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 quarterly period ended SEPTEMBER 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-5787
LEVITZ FURNITURE CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 23-1657490
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6111 BROKEN SOUND PARKWAY, N.W., BOCA RATON, FL 33487-2799
- ----------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(561) 994-6006
----------------------------------------------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On October 31, 1996, there were 1,000 shares of Common Stock, par value $0.40,
outstanding.
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30, MARCH 31,
1996 1996
(UNAUDITED)
ASSETS --------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,585 $ 12,755
Receivables 37,699 34,025
Inventories 171,417 140,918
Deposits and prepaid expenses 6,679 3,820
--------------- --------------
Total current assets 225,380 191,518
--------------- --------------
PROPERTY AND EQUIPMENT, net 216,889 225,509
--------------- --------------
PROPERTY UNDER CAPITAL LEASES, net 124,343 134,944
--------------- --------------
OTHER ASSETS:
Intangible leasehold interests 16,300 17,053
Deferred financing fees 12,874 6,820
Goodwill 18,435 18,693
Other 5,763 5,707
--------------- --------------
53,372 48,273
--------------- --------------
$ 619,984 $ 600,244
=============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Cash overdrafts $ 19,912 $ 17,912
Current portion of long-term debt 7,765 2,441
Current portion of obligations under capital leases 3,880 4,845
Accounts payable, trade 78,912 55,933
Accrued expenses and other liabilities 80,880 79,640
Payable to parent 11,583 5,904
Deferred income taxes 5,197 4,628
Revolver borrowings 75,014 52,516
--------------- --------------
Total current liabilities 283,143 223,819
--------------- --------------
LONG-TERM DEBT, net of current portion 278,304 286,775
--------------- --------------
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 76,942 82,922
--------------- --------------
OTHER NONCURRENT LIABILITIES 28,169 24,423
--------------- --------------
DEFERRED INCOME TAXES 44,318 54,041
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, at par value 1 1
Capital in excess of par 58,453 57,853
Minimum pension liability (654) (654)
Retained earnings (deficit) (148,692) (128,936)
--------------- --------------
Total stockholder's deficit (90,892) (71,736)
--------------- --------------
$ 619,984 $ 600,244
=============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 237,146 $ 251,263 $ 465,274 $ 493,125
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 130,327 134,123 256,840 262,181
Selling, general and administrative
expenses 96,913 97,987 187,223 199,374
Store closing charge - - 8,295 -
Restructuring expense - 4,000 - 4,000
Depreciation and amortization 6,789 7,370 13,688 14,745
---------- ---------- ---------- ----------
234,029 243,480 466,046 480,300
---------- ---------- ---------- ----------
Operating income (loss) 3,117 7,783 (772) 12,825
Interest expense, net 13,846 11,978 26,641 25,211
---------- ---------- ---------- ----------
Loss before income taxes (10,729) (4,195) (27,413) (12,386)
Income tax benefit 3,780 1,453 9,659 4,459
---------- ---------- ---------- ----------
Loss before extraordinary items (6,949) (2,742) (17,754) (7,927)
Extraordinary items, net of tax
benefit of $1,090 - - (2,002) -
---------- ---------- ---------- ----------
Net loss $ (6,949) $ (2,742) $ (19,756) $ (7,927)
========== ========== ========== ==========
Loss per common share:
Loss before extraordinary
items $ (6,949) $ (2,742) $ (17,754) $ (7,927)
Extraordinary items - - (2,002) -
---------- ---------- ---------- -----------
Net loss per common share $ (6,949) $ (2,742) $ (19,756) $ (7,927)
========== ========== ========== ===========
Weighted average number of common
shares outstanding 1,000 1,000 1,000 1,000
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED SEPTEMBER 30,
1996 1995
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,756) $ (7,927)
--------------- --------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 7,911 8,368
Amortization 5,777 6,377
Provision for deferred taxes (9,154) (5,615)
Gain on disposal of property and equipment (150) (14)
Amortization of deferred financing fees 1,126 993
Pension expense 782 2,482
Other 177 -
Extraordinary losses related to early redemption
of debt before tax benefit 3,092 -
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables (3,668) (7,578)
Inventories (30,499) 7,508
Deposits and prepaid expenses (2,859) (537)
Income taxes receivable - 3,054
Other, net 56 89
Increase (decrease) in:
Accounts payable, trade 22,979 10,687
Accrued expenses and other liabilities 4,870 (1,510)
Payable to parent 5,679 (1,199)
Other noncurrent liabilities 4,552 (2,005)
--------------- --------------
Total adjustments 10,671 21,100
--------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: (9,085) 13,173
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,349) (6,838)
Proceeds from sale of property and equipment and
other assets 174 191
Proceeds from sale-leaseback agreement - 22,209
--------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: (3,175) 15,562
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Credit Agreement 518,178 148,100
Repayments under Credit Agreement (495,679) (173,211)
Principal payments on long-term debt (2,725) (889)
Principal payments under capital lease obligations (2,412) (2,584)
Payment of deferred financing fees (10,272) -
Increase in cash overdrafts 2,000 1,832
--------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,090 (26,752)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,170) 1,983
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,755 6,301
--------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,585 $ 8,284
=============== =============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION:
Levitz Furniture Corporation (Levitz), a Florida corporation, is a
wholly-owned subsidiary of Levitz Furniture Incorporated (LFI).
In the opinion of Management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments consisting of
normal recurring accruals necessary to present fairly the financial
position as of September 30, 1996, the results of operations and cash
flows for the periods then ended. The results of operations for the
period ended September 30, 1996, are not necessarily indicative of the
results to be expected for the full year.
2. CONSOLIDATED STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information (dollars in
thousands):
SIX MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------- -------
Interest paid $25,460 $24,484
======= =======
Income taxes refunded $(6,980) $(1,180)
======= =======
3. LONG-TERM DEBT AND REVOLVER BORROWINGS:
On July 1, 1996, Levitz and certain of its wholly owned subsidiaries
entered into new senior secured credit facilities providing for up to
$190.0 million of availability (collectively, the "Senior Secured
Facilities"). The Senior Secured Facilities are secured by
substantially all of the assets of Levitz and its subsidiaries and are
comprised of the Tranche A Facility (the "Tranche A Facility")
providing for up to $150.0 million and the Tranche B Facility (the
"Tranche B Facility") providing up to $40.0 million. The proceeds of
the Senior Secured Facilities were used to refinance indebtedness
incurred under the previous bank credit agreement, to provide liquidity
for working capital needs and for other general corporate purposes. The
Senior Secured Facilities will expire on July 1, 2001. Levitz paid
financing fees of $10.3 million for the Senior Secured Facilities.
The Tranche A Facility consists of $115.0 million of revolving debt
(the "Tranche A Revolver") which is provided by BT Commercial
Corporation ("BTCC") and $35 million of term debt (the "Tranche A Term
Facility") provided by Apollo Investment Fund III, L.P., Apollo
Overseas Partners III, L.P. and Apollo U.K. Partners III, L.P.
(collectively "Apollo"). The maximum borrowings under the Tranche A
Revolver are calculated based upon inventory and receivable levels.
Tranche B consists of $40.0 million of revolving debt based on a fixed
asset sublimit. This fixed asset sublimit will be permanently reduced
each year effective July 1997 by an amount equal to the lesser of $5.0
million or 100% of Excess Cash Flow (as defined in the Senior Secured
Facilities). Asset sales and the reduction of inventory and receivables
(as defined in the Senior Secured Facilities) below $115.0 million will
also trigger permanent reductions to the fixed asset sublimit.
5
<PAGE>
Loans made under the Tranche A Revolver and the Tranche B Facility bear
interest, at Levitz's option, at a rate equal to either Bankers Trust
Company's ("BTC's") prime lending rate plus 1.5% or BTC's LIBOR rate
plus 3.25%. The Tranche A Term Facility bears interest at a rate of
15.5%, payable in cash or, at Levitz's option, at any time prior to
July 1, 1999, by the issuance of up to $10.0 million of additional
Tranche A Term Notes, having a principal amount equal to the amount of
interest accrued and maturing on July 1, 2001. To the extent additional
Tranche A Term Notes are issued for interest, the amount available
under the Tranche A Revolver will be permanently decreased. If LFI
achieves a prescribed Fixed Charge Coverage Ratio, as defined, the
interest rate on the Tranche A Term Facility will be reset from 15.5%
to 11.0%.
In addition, LFI issued warrants to Apollo to purchase up to 5,000,000
shares of Common Stock of LFI at an initial exercise price of $4.125
per share, subject to downward adjustments if certain targeted stock
prices of LFI are not achieved in the future and other antidilution
provisions.
As a result of the July 1996 refinancing, in the quarter ended June 30,
1996, Levitz incurred a before-tax extraordinary loss of $3.1 million
on the write-off of deferred financing fees related to the termination
of the previous bank credit agreement. The after-tax loss was $2.0
million or $2,002 per share.
In order to comply with a consensus issued in November 1995 set forth
by the Emerging Issues Task Force in EITF 95-22 regarding
classification of certain debt instruments that include both a
requirement for a lock box arrangement and a subjective acceleration
clause, $75.0 million of the borrowings under the Tranche A Revolver
have been classified as Revolver Borrowings in current liabilities.
Under the terms of the Tranche A Revolver, however, Levitz will not be
required to repay this amount in the next year. Payment will only be
required at the expiration of the Tranche A Facility on July 1, 2001 or
if the borrowing base is reduced below the amount outstanding. Based on
anticipated borrowing base levels, Levitz believes the amount
outstanding under the Senior Secured Facilities will be due and payable
in July 2001.
As of September 30, 1996, Levitz had approximately $27.4 million of
availability under the Senior Secured Facilities. The Senior Secured
Facilities require LFI to achieve an interest coverage ratio beginning
December 31, 1996 and quarterly thereafter. It also contains
limitations on capital expenditures, additional indebtedness,
incurrence of liens, sale of assets, payment of dividends, investments
and other restrictions.
The retail furniture industry historically has been highly cyclical and
directly affected by, among other things, housing starts, existing home
sales, consumer confidence, the level of personal discretionary
spending, consumer credit availability and general economic conditions.
Furniture purchases are generally discretionary, and in view of the
fact that they represent a significant expenditure to the average
consumer, they are often deferred during times of economic uncertainty.
Decreased comparable store sales and gross profit over the past two
years which have continued during Fiscal 1997, have significantly
reduced operating income and the resulting cash flow resulting in debt
compliance and liquidity concerns.
Management has undertaken a number of steps including the offer for
sale of under-utilized properties to address the liquidity needs of LFI
and Levitz as well as compliance with the Senior Secured Facilities.
Based upon anticipated cash flow from operations and existing borrowing
capacity under the Senior Secured Facilities, Management believes
Levitz will be able to meet the covenants contained in the Senior
Secured Facilities during the foreseeable future, and has sufficient
cash flow to meet current cash needs. However, compliance with such
covenants will be dependent on the successful accomplishment of
Management's strategies and Levitz achieving improved comparable store
sales. Actual results could differ from the estimates used to set these
covenants resulting in Levitz's failure to be in compliance with the
Senior Secured Facilities.
The Senior Secured Facilities and mortgages are secured by
substantially all assets of Levitz and its subsidiaries and a perfected
pledge of stock of all Levitz's subsidiaries.
6
<PAGE>
LFI and Levitz are subject to certain covenants and restrictions and
cross-default provisions as described in the Senior Secured Facilities
and/or indentures, including among other restrictions the following:
provisions which require certain financial tests be met, restrictions
with respect to the sale of assets, annual capital expenditures,
ability to enter into sale-leaseback transactions or mortgage loans,
ability to redeem certain indebtedness, and limitations on the ability
to incur additional indebtedness, requirements to repurchase certain
indebtedness if a change in control occurs and limitations on the
ability to pay dividends or make certain other restricted payments by
Levitz or LFI.
LFI and Levitz are currently in compliance with all such covenants
under the Senior Secured Facilities and all applicable debt indentures.
4. SALE OF RECEIVABLES:
Levitz and General Electric Capital Corporation (GECC) are parties to
an Account Purchase Agreement (the Agreement), whereby GECC has agreed
to purchase Levitz's customer credit obligations without recourse.
Levitz accounts for the above transactions as a sale. Under the terms
of the Agreement, Levitz may pay GECC a fee or may receive income,
based upon the relationship among the interest earned on the portfolio
sold thereunder, the amount of the servicing fee, the prime rate and to
a limited extent, credit losses. The Agreement expires October 31,
1998, with automatic five-year renewals, unless canceled by either
party with twenty-six months' notice prior to scheduled termination.
Notice of Levitz intent to renegotiate the Agreement with GECC has been
given and negotiations are currently being conducted to reach a new
agreement. For the six month periods ended September 30, 1996 and 1995,
Levitz recorded income under the Agreement of $7.0 million and $5.9
million, respectively. These amounts are included in selling, general
and administrative expenses as they represent an adjustment to the
estimated sales price of the receivables.
5. EARNINGS PER COMMON SHARE:
Earnings per common share are based on the weighted average number of
common shares outstanding during each period.
6. CLOSED STORES:
During the quarter ended June 30, 1996, Management developed a plan to
close five satellite stores effective October 31, 1996. The plan
resulted in a pre-tax charge for store closings of $8.3 million. The
charge includes the reduction of the carrying value of the store assets
to their estimated fair value net of selling expenses as well as
reserves for future rental payments under operating lease agreements.
Included in the store closing charge is a $2.4 million charge from the
adoption of SFAS No. 121 effective April 1, 1996 for one of the closed
stores.
7
<PAGE>
<TABLE>
<CAPTION>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth Levitz's results of operations expressed as a
percentage of net sales for the periods indicated:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 55.0 53.4 55.2 53.2
----------- ----------- ----------- -----------
Gross profit 45.0 46.6 44.8 46.8
Selling, general and administrative
expenses 40.9 39.0 40.3 40.4
Store closing charge - - 1.8 -
Restructuring expense - 1.6 - 0.8
Depreciation and amortization 2.8 2.9 2.9 3.0
----------- ----------- ----------- -----------
Operating income 1.3 3.1 (0.2) 2.6
Interest expense 5.8 4.8 5.7 5.1
----------- ----------- ----------- -----------
Loss before income taxes (4.5) (1.7) (5.9) (2.5)
Income tax benefit 1.6 0.6 2.1 1.0
----------- ----------- ----------- -----------
Loss before extraordinary items (2.9) (1.1) (3.8) (1.5)
Extraordinary items, net of tax
benefit - - (0.4) -
----------- ----------- ----------- -----------
Net loss (2.9)% (1.1)% (4.2)% (1.5)%
============ =========== =========== ===========
Comparable store sales (5.6)% (9.7)% (5.7)% (9.5)%
============ =========== =========== ===========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Net sales of $237.1 million for the three month period ended September 30, 1996
decreased $14.2 million or 5.6% over net sales of $251.3 million in the same
period for the prior year. Sales on a comparable store basis decreased 5.6%.
Gross profit as a percentage of net sales decreased to 45.0% for the three month
period ended September 30, 1996 compared to 46.6% in the same period for the
prior year. The decrease, in part, reflects the move to more competitive pricing
and increased value for the customer. Gross profit is expected to be maintained
at approximately 45.0% which increased from 44.5% during the three month period
ended June 30, 1996.
Selling, general and administrative (SG&A) expenses decreased $1.1 million for
the three month period ended September 30, 1996 as compared to the same period
for the prior year. As a percentage of net sales, SG&A expenses increased to
40.9% from 39.0%, respectively. Salaries, payroll taxes and employee benefit
expenses decreased $7.8 million which is attributable to the reduction in the
number of employees by approximately 1,100 from the comparable period last year.
This was offset by an increase in advertising expense of $3.5 million and a
reduction of GECC service fee income of $1.0 million. The percentage increase in
SG&A was caused by the decline in net sales as previously noted.
8
<PAGE>
The restructuring expense for the three month period ended September 30, 1995
was a result of the consolidation of six regional offices into two divisional
offices and the elimination of certain support positions at the corporate,
division and store levels. The restructuring charge included $3.1 million of
severance pay and related employee benefits and $0.9 million of lease
commitments on closed regional office facilities. The restructuring was
completed in November 1995.
Depreciation and amortization expenses decreased $0.6 million or 7.9% for the
three month period ended September 30, 1996 as compared to the same period of
the prior year. As a percentage of net sales, depreciation and amortization
expenses for such periods decreased to 2.8% from 2.9%, respectively.
Operating income for the three month period ended September 30, 1996 decreased
$4.7 million or 60.0% from the same period for the prior year. As a percentage
of net sales, operating income decreased to 1.3% from 3.1%, respectively. The
percentage and dollar decreases are primarily attributable to the decrease in
net sales.
Interest expense for the three month period ended September 30, 1996 increased
$1.9 million or 15.6% from the same period for the prior year. As a percentage
of net sales, interest expense increased to 5.8% from 4.8%, respectively. The
dollar increase is due to higher effective interest rates and increased average
borrowing levels. The percentage of net sales increase is also due to the
decline in net sales as well as the increase in interest rates and average
borrowing levels.
As a result of the aforementioned factors, loss before income taxes for the
three month period ended September 30, 1996 amounted to $10.7 million or 4.5% of
net sales as compared to a loss of $4.2 million or 1.7% of net sales for the
same period of the prior year.
Income tax benefit for the three month period ended September 30, 1996 was $3.8
million or 1.6% of net sales as compared to an income tax benefit of $1.5
million or 0.6% of net sales for the same period of the prior year. The
effective tax rate was 35.2% in the three month period ended September 30, 1996
as compared to 34.6% for the same period of the prior year.
Net loss for the three month period ended September 30, 1996 was $6.9 million or
2.9% of net sales as compared to a net loss of $2.7 million or 1.1% of net sales
for the same period of the prior year.
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1995
Net sales of $465.3 million for the six months ended September 30, 1996
decreased $27.9 million or 5.6% from net sales of $493.1 million in the same
period of the prior year. Sales on a comparable store basis decreased 5.7%.
Gross profit as a percentage of net sales decreased to 44.8% for the six month
period ended September 30, 1996 compared to 46.8% in the same period for the
prior year. The decrease is attributable to a change in pricing policy toward
more competitive pricing and increased value for the customer.
SG&A expenses decreased $12.2 million or 6.1% for the six month period ended
September 30, 1996 as compared to the same period of the prior year. As a
percentage of net sales, SG&A expenses decreased to 40.3% from 40.4%,
respectively. The dollar decrease in SG&A expenses is primarily due to the
reduction in the number of employees of approximately 1,100 from the comparable
period last year. Salaries, payroll taxes and employee benefit expense decreased
$15.8 million. GECC service fee income increased $1.1 million and advertising
expense increased $3.7 million.
The store closing charge of $8.3 million for the six month period ended
September 30, 1996 includes the reduction of the carrying value of the store
assets to the estimated fair value net of selling expenses as well as reserves
for future rental payments under operating lease agreements. Five satellite
stores were closed on October 31, 1996.
The restructuring expense for the six month period ended September 30, 1995, was
a result of the consolidation of six regional offices into two divisional
offices and the elimination of certain support positions at the corporate,
division and store levels. The restructuring charge included $3.1 million of
severance pay and related employee benefits and $0.9 million of lease
commitments on closed regional office facilities. The restructuring was
completed in November 1995.
9
<PAGE>
Depreciation and amortization expenses decreased $1.1 million or 7.2% for the
six month period ended September 30, 1996 as compared to the same period of the
prior year. As a percentage of net sales, depreciation and amortization expenses
for such periods decreased to 2.9% from 3.0%, respectively.
Operating loss for the six month period ended September 30, 1996 was $0.8
million as compared to operating income of $12.8 million for the same period of
the prior year. The decrease in operating income is primarily attributable to
the decrease in net sales and the store closing charge.
Interest expense increased $1.4 million or 5.7% for the six month period ended
September 30, 1996 as compared to the same period of the prior year. As a
percentage of net sales interest expense increased to 5.7% from 5.1%,
respectively. The increase in interest expense was primarily due to increased
average borrowing levels and to higher interest rates. The increase in
percentage of net sales is due to the dollar increase as noted above and the
decline in net sales.
As a result of the aforementioned factors, loss before income taxes for the six
month period ended September 30, 1996 amounted to $27.4 million or 5.9% of net
sales as compared to a loss of $12.4 million or 2.5% of net sales for the same
period of the prior year.
Income tax benefit was $9.7 million or 2.1% of net sales for the six month
period ended September 30, 1996 as compared to income tax benefit of $4.5
million or 1.0% of net sales for the same period of the prior year. The
effective tax rate decreased to 35.2% from 36.0%.
Loss before extraordinary items for the six month period ended September 30,
1996 amounted to $17.8 million or 3.8% of net sales as compared to a net loss of
$7.9 million or 1.5% of net sales for the same period of the prior year.
Extraordinary loss net of tax benefit was $2.0 million or 0.4% of net sales for
the period ended September 30, 1996. The extraordinary loss included the
write-off of deferred financing fees relating to the previous credit agreement.
Net loss for the six month period ended September 30, 1996 was $19.8 million or
4.2% of net sales as compared to a net loss of $7.9 million or 1.5% of net sales
for the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Levitz's primary sources of liquidity are cash flows from operations (including
the proceeds from the sale of customer credit obligations) and borrowings under
the Senior Secured Facilities.
Net cash used in operating activities for the six month period ended September
30, 1996 includes the add-back of depreciation and amortization expense of $13.7
million, plus other non-cash items of $2.1 million, extraordinary loss on the
early redemption of debt of $3.1 million and a decrease in working capital of
$9.2 million. The decrease in working capital excluding income taxes primarily
includes an increase in inventory of $30.5 million and an increase in trade
accounts payable of $23.0 million. The increase in inventory is due to the
decrease in net sales and the change in merchandise assortment. The increase in
trade payables is due to the increase in inventory and longer payment terms with
vendors.
Capital expenditures of $3.3 million during the period ended September 30, 1996
were for maintenance and alterations of existing stores. Management estimates
that approximately $6.0 million to $10.0 million is required annually to
adequately maintain and/or improve its existing warehouse-showrooms and
satellite stores. Levitz does not expect to open any new stores in the current
fiscal year.
The cash provided by investing activities for the six month period ended
September 30, 1995 was primarily due to the sale-leaseback of three
warehouse-showrooms and one satellite store for approximately $22.2 million.
The net cash provided by financing activities for the period ended September 30,
1996 included increased borrowings under the Senior Secured Facilities of $22.5
million reduced by payment of financing fees of $10.3 million and principal
payments under other long-term debt and capital leases of $5.1 million.
10
<PAGE>
On July 1, 1996, Levitz and certain of its wholly owned subsidiaries entered
into new senior secured credit facilities providing for up to $190.0 million of
availability (collectively, the "Senior Secured Facilities"). The Senior Secured
Facilities are secured by substantially all of the assets of Levitz and its
subsidiaries and are comprised of the Tranche A Facility (the "Tranche A
Facility") providing for up to $150.0 million and the Tranche B Facility (the
"Tranche B Facility") providing up to $40.0 million. The proceeds of the Senior
Secured Facilities were used to refinance indebtedness incurred under the Levitz
prior credit agreement, to provide liquidity for working capital needs and for
other general corporate purposes. The Senior Secured Facilities expire on July
1, 2001. Levitz paid financing fees of $10.3 million for the Senior Secured
Facilities.
In addition, LFI issued warrants to Apollo to purchase up to 5,000,000 shares of
Common Stock of LFI at an initial exercise price of $4.125, subject to downward
adjustments if certain targeted stock prices of LFI are not achieved in the
future and other antidilution provisions.
In order to comply with a consensus issued in November 1995 set forth by the
Emerging Issues Task Force in EITF 95-22 regarding classification of certain
debt instruments that include both a requirement for a lock box arrangement and
a subjective acceleration clause, $75.0 million of the borrowings under the
Tranche A Facility have been classified as a current liability. Under the terms
of the Tranche A Facility, however, Levitz will not be required to repay this
amount in the next year. Payment will only be required at the expiration of the
Tranche A Facility on July 1, 2001 or if the borrowing base is reduced below the
amount outstanding. Based on anticipated borrowing base levels, Levitz believes
the amount outstanding will be due and payable in July 2001. See Note 3 of the
consolidated condensed financial statements.
Management has undertaken a number of steps to address the liquidity needs of
LFI and Levitz as well as compliance with the Senior Secured Facilities. Based
upon anticipated cash flow from operations and existing borrowing capacity under
the Senior Secured Facilities, Management believes LFI and Levitz will be able
to meet the covenants contained in the Senior Secured Facilities during the
foreseeable future and has sufficient cash flow to meet current cash needs.
However, compliance with such covenants will be dependent on the successful
accomplishment of management's strategies and Levitz achieving improved
comparable store sales. Actual results could differ from the estimates used to
set these covenants resulting in Levitz's failure to be in compliance with the
Senior Secured Facilities. As of September 30, 1996, Levitz had approximately
$27.4 million of availability under the Senior Secured Facilities.
11
<PAGE>
PART II OTHER INFORMATION:
ITEM 5. On September 11, 1996 Levitz Furniture Corporation entered into
an Employment Agreement (the "Agreement") with Brian Levy pursuant to
which Mr. Levy was named President-Store Operations of Levitz. A copy
of the Agreement is attached to this report as Exhibit 10. Mr. Levy was
also named President-Store Operations of LFI. Also, on September 11,
1996 Ronald A. Kaplan resigned as President-Chief Operating Officer of
Levitz and LFI.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 10: Employment Agreement by and among Levitz
Furniture Corporation and Brian Levy, dated as
of September 11, 1996.
Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K: NONE.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEVITZ FURNITURE CORPORATION
(Registrant)
Date: November 8, 1996 /s/ PATRICK J. NOLAN
---------------------
Patrick J. Nolan
Senior Vice President and
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
EXHIBITS TO FORM 10-Q
NUMBER
EXHIBIT TABLE EXHIBIT
- ------------- -------
10 Employment Agreement by and among
Levitz Furniture Corporation and
Brian Levy dated as of September 11,
1996.
27 Financial Data Schedule.
EXHIBIT 10
September 11, 1996
Mr. Brian Levy
7408 Baychase Drive
Arlington, Texas 76016
Dear Mr. Levy:
This letter sets forth the terms of your employment with Levitz
(Levitz being defined for this purpose as Levitz Furniture Corporation or any of
its subsidiaries). You agree to devote your primary working time, skill,
attention and best efforts to the business of Levitz as President of Store
Operations of Levitz at Levitz's Boca Raton, Florida offices or in such other
similar executive position or office as Levitz's Chief Executive Officer may
designate.
In consideration of your services as set forth above, and for other
good and valuable consideration, receipt of which is hereby acknowledged, Levitz
hereby agrees as follows:
1. BASE SALARY. Your annual base salary will be $250,000 to be paid
in accordance with Levitz's normal payroll procedures.
2. PERFORMANCE BONUS. You will participate in Levitz's annual
performance bonus program for officers, as that program may be amended from time
to time, with a maximum annual bonus of 50% of your base salary. For the fiscal
year ending March 31, 1997, you will receive a bonus of at least $25,000 from
that program.
3. SIGNING BONUS. You will receive a signing bonus of $25,000 payable
within three business days after you report for work at Levitz's offices in Boca
Raton, Florida.
4. STOCK OPTION GRANT. As soon as possible after the date hereof, you
will receive, subject to grant by the Compensation Committee of the Board of
Directors of Levitz Furniture Incorporated (LFI), options to purchase 60,000
shares of the common stock of LFI at an exercise price equal to the average of
the high and low prices of such stock on the New York Stock Exchange on the date
of grant and on the terms as determined by such Compensation Committee. Provided
that all such options shall be exercisable in various increments starting one
year from date of grant, and all such options will be fully exercisable no later
than three years from date of grant.
In the event that such exercise price is greater than $4-7/8 per
share the Company shall cause additional shares to be issued to you, or make
alternative payment arrangements in order to fairly compensate you for such
increase in exercise price.
5. RELOCATION EXPENSES. It is understood that you will sell your home
in the Arlington, Texas area. Levitz will reimburse you for the cost of
reasonable real estate commissions, transfer taxes and closing costs and fees as
normally paid by a home seller in that area. Levitz will also pay your household
moving expenses from Arlington, Texas to Boca Raton, Florida in accordance with
Levitz's relocation procedures for officers, which will include reimbursement
for the expense of one house hunting trip of up to three days and the movement
of two personal cars. Levitz will also reimburse you an amount equal to your
regular mortgage payments (principal, interest, property taxes and homeowner's
insurance) on your present house located at 7408 Baychase Drive, Arlington,
Texas 76016 for a period of eight months from the date of this letter or the
date of closing of escrow on such house, whichever comes first.
Furthermore, if you sell your house for less than its market value,
then Levitz will pay you the difference between the price you sell your house
for and its market value. The market value will be the average of two appraisals
of the house, one appraiser being selected by you and the other by the Company.
1
<PAGE>
6. SEVERANCE BENEFITS. Levitz shall have the right to terminate your
employment at any time.
(a) If such termination is for "gross misconduct," then such
termination shall become effective immediately. Levitz shall have only those
rights or obligations which may have accrued prior to such termination. You
shall be entitled to all earned and unpaid salary to the date of termination as
well as all other benefits which may be due you pursuant to and subject to any
of Levitz's health or welfare plans in which you are a participant. "Gross
misconduct" for purposes of this letter shall mean that you have been convicted
of, or have pleaded NOLO CONTENDERE to, a felony, whether or not related to
Levitz's business, or you were guilty of reckless or wilful misconduct in
performance of your duties hereunder. Levitz's right to terminate your
employment shall be in addition to any other rights it may have against you.
(b) If such termination is for any reason other than "gross
misconduct," your death or disability, you shall be entitled to receive
severance benefits from Levitz as set forth below:
(i) If such subsection (b) termination occurs within the first
12 months after the date of this letter, you will continue to receive your then
annual salary for a period equal to 24 months less the number of months elapsed
from the date of this letter to the date of such termination. However, any
amounts paid in excess of 12 months of salary are subject to reduction by the
amount of compensation received, in any form, from a successor employer.
(ii) If such subsection (b) termination occurs more than 12
months from the date of this letter, Levitz will continue to pay your annual
salary for 12 months.
In the event of a subsection (b) termination, you will
also be entitled to receive your guaranteed bonus or a pro-rata earned but
unpaid performance bonus and you will receive all other benefits which may be
due you pursuant to and subject to the provisions of any Levitz health or
welfare plan in which you are a participant.
(c) In the event of a subsection (b) termination you may elect to
receive a lump sum payment, in lieu of continuing periodic payments, equal to
the present value of such periodic payments, using a 5% discount rate.
(d) In the event of a subsection (b) termination you will be deemed
to have an additional three years of age and service for the purposes of the
Company's Supplemental Executive Retirement Plan ("SERP").
7. CHANGE OF CONTROL. Within 30 days after a Change In Control (as
defined in Exhibit A attached hereto) all your stock options will be exercisable
regardless of the date of grant. If within twelve months after a Change In
Control, (i) your employment is terminated by Levitz for other than "gross
misconduct," death or disability, or (ii) you elect to terminate your employment
within 90 days of the occurrence of a Good Cause Event (as defined on Exhibit A
attached hereto), Levitz will (i) continue to pay your annual salary for a
period of 18 months, (ii) pay you an amount equal to the average of your
performance bonus awarded over the last three years or, if you have been
employed by the Company for less than three years, the average of such bonus
awarded during your term of employment with the Company, (iii) continue your
health and welfare benefits as set forth in paragraph 6 above for such 18 month
period, and (iv) you will be deemed to have an additional three years of age and
service for purposes of the SERP.
You may elect to receive a lump sum payment, in lieu of continuing
periodic payments payable hereunder, equal to the present value of such periodic
payments using a 5% discount rate.
Salary benefits paid after a Change in Control are not subject to
mitigation.
2
<PAGE>
8. DEATH AND DISABILITY. If your employment is terminated pursuant to
your death or disability, neither your estate nor you will be entitled to any
severance benefits except as may be payable pursuant to a Levitz health or
welfare benefit plan in which you are a participant. For purposes of this
letter, "disability" means your inability to perform the services to be rendered
by you hereunder due to illness or injury and such inability continues for a
period of six months in any twelve-month period.
9. SERP AND LIFE INSURANCE. You will be a participant in the SERP
according to the terms of such plan as described in Levitz Furniture
Incorporated's Annual Report for the year ended March 31, 1996. While you are
employed by the Company, the Company will arrange for and pay the premiums for a
life insurance policy on your life in an amount not less than $300,000. Such
policy will be owned by you.
10. MISCELLANEOUS. This letter contains the entire understanding of
you and Levitz regarding your employment with Levitz. The terms of this letter
shall be governed by the laws of the State of Florida and may be modified except
by a writing signed by both of us.
If these terms are acceptable to you, please sign below and return one
copy of this letter to me.
Levitz Furniture Corporation
By: /s/ MICHAEL BOZIC
-----------------
Michael Bozic
Chief Executive Officer
Accepted and Agreed to:
/s/ BRIAN LEVY
- --------------
Brian Levy
Date: September 11, 1996
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 9,585
<SECURITIES> 0
<RECEIVABLES> 37,699
<ALLOWANCES> 0
<INVENTORY> 171,417
<CURRENT-ASSETS> 225,380
<PP&E> 216,889
<DEPRECIATION> 0
<TOTAL-ASSETS> 619,984
<CURRENT-LIABILITIES> 283,143
<BONDS> 278,304
0
0
<COMMON> 1
<OTHER-SE> (90,893)
<TOTAL-LIABILITY-AND-EQUITY> 619,984
<SALES> 465,274
<TOTAL-REVENUES> 465,274
<CGS> 256,840
<TOTAL-COSTS> 256,840
<OTHER-EXPENSES> 209,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,641
<INCOME-PRETAX> (27,413)
<INCOME-TAX> 9,659
<INCOME-CONTINUING> (17,754)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,002)
<CHANGES> 0
<NET-INCOME> (19,756)
<EPS-PRIMARY> (19,756)
<EPS-DILUTED> 0
</TABLE>
