<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 January 31, 1998
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 January 31, 1998, 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>
<S> <C>
Item 1. Financial Statements:
Balance Sheet at January 31, 1998 and August 2, 1997........ 3
Statement of Operations for the thirteen and twenty-six
week periods ended January 31, 1998 and February 1, 1997... 4
Statement of Cash Flows for the twenty-six week periods
ended January 31, 1998 and February 1, 1997................ 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 4. Submission of Matters to a Vote of Security Holders................. 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>
January 31, 1998 August 2, 1997
---------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS
- --------------
<S> <C> <C>
Cash $ 627,078 $ 297,790
Receivables 410,541 397,460
Inventories 13,268,770 15,585,221
Prepaid expenses 516,887 251,900
Deferred income taxes 35,635 35,635
----------- -----------
Total current assets 14,858,911 16,568,006
PROPERTY, FIXTURES AND IMPROVEMENTS, at cost
- --------------------------------------------
Buildings 1,193,834 1,193,834
Fixtures and equipment 9,289,463 8,943,029
Leasehold improvements 3,023,426 3,014,051
----------- -----------
13,506,723 13,150,914
Less - accumulated depreciation 7,869,570 7,269,480
----------- -----------
5,637,153 5,881,434
OTHER ASSETS
- ------------
Deferred cost of leases, net 1,168,533 1,247,924
Deferred income taxes 574,432 574,432
Other 1,197,560 1,068,528
----------- -----------
2,940,525 2,890,884
----------- -----------
$23,436,589 $25,340,324
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Long-term debt - current portion $ 147,847 $ 263,580
Accounts payable 4,633,710 5,442,886
Accrued liabilities 1,117,976 1,208,940
----------- -----------
Total current liabilities 5,899,533 6,915,406
LONG-TERM DEBT, LESS CURRENT PORTION 7,743,721 8,497,177
- ------------------------------------
DEFERRED COMPENSATION 200,000 200,000
- ---------------------
OTHER LIABILITIES 954,568 791,941
- -----------------
STOCKHOLDER'S EQUITY
- --------------------
Preferred stock; $.25 par value; authorized 300,000 shares;
none issued
Common stock; $.25 par value
Class A - authorized 6,000,000; issued 1,676,969 419,242 419,242
Class B - authorized 6,000,000; issued 1,563,863 390,966 390,966
Additional paid-in capital 1,255,525 1,255,525
Retained earnings 8,377,778 8,674,811
----------- -----------
10,443,511 10,740,544
Less - 804,883 shares of common stock in treasury, at cost 1,804,744 1,804,744
----------- -----------
8,638,767 8,935,800
----------- -----------
$23,436,589 $25,340,324
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
THREE D DEPARTMENTS, INC.
-------------------------
STATEMENT OF OPERATIONS
-----------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the thirteen weeks ended For the twenty-six weeks ended
January 31, February 1, January 31, February 1,
------------- ---------------- ----------------- ---------------
1998 1997 1998 1997
------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Sales $12,129,386 $13,213,052 $22,525,183 $ 24,200,533
Cost of sales, including warehousing,
transportation and buying expenses 6,928,128 7,581,481 12,862,681 13,813,030
Store operating, administrative and
general expenses 4,725,446 5,077,816 9,324,875 10,039,695
----------- ----------- ----------- ------------
Operating income 475,812 553,755 337,627 347,808
Interest expense 312,261 316,563 634,660 640,589
----------- ----------- ----------- ------------
Income (loss) before income taxes 163,551 237,192 (297,033) (292,781)
Income taxes 0 0 0 0
----------- ----------- ----------- ------------
Net income (loss) $ 163,551 $ 237,192 $ (297,033) $ (292,781)
=========== =========== =========== ============
Net income (loss) per share $ 0.07 $ 0.10 $ (0.12) $ (0.12)
=========== =========== =========== ============
Weighted average number of common shares
outstanding 2,435,949 2,435,949 2,435,949 2,435,961
=========== =========== =========== ============
</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
January 31, 1998 February 1, 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (297,033) $ (292,781)
Adjustments to reconcile net loss to cash provided from
operating activities:
Depreciation and amortization 749,794 577,813
Increase in cash value of life insurance (170,438) (170,718)
Gain (loss) on sales of fixtures and improvements 4,500 111,636
Changes in assets and liabilities:
Accounts receivable (13,081) 33,022
Inventories 2,316,451 1,328,306
Prepaid expenses (264,987) 285,823
Prepaid income taxes 0 (90,375)
Accounts payable and accrued liabilities (900,140) (982,410)
Other liabilities 162,627 95,807
---------- ----------
Net cash provided by operating activities 1,587,693 896,123
Cash flows from investing activities:
Purchase of fixtures, equipment and improvements (382,318) (448,738)
Purchase of software (6,898) (6,921)
---------- ----------
Net cash used in investing activities (389,216) (455,659)
Cash flows from financing activities:
Dividends paid 0 (48,239)
Repayment of debt (869,189) (843,705)
Purchase of treasury stock 0 (11)
---------- ----------
Net cash used in financing activities (869,189) (891,955)
---------- ----------
Net increase (decrease) in cash and cash equivalents 329,288 (451,491)
Cash and cash equivalents:
Beginning of period 297,790 507,033
---------- ----------
End of period $ 627,078 $ 55,542
========== ==========
</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 January 31, 1998 and February 1, 1997, 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 2, 1997. The results of
operations for the thirteen and twenty-six week periods ended January
31, 1998, are not necessarily indicative of the results for the entire
fiscal year ending August 1, 1998.
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 2, 1997, which should be read in conjunction with
this quarterly report.
6
<PAGE>
THREE D DEPARTMENTS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Thirteen week periods ended January 31, 1998 and February 1, 1997
- -----------------------------------------------------------------
Sales. Sales were $12,129,386 for the thirteen week period ended January 31,
1998 compared to $13,213,052 for the thirteen week period ended February 1,
1997, a decrease 8.2%. Sales for stores open in both periods were $11,679,480
for the thirteen week period ended January 31, 1998 and $13,069,480 for the
thirteen week period ended February 1, 1997. The Company eliminated a
promotional event in November 1997, and reduced advertising coverage in December
1997. The Company closed one store in prior periods which has resulted in a net
decrease in sales of $143,804 for the thirteen week period ended January 31,
1998.
Cost of sales. Cost of sales for the thirteen week period ended January 31,
1998, was 57.1% of sales compared to 57.4% for the thirteen week period ended
February 1, 1997. There were no material changes in the merchandise mix or
promotional discounts offered over the prior year.
Store operating, administrative and general expenses. Store operating,
administrative and general expenses for the thirteen week period ended January
31, 1998 were $4,725,446 compared to $5,077,816 in the same period of the prior
year. The decrease in operating expenses was principally related to a decrease
of advertising expenditures over the prior period.
Interest expense. Interest expense for the thirteen week periods ended January
31, 1998 and February 1, 1997 was $312,261 and $316,563, respectively.
Income tax expense. No income tax expense was recognized for the quarter ended
January 31, 1998. The Company has previously established a valuation allowance
against deferred tax assets which related primarily to operating loss carry
forwards generated in fiscal years 1994 through 1997. 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
January 31, 1998.
Quarterly results. Income before income taxes was $163,551 versus $237,192 for
the same period in the prior year. Net income for the thirteen-week period ended
January 31, 1998, was $163,551 compared to net income of $237,192 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.
7
<PAGE>
Twenty-six week periods ended January 31, 1998 and February 1, 1997
- -------------------------------------------------------------------
Sales. Sales were $22,525,183 for the twenty-six week period ended January 31,
1998 compared to $24,200,533 for the twenty-six week period ended February 1,
1997, a decrease 6.9%. Sales for stores open in both periods were $21,544,880
for the twenty-six week period ended January 31, 1998 and $23,903,696 for the
twenty-six week period ended February 1, 1997, a decrease of 9.9%. The Company
has reduced the frequency of promotional events in fiscal 1998. The Company
closed one store in prior periods which has resulted in a net decrease in sales
of $296,837 for the twenty-six week period ended January 31, 1998.
Cost of sales. Cost of sales for the twenty-six week period ended January 31,
1998, was 57.1% of sales compared to 57.1% for the twenty-six week period ended
February 1, 1997. There were no material changes in the merchandise mix or
promotional discounts offered over the prior year.
Store operating, administrative and general expenses. Store operating,
administrative and general expenses for the twenty-six week period ended January
31, 1998, were $9,324,875 compared to $10,039,695 in the same period of the
prior year. The decrease in operating expenses was principally related to a
decrease of advertising expenditures over the prior period.
Interest expense. Interest expense for the twenty-six week periods ended January
31, 1998 and February 1, 1997 was $634,660 and $640,589, respectively.
Income tax expense. No income tax benefit was recognized for the twenty-six
weeks ended January 31, 1998. The Company has previously established a valuation
allowance against deferred tax assets, which related primarily to operating loss
carry forwards generated in fiscal years 1994 through 1997. 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 January 31, 1998.
Twenty-six week results. Loss before income taxes was $297,033 versus a loss of
$292,781 for the same period in the prior year. Net loss for the twenty-six week
period ended January 31, 1998, was $297,033 compared to a net loss of $292,781
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 January 31, 1998, working capital was
- -------------------------------
$8,959,378 compared to $9,652,600 at the beginning of the fiscal year. Cash
generated by operations was $1,587,693, which was offset by debt reduction of
$869,189 and expenditures on capital improvements of $389,216.
The Company believes the home furnishings specialty store segment is targeted
toward the upper moderate customer, and that many customers who would prefer a
specialty store environment are priced out of the market and shop for home
furnishings in traditional promotional chains. The Company is undertaking a
program to refurbish some of its existing stores and will merchandise these
stores to create an attractive offering to the moderate customer. 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 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 1, 1998.
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 16, 1998. The
following were elected to the Board of Directors:
Directors Representing Class A Common Shareholders
--------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Name Votes For Votes Withheld
---- --------- --------------
Abe Markowicz 898,160 (76.7%) 135,682 (11.6%)
John B. Dawson 906,380 (77.4%) 127,462 (10.9%)
</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>
Bernard Abrams 915,636 (72.4%) 116,191 (9.2%)
Donald L. Abrams 1,025,785 (81.1%) 6,042 (.5%)
Steven R. Kerkstra 917,636 (72.5%) 114,337 (9.0%)
Jennie Daniells 1,025,785 (81.1%) 6,042 (.5%)
</TABLE>
There were no abstentions and no broker non-votes for any nominee.
Item 5. Exhibits and Reports of Form 8-K
On January 16, 1998 the Company filed a report on Form 8-K disclosing a change
in the Company's certifying accountant for the fiscal year ended August 1, 1998.
The previous independent accountant was Price Waterhouse LLP. There were no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
BDO Seidman was appointed as the certifying accountant for the fiscal year ended
August 1, 1998. The Board of Directors participated in and approved the
decision.
10
<PAGE>
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 16, 1998
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,
JANUARY 31, 1998, 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-02-1997 AUG-03-1997
<PERIOD-END> JAN-31-1998 JAN-31-1998
<CASH> 627,078 627,078
<SECURITIES> 0 0
<RECEIVABLES> 410,541 410,541
<ALLOWANCES> 0 0
<INVENTORY> 13,268,770 13,268,770
<CURRENT-ASSETS> 14,858,911 14,858,911
<PP&E> 13,506,723 13,506,723
<DEPRECIATION> 7,869,570 7,869,570
<TOTAL-ASSETS> 23,436,589 23,436,589
<CURRENT-LIABILITIES> 5,899,533 5,899,533
<BONDS> 7,743,721 7,743,721
0 0
0 0
<COMMON> 810,208 810,208
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 23,436,589 23,436,589
<SALES> 12,129,386 22,525,183
<TOTAL-REVENUES> 12,129,386 22,525,183
<CGS> 6,928,128 12,862,681
<TOTAL-COSTS> 4,725,446 9,324,875
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 312,261 634,660
<INCOME-PRETAX> 163,551 (297,033)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 163,551 (297,033)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 163,551 (297,033)
<EPS-PRIMARY> 0.07 (0.12)
<EPS-DILUTED> 0.07 (0.12)
</TABLE>
