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, 1998
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
(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.)
7887 NORTH FEDERAL HIGHWAY, BOCA RATON, FL 33487-1613
(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 July 31, 1998, there were 1,000 shares of Common Stock, par value $0.40,
outstanding.
<PAGE>
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) BANKRUPTCY OR DISTRICT COURT
ACTIONS OR PROCEEDINGS RELATED TO THE BANKRUPTCY OF LFI, LEVITZ AND ITS
SUBSIDIARIES; (2) COMPETITIVE PRESSURE IN LEVITZ's INDUSTRY; (3) GENERAL
ECONOMIC CONDITIONS; (4) CHANGES IN THE FINANCIAL MARKETS AFFECTING LEVITZ's
FINANCIAL STRUCTURE AND LEVITZ's COST OF CAPITAL AND BORROWED MONEY; (5)
INVENTORY RISKS DUE TO CHANGES IN MARKET DEMAND OR LEVITZ'S BUSINESS STRATEGIES;
(6) CHANGES IN EFFECTIVE TAX RATES; AND (7) UNCERTAINTIES INHERENT IN LEVITZ'S
OPERATIONS. LEVITZ 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.
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
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....................................... 12
Liquidity and Capital Resources................................ 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 17
Signatures............................................................ 18
Exhibit Index......................................................... 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30, MARCH 31,
1998 1998
(UNAUDITED)
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,932 $ 5,339
Receivables 22,729 24,118
Inventories 137,113 142,618
Deposits and prepaid expenses 4,471 3,442
Deferred income taxes 1,531 3,418
----------- ----------
Total current assets 170,776 178,935
----------- ----------
PROPERTY AND EQUIPMENT, net 141,065 143,249
----------- ----------
PROPERTY UNDER CAPITAL LEASES, net 90,978 92,721
----------- ----------
OTHER ASSETS:
Receivable under account purchase agreement 530,653 554,322
Intangible leasehold interests 13,632 14,151
Deferred financing fees 1,508 2,061
Property held for disposal 14,548 17,766
Other 3,505 3,496
----------- ----------
563,846 591,796
----------- ----------
$ 966,665 $1,006,701
=========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Cash overdrafts $ 10,935 $ 16,395
Current portion of long-term debt 1,524 1,333
Accounts payable, trade 22,476 30,511
Accrued expenses and other liabilities 74,715 55,847
Payable to parent 13,737 13,633
DIP Facility 167,671 148,381
----------- ----------
Total current liabilities 291,058 266,100
----------- ----------
LONG-TERM DEBT, net of current portion 5,481 5,702
----------- ----------
OBLIGATION UNDER ACCOUNT PURCHASE AGREEMENT 530,653 554,322
----------- ----------
OTHER NONCURRENT LIABILITIES 683 683
----------- ----------
DEFERRED INCOME TAXES 6,921 8,825
----------- ----------
LIABILITIES SUBJECT TO COMPROMISE 359,743 360,976
----------- ----------
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) (286,328) (248,361)
----------- ----------
Total stockholder's deficit (227,874) (189,907)
----------- ----------
$ 966,665 $1,006,701
=========== ==========
</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 OPERATIONS
(Dollars in thousands except share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Net sales $176,481 $211,367
-------- --------
Costs and expenses:
Cost of sales 97,182 115,767
Selling, general and administrative expenses 81,826 86,985
Unusual operating expenses - 3,817
Depreciation and amortization 5,192 6,513
Interest expense, net 7,501 13,794
-------- --------
191,701 226,876
-------- --------
Loss before reorganization items and income taxes (15,220) (15,509)
-------- --------
Reorganization items:
Loss on store closings 21,135 -
Professional fees 1,612 -
-------- --------
22,747 -
-------- --------
Loss before income taxes (37,967) (15,509)
Income tax benefit - 5,465
-------- --------
Net loss $(37,967) $(10,044)
======== ========
Loss per common share $(37,967) $(10,044)
======== ========
Weighted average number of common shares outstanding 1,000 1,000
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(37,967) $(10,044)
-------- --------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 3,162 3,822
Amortization 2,030 2,691
Amortization of deferred financing fees 553 730
Pension expense 101 486
Other 106 104
Loss on disposal of property and equipment 2 16
Reorganization items, non-cash 16,133 -
Deferred tax benefit - (5,466)
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables 2,073 6,299
Inventories 5,505 18,825
Deposits and prepaid expenses (1,029) (1,065)
Other, net 14 (8)
Increase (decrease) in:
Accounts payable, trade (9,281) (17,494)
Accrued expenses and other liabilities 2,326 (927)
Payable to parent (34) 2,947
Other noncurrent liabilities (221) (247)
-------- --------
Total adjustments 21,440 10,713
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (16,527) 669
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,365) (3,349)
Proceeds from sale of property and equipment and
other assets 4,334 2,327
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,969 (1,022)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 220,933 250,035
Repayments under credit facilities (201,748) (240,508)
Principal payments on long-term debt (31) (6,301)
Principal payments under capital lease obligations (664) (968)
Decrease in cash overdrafts (5,460) (1,121)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,030 1,137
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (407) 784
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,339 9,267
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,932 $ 10,051
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
5
<PAGE>
LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. CHAPTER 11 PROCEEDINGS AND BASIS OF PRESENTATION:
On September 5, 1997 (the "Petition Date"), Levitz Furniture
Incorporated, a Delaware corporation ("LFI"), and 11 of its
subsidiaries (collectively, the "Debtors"), including, Levitz Furniture
Corporation, a Florida corporation and wholly-owned subsidiary of LFI
("Levitz" or the "Company"), filed voluntary petitions for relief under
Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code")
with the United States Bankruptcy Court for the District of Delaware,
Wilmington, Delaware. The bankruptcy cases of LFI and Levitz and their
affiliates are being jointly administered, for procedural purposes
only, before the United States District Court for the District of
Delaware (the "Court") under Case No. 97-1842(JJF). Pursuant to
Sections 1107 and 1108 of the Bankruptcy Code, Levitz, as debtor and
debtor-in-possession, has continued to manage and operate its assets
and businesses pending the confirmation of a reorganization plan or
plans and subject to the supervision and orders of the Court.
The Debtors expect to reorganize their affairs under the protection of
Chapter 11 and to propose a Chapter 11 plan of reorganization for
themselves. Although management expects to file a plan of
reorganization during 1998 or 1999 which would contemplate emergence in
1999, there can be no assurance at this time that a plan of
reorganization proposed by the Debtors will be approved or confirmed by
the Court, or that such plan will be consummated. The Court has granted
the Debtors' request to extend its exclusive right to file a plan of
reorganization through August 31, 1998. The Debtors will request a
further extension of the exclusivity period. There can be no assurance
that the Court will grant such further extension. After the expiration
of the exclusivity period, creditors would have the right to propose
alternative plans of reorganization.
The consolidated condensed financial statements have been presented in
accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (SOP 90-7) and have been
prepared in accordance with generally accepted accounting principles
applicable to a going concern, which principles, except as otherwise
disclosed, assume that assets will be realized and liabilities will be
discharged in the ordinary course of business. As a result of the
Chapter 11 cases and circumstances relating to this event, including
Levitz's debt structure, its recurring losses, and current economic
conditions, such realization of assets and liquidation of liabilities
are subject to significant uncertainty. Additionally, the amounts
reported on the consolidated condensed balance sheet could materially
change because of changes in business strategies and the effects of any
proposed plan of reorganization.
Levitz's ability to continue as a going concern is dependent upon,
among other things, confirmation of a plan of reorganization, future
profitable operations, the ability to comply with the terms of the DIP
Facility and the ability to generate sufficient cash from operations
and financing arrangements to meet obligations. No assurances can be
given that Levitz will be able to meet these objectives.
In the Chapter 11 cases, substantially all unsecured liabilities as of
the Petition Date are subject to compromise or other treatment under a
plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. For
financial reporting purposes, those liabilities and obligations have
been segregated and classified as "liabilities subject to compromise"
in the consolidated condensed balance sheets. Generally, all actions to
enforce or otherwise effect repayment of pre-Chapter 11 liabilities as
well as all
6
<PAGE>
pending litigation against the Debtors are stayed while the Debtors
continue their business operations as debtors-in-possession. Unaudited
schedules have been filed by the Debtors with the Court setting forth
the assets and liabilities of the Debtors as of the Petition Date as
reflected in the Debtor's accounting records. Levitz has notified all
known claimants subject to the August 10, 1998 bar date of their need
to file a proof of claim with the Court. Differences between amounts
shown by the Debtors and eventual claims filed by creditors will be
investigated and will be either amicably resolved or adjudicated before
the Court. The ultimate amount of and settlement terms for such
liabilities are subject to an approved plan of reorganization and
accordingly are not presently determinable.
Under the Bankruptcy Code, the Debtors may elect to assume or reject
real estate leases, employment contracts, personal property leases,
service contracts and other prepetition executory contracts, subject to
Court approval. Claims for damages resulting from the rejection of real
estate leases and other executory contracts will be subject to separate
bar dates. The Debtors have not reviewed all real estate leases for
assumption or rejection. As of June 30, 1998, the Debtors had rejected
leases for nine store locations and reached agreement with the landlord
on one store location to terminate without liability. The Court has
extended the time for which the Debtors may assume or reject unexpired
leases of nonresidential real property to October 30, 1998. Accrued
expenses and other liabilities and liabilities subject to compromise
include reserves for an estimated amount that may be claimed by lessors
for the stores that have been closed through June 30, 1998. The Debtors
will continue to analyze their real estate leases and executory
contracts and may assume or reject additional leases and contracts.
Such rejections could result in additional liabilities subject to
compromise.
Levitz Furniture Corporation, a Florida corporation, is a wholly-owned
subsidiary of Levitz Furniture Incorporated.
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, 1998, the results of operations and cash flows
for the periods then ended. The results of operations for the period
ended June 30, 1998, 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. These consolidated condensed
financial statements should be read in conjunction with the financial
statements and notes thereto included in Levitz's audited financial
statements for the year ended March 31, 1998, which is included in its
Form 10K filed for that period.
2. DEBT:
LFI, Levitz and substantially all of its subsidiaries, as
debtors-in-possession, are parties to a Postpetition Credit Agreement
dated as of September 5, 1997 (the "DIP Facility") with BT Commercial
Corporation ("BTCC") as agent. The DIP Facility has been approved by
the Court and includes a total commitment of $260.0 million which is
comprised of revolving notes of $223.6 million and a term note of $36.4
million. Letter of Credit obligations under the revolver portion of the
DIP Facility are limited to $25.0 million. The DIP Facility is intended
to provide Levitz with the cash and liquidity to conduct its operations
and pay for merchandise shipments at normal levels during the course of
the Chapter 11 proceedings.
7
<PAGE>
Loans made under the DIP Facility revolving notes bear interest, at
Levitz's option, at a rate equal to either Bankers Trust Company's
prime lending rate plus 1.5% or BTCC's LIBOR rate plus 3.75%. The term
note bears interest at 16%. Levitz is required to pay an unused line
fee of 0.5%, and a letter of credit fee of 2.0%.
The maximum borrowings, excluding the term commitments, under the DIP
Facility are limited to 85% of eligible accounts receivable, 75% of
eligible inventory (as defined in the DIP Facility) and a fixed asset
sublimit which is permanently reduced as the proceeds from the sale of
fixed assets and leasehold interests are received. Qualification of
accounts receivable and inventory items as "eligible" is subject to
unilateral change at the discretion of the lenders. Excess availability
under the DIP Facility at June 30, 1998 was $16.2 million.
The DIP Facility is secured by substantially all of the assets of
Levitz and its subsidiaries and a perfected pledge of stock of all
Levitz's subsidiaries. The DIP Facility contains restrictive covenants
including, among other things, the maintenance of minimum earnings
before interest, taxes, depreciation and amortization as defined
(EBITDA), limitations on the incurrence of additional indebtedness,
liens, contingent obligations, sales of assets, capital expenditures
and a prohibition on paying dividends. LFI and Levitz are currently in
compliance with the DIP Facility covenants as amended.
The lenders under the DIP Facility have a super-priority administrative
expense claim against the estate of the Debtors. The DIP Facility
expires on March 5, 1999.
8
<PAGE>
3. LIABILITIES SUBJECT TO COMPROMISE:
The principal categories of obligations classified as liabilities
subject to compromise under reorganization proceedings are identified
below. The amounts below in total may vary significantly from the
stated amount of proofs of claim that will be filed with the Court and
may be subject to future adjustment depending on Court action, further
developments with respect to potential disputed claims, determination
as to the value of any collateral securing claims, or other events.
Additional claims may arise from the rejection of additional real
estate leases and executory contracts by the Debtors.
<TABLE>
<CAPTION>
JUNE 30,
1998
(DOLLARS IN
LIABILITIES SUBJECT TO COMPROMISE THOUSANDS)
--------------------------------- -----------
<S> <C>
Accounts payable, trade $ 38,707
Accrued expenses 15,676
13.375% Senior Notes due 10/15/98 96,031 (1)
9.625% Senior Subordinated Notes due 7/15/03 101,337 (1)
Financing on store building 4,000
Obligations under capital leases 63,365
Reserve for lease rejection claims 11,012
Deferred rent on operating leases 3,569
Deferred gain on sale leasebacks 3,062
Supplemental executive retirement programs 13,281
Employment agreement severance costs 2,860
General liability claims 736
Reserve for previous store closings 2,817
Real estate taxes 2,695
Personal property taxes 595
-----------
$ 359,743
===========
</TABLE>
(1) Includes accrued interest at September 4, 1997.
As a result of the Chapter 11 filing, no principal or interest payments
will be made on most prepetition debt without Court approval or until a
plan of reorganization providing for the repayment terms has been
confirmed by the Court and becomes effective. Interest on prepetition
unsecured obligations has not been accrued after the Petition Date
except that interest expense and principal payments will continue to be
recorded on capital lease obligations unless the leases are rejected by
the Debtors. If a capital lease is rejected the obligation will be
limited to the lease rejection claim. Contractual interest expense of
$5.5 million was not recorded on certain prepetition debt for the
period ended June 30, 1998.
4. TRANSFER AND SERVICING OF FINANCIAL ASSETS:
Levitz and General Electric Capital Corporation (GECC) are parties to a
Second Amended and Restated Account Purchase and Credit Card Program
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. At June
30, 1998 GECC had purchased $624.7 million of customer credit
obligations. The GECC Agreement expires October 31, 1999 and may
require Levitz to repurchase the outstanding customer credit
obligations at a price equal to their outstanding balance less a
defined discount. In the event GECC would exercise its right to require
Levitz to repurchase the outstanding customer credit obligations at
termination of the GECC Agreement, Levitz would realize a loss because
the required repurchase price would likely exceed the then fair market
value
9
<PAGE>
of the repurchased customer credit obligations. The amount of such loss
would be dependent upon the circumstances at termination date of the
GECC Agreement that would affect the fair market value of the then
outstanding customer credit obligations. There is significant doubt as
to Levitz's ability to repurchase the outstanding customer credit
obligations due to the Chapter 11 filing and current financial
condition. The GECC Agreement also requires Levitz to pay a fee of $3.5
million upon termination. The Court approved the GECC Agreement and
granted a perfected security interest and lien to GECC for any
purchased customer credit obligation and gave administrative expense
status to any obligation of Levitz arising from the GECC Agreement.
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 $1.4 million and $1.9 million,
respectively for the quarters ended June 30, 1998 and 1997. These
amounts are included in selling, general and administrative expenses
and unusual operating expenses.
Levitz has been engaged in discussions with another party to finance
and service its customer credit obligations. On August 12, 1998, Levitz
filed a motion requesting Court approval authorizing the Company to
enter into a "Merchants Agreement" with Household Bank (SB), N.A.
("Household"). The Merchants Agreement with Household would replace the
GECC Agreement. It is expected that the Merchants Agreement, if
consummated, would take approximately sixty to ninety days to
implement. No assurances can be given that the Court will approve the
Company's request to enter into the Merchants Agreement or that the
Merchants Agreement will be consummated with Household.
5. REORGANIZATION ITEMS:
Store Closings
In June 1998 Management finalized a plan to close fifteen stores in
under-performing markets. Thirteen stores were closed at the end of
June 1998, one store was closed in July 1998 and one other store is
expected to be closed by October 1998. The plan also included the
elimination of certain support functions and the closing of warehouses
in certain locations. The majority of the support functions were
eliminated in July 1998. The specific warehouses are expected to be
closed by the end of the fiscal year. The pre-tax charge for the store
closings and other charges of $21.1 million includes non-cash charges
of $10.0 million for the write-down of assets to their net realizable
values, $1.8 million loss on the sale of inventory to a liquidator and
anticipated lease rejection claims of $4.3 million. Cash charges
include severance pay of $1.1 million and continuing expenses of $3.9
million.
Professional fees
Professional fees include accounting, legal and consulting services
provided to Levitz and the Creditors' Committee which, subject to Court
approval, are required to be paid by Levitz while it is in Chapter 11.
6. UNUSUAL OPERATING EXPENSES:
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 recorded 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 was 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.
10
<PAGE>
7. INCOME TAXES:
Income taxes are provided based on the asset and liability method of
accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Levitz had generated
net operating loss ("NOL") carryforwards of $62.4 million at March 31,
1998 as a result of net losses incurred in fiscals 1998 and 1997. The
cumulative NOL benefit at March 31, 1998 was supported by deferred tax
credits which are projected to turn during the carryforward periods.
Levitz has not recorded any tax benefits for the loss incurred during
the period ended June 30, 1998 and expects not to record any tax
benefits for the remainder of fiscal 1999.
8. LOSS PER SHARE:
Basic and diluted loss per share amounts are determined in accordance
with the provisions of SFAS No. 128, "Earnings Per Share". Loss per
common share is based on the weighted average number of common shares
outstanding during each period of 1,000 shares.
9. CONSOLIDATED STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Interest paid $ 6,713 $13,179
======= =======
Income tax paid (refunded), net $ 34 $(2,470)
======= =======
</TABLE>
In June 1997 Levitz exercised its option to issue additional term
notes, under the previous credit agreement, of approximately $1.4
million in lieu of paying interest in cash.
10. NEW ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and disclosure of comprehensive income. Levitz adopted this statement
effective for the quarter ended June 30, 1998. For the quarters ended June 30,
1998 and 1997, there were no differences between comprehensive loss and net
loss.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
On September 5, 1997 (the "Petition Date"), Levitz Furniture Incorporated, a
Delaware corporation ("LFI"), and 11 of its subsidiaries (collectively, the
"Debtors"), including, Levitz Furniture Corporation, a Florida corporation and
wholly-owned subsidiary of LFI ("Levitz"), filed voluntary petitions for relief
under Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code")
with the United States Bankruptcy Court for the District of Delaware,
Wilmington, Delaware. The bankruptcy cases of LFI and Levitz and their
affiliates are being jointly administered, for procedural purposes only, before
the United States District Court for the District of Delaware (the "Court")
under Case No. 97-1842(JJF). Pursuant to Sections 1107 and 1108 of the
Bankruptcy Code, Levitz, as debtor and debtor-in-possession, has continued to
manage and operate its assets and businesses pending the confirmation of a
reorganization plan or plans and subject to the supervision and orders of the
Court.
COMPARISON OF OPERATIONS
The following table sets forth Levitz's results of operations expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
------------------------
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
------ ------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 55.1 54.8
------ ------
Gross profit 44.9 45.2
Selling, general and administrative expenses 46.4 41.1
Unusual operating expenses - 1.8
Depreciation and amortization 2.9 3.1
Interest expense 4.2 6.5
------ ------
Loss before reorganization items and income taxes (8.6) (7.3)
Reorganization items 12.9 -
------ ------
Loss before income taxes (21.5) (7.3)
Income tax benefit - 2.6
------ ------
Net loss (21.5)% (4.7)%
====== =====
Comparable store sales decrease (2.5)% (6.4)%
====== =====
</TABLE>
12
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net sales of $176.5 million for the period ended June 30, 1998 decreased $34.9
million or 16.5% from net sales of $211.4 million in the same period for the
prior year. Approximately $29.9 million of the net sales decrease was due to the
closing of twenty-four stores during the last six months of fiscal 1998. Sales
on a comparable store basis decreased 2.5%. Comparable store sales for April
1998 decreased 9.5% for the same month of the prior year. May and June 1998
comparable store sales increased 1.0% from the comparable period for the prior
year
Gross profit as a percentage of net sales decreased to 44.9% from 45.2% for the
periods ended June 30, 1998 and 1997. The decrease in gross profit as a
percentage of net sales was primarily caused by frequent use of percentage-off
sales on clearance merchandise in the month of June 1998.
Selling, general and administrative (SG&A) expenses of $81.8 million for the
period ended June 30, 1998 decreased $5.2 million or 5.9% from SG&A expenses of
$87.0 million in the same period for the prior year. As a percentage of net
sales, SG&A expenses increased to 46.4% from 41.1% for the periods ended June
30, 1998 and 1997, respectively. The dollar decrease in SG&A expenses is
primarily due to the store closings as noted above. The increase in SG&A
expenses as a percentage of net sales of 5.3% occurred in advertising (2.4%),
salaries (1.3%), credit card fees (0.3%), and a reduction in service fee income
(1.3%). Advertising increased as a percentage of net sales due to expanded
coverage in newspaper and greater use of television in Levitz's larger markets.
The increase in salaries as a percentage of net sales is being addressed through
the elimination of certain support functions and warehouse closings as part of
the current reorganization plan. The credit card fee increase is a result of
Levitz's acceptance of major credit cards in all stores effective January 1998.
The service fee income reduction is primarily a result of increased service fees
charged by the provider under Levitz's private label program.
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.
Interest expense for the period ended June 30, 1998 decreased to $7.5 million
from $13.8 million for the same period of the prior year. As a result of the
Chapter 11 filing, no principal or interest payments will be made on most
pre-petition debt without Court approval or until a plan of reorganization
providing for the repayment terms has been confirmed by the Court and becomes
effective. Interest on pre-petition unsecured obligations has not been accrued
after the Petition Date except that interest expense and principal payments will
continue to be recorded on capital lease obligations unless the Debtors reject
the leases. Contractual interest expense of $5.5 million was not recorded on
certain pre-petition debt for the period ended June 30, 1998.
Reorganization items include a charge of $21.1 for the closing of fifteen stores
in under-performing markets. The charge also includes a reserve for the
elimination of certain support functions and the closing of warehouses in
certain locations. Thirteen stores were closed at the end of June 1998, one
store was closed in July 1998 and one other store is expected to be closed by
October 1998. The plan also included the elimination of certain support
functions and the closing of warehouses in certain locations. The majority of
the support functions were eliminated in July 1998. The specific warehouses are
expected to be closed by the end of the fiscal year. Professional fees include
accounting, legal and consulting services provided to Levitz and the Creditors'
Committee which, subject to Court approval, are required to be paid by Levitz
while it is in Chapter 11.
Levitz has not recorded any tax benefits for the loss incurred during the period
ended June 30, 1998 and expects not to record any tax benefits for the remainder
of fiscal 1999.
As a result of the aforementioned factors, net loss for the period ended June
30, 1998 amounted to $38.0 million or 21.5% of net sales as compared to net loss
of $10.0 million or 4.7% of net sales for the same period of the prior year.
13
<PAGE>
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), trade
credit and borrowings under the DIP Facility. During the quarter ended June 30,
1998, Levitz used approximately $15.9 million of net cash flow in operations
before changes in operating assets and liabilities. Changes in operating assets
and liabilities further reduced net cash flow from operations by $0.6 million.
Management is attempting to increase cash flow from operations by closing
fifteen stores in under-performing markets, eliminating certain support function
positions and by eliminating the cost of warehouse operations in markets where
it is determined that fewer warehouses can service the market.
Cash provided by investing activities for the period ended June 30, 1998
includes $4.3 million of proceeds from asset sales of closed facilities. All of
these proceeds were applied as repayments to the DIP Facility as required by the
agreement.
Levitz's total capital expenditures were approximately $1.4 million during the
period ended June 30, 1998. Capital expenditures were for existing store
improvements and equipment. Management estimates that approximately $5.0 million
to $7.0 million is required annually to adequately maintain and/or improve its
existing warehouse-showrooms and satellite stores. Levitz announced the closing
of fifteen stores in June 1998 and expects to open three new stores during the
fiscal year ending March 31, 1999.
Net cash provided by financing activities amounted to $13.0 million in the
period ended June 30, 1998 and includes increased borrowings under the DIP
Facility of $19.2 million less principal payments under long-term obligations of
$0.7 million and decrease in outstanding checks and cash overdrafts of $5.5
million which changes based on the timing of payments.
Debt
LFI, Levitz and substantially all of its subsidiaries, as debtors-in-possession,
are parties to a Postpetition Credit Agreement dated as of September 5, 1997
(the "DIP Facility") with BT Commercial Corporation ("BTCC") as agent. The DIP
Facility has been approved by the Court and includes a total commitment of
$260.0 million which is comprised of revolving notes of $223.6 million and a
term note of $36.4 million. Letter of Credit obligations under the revolver
portion of the DIP Facility are limited to $25.0 million. The DIP Facility is
intended to provide Levitz with the cash and liquidity to conduct its operations
and pay for merchandise shipments at normal levels during the course of the
Chapter 11 proceedings.
Loans made under the DIP Facility revolving notes bear interest, at Levitz's
option, at a rate equal to either Bankers Trust Company's prime lending rate
plus 1.5% or BTCC's LIBOR rate plus 3.75%. The term note bears interest at 16%.
Levitz is required to pay an unused line fee of 0.5%, and a letter of credit fee
of 2.0%.
14
<PAGE>
The maximum borrowings, excluding the term commitments, under the DIP Facility
are limited to 85% of eligible accounts receivable, 75% of eligible inventory
(as defined in the DIP Facility) and a fixed asset sublimit which is permanently
reduced as the proceeds from the sale of fixed assets and leasehold interests
are received. Qualification of accounts receivable and inventory items as
"eligible" is subject to unilateral change at the discretion of the lenders.
Excess availability under the DIP Facility at June 30, 1998 was $16.2 million.
The DIP Facility is secured by substantially all of the assets of Levitz and its
subsidiaries and a perfected pledge of stock of all Levitz's subsidiaries. The
DIP Facility contains restrictive covenants including, among other things, the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization as defined (EBITDA), limitations on the incurrence of additional
indebtedness, liens, contingent obligations, sales of assets, capital
expenditures and a prohibition on paying dividends. Although LFI and Levitz are
currently in compliance with the DIP Facility covenants as amended, no
assurances can be given that LFI and Levitz will be able to meet their EBITDA
covenants in the future. In the event that LFI and Levitz will not meet future
covenants, the Company would seek a waiver or amendment from the lenders under
the DIP Facility. No assurances can be given that such lenders will grant LFI
and Levitz such a waiver or amendment.
The lenders under the DIP Facility have a super-priority administrative expense
claim against the estate of the Debtors. The DIP Facility expires on March 5,
1999.
Levitz and General Electric Capital Corporation (GECC) are parties to a Second
Amended and Restated Account Purchase and Credit Card Program 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. At June 30, 1998 GECC had purchased $624.7 million
of customer credit obligations. The GECC Agreement expires October 31, 1999 and
may require Levitz to repurchase the outstanding customer credit obligations at
a price equal to their outstanding balance less a defined discount. In the event
GECC would exercise its right to require Levitz to repurchase the outstanding
customer credit obligations at termination of the GECC Agreement, Levitz would
realize a loss because the required repurchase price would likely exceed the
then fair market value of the repurchased customer credit obligations. The
amount of such loss would be dependent upon the circumstances at termination
date of the GECC Agreement that would affect the fair market value of the then
outstanding customer credit obligations. There is significant doubt as to
Levitz's ability to repurchase the outstanding customer credit obligations due
to the Chapter 11 filing and current financial condition. The GECC Agreement
also requires Levitz to pay a fee of $3.5 million upon termination. The Court
approved the GECC Agreement and granted a perfected security interest and lien
to GECC for any purchased customer credit obligation and gave administrative
expense status to any obligation of Levitz arising from the GECC Agreement.
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 $1.4 million and $1.9 million, respectively for the quarters
ended June 30, 1998 and 1997. These amounts are included in selling, general and
administrative expenses and unusual operating expenses. 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. Levitz expects
the income under the GECC Agreement to be minimal for fiscal 1999.
Levitz has been engaged in discussions with another party to finance and service
its customer credit obligations. On August 12, 1998, Levitz filed a motion
requesting Court approval authorizing the Company to enter into a "Merchants
Agreement" with Household Bank (SB), N.A. ("Household"). The Merchants Agreement
with Household would replace the GECC Agreement. It is expected that the
Merchants Agreement, if consummated, would take approximately sixty to ninety
days to implement. No assurances can be given that the Court will approve the
Company's request to enter into the Merchants Agreement or that the Merchants
Agreement will be consummated with Household.
15
<PAGE>
Going Concern
The Company believes that cash on hand, amounts available under the DIP
Facility, as amended, and funds from operations (including proceeds from the
transfer of customer credit obligations to GECC) will enable the Company to meet
its immediate liquidity and capital expenditure requirements. Continued
availability under the DIP Facility is dependent upon LFI and Levitz meeting the
covenants thereunder or obtaining a waiver or amendment from the lenders under
the DIP Facility if necessary. LFI and Levitz are currently in discussions with
several potential financing sources relating to the provision of debt financing
to increase availability and to provide alternative sources of liquidity. No
assurances can be given that such potential financing sources will be willing to
provide funds to LFI and Levitz on terms acceptable to LFI and Levitz. Until a
plan or reorganization is approved, the Company's long-term liquidity and the
adequacy of its capital resources cannot be determined.
Inherent in a successful plan of reorganization is a capital structure that
permits the Company to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
Company. Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and stockholders may be substantially altered. At this time it is not
possible to predict the outcome of the Chapter 11 case, in general, or the
effects of such case on the business of the Company or on the interests of
creditors.
Year 2000
There have been no significant changes to the Company's Year 2000 project as
reported in its Form 10-K for the fiscal year ended March 31, 1998. Levitz is in
the process of assessing the risk to the availability and integrity of financial
systems and the reliability of operational systems. The Company is also
communicating with vendors, financial institutions and others with which it does
business to coordinate year 2000 conversion. The cost of achieving Year 2000
compliance, excluding in-house salaries, wages and benefits, has been estimated
at approximately $0.3 million for software maintenance and development and $0.3
million for other operational systems. The Company expects to spend $2.4 million
in capital expenditures for the enhancement of operational and financial
software and hardware systems as needed for current changes in business strategy
which will eliminate the need for achieving Year 2000 compliance on some
existing software. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
16
<PAGE>
PART II OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule
(b) Report on Form 8-K: None.
17
<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 13, 1998 /s/ MICHAEL MCCREERY
-------------------------
Michael McCreery
Senior Vice President and
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibits to Form 10-Q
NUMBER
EXHIBIT TABLE EXHIBIT
------------- -------
27 Financial Data Schedule.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,932
<SECURITIES> 0
<RECEIVABLES> 22,729
<ALLOWANCES> 0
<INVENTORY> 137,113
<CURRENT-ASSETS> 170,776
<PP&E> 141,065
<DEPRECIATION> 0
<TOTAL-ASSETS> 966,665
<CURRENT-LIABILITIES> 291,058
<BONDS> 5,481
0
0
<COMMON> 1
<OTHER-SE> (227,875)
<TOTAL-LIABILITY-AND-EQUITY> 966,665
<SALES> 176,481
<TOTAL-REVENUES> 176,481
<CGS> 97,182
<TOTAL-COSTS> 97,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,501
<INCOME-PRETAX> (37,967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,967)
<EPS-PRIMARY> (37,967)
<EPS-DILUTED> 0
</TABLE>
