussion and Analysis contain
various "forward looking statements" within the meaning of section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which represent the Company's expectations or beliefs
concerning future events, including the following: the planned expansion of two
bed and bath stores to the superstore format; the opening of one new superstore;
the ability of the Company to obtain increased visits from its customer base;
the ability of the Company to obtain positive cash flow from its current
portfolio of stores; the prospects of generating income sufficient to utilize
existing deferred tax assets; the ability of the Company to maintain its credit
facilities; the timely availability of branded and private label merchandise in
sufficient quantities to satisfy customer demand; and sufficiency of the
Company's working capital, bank loan agreement and cash flow from operating
activities for the Company's future operating and capital requirements. The
Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, without limitations, the following:
decline in demand for merchandise offered by the Company; the ability of the
Company to gauge the fashion tastes of its customers and provide merchandise to
satisfy customer demand; the ability of the Company to hire and train employees;
the possible unavailability of merchandise from the Company's vendors and
private label suppliers; the effect of economic conditions in the Company's
markets, the effect of severe weather or natural disaster; and the effect of
competitive pressures from other retailers. Results actually achieved thus may
differ materially from expected results in these statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Company's financial statement at August 3, 1996 and July 29, 1995, and for
each of the three years in the period ended August 3, 1996, and the Report of
Price Waterhouse LLP are included in this Annual Report on Form 10-K on pages 14
through 26 below.
10
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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 1996 Annual Meeting of
Stockholders, which is expected to be filed with the Securities and Exchange
Commission on or about December 1, 1996, and such information is incorporated
herein by this reference.
PART IV
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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:
<TABLE>
<CAPTION>
(1) Financial Statements Page No.
-------------------- --------
<S> <C>
Report of Independent Accountants 14
Balance Sheet as of August 3, 1996 and July 29, 1995 15
Statement of Operations for the Fiscal Years Ended
August 3, 1996, July 29, 1995, and July 30, 1994 16
Statement of Changes in Stockholders' Equity for the
Fiscal Years Ended August 3, 1996, July 29, 1995,
and July 30, 1994 17
Statement of Cash Flows for the Fiscal Years Ended
August 3, 1996, July 29, 1995 and July 30, 1994 18
Notes to Financial Statements 19
</TABLE>
(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
--------
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, as filed
with the Delaware Secretary of State on November 30, 1984,
together with the Certificate of Amendment of the Restated
Certificate of Incorporation, as filed with the Delaware
Secretary of State on March 3, 1987./1/
3.2 By-laws of the Company as amended through July 29, 1987.
4.1 Class A Common Stock share certificate./2/
4.2 Class B Common Stock share certificate.
10.1 1993 Incentive Stock Option Plan and Option Certificate./3/
10.2 Promissory note with an officer.
18 Accountant's preferability letter regarding change in
accounting.
23.1 Accountant's consent for incorporation of S-8 filing.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended August 3, 1996
- - ------------------------------
/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 Registrants 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 25, 1996
THREE D DEPARTMENTS, INC.
(Registrant)
By: /s/ Steven Kerkstra
------------------------------------
Steven Kerkstra, Vice President
And Chief 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 Abrams President, Chief Operating Officer and
- - ------------------------ Director
Donald Abrams
/s/ Steven Kerkstra Vice President, Chief Financial Officer and
- - ------------------------ Assistant Secretary
Steven Kerkstra
/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/ 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. at August 3, 1996 and July 29, 1995, and
the results of its operations and its cash flows for each of the three years in
the period ended August 3, 1996, 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 from 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 1994. Also, as described in Note
2 to the financial statements, the Company changed its method of accounting for
merchandise inventory in fiscal 1996.
PRICE WATERHOUSE
Los Angeles, California
October 14, 1996
14
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
August 3, 1996 July 29, 1995
-------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 507,033 $ 319,045
Receivables 376,850 296,291
Inventories 16,431,485 16,260,487
Prepaid expenses 538,757 475,435
Prepaid income taxes 98,363
Deferred income taxes 35,635 325,936
---------------------------
Total current assets 17,889,760 17,775,557
PROPERTY FIXTURES AND IMPROVEMENTS, at cost
- - ----------------------------------
Property, fixtures and equipment 10,225,431 10,988,714
Leasehold improvements 2,846,548 2,821,530
---------------------------
13,071,979 13,810,244
Less-accumulated depreciation and amortization 6,517,976 6,550,443
---------------------------
6,554,003 7,259,801
OTHER ASSETS
- - ------------
Deferred costs of leases, net 1,134,429 1,263,509
Deferred income taxes 574,432 615,415
Other 1,354,510 1,163,003
---------------------------
3,063,371 3,041,927
---------------------------
$27,507,134 $28,077,285
===========================
Liabilities and Stockholders' Equity
------------------------------------
CURRENT LIABILITIES
- - -------------------
Long-term debt - current portion $ 374,920 $ 312,929
Accounts payable 4,882,924 3,839,852
Accrued liabilities 1,406,139 1,431,240
---------------------------
Total current liabilities 6,663,983 5,584,021
LONG-TERM DEBT, LESS CURRENT PORTION 9,143,410 9,784,325
- - ------------------------------------ ---------------------------
DEFERRED COMPENSATION 200,000 200,000
- - --------------------- ---------------------------
OTHER LIABILITIES 814,813 763,594
- - ---------------- ---------------------------
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 1,666,569 shares (1995- 1,656,969) 416,642 414,242
Class B- authorized 6,000,000 shares; issued 1,574,263 shares (1995- 1,576,113) 393,566 394,028
Additional paid-in capital 1,255,525 1,246,557
Retained Earnings 10,423,928 11,495,251
---------------------------
12,489,661 13,550,078
Less-804,871 shares of commmon stock in treasury, at cost 1,804,733 1,804,733
---------------------------
COMMITMENTS (Note 11) 10,684,928 11,745,345
- - ----------- ---------------------------
$27,507,134 $28,077,285
===========================
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
August 3, 1996 July 29, 1995 July 30, 1994
<S> <C> <C> <C>
Sales $47,851,248 $49,981,704 $41,752,567
Costs and expenses
Cost of sales, including warehousing, transportation and buying
expenses 26,926,533 28,875,367 24,043,495
Store operating, administrative and general expenses 20,893,231 21,035,406 18,570,736
------------------------------------------------
Operating income (loss) 31,484 70,931 (861,664)
Interest Expense 1,317,052 1,054,330 539,797
------------------------------------------------
Loss before income taxes and cumulative effect of accounting change
(1,285,568) (983,399) (1,401,461)
------------------------------------------------
Benefit for income taxes:
Federal (381,403) (520,173)
State (74,368) (109,504)
------------------------------------------------
Net loss before cumulative effect of accounting change (1,285,568) (527,628) (771,784)
Cumulative effect of accounting change (Notes 2, 7 and 14) 310,427 96,223
------------------------------------------------
Net loss $ (975,141) $ (527,628) $ (675,561)
================================================
Net loss per share before cumulative effect of accounting change
($0.53) ($0.21) ($0.27)
================================================
Net loss per share ($0.40) ($0.21) ($0.24)
================================================
Weighted average number of common shares outstanding 2,433,417 2,528,011 2,850,804
================================================
</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 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 ($.03 per share) (39,529)
Purchase of common stock for treasury
(257,586 shares of Class A and 165,007
shares of Class B) (548,867)
----------------------------------------------------------------------
Balance at July 29, 1995 414,242 394,028 1,246,557 11,495,251 (1,804,733)
- - ------------------------
Net loss (975,141)
Cash dividends:
Class A common stock ($.05 per share) (57,888)
Class B common stock ($.03 per share) (38,294)
Shares purchased under option agreement
(3,500 Class A shares and 4,250 Class B
shares) 875 1,063 8,968
Conversions from Class B to Class A
common stock 1,525 (1,525)
----------------------------------------------------------------------
Balance at August 3, 1996 $416,642 $393,566 $1,255,525 $10,423,928 $(1,804,733)
- - ------------------------- ======================================================================
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
THREE D DEPARTMENTS, INC.
------------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
August 3, July 29, July 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (975,141) $ (527,628) $ (675,561)
Adjustments to reconcile net loss to cash provided from operating
activities:
Depreciation and amortization 1,709,186 1,558,698 1,323,232
Increase in cash value of life insurance (321,590) (354,732) (298,507)
Loss on sales and abandonment of fixtures and improvements 54,587 64,970 46,018
Changes in assets and liabilities:
Accounts receivable (80,559) 727,148 (755,000)
Inventories (170,998) (2,141,767) (1,129,414)
Prepaid expenses (63,322) (182,282) 102,332
Prepaid income taxes 98,363 9,192 21,137
Deferred taxes 331,284 (458,220) (327,423)
Deposits 59,045 (48,116)
Accounts payable and accrued liabilities 1,017,971 (970,404) 1,199,208
Accrued income taxes 158,299 507,547
Other liabilities 51,219
------------------------------------------
Net cash provided by (used in) operating activities 1,651,000 (2,057,681) (34,547)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixtures 10,034 38,784 190,590
Purchase of fixtures, equipment and improvements (802,406) (2,798,083) (1,166,810)
Purchase of software (6,440) (66,877) (2,940)
Purchase of buildings (1,193,834)
Purchase of leases (280,000)
------------------------------------------
Net cash used in investing activities (798,812) (4,300,010) (979,160)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10,906
Proceeds from loan against cash value of insurance 2,043,180
Proceeds from borrowings 7,150,000 5,928,568
Dividends paid (96,182) (104,787) (113,697)
Purchase of common stock (548,867)
Repayment of debt (578,924) (3,130,754) (5,597,881)
------------------------------------------
Nest cash (used in) provided by financing activities (664,200) 3,365,592 2,260,170
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 187,988 (2,992,099) 1,246,463
Cash and cash equivalents:
Beginning of year 319,045 3,311,144 2,064,681
------------------------------------------
END OF YEAR $ 507,033 $ 319,045 $ 3,311,144
==========================================
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - THE COMPANY:
- - ---------------------
Three D Departments, Inc. (the Company) operates retail bed, bath and decorative
housewares specialty stores. At August 3, 1996 the company operated 23 stores in
three states. The Company operates under the name Three D Bed and Bath in
California and Connecticut and under the name Linens Plus in Arizona.
The Company's fiscal year is based on a 52-53 week calendar ending on the
Saturday nearest to July 31. The fiscal year 1996 included 53 weeks, the fiscal
years 1995 and 1994 included 52 weeks.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES:
- - ----------------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the respective
reporting periods. Actual results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost or market. In fiscal 1996 the
Company changed its method of accounting for inventories to include the costs of
certain buying, warehousing, and transportation costs. The Company believes this
refinement provides a better measurement of operations by more closely matching
revenues with expenses. At the beginning of fiscal 1996 the Company restated
its inventory to include $527,040 of such costs. This amount, less the tax
effect of $216,613, is reported as a change in accounting principle totaling
$310,427. At August 3, 1996 capitalized costs were $543,246. The effect of this
change on net income for the fiscal year ended August 3, 1996 is immaterial.
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: buildings - 20 to 25 years; fixtures,
furniture and equipment - 3 to 8 years; and leasehold improvements - 4 to 15
years.
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
$129,079, $106,296 and $78,006 for fiscal years 1996, 1995 and 1994,
respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS No. 109, "Accounting for Income Taxes". The Company computes
income taxes based upon the change in its tax assets and liabilities. SFAS 109
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities at the applicable enacted rates.
Advertising
Advertising cost is expensed in the period incurred.
Statement of Cash Flows
The Company includes as cash and cash equivalents all highly liquid investments
with original maturities of three months or less.
Earnings per Share
Net income (loss) per share is computed based upon the weighted average number
of shares outstanding, plus common share equivalents when dilutive.
19
<PAGE>
New Pronouncements by Financial Accounting Standards Board
The Company accounts for Employee Stock Option Plans under Accounting
Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees"(APB 25). In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation"(SFAS 123), which is effective for fiscal years
beginning after December 15, 1995. The pronouncement calls for the fair value
based method of accounting for employee stock compensation plans. The
pronouncement also allows for the retention of the current method of accounting
for stock option, if expanded footnote disclosure illustrates both methods of
accounting. For Fiscal 1996, the Company has retained its current method of
accounting. The Company anticipates accounting for future stock compensation
awards in accordance with APB 25 with appropriate footnote disclosure required
under SFAS 123.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts and other
receivables, accounts payables, and accrued liabilities approximate fair market
value because of the short maturity of these instruments. The carrying amount of
the Company's debt approximates fair value based upon the prevailing market
rates.
Reclassification
Certain reclassifications, which have no effect on equity, have been made to the
1995 financial statements to conform with the 1996 financial statement
presentation.
NOTE 3 - OTHER ASSETS:
- - ----------------------
The Company has life insurance policies on key executives in which the Company
is the principal beneficiary. Cash surrender value (net of policy loans of
$2,739,440 at both August 3, 1996 and July 29, 1995) was $1,142,518 and
$820,928 at August 3, 1996 and July 29, 1995, respectively. Net cash surrender
values are included in other assets.
<TABLE>
<CAPTION>
NOTE 4 - ACCRUED LIABILITIES:
- - ----------------------------
Accrued liabilities consist of the following:
August 3,1996 July 29, 1995
------------- -------------
<S> <C> <C>
Accrued expenses $1,002,702 $1,130,694
Accrued salaries and wages 403,437 300,546
--------------------------
$1,406,139 $1,431,240
==========================
</TABLE>
20
<PAGE>
NOTE 5 - LONG TERM DEBT:
- - ------------------------
<TABLE>
<CAPTION>
Long-term debt consists of the following:
August 3, 1996 July 29, 1995
-------------- -------------
<S> <C> <C>
Note payable - revolving credit loan, payable monthly
through July 28, 1999, interest at prime rate plus 2%
(10.25% at August 3, 1996). $8,300,000 $ 8,550,000
Note payable - secured promissory note, payable
monthly through July 28, 1999, principal and interest
at prime rate plus 2% (10.25% at August 3, 1996). 720,000 960,000
Note payable to officer - monthly interest payments of
$4,167 through July, 1996, monthly payments of
principal and interest of $14,158 through December at
10 % interest. 479,933 500,000
Capitalized lease obligation, due in monthly
installments of $6,239 including interest at 10.25%
through October, 1996. Secured by computer
equipment. 18,397 87,254
--------------------------
Less current portion 374,920 312,929
--------------------------
$9,143,410 $ 9,784,325
==========================
</TABLE>
The weighted average interest rate associated with all borrowings outstanding at
August 3, 1996 and July 29, 1995 was 10.5% and 10.7%, respectively.
The revolving credit loan matures on July 28, 1999, and provides for borrowings
of 60% of eligible inventory not to exceed a maximum of $9,000,000, of which
$8,300,000 was outstanding at August 3, 1996. Payments of principal are required
only if inventory falls below 167 percent of the amount then outstanding. 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
$720,000 at August 3, 1996.
Both the revolving credit line and the secured promissory note are secured by
inventory, fixtures and accounts receivable of the Company. The agreement
requires the Company to maintain certain financial covenants, some of which
limit capital expenditures and dividend payments and restrict disposal of assets
without prior approval. At August 3, 1996 the Company was in compliance with all
covenants.
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 of $58,248 and $116,495 at August 3, 1996 and
July 29, 1995, respectively. Future minimum lease payments at August 3, 1996 are
$18,397 all of which are due in fiscal 1997.
NOTE 6 - OTHER LIABILITIES:
- - ---------------------------
In September 1994, the Company entered into an agreement to purchase a favorable
lease for approximately $750,000. The agreement calls for annual payments of
$150,000 for five years. The outstanding balance at August 3, 1996 is $450,000
of which $150,000 is current and included in current liabilities.
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 basis 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
21
<PAGE>
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 the deferred tax assets or 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 August 3, 1996 comprised the following:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Current tax expense
Federal $0 $ 0 $(364,395)
State 0 13,050 13,050
---------------------------------
0 13,050 (351,345)
Deferred tax expense
Federal 0 (381,403) (155,778)
State 0 (87,418) (122,554)
---------------------------------
0 (468,821) (278,332)
---------------------------------
Benefit for income taxes $0 $(455,771) $(629,677)
=================================
</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 August 3, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit (6.5)% (7.1)% (5.2)%
Life insurance premiums (1.3)% (3.5)% (1.0)%
Valuation allowance 37.3%
Other 4.5% (1.7)% (4.7)%
---------------------------------
0.0% (46.3)% (44.9)%
=================================
</TABLE>
22
<PAGE>
Deferred tax assets and liabilities as of August 3, 1996 and July 29, 1995
relate to the following:
<TABLE>
<CAPTION>
Deferred tax assets August 3, 1996 July 29, 1995
-------------- -------------
<S> <C> <C>
Inventories $ 11,591 $ 249,227
Contribution carry forwards 12,292 10,205
Accrued vacation 24,044 66,504
Accrued compensation 81,057 88,000
Loss carry forwards 1,210,052 737,169
Leasehold improvements 235,115 236,155
---------------------------
Total deferred tax assets 1,574,151 1,387,260
Valuation allowance for deferred tax assets (478,929)
---------------------------
Net deferred tax assets 1,095,222 1,387,260
Deferred tax liabilities:
Fixtures and equipment 485,155 445,909
---------------------------
Total net deferred tax assets $ 610,067 $ 941,351
===========================
</TABLE>
At August 3, 1996 the Company had federal net operating loss carry forwards
of $2,685,413 expiring from 2009 through 2011 and state net operating loss carry
forwards of approximately $2,700,000 expiring from 1997 through 2001. The
Company's plans for future operations suggest that earnings will be sufficient
in future years to utilize all of its operating loss carry forwards and other
associated deferred tax assets. However, because the plans of the Company are
prospective in nature and in deference to the recent history of operating losses
the Company has decided to establish a reserve against its deferred tax assets
in the amount of $478,929. Although realization is not assured, management
believes it is more likely than not that the remaining deferred tax assets will
be realized. The amount of the deferred tax asset considered realizable, could
be reduced in the near term if estimates of future taxable income are reduced.
NOTE 8 - STOCKHOLDERS' EQUITY
- - -----------------------------
The Company is authorized to issue 300,000 shares of preferred stock of $1.00
par value, 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 differ in that quarterly cash
dividends, if declared, must be for a higher amount than Class B shares and
Class A shares have 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 market price.
During fiscal 1993 the Company acquired 8,000 shares of its Class A 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 $545,877 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 -EMPLOYEE BENEFITS:
- - -------------------------=
Effective June 1, 1996 the Company adopted the Three D Departments, Inc.
Employee Savings and Profit Sharing Plan (the Plan) under section 401(k) of the
Internal Revenue Code. All employees who have completed 90 days of service, have
attained the age of 21 years and worked at least 1,000 hours are eligible to
participate in the Plan. The Plan is funded by voluntary employee salary
deferrals of up to 15% of annual compensation and employer matching
contributions equal to five percent of the Company's net income. There was no
Company contribution for the fiscal year ended August 3, 1996.
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 installments. The liability
under the agreement has been accrued.
The Company has a non-qualified and two qualified stock option plans (the
"1983 Plan" and the "1993 Plan") 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 and expire ten years after the date of grant.
Options are exercisable in cumulative amounts at 25% per year, one year from the
date of grant. At August 3, 1996 100,000 shares were available for future
grants.
Under 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 expire ten years after
date of grant. In June 1992, the 1983 Plan expired and no additional shares will
be granted under the 1983 Plan.
The 1993 Plan, as amended authorizes options for a maximum of 300,000 shares
of Class A common stock and 300,000 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 one year from the date of
grant, and expire ten years after date of grant. Under the 1993 Plan the number
of options granted to any single employee in a twelve month period is limited to
100,000 shares. As of August 3, 1996 remaining options open for grant to
employees, officers and directors were 180,500 Class A shares and 161,039 Class
B shares.
Information with respect to the Company's stock option plans is summarized below
for each of the three fiscal years in the period ended August 3, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year 375,389 268,889 129,198
Granted 25,000 150,000 145,691
Exercised (7,750)
Canceled (57,750) (43,500) (6,000)
--------------------------------
Outstanding at end of year 334,889 375,389 268,889
================================
Exercisable at end of year 161,419 122,121 129,198
================================
Price range per share of options $ 1.125 $ 1.125 $ 2.880
outstanding at end of year to to to
$ 5.250 $ 5.250 $ 5.250
</TABLE>
NOTE 10 - RELATED PARTIES:
- - --------------------------
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 eighteen months and interest
and principal thereafter with the final payment due in December, 1999. The
outstanding balance at August 3, 1996 is $479,933 and is included in long-term
debt.
In May 1992, 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. In May 1995, the Company also increased the interest on the
note to 10.75% per annum. The outstanding balance at
24
<PAGE>
August 3, 1996 is $57,974 and is included in accounts receivable.
In May 1990, the Company entered into a lease agreement for space in a shopping
center in which several officers and directors of the Company have 41%
ownership. During fiscal 1996, 1995, and 1994, the Company paid approximately
$153,000, $119,000, and $127,000 respectively, in rent for such space.
Management believes the terms of the lease are competitive with those available
for similar properties.
A stockholder, officer and director of the Company is the principal stockholder
of an insurance agency used by the Company. During fiscal 1996, 1995 and 1994,
the Company paid insurance premiums on insurance policies issued through this
agency of $383,874, $451,000 and $437,800, respectively. Management believes
that such premiums are competitive with those charged by unrelated insurance
brokers.
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 are cancelable by either party if a specified level
of annual sales is not attained.
Aggregate annual minimum rental commitments at August 3, 1996, excluding real
estate taxes and certain other expenses, under the aforementioned leases are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Rental (000's)
----------- -------------
<S> <C>
1997 $ 4,292
1998 4,236
1999 3,956
2000 3,682
2001 3,124
thereafter 12,141
-------
$31,431
=======
</TABLE>
Total rents charged against income, including payments for real estate taxes and
certain other expenses, amounted to $5,917,020 in fiscal 1996, $5,583,191 in
fiscal 1995 and $5,235,175 in fiscal 1994.
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- - -----------------------------------------------------------
For the three fiscal years in the period ended August 3, 1996, supplemental cash
flow information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- --------
<S> <C> <C> <C>
Interest paid $1,317,053 $1,045,875 $372,283
Income taxes paid (refunded) (86,084) 3,858 17,356
Non-cash investing 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
1996 $12,117,969 $13,922,571 $10,419,704 $11,391,004 $47,851,248
1995 11,704,513 14,794,036 11,522,075 11,961,080 49,981,704
Income (loss) before taxes
1996 (620,465) 319,232 (237,488) (746,847) (1,285,568)
1995 (206,290) 608,252 (153,908) (1,231,453) (983,399)
Net income (loss)
1996 (47,156) 169,516 (148,289) (949,212) (975,141)
1995 (134,068) 345,765 (104,144) (635,181) (527,628)
Net income (loss) per share
1996 $ (0.02) $ 0.07 $ (0.06) $ (0.39) $ (0.40)
1995 (0.05) 0.14 (0.04) (0.26) (0.21)
</TABLE>
The 1996 first quarter net loss of $47,156 is net of $310,427 credit for the
cumulative effect of change in accounting principle relating to the
capitalization in inventory of certain buying, warehousing, and transportation
costs. The 1996 fourth quarter net loss of $949,212 includes the valuation
allowance for deferred taxes of $478,929.
NOTE 14 - PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED):
- - --------------------------------------------------------
In fiscal 1996 the Company changed its method of accounting for inventories to
include the costs of certain buying, warehousing, and transportation costs. The
Company believes this refinement provides a better measurement of operations by
more closely matching revenues with expenses. At the beginning of fiscal 1996
the Company restated its inventory to include $527,040 of such costs. This
amount, less the tax effect of $216,613, is reported as a change in accounting
principle totaling $310,427. At August 3, 1996 capitalized costs were $543,246.
The information below presents, on a pro forma basis, the results of operations
assuming the capitalization of certain warehousing, buying and transportation
costs applied on a retroactive basis for each of the three fiscal years in the
period ended August 3, 1996.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ---------
<S> <C> <C> <C>
Net (loss) before cumulative effect of accounting change $(1,285,568) $(525,542) $(699,108)
Cumulative effect of accounting change for income taxes 96,223
-------------------------------------
Net loss $(1,285,568) $(525,542) $(602,885)
=====================================
Net loss per share before cumulative effect of accounting
change $ (0.53) $ (0.21) $ (0.25)
=====================================
Net loss per share $ (0.40) $ (0.21) $ (0.21)
=====================================
</TABLE>
26
<PAGE>
Exhibit 18
----------
October 14, 1996
To the Board of Directors of Three D Departments, Inc.
Dear Sirs:
We have audited the financial statements included in the Company's Annual Report
on Form 10-K for the year ended August 3, 1996 and have issued our report
thereon dated October 14, 1996. Note 2 to the financial statements describes a
change in the method of accounting for certain indirect costs incurred in the
acquisition of merchandise inventories. It should be understood that the
preferability of one acceptable method of accounting for indirect costs incurred
in the acquisition of merchandise inventories over another has not been
addressed in any authoritative accounting literature and in arriving at our
opinion expressed below, we have relied on management's business planning and
judgement. Based upon our discussions with management and the stated reasons for
the change, we believe that such change represents, in your circumstances, the
adoption of a preferable alternative accounting principle for indirect costs
incurred in the acquisition of merchandise inventories in conformity with
Accounting Principles Board Opinion No. 20.
Yours very truly,
PRICE WATERHOUSE LLP
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 033-63897) of our report dated October 14, 1996
appearing on page 14 of Three D Departments, Inc.'s Annual Report on Form 10-K
for the year ended August 3, 1996.
PRICE WATERHOUSE LLP
Los Angeles, California
October 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K,
AUGUST 3, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-29-1995
<PERIOD-START> JUL-30-1995
<PERIOD-END> AUG-03-1996
<CASH> 507,033
<SECURITIES> 0
<RECEIVABLES> 376,850
<ALLOWANCES> 0
<INVENTORY> 16,431,485
<CURRENT-ASSETS> 17,889,760
<PP&E> 13,071,979
<DEPRECIATION> 6,517,976
<TOTAL-ASSETS> 27,507,134
<CURRENT-LIABILITIES> 6,663,983
<BONDS> 9,143,410
<COMMON> 814,813
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,507,134
<SALES> 47,851,248
<TOTAL-REVENUES> 47,851,248
<CGS> 26,926,533
<TOTAL-COSTS> 20,893,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,317,052
<INCOME-PRETAX> (1,285,568)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,285,568)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 310,427
<NET-INCOME> (975,141)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
