<PAGE>
================================================================================
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 May 3, 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 May 3, 1997, there were 1,676,569 shares of Class A common stock and
1,563,863 shares of Class B common stock, par value $.25, outstanding.
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<PAGE>
THREE D DEPARTMENTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<C> <S> <C>
Item 1. Financial Statements:
Balance Sheet at May 3, 1997 and August 3, 1996.....................3
Statement of Operations for the thirteen and thirty-nine week
periods ended May 3, 1997 and April 27, 1996........................4
Statement of Cash Flows for the thirty-nine week periods ended
May 3, 1997 and April, 1996.........................................5
Notes to Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................7
PART II. OTHER INFORMATION
Item 5. Other information..................................................10
Item 6. Exhibits and Reports on Form 8-K...................................10
Signatures.........................................................10
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
THREE D DEPARTMENTS, INC.
-------------------------
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
ASSETS May 3, August 3,
------ ------ ---------
1997 1996
------ ---------
(Unaudited)
-----------
<S> <C> <C>
CURRENT ASSETS:
- --------------
Cash and cash equivalents $ 92,996 $ 507,033
Receivables 354,008 376,850
Inventories 16,606,820 16,431,485
Prepaid expenses 667,151 538,757
Deferred income taxes 35,635 35,635
---------------------------
Total current assets 17,756,610 17,889,760
PROPERTY FIXTURES AND IMPROVEMENTS, at cost
- ----------------------------------
Property, fixtures and equipment 10,370,885 10,225,431
Leasehold improvements 2,950,383 2,846,548
---------------------------
13,321,268 13,071,979
Less-accumulated depreciation and amortization 7,313,749 6,517,976
---------------------------
6,007,519 6,554,003
OTHER ASSETS
- ------------
Deferred costs of leases, net 1,287,620 1,134,429
Deferred income taxes 597,817 574,432
Other 961,437 1,354,510
---------------------------
2,846,874 3,063,371
---------------------------
$26,611,003 $27,507,134
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Long-term debt - current portion $ 321,525 $ 374,920
Accounts payable 5,800,685 4,882,924
Accrued liabilities 1,208,964 1,406,139
---------------------------
Total current liabilities 7,331,174 6,663,983
LONG-TERM DEBT, LESS CURRENT PORTION 8,386,795 9,143,410
- ------------------------------------ ---------------------------
DEFERRED COMPENSATION 200,000 200,000
- --------------------- ---------------------------
OTHER LIABILITIES 954,902 814,813
- ----------------- ---------------------------
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 9,477,143 10,423,928
---------------------------
11,542,876 12,489,661
Less- 804,883 (August 3, 1996 - 804,871) shares of common stock in treasury, 1,804,744 1,804,733
at cost
---------------------------
9,738,132 10,684,928
---------------------------
$26,611,003 $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 Thirty-nine week periods ended
May 3, April 27, May 3, April 27,
----------- ------------ ------------ ------------
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $9,807,148 $10,419,704 $34,007,680 $36,460,244
Cost of sales, including warehousing,
transportation and buying expenses 5,325,182 5,616,716 19,138,212 21,425,908
Store operating, administrative and general
expenses 4,760,924 4,730,930 14,800,619 14,592,824
---------------------------------------------------------
Operating income (278,958) 72,058 68,849 441,512
Interest Expense 302,677 309,547 943,265 980,233
---------------------------------------------------------
(Loss) before income taxes and cumulative
effect of accounting change (581,635) (237,489) (874,416) (538,721)
Income tax expense (benefit)
Federal (76,391) (173,274)
State (12,808) (29,091)
---------------------------------------------------------
(Loss) before cumulative effect of
accounting change (581,635) (148,290) (874,416) (336,356)
Cumulative effect of accounting change 310,427
---------------------------------------------------------
Net (loss) $ (581,635) $ (148,290) $ (874,416) $ (25,929)
=========================================================
Net (loss) per share before cumulative
effect of accounting change $ (0.24) $ (0.06) $ (0.36) $ (0.14)
=========================================================
Net (loss) per share $ (0.24) $ (0.06) $ (0.36) $ (0.01)
=========================================================
Weighted average number of common
shares outstanding 2,435,961 2,435,961 2,435,961 2,432,502
=========================================================
Cash dividends per share:
Class A Common $ 0.0125 $ 0.0000 $ 0.0375 $ 0.0250
=========================================================
Class B Common $ 0.0075 $ 0.0000 $ 0.0225 $ 0.0150
=========================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF CASH FLOWS
-----------------------
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Week Periods Ended
May 3, April 27,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (874,416) $ (25,929)
Adjustments to reconcile net loss to cash provided from operating
activities:
Depreciation and amortization 1,244,013 1,271,256
Increase in cash value of life insurance (256,078) (235,502)
Gain on sales of fixtures and improvements 119,575 45,650
Changes in assets and liabilities:
Accounts receivable 22,842 (186,324)
Inventories (175,335) (206,747)
Prepaid expenses (73,289) 84,868
Prepaid income taxes (55,105) (74,445)
Deferred taxes (23,385) (512,793)
Other assets 21,746
Accounts payable and accrued liabilities 917,761 968,444
Other liabilities (57,086) 75,000
-----------------------
Net cash provided by operating activities 789,497 1,225,224
Cash flows from investing activities:
Purchase of fixtures, equipment and improvements (632,895) (664,733)
Purchase of leases (250,000)
Purchase of software (34,249) (6,440)
-----------------------
Net cash used in investing activities (917,144) (671,173)
Cash flows from financing activities:
Dividends paid (72,368) (48,018)
Repayment of debt (810,010) (480,939)
Proceeds from loan against cash value of insurance 596,000
Proceeds from exercise of stock options 10,906
Purchase of treasury stock (11)
-----------------------
Net cash (used in) financing activities (286,389) (518,051)
Net (decrease) increase in cash and cash equivalents (414,036) 36,000
Cash and cash equivalents:
Beginning of period 507,033 319,045
-----------------------
End of period $ 92,997 $ 355,045
=======================
</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 thirty-nine week periods
ended May 3, 1997 and April 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 thirty-nine week
periods ended May 3, 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 May 3, 1997 and April 27, 1996
- ----------------------------------------------------------
Sales. Sales were $9,807,148 for the thirteen week period ended May 3, 1997
compared to $10,419,704 for the thirteen week period ended April 27, 1996, a
decrease of 5.9%. Sales for stores open in both periods were $9,807,148 for the
thirteen week period ended May 3, 1997 and $10,119,227 for the thirteen week
period ended April 27, 1996. The Company closed three stores in prior periods
which have resulted in a net decrease in sales of $299,571 for the thirteen week
period ended May 3, 1997.
Cost of sales. Cost of sales for the thirteen week period ended May 3, 1997,
was 54.3% of sales compared to 53.9% for the thirteen week period ended April
27, 1996.
Store operating, administrative and general expenses. Store operating,
administrative and general expenses for the thirteen week period ended May 3,
1997 were $4,760,924 compared to $4,730,930 in the same period of the prior
year. Operating expenses excluding advertising decreased, which was related to
three fewer stores in the current period. However, this decrease was partially
offset by an increase in advertising expenditures in the current period.
Interest expense. Interest expense for the thirteen week periods ended May 3,
1997 and April 27, 1996 was $302,677 and $309,547, respectively.
Income tax expense. No income tax expense (benefit) was recognized for the
quarter ended May 3, 1997 versus a tax benefit of $89,199 which was recorded for
the quarter ended April 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 thirty-nine weeks ended May 3, 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. Loss before income taxes and cumulative effect of accounting
change was $581,635 versus $237,489 for the same period in the prior year. Net
loss for the thirteen week period ended May 3, 1997, was $581,635 compared to a
net loss of $148,290 in the same period of the prior year. The increase in net
loss is attributable to no tax benefit recorded in the current period, and the
aforementioned results of sales and operating expenses. The specialty domestics
segment of the retail industry has seen increased competition with corresponding
pressure on sales and margins.
7
<PAGE>
Thirty-nine week periods ended May 3, 1997 and April 27, 1996
- -------------------------------------------------------------
Sales. Sales were $34,007,680 for the thirty-nine week period ended May 3,
1997 compared to $36,460,244 for the thirty-nine week period ended April 27,
1996, a decrease 6.7%. Sales for stores open in both periods were $34,007,680
for the thirty-nine week period ended May 3, 1997 and $34,681,334 for the
thirty-nine week period ended April 27, 1996. The Company closed five stores in
prior periods which have resulted in a net decrease in sales of $1,777,982 for
the thirty-nine week period ended May 3, 1997.
Cost of sales. Cost of sales for the thirty-nine week period ended May 3, 1997,
was 56.3% of sales compared to 58.8% for the thirty-nine week period ended April
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 thirty-nine week period ended May
3,1997, were $14,800,619 compared to $14,592,824 in the same period of the prior
year. Operating expenses, excluding advertising decreased which was related to
five fewer stores in the current period, compared to the same period of the
prior year. However, this decrease was offset by an increase in advertising
expenditures in the current period.
Interest expense. Interest expense for the thirty-nine week periods ended May 3,
1997 and April 27, 1996 was $943,265 and $980,233, respectively. The reduction
in interest expense of $36,968 is related to a reduction in average outstanding
borrowings of approximately $428,000 over the comparable period of the prior
year.
Income tax expense. No income tax benefit was recognized for the thirty-nine
weeks ended May 3, 1997 versus a tax benefit of $202,365 which was recorded for
the thirty-nine weeks ended April 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 thirty-nine weeks ended May 3, 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.
Thirty-nine week results. Loss before income taxes and cumulative effect of
accounting change was $874,416 versus a loss of $538,721 for the same period in
the prior year. Net loss for the thirty-nine week period ended May 3, 1997, was
$874,416 compared to a net loss of $25,929 in the same period of the prior year.
The increase in net loss is attributable to no tax benefit recorded in the
current period, the cumulative effect of accounting change, and the
aforementioned results of sales and operating expenses. 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 May 3, 1997, working capital was
- --------------------------------
$10,425,426 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
$789,496 and expenditures on capital improvements of $632,895. 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 5. Other Information
As of May 3, 1997, the Company owned and operated 22 stores in Connecticut,
California, and Arizona, operating under the trade names of Three D Bed & Bath
and Linens Plus. These are comprised of 17 superstores averaging approximately
24,000 square feet and five bed and bath specialty stores averaging
approximately 12,000 square feet. The Company plans to convert the remaining
bed and bath specialty stores to the superstore format.
During the period ended May 3, 1997, the Company converted two bed and bath
specialty stores to the superstore format, and closed its bed and bath clearance
store in Chino, California. No additional stores will be closed during the
remainder of the fiscal year. Additionally, the Company is building a new 25,000
square foot superstore in Orange, Connecticut, which will open in the summer of
1997.
Item 6. Exhibits and Reports on Form 8-K
The Company was not required to file a report on Form 8-K for any event during
the thirteen week period ended May 3, 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: June 16, 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
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q,
MAY 3, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> AUG-02-1997 AUG-02-1997
<PERIOD-START> FEB-02-1997 AUG-04-1996
<PERIOD-END> MAY-03-1997 MAY-03-1997
<CASH> 92,996 92,996
<SECURITIES> 0 0
<RECEIVABLES> 354,008 354,008
<ALLOWANCES> 0 0
<INVENTORY> 16,606,820 16,606,820
<CURRENT-ASSETS> 17,756,610 17,756,610
<PP&E> 13,321,268 13,321,268
<DEPRECIATION> 7,313,749 7,313,749
<TOTAL-ASSETS> 26,611,003 26,611,003
<CURRENT-LIABILITIES> 7,331,174 7,331,174
<BONDS> 8,386,795 8,386,795
0 0
0 0
<COMMON> 810,208 810,208
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 26,611,003 26,611,003
<SALES> 9,807,148 34,007,680
<TOTAL-REVENUES> 9,807,148 34,007,680
<CGS> 5,325,182 19,138,212
<TOTAL-COSTS> 4,760,924 14,800,619
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 302,677 943,265
<INCOME-PRETAX> (581,635) (874,416)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (581,635) (874,416)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (581,635) (874,416)
<EPS-PRIMARY> (0.24) (0.36)
<EPS-DILUTED> (0.24) (0.36)
</TABLE>
