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 JUNE 30, 1997
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 33-61534
LEVITZ FURNITURE CORPORATION
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(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
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(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 July 31, 1997, there were 1,000 shares of Common Stock, par value $0.40,
outstanding.
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THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THESE FORWARD LOOKING STATEMENTS
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF
SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE
COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (2) GENERAL ECONOMIC CONDITIONS ARE
LESS FAVORABLE THAN EXPECTED; (3) CHANGES IN THE FINANCIAL MARKETS AFFECTING THE
COMPANY'S FINANCIAL STRUCTURE AND THE COMPANY'S COST OF CAPITAL AND BORROWED
MONEY; AND (4) THE UNCERTAINTIES INHERENT IN THE COMPANY'S OPERATIONS. THE
COMPANY HAS NO DUTY UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
TO UPDATE THE FORWARD LOOKING STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q
AND THE COMPANY DOES NOT INTEND TO PROVIDE SUCH UPDATES.
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LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets..................................... 3
Consolidated Condensed Statements of Operations........................... 4
Consolidated Condensed Statements of Cash Flows........................... 5
Notes to Consolidated Condensed Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of Operations.................................................. 9
Liquidity and Capital Resources........................................... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 13
Signatures .................................................................... 14
Exhibit Index.................................................................... 15
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30, MARCH 31,
1997 1997
------------ -----------
(Unaudited)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 10,051 $ 9,261
Receivables 31,059 37,358
Inventories 150,663 169,488
Deposits and prepaid expenses 4,579 3,514
Deferred income taxes - 933
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Total current assets 196,352 220,560
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PROPERTY AND EQUIPMENT, net 211,782 214,626
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PROPERTY UNDER CAPITAL LEASES, net 116,825 119,077
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OTHER ASSETS:
Receivable under account purchase agreement 381,000 327,000
Intangible leasehold interests 15,294 15,613
Deferred financial fees 11,245 11,975
Goodwill 18,048 18,177
Other 4,917 4,947
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430,504 377,712
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$ 955,463 $ 931,975
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LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Cash overdrafts $ 18,403 $ 19,524
Current portion of long-term debt 5,202 11,193
Current portion of obligations under capital leases 3,228 3,398
Accounts payable, trade 55,550 73,044
Accrued expenses and other liabilities 88,317 88,897
Payable to parent 13,239 10,304
Deferred income taxes 1,546 -
Revolver borrowings 83,390 75,220
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Total current liabilities 268,875 281,580
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LONG-TERM DEBT, net of current portion 275,126 273,976
------------ -----------
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 73,668 74,466
------------ -----------
OBLIGATION UNDER ACCOUNT PURCHASE AGREEMENT 381,000 327,000
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OTHER NONCURRENT LIABILITIES 24,241 24,424
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DEFERRED INCOME TAXES 40,176 48,101
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT
Common stock, at par value 1 1
Capital in excess of par 58,453 58,453
Retained earnings (deficit) (165,440) (155,389)
Minimum pension liability (637) (637)
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Total stockholder's deficit (107,623) (97,572)
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$ 955,463 $ 931,975
============ ===========
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
3
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LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
1997 1996
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Net sales $ 211,367 $ 228,128
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Costs and expenses:
Cost of sales 115,767 126,513
Selling, general and administrative expenses 86,985 90,310
Unusual operating expenses (Note 6) 3,817 -
Store closing charge (Note 6) - 8,295
Depreciation and amortization 6,513 6,899
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213,082 232,017
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Operating loss (1,715) (3,889)
Interest expense, net 13,794 12,795
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Loss before income taxes (15,509) (16,684)
Income tax benefit 5,465 5,879
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Loss before extraordinary items (10,044) (10,805)
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Extraordinary item, net of tax benefit of
$1,090 (Note 6) - (2,002)
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Net loss $ (10,044) $ (12,807)
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Earnings (loss) per common share (Note 5 and 6):
Loss before extraordinary item $ 10,044 $ (10,805)
Extraordinary item - $ (2,002)
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Net loss per common share $ 10,044 $ (12,807)
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Weighted average number of common shares outstanding 1,000 1,000
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</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
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LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,044) $ (12,807)
----------- -----------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 3,822 3,970
Amortization 2,691 2,929
Amortization of deferred financing fees 730 392
Other 606 144
Benefit for deferred taxes (5,466) (5,655)
Extraordinary loss related to early redemption of
debt, before tax benefit - 3,092
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables 6,299 (5,079)
Inventories 18,825 (20,845)
Deposits and prepaid expenses (1,065) (1,110)
Other, net (8) (3)
Increase (decrease) in:
Accounts payable, trade (17,494) 18,486
Accrued expenses and other liabilities (927) 3,304
Payable to parent 2,947 5,835
Other noncurrent liabilities (247) 5,281
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Total adjustments 10,713 10,741
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 669 (2,066)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,349) (967)
Proceeds from sale of property and equipment and
other assets 2,327 152
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NET CASH USED IN INVESTING ACTIVITIES (1,022) (815)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Senior Secured Facilities 250,035 103,400
Repayments under Senior Secured Facilities (240,508) (105,011)
Principal payments on long-term debt (6,301) (324)
Principal payments under capital lease obligations (968) (1,260)
Increase (decrease) in cash overdrafts (1,121) 2,967
Payment of deferred financing fees - (1,019)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,137 (1,247)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 784 (4,128)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,267 12,755
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,051 $ 8,627
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</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
5
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LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION:
Levitz Furniture Corporation (which together with its subsidiaries are
collectively referred to as "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 June 30, 1997, the results of operations and cash flows
for the periods then ended. The results of operations for the period
ended June 30, 1996, are not necessarily indicative of the results to
be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in LFI's audited
financial statements for the year ended March 31, 1997, which is
included in its Form 10K filed in July 1997.
2. CONSOLIDATED STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information (dollars in
thousands):
THREE MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
----------- ----------
Interest paid, net $ 13,179 $ 10,979
=========== ==========
Income tax refunds, net $ (2,470) $ (6,991)
=========== ==========
In June 1997, Levitz exercised its option to issue additional term
notes under the Senior Secured Facilities as defined below, of
approximately $1.4 million in lieu of paying interest in cash.
3. LONG-TERM DEBT AND REVOLVER BORROWINGS:
Levitz has a senior secured facilities agreement providing for up to
$190.0 million of availability (collectively, the "Senior Secured
Facilities"). The Senior Secured Facilities are comprised of $115.0
million of revolving notes, $35.0 million of term notes and $40.0
million of other notes.
The Senior Secured Facilities are secured by substantially all of the
assets of Levitz and its subsidiaries and a perfected pledge of stock
of all Levitz's subsidiaries. LFI and Levitz are subject to certain
covenants and restrictions and cross-default provisions as described in
the Senior Secured Facilities or debt indentures of Levitz, 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
6
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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.
The maximum borrowings, excluding the term notes, under the Senior
Secured Facilities are calculated based upon inventory and receivable
levels and a fixed asset sublimit. The maximum borrowings were $155.0
million which are permanently reduced each year effective July 1997 by
an amount equal to the lesser of $5.0 million or 100% of excess cash
flow, and the amount of additional term notes issued to pay interest.
On June 30, 1997, Levitz exercised its option to issue additional term
notes of approximately $1.4 million in lieu of paying interest in cash.
Availability under the Senior Secured Facilities at June 30, 1997 was
$4.0 million. During 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 Levitz's previous
credit agreement. The after-tax loss was $2.0 million or $2,002 per
share.
In order to comply with the Emerging Issues Task Force EITF 95-22
regarding classification of certain debt instruments, $83.4 million of
the revolving notes are classified as Revolver Borrowings in current
liabilities.
On December 6, 1996, June 13, 1997 and June 30, 1997, Levitz obtained
amendments under the Senior Secured Facilities to lower the interest
coverage ratio requirements thereunder through July 1, 2001 allowing
Levitz to remain in compliance with the Senior Secured Facilities
covenants. The June 30, 1997 amendment, among other things, further
decreased the interest coverage ratio for the quarter ended June 30,
1997. Levitz obtained an amendment to the Senior Secured Facilities on
July 25, 1997 which provided $9.0 million of funding payable on the
earlier of October 31, 1997 or upon the sale of Levitz's North Avenue,
Chicago, Illinois property. The sale is anticipated to close in the
third quarter of Fiscal 1998. Management has a reasonable basis to
believe Levitz will be in compliance with the Senior Secured Facilities
covenants as amended, which assumes achieving improved comparable store
sales for the next twelve months. Management has also been seeking
equity investments, the sale of assets, reorganizing its marketing
function, refining its operating structure and negotiating a new
agreement with GECC, as discussed in Note 4, so that Levitz can meet
its obligations and sustain operations. There can be no assurance,
however, that Management's efforts will ultimately be successful or
achieve compliance with the covenants.
Levitz has incurred $48.7 million of losses during the past two fiscal
years, while cash provided by operating activities has decreased from
$34.0 million during the fiscal year ended March 31, 1995 to $1.2
million during the fiscal year ended March 31, 1997. Levitz experienced
a comparable store sale decline of 6.4% and a net loss of $10.0 million
in the quarter ended June 30, 1997. These factors may seriously
jeopardize Levitz's ability to continue as a going concern.
Levitz's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flows to meet its obligations on a
timely basis, to comply with the terms and covenants of its financing
agreements, to obtain equity investments, additional financing or
increased availability, as may be required and ultimately to achieve
increased sales and operating profit. No assurances can be given that
Levitz will be able to meet these objectives in the short-term.
4. TRANSFER AND SERVICING OF FINANCIAL ASSETS:
Levitz and General Electric Capital Corporation (GECC) are parties to
an Account Purchase and Credit Card Agreement (the "GECC Agreement"),
whereby GECC is required to purchase Levitz's customer credit
obligations, subject to certain restrictions, without recourse up to a
maximum investment of $900.0 million. The termination provision
includes a payment of a $3.5 million termination fee. At June 30, 1997
GECC had $748.5 million of customer credit obligations outstanding.
Pursuant to generally accepted accounting principles, prior to January
1, 1997, these transactions were recorded as a sale in accordance with
SFAS No. 77.
7
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On August 21, 1996 Levitz gave GECC notice of Levitz's intent to
renegotiate the GECC Agreement. On July 8, 1997 Levitz and GECC entered
into an amendment to the GECC Agreement which extended the
renegotiation period to August 16, 1997, extended the GECC Agreement
until October 1999, removed Levitz's obligations to repurchase at
GECC's direction those receivables transferred prior to January 1, 1997
and extended until October 1999 GECC's ability to direct Levitz to
repurchase those receivables transferred subsequent to December 31,
1996 at a price equal to their outstanding balance less a loss reserve.
Effective January 1, 1997, Levitz was required to account for the
transactions under the GECC Agreement in accordance with SFAS No. 125.
SFAS No. 125 requires the transferred assets to be "beyond the reach of
the transferor and its creditors, even in bankruptcy or other
receivership." Due to this requirement and not finalizing a new
agreement with GECC which met the sale criteria of SFAS No. 125, Levitz
was now required to account for these transactions as a secured
borrowing with a pledge of collateral rather than as a sale for
financial reporting purposes. Consequently, Levitz recorded $381.0
million as a Receivable Under Account Purchase Agreement and an
offsetting Obligation Under Account Purchase Agreement in its June 30,
1997 financial statements.
Levitz is exposed to market risk under the terms of the GECC Agreement.
Levitz may pay a fee or may receive income, based upon the relationship
among the interest earned on the portfolio, the amount of the servicing
fee, the prime rate, promotional discount fees and to a limited extent,
credit losses. Levitz recorded income of $1.9 million and $3.8 million,
respectively for the quarters ended June 30, 1997 and 1996. These
amounts are included in selling, general and administrative expenses.
See Note 6.
5. EARNINGS PER COMMON SHARE:
Earnings per common share are based on the weighted average number of
common shares outstanding during each year of 1,000 shares.
6. UNUSUAL OPERATING EXPENSES AND STORE CLOSING CHARGE:
In July 1997, the former President-Merchandising/Marketing resigned.
Levitz accrued a charge for future payroll and employee benefit costs
of $1.3 million in connection with the Officer's employment agreement.
Also, Levitz incurred a $2.5 million reduction for the partial
write-off of future service revenue receivable under the GECC
Agreement. The write-off occurred since Levitz is required to account
for the transfer of assets under the GECC Agreement as a secured
borrowing with a pledge of collateral rather than as a sale for
financial reporting purposes.
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.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
COMPARISON 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
JUNE 30,
--------------------------
1997 1996
-------- --------
Net sales 100.0 % 100.0 %
Cost of sales 54.8 55.5
-------- --------
Gross profit 45.2 44.5
Selling, general and administrative expenses 41.1 39.6
Unusual operating expenses 1.8 -
Store closing charge - 3.6
Depreciation and amortization 3.1 3.0
-------- --------
Operating loss (0.8) (1.7)
Interest expense 6.5 5.6
-------- --------
Loss before income taxes (7.3) (7.3)
Income tax benefit 2.6 2.6
-------- --------
Loss before extraordinary items (4.7) (4.7)
Extraordinary items, net of tax - (0.9)
-------- --------
Net loss (4.7)% (5.6)%
-------- --------
Comparable store sales decrease (6.4)% (5.7)%
-------- --------
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net sales of $211.4 million for the period ended June 30, 1997 decreased $16.7
million or 7.3% from net sales of $228.1 million in the same period for the
prior year. Sales on a comparable store basis decreased 6.4%. Comparable store
sales for April and May 1997 decreased 0.1% from the comparable period for the
prior year. June 1997 comparable store sales declined 17.3% for the same month
of the prior year. The decrease in comparable store sales for June 1997 was
primarily due to the termination of an advertising agency, the decrease in
inventory levels during the quarter and a change in date of credit promotions in
June 1997. Decreased net sales and comparable store sales have reduced operating
performance significantly during the past two years.
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Gross profit as a percentage of net sales increased to 45.2% from 44.5% for the
periods ended June 30, 1997 and 1996. The increase in gross profit as a
percentage of net sales is attributable to a change in merchandise mix and
pricing policy.
Selling, general and administrative (SG&A) expenses of $87.0 million for the
period ended June 30, 1997 decreased $3.3 million from SG&A expenses of $90.3
million as compared to the same period for the prior year. As a percentage of
net sales, SG&A expenses increased to 41.1% from 39.6% for the periods ended
June 30, 1997 and 1996, respectively. The percent of net sales increase is due
to the decline in net sales.
During the quarter ended June 30, 1997, Levitz incurred unusual operating
expenses for one officer's termination in the amount of $1.3 million and $2.5
million on the partial write-off of a receivable due to the loss of sale
accounting treatment under the GECC Agreement.
During the quarter ended June 30, 1996, Management developed a plan to close
five satellite stores effective October 31, 1996. The store closing charge of
$8.3 million, pre-tax, 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.
Depreciation and amortization expenses decreased to $6.5 million for the period
ended June 30, 1997 from $6.9 million for the comparable period of the prior
year.
Operating loss was $1.7 million for the period ended June 30, 1997 as compared
to an operating loss of $3.9 million for the same period of the prior year.
Interest expense for the period ended June 30, 1997 increased to $13.8 million
from $12.8 million for the same period of the prior year due to increased
average borrowings.
As a result of the aforementioned factors, loss before income taxes for the
period ended June 30, 1997 amounted to $15.5 million or 7.3% of net sales as
compared to loss of $16.7 million or 7.3% of net sales for the same period of
the prior year.
The income tax benefit was $5.5 million for the period ended June 30, 1997 as
compared to an income tax benefit of $5.9 million for the same period of the
prior year. The effective tax rate was 35.2% for the three month periods ended
June 30, 1997 and 1996, respectively.
Loss before extraordinary items for the period ended June 30, 1997 amounted to
$10.0 million or 4.7% of net sales as compared to a loss of $10.8 million or
4.7% of net sales for the same period of the prior year. The results for the
three month period ended June 30, 1997 are not necessarily indicative of the
results that may be achieved for the full fiscal year.
An extraordinary loss, net of tax benefits of $2.0 million for the period ended
June 30, 1996 was due to the write-off of deferred financing fees related to the
termination of the previous bank credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Levitz's primary sources of liquidity are cash flow from operations (including
the proceeds from the transfer of customer credit obligations to GECC) and
borrowings under the Senior Secured Facilities. During the quarter ended June
30, 1997, Levitz generated approximately $0.7 million of net cash flow from
operations as compared to $2.0 million used in operating activities in the
quarter ended June 30, 1996. Such amounts primarily represent net loss plus
depreciation and amortization expenses of approximately $6.5 million and $6.9
million for the periods ended June 30 1997 and 1996, respectively.
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Working capital changes impact cash flow from operations. Such changes,
excluding income taxes, resulted in an increase in funds available of
approximately $5.6 million for the period ended June 30, 1997 as compared to a
decrease in funds available of approximately $5.2 million for the comparable
period ended June 30, 1996. The increase in working capital for the period ended
June 30, 1997 was primarily due to the decrease in receivables of $6.3 million
and the decrease in inventory of $18.8 million as offset by the decrease in
trade payables of $17.5 million.
Net cash provided by financing activities amounted to $1.1 million in the period
ended June 30, 1997 and includes increased borrowings under the Senior Secured
Facilities of $9.5 million less principal payments under long-term obligations
of $7.3 million.
Levitz's total capital expenditures (other than for capitalized leases) were
approximately $3.3 million during the period ended June 30, 1997. Capital
expenditures were for existing store improvements and equipment. 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 during the
fiscal year ending March 31, 1998.
LONG-TERM DEBT
In March 1996, LFI and Levitz consummated an exchange offer pursuant to which
Levitz issued $91.6 million principal amount of 13.375% Senior Notes due October
15, 1998 and LFI issued warrants to purchase 283,972 shares of LFI Common Stock
at an exercise price equal to $3.89 per share in exchange for $91.6 million
principal amount of 12.375% Senior Notes due April 15, 1997. The untendered
Subordinated Notes, in the aggregate principal amount of $6.0 million, were paid
in full in April 1997.
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 comprised of $115.0 million of revolving notes, $35.0 million of
term notes and $40.0 million of other notes. The Senior Secured Facilities
expire on July 1, 2001. The Senior Secured Facilities require LFI to achieve an
interest coverage ratio quarterly. It also contains limitations on capital
expenditures, additional indebtedness, incurrence of liens, sale of assets,
payment of dividends, investments and other restrictions.
Loans made under the Senior Secured Facilities 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 term notes bear
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 term
notes, having a principal amount equal to the amount of interest accrued and
maturing on July 1, 2001. To the extent additional term notes are issued for
interest the amount available under the revolving notes will be permanently
decreased. On June 30, 1997, Levitz exercised its option under the term notes to
pay interest due at that date of $1.4 million by issuing additional term notes.
As of June 30, 1997, Levitz had an aggregate of $363.7 million of total debt
outstanding (excluding its Obligation Under Account Purchase Agreement) and
$76.9 million of capitalized lease obligations.
The GECC Agreement provides for the purchase of Levitz's customer credit
obligations by GECC up to a maximum of $900.0 million, of which GECC had
outstanding $748.5 million at June 30, 1997. Levitz and GECC are in the process
of renegotiating this agreement for the purpose of extending the termination
date, changing the fee arrangement and to meet the requirements for sale
accounting under SFAS No. 125. The GECC Agreement as amended on July 8, 1997
currently expires in October, 1999. Upon the expiration date Levitz will be
required to repurchase all of the outstanding credit obligations purchased by
GECC after December 31, 1996 at a price equal to their outstanding balance less
a loss reserve. Levitz is exposed to market risk under the terms of the GECC
Agreement, and pays a fee or receives cash payments, based upon the relationship
among the interest earned on the portfolio, the amount of the servicing fee, the
prime rate, promotional advertising fees and to a limited extent, credit losses.
As a result of the timing of payments under its promotional advertising program,
LFI anticipates a reduction in cash flow resulting from
11
<PAGE>
the GECC Agreement during Fiscal 1998 in the amount of approximately $23.0
million. A one-percent change in the prime rate (when prime is greater than 7%)
would increase or decrease the income from GECC by approximately $6.0 to $7.5
million per year.
GOING CONCERN
On December 6, 1996, June 13, 1997 and June 30, 1997, Levitz obtained amendments
under the Senior Secured Facilities to lower the interest coverage ratio
requirements thereunder through July 1, 2001 allowing Levitz to remain in
compliance with the Senior Secured Facilities covenants. The June 30, 1997
amendment, among other things, further decreased the interest coverage ratio for
the quarter ended June 30, 1997. Levitz obtained an amendment to the Senior
Secured Facilities on July 25, 1997 which provided $9.0 million of funding
payable on the earlier of October 31, 1997 or upon the sale of Levitz's North
Avenue, Chicago, Illinois property. The sale is anticipated to close in the
third quarter of Fiscal 1998. Management has a reasonable basis to believe
Levitz will be in compliance with the Senior Secured Facilities covenants as
amended in Fiscal 1998, which assumes achieving improved comparable store sales
for the next twelve months. Management has also been seeking equity investments,
the sale of assets, reorganizing its marketing function, refining its operating
structure and negotiating a new agreement with GECC so that Levitz can meet its
obligations and sustain operations. There can be no assurance, however, that
Management's efforts will ultimately be successful or achieve compliance with
the covenants.
Levitz has incurred $48.7 million of losses during the past two fiscal years,
while cash provided by operating activities has decreased from $34.0 million
during the fiscal year ended March 31, 1995 to $1.2 million during the fiscal
year ended March 31, 1997. In addition, availability under the Senior Secured
Facilities was $4.0 million at June 30, 1997. Levitz experienced a comparable
store sale decline of 6.4% and a net loss of $10.0 million in the quarter that
ended June 30, 1997. These factors may seriously jeopardize Levitz's ability to
continue as a going concern.
Levitz's ability to continue as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis, to
comply with the terms and covenants of its financing agreements, to obtain
equity investments, additional financing or increased availability, as may be
required and ultimately to achieve increased sales and operating profit. No
assurances can be given that Levitz will be able to meet these objectives in the
short-term.
12
<PAGE>
PART II OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.44: Amendment No. 5 dated as of July 25,
1997 to the Credit Agreements among Levitz Furniture
Corporation, et al. and BT Commercial Corporation, as
Agent.
Exhibit 27: Financial Data Schedule
(b) Report on Form 8-K: None.
13
<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: August 11, 1997 /s/ PATRICK J. NOLAN
-------------------------------
Patrick J. Nolan
Senior Vice President/Chief
Financial Officer and Treasurer
14
<PAGE>
EXHIBIT INDEX
EXHIBITS TO FORM 10-Q
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.44 Amendment No. 5 dated as of July 25, 1997 to the Credit
Agreements among Levitz Furniture Corporation, et al. and BT
Commercial Corporation, as agent.
27 Financial Data Schedule.
15
EXHIBIT 10.44
AMENDMENT NO. 5
TO
CREDIT AGREEMENTS
THIS AMENDMENT NO. 5 TO CREDIT AGREEMENTS ("Amendment") is dated as of
July 25, 1997, by and among LEVITZ FURNITURE CORPORATION, a Florida corporation
("LFC"), LEVITZ FURNITURE COMPANY OF THE MIDWEST, INC., a Colorado corporation
("LFC Midwest"), LEVITZ FURNITURE COMPANY OF THE PACIFIC, INC., a California
corporation ("LFC Pacific"), LEVITZ FURNITURE COMPANY OF WASHINGTON, INC., a
Washington corporation ("LFC Washington") and JOHN M. SMYTH COMPANY, an Illinois
corporation ("Smyth") (LFC, LFC Midwest, LFC Pacific, LFC Washington and Smyth
sometimes hereinafter referred to individually as a "Borrower" and collectively
as the "Borrowers"); LFC, acting in its capacity as borrowing agent for the
Borrowers (LFC, in such capacity, the "LFC Funds Administrator"); BT COMMERCIAL
CORPORATION, a Delaware corporation (in its individual capacity, hereinafter
referred to as "BTCC"), acting in its capacity as agent (in such capacity,
hereinafter referred to as the "Tranche A Agent") under the "Tranche A Credit
Agreement" (as hereinafter defined); BTCC, acting in its capacity as agent (in
such capacity, hereinafter referred to as the "Tranche B Agent") under the
"Tranche B Credit Agreement" (as hereinafter defined); and each of the Lenders
under and as defined in the Tranche A Credit Agreement (hereinafter referred to
as the "Tranche A Lenders") and the "Tranche B Lenders" (as defined in the
Tranche A Credit Agreement). Capitalized terms used herein but not otherwise
defined herein shall have the respective meanings assigned to such terms in the
Tranche A Credit Agreement.
WITNESSETH:
WHEREAS, Borrowers, the Tranche A Agent and the Tranche A Lenders have
entered into that certain Credit Agreement dated as of July 1, 1996, as amended
(the "Tranche A Credit Agreement"), pursuant to which the Tranche A Lenders have
agreed to make certain loans and other financial accommodations to or for the
account of Borrowers;
WHEREAS, Borrowers, the Tranche B Agent and the Tranche B Lenders have
entered into that certain Credit Agreement dated as of July 1, 1996, as amended
(the "Tranche B Credit Agreement"), pursuant to which the Tranche B Lenders have
agreed to make certain loans and other financial accommodations to or for the
account of Borrowers;
WHEREAS, the Tranche A Agent and the Tranche B Agent (sometimes
hereinafter referred to collectively as the "Agents") and the Tranche A Lenders
and the Tranche B Lenders (sometimes hereinafter referred to collectively as the
"Lenders") have agreed to amend certain provisions of the respective Credit
Agreements on the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
respective parties hereto agree as follows:
1. AMENDMENT TO CREDIT AGREEMENTS. Effective as of the date hereof,
upon satisfaction of the conditions precedent set forth in Section 3 below, and
in reliance upon the representations and warranties of Borrowers set forth
herein, each of the Credit Agreements is hereby amended as follows:
1.1 The definition of the term "Borrowing Base" set forth in
Section 1.1 of each of the Credit Agreements is hereby amended by inserting the
following language therein immediately following the semi-colon appearing at the
end of clause (c) thereof:
1
<PAGE>
plus
(d) 9,000,000, during the period commencing on July 25,
1997 and ending on the earlier to occur of (x)
October 31, 1997 and (y) the date on which the Net
Cash Disposition Proceeds of the sale by Smyth of the
Unrestricted Real Property located at 825 West North
Avenue, Chicago, Illinois are received by or for the
account of the LFC Funds Administrator or any
Borrower;
3. CONDITIONS PRECEDENT. This Amendment shall become effective as of
the date hereof, upon satisfaction of each of the following conditions:
(a) Agents shall have received a copy of this Amendment, duly
executed by the LFC Funds Administrator, each of the Borrowers and the
Majority Lenders; and
(b) receipt by the Agent in immediately available funds for
the ratable benefit of the Lenders of an amount equal to $250,000.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS.
4.1 Each of the Borrowers hereby represents and warrants to
each of the Agents and Lenders that, after giving effect to this Amendment:
(a) All representations and warranties contained in each of
the Credit Agreements and the other Transaction Documents are true and
correct in all material respects on and as of the date of this
Amendment, in each case as if then made, other than representations and
warranties that expressly relate solely to an earlier date (in which
case such representations and warranties were true and accurate on and
as of such earlier date);
(b) No Default or Event of Default has occurred which has not
been waived (or, in the case of an Event of Default, cured) pursuant to
the respective terms of the Credit Agreements;
(c) this Amendment, and each of the Credit Agreements as
amended hereby, constitute legal, valid and binding obligations of the
LFC Funds Administrator and each of the Borrowers and are enforceable
against such Persons in accordance with their respective terms; and
(d) the execution and delivery by the LFC Funds Administrator
and each of the Borrowers of this Amendment does not require the
consent or approval of any Person, except such consents and approvals
as shall have been obtained.
a. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENTS AND THE OTHER
TRANSACTION DOCUMENTS.
4.1 Upon the effectiveness of this Amendment, each reference
in each of the Credit Agreements to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in each of the other
Transaction Documents to the "Credit Agreement" the "Tranche A Credit Agreement"
and/or the "Tranche B Credit Agreement" shall in each case mean and be a
reference to the respective Credit Agreements as amended hereby.
4.2 Except as expressly set forth herein, (i) the execution
and delivery of this Amendment shall in no way affect any of the respective
rights, powers or remedies of either of the Agents or any of the Lenders with
respect to any Default or Event of Default nor constitute a waiver of any
provision of either of the Credit Agreements or any of the other Transaction
Documents and (ii) all of the respective terms and conditions of the Credit
2
<PAGE>
Agreement, the other Transaction Documents and all other documents, instruments,
amendments and agreements executed and/or delivered by the Borrowers and/or the
LFC Funds Administrator pursuant thereto or in connection therewith shall remain
in full force and effect and are hereby ratified and confirmed in all respects.
The execution and delivery of this Amendment by the Agents and each of the
Lenders shall in no way obligate the Agents or any of the Lenders, at any time
hereafter, to consent to any other amendment or modification of any term or
provision of the Credit Agreements or any of the other Transaction Documents,
whether of a similar or different nature.
5. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS AND
DECISIONS OF THE STATE OF NEW YORK.
6. HEADINGS. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.
[SIGNATURE PAGES FOLLOW]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the date first set forth above.
LFC FUNDS ADMINISTRATOR:
LEVITZ FURNITURE CORPORATION, a Florida
corporation, in its capacity as LFC
Funds Administrator
By: /s/ PATRICK J. NOLAN
--------------------------------------
Name: PATRICK J. NOLAN
--------------------------------------
Title: SENIOR VICE PRESIDENT
--------------------------------------
4
<PAGE>
BORROWERS:
LEVITZ FURNITURE CORPORATION, a Florida
corporation
By: /s/ PATRICK J. NOLAN
--------------------------------------
Name: Patrick J. Nolan
Title: Senior Vice President
LEVITZ FURNITURE COMPANY OF THE MIDWEST,
INC., a Colorado corporation
By: /s/ PATRICK J. NOLAN
--------------------------------------
Name: Patrick J. Nolan
Title: Senior Vice President
LEVITZ FURNITURE COMPANY OF THE PACIFIC,
INC., a California corporation
By: /s/ PATRICK J. NOLAN
--------------------------------------
Name: Patrick J. Nolan
Title: Senior Vice President
LEVITZ FURNITURE COMPANY OF WASHINGTON,
INC., a Washington corporation
By: /s/ PATRICK J. NOLAN
--------------------------------------
Name: Patrick J. Nolan
Title: Senior Vice President
JOHN M. SMYTH COMPANY, an Illinois
corporation
By: /s/ PATRICK J. NOLAN
--------------------------------------
Name: Patrick J. Nolan
Title: Senior Vice President
5
<PAGE>
AGENTS:
BT COMMERCIAL CORPORATION, in its respective
capacities as Tranche A Agent and Tranche B
Agent
By: /s/ WAYNE D. HILLOCK
--------------------------------------
Wayne D. Hillock
Senior Vice President
6
<PAGE>
LENDERS:
BT COMMERCIAL CORPORATION
By: /s/ WAYNE D. HILLOCK
--------------------------------------
Wayne D. Hillock
Senior Vice President
SANWA BUSINESS CREDIT CORPORATION
By:
--------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
LASALLE NATIONAL BANK
By:
--------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
--------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
HELLER FINANCIAL, INC.
By: /s/ DWAYNE L. COKER
--------------------------------------
Name: DWAYNE COKER
-------------------------------------
Title: VICE PRESIDENT
-------------------------------------
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
--------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
7
<PAGE>
FINOVA CAPITAL CORPORATION
By: /s/ PETER MARTINEZ
--------------------------------------
Name: PETER MARTINEZ
--------------------------------------
Title: VICE PRESIDENT
--------------------------------------
SILVER OAK CAPITAL L.L.C.
By: /s/ FRED BERGER
--------------------------------------
Name: FRED BERGER
--------------------------------------
Title: ATTORNEY IN FACT
--------------------------------------
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,051
<SECURITIES> 0
<RECEIVABLES> 31,059
<ALLOWANCES> 0
<INVENTORY> 150,663
<CURRENT-ASSETS> 196,352
<PP&E> 211,782
<DEPRECIATION> 0
<TOTAL-ASSETS> 955,463
<CURRENT-LIABILITIES> 268,875
<BONDS> 275,126
0
0
<COMMON> 1
<OTHER-SE> (107,624)
<TOTAL-LIABILITY-AND-EQUITY> 955,463
<SALES> 211,367
<TOTAL-REVENUES> 211,367
<CGS> 115,767
<TOTAL-COSTS> 115,767
<OTHER-EXPENSES> 97,315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,794
<INCOME-PRETAX> (15,509)
<INCOME-TAX> (5,465)
<INCOME-CONTINUING> (10,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,044)
<EPS-PRIMARY> (10,044)
<EPS-DILUTED> 0
</TABLE>
