<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934.
For the period ended February 1, 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)
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
----- -----
As of February 1, 1997, there were 1,171,494 shares of Class A common stock and
1,264,455 shares of Class B common stock, par value $.25, outstanding.
================================================================================
<PAGE>
THREE D DEPARTMENTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements:
<S> <C> <C>
Balance Sheet at February 1, 1997 and August 3,1996.................................3
Statement of Operations for the thirteen and twenty-six week periods
ended February 1, 1997 and January 27, 1996........................................4
Statement of Cash Flows for the twenty-six week periods ended
February 1, 1997 and January 27, 1996...............................................5
Notes to Financial Statements.......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................7
<CAPTION>
PART II. OTHER INFORMATION
<S> <C> <C>
Item 4. Submission of Matters to a Vote of SecurityHolders..................................10
Item 5. Exhibits and Reports on Form 8-K....................................................10
Signatures..........................................................................11
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THREE D DEPARTMENTS, INC.
-------------------------
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
ASSETS February 1, August 3,
-------- ----------- ---------
1997 1996
---- ----
(Unaudited)
------------
CURRENT ASSETS:
- ---------------
<S> <C> <C>
Cash and cash equivalents $ 55,542 $ 507,033
Receivables 343,828 376,850
Inventories 15,103,179 16,431,485
Prepaid expenses 319,924 538,757
Deferred income taxes 35,635 35,635
---------------------------
Total current assets 15,858,108 17,889,760
PROPERTY FIXTURES AND IMPROVEMENTS, at cost
- -----------------------------------
Property, fixtures and equipment 10,286,058 10,225,431
Leasehold improvements 2,916,646 2,846,548
---------------------------
13,202,704 13,071,979
Less-accumulated depreciation and amortization 7,017,205 6,517,976
---------------------------
6,185,499 6,554,003
OTHER ASSETS
- ------------
Deferred costs of leases, net 1,319,890 1,134,429
Deferred income taxes 597,817 574,432
Other 1,474,481 1,354,510
---------------------------
3,392,188 3,063,371
---------------------------
$25,435,795 $27,507,134
===========================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
<S> <C> <C>
Long-term debt - current portion $ 319,520 $ 374,920
Accounts payable 3,965,378 4,882,924
Accrued liabilities 1,341,275 1,406,139
---------------------------
Total current liabilities 5,626,173 6,663,983
LONG-TERM DEBT, LESS CURRENT PORTION 8,355,105 9,143,410
- ------------------------------------ ---------------------------
DEFERRED COMPENSATION 200,000 200,000
- --------------------- ---------------------------
OTHER LIABILITIES 910,620 814,813
- ----------------- ---------------------------
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 (August 3, 1996-
1,666,569) 419,242 416,642
Class B- authorized 6,000,000 shares; issued 1,563,863 shares (August 3, 1996-
1,574,263) 390,966 393,566
Additional paid-in capital 1,255,525 1,255,525
Retained Earnings 10,082,908 10,423,928
---------------------------
12,148,641 12,489,661
Less- 804,483 (August 3, 1996 - 804,871) shares of common stock in treasury, at cost 1,804,744 1,804,733
---------------------------
10,343,897 10,684,928
---------------------------
$25,435,795 $27,507,134
===========================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF OPERATIONS
-----------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Thirteen Week Periods Ended Twenty-six Week Periods Ended
February 1, January 27, February 1, January 27,
---------- ----------- ----------- -----------
1997 1996 1997 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $13,213,052 $13,922,571 $24,200,533 $26,040,540
Cost of sales, including warehousing,
transportation and buying expenses 7,581,481 8,186,301 13,813,030 15,131,725
Store operating, administrative and general 5,077,816 5,097,004 10,039,695 10,539,362
expenses --------------------------------------------------------------------
Operating income 553,755 639,266 347,808 369,453
Interest Expense 316,563 320,034 640,589 670,686
---------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change 237,192 319,232 (292,781) (301,233)
---------------------------------------------------------------------
Income tax expense (benefit)
Federal 131,000 (96,883)
State 18,716 (16,283)
expenses ---------------------------------------------------------------------
Net income (loss) before cumulative effect
of accounting change 237,192 169,516 (292,781) (188,067)
---------------------------------------------------------------------
Cumulative effect of accounting change 310,427
---------------------------------------------------------------------
Net income (loss) $ 237,192 $ 169,516 ($292,781) $ 122,360
=====================================================================
Net income (loss) per share before
cumulative effect of accounting change $ 0.10 $ 0.07 ($0.12) ($0.08)
=====================================================================
Net income (loss) per share $ 0.10 $ 0.07 ($0.12) $ 0.05
=====================================================================
Weighted average number of common
shares outstanding 2,435,961 2,433,336 2,435,961 2,430,774
=====================================================================
Cash dividends per share:
Class A Common $ 0.0125 $ 0.0125 $ 0.0250 $ 0.0250
=====================================================================
Class B Common $ 0.0075 $ 0.0075 $ 0.0150 $ 0.0150
=====================================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF CASH FLOWS
-----------------------
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Week Periods Ended
February 1, January 27,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (292,781) $ 122,360
Adjustments to reconcile net loss to cash provided from operating
activities:
Depreciation and amortization 577,813 852,834
Increase in cash value of life insurance (170,718) (157,001)
Gain on sales of fixtures and improvements 111,636 27,552
Changes in assets and liabilities:
Accounts receivable 33,022 (27,066)
Inventories 1,328,306 343,795
Prepaid expenses 285,823 (143,428)
Prepaid income taxes (66,990) (14,627)
Deferred taxes (23,385) (423,593)
Other assets 21,589
Accounts payable and accrued liabilities (982,410) 1,040,027
Other liabilities 95,807 75,000
---------------------------
Net cash provided by operating activities 896,123 1,717,442
Cash flows from investing activities:
Proceeds from sales of fixtures
Purchase of fixtures, equipment and improvements (448,738) (617,629)
Purchase of software (6,921) (6,440)
---------------------------
Net cash used in investing activities (455,659) (624,069)
Cash flows from financing activities:
Dividends paid (48,239) (48,018)
Repayment of debt (843,705) (147,243)
Proceeds from exercise of stock options 10,906
Purchase of treasury stock (11)
---------------------------
Net cash (used in) financing activities (891,955) (184,355)
Net (decrease) increase in cash and cash equivalents (451,491) 909,018
Cash and cash equivalents:
Beginning of period 507,033 319,045
---------------------------
End of period $ 55,542 $1,228,063
===========================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
THREE D DEPARTMENTS, INC.
Notes to Financial Statements
1. The financial statements for the thirteen and twenty-six week periods
ended February 1, 1997 and January 27, 1996, are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
financial statements should be read in conjunction with the financial
statements and notes thereto, together with Management's Discussion and
Analysis of Financial Condition and Results of Operations, contained in the
Company's Annual Report to Shareholders incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended August 3,
1996. The results of operations for the thirteen and twenty-six week
periods ended February 1, 1997, are not necessarily indicative of the
results for the entire fiscal year ending August 2, 1997.
2. The accounting policies followed by the Company for the unaudited interim
periods contained herein, are substantially the same as outlined in the
Company's Annual Report to Shareholders for the fiscal year ended August 3,
1996, which should be read in conjunction with this quarterly report.
3. 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.
6
<PAGE>
THREE D DEPARTMENTS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Thirteen week periods ended February 1, 1997 and January 27, 1996
- -----------------------------------------------------------------
SALES. Sales were $13,213,052 for the thirteen week period ended February 1,
1997 compared to $13,922,571 for the thirteen week period ended January 27,
1996, a decrease 5.1%. Sales for stores open in both periods were $13,213,052
for the thirteen week period ended February 1, 1997 and $13,233,596 for the
thirteen week period ended January 27, 1996. The Company closed five stores in
prior periods which have resulted in a net decrease in sales of $688,953 for the
thirteen week period ended February 1, 1997.
COST OF SALES. Cost of sales for the thirteen week period ended February 1,
1997, was 57.4% of sales compared to 58.8% for the thirteen week period ended
January 27, 1996. The Company incurred higher markdowns in the year earlier
period which were related to a customer loyalty program.
STORE OPERATING, ADMINISTRATIVE AND GENERAL EXPENSES. Store operating,
administrative and general expenses for the thirteen week period ended February
1, 1997 were $5,077,816 compared to $5,097,004 in the same period of the prior
year. The decrease in operating expenses was related to five fewer stores in
the current period, compared to the same period of the prior year. However, this
decrease was offset in part by an increase in advertising expenditures in the
current period.
INTEREST EXPENSE. Interest expense for the thirteen week periods ended
February 1, 1997 and January 27, 1996 was $316,563 and $320,034, respectively.
INCOME TAX EXPENSE. No income tax expense was recognized for the quarter ended
February 1, 1997 versus a tax expense of $149,716 which was recorded for the
quarter ended January 27, 1996. At fiscal year end August 3, 1996 the Company
established a valuation allowance against deferred tax assets which related
primarily to operating loss carry forwards generated in fiscal 1994 through
1996. Accordingly, the Company continues to record a tax valuation allowance
against the tax benefit that may be realized from the operating loss generated
in the twenty-six weeks ended February 1, 1997.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In fiscal 1996, the Company changed its
method of accounting for inventories to include the costs of certain buying,
warehousing, and transportation costs. At the beginning of fiscal 1996, the
Company restated its inventory to include $527,040 of such costs. The amount,
less the tax effect of $216,613, was reported as a change in accounting
principle totaling $310,427.
QUARTERLY RESULTS. Income before income taxes and cumulative effect of
accounting change was $237,192 versus $319,232 for the same period in the prior
year. Net income for the thirteen week period ended February 1, 1997, was
$237,192 compared to net income of $169,516 in the same period of the prior
year. The increase in net income is attributable to no tax expense recorded in
the current period. The specialty domestics segment of the retail industry has
seen increased competition with corresponding pressure on sales and margins.
7
<PAGE>
Twenty-six week periods ended February 1, 1997 and January 27, 1996
- -------------------------------------------------------------------
SALES. Sales were $24,199,384 for the twenty-six week period ended February 1,
1997 compared to $26,040,540 for the twenty-six week period ended January 27,
1996, a decrease 7.1%. Sales for stores open in both periods were $24,199,384
for the twenty-six week period ended February 1, 1997 and $24,562,106 for the
twenty-six week period ended January 27, 1996. The Company closed five stores in
prior periods which have resulted in a net decrease in sales of $1,478,411 for
the twenty-six week period ended February 1, 1997.
COST OF SALES. Cost of sales for the twenty-six week period ended February 1,
1997, was 57.1% of sales compared to 58.1% for the twenty-six week period ended
January 27, 1996. The Company incurred higher markdowns in the year earlier
period which were related to a customer loyalty program and an inventory
clearance event in October, 1995.
STORE OPERATING, ADMINISTRATIVE AND GENERAL EXPENSES. Store operating,
administrative and general expenses for the twenty-six week period ended
February 1, 1997, were $10,039,695 compared to $10,539,362 in the same period
of the prior year. The decrease in operating expenses was related to five
fewer stores in the current period, compared to the same period of the prior
year. However, this decrease was offset in part by an increase in advertising
expenditures in the current period.
INTEREST EXPENSE. Interest expense for the twenty-six week periods ended
February 1, 1997 and January 27, 1996 was $640,589 and $670,686, respectively.
The reduction in interest expense of $30,097 is related to a reduction in
average outstanding borrowings of approximately $760,000 over the comparable
period of the prior year.
INCOME TAX EXPENSE. No income tax benefit was recognized for the twenty-six
weeks ended February 1, 1997 versus a tax benefit of $113,166 which was recorded
for the twenty-six weeks ended January 27, 1996. At fiscal year end August 3,
1996, the Company established a valuation allowance against deferred tax assets
which related primarily to operating loss carry forwards generated in fiscal
1994 through 1996. Accordingly, the Company continues to record a tax valuation
allowance against the tax benefit that may be realized from the operating loss
generated in the twenty-six weeks ended February 1, 1997.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In fiscal 1996 the Company changed its
method of accounting for inventories to include the costs of certain buying,
warehousing, and transportation costs. At the beginning of fiscal 1996 the
Company restated its inventory to include $527,040 of such costs. The amount,
less the tax effect of $216,613 was reported as a change in accounting principle
totaling $310,427.
TWENTY-SIX WEEK RESULTS. Loss before income taxes and cumulative effect of
accounting change was $292,781 versus a loss of $301,233 for the same period in
the prior year. Net loss for the twenty-six week period ended February 1, 1997,
was $292,781 compared to net income of $122,360 in the same period of the prior
year. The specialty domestics segment of the retail industry has seen increased
competition with corresponding pressure on sales and margins.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. At February 1, 1997, working capital was
- --------------------------------
$10,231,935 compared to $11,225,777 at the beginning of the fiscal year. Cash
generated by operations was $896,123, which was offset by debt reduction of
$843,705 and expenditures on capital improvements of $455,659. In March, 1997,
the Company expanded its line of credit with Foothill Capital Corporation from
$9,000,000 to $12,000,000. The expansion of the line of credit is earmarked to
fund working capital requirements as the Company increases its number of stores
and merchandise content. Management believes that cash from operations, coupled
with its credit resources and line of credit will be sufficient to meet the
Company's operational and capital needs for the remainder of the fiscal year
ending August 2, 1997.
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 ability of the Company
to obtain positive cash flow from its current portfolio of stores; the ability
of the Company to maintain its credit facilities; 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.
9
<PAGE>
THREE D DEPARTMENTS, INC.
PART II. - OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
The Company held its Annual Meeting of Shareholders on January 31, 1997. The
following were re-elected to the Board of Directors:
Directors Representing Class A Common Shareholders
--------------------------------------------------
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
------ --------- --------------
<S> <C> <C>
Abe Markowicz 708,309 (60.0%) 134,952 (11.4%)
Henry W. Nozko, Jr. 708,309 (60.0%) 134,952 (11.4%)
</TABLE>
There were no abstentions and no broker non-votes for any nominee.
Directors Representing Class B Common Shareholders
--------------------------------------------------
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
------ --------- --------------
<S> <C> <C>
John B. Abrahms 899,375 (70.0%) 6,732 (.5%)
Bernard Abrams 899,276 (70.0%) 6,831 (.5%)
Donald L. Abrams 899,375 (70.0%) 6,732 (.5%)
Gerson K. Bernstein 899,375 (70.0%) 6,732 (.5%)
David Kotkin 899,375 (70.0%) 6,732 (.5%)
</TABLE>
There were no abstentions and no broker non-votes for any nominee.
Price Waterhouse was approved to serve as the independent accountants for the
Company for Fiscal 1997.
Appointment of Price Waterhouse
-------------------------------
<TABLE>
<CAPTION>
Shares Votes For Votes Against Votes Withheld
-------- --------- ------------- --------------
<S> <C> <C> <C>
Class A 712,211 (60.0%) 125,632 (10.6%) 5,418 (.5%)
Class B 902,579 (70.0%) 1,112 (.1%) 2,416 (.2%)
</TABLE>
There were no broker non-votes.
Item 5. Exhibits and Reports of Form 8-K
In February, 1997 the Company received a notice from the American Stock
Exchange (AMEX) that the Company's Class A and Class B Common Stock issues would
be removed from listing on the AMEX. The Company currently does not meet the
listing guidelines under the AMEX rules because the Company has reported net
losses over the last five years totaling approximately $2,700,000 and the market
value for the shares of the Company in the public float ( as defined by AMEX
rules) do not meet AMEX standards. The last day of trading on the AMEX was March
5, 1997.
10
<PAGE>
The Company has made arrangements for the Class A and Class B Common Stock to be
traded on the National Association of Securities Dealers Automated Quote System
(NASDQ) under the bulletin board. Trading under the NASDQ Bulletin Board
commenced March 10, 1997.
The Company was not required to file a report on Form 8-K for any event during
the thirteen week period ended February 1, 1997.
THREE D DEPARTMENTS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 17, 1997
THREE D DEPARTMENTS, INC.
-------------------------
(Registrant)
/s/ Steven Kerkstra
--------------------------
Steven Kerkstra
Vice President and
Chief Financial Officer
/s/ Ronald C. Dow
---------------------------
Ronald C. Dow
Controller and Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q,
February 1, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-mos 6-mos
<FISCAL-YEAR-END> AUG-02-1997 AUG-02-1997
<PERIOD-START> NOV-03-1996 NOV-03-1996
<PERIOD-END> FEB-01-1997 FEB-01-1997
<CASH> 55,542 55,542
<SECURITIES> 0 0
<RECEIVABLES> 343,828 343,828
<ALLOWANCES> 0 0
<INVENTORY> 15,103,179 15,103,179
<CURRENT-ASSETS> 15,858,108 15,858,108
<PP&E> 13,202,704 13,202,704
<DEPRECIATION> 7,017,205 7,017,205
<TOTAL-ASSETS> 25,435,795 25,435,795
<CURRENT-LIABILITIES> 5,626,173 5,626,173
<BONDS> 8,355,105 8,355,105
0 0
0 0
<COMMON> 810,208 810,208
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 25,435,795 25,435,795
<SALES> 13,213,052 24,200,533
<TOTAL-REVENUES> 13,213,052 24,200,533
<CGS> 7,581,481 13,813,030
<TOTAL-COSTS> 5,077,816 10,039,695
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 316,563 640,589
<INCOME-PRETAX> 237,192 (292,781)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 237,192 (292,781)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 237,192 (292,781)
<EPS-PRIMARY> (0.10) (0.12)
<EPS-DILUTED> (0.10) (0.12)
</TABLE>
