<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 2, 1997
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:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock
Class B Common Stock
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 an 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, 1997 was $222,751 for Class A common
stock and $108,395 for Class B common stock, based upon the last closing price
of $.50 per share for Class A common stock and $.25 per share for Class B common
stock on that date.
As of September 30, 1997 1,171,494 shares of Class A common stock and 1,264,455
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 1997 Annual Meeting of Stockholders which is expected to be filed with the
Commission on or about December 3, 1997.
The total number of pages is 27. The exhibit index is located on page 12.
<PAGE>
PART I
------
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. As of August 2, 1997 the Company operated 22 stores including
nine stores in southern California, seven stores in Arizona, and six stores in
Connecticut. Additionally the Company has opened a new superstore in Connecticut
during the first month of fiscal 1998. The Company operates both regular stores
(under 20,000 square feet) and superstores (over 20,000 square feet). There are
currently seventeen superstores and six regular stores.
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 of 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 targeted 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 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 - 41%, bath - 25%,
and decorative housewares and accessories - 34%. 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-two 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 with
1
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its high ticket price does not create enough demand for frequent visits by the
customer. With a wider array of products 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 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. For the year ended August 2, 1997, these
stores generated store level operating cash flow of approximately 15.4% 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.
For the year ended August 2, 1997, these stores generated store level operating
cash flow of approximately 7.1% annual return on sales.
Bed and Bath Stores The Company continues to operate seven stores in its
previously existing markets
2
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where the store was originally opened as a bed and bath store. The Company
intends, subject to the availability of funds, to either convert these stores to
superstores or replace them with new space on an opportunistic basis. For the
year ended August 2, 1997, these stores generated store level operating cash
flow of approximately 5.4% annual return on sales.
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. The Company's corporate
offices are located at 3535 Hyland Avenue, Costa Mesa, California. During fiscal
1997 the Company paid approximately $5,915,000 in aggregate annual rent payments
in connection with leases that expire between fiscal 1998 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
-----------------
In the ordinary course of business, the Company is subject to claims, complaints
and legal actions. In the opinion of management, such matters are not expected
to have a material adverse effect on the financial position of 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
---------------------------------------------------------------------
Beginning March 1, 1997 both classes of the Company's common stock began
trading on the Nasdaq Stock Market, Inc., OTC Bulletin Board. Prior to March 1,
1997 both classes of the Company's common stock were 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 OTC Bulletin Board and the American Stock
Exchange are as follows:
<TABLE>
<CAPTION>
1997 HIGH LOW DIVIDEND
---- ---- --- --------
<S> <C> <C> <C>
First Quarter
Class A $1 3/16 $ 1 $0.0125
Class B 1 1/16 15/16 0.0075
Second Quarter
Class A 1 3/16 5/8 0.0125
Class B 7/8 1/2 0.0075
Third Quarter
Class A 7/8 3/8 0.0125
Class B 3/4 3/8 0.0075
Fourth Quarter
Class A 7/8 5/8
Class B 5/8 11/64
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
</TABLE>
In the fourth quarter of fiscal 1997, the Company suspended the payment of
dividends on both classes of its common stock. The Company had approximately
346 holders of record of its Class A common stock and approximately 327 holders
of record of its Class B common stock as of August 2, 1997.
4
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
FISCAL YEAR ENDED (A)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
AUGUST 2, AUGUST 3, JULY 29, JULY 30, JULY 31,
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 44,181,878 $47,851,248 $49,981,704 $41,752,567 $42,044,998
Operating expenses 44,648,400 47,819,764 49,910,773 42,614,231 41,795,024
Interest expense 1,210,227 1,317,052 1,054,330 539,797 461,035
---------------------------------------------------------------------
Loss before income taxes and
cumulative effect of
accounting change (1,676,749) (1,285,568) (983,399) (1,401,461) (211,061)
Benefit for federal and state
income taxes (455,771) (629,677) (64,100)
----------------------------------------------------------------------
Loss before cumulative effect
of accounting change (1,676,749) (1,285,568) (527,628) (771,784) (146,961)
Cumulative effect of
accounting change 310,427 96,223
----------------------------------------------------------------------
Net loss ($1,676,749) ($975,141) ($527,628) ($675,561) ($146,961)
======================================================================
Weighted average shares
outstanding 2,435,955 2,433,417 2,528,011 2,850,804 2,870,381
Loss per share before
cumulative effect of
accounting change ($0.69) ($0.53) ($0.21) ($0.27) ($0.05)
======================================================================
Net loss per share ($0.69) ($0.40) ($0.21) ($0.24) ($0.05)
======================================================================
Book value per share $ 3.67 $ 4.39 $ 4.65 $ 4.53 $ 4.78
Dividends declared per share:
Class A $ 0.0375 $ 0.05 $ 0.05 $ 0.05 $ 0.05
Class B $ 0.0225 $ 0.03 $ 0.03 $ 0.03 $ 0.03
Working capital $ 9,652,600 $11,225,777 $12,191,536 $12,867,856 $ 7,741,610
Long-term debt $ 8,497,177 $ 9,143,410 $ 9,784,325 $ 6,015,911 $ 1,971,440
Stockholders' equity $ 8,935,800 $10,684,928 $11,745,345 $12,922,169 $13,711,433
Total assets $ 25,340,324 $27,507,134 $28,077,285 $25,446,968 $24,254,008
</TABLE>
(a) The Company operates on a 52-53 week basis. Years end on the Saturday
nearest to July 31. The fiscal years 1993, 1994,1995 and 1997 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
- - -------------
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 2, AUGUST 3, JULY 29,
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales, including warehousing and buying 57.2% 57.3% 57.8%
----- ----- -----
Gross profit 42.8% 42.7% 42.2%
Store operating, administrative, and general
expenses 43.9% 42.6% 42.1%
Interest expense 2.7% 2.8% 2.1%
----- ----- -----
Loss before income tax and cumulative effect of
change in accounting principle (3.8)% (2.7)% (2.0)%
Income tax benefit 0.0% 0.0% (0.9)%
Cumulative effect of change in accounting
principle 0.0% 0.6% 0.0%
----- ----- -----
Net loss (3.8)% (2.1)% (1.1)%
===== ===== =====
=======================================================================================
Number of stores, beginning of year 23 28 27
New store openings 0 0 4
Store closures (1) (5) (3)
----- ----- -----
Number of stores, end of year 22 23 28
===== ===== =====
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
- - -----------------------------------
Sales in fiscal 1997 were $44,181,878, a 7.7% decrease from fiscal 1996 sales of
$47,851,248. Sales of stores open in both fiscal 1997 and 1996 decreased by
3.5%. The Company experienced competitive openings against several of its key
stores during fiscal 1997. Additionally, sales of the stores closed during
fiscal 1996 accounted for a decrease $1,986,234.
Cost of sales, including warehouse, transportation, and buying expenses, was
57.2% of sales in fiscal 1997, compared to 57.3% in fiscal 1996.
Store operating, administrative and general expenses were 43.9% of sales in
fiscal 1997 compared to 42.6% in fiscal 1996. The decrease in comparable store
sales of 3.5% negatively impacted the Company's
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ability to leverage its fixed expenses such as rent and depreciation.
Interest expense decreased $106,825 to $1,210,227 in fiscal 1997 due principally
to a decrease in average outstanding borrowings. The average outstanding
borrowings for fiscal 1997 were $9,005,13 compared to $9,689,023 in fiscal 1996.
The Company retired $757,573 in debt during the year as its working capital
needs decreased in conjunction with the decrease in merchandise inventory.
The Company did not record a tax benefit arising from the operating loss of
$1,676,749 in fiscal 1997. The Company increased the valuation allowance against
deferred tax assets from $478,929 at the end of fiscal year 1996 to $1,289,313
at the end of fiscal 1997. The valuation allowance relates primarily to
operating loss carry forwards generated in fiscal years 1994 through 1997.
Taxable income is required to offset these loss carry forwards before their
expiration dates, which occur between fiscal 1998 and 2012. The ultimate
realization of deferred tax assets, net of the valuation allowance, of
$1,083,083 depends on the Company's ability to generate sufficient taxable
income in the future. A portion of this asset will be realized through the
reversal of taxable temporary differences totaling $473,016 reflected as
deferred tax liabilities in the financial statements. Certain tax planning
strategies combined with the Company's plans for fiscal 1998 and beyond provide
the basis for management's conclusion that it is more likely than not that the
Company will generate sufficient taxable income to realize the net deferred tax
asset recorded at August 2, 1997. The amount of the deferred tax asset could be
reduced in the near term if estimates of future taxable income are reduced.
For the year ended August 2, 1997, net loss was $1,676,749 compared to a net
loss of $975,141 in 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.
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
57.3% of sales in fiscal 1996, 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 42.6% 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
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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 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. The ultimate realization of deferred tax assets, net of the valuation
allowance, of $1,095,222 depends on the Company's ability to generate sufficient
taxable income in the future. A portion of this asset will be realized through
the reversal of taxable temporary differences totaling $485,155 reflected as
deferred tax liabilities in the financial statements. The Company's plans for
fiscal 1997 and beyond provide the basis for management's conclusion that it is
more likely than not that the Company will generate sufficient taxable income to
realize the net deferred tax asset recorded at August 3, 1996. The amount of the
deferred tax asset 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.
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 2, 1997
the Company maintained a working capital position of $9,652,600 compared to
$11,225,777 as of August 3, 1996. During fiscal 1997 borrowings under credit
facilities decreased by $757,573 from $9,518,330 at August 3, 1996 to $8,760,757
at August 2, 1997.
8
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Cash provided by operations during the year ended August 2, 1997 was $1,213,496
compared to cash provided by operations of $1,931,583 in the year ended August
3, 1996. During the year ended August 2, 1997, the Company used cash generated
by operations to invest in store fixtures and equipment of $905,139, purchase a
lease for $250,000 and invest in life insurance policies of $250,975.
Additionally, the Company reduced its borrowings under lines of credit by
$577,573, and paid dividends of $72,368. Net cash decreased by $209,243 from
$507,033 at August 3, 1996 to $297,790 at August 2, 1997.
On July 27, 1994 the Company entered into a revolving credit facility with
Foothill Capital Corporation. The revolving credit loan, as amended, matures on
July 28, 2001, and provides for borrowings of 60% of eligible inventory not to
exceed a maximum of $12,000,000 of which $8,370,227 was outstanding at August 2,
1997. 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 2, 1997 was $180,000. 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 2, 1997, the Company was in compliance with all
covenants.
The Company opened a new superstore in the Connecticut market during the first
month of fiscal 1998. Additionally, the Company plans to open five new stores in
the latter half of the fiscal year. The Company also plans to upgrade its store
level computer systems. Total capital expenditures for fiscal 1998 are planned
to be approximately $1,000,000. Management believes that funds generated from
operations, its $12,000,000 revolving credit facility ($8,400,000 which was
utilized as of August 2, 1997), and use of trade credit will be sufficient to
satisfy the Company's working capital requirements and commitments for capital
expenditures through fiscal 1998.
At August 2, 1997 the Company had total deferred tax assets of $2,372,396 and
deferred tax liabilities of $473,016. The deferred tax assets consist primarily
of state and federal tax loss carry forwards which relate to operating losses
generated in fiscal years 1994 through 1997. 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.
9
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<TABLE>
<CAPTION>
Cumulative Taxable
------------------
Taxable Income Income Required to
-------------- ------------------
Expiration of Amount of Required to Utilize Utilize Deferred Tax
------------- --------- ------------------- --------------------
Deferred Tax Assets Deferred Tax Assets Deferred Tax Assets Assets
------------------- ------------------- ------------------- ------
<S> <C> <C> <C>
End of fiscal 1998 $ 30,342 $ 69,264 $ 69,264
End of fiscal 1999 $ 111,210 $ 253,869 $ 323,133
End of fiscal 2000 $ 80,082 $ 182,811 $ 505,944
End of fiscal 2001 $ 110,556 $ 252,376 $ 758,320
End of fiscal 2002 $ 125,212 $ 285,833 $1,044,153
End of fiscal 2003 and after $1,442,361 $3,292,611 $4,336,764
</TABLE>
The Company is required to record a valuation allowance against deferred tax
assets when it is more likely than not that some portion of the deferred tax
assets will not be realized. In view of the prospective nature of the Company's
plans 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
$1,289,313. The ultimate realization of deferred tax assets, net of the
valuation allowance, of $1,083,083 depends on the Company's ability to generate
sufficient taxable income in the future. A portion of this asset will be
realized through the reversal of taxable temporary differences totaling $473,016
reflected as deferred tax liabilities in the financial statements. Certain tax-
planning strategies combined with the Company's plans for fiscal 1998 and beyond
provide the basis for management's conclusion that it is more likely than not
that the Company will generate sufficient taxable income to realize the net
deferred tax asset recorded at August 2, 1997. The amount of the deferred tax
asset could be reduced in the near term if estimates of future taxable income
are reduced.
Inflation and Seasonality
- - -------------------------
Management believes its operating results have not been materially affected by
inflation in fiscal 1995, 1996 and 1997. 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 opening of five
additional stores in the latter half of fiscal 1998; 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
10
<PAGE>
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 statements at August 2, 1997 and August 3, 1996, and for
each of the three years in the period ended August 2, 1997, and the Report of
Price Waterhouse LLP are included in this Annual Report on Form 10-K on pages 14
through 27 below.
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 1997 Annual Meeting of
Stockholders, which is expected to be filed with the Securities and Exchange
Commission on or about December 1, 1997, 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:
<TABLE>
<CAPTION>
(1) Financial Statements Page No.
-------------------- --------
<S> <C>
Report of Independent Accountants 14
Balance Sheet as of August 2, 1997 and August 3,
1996 15
Statement of Operations for the Fiscal Years Ended
August 2, 1997,
August 3, 1996, and July 29, 1995 16
Statement of Changes in Stockholders' Equity for
the Fiscal Years
Ended August 2, 1997, August 3, 1996, and July 29,
1995 17
Statement of Cash Flows for the Fiscal Years Ended
August 2, 1997,
August 3, 1996 and July 29, 1995 18
Notes to Financial Statements 19
</TABLE>
11
<PAGE>
(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.
(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 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./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./3/
23.1 Accountant's consent for incorporation of S-8 filing.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended August 2, 1997.
____________________
/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 31, 1997
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
- - ------------------------
Bernard Abrams Director
/s/ Donald Abrams President, Chief Operating Officer and Director
- - ------------------------
Donald Abrams
/s/ Steven Kerkstra Vice President, Chief Financial Officer and
- - ------------------------
Steven Kerkstra Assistant Secretary
/s/ John B. Abrahms Senior Vice President, Assistant Treasurer and
- - ------------------------
John B. Abrahms Director
/s/ Abe Markowicz Director
- - ------------------------
Abe Markowicz
/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 2, 1997 and August 3, 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended August 2, 1997, 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 2 to the financial statements, the Company changed its
method of accounting for merchandise inventory in fiscal year 1996.
PRICE WATERHOUSE LLP
Los Angeles, California
October 16, 1997
14
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
August 2, 1997 August 3, 1996
-------------- --------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
- - --------------
Cash
$ 297,790 $ 507,033
Receivables 397,460 376,850
Inventories 15,585,221 16,431,485
Prepaid expenses 251,900 538,757
Deferred income taxes 35,635 35,635
---------------------------
Total current assets 16,568,006 17,889,760
---------------------------
PROPERTY FIXTURES AND IMPROVEMENTS, at cost
- - -----------------------------------
Land 53,150
Buildings 1,193,834 1,356,361
Fixtures and equipment 8,943,029 8,815,920
Leasehold improvements 3,014,051 2,846,548
---------------------------
13,150,914 13,071,979
Less-accumulated depreciation and amortization 7,269,480 6,517,976
---------------------------
5,881,434 6,554,003
---------------------------
OTHER ASSETS
- - ------------
Deferred costs of leases, net 1,247,924 1,134,429
Deferred income taxes 574,432 574,432
Other 1,068,528 1,354,510
---------------------------
2,890,884 3,063,371
---------------------------
$25,340,324 $27,507,134
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- - -------------------
Long-term debt - current portion $ 263,580 $ 374,920
Accounts payable 5,442,886 4,882,924
Accrued liabilities 1,208,940 1,406,139
---------------------------
Total current liabilities 6,915,406 6,663,983
---------------------------
LONG-TERM DEBT, LESS CURRENT PORTION 8,497,177 9,143,410
- - ------------------------------------ ---------------------------
DEFERRED COMPENSATION 200,000 200,000
- - --------------------- ---------------------------
OTHER LIABILITIES 791,941 814,813
- - ----------------- ---------------------------
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 1,676,969 shares (1996- 1,666,569)
419,242 416,642
Class B- authorized 6,000,000 shares; issued 1,563,863 shares (1996- 1,574,263) 390,966 393,566
Additional paid-in capital 1,255,525 1,255,525
Retained earnings 8,674,811 10,423,928
---------------------------
10,740,544 12,489,661
Less- 804,883 shares of common stock in treasury, at cost (1996 - 804,871) 1,804,744 1,804,733
---------------------------
8,935,800 10,684,928
COMMITMENTS (Note 11)
- - ----------- ---------------------------
$25,340,324 $27,507,134
===========================
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------
August 2, 1997 August 3, 1996 July 29, 1995
<S> <C> <C> <C>
Sales $44,181,878 $47,851,248 $49,981,704
Costs and expenses
Cost of sales, including warehousing, transportation and buying
expenses 25,254,183 27,443,694 28,875,367
Store operating, administrative and general expenses 19,394,217 20,376,070 21,035,406
-----------------------------------------------
Operating income (loss) (466,522) 31,484 70,931
Interest expense 1,210,227 1,317,052 1,054,330
-----------------------------------------------
Loss before income taxes and cumulative effect of accounting change (1,676,749) (1,285,568) (983,399)
Benefit for income taxes:
Federal (381,403)
State (74,368)
-----------------------------------------------
Loss before cumulative effect of accounting change (1,676,749) (1,285,568) (527,628)
Cumulative effect of accounting change 310,427
-----------------------------------------------
Net loss $(1,676,749) $ (975,141) $ (527,628)
===============================================
Loss per share before cumulative effect of accounting change ($0.69) ($0.53) ($0.21)
===============================================
Net loss per share ($0.69) ($0.40) ($0.21)
===============================================
Weighted average number of common shares outstanding 2,435,955 2,433,417 2,528,011
===============================================
</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 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 ($.03 per share) (38,294)
Shares issued under option agreement (3,500
Class A shares and 4,250 Class B shares)
875 1,063 8,968
Conversions from Class B to Class A
common stock 1,525 (1,525)
-----------------------------------------------------------
Balance at August 3, 1996 416,642 393,566 1,255,525 10,423,928 (1,804,733)
- - -------------------------
Net loss (1,676,749)
Cash dividends:
Class A common stock ($.0375 per share) (43,891)
Class B common stock ($.0225 per share) (28,477)
Purchase of 12 shares of Class B common
stock for treasury (11)
Conversions from Class B to Class A
common stock 2,600 (2,600)
-----------------------------------------------------------
Balance at August 2, 1997 $419,242 $390,966 $1,255,525 $ 8,674,811 $ (1,804,744)
- - ------------------------- ===========================================================
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
THREE D DEPARTMENTS, INC.
------------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
August 2, August 3, July 29,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,676,749) $ (975,141) $ (527,628)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization 1,667,895 1,709,186 1,558,698
Increase in cash value of life insurance over premiums paid (155,847) (41,007) (100,870)
(Gain) loss on sales property and equipment (60,303) 54,587 64,970
Changes in assets and liabilities:
Receivables (20,610) (80,559) 727,148
Inventories 846,264 (170,998) (2,141,767)
Prepaid expenses 235,455 (63,322) (182,282)
Prepaid income taxes 51,402 98,363 9,192
Deferred taxes 331,284 (458,220)
Accounts payable and accrued liabilities 362,763 1,017,971 (970,404)
Accrued income taxes 158,299
Other (36,774) 51,219 59,045
---------------------------------------
Net cash provided by (used in) operating activities 1,213,496 1,931,583 (2,057,681)
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixtures 10,034 38,784
Purchase of fixtures, equipment and improvements (860,390) (802,406) (2,798,083)
Purchase of software (44,749) (6,440) (66,877)
Investment in life insurance policies (250,975) (280,583) (253,862)
Purchase of buildings (1,193,834)
Purchase of leases (250,000) (280,000)
---------------------------------------
Net cash used in investing activities (1,406,114) (1,079,395) (4,553,872)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10,906
Proceeds from loan against cash value of insurance 633,327
Proceeds from borrowings 7,150,000
Dividends paid (72,368) (96,182) (104,787)
Purchase of common stock (11) (548,867)
Repayment of debt (577,573) (578,924) (3,130,754)
---------------------------------------
Net cash (used in) provided by financing activities (16,625) (664,200) 3,365,592
---------------------------------------
NET INCREASE (DECREASE) IN CASH (209,243) 187,988 (2,992,099)
Cash:
Beginning of year 507,033 319,045 3,311,144
---------------------------------------
END OF YEAR $ 297,790 $ 507,033 $ 319,045
=======================================
</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 2, 1997 the Company operated 22 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 1997 and 1995 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. Capitalized costs in inventory at August 2, 1997 and August 3, 1996
were $417,636 and $543,246, respectively.
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 of $726,483
and $589,978 at August 2, 1997 and August 3, 1996, respectively in the balance
sheet. Amortization charged to the statement of operations amounted to $136,509,
$129,079 and $106,296 for fiscal years 1997, 1996 and 1995, respectively.
Income Taxes
Income taxes are provided for using an asset and liability approach which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities at the applicable enacted tax rates. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred
19
<PAGE>
tax assets will not be realized.
Advertising
Advertising cost is expensed in the period incurred. Advertising costs of
$1,127,107, $1,220,658 and $1,703,541 were incurred during the years ended
August 2, 1997, August 3, 1996 and July 29, 1995, respectively.
Earnings per Share
Net loss per share is computed based upon the weighted average number of shares
outstanding, plus common share equivalents when dilutive. Statement of Financial
Accounting Standards No. 128, Earnings Per Share" (SFAS 128), issued in February
1997, would require the Company to report a basic earnings per share and a
diluted earnings per share. Basic earnings per share would be computed by
dividing net income available to common stockholders by the weighted average
shares outstanding during the period, with no assumption of conversion of
dilutive common stock equivalents. Diluted earnings per share would be computed
by reflecting the potential dilution that could occur if additional shares of
common stock were issued upon the exercise of employee stock options. Adoption
of SFAS 128 is not expected to have a material impact on the Company's financial
statements.
Impairment of Long-Lived assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121), during fiscal 1997. This
statement requires that long-lived assets and certain intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the future cash flows on an
undiscounted basis to the net book value of the assets. In the event the
projected undiscounted cash flows are less than the net book value of the
assets, the carrying value of the assets will be written down to their fair
value. In addition, SFAS 121 requires that assets to be disposed of be measured
at the lower of cost or fair value, less estimated costs to sell. Adopting SFAS
121 in fiscal 1997 had no effect on the Company's financial position or results
of operations.
Fair Value of Financial Instruments
The carrying amount of cash, accounts and other receivables, accounts payables,
and accrued liabilities approximate fair 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. At August 2, 1997, the Company had
performance letters of credit outstanding totaling $95,997, which primarily
guarantee various trade activities. The fair value of these letters of credit
approximates contract values based on the nature of the fee arrangements with
the issuing bank.
Reclassification
Certain amounts have been reclassified to conform with the 1997 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
$3,372,767 at August 2, 1997 and $2,739,440 at August 3, 1996) was $906,948 at
August 2, 1997 and $1,142,518 at August 3, 1996. Net cash surrender values are
included in other assets.
20
<PAGE>
<TABLE>
<CAPTION>
NOTE 4 - ACCRUED LIABILITIES:
- - -----------------------------
Accrued liabilities consist of the following:
August 2, 1997 August 3,1996
-------------- --------------
<S> <C> <C>
Accrued expenses $ 805,279 $1,002,702
Accrued salaries and wages 403,661 403,437
------------------------------
$1,208,940 $1,406,139
==============================
<CAPTION>
NOTE 5 - LONG TERM DEBT:
- - ------------------------
Long-term debt consists of the following:
August 2, 1997 August 3, 1996
-------------- --------------
<S> <C> <C>
Note payable - revolving credit loan, payable monthly
through July 28, 2001, interest at prime rate plus 2%
(10.5% at August 2, 1997) $8,370,227 $8,300,000
Note payable - secured promissory note, payable
monthly through July 28, 1999, principal and interest
at prime rate plus 2% (10.5% at August 2, 1997) 180,000 720,000
Note payable to officer - monthly interest payments of
$4,167 through July, 1996, monthly payments of
principal and interest through July 1999 at 10% interest 210,530 479,933
Capitalized lease obligation, due in monthly
installments of $6,239 including interest at 10.25%
through October, 1996. Secured by computer
equipment 18,397
------------------------------
8,760,757 9,518,330
Less current portion 263,580 374,920
------------------------------
$8,497,177 $9,143,410
==============================
</TABLE>
Scheduled maturities for total debt outstanding at August 2, 1997 are as
follows:
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1998 $ 263,580
1999 92,332
2000 34,618
2001 8,370,227
---------
Total $8,760,757
==========
</TABLE>
The revolving credit loan, as amended matures on July 28, 2001, and provides for
borrowings of 60% of eligible inventory not to exceed a maximum of $12,000,000,
of which $8,370,227 was outstanding at August 2, 1997. 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.
Both the revolving credit line and the secured promissory note are secured by
inventory, fixtures and receivables 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 2, 1997 the Company was in compliance with all covenants.
21
<PAGE>
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 2, 1997 is $300,000
of which $150,000 is current and included in current liabilities.
NOTE 7 - INCOME TAXES:
- - ---------------------
The provision (benefit) for income taxes for each of the three fiscal years in
the period ended August 2, 1997 comprised the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Current tax expense
Federal $ 0 $ 0 $ 0
------------------------------------------
State 0 0 13,000
0 0 13,050
Deferred tax expense
Federal 0 0 (381,403)
State 0 0 (87,418)
------------------------------------------
0 0 (468,821)
------------------------------------------
$ 0 $ 0 $(455,771)
==========================================
</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 2, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ---------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate (34.0)% (34.0) (34.0)%
State taxes, net of federal benefit (5.7)% (6.5)% (7.1)%
Life insurance premiums (3.1)% (1.3)% (3.5)%
Valuation allowance 42.8% 37.3%
Other 0.0% 4.5% (1.7)%
----------------------------
0.0% 0.0% (46.3)%
============================
</TABLE>
22
<PAGE>
Deferred tax assets and liabilities as of August 2, 1997 and August 3, 1996
relate to the following:
<TABLE>
<CAPTION>
Deferred tax assets August 2, 1997 August 3, 1996
--------------- ---------------
<S> <C> <C>
Inventories $ 13,058 $ 11,591
Contribution carry forwards 13,445 12,292
Accrued vacation 25,431 24,044
Accrued compensation 87,612 81,057
Loss carry forwards 1,911,572 1,210,052
Leasehold improvements 321,278 235,115
-------------------------------
Total deferred tax assets 2,372,396 1,574,151
Valuation allowance for deferred tax assets (1,289,313) (478,929)
-------------------------------
Net deferred tax assets 1,083,083 1,095,222
Deferred tax liabilities:
Fixtures and equipment 473,016 485,155
-------------------------------
Total net deferred tax assets $ 610,067 $ 610,067
===============================
</TABLE>
At August 2, 1997 the Company had federal net operating loss carry forwards of
$4,242,239 expiring from 2009 through 2012 and state net operating loss carry
forwards of approximately $4,571,453 expiring from 1998 through 2002. The
ultimate realization of deferred tax assets, net of the valuation allowance, of
$1,083,083 depends on the Company's ability to generate sufficient taxable
income in the future. A portion of this asset will be realized through the
reversal of taxable temporary differences totaling $473,016 reflected as
deferred tax liabilities in the financial statements. Certain tax planning
strategies combined with the Company's plans for fiscal 1998 and beyond provide
the basis for management's conclusion that it is more likely than not that the
Company will generate sufficient taxable income to realize the net deferred tax
asset recorded at August 2, 1997. The amount of the deferred tax asset could be
reduced in the near term if estimates of future taxable income are reduced. The
increase in the valuation allowance during fiscal 1997 is attributable to loss
carry forwards in the current year for which no benefit was recognized.
NOTE 8 - STOCKHOLDERS' EQUITY:
- - -----------------------------
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.
The Company's Board of Directors has authorized the Company to repurchase shares
of the Company's common stock in the open market (the total amount of common
stock authorized to be repurchased was increased to $2,350,000 in fiscal 1988).
The total shares held as treasury stock will be used for various corporate
purposes, including the issuance under the Company's stock option plans.
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 years ended August 2, 1997 and 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
23
<PAGE>
installments. The liability under this agreement has been accrued as of August
2, 1997.
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 2, 1997 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 2, 1997 remaining options open for grant to
employees , officers and directors were 189,500 Class A shares and 161,309 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 2, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 334,889 $ 2.02 375,389 $2.05 268,889 $2.62
Granted 25,000 1.63 150,000 1.20
Exercised (7,750) 1.41
Canceled (12,000) 2.36 (57,750) 2.14 (43,500) 2.67
------------------------------------------------------------------
Outstanding at end
of year 322,889 $ 2.01 334,889 $2.02 375,389 $2.05
==================================================================
Option price $ 1.125 $ 1.125 $ 1.125
range at end to to to
of year $ 5.250 $ 5.250 $ 5.250
Weighted average
fair value
of options granted - $ 1.53 -
</TABLE>
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock Based Compensation" which encourages,
but does not require companies to recognize compensation cost for stock-based
compensation plans over the vesting period based upon the fair value of awards
on the date of the grant. However, the Statement allows the alternative of the
continued use of the intrinsic value method as prescribed in Accounting
Principles Board Opinion No. 25
24
<PAGE>
(APB 25), "Accounting for Stock Issued to Employees". Therefore, as permitted,
the Company will continue to apply APB 25, and related interpretations, in
accounting for its stock-based compensation plans. Had compensation cost for
these plans been determined in accordance with SFAS 123 the Company's net loss
and loss per common share would have been increased to the following pro forma
amounts as presented below:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Net loss: As reported ($1,676,749) ($975,141)
Pro forma ($1,686,249) ($984,641)
Net loss per common share: As reported ($0.69) ($0.40)
Pro forma ($0.69) ($0.40)
</TABLE>
At the end of fiscal 1997, the total options had an average remaining life of
5.7 years. At the end of fiscal 1997 there were 217,466 options exercisable at
an average price of $2.29. The fair value of each option granted was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for the grants during 1996: risk free interest rate
of 4.99%; expected volatility of 115%; expected dividend yield of .8%, and the
expected life of the options was ten years.
NOTE 10 - RELATED PARTIES:
- - --------------------------
In October, 1996 the Company sold a residence it owned in West Hartford,
Connecticut to an officer, director and a shareholder of the Company, in
exchange for a reduction of $180,000 in the note payable the Company owes to the
officer. The Company obtained an independent appraisal of the property prior to
the transaction, reviewed the appraisal with the Company's executive committee
and believes the price is competitive with those of similar properties. The
Company recorded a gain of $78,833 in connection with this transaction.
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 July, 1999. The
outstanding balance at August 2, 1997 is $210,530 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 1997. In May 1995, the Company also increased the interest on the
note to 10.75% per annum. The outstanding balance at August 2, 1997 is $60,525
and is included in receivables.
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 1997, 1996, and 1995, the Company paid approximately
$170,000, $153,000, and $119,000 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 1997, 1996 and 1995,
the Company paid insurance premiums on insurance policies issued through this
agency of $93,163, $383,874, and $451,000, 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.
25
<PAGE>
Aggregate annual minimum rental commitments at August 2, 1997, excluding real
estate taxes and certain other expenses, under the aforementioned leases are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Rental (000's)
----------- --------------
<S> <C>
1998 $ 4,609
1999 4,100
2000 3,823
2001 3,325
2002 2,808
thereafter 12,303
--------------
$30,968
==============
</TABLE>
Total rents charged against income, including payments for real estate taxes and
certain other expenses, amounted to $5,914,749 in fiscal 1997, $5,917,020 in
fiscal 1996, and $5,583,191 in fiscal 1995.
NOTE 12 - STATEMENTS OF CASH FLOWS:
- - -----------------------------------
For the three fiscal years in the period ended August 2, 1997, supplemental cash
flow information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest paid $ 1,210,227 $ 1,317,052 $ 1,045,875
Income taxes paid (refunded) (86,084) 3,858
Non-cash investing transaction for
purchase of lease 600,000
Sale of land and building in exchange for
reduction of notes payable to officer 180,000
</TABLE>
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
1997 $10,987,481 $13,213,052 $ 9,807,148 $10,174,197 $44,181,878
1996 1,211,796 13,922,571 10,419,704 11,391,004 47,851,248
Income (loss) before taxes
1997 (529,973) 237,192 (581,635) (802,333) (1,676,749)
1996 (620,465) 319,232 (237,488) (746,847) (1,285,568)
Net income (loss)
1997 (529,973) 237,192 (581,635) (802,333) (1,676,749)
1996 (47,156) 169,516 (148,289) (949,212) (975,141)
Net income (loss) per share
1997 $ (0.22) $ 0.10 $ (0.24) $ (0.33) $ (0.69)
1996 (0.02) 0.07 (0.06) (0.39) (0.40)
</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.
26
<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. 33-63897) of Three D Departments, Inc. of our report
dated October 16, 1997 appearing on page 14 of this Form 10-K.
PRICE WATERHOUSE LLP
Los Angeles, California
October 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K,
AUGUST 2, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-2-1997
<PERIOD-START> AUG-4-1996
<PERIOD-END> AUG-2-1997
<CASH> 297,790
<SECURITIES> 0
<RECEIVABLES> 397,460
<ALLOWANCES> 0
<INVENTORY> 15,585,221
<CURRENT-ASSETS> 16,568,006
<PP&E> 13,150,914
<DEPRECIATION> 7,269,480
<TOTAL-ASSETS> 25,340,324
<CURRENT-LIABILITIES> 6,915,406
<BONDS> 8,497,177
0
0
<COMMON> 810,208
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,340,324
<SALES> 44,181,878
<TOTAL-REVENUES> 44,181,878
<CGS> 25,254,183
<TOTAL-COSTS> 19,394,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,210,227
<INCOME-PRETAX> (1,676,749)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,676,749)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,676,749)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
